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Administration
Telkom SA Limited Annual Report 2009
COMPANY REGISTRATION NUMBER
REGULATORY AND PUBLIC POLICY
1991/005476/06
Adv. Ouma Rasethaba
HEAD OFFICE Telkom Towers North
Tel: +27 12 311 4785
[email protected]
152 Proes Street
AUDITORS
Pretoria 0002
Ernst & Young Inc. Wanderers Office Park
POSTAL ADDRESS Telkom SA Limited Private Bag X881 Pretoria 0001
0861 100 948
Illovo 2196 Private Bag X14 Northlands 2116 Tel: +27 11 772 3000 Fax: +27 11 772 4000
TRANSFER AGENTS
CUSTOMER CALL CENTRE
Computershare Investor Services 2004 (Pty) Ltd
10219
70 Marshall Street
COMPANY SECRETARY
Johannesburg, 2001
Mmathoto Lephadi
PO Box 61051
Tel: +27 12 311 7743
Marshalltown 2107
[email protected]
MEDIA RELATIONS Ajith Bridgraj Tel: +27 12 311 7720
[email protected]
BUSINESS CALL CENTRE 10217
INVESTOR RELATIONS Nicola White Tel: +27 12 311 5720
UNITED STATES ADR DEPOSITARY
[email protected]
The Bank of New York
[email protected]
Shareholder Relations Department PO Box 11258 New York NY 10286-1258
Telkom SA Annual Report 2009
TELKOM SHARE REGISTER HELPLINE
52 Corlett Drive
SPONSORS UBS Securities South Africa (Pty) Limited 64 Wierda Road East Wierda valley Sandton 2196
Creating synergy to give business the
edge
Tel: +1 888 643 4269 e-mail:
[email protected]
CORPORATE COMMUNICATIONS Brenda Kali Tel: +27 12 311 4301
[email protected]
www.telkom.co.za
Telkom SA Annual Report 2009
We
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Contents 1
Group overview Telkom Group structure and revenue contribution Telkom shareholding Group strategy Financial review summary Operational review summary Equity markets The Telecommuniations Industry The independent benchmarking of Telkom’s pricing
2
86 87 104 105
Annual financial statements Directors’ responsibility statement Certificate from Group Company Secretary Report of the independent auditors Directors’ report Consolidated income statement Consolidated balance sheet Consolidated statement of changes in equity Consolidated cash flow statement Notes to the consolidated annual financial statements Company income statement Company balance sheet Company statement of changes in equity Company cash flow statement Notes to the Company annual financial statements
6
36 42 50 58 62 72 78 82
Performance review Five year operational review Operational review Three year financial review Financial review
5
16 20 24 28 30 31
Sustainability review Sustainability review Corporate governance Enterprise risk management Black economic empowerment Human capital management Safety, health and environment Corporate social investment GRI content index
4
Telkom SA Limited Annual Report 2009
Management review Chairman’s review Chief Executive Officer’s review Chief Financial Officer’s review Board of directors Chief officers Management team
3
2 3 4 6 7 8 9 13
137 137 138 140 142 143 144 145 146 250 251 252 253 254
Shareholder information Shareholder analysis Definitions Special note regarding forward-looking statements Administration
337 339 343 ibc
We have the
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Telkom Annual Report 2009
1
We are... one of Africa’s largest integrated communication service providers.
We aim... to be Africa’s preferred ICT solutions provider.
and resources to create a powerful communications platform
Group overview
Management review
Sustainability review
Performance review
Financial statements
Company Financial Information
for more information please visit our website at www.telkom.co.za
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Telkom Annual Report 2009
Telkom Group structure and revenue contribution as at March 31, 2009
Telkom SA Our fixed-line segment is our largest business. Telkom South Africa provides fixed-line subscription and connection, traffic, interconnection, data and internet service
Trudon – 64.9% Trudon (Pty) Ltd, formerly known as TDS Directory Operations, provides Yellow and White page directory services, an electronic directory service, 10118 “The Talking Yellow Pages”, and an online web directory service.
Multi-Links – 100% Multi-Links Telecommunications Limited is one of Nigeria’s pioneer private telephone operators. As one of the leading providers of telecommunications solutions in Nigeria, Multi-Links was one of the first to locally introduce the CDMA technology. Telkom acquired the remaining 25% interest in Multi-Links on January 21, 2009, thereby increasing its ownership of Multi-Links to 100%.
Africa Online – 100% Africa Online is an internet service provider (ISP) in Africa. As one of the largest Pan-African ISP in sub-Saharan Africa, Africa Online offers a wide range of services to suit a variety of customer needs. With operations in Cote d’Ivoire, Ghana, Kenya, Namibia, Swaziland, Tanzania, Uganda, Zambia and Zimbabwe, Africa Online is positioned to provide individuals and organisations with scalable solutions based on each client’s specific needs.
Joint venture – Vodacom Group – 50% Vodacom Group (Pty) Ltd is a leading mobile communications company in South Africa, providing mobile communications services as of March 31, 2009 to 39.6 million customers in South Africa, Tanzania, Lesotho, the Democratic Republic of the Congo and Mozambique. Vodacom has an estimated market share of 53% in South Africa. Telkom concluded the sale and unbundling of its interest in Vodacom after year end.
Swiftnet – 100% Swiftnet (Pty) Ltd trades under the name FastNet Wireless Services. FastNet provides synchronous wireless access on Telkom’s X.25 network, Saponet-P, to its customer base. Services include retail credit card and check point of sale terminal verification, telemetry, security and fleet management. Telkom’s Board of directors has decided to dispose of Swiftnet.
Telkom Media – 75% Telkom Media is the holder of a commercial satellite and cable subscription broadcasting licence, which allows it to operate both a satellite pay-TV service and an IPTV service in South Africa. On May 4, 2009, Telkom sold its 75% interest in Telkom Media to Shenzhen Media South Africa (Pty) Ltd.
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Telkom Annual Report 2009
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Telkom shareholding as at March 31, 2009
Government The government of the Republic of South Africa is the largest shareholder in Telkom, holding 39.8% of the Company’s issued share capital. The government is the Class A shareholder.
Black Ginger 33 (Pty) Ltd
Public Investment Corporation
Black Ginger 33 (Pty) Ltd is a wholly owned (100%) subsidiary of the Public Investment Corporation holding 8.9% of the Company’s issued share capital. Black Ginger 33 is the Class B shareholder.
The Public Investment Corporation (PIC) is an investment management company wholly owned by the government. It invests funds on behalf of public sector entities. The PIC holds 6.7% of the Company’s issued share capital.
Group overview
Elephant Consortium
Telkom Treasury Stock
The Elephant Consortium is a Black Economic Empowerment group, which through Newshelf 772 (Pty) Ltd holds 7.2% of Telkom’s issued share capital.
Rossal No 65 (Pty) Ltd holds 11,646,680 shares, 2.2% of the Company’s issued share capital which were purchased for the Telkom Conditional Share Plan. Acajou Investments (Pty) Ltd holds 8,143,556 shares, 1.6% of the Company’s issued share capital.
Free float The free float of 33.6% makes up the remainder of the Company’s issued share capital. Included in the free float are 11,570,245 shares held by 91,625 retail shareholders representing 2.2% of the Company’s issued share capital.
Management review
Sustainability review
Performance review
Financial statements
Company Financial Information
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Telkom Annual Report 2009
Group Strategy – The evolution of Telkom
Defend profitable revenue
• Maintain fixed-line net revenue. • Retain leading fixed-line market share. • Increase annuity revenue as a percentage of total fixed-line operating revenue.
• Improve competitiveness through tariff rebalancing. • Build customer retention initiatives that entice customers to stay with Telkom. • Build customer loyalty by providing superior value propositions that position Telkom as the service provider of choice. • Convert revenue streams to annuity revenue.
Grow profitable revenue through broadband and converged services
• Expand our broadband footprint. • Increase broadband penetration.
• Increase bandwidth to offer higher bandwidth applications.
• Deliver superior data speed and quality through fixed-line network.
• Provide converged information, communications and technology solutions to the enterprise market and enable the digital home in the consumer market.
• Increase converged services revenue.
• Bundle content to provide added value in subscription and pay-as-you go models.
• Partnerships with content providers.
• Target the medium to large business segment to meet their demand for end-to-end solutions.
• Improve market share in information technology services sector. • Expand domestic data centre operations. • Improve innovation capability. • Grow organically and through acquisitions.
• Satisfy customer demand for converged onestop solutions for communications and information technology infrastructure requirements. • Develop improved value propositions through customer understanding enabled by the customer centricity programme. • Enhance availability to successfully partner with others where synergistic opportunities exist.
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Grow profitable revenue through wireless voice and mobile data services
• Provide integrated bundled offerings. • Combine with mobility to enhance fixed-line offering.
Transform fixed-line business to incorporate key value-added services, including mobile converged voice services. Build a cost-effective wireless voice and mobile data network in selected areas to offer: • Wireless access in campus environments, gated communities, security complexes and other developments. • Mobile data services. • Fixed and nomadic wireless voice services.
Grow profitable revenue internationally Become a Pan-African integrated service provider, offering: • Increase revenue and long-term profitability from acquired African subsidiaries and international services.
• International communications and internet connectivity. • Hosting and managed data services. • Wireless voice and mobile broadband solutions. Leverage synergies across the Telkom Group to grow revenue from subsidiaries – organically and through acquisitions. Introduce converged fixed and mobile service in the Nigerian market through Multi-Links.
Group overview
Management review
Sustainability review
Performance review
Financial statements
Company Financial Information
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Telkom Annual Report 2009
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Financial review summary Continuing operations
Solid revenue growth
EPS & HEPS
The 3.3% growth in fixed-line revenue to R33.7 billion contributed to the Group’s overall 6.9% revenue growth to R35.9 billion.
The decrease in both headline and basic earnings per share reflects increasing operating expenses, once-off impairments of Multi-Links and Africa Online and increased finance charges and fair value movements.
Operating revenue
Annuity revenue
Rm
Rm
R35,940m (R33,611m)
40 35
8 7
Strong growth in data
30
R7,387m (R6,917m)
6
revenues, higher revenue
25
5
from interconnection and
20
calling plans, partially off-
4
Telkom continues to be
15
set by lower traffic. Multi-
3
successful in tying in large
10
Links
strong
2
corporate
revenue growth as a result
1
term and volume discount
of subscriber growth.
0
5 0 07
08
delivered
09
08
09
Operating expenditure
Rm
Rm
10
30 000
9
R9,310m (R8,308m)
25 000
8 7
Higher demand for data services, including ADSL, an increase in internet access and related services and data
network
services.
R29,895m (R25,014m)
20 000
6 5
15 000
Operating
4
increased
10 000
3
expenses across
all
segments and were affected
2
5 000
by a number of once-off
1 0
items.
0 07
08
09
07
08
09
Operating profit
Headline earnings per share
Rm
cents
10
1 400
9 1 200
8
R6,388m (R9,069m)
7 6 5
Excluding
4
the
1 000
Multi-Links
impairment of R1.8 billion
3
557.0 cents (1,028.9 cents) Decrease
in
earnings reflects decrease
1
performed well in the current
in operating profit and
0
high inflationary environment.
increased finance charges.
08
09
800 600
headline
the South African business
2
07
to
plans. 07
Data revenue
managed
customers
400 200 0 07
08
09
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Telkom Annual Report 2009
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Operational review summary
Quality, value for money products delivering strong growth 93% ADSL coverage enabled. They consist of 4,000
27.3% increase in calling plan subscribers
digital subscriber line access
The Telkom Closer packages have
multiplexers, serving approximately
performed well, increasing by 27.6%
548,015 customers, which
to 575,812 plans. Supreme call
represents a growth of 33.0%.
packages, targeted at the business
93% of our exchanges are ADSL
segment, have increased by 14.4% to 14,778 packages and PC bundles have increased 48.3% to 11,336.
58% increase in Do Broadband packages Do Broadband subscribers
7.4% increase in wholesale internet leased lines
increased 58.1% to 188,540.
The growth in broadband
Our current Broadband line
has stimulated the demand for
penetration rate is 15%.
leased lines. Wholesale internet leased lines increased 7.4% to 24,204 lines.
57% self-install ADSL packages Our self-install option is very
141 W-CDMA base stations selectively deployed
popular and had a positive
Telkom has commenced the
impact on ADSL installation
deployment of a W-CDMA
times.
wireless local loop network in
Group overview
Management review
the 2100MHz band. Sustainability review
Managed data network sites (000)
ADSL subscribers (000) 600
30
500
25
Supreme Call subscribers (000) 16
200
14
180
20
300
15
200
10
140
10
120
8
100
6
80
5
0
0 07
08
09
20
0 08
09
Company Financial Information
40
2
07
Financial statements
60
4 100
Performance review
160
12 400
Do Broadband subscribers (000)
0 07
08
09
07
08
09
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Equity markets
The financial year ended March 31, 2009 was characterised by extreme volatility in global stock markets and currencies as a result of the sub-prime crisis. Despite these difficulties we managed to conclude:
• The sale of our 15% share in Vodacom to Vodafone Plc for the excellent price of R22.5 billion. In addition, the remaining 35% share in Vodacom was unbundled directly to shareholders. Details of the transaction can be found in the performance review. • As a result of this transaction Telkom was able to pay a special dividend of R19.00 per share to its shareholders. • In addition, Telkom declared an ordinary dividend of R1.15 and a special dividend of R2.60 in respect of the 2009 financial year. Telkom remains committed to returning cash to shareholders and growing shareholder value. Market performance JSE Limited
NYSE
(ZAR per ordinary share)
(USD per ADS)
year ended March 31
year ended March 31,
2008
2009
Closing price
131.20
Highest price
195.02
Market capitalisation (millions)
68,327
17 500 000
140
15 000 000
130
12 500 000
120
10 000 000
110
7 500 000
100
5 000 000
90
2 500 000
80
0
45.03
54,937
8,519
5,850
Nov 08
Jan 09
Mar 09
Volume
250
80 75
200
70 65 60
150
55 50 100
45 40 35
50
30 25 20
0
Mar 08
Aug 08
Jun 08
Share price (US$)
-31.3 -32.9
Nasdaq
-19.6
FTSE Global Telcos
-34.6
S&P Telecoms
-31.2
-36.8
DJI
-38.0
S&P 500
0
-10
-20 %
-39.7 -46.1
03-
-30
FTSE 350 Telcos (in USD)
-60
-32.4
-40
Industrials
-50
All share
-25.2
Telkom US$
-40
-15.5
Telkom
Mar 09
NYSE share price relative to major international stock market indices FTSE 250 Telcos
Telco index
Jan 09
%
0
JSE share price relative to SA indices
Nov 08
Volume
-10
Aug 08
44.93
113.00
-20
Jun 08
65.43
107.37
Volume
150
Share price (R)
105.49
85
Share price (USD)
20 000 000
Mar 08
2009
NYSE share price vs volume traded
160
Volume
Share price (R)
JSE share price vs volume traded
2008
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The telecommunications industry
Conclusion of Vodacom transaction gives Telkom
freedom
to compete
Overview Telkom is an integrated communications service provider offering bundled voice, data, broadband and internet services with its service offerings expanded to business and residential customers. Competition in the South African fixed-line communications market is intense and is increasing as a result of the Electronic Communications Act and determinations issued by the Minister of Communications. The new licensing framework included in the Act has resulted in the market becoming more horizontally layered with a large number of separate licences being issued for electronic communications network services, electronic communications services, broadcasting services and radio frequency spectrum and, as a result, this will substantially increase competition in Telkom’s fixed-line business. In the areas where we currently face competition, and expect to compete for public switched telecommunications services, Telkom competes primarily on the basis of customer service, quality, dependability and price. In addition, we intend to introduce new products, services and tariff structures to enable us to maintain and
Group overview
grow revenue. Fixed-line voice competition
Management review
In September 2004, South Africa’s Minister of Communications granted an additional licence to provide switched telecommunications services to Neotel, a company that was 30% owned by Transtel Telecoms, a division of Transnet Limited, and
Sustainability review
Esitel, which is beneficially owned by the South African government and other strategic equity investors, including a 26% shareholding owned by TATA Africa Holdings (Pty) Ltd, a member
Performance review
of the TATA Group, a large Indian conglomerate with information and communications operations. On March 19, 2008, Neotel announced that the Competition Tribunal of South Africa had
Financial statements
approved its acquisition of Transtel without any conditions. Subsequently, TATA Africa Holdings (Pty) Ltd acquired the government’s 30% equity, extending its equity in Neotel to 56%. Neotel started providing services to large corporations and other licensees at the start of the 2007 calendar year and on April 25, 2008, announced that the first of its consumer products were
Company Financial Information
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The telecommunications industry (continued)
All existing licences have been
converted available to limited parts of Johannesburg
individual ECNS and individual ECS
including licence fees to be paid, minimum
and Pretoria.
licences for a public entity’, inviting
services to be provided to customers and
Broadband Infraco to submit applications
other service obligations, will be contained
for these licences.
in regulations, some of which have been
As a result of an amendment to the Electronic Communications Act to enable
promulgated and some of which are in the
state investment and licensing in the sector,
The process to issue additional licences to
the government created an infrastructure
small business operators for the purpose of
company, Broadband Infraco (Pty) Ltd, in
providing telecommunications services in
Telkom’s licence fee under the public
2007, to provide inter-city bandwidth at
underserviced areas with a teledensity of less
switched
cost based prices to Neotel and, later, to
than 5% started in 2005. To date, the
licence amounted to 0.1% of its annual
the rest of the industry, which added further
Minister of Communications has identified
revenue generated from the provision of the
competition to Telkom’s communications
27 underserviced areas and ICASA has
licensed public switched telecommuni-
network. Broadband Infraco will also be
issued licences to seven successful bidders
cations services. This provision was
involved in some of the undersea cable
with the Minister issuing invitations to apply
retained following the conversion to the
projects.
for licences in an additional 14 areas.
ECS and ECNS licences. However, in
Licences
All existing USAL licences, including
2009, Telkom’s annual licence fees for
On October 29, 2008, the Minister of
Telkom’s, have been converted into ECS
ECS and ECNS were set at 1.5% of gross
Communications published for public
and ECNS licences, and all future licences
profit from licensed activities, defined as
comment,
for this category will be issued as ECS and
total revenue obtained from the provision of
ECNS licences.
licensed services, less total costs directly
process of being promulgated.
telecommunications
service
terms of a regulation published on April 1,
a
draft
policy
direction
which would direct ICASA to grant Broadband Infraco individual Electronic Communications Electronic
Services
(ECS)
Communications
and
Network
Services (ECNS) licences.
These licences provide the authorisation to construct, maintain and operate an electronic communications network and
incurred in the provision of such services. As a result, there may be a material increase in Telkom’s annual licence fee.
provide ECNS and ECS. All the obligations
On March 25, 2009, the telecommuni-
On March 13, 2009, ICASA published
contained in Telkom’s public switched
cations industry put forward proposals to
an ‘invitation for a public entity to apply for
telecommunications
ICASA regarding a Service Charter
service
licence,
Telkom is in the process of challenging the proposed new licence fee regulation
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Telkom Annual Report 2009
11
regulation that stipulated standard levels of service. The standards stipulated in the regulation are extremely demanding and, the
The 2010 Telkom ‘hotseat’
communications industry has made representation to ICASA. On
This is the control room – the ‘hotseat’ – for our 2010 World
July 24, 2009, ICASA has repeated the previous Service Charter
Cup soccer national transport network. From here, our highly
regulation and published a new regulation that implements many
skilled team will direct all incoming and outgoing
of the recommendations made by the industry.
transmissions for the duration of the tournament.
Other licences In August 1995, Telkom’s subsidiary, Swiftnet, was granted a telecommunications licence and a radio frequency spectrum licence for the provision of: • The construction, maintenance and operation of a national wireless data network and the provision of
wireless data
telecommunications services; and • Interconnection with Telkom’s network. In terms of the licence agreement, Swiftnet was required to have at least a 30% black economic empowerment (BEE) shareholding. In spite of Telkom entering into an agreement in 2007 to sell 30% of Swiftnet to the Radio Surveillance Consortium, a group of empowerment investors, an agreement that received Competition Commission approval, ICASA did not approve the transaction. As a result, Swiftnet was in breach of its licence. Swiftnet, assisted by Telkom, has subsequently had two meetings with ICASA on this matter and ICASA has indicated that currently there is no agreement within the industry as to acceptable BEE shareholding percentages for all licensees. ICASA also indicated that the shareholding issue for the Swiftnet licence would have to be in line with the BEE values applicable to other similar licensees. Swiftnet received a new licence from ICASA on January 16, 2009 which stipulated that the company still needed to secure a 30%
Group overview
BEE shareholding. However, ICASA has said that in the 2010 financial year it will be reviewing the equity shareholdings of all licensees, after which it is anticipated that all licensees will be
Management review
given sufficient time to meet their equity shareholding requirements. Telkom’s Board of directors has decided to dispose of Swiftnet, and Telkom is currently seeking potential purchasers that would comply with Swiftnet’s BEE requirements.
Sustainability review
Carrier pre-selection The now repealed Telecommunications Act mandated that fixed-line
Performance review
operators were required to implement carrier pre-selection to enable customers to choose and vary their fixed-line telecommunications carrier for long distance and international calls. These provisions were retained in the Electronic Communications Act and on June
Financial statements
24, 2005, regulations were published for the implementation of carrier pre-selection in two phases (the implementation of call-by-call pre-selection and fully automatic pre-selection, to be implemented and provided within two months and 10 months, respectively, of them being requested by another operator). Telkom had already conditioned its exchanges to handle call-by-call carrier pre-selection
Company Financial Information
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Telkom Annual Report 2009
The telecommunications industry (continued)
Telkom has made significant progress in
rebalancing its fixed-line tariffs...
by December 31, 2003. Telkom has met
includes multi-line porting, secure file
including lines of 2 Mbps of capacity and
with Neotel to discuss its request for
transfer protocol access to third parties and
the rental and installation of business
implementing carrier pre-selection.
operational software upgrades on the
exchange lines.
Until Neotel’s interconnection systems and
central reference data base.
Approximately 57% of Telkom’s operating
its inter-operator process and systems to
The set-up and per-operator costs are
revenue in the year ended March 31,
support carrier pre-selection become
typically the largest cost components of
2008 was included in this basket,
available, Telkom cannot fully implement
implementing number portability. Similar to
compared to approximately 54% in the
carrier pre-selection. However, Telkom
carrier pre-selection, there is a risk of not fully
year ended March 31, 2009.
does not believe it can meet the 10 months
recovering
deadline
implementation of these requirements in a
for
automatic
carrier
pre-
selection. Number portability The Telecommunications Act mandated that number portability, to enable customers to retain their fixed-line and mobile telephone numbers if they switch between fixed-line
system
set-up
costs.
The
timely manner, could result in Telkom’s business being disrupted and cause its net profit to decline and the implementation of these requirements will likely further increase competition and cause
churn rates to
increase.
operators or between mobile operators, be
Fees and tariffs
introduced. These provisions were retained
Telkom has made significant progress in
in the Electronic Communications Act.
rebalancing its fixed-line tariffs with a view
A framework number portability regulation
to focusing more on the relationship
was published at the end of 2004 that
between the actual costs and tariffs of
generically provides for the introduction of
subscriptions and connections and traffic in
fixed-to-fixed and mobile-to-mobile number
order to more accurately reflect underlying
portability. Telkom is required to implement
costs and to be more competitive.
number portability in blocks of 10,000
Regulations made under the repealed
numbers within two months after Neotel
Telecommunications Act, but which are still
launches such retail services and individual
in effect, imposed a price cap (3.5%
number portability within 12 months of
below inflation, effectively implying a
receiving a request from Neotel. Telkom
continuous real decrease in prices) on a
has received a request from Neotel to
basket of Telkom’s specified services. These
implement both block and individual
include installations; pre-paid and post-
number portability and Telkom and Neotel
paid line rentals; local, long distance and
implemented number portability in blocks
international calls; fixed-to-mobile calls;
of 10,000 and 1,000 numbers in May
public payphone calls; ISDN services; its
2009. After several delays mobile number
Diginet product and its Megaline product.
portability phase one was launched on
A similar cap applies to a sub-basket of
November 11, 2006. Phase 2, which
those services provided to residential
was implemented during April 2007,
customers, including leased lines up to and
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13
Independent benchmarking of Telkom’s pricing – Tarifica review, 4th quarter 2008 Telkom continues to manage its pricing actively in order to continually offer enhanced value to our customers. We intend to educate all our customers as to the global attractiveness of our pricing and the value offered by the fixed-line service. Telkom’s mobile offering will follow the lead of the fixed-line in terms of competitive pricing. Below find a selection of Tarifica’s findings. Local peak (3 minute) Source: Tarifica 4th quarter 2008 0.25
a - Euros
0.20
0.15
0.10
0.05
Lithuania
Finland
Norway
Ireland
Germany
Czech Republic
Latvia
Average
Iceland
Romania
Spain
Estonia
Belgium
Sweden
Switzerland
Austria
Netherlands
Poland
Czech Republic
Average
Netherlands
Greece
Denmark
Denmark
Portugal
Latvia
Austria
Switzerland
Italy
Romania
Poland
Croatia
Slovenia
France
Turkey
Lithuania
UK (BT)
Hungary
Estonia
Luxembourg
Bulgaria
Telkom
Iceland
Germany
Slovenia
Malta
Cyprus
Slovak Republic
0.00
Local off peak (3 minute) Source: Tarifica 4th quarter 2008 0.20
a - Euros
0.15
0.10
0.05
Greece
Finland
Belgium
Sweden
Portugal
Norway
France
Spain
Hungary
Italy
Bulgaria
UK (BT)
Croatia
Turkey
Luxembourg
Cyprus
Telkom
Ireland
Malta
Slovak Republic
0.00
Group overview
Management review To adjacent country Peak (3 minutes) Source: Tarifica 4th quarter 2008 1.0
Sustainability review
a - Euros
0.8
Performance review
0.6
0.4
Financial statements 0.2
Lithuania
UK (BT)
Germany
Croatia
Portugal
Italy
Belgium
Greece
Ireland
Hungary
Estonia
Spain
Malta
Average
Finland
Slovak Republic
Latvia
Czech Republic
Poland
Austria
Bulgaria
Luxembourg
France
Denmark
Telkom
Slovenia
Romania
Iceland
Netherlands
Switzerland
Norway
Sweden
Cyprus
Turkey
0.0
Company Financial Information
Austria
Czech republic
Switzerland
Belgium
France
Poland
Portugal
UK (BT) Ireland Denmark Malta Norway
100
Average
a - Euros
Czech Republic
Lithuania
Italy
UK (BT)
Spain
Ireland
Germany
Croatia
Iceland
Latvia
Telkom
Malta
Norway
Finland
Hungary
Bulgaria
Turkey
Denmark
Cyprus
Greece
Sweden
Luxembourg
Romania
Slovak Republic
Belgium
Average
Croatia
Portugal
Slovenia
Poland
Italy
Finland (Elisa)
Netherlands
Cyprus
200
Austria
400
Spain
500
Latvia
Source: Tarifica 4th quarter 2008
Croatia Lithuania UK (BT) Portugal Finland Hungary Greece Italy Latvia Belgium Estonia Denmark Malta Average Bulgaria Spain
600
Sweden
Poland
Germany
Ireland
64 kbits / 50kms
Hungary
Austria
Iceland
Czech Republic
Romania
Switzerland
Telkom
Greece
Slovak Republic
Bulgaria
Netherlands
Luxembourg
Iceland Netherlands Sweden Norway Switzerland Telkom Cyprus
0.0
Turkey 0
Romania
Luxembourg
30
France
60
Slovenia
90
Estonia
120
France
Business: Installation Source: Tarifica 4th quarter 2008 150
Turkey
0
Germany
300
a - Euros
0.9
0.6
a - Euros
Telkom Annual Report 2009
14
Page 14 6:18 PM 8/12/09 Telkom AR front.qxp
Independent benchmarking of Telkom’s pricing – Tarifica review, 4th quarter 2008
Residential: Installation Source: Tarifica 4th quarter 2008 1.5
1.2
0.3
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Page 15
management team with experience to guide the Group Management review Chairman’s review Chief Executive Officer’s review Chief Financial Officer’s review Board of directors Chief officers Management team
16 20 24 28 30 31 Group overview
Management review
Sustainability review
Performance review
Financial statements
Company Financial Information
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Telkom Annual Report 2009
Chairman’s review
We have
strengthened the Board, our structures and processes to ensure Telkom’s transformation The year under review was characterised
The socio-economic environment
by the sale of Vodacom, a fast and
This period is marked by the shrinking local
substantively changing competitive local
economy,
landscape, and our efforts to grow in other
shareholders and stakeholders, the socio-
parts of the African continent. To ensure
economic challenges and new political
consistent
leadership.
growth
in
value
for
our
shareholders, among our strategic priorities, my first year in Telkom was to bring stability to
the
organisation;
the
second
a
strengthening of the Board; and the third must embed the ongoing transformation of the new Telkom to defend, grow, and deliver, competitively. While it has been a demanding period for the Telkom Board, we have been preparing for our most Shirley Lue Arnold Chairman
It is with great regret that we said a final farewell to the former Minister of Communications Dr Ivy Matsepe-Casaburri, who passed away on April 6, 2009. She was a great source of strength to us and we will miss her wise counsel.
challenging year, which lies ahead.
growing
activism
of
our
Bold and creative leadership is required to create employment, and intervene in the education, health, housing and security sectors. These socio-economic factors will strain corporations and increase the focus on companies as good corporate citizens. Pressure on the government to further reduce communication costs and widen services to boost the economy and public services will increase. Reporting on sustainability and
Restructuring Telkom SA Limited
environment impacts is also being more
This demands Telkom’s organisational
strongly demanded. Telkom is addressing
structures and operational systems become
these issues and our efforts are detailed
more responsive, adaptive and much
elsewhere in this report.
quicker in delivering innovative and quality services. More detail on the strategic priorities and restructuring of the company is provided by Reuben September in his CEO review.
The South African Gross Domestic Product (GDP) dropped 1.5% in the six months to March 2009, with the mining, manufacturing and automotive industries being particularly hard hit. In addition, in the first
The change is fundamental to our strategy
quarter of 2009, formal employment fell by
to grow our market share in South Africa
90,000. The rand remained under
and build a strong footprint across the
pressure with the resultant impact on the
African continent. It is vital to Telkom’s
economy and we believe that until world
survival to continually retire obsolete legacy
markets revive, the overall macro-economic
systems and bureaucracies as we review
scenario remains parlous.
our performance and restructure to meet our challenges.
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Telkom Annual Report 2009
17
Group overview
The regulatory environment
99.9% of our telephone access lines were
using three satellite operators – Intelsat,
connected to digital exchanges.
SES-Newskies and Hellas Sat.
challenging as the telecommunications
Our national network operations centre
Progress continues with the roll-out of the
regulator, ICASA, continues to implement
provides
global
Next Generation Network (NGN). The
the Electronic Communications Act. Until all
customers with managed data networking
NGN will give us significant advantages
the new regulations are promulgated, an
services and our investment in a third
over mobile operators through increased
element of uncertainty will bedevil all
upgrade of the South Atlantic Tele-
ability to carry traffic, provide superior
operators. Telkom remains committed to
communications Cable – 3 West African
quality services and compete on price.
working with ICASA for the greater good
submarine cable/South Africa Far East –
Changing market dynamics
of the South African telecommunications
has increased fibre optic transmission
To counter the continued decrease in voice
industry.
capability between South Africa and
revenues through the shift to mobile
international destinations. Our supply
units, we are aggressively expanding our
contract for the development of the EASSy
broadband footprint to offer and host
submarine cable system will link eight
higher bandwidth applications such as
countries from Sudan to South Africa.
video services. Our enhanced ADSL
The
regulatory
environment
remains
The technological environment Our fully digital fixed-line network provides service to every major urban area in South Africa, giving Telkom a competitive edge
our
corporate
and
offering enables our customers to access a
service
The acquisition of satellite bandwidth from
host of broadband value-added services.
providers selling value-added voice and
Intelsat in the Atlantic and Indian Ocean
ADSL subscribers increased by a pleasing
data services. At the end of March 2009,
regions provides services on eight satellites
33% over the previous financial year.
over
other
communications
Management review
Sustainability review
Performance review
Financial statements
Company Financial Information
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Telkom Annual Report 2009
Chairman’s review (continued)
explore We continue to
all avenues that will provide us with growth
Our strategic direction, the implementation
Chief Financial Officer of AngloCoal, on
Africa during the year under review. An
of Telkom’s new structure and the increasing
September 1, 2008.
additional R832 million is expected to be
challenges
of
the
competitive
and
regulatory environment are explained more fully in the Chief Executive Officer’s review. Management
continues
to
identify
opportunities for growth, particularly in sub-
The change in our articles of association allowed our new Chief Financial Officer, Peter Nelson, to join the Board on December 8, 2008.
spent in the 2010 and 2011 financial years. FIFA’s president, Sepp Blatter has been most complimentary about Telkom’s services (see box alongside). A major spinoff of the project is that all the equipment
Detailed curriculum vitae can be viewed on
used
pages 28 and 29.
communities.
The Vodacom transaction
Empowerment
The conclusion of the sale of 15% of our
Appreciation
While we remain a champion of Broad
shares in Vodacom to Vodafone and the
A special note of appreciation must go the
Based Black Economic Empowerment
unbundling of the remaining 35% to
Telkom Board members for their tireless
(BBBEE) with excellent performances in
shareholders after year end allows us to
commitment to Telkom under demanding
some areas (10 out of 10 for management
enter the South African mobile market and
conditions, our employees, and all our
control and 19.1 out of 20 for preferential
provide fully converged services. Telkom is
customers.
procurement), our overall BBBEE status is
now a smaller company which allows us to
relatively low – a level 6 contributor at the
Telkom has remained, through even more
put more focus on our key growth areas.
last verification. A new BBBEE strategy will
difficult times in our history as one of South
be implemented to rectify this situation. See
Africa’s leading ICT companies, and the
page 58.
Board and Executive will continue to
Saharan Africa.
The Board In the year under review, Mark Lamberti resigned on June 3, 2008 and the PIC
Confederations Cup and the 2010
representative, Athol Rhoda, resigned
Soccer World Cup
on July 3, 2008. I would like to thank them
A significant accolade for the year under
both for their commitment and support.
review was being appointed FIFA’s main
Brian Molefe replaced Athol Rhoda as the
partner for the development of fixed-line
PIC’s representative.
network infrastructures for these major
We were pleased to welcome Peter Joubert, director of companies, on August 12, 2008, and David Barber, former
will
benefit
local
and
other
provide value to our shareholders and service to the country as a strategic national asset.
sports events. Some R118 million was invested in the necessary equipment and
Shirley Lue Arnold
cabling for the soccer stadia around South
Chairman
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Telkom Annual Report 2009
19
On target for 2010
‘For the first time ever, the FIFA World Cup will kick off on African soil. This is an exciting, historic moment for Africa, and YOU are the people making it happen. For me, it will be the realisation of a dream. I have seen what football means to Africa. With so many talented and outstanding African players, coaches, clubs and national teams it is fitting that the 2010 FIFA World Cup should find a home on this continent. I have felt South Africa’s enormous enthusiasm – from the blue-collar worker to the top executive. This country has a phenomenal spirit, and I am privileged to share in the hope and inspiration that the 2010 FIFA World Cup is bringing to your people. You have shown the world that South Africa can achieve wonders, and there is no doubt in my mind that you will be ready. Telkom is ideally placed to make this a FIFA World Cup to be remembered. You are making history. Not only is this the first time the tournament is being hosted in Africa, but it is also the first time the event will be broadcast in high definition. With the huge volume of voice and data traffic that will be moving through the FIFA event network, your work is critical in facilitating the successful broadcast of the event.
Group overview
Management review
Telkom is on target for meeting the FIFA Confederations Cup 2009 requirements. And the completion of the network will allow Telkom to meet its requirements for 2010. This is how I know Telkom can deliver. Your efforts not only guarantee the smooth running of the games, but also build an infrastructure that will benefit your country long after we are gone. This is the kind of legacy we hope the 2010 FIFA World Cup will leave in Africa, and you are delivering an enormous gift, not just to us, but also to your own people. I have seen what this nation can do – the spirit of Ubuntu that pulls you together. With teamwork you can achieve anything and Telkom is no different. I have every confidence in you, the Telkom staff, to make this the greatest FIFA World Cup we have ever seen’ – Sepp Blatter.
Sustainability review
Performance review
Financial statements
Company Financial Information
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Telkom Annual Report 2009
Chief Executive Officer’s review
evolve
with the changing trends, meet the demand The
static,
unknown and competitive markets, highly
characterised as it is by fluidity, change
ICT
market
is
never
volatile currency fluctuations, infrastructure
and on-going innovation and those factors
and technology challenges. But, expensive
aptly summed up the year under review.
as they were, we have learned our lessons
Following the sale of Vodacom at what I believe was an exceptional price given the
and we are ready to capitalise on the opportunities going forward.
market conditions, and returning substantial
In South Africa, our on-going drive to
capital to our shareholders, and the sale of
enhance the Next Generation Network
our 75% stake in Telkom Media to
(NGN) continues to deliver significant
Schenzen Media, we are now poised to
benefits and gives us a substantial
compete
competitive
more
aggressively
in
the
edge
in
providing
our
telecommunications market. Our defend
customers with a full suite of converged ICT
and grow strategies are on track and,
services. In particular, given the fact that
following our restructuring, we are better
we can now enter the mobile market, the
Reuben September
placed to manage our resources more
NGN’s leading edge technologies will
Chief Executive Officer
effectively and efficiently.
enable us to carry increased traffic,
In South Africa, our on-going drive to enhance the Next Generation Network (NGN) continues to deliver benefits and gives us a competitive edge in providing our customers with a full suite of converged Information, Communication and Technology (ICT) services.
provide superior service and compete on Our South African operations remain our
price in a market where quality and
core business and cash flow generator and
efficiency is key.
I am pleased to report that we achieved good growth in our bundled calling plan products – Telkom Closer and Supreme Call – and significant growth in our broadband products. We once again achieved double digit growth from our data revenue, up 12.1% to R9.3 billion for the year.
Our operating revenue from continuing operations grew by 6.9% to R35.9 billion in the year under review. Operating profit from continuing operations declined by 29.6% to R6.4 billion and cash generated from operations before dividends paid fell by 9.6% to R14.8 billion.
In Africa, our footprint now covers almost the entire continent, with the exception of North
Financial overview
Africa,
which
gives
us
the
opportunity to extend our services to a very fast-growing market. We took our holding in Multi-Links Nigeria up to 100% and, post the year end, we acquired MWEB Africa, including AFSAT, from Naspers.
The Group EBITDA margin decreased from 39.3% to 32.5% in the year under review, mainly because of an EBITDA loss of R226 million recorded by Multi-Links and higher fixed-line operating expenditure which reduced the fixed-line EBITDA margin to 25.8% as at March 31, 2009 compared to 36.3% as at March 31,
However, on the debit side, our initiatives
2008. The South African business, however,
in Africa to date have been most
performed relatively well, and excluding
challenging, with high start-up costs,
the Multi-Links, Telkom Media and Africa
s,
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Telkom Annual Report 2009
21
Online impairments, the fixed-line EBITDA
R9.3 billion. Data connectivity revenue
Defend profitable revenue
margin would have been 32.3%.
increased to R5.0 billion, up 10.9% and
Our key objectives are to improve our
internet access revenues increased by 29.6%
competitiveness in areas where competition
to R1.5 billion. Our managed network
is expected to intensify by use of tariff
services and VPN revenues were up by
rebalancing, building customer retention,
22.3% to R891 million. We intend to continue
building customer loyalty and converting
to exploit the competitive edge our high-quality
revenue streams to annuity revenue.
We experienced a 45.9% decrease in headline earnings per share to 557 cents a share and declared an ordinary dividend of 115 cents per share and a special dividend of 260 cents per share, a decrease of 43.2% from the ordinary dividend of
network gives us in the corporate data market.
Pricing is a key element and our tariff
660 cents per share declared in the 2008
Cost management is a key element in
rebalancing will focus mainly on the
financial year. The dividend was paid to
creating shareholder value, particularly as
relationship between the actual costs and
shareholders on July 20, 2009.
competition continues to erode our revenue
tariffs of line rentals and traffic so we can
base. As a result of the vicious inflationary
compete in a liberalised communications
environment; expenses incurred by the
market. We aim to protect our margins and
Vodacom transaction; an R85 million
increase the per second billing benefits as
impairment of Africa Online; the R254 million
part of our bundled packages.
Total traffic revenue decreased by 3.9% to R15.3 billion, with local traffic revenue decreasing 10.8% to R3.6 billion and long distance revenue decreasing by 9.6% to
impairment of Telkom Media and the
R2.0 billion, primarily because of the
R1.8 billion impairment of Multi-Links, our
continuing fixed to mobile substitution.
fixed-line operating expenses rose by
The Telkom Closer packages performed
19.6% to R29.8 billion.
well, growing by 27.6% to 575,812 plans
Employee expenses rose to R8 billion, an
and Supreme call packages, targeted at
increase of 8.1%; selling, general and
the business segment, grew by 14.4% to
administrative expenses were up 68.8% to
14,778 packages. Our PC bundles showed
R6.6 billion; service fees rose 14.4% to
a 48.3% growth to 11,336 packages and
R2.8 billion and payments to other
we continued successfully to tie in large
operators increased 9.2% to R7.5 billion,
corporate customers to term and volume
with operating leases decreasing by 1% to
discount plans.
R613 million. Depreciation, amortisation,
Annuity revenue streams, excluding line installations, reconnection fees and customer premises equipment sales, grew by 6.8% to R7.4 billion and we will seek to continue to convert revenue streams to annuity revenues, largely through bundling call minutes with access line rental in attractive subscription-based value propositions. Our current line penetration of bundled products is 41.7%. By 2013/14, we are targeting a penetration of 56%. Broadband
and
converged
services
performed very well with a 33% growth in ADSL subscribers to 548,015. There was a 58.1% increase in Do Broadband subscribers to 188,540. Internet all-access subscribers grew to 423,196, an increase
• Differentiating retail list prices from value-based offerings. Our quest is to convert customers from usage-based products to adopting
impairment and write-offs increased by 16.8% to R4.4 billion. Headline earnings from continuing operations decreased
calling plans and bundles. • Value-based calling packages and bundles. Our intention is to deliver value to our customers and thus improve retention and loyalty. We will bundle call minutes with access line rental in an attractive subscription-based value proposition to deliver greater value to our customers. • Converting revenue to annuity-based
Group overview
45.9% to 557 cents per share for the year
revenue.
ended March 31, 2009. The reduced
This will help us offset declining usage-
earnings can be attributed to the significant
based revenue and boost annuity
impairments
revenue.
contained
in
operating
expenses and negative foreign exchange and fair value movements of R1.1 billion resulting from the depreciation of the rand and the naira against the US dollar. Strategic overview Our core strategy is to defend and grow profitable revenue, while managing costs. We will aim to differentiate ourselves from competitors by moving from a provider of basic voice and data connectivity to
• Rebalancing prices of data services. We will pass on the benefits of increased
network
efficiencies
to
Sustainability review
customers so we can defend our market share and revenue.
Performance review
• Differentiated attributes of our offerings. We will emphasise the offerings that customers value so that we can compete on more than just price.
become Africa’s preferred information,
Build customer retention
communications and technology service
We will continue to launch initiatives to
In line with our strategy of growing our data
provider offering fully converged voice,
attract customers to stay with us and focus on
business, data revenues (including broad-
data, video and information technology
customer centricity through implementing
band) increased a very pleasing 12.1% to
services.
value
of 18.2%.
Management review
and
needs-based
customer
Financial statements
Company Financial Information
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Telkom Annual Report 2009
Chief Executive Officer’s review (continued)
segmentation. Additionally, we will concen-
as mobile converged voice services and
been initiated with the objective of
trate on fostering long-term relationships with
by building a wireless voice and mobile
transforming us into a leading Pan-African
enterprise and wholesale customers through
data network in areas that use less
communications company. Delivering on
volume and term agreements.
vulnerable access technologies, which will
this requires a compelling and focused
reduce the theft of copper cables and
transformation programme. This programme
improve service levels. We will also enter
consists of various initiatives including
into, among other things, a roaming
defending our market share, seeking new
agreement in the areas where we choose
revenue and businesses, implementing a
not to build our own network.
structure that enables clear profit and loss
Build customer loyalty We will continue to position Telkom as the service provider of choice through superior value propositions and constant product and service innovations. We will also upgrade our customer communication programme. Grow profitable revenue through broadband and converged services Profitable revenue growth in our broadband and converged services area will be driven by continuing to increase converged services revenue; pursuing partnerships with content providers
to
enhance
our
products;
aggressively seeking to improve our market share in the information technology services sector and improving our innovation capabilities. We are in no doubt that the next battleground of the convergence between telecommunications and IT will be in the data management environment. We have one of the finest National Network Operating Centres in the world and we will use it to provide our customers with cost-effective solutions that support their total ICT needs. We expect to stimulate the
To implement this strategy we have obtained access to the 1800MHz and 2100MHz spectrum bands to utilise 2G
This is aimed at achieving certain key financial targets, such as improving our
higher value customer segments and
EBITDA by increasing the return on our
technologies that enable roaming across
assets,
networks
mobile
expenditure investments, as well as
technologies, we can offer wireless access
improving our cash flow. We intend to do
to, amongst others, campuses, gated
this by significantly improving revenue
communities and security complexes and
through our strategic initiatives, capturing
provide
operating
that
use
mobile
different
data
services
and
fixed/nomadic voice services. Our move to offering a fully fledged mobile service depends on the outcome of a market research programme and a roaming
service offerings in response to increased demand for higher bandwidth in the
effective
expenditure
capital
efficiencies,
can increase our return on assets and critically challenging capital expenditure planned for the next few years.
agreement we are currently negotiating with
We embarked on the initiative towards the
the South African mobile operators. At this
end of the year under review and our
stage, we will not commit to any capital
inspirational objective is creating a new
expenditure before completion of the
Telkom. It is a bold, new journey for the
comprehensive market study.
Group and its scope and importance is
Telkom aims to increase revenue and long-
and improve our integrated communications
making
focusing on expenditure in areas where we
our data centre business.
data communications service capabilities
deliver upon our strategic intent.
and mobile data services. By focusing on
Grow profitable revenue internationally
have been introduced to strengthen our
business processes and work practices
and 3G technologies in pursuit of our voice
use of bandwidth over our network through
Several products, including Metro LAN,
accountability, as well as ensuring that our
term
profitability
from
our
African
subsidiaries we have acquired and from the international services we provide. We will become a Pan-African integrated service provider that offers international communications and internet connectivity,
such that it will roll out over two years. It is a phased and planned programme that will transform our Group’s culture and the way we do business. It will ensure full profit and loss accountability throughout the organisation and will enable us to focus on efficient resource management and cost containment. Our financial objective is a 10% reduction in operating expenses by
hosting and managed data services and
the financial year ending 2011/2012.
wireless voice and mobile broadband
Currently we are conducting a Group-wide
Grow profitable revenue through
solutions. We have the opportunity to
survey to analyse our current culture and
wireless voice and mobile data services
leverage synergies from Telkom South
give employees the opportunity to provide
By providing customers with an integrated
Africa
subsidiaries,
their views on what our culture should look
bundled offering with superior speeds and
capitalise on strategic partnerships, for
like. I believe that this is essential if we are
quality through our fixed-line network,
example, with AT&T, and advance data
to have a firm foundation on which to build
combined with mobility when required, we
services into a growing market in Africa.
the remainder of the process.
Executing our strategy
Underpinning the programme is the four
This we can do by transforming our fixed-
We will execute our strategy through the
‘Rs” strategy:
line business to incorporate services such
Telkom Renaissance initiative which has
corporate and global segment.
can grow profitable revenue.
into
our
Africa
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Telkom Annual Report 2009
23
MWEB Africa
The ordinary dividend of 115 cents per
Our geographic expansion strategy is
share declared for the 2009 financial year
geared to establishing us as a regional
provides the new targeted base established
voice and data player via a range of
by the Board for the determination of future
hosting services, managed solutions, and
dividends for Telkom as a stand-alone entity.
mobile voice and wireless broadband
The level of dividend payments going
services. To this end, in addition to Multi-
forward will be based on a number of
• Revitalisation – renewing the entire
Links, we purchased MWEB Africa and
factors, including the consideration of the
Group and reinforcing a positive ‘make
75% of MWEB Namibia for approximately
financial results, capital and operating
it happen’ attitude among all our
R498 million. As of March 31, 2009,
expenditure requirements, the Group's
people.
MWEB Africa had a customer base of
debt level, interest coverage, internal cash
20,175 with operations in Nigeria, Kenya,
flows, prospects and available growth
Tanzania,
opportunities.
• Remodelling – reaching for new revenue streams in current and new markets. • Reorganising – fashioning a structure that enables clear profit and loss accountability
and
focus
in
a
performance-oriented environment.
• Re-engineering – ensuring that our business
processes,
allocation
Uganda,
Namibia
and
of
Zimbabwe and an agency arrangement in
resources and work practices deliver on
Botswana. This acquisition, together with our
our strategic intent.
investment in Africa Online, gives us the
We are re-building the organisation into a world class team.
ideal opportunity to service multi-national and corporate customers across Africa, particularly in the data products field, which
Multi-Links
we believe will deliver enormous future
As mentioned earlier in my report, we
growth. The memorandum of understanding
acquired the remaining 25% of Multi-Links
signed with AT&T will further enhance our
in January 2009 for US$130 million. The
ability to service multi-national and corporate
company did not perform well in the last
customers throughout the continent.
financial year with a net loss for the period
Prospects
ending March 31, 2009 of R1.76 billion.
Telkom’s strategy is designed to deliver
We acknowledge that we under-estimated
sustainable,
the competitiveness of the Nigerian market and failed to execute on the building and management of our distribution channels. Turning Multi-Links’ performance around is our number one priority, given the extent of our
investment
and
the
enormous
opportunity the Nigerian market provides. US$100 million has been budgeted for the 2009/10 financial year for the completion
profitable
growth
Appreciation As ever, on behalf of the Executive Committee, I extend my sincere gratitude to the Telkom Board of directors for the guidance and insights its members have provided. I must also thank the executive team and all our employees for their dedication and commitment in executing our defend and grow strategies. Thanks also to our customers for their continued and valued support.
going
forward and is benchmarked against global best practice. The creation of shareholder value is the underlying driver of every decision made. Telkom’s Board of directors and management team believes that the share price has not been reflecting the underlying value of the fixed-line business and they are committed to rectifying this.
Conclusion In summing up the year I am reminded of something one of our call centre operators in Cape Town said about her job: ”You have to take the good with the bad and, overall, the good outweighs the bad.” And that was the year under review. Tremendous pressures on all fronts; a lot of angst around the Vodacom deal – externally and internally – the on-going fight against the cable thieves, etc. But then we had the restructuring of the business, a force for good, and the
Over the next few years, we will be
opportunity, via our appointment by FIFA, to
focusing on transforming the business to
design and provision the infrastructure for the
deal with competition; concentrating on
Confederations Cup and 2010 Soccer
delivering innovative products and services
World Cup stadia, to show the world just
to our customers; expanding our network
how good we are. The fact that our diverse
and bedding down our growth drivers.
customer base includes the majority of the
connectivity for voice and data customers.
We expect that over the next three years,
country’s large corporates also contributed to
In addition, 227 cell towers are to be
competition will continue to constrain
the ‘good’ part of the year.
erected and another 300 commissioned on
revenue growth and, in a transforming
Telkom is now poised to maximise value for
third party leased tower infrastructure during
industry like ours, targets are inherently
all our shareholders.
the year. Seven new customer service
risky, particularly in the later years, and
centres are planned to facilitate and support
investors should not place undue reliance
of an additional 1,645 km build and 584 km swop of optic fibre cable for the DWDM/SDH network. It is anticipated that the network will connect 80 DWDM/SDH sites, covering all major cities in Nigeria, providing us with additional bandwidth
the network growth.
on such targets. Increased revenues from
We expect Multi-Links to be EBITDA
business
positive in 2010/11 and to be cash flow
subsidiaries are projected to mitigate the
Reuben September
positive by 2011/12.
impact of increased competition.
Chief Executive Officer
our
recently
Management review
Sustainability review
Performance review
Financial statements
Company Financial Information
our data, broadband and converged and
Group overview
acquired
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Telkom Annual Report 2009
Chief Financial Officer’s review
The roll-out of our mobile network is expected to enable us to provide connectivity
cost-effectively It is my pleasure to present Telkom’s
around Multi-Links’s performance is vital to
financial review for the year ended
Telkom given the extent of the Group’s
March 31, 2009. It has been a challenging
investment and the enormous opportunity
year and despite difficult economic
the Nigerian market provides.
conditions, Telkom managed to deliver value to shareholders by declaring a special dividend of R19 per share upon conclusion of the Vodacom transaction after year end and declaring an ordinary dividend of R1.15 per share and special dividend of R2.60 per share in June 2009.
The roll-out of our mobile network is expected
to
enable
us
to
provide
connectivity in a more cost effective manner in rural and high cable theft areas. Next Generation Network and mobile technology also allows us to replace expensive to maintain legacy equipment.
Faced with competition eroding our
We continue with the renegotiation of all
revenue base, cost management continues
supplier
to be a key element in creating shareholder
engagement with labour unions. We are
Peter Nelson
value. Combined with the inflationary
reviewing our IT investment strategy in
Chief Financial Officer
environment
contracts
and
constructive
operating
order to ensure optimum levels of spend in
expenses, a number of once-off items
line with our strategy and network
impacted Group earnings including:
investment. Inventories and capital work-in-
affecting
our
progress • R691 million cost relating to the Vodacom BEE deal;
are
receiving
considerable
attention as we seek to lower just-in-time levels of investment and to monetise any
• R462 million impairment of Multi-Links;
excessive levels of assets.
• R409 million fair value loss on the
Telkom is targeting an operating cost
acquisition of the additional 25% in
reduction of 10% over the following three
Multi-Links;
financial years. The Telkom Board is
• R204 million foreign exchange loss on the
acquisition
of
Gateway
by
Vodacom;
Vodacom transaction;
It has reduced the initial five year capital and is targeting lower levels of inventory. The Telkom Group added Multi-Links as a
• R39 million impairment of Africa
new segment to its financial reporting for the 2009 financial year. As a result, the
Online; and • R454 million deferred tax credit on the Vodacom transaction. addition,
and free cash flow profile of the Company. expenditure budget by 40% to R34 billion
• R177 million expenses relating to the
In
focusing on improving the cost efficiency
Multi-Links
Telkom Group’s four reporting segments for the 2009 financial year are fixed-line, Multi-Links, mobile and other. The other
reported
a
segment includes Telkom’s Trudon, formerly
R1.76 billion loss before eliminations
known as TDS Directory Operations, and
during the 2009 financial year. Turning
Africa Online, subsidiaries. The information
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Telkom Annual Report 2009
25
in this annual report has been updated to
increased by 3.3% to R33,659 million due
Finance charges and fair value
reflect the above changes to Telkom’s
to growth in data revenues, higher revenue
movements
reporting
currently
from interconnection and subscription-
Finance charges include interest paid on
expects its Telkom SA, Telkom International
based calling plans, partially offset by
local and foreign borrowings, amortised
and Telkom Data Centre businesses will
lower traffic revenue. Multi-Links’s operating
discounts on bonds and commercial paper
constitute distinct reporting segments in the
revenue increased 124.9% due to a
bills, fair value gains and losses on
2010
209.3% growth in its subscriber base.
financial instruments and foreign exchange
segments.
financial
Telkom
year
due
to
the
implementation of its new organisational structure, which became effective as of April 1, 2009.
Telkom’s defend and growth strategies are on track. We have achieved good growth in our bundled calling plan products,
Telkom concluded the disposal and sale of
Telkom Closer and Supreme Call, and
Vodacom, its mobile segment that provided
strong growth in our broadband products.
mobile services through its 50% joint venture
Data revenue continues to achieve double
interest in Vodacom, effective as of April 20, 2009. In addition, Telkom’s Board of directors has decided to dispose of Swiftnet, a wholly owned subsidiary that
digit growth, delivering a 12.1% revenue growth to R9,310 million for the year ended March 31, 2009.
gains and losses on foreign currency denominated transactions and balances. Finance charges and fair value movements increased by 82.7% to R2,843 million (March 31, 2008: R1,556 million) in the year ended March 31, 2009, primarily due to a 12.2% increase in interest expense to R1,732 million (March 31, 2008: R1,543 million) mainly as a result of the 38.7% increase in the Group’s net
provides wireless data services, and
Group operating expenses
debt to R23,047 million (March 31,
determined to abandon its Telkom Media
Group operating expenses increased by
2008: R16,617 million). In addition to the
subsidiary.
Group’s
19.5% to R29,895 million (March 31,
increase in the interest expense, net fair
consolidated financial statements and
2008: R25,014 million) in the year ended
value
March 31, 2009, due to a 19.6%
movements
increase in operating expenses in the fixed-
R1,111 million for the year ended
line segment to R29,849 million (before
March 31, 2009 (March 31, 2008:
inter-segmental
a
R13 million). The increase in the loss was
157.1% increase in operating expenses in
mainly attributable to foreign exchange
The
Telkom
information included herein reflects the restatement
to
Telkom’s
consolidated
financial statements in prior years as a result of these events to disclose the effect of discontinued operations and the disposal of the subsidiaries held for sale as follows: • Income statement data for all the periods have been restated to reflect our 50% share of Vodacom’s results, our 100% share of Swiftnet’s results and our 75% share of Telkom Media’s results as
eliminations)
and
Multi-Links to R2,422 million (before intersegmental eliminations). Fixed-line operating expenses increased due to increased selling, general
and
administrative
expenses,
payments to other network operators,
and
foreign resulted
exchange in
a
loss
rate of
losses incurred by Multi-Links on foreign denominated loans and creditors’ balances as a result of the devaluation of the Naira as well as the mark to market valuation of the Multi-Links put option.
Group overview
discontinued operations in accordance
depreciation, amortisation, impairment and
Taxation
with IFRS5; and
write-offs, employee expenses and service
Consolidated
fees. The increase in Multi-Links’s operating
continuing
expenses was primarily due to increased
37.3% to R1,660 million (March 31,
cost of sales and associated subsidies as a
2008: R2,647 million) in the year ended
100% share of Swiftnet’s results as
result
volumes,
March 31, 2009. The consolidated
discontinued operations in accordance
increased advertising and promotional
effective taxation rate for the year ended
with IFRS5.
expenditure and an increase in expatriate
March 31, 2009 was 44.6% (March 31,
fees as a result of an increase in staff
2008: 34.5%). Telkom company’s effective
• Balance sheet data for only the year ended March 31, 2009 reflects our 50% share of Vodacom’s results and our
The discussion of the business below has been revised from previous years to reflect
of
increased
sales
seconded from Telkom during the year.
taxation
operations
expense decreased
from by
taxation rate was 8.9% (March 31, 2008:
Investment income
discontinued operations.
for Telkom Company in the year ended
Investment income consists of interest
March 31, 2009 was mainly due to the
Group operating revenue
received on short-term investments and
deferred taxation asset that was raised on
Group operating revenue increased by
bank
income
the capital gains tax base cost of the 15%
6.9% to R35,940 million (March 31,
increased by 7.7% to R181 million
investment in Vodacom which is held for
2008: R33,611 million) in the year ended
(March 31, 2008: R168 million), largely
sale that will be utilised in the future capital
March 31, 2009. Fixed-line operating
as a result of increased short-term deposits
gains tax liability of the sale transaction,
revenue, before inter-segmental eliminations,
and interest rates.
partially offset by the R1,843 million
Investment
Sustainability review
Performance review
24.6%). The lower effective taxation rate
the changes to Telkom’s segments and its
accounts.
Management review
Financial statements
Company Financial Information
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Telkom Annual Report 2009
26
Chief Financial Officer’s review (continued)
impairment of the Multi-Links investment, a
Group cash flow
provisioning and fulfilment, assurance and
R254 million impairment of the Telkom
Cash flows from operating activities
customer
Media loan and R85 million impairment of
increased by 7.8% to R11,432 million
upgrades on the billing platform and
the Africa Online investment at company
(March 31, 2008: R10,603 million),
performance and service management and
level.
primarily due to a lower dividend paid in
property optimisation. During the year
respect of the 2008 financial year and
ended March 31, 2009, R603 million
lower taxation payments partially offset by
(March 31, 2008: R841 million) was spent
higher finance charges. Cash flows utilised
on the implementation of several systems.
in investing activities increased by 20.6%
Multi-Links’s capital expenditure, which
to R17,005 million (March 31, 2008:
includes spending on intangible assets,
R14,106 million), primarily due to higher
R7,975 million) in the year ended
increased by 112.7% to R2,791 million
capital expenditure in the Multi-Links and
March 31, 2009. A major contributor to
(March 31, 2008: R1,312 million) and
mobile segments and the acquisition of
the decrease was the net loss of
represents 146.9% of Multi-Links’s revenue
Gateway by Vodacom. Cash flows from
R1.76 billion reported by Multi-Links.
(March 31, 2008: 155.3%) and was due
financing activities includes loans raised of
to the continued investment to improve
Group basic earnings per share from
R18,168 million, partially offset by loans
geographic
repaid of R10,212 million.
capacity for both the voice and data
407.4 cents per share (March 31, 2008:
Group capital expenditure
networks.
963.7
headline
Group capital expenditure, which includes
Mobile capital expenditure, which includes
continuing
spend on intangible assets, increased by
spending on intangible assets, increased
operations decreased by 45.9% to
11.2% to R13,234 million (March 31,
by 3.2% to R3,569 million (March 31,
557.0 cents per share (March 31, 2008:
2008: R11,900 million) and represents
2008: R3,460 million) and represents
1,028.9 cents).
36.8% of Group revenue (March 31,
12.9% of mobile revenue (March 31,
2008: 35.4%).
2008: 14.4%) and was due to the
Profit for the year and earnings per share Profit attributable to the equity holders of Telkom
decreased
R4,170
million
by
47.7%
(March
31,
to
2008:
continuing operations decreased 57.7% to cents)
and
Group
per
share
from
earnings
Group balance sheet
care,
hardware
coverage
technology
and
increase
continued investment to improve geographic
Net debt, after financial assets and
Fixed-line capital expenditure, which
liabilities,
discontinued
includes spending on intangible assets,
operations, increased by 38.7% to
decreased by 1.5% to R6,690 million
R23,047 million (March 31, 2008:
(March 31, 2008: R6,794 million) and
Other capital expenditure consists of
R16,617 million) resulting in a net debt to
represents 19.9% of fixed-line revenue
additions to property, plant and equipment
EBITDA ratio of 1.2 times from 0.8 times at
(March 31, 2008: 20.9%). Baseline
and intangible assets for our subsidiaries
capital expenditure of R3,343 million
Trudon (Pty) Ltd, formerly known as TDS
(March 31, 2008: R4,039 million) was
Directory Operations, Swiftnet (Pty) Ltd,
largely for the deployment of technologies
Africa Online Ltd and Telkom Media (Pty)
to support the growing data services
Ltd. Other capital expenditure decreased to
business (including the ADSL footprint), links
R184
to the mobile cellular operators and
R334 million) and represents 13.8% of
expenditure for access line deployment in
other revenue (March 31, 2008: 29.1%).
including
March 31, 2008. On March 31, 2009, the
Group
had
cash
balances
of
R1,931 million (March 31, 2008: R1,134 million). Net debt, after financial assets
and
liabilities
of
continuing
operations, was R15,497 million with a net debt to EBITDA ratio of 1.3 times.
selected high growth commercial and
coverage and increase capacity for both the voice and data networks.
million
(March
31,
2008:
Prospects
Telkom Company issued new local bonds,
residential areas. The continued focus on
the TL12 and TL15 with a nominal value of
rehabilitating the access network and
R1,060 million and R1,160 million,
increasing the efficiencies and reducing
respectively as well as syndicated loans
redundancies in the transport network as
with a nominal value of R4,100 million
well as the initiation of the fixed-wireless
during the year ended March 31, 2009.
roll-out contributed to the network evolution
The Company issued commercial paper bills
and sustainment capital expenditure of
with a nominal value of R11,025 million for
R1,488 million (March 31, 2008:
the year ended March 31, 2009 of which
R1,369 million).
commercial paper bills with a nominal value
Telkom continues to focus on its operations
business and are committed to addressing
of R9,849 million were repaid by
support system investment with current
this while we invest for growth in new
March 31, 2009.
emphasis on workforce management,
areas of business.
Telkom’s strategy is designed to deliver sustainable,
profitable
growth
going
forward and is benchmarked against global best practice. The creation of sustainable shareholder value is the underlying driver of every decision made. Telkom’s
Board
of
directors
and
management team believe in the cost efficiencies and cash flows of the fixed-line
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Telkom Annual Report 2009
27
Capital expenditure for the Group is
operational requirements, the Group’s debt
African and global investors. Telkom
expected to range between 20% and 23%
level, interest coverage, internal cash
intends to maintain a level 1 American
of revenue over the next financial year.
flows, prospects and available growth
Depositary Receipt programme to facilitate
opportunities.
over-the-counter trading in the United States
In the long term the targeted net debt to
of America.
EBITDA ratio is expected to be below
New York Stock Exchange Listing
1.4 times. However, in the shorter term,
Given the current global economic climate
Conclusion
debt levels will be considerably lower
and the business imperative for Telkom to
With a year of unprecedented global
given the retention in part of the proceeds
reduce its cost base, the Board has
financial conditions behind us, I certainly
from the sale of 15% of Vodacom.
decided to delist from the New York Stock
Targets in a transforming industry such as
Exchange. Maintaining a listing in the
ours are inherently risky, particularly in later
United States is expensive and takes
years and investors should not place undue
considerable management time. The
reliance on such targets. Our ability to meet
methodology employed and discipline
such targets is subject to a number of risks
gained
and uncertainties and there could be no
Sarbanes-Oxley reporting requirements will
assurance that we could meet such targets.
be retained, where appropriate, to ensure
The level of dividend going forward will be based on a number of factors including the
from
compliance
with
the
look forward to the challenges of the year ahead. The management team is committed to turning the performance of Multi-Links around, reducing operating and capital expenditures and continuing to deliver value to our shareholders. I remain confident in our ability to meet these challenges.
strict corporate governance compliance and transparent financial reporting.
consideration of the financial results,
Telkom is comfortable that the JSE provides
Peter Nelson
available growth opportunities, capital and
sufficient access to capital from both South
Chief Financial Officer
Group overview
Management review
Sustainability review
Performance review
Financial statements
Company Financial Information
Telkom AR front.qxp
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Telkom Annual Report 2009
Board of directors
SHIRLEY LUE ARNOLD Chairman Shirley Lue Arnold was appointed Chairman and non-executive director on November 1, 2006. Holder of a BA degree and a Certificate in Education, Ms Arnold is a former non-executive director of Peermont Global Limited and Ernst & Young South Africa. Currently she is a member of the Chairpersons Forum, Gordon Institute of Business, the Independent Directors’ Initiative and the Institute of Directors in South Africa. She is a trustee of the Thutuka Bursary Fund (SAICA) and the Maths Centre and is a patron of the Student Sponsorship Programme.
REUBEN SEPTEMBER Chief Executive Officer With 32 years’ experience in the IT and telecommunications industry, Reuben September was appointed acting Chief Executive Officer in April 2007; appointed to the Board in May 2007 and appointed CEO of Telkom in November 2007. He has worked in various engineering and commercial positions at Telkom since 1977, including Managing Executive of Technology and Network Services; Chief Technical Officer and Chief Operating Officer and also served as a director of Vodacom. Mr September has a BSc in electrical and electronic engineering from the University of Cape Town and is a member of the Professional Institute of Engineers of South Africa (ECSA).
PETER NELSON Chief Financial Officer Peter Nelson, BComm, BAcc (Honours), CA, was appointed to the Board on December 8, 2008. Previously he was the Chief Financial Officer of Netcare. Mr Nelson has also served at board level for a number of major corporations for the past 20 years, including BMW, Mondi Paper and Pretoria Portland Cement.
Government, independent and PIC representatives KEITUMETSE MATTHEWS Government representative Appointed to the Board in June 2006, Ms Matthews is a businesswoman and former Chief Legal Advisor for the South African Broadcasting Corporation (SABC) and a former special advisor to the Minister of Communications. She has a BA (Hons) degree and is a Barrister-at-Law.
SIBUSISO LUTHULI Independent Mr Luthuli, managing director of Ithala Limited since 2004, was appointed to the Telkom Board in July 2005. A qualified chartered accountant (CA), Mr Luthuli holds a BComm degree and a post graduate diploma in accountancy. He is non-executive Chairman of Cipla Medro SA and a member of the KwaZulu-Natal Provincial Government audit committee.
BRAHM DU PLESSIS Independent Brahm du Plessis was appointed to the Board in December 2004. A practising advocate at the Johannesburg Bar since 1987, Advocate Du Plessis, who holds BA and LLB degrees from the University of Stellenbosch and an LLM degree from the University of London, is a member of Advocates For Transformation and has served as a member of the Johannesburg Bar Council.
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Telkom Annual Report 2009
More than100 years of combined telecommunications experience
29
DR EKWOW SPIO-GARBRAH Government representative Appointed to the Board in September 2007. Dr Spio-Garbrah is the Chief Executive Officer of the London-based Commonwealth Telecom Organisation and Ghana’s former Minister of Communication and Education. He holds a BA (Hons), English from the University of Ghana, a Graduate Certificate in International Banking from the New York University; a Graduate Diploma in Journalism and Communication and an MA in International Affairs from Ohio University and an LLD (Honorary Doctorate in Laws) from Middlebury University in the USA.
JACKIE HUNTLEY Government representative Ms Huntley who was appointed to the Board in September 2007, is an attorney and senior partner at Mkhabela Huntley Adekeye Inc, one of the major black law firms in South Africa. She has extensive experience in commercial and corporate law, including telecommunications law. She holds BProc and LLB degrees from the University of the Witwatersrand along with a Management Advanced Programme certificate.
DR VICTOR LAWRENCE
PETER JOUBERT
Government representative
Independent
Dr Lawrence was appointed to the Board in September 2007, holds BSc, MSc and PhD degrees in Electrical and Computer Engineering from the University of London, is the Charles W Bachelor Chair Professor of Electrical and Computer Engineering and Associate Dean for Special Programs at Stevens Institute of Technology.
Mr Joubert was appointed to the Board in August 2008. Previously he was the Chief Executive Officer and chairman of Afrox. He has served as the chairman of numerous companies. He is the current Chairman of BDFM Publishers and Sandvik and is a director of SAA and Transnet and external advisor to General Motors SA. He holds a BA degree from Rhodes University, a DPWM from Rhodes and has completed Harvard Business School’s Advanced Group Management Programme.
overview
DAVID BARBER Independent Appointed to the Board in September 2008, Mr Barber is the former global Chief Financial Officer of AngloCoal and former Chief Financial Officer for the Anglo American Corporation of South Africa. Mr Barber is a chartered accountant (South Africa) and FCA (England and Wales) and serves as an independent non-executive director and member of the audit committee for Murray & Roberts.
BRIAN MOLEFE Public Investment Corporation representative Appointed to the Board in July 2008, Mr Molefe is the Chief Executive Officer of the PIC. A former deputy Director General at the National Treasury and Chief Director: strategic planning in the office of the Premier of Limpopo, Mr Molefe holds a Masters of Business Leadership and BCom degrees from the University of South Africa. He also has a post-graduate Diploma in Economics from London University, School of Oriental and African Studies.
Management review
Sustainability review
Performance review
Financial statements
Company Financial Information
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Chief officers
THAMI MSIMANGO
NAAS FOURIE
Chief of Global Operations and Subsidiaries
Chief of Strategy
Mr Msimango was appointed Managing Director of Telkom International on April 15, 2009. Previously he served as Chief of Global Operations and Subsidiaries since November 1, 2007 and Chief Technical Officer from September 2005. He joined Telkom in 1984 and held a number of senior positions, including Managing Executive of Technology and Network Services and Executive Technology, Direction and Integration.
Mr Fourie was appointed Chief of Strategy in April 2008 having acted in the position from November 2007. He joined Telkom in 1994. He is a former Managing Executive of Commercial Services and Executive of Marketing Services. He holds a BA, BDivinity and BAcc Science (Honours) degrees and has completed the advanced executive programme of the Kellogg School of Business.
CHARLOTTE MOKOENA
OUMA RASETHABA
Chief of Human Resources
Chief of Corporate Governance
Ms Mokoena, former Group Executive of Human Resources from December 2002 to October 2007, was appointed Chief of Human Resources in November 2007. She holds a BA (Hons) degree in human resources development from the University of Johannesburg; a BSoc Sciences from the University of the North West and a postgraduate diploma in training and performance management from Leicester University in the UK.
Appointed Chief Corporate Governance Officer in November 2007, Advocate Rasethaba joined Telkom in 2006 as Group Executive of Regulatory and Public Policy. She is a former special director of Public Prosecutions at the National Prosecuting Authority. She holds a BProc degree from the University of the North, an LLB (Hons) and Higher Diploma in Company Law from the University of the Witwatersrand and an LLM from the University of Pretoria.
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Telkom Annual Report 2009
31
Management team
Age at Name
30 June
Marius Mostert
54
Telkom Portfolio
Position
Responsibilities
appointment appointment
Network Infrastructure
Responsible for network technology,
1973
2007
Provisioning
strategy, planning, technical product
1993
2007
1976
2007
1980
2007
1997
2007
1986
2007
1996
2007
development and all associated network infrastructure deployment. Casper Kondo
48
Chihaka
Network
Responsible for customer service
Field Operations
fulfilment and assurance network restoration.
Pierre Marais
50
Network Core Operations
Responsible for the technical and operational management associated with Telkom’s core network.
Zethembe Khoza
51
Contact Centre
Responsible for managing all contact
Operations
points in which customers contact Telkom, such as call centres, TelkomDirect shops, commercial services and credit management.
Godfrey Ntoele
48
National Sales and
Responsible for the national sales and
Marketing Operations
marketing operations for Telkom’s retail consumers and business enterprises and direct sales to business customers and government entities.
Bashier Sallie
41
Information
Responsible for enterprise wide IT
Operations
activities including infrastructure, architecture, applications, support and internet service providers.
Theo Hess
51
Capability
Responsible for ensuring that Telkom has
Management
the right groups of processes, relationships, assets and resources that enable it to
Group overview
deliver on its strategic objectives. Amith Maharaj
34
Fixed Mobile
Responsible for the development and
Convergence Services
implementation of the mobile and
2008
2008 Management review
fixed-mobile converged business and technical strategy. Thami Magazi
51
Multi-National
Responsible for national and
Customers
international sales revenue for multi-
2001
2007
Sustainability review
national customers and also service and project management to support both
Performance review
national and multi-national sales teams. The portfolio directs Telkom’s service delivery obligations for 2010 FIFA Soccer World Cup. Alphonzo Samuels
43
Wholesale and
Responsible for national and international
Marketing Operations
wholesale revenue and customer relationship management.
Financial statements
1984
2007 Company Financial Information
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Telkom Annual Report 2009
Management team (continued)
Age at Name
30 June
Brenda Kali
55
Telkom
Position
Portfolio
Responsibilities
appointment appointment
Corporate
Guided by the company’s business
2008
2008
Communications
plan, vision and brand strategy,
1995
2005
2006
2006
1997
2007
Responsible for Telkom Group strategy
2008
2008
Responsible for financial accounting,
1993
2008
1992
2008
2007
2007
the role of Corporate Communication is to influence stakeholder behaviour through effective, timely and measureable communication making use of world-class reputation management solutions. Mike Mlengana
49
Corporate Development
Responsible for implementing Telkom’s international expansion strategy through business development and merger and acquisition activities across Africa and other emerging markets.
Nicola White
37
Investor Relations
Responsible for liaising with the investor community which includes retail shareholders, analysts and institutional investors.
Nicolene Rossouw
40
Performance Centre
Responsible for the Performance
(Acting)
Centre in support of the company’s customer centricity strategy, marketing intelligence and to management the business improvement function.
David Lupafya
36
Strategy (Acting)
Deon Fredericks
48
Accounting Services
reporting and analysis, financial services, external and regulatory reporting, capital work in progress and asset management Robin Coode
43
Corporate Finance,
Overall responsible for taxation, treasury
Specialised Services
and corporate investment with specific focus areas that include share buy-back evaluations, trustee responsibilities on retirement funds and a merger and acquisition role through strategy.
Stafford Augustine
40
Procurement Services
Responsible for overall management of procurement services encompassing strategic sourcing management of outsourced entities, corporate support and BEE.
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Telkom Annual Report 2009
Age at Name
30 June
Mohammed Dukandar 37
Telkom Portfolio Internal Audit
33
Position
Responsibilities
appointment appointment
Accountable for developing and
2009
2009
1991
2005
2006
2007
1991
2008
1996
2008
implementing internal audit strategies for Telkom Group and its subsidiaries and to ensure proper management of the internal audit function. Ensure that significant risks are understood and managed by management and ensure that significant risks are independently and objectively reviewed periodically. Anton Klopper
47
Legal Services
Responsible for managing the provision of legal advice and assistance to various business units within Telkom.
Andrew Barendse
42
Regulatory Affairs
Responsible for regulatory affairs which include regulatory strategy and analysis, regulatory compliance, regulatory pricing and costing and protecting Telkom’s regulatory rights.
Charmaine Houvet
36
Governance
Responsible for improved governance in the organisation through the design and implementation of the Enterprise Programme office and key company governance process and policies.
Prelene Schmidt
38
CEO Telkom
Responsible for all facets of the
Foundation (Acting)
Telkom Foundation.
Group overview
Management review
Sustainability review
Performance review
Financial statements
Company Financial Information
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Telkom Annual Report 2009
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a partnership with communities, creating synergies that benefit Sustainability review Sustainability review Corporate governance Enterprise risk management Black economic empowerment Human capital management Safety, health and environment Corporate social investment GRI content index
36 42 50 58 62 72 78 82 Group overview
Management review
Sustainability review
Performance review
Financial statements
Company Financial Information
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Telkom Annual Report 2009
Sustainability review
The modern corporation must meet the
expectations
of a diverse range of stakeholders
As
one
of
South
Africa’s
largest
Company will completely renew itself in
Throughout the year we refined our
corporations, Telkom’s public visibility is
terms
stakeholder management policy to ensure
enormous. Our activities impact on the lives
capabilities and a new behaviour. Our goal
of every South African in one way or
is to create a high performance company
another and so our sustainability must be
that is capable of executing our ‘defend and
beyond reproach.
grow’
As the draft King Report III notes: “Although a company is an economic institution, it remains a corporate citizen and therefore has to balance economic, social and environmental value. The triple bottom line approach enhances the potential of a company to create economic value…”
of
markets,
strategy;
a
processes,
company
skills,
that
is
characterised by profitability, sustainability and an ability to realise its vision; a
systematic engagements with: • Employees • Customers • Investors • Government
company that is customer-focused with
• Regulators
leading edge value solutions, and where the
• Media
creation of value through excellence is the
• Suppliers
norm and not the exception.
• Unions
To date, we have distinguished ourselves
• Civil society
as an entity that subscribes to the values of
As a result, we achieved:
good corporate governance but, we can
Employees: A significant improvement in
of our business strategy. It is a business
do better. We can, like the Renaissance
levels of employee engagement over the
opportunity for us, an opportunity we
Period of the 14th to 16th centuries that our
last three years via briefing sessions,
pursue with relentless vigour in all our
initiative is named after, expand our vision
training initiatives and electronic and print
operations.
beyond the conventional and traditional,
communication. In the year under review
and sustainability is a key focus area in this
there was an on-going refinement in
regard.
promoting a culture of engagement and
and, to this end, in the latter part of the
Stakeholder engagement
internal communication channels. Greater
year under review we embarked on a
The modern corporation must meet the
prominence was given to face-to-face
focused internal transformation programme,
expectations of a diverse range of
communication, especially between top
Telkom Renaissance, a programme geared
stakeholders
the
leaders and the next management level, as
to ensuring that we become Africa’s
management of stakeholder relationships is
well as electronic communication from the
leading ICT service provider. It is, at least,
not a nice to have but a critical must.
CEO across the company.
Telkom has long subscribed to this philosophy and sustainability is a key driver
Last year we reported that we continue to focus on the transformation of our business
and,
as
such,
a two year initiative during which time the
As one of South Africa’s largest corporations, Telkom’s public visibility is enormous
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Telkom Annual Report 2009
37
Group overview
Customers:
Through
our
Customer
Action, especially in the areas of economic
proactive engagement and relationship building.
seen
growth, infrastructure development and the
improvements in customer call centre
provision of telecommunications for public
operations; our ability to keep our promises
schools, was well received. Our success in
and the reaction time in identifying and
engaging with government is evident in the
dealing with complaints.
irrevocable
Centricity
project
we
have
Investors: An improvement in sharing with them our strategic plans, operational
support
provided
by
Suppliers: The top company award in the 2008 Empowerdex Preferential Procurement on overall spend survey.
Sustainability review
government which resulted in the successful
Unions: We continued to engage with the
conclusion of the Vodacom transaction.
unions through the Restructuring Forum, a purely consultative body where we share
performance and financial results through
Regulators: Regular submissions on new
information
one-on-one briefings; daily consultations;
regulations and responses to enquiries to,
Company Forum, the only decision-making
roadshows and the Investor Relations
in particular, the Independent Com-
structure on issues that require negotiations;
website.
munications Authority of South Africa
the National Employment Equity and Skills
(ICASA) and total compliance, where
Development Forum and Task Teams which
technically possible, with all the regulatory
consist of both management and union
requirements in our operational areas.
representatives and which deal with
Government: A substantial improvement in our relations with national government as a result of extensive consultations in which
with
union
leaders;
the
specific issues.
emerging issues were pre-empted and
Media:
promptly dealt with. In addition, our
conducted in a structured manner guided
Civil society: Traditionally, telecommuni-
support for the government’s Programme of
by three focus areas: reactive engagement,
cations companies and utilities are at the
Media
management
was
Management review
Performance review
Financial statements
Company Financial Information
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Telkom Annual Report 2009
Sustainability review (continued)
Group communication and brand was
infused with a renewed sense of purpose
bottom of global reputation studies as they face an uphill battle to communicate with the public. As a result of this, we embarked on a reputation study in May 2008 to measure and analyse attitudes and perceptions about us amongst various stakeholder groups. In the year under review approximately 3,700 interviews were conducted. It was gratifying to note that our reputation improved significantly, albeit from a low base. There was increased recognition in our key areas of
products/service;
leadership
and
governance and a significant improvement in the perceptions of our corporate social investment programme. Going forward In the 2009/10 financial year we will focus
on
developing
unambiguous
stakeholder value statements that detail our promises to our stakeholders and, equally importantly, internal scorecards for us to check how we live up to those promises. Group communication and brand Group communication and brand was infused with a renewed sense of purpose following the appointment of one of South Africa’s leading communications experts, Brenda
Kali,
as
Group
Executive
responsible for this function. Guided by the decision to integrate and align
communication
processes
and
practices with Telkom’s brand position and values system to ensure greater credibility amongst our stakeholders, we focused on two specifics – the management of stakeholder relationships and reputation, and brand and image management.
d
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39
• Interfacing with the media While the media is an influential stakeholder in its own right, it is also a vehicle through which we can communicate to our broader stakeholder base. To this end, a dedicated media unit was established to ensure we sent out a consistent message to enhance our reputation and create greater brand awareness. On the reactive front, the vast scope of our activities ensured a very high level of media interest in the year under review. Media enquiries ranged from our growth and expansion plans to cable theft, the provision of broadband, regulatory issues, the evolution of the network, our financial results, service delivery, customer complaints and corporate governance. As a result of our commitment to providing accurate and strategic information to the media, our reputation took a turn for the better. During the year under review, the value of proactive media engagement was underscored in three areas – the 2010 Soccer World Cup; the sale of our shares in Vodacom and the strategic agreement with AT&T. 2010 World Cup As FIFA’s main partner in the development of fixed-line network infrastructure, we are responsible for providing infrastructure and communication services. Our capabilities in this regard were highlighted through media site visits and face-to-face interviews with the key people in our 2010 project office. The Vodacom transaction Throughout the transaction process from November 2008 to June 2009, journalists were given as much access as they requested to our key top management team. The AT&T agreement
Group overview
At the announcement of the strategic memorandum of understanding, journalists had the opportunity to spend time with the role players from both companies.
Management review
We pride ourselves not only on building strong relationships between the media and our management team, but also on enhancing the media’s knowledge of the IT industry as a whole.
Sustainability review
In the year under review we hosted a number of well attended functions, including inviting key media to the Southern African Telecommunication and Applications conference.
Performance review
• Connecting with our employees In addition to refining our internal communication channels, we provided effective and timeous communication to all employees
Financial statements
on the progress of our transformation programme, Telkom Renaissance. The programme’s specific communication was given a highlighted visual appearance to distinguish it from other electronic communications and to emphasise the status of each message. Weekly messages containing detailed information on the project’s progress were issued and a tailor-made web site
Company Financial Information
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Telkom Annual Report 2009
Sustainability review continued
To reinforce the visibility of our involvement with the
World Cup two giant footballs are being erected on two prominent Johannesburg and Pretoria landmarks was set up to enable employees to ask
services and ‘from the desk of the CEO’
weekly E-news channel and an e-mail
questions, make suggestions and receive
e-mails.
based desktop broadcast system.
feedback.
On a more generic level, a number of
We also put together a number of face-to-
As the torch bearer of the programme, the
initiatives were launched during the
face
CEO was highly active in all internal
reporting period, for example a cross-
management level where the Group’s
communications via our Skytrain interactive
functional editorial committee for our
strategy and business approach was
satellite-based network; our digital media
Online print channel; the opening of a
debated.
sessions
at
top
and
senior
To ensure greater credibility amongst our stakeholders we focused on two specifics – the management of stakeholder relationships and reputation, and brand and image management.
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Telkom Annual Report 2009
41
Partnering with Human Resources Group communication and brand played a pivotal role in communicating Human Resource initiatives to employees. These ranged from changes in employee benefits to the Renaissance programme. Where necessary, the communications function was supplemented by event management. Brand and image management In our view, the brand concept is much more than just logos and products. It also promises an experience and a relationship. As a result, in the year under review, the full spectrum of brand activities was incorporated into the communication function. Our brand has matured since Telkom was formed in 1991 and, as a result, a process was initiated during the year to rebuild it and create a fresh, innovative look and feel to give us a more modern, vibrant and customer-focused brand. To support this, a new Vision, Mission and Value (VMV) statement, together with a VMV-wired concept, was developed to ensure that our employees wholeheartedly embrace and accept the brand and, in the process, deliver the brand promise to our customers. 2010 Soccer World Cup sponsorship To reinforce the visibility of our involvement with the World Cup, two giant footballs are being erected on two prominent Johannesburg and Pretoria landmarks – the Hillbrow and Lukasrand towers. As a further reminder of our commitment and expertise, a number of TV commercials were produced and broadcast.
Group overview
Management review
Sustainability review
Performance review
Financial statements
Company Financial Information
Artist’s impression of the Lukasrand tower
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Telkom Annual Report 2009
Corporate governance
appointed by the government of South Africa (the Class A shareholder) and one non-executive appointed by Black Ginger 33 (the Class B shareholder). There are four other non-executive directors who are appointed at the company’s annual
general
meeting
and
are
considered to be independent, as set out in King II and the JSE Listings Requirements. The executive directors on the Board are the Chief Executive Officer and the Chief Financial Officer. In line with best practice, the roles of the Chairman and Chief Executive Officer have been separated. The Board is led by Ms ST Arnold, the Chairman, while operational management of the Group is the responsibility of Mr RJ September, Chief Executive Officer. In terms of the articles of association, the non-executive directors appointed by the Class A shareholder have a fixed term of three years and may be re-elected to the Board
by
those
shareholders.
The
Chairman has a term of one year and is reelected as Chairman for the ensuing year by the Class A shareholder. The four independent non-executive directors are The Board takes overall responsibility for the Group and its role is to exercise leadership and judgement in directing it to achieve continued prosperity and to act in the best interests of stakeholders.
subject to retirement by rotation and reelection by shareholders at least every three years in accordance with the articles of
Compliance
association. Most of the areas of non-
The Telkom Board subscribes to and is fully
compliance will be resolved by no later
committed to sound business principles and
than March 2011, when the provisions of
practices of integrity and accountability,
Telkom’s articles of association resulting in
and values of good corporate governance
non-compliance with the Code fall away or
as espoused in the Code of Corporate
earlier if the shareholding of a significant
Practices and Conduct of King II (the
shareholder falls below certain stipulated
Code). In so doing, the directors recognise
levels.
the need to conduct the enterprise in
association
and
JSE
Listings
Requirements. The holders of the Class A and B ordinary shares are the government of South Africa and Black Ginger respectively. The only significant shareholder is the Class A shareholder who currently holds 39.8% of the issued ordinary shares in the company. The significant shareholder has certain
Chairman and Board of directors
Board-reserved matters which are detailed
The Board takes overall responsibility for
in the company’s articles of association.
The Board is of the view that Telkom
the company and its role is to exercise
Pursuant to the articles of association, whilst
complies in all material respects to the
leadership and sound judgement in
the government is a significant shareholder,
principles
it
directing it to achieve continued prosperity
neither Telkom nor any of its subsidiaries
acknowledges the importance of good
and to act in the best interests of
may take action with respect to certain
governance, the Board is aware that
stakeholders.
reserved matters unless authorised by the
Telkom does not strictly comply with certain
Telkom has a unitary Board comprising 12
Board.
principles set out in the Code. These areas
directors. In accordance with Telkom’s
resolution of the Board must have received
of non-compliance stem mainly from certain
articles of association, five non-executives
the affirmative vote of at least one of the
provisions
including
directors appointed by the government.
accordance with best corporate practices.
of
in
the
Code.
Telkom’s
While
articles
of
the
Chairman
have
been
In
addition,
the
authorising
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Telkom Annual Report 2009
43
The members’ resignations and appointments
Board meetings
to the Telkom Board of directors during the
Board meetings are held at least once a quarter. In addition to these meetings, whenever
year under review are as follows:
circumstances dictate the necessity, special Board meetings are convened. During the year under review, four scheduled Board meetings were held and 11 additional special Board
Resignations MJ Lamberti
3 June 2008
AG Rhoda
3 July 2008
meetings were convened. Details of attendance by each director including attendance at committee meetings of the Board are set out in the table below. Certain members of senior management attend Board meetings when invited to make presentations on particular
Appointments
company issues of interest to the Board. A majority of directors, one of whom must be a
B Molefe
3 July 2008
PG Joubert
12 August 2008
DD Barber
1 September 2008
The following table presents the attendance of meetings held during the 2009 financial
PG Nelson
8 December 2008
year by directors:
representative of the Class A shareholder, is required for a quorum for Board meetings.
Scheduled Number of meetings1 Attendance
Company Secretary All directors have access to the advice and services of the Group Company Secretary, who is responsible for ensuring the proper administration of the board and corporate governance
procedures.
The
Group
Company Secretary provides guidance to the directors on their responsibilities within the prevailing regulatory and statutory environment and the manner in which such responsibilities should be discharged. Details of the secretary’s business address and the company’s registered office are set out on inside back cover. Delegation of authority The ultimate responsibility for the Group’s operations rests with the Board. The Board retains effective control through a welldeveloped governance structure of Board committees which specialise in certain areas of the business. Certain authorities have been delegated to the Chief Executive Officer to manage the day-to-day business affairs of the company. The Group executives assist the Chief Executive Officer in discharging his duties and the duties of the Board when it is not in session. However, in terms of statute and the company’s constitution, together with the revised delegation of authority, certain matters are still reserved for Board and/or shareholder approval.
Special Number of meetings1 Attendance
Non-executive ST Arnold (Chairman) DD Barber B du Plessis RJ Huntley PG Joubert MJ Lamberti VB Lawrence PCS Luthuli KST Matthews B Molefe AG Rhoda E Spio-Garbrah
4 3 4 4 3 0 4 4 4 4 0 4
4 3 4 4 2 0 4 4 3 1 0 4
11 4 11 11 5 4 11 11 11 6 5 11
11 4 11 10 4 3 11 9 10 3 4 10
Executive RJ September PG Nelson
4 1
4 1
11 1
11 1
1
The table represents the possible meetings based on the appointment and resignation dates of Group overview
members.
Executive committee
Audit and risk committee (ARC)
This committee consists of the two executive
The ARC is chaired by Mr PCS Luthuli, a
directors that serve on the Board of
non-executive
directors and chief executives of the Telkom
scheduled meetings and six special
Group. The Chief Executive Officer is the
meetings
Chairman of this committee and has the
Mr Luthuli is considered an audit committee
power of authority to, among other things:
financial expert within the meaning of the
• Implement approved business plans,
requirements of the US Securities and
annual budgets and all other matters
Exchange Commission (SEC). He is a
and issues relating to the achievement
chartered accountant.
of
Telkom’s
obligations
during
the
it
held
financial
four
its
In terms of its charter, the ARC evaluates the Group’s systems of internal and financial
network
control; reviews accounting policies and
procurement,
tariff
Committees
packaging,
customer
The Board is assisted in discharging its
marketing; and
equipment setting
and
service
and
Management review
year.
licences, including without limitations expansion,
under
director;
Sustainability review
Performance review
Financial statements
financial information issued to the public; reviews the performance of the internal and external auditors and determines the fees
duties through its committees. During the
• Prepare, review and recommend to the
payable to the external auditors. It also
year under review, the Board merged the
Board the annual budgets and any
determines and monitors the use of the
Investment and Strategy Committees.
amendments thereto.
external auditors for non-audit related
Company Financial Information
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Corporate governance (continued)
Board committees
specialise in distinctive business areas
services. The committee examines, reviews
Ms ST Arnold and Mr B du Plessis. A quorum
Mr B du Plessis (Chairman)
financial results and recommends same to
for a meeting is two members.
Mr PG Joubert (independent)
the Board for approval. A quorum for a meeting is two members.
The committee makes recommendations to the Board on the composition of the Board,
Ms KST Matthews Mr E Spio-Garbrah
As at March 31, 2009, the committee
and the balance between executive, non-
The HRRRC held four scheduled meetings
comprised four non-executive directors of
executive and independent non-executive
and one special meeting during the
which three are considered independent:
directors with regard to all aspects of
financial
Mr PCS Luthuli (independent)
diversity and experience.
consultation with management, ensures that
Mr RJ Huntley Mr DD Barber (independent) Mr PG Joubert (independent) The new terms of reference of the committee were approved during the year.
The committee is responsible for identifying and nominating candidates and formulating succession plans for the approval of the Board.
year.
This
committee,
in
the Group’s directors and senior executives are fairly rewarded for their individual contribution to the Group’s performance. In fulfilling its duties, the HRRRC gives consideration
to
industry
and
local
In addition, the committee recommends to
benchmarks to ensure that remuneration
At the time of the Chief Financial Officer’s
the Board continuation (or not) of services
packages remain competitive. Senior
appointment on December 8, 2008 the
of any director who has reached the
executives receive a salary, short-term
retirement age as well as directors who are
incentive and an allocation in terms of the
retiring by rotation, for re-election.
rules of the Conditional Share Plan.
audit and risk committee satisfied itself of the appropriateness of his credentials, professionalism, technical competency and experience. The audit and risk committee will conduct a similar review on an annual basis as required by the JSE Listings Requirements. The internal and external auditors have unlimited access to the Chairman of the audit and risk committee. The audit and risk committee is satisfied that Ernst & Young is independent in accordance with section 270A of the
Investment and strategy committee The investment and strategy committee, consists of Mr DD Barber (Chairman), Dr E Spio-Garbrah, Mr RJ Huntley, Mr RJ September, Mr PG Nelson and Dr VB Lawrence.
Medical and retirement benefits are also offered. Remuneration packages are reviewed
annually
and
performance
bonuses are linked both to individual performance and to the performance of the Group. Non-executive directors are paid fees for their services as directors of the
The function of the committee is to assist the
Company and for their participation as
Board in evaluating investments, corporate
members of the Board committees.
actions and key funding and financial proposals.
Board effectiveness An appraisal of the effectiveness of the
Corporate Laws Amendment Act, and
Human resources review and
Board was conducted externally during the
nominated the re-appointment of Ernst &
remuneration committee (HRRRC)
year. The appraisal was benchmarked
Young as registered auditors for the
The committee consists entirely of non-
against the strategic requirements of Telkom
executive directors. Mr B du Plessis, an
SA to ensure the capacity to deliver these
Nominations committee
independent non-executive director, was
requirements and strengthen the diversity
The nomination committee, which must have
appointed as Chairman of the HRRRC as
and sector expertise of directors. The
a minimum of three members and is chaired
of June 2008. The HRRRC comprises the
appraisal
by an independent non-executive director,
following non-executive directors, of which
recommendation will be followed through
consists of Mr PCS Luthuli (Chairman),
two must be independent:
implementation.
2009/2010 financial year.
was
positive
and
its
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Telkom Annual Report 2009
Share dealings
the requirements of Section 302 have been
In line with JSE Listings Requirements and
met for the year ended March 31, 2009.
the
Group’s
insider
trading
policy,
executives who wish to trade in Telkom securities are required to obtain prior written approval from the Chairman of the
In addition to the Sarbanes-Oxley Act, the NYSE
corporate
governance
rules,
approved by the SEC, permit NYSE-listed
• Accept
directly
consulting,
or
45
indirectly
advisory
or
any other
compensation from the listed entity; and • Be an affiliated person of the listed entity.
companies that are foreign private issuers,
An affiliated person of an issuer is a person
such as Telkom, to follow home-country
who directly, or indirectly, through one or
practices in lieu of the requirements
more
applicable to listed US companies, subject
controlled by or is under common control
to certain exceptions.
with the issuer.
required, in terms of corporate activities as
In particular, foreign private issuers must
Rule 10A-3(b)(1)(iv)(E) of the US Securities
and when these occur.
have an audit committee that satisfies the
Exchange Act provides an exemption from
Compliance with Sarbanes-Oxley
requirements of Rule 10A-3 under the
the prohibition on being an affiliated
The Sarbanes-Oxley Act of 2002 was
Securities Exchange Act of 1934, as
person of the issuer for an audit committee
passed in the United States of America to
amended and must disclose the significant
member of a foreign private issuer, who is
protect investors by improving the accuracy
ways in which their corporate governance
a representative or designee of a foreign
and reliability of corporate disclosures,
practices differ from those followed by US
governmental entity that is an affiliate of the
accounting
companies
listing
foreign private issuer if the member is not
governance. Telkom, as a listed company
standards. In addition, the CEO of a
an executive officer of the foreign private
on the New York Stock Exchange (NYSE),
foreign private issuer must promptly notify
issuer.
registered in terms of the US Securities
the NYSE in writing after any executive
Exchange Act of 1934, is required to
officer of the listed company becomes
comply with the Sarbanes-Oxley Act.
aware of any material non-compliance with
Telkom is committed to good corporate
any applicable provisions of the NYSE
governance practices and compliance with
corporate governance standards and
the Act as directed by the US Securities
foreign private issuers must submit an
and Exchange Commission (SEC).
annual and interim written affirmation to the
Board and the Group Company Secretary before dealing in Telkom securities. The Group operates closed periods as defined in the JSE Listings Requirements. Additional closed periods are enforced, when
practices
and
corporate
Telkom’s Sarbanes-Oxley steering committee represents divisions directly impacted by the requirements of the Act. Working
under
the
NYSE
foregoing
requirements
and
As a foreign private issuer the definition of independence of directors for Telkom is
ensuring that risks and controls that may
only relevant to the audit committee and is
impact on the integrity of financial
included in Rule 10A-3 of the US Security
reporting
Exchange Act. This states that each
reviewed
and
reported
documented, on.
The
member of the audit committee must be a
independent external auditor attested to
member of the Board and should be
and reported on management’s assessment
independent as defined in Rule 10A-3
of the effectiveness of internal control over
(b)(1)(ii) of the US Securities Exchange Act.
financial reporting for the year ended
A member of an audit committee of a listed
March 31, 2009.
or
is
certain
changes to their audit committees.
Oxley compliance team is responsible for
properly
controls,
NYSE with regard to compliance with the
closely with line management, a Sarbanes-
are
intermediaries,
Group overview
Management review
Sustainability review
Performance review
issuer may not, other than in his capacity
The Chief Executive Officer and the Chief
as a member of the audit committee, the
Financial Officer (CFO) have certified that
Board, or any other Board committee:
Financial statements
Company Financial Information
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Telkom Annual Report 2009
Corporate governance (continued)
Key differences between NYSE corporate governance listing rules and Telkom practice are: NYSE rules
Telkom practice
The Board of directors should have a majority
The majority of Telkom’s directors are non-executive
of independent directors.
Four of the 12 directors are considered independent, based
Board of directors Composition
on the King II definition of ‘independent’. Based on their ordinary shareholding at March 31, 2009 and their holding of the Class A and Class B shares respectively, the government is entitled to appoint five directors to the Board, while Black Ginger is entitled to appoint one director to the Board. King II defines an independent director as a non-executive director who: • Is not a representative of a share owner who has the ability to control or significantly influence management; • Has not been employed by the company or the Group, of which it currently forms part, in any executive capacity for the preceding three financial years; • Is not a member of the immediate family of an individual who is, or has been in any of the past three financial years, employed by the company or the Group in an executive capacity; • Is not a professional advisor to the company or the Group other than in a director capacity; • Is not a significant supplier to, or customer of the company or Group; • Has not been a significant supplier to, or customer of the company or Group; • Has no significant contractual relationship with the company or Group; and • Is free from any business or other relationship that could be seen to materially interfere with the individual’s capacity to act in an independent manner. Board committees Committees
Companies are required to establish an audit
Telkom has an ARC, investment, and strategy committee,
required
committee, a nominating or corporate
nominations committee and HRRRC. For the description and
governance committee and a compensation
composition of these committees and the members refer to
committee. Each of these committees must have
pages 43 and 44. Board members who are not appointed
a written charter that addresses certain matters
by the Class A and B shareholders are appointed by
specified in the NYSE listing standards,
shareholders at the annual general meeting as stipulated in
including the committee’s purpose and
Telkom’s articles of association. Telkom does not perform an
responsibilities and an annual performance
annual performance evaluation of each committee.
evaluation of each committee.
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47
NYSE rules
Telkom practice
All of the required committees should be
All the committees have non-executive directors as members.
composed entirely of independent non-executive
However, not all non-executives are independent.
Board committees Composition
directors. Audit committee Written charter
The audit committee must have a written charter
The ARC has a written charter. The responsibilities of the
that addresses certain matters specified in the
ARC are described in further details, on pages 43 and 44.
NYSE listing standards, including the
In addition, Telkom’s audit and risk committee charter, as a
committee’s purpose, an annual performance
listed issuer, complies with the Sarbanes-Oxley
evaluation and the duties and responsibilities of
requirements.
the audit committee. Composition
The audit committee must include a minimum
The ARC consists of four non-executive members of Telkom’s
of three members that satisfy the independence
Board of directors, three of which are independent.
requirements of both the NYSE listing standards
Pursuant to the Sarbanes-Oxley Act, each member of
and the Sarbanes-Oxley Act.
Telkom’s ARC, as a non-US listed company, is a member of the Board of directors. In addition, although one of the members is appointed by the government, who may be deemed to be affiliated persons of Telkom, such appointments fall within the exception for the SEC independence requirements.
Each of the members of the audit committee
For members’ work experience refer to pages 28 to 29 under
must be financially literate. In addition, at
Board of directors. The Chairman of Telkom’s ARC,
least one member of the audit committee
Mr PCS Luthuli, who is a Chartered Accountant, is
must have accounting or related financial
considered an audit committee financial expert within the
management skills. An audit committee financial
meaning of item 16A of the requirements of Form 20-F in
expert within the meaning of the SEC rules
terms of the definition in the Sarbanes-Oxley Act. The SEC
adopted pursuant to the Sarbanes Oxley Act
has determined that the audit committee financial expert
satisfies this requirement.
designation does not impose on the person with that designation any duties, obligations or liabilities that are
Group overview
greater than the duties, obligations or liabilities imposed on such person as a member of the audit committee in the absence of such designation.
Management review
Listed companies are required to adopt, and
The corporate governance statement is available on the
Sustainability review
governance
post on their websites, a set of corporate
company’s website, www.telkom.co.za/ir.
guidelines
governance guidelines and the charters of their
Disclosure and Communication Corporate
most important committees, including at least the
Performance review
audit, and, if applicable, compensation and nominating committees. The guidelines must address, among other things: director qualification standards, director responsibilities, director access
Financial statements
to management and independent advisers, director compensation, director orientation and continuing education, management succession, and an annual performance evaluation of the Board of directors.
Company Financial Information
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48
Corporate governance (continued)
Telkom Audit Services (TAS) is an independent and objective assurance and consulting function that focuses on a balance between
value protection and value enhancement
Internal controls Our
internal
control
environment
is
monitored by the ARC, which: • Ensures that risks are identified and assessed.
weaknesses, including processes that
• Significant financial, managerial and
ascertain the level at which deficiencies
operating information is accurate,
are reported. Significant deficiencies and
reliable and timely;
material weaknesses in internal controls are reported to top management, the Board or the ARC, and the external auditors.
• Ascertains
that
all
systems
and
processes to prevent and/or mitigate these risks are monitored; and
• Employees’ actions are in compliance with policies, standards, procedures, applicable laws and regulations;
Telkom Audit Services (TAS) TAS, in accordance with global best practices, is a value-adding, independent
• Significant legislative or regulatory issues impacting on us are recognised and addressed appropriately; and
• Reviews the quality of reporting and
and objective assurance and consulting
adherence to internal policies and other
function, designed to add value to, and
• An assessment is provided regularly of
governance best practices.
improve our operations. Its mandate is to
the adequacy and effectiveness of our
provide an independent assessment on the
corporate governance, risk and control
reliability of financial reporting, validate
processes for controlling our activities
control systems and provide an oversight of
and managing our risks.
Our organisational structure facilitates and allows the flow of information upstream, downstream and across all business activities. This is supported by formal
management
and
overall
business
activities, bringing a systematic, disciplined
mechanisms in place to communicate the
approach
responsibilities
improvement of the effectiveness of risk
and
expectations
of
to
the
evaluation
and
To ensure the independence of TAS, the Group Executive: Telkom Audit Services reports functionally to the ARC Chairman and administratively to the Chief Financial
business activities at executive level.
management,
Section 404 of the Sarbanes-Oxley Act
corporate
requires that companies listed on the NYSE
carrying out its mandate, TAS co-ordinates
annually evaluate and report on the
with other control and monitoring functions
oversees processes related to financial risks
effectiveness of their controls over financial
(enterprise risk management, compliance,
and internal controls, financial reporting
reporting. We submit progress reports at
security, legal, ethics, environment and
and the monitoring of internal and external
external audit).
auditing processes. In carrying out its
least quarterly to the ARC which then reports to the Board. Our internal audit function plays a key role in providing an objective view and continuous assessment of the effectiveness of the internal control systems throughout
governance
internal
control
In
Officer and has direct access to the Chief Executive Officer. In this context, the ARC
all Telkom functions, records, property and personnel.
our control processes and systems are adequate and functioning to ensure that: • Resources and assets are effective and protected;
identified
processes.
assurance and to determine whether or not
ARC.
on
and
duties, the team has unrestricted access to
efficiently
report
controls
TAS is required to provide reasonable
the Group to both management and the
Mechanisms are in place that capture and
internal
used
and
adequately
• Risks are appropriately identified and managed;
The TAS team conducts audit work, or any other task, in accordance with the internal auditing standards set by the globally recognised Institute of Internal Auditing (IIA). This requires compliance with the Standards or Professional Practice of Internal Auditing (SPPIA) and, in particular,
n
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49
the codes of conduct and ethics that are promulgated from time to time by relevant professional bodies and any other corporate
The Network Operations Centre (NOC)
governance initiatives. Internal audit practices and activities are
Our world-class campus in Centurion, outside Pretoria,
also benchmarked independently by an authoritative external party
enables us to offer our customers an integrated solution to
as recommended by the SPPIA and required by the ARC.
their network requirements. At its heart is the Network Operations Centre (NOC). Developed from the best in world-class practices and centres, it employs the latest technologies and houses high level technical skills and support teams. It offers full network monitoring, fault management, configuration management, accounting management, performance management and security management 24 hours a day, seven days a week.
Group overview
Management review
Sustainability review
Performance review
Financial statements
Company Financial Information
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Enterprise risk management
We manage a variety of risks including financial, political, regulatory and technology across the
African continent S AT -3
M au rit ain ia M ali Ni ger
Se n e gal
E AS S y
G am bia
S udan
Bu rk ina G u in e a Sierra Leone
Beni n Ivor y Coast
Togo
Ni ger i a
S omal i a
G h an a
E thi opi a
C e n t r a l A f r i c an Republ i c
L ibe ria
Cameroon E qua.Gui nea
S AT - 3
Congo
Gabon
Keny a
Uganda D RC
Ra w a n d a Bur undi E AS S y
Tanzania
O v e rla p of Prima r y O p e ra tor s of Africa O nline a nd MWEB Angol a
O v e rla p of Mu lti- Links a nd MWE B
Z ambi a
O nly Africa O nline O p e ra tor s Zimbabwe
O v e rla p of Dis trib u tor s of Africa O nline a nd MWEB O nly Africa O nline Af filia te s (Pa r tne s hip w ith A - link)
Mozambi que
Madagascar
Nami bi a Botswana S AT -3 S wazi l and
Te lkom S A Limite d
E AS S y
Lesotho S outh Afr i ca
S AT -3
Our Enterprise Risk Management (ERM)
management framework, risk policy and
Our various subsidiaries and service
strategy was comprehensively reviewed
procedure deliverables were updated and
organisations completed risk management
during the year, in particular the capturing
approved by the Board.
compliance plans and all Telkom SA policies
and reviewing of the high risks for the business for the Telkom enterprise risk management committee (TERMC), together with the compilation of an improved TERMC report. As a result of certain gaps identified by KPMG’s risk maturity assessment, the risk
A proposed risk reporting format for the various risk committees was developed to
were endorsed. In addition, all Telkom Group subsidiaries are now covered.
help the audit and risk committee (ARC)
Enterprise risk management governance
monitor ERM’s effectiveness across the
We manage a variety of risks including
Group and the Risk Portfolio was monitored
financial; political; regulatory; technology;
on an on-going basis.
human capital; operational; safety, health and environment; security; strategic and
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51
Enterprise risk management governance Enterprise risk management at Telkom is guided and monitored by various committees that have adopted certain principles to assist them in executing their respective enterprise risk management functions. The model below outlines the key enterprise risk management structures, the key role-players and their roles and responsibilities.
t
Group overview
Management review
Sustainability review
Performance review
Financial statements
Company Financial Information
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Enterprise risk management (continued)
We practice a risk management approach that triggers an
informed and dynamic approach
legal, across the African continent. These
On a daily basis, risks are managed by a
management performance and providing
are identified, measured and monitored
number of committees (see chart), mainly
an on-going high level risk assessment
through various control mechanisms.
through the ARC, which reports to the
to the Board. To ensure it fulfils its
Board.
responsibilities, the ARC can access any
*Risk appetite is a framework which we use to measure
information it needs.
Our Board which sets the risk management standard and risk appetite* for the group is
the ‘amount of risk’ – on a broad level – which we are
supported by various committees whose
prepared to accept in our pursuit of our strategic and
responsibilities include:
financial objectives. As part of our business strategy, it
• Telkom enterprise risk management committee (TERMC)
helps management allocate resources across the various
• Reviewing and recommending to the Board risk management standards, including risk control principles and overall risk measure. • Reviewing the overall risk appetite and profile of the Group. • Reviewing significant changes in the risk framework, risk policy and the various procedures that support the risk strategy. • Reviewing the dashboard of strategic risks that impact on us; and
This is a dedicated risk management
service organisations to ensure that objectives are met.
committee appointed by the ARC to
Responsibility and accountability
implement an effective risk management
• The Board
process that will optimise our risk taking.
The Board, through the ARC, is responsible
• Group management
for the total risk management process and
The senior and line management teams of
the formation of its own opinion on the
our service organisations are responsible
effectiveness of the process. The Board
for effective risk management.
approves the risk strategy in liaison with, and through recommendations of, the
Enterprise risk management framework
ARC.
Risk is an unavoidable consequence of doing business but, managed correctly, it
• Audit and risk committee (ARC)
can be an opportunity for us to operate
The ARC, which is empowered by the
competitively.
• Reviewing reports on specific material
Board, operates within written guidelines
aspects of our risk governance and risk
established by it. The ARC is responsible
In our quest to be the leading customer and
management processes.
for reviewing and monitoring our risk
employee-centred ICT solutions service
Loss statistics for 2008/2009 In the year under review our copper cable losses amounted to R284.9 million excluding outbound revenue losses which is estimated at R907 million.
2006/07
8%
8%
2007/08
2008/09
13%
15%
11%
10% 74%
Copper cable
7%
Dect (CPE)
14% 69%
3%
Optic
68%
Damages (unknown third parties)
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provider, we practice a risk management
Statistics 2006/07
approach that triggers an informed and dynamic response through the evaluation and
management
of
the
many
opportunities and threats that permeate our business environment.
53
2007/08
2008/09
Total incidents reported
9,279
7,954
7,216
Total cases investigated
8,863
7,838
7,116
Total cases resolved
8,443
6,427
5,960
1,794
2,026
2,573
Burglary
117
141
196
Business Code of Ethics
294
293
265
Fraud
192
124
130
72
27
15 112
Case types investigated
Protecting our assets To minimise, and preferably prevent, fraud, corruption and theft, we have a Telkom Asset and Revenue Protection Services (TARPS) section in place. Its scope includes forensic services, a fraud committee and
TARPS investigations Asset theft
Line management requests
an anti-fraud policy statement.
Payphones
224
157
Forensic services investigates all fraud-
Reputational risk (Refund scam)
594
469
657
related activities; the committee, which
Robbery
111
159
244
meets continuously, monitors all fraud-
Security breaches
57
16
16
related activities and the policy statement
Vehicle
96
39
19
implements fraud risk management.
Forensic projects
3
–
–
3,554
3,451
4,227
Although no major fraud incidents were
Total TARPS investigations
reported in the year under review, asset
Network Protection Services (NPS) investigations
theft losses increased by 27%, mainly as a
Cable
result of information technology equipment
Network fraud
compliance
Solar panel theft
which
highlighted
past
lost/stolen equipment at ‘unknown times’.
Total NPS investigations
The Telkom Crime Hotline 0800 124 000 The Hotline 0800 124 000, which takes calls from employees and the public regarding any Telkom-related alleged
3,399
3,198
2,018
786
716
690
1,124
473
181
5,309
4,387
2,889
1,250
1,079
568
156
165
128
Successes Number of arrests Number of convictions
unethical or criminal activities, was contracted
out
to
an
Group overview
independent
administrator on January 1, 2009 in compliance with the Sarbanes-Oxley Act
Management review
requirements. The administrator does, however, forward all information to TARPS for investigation. As a result, employee trust in the line has been rejuvenated in terms of anonymity. In
Cable theft has
addition, our Whistleblower policy was
Sustainability review
Performance review
updated to ensure more effective support for the whistleblowing process. Security services We continue to use physical and technical security services for physical access control to all our sites and the protection of our assets, and the provision of electronic solutions for all our security needs and requirements.
Financial statements
to affect our operations Company Financial Information
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Enterprise risk management (continued)
The Second Hand Goods Act provides for stiff
penalties
including imprisonment
Cable statistics
Cable theft
Total cable losses
Cable theft has been a problem for the last 2006/07
2007/08
2008/09
227.1
194.6
190.6
Dect (CPE)
31.8
20.0
9.2
Optic fibre
25.7
31.6
40.0
Damages
26.1
37.7
40.8
Payphone vandalism
15.0
5.8
4.3
325.7
289.7
284.9
R millions Copper cable
Total
2006/07
2007/08
2008/09
179.5
151.2
141.2
Fibre
5.5
7.9
10.2
Total
185.0
159.1
151.4
Copper
Outbound revenue1 1
Estimates based on certain assumptions
cable losses amounted to R284.9 million excluding outbound revenue losses which is estimated at R907 million. Our main cable network and open wire routes have been targeted by highly organised syndicates and, on our smaller petty crime. The key drivers, we believe, are the rising price of copper which, on average, increased by 600% over the last five years, and the strong demand for the metal from international markets, in particular China.
Estimated outbound revenue loss due to cable theft R millions
rate. In the year under review our copper
cable routes, we have seen an increase in
Cable theft repair costs R millions
10 years and increased at an alarming
2006/07
2007/08
2008/09
368.1
626.3
906.8
While the problem is not unique to us or, indeed, South Africa, as evidenced
by
reports from, amongst other countries, Zambia, Tanzania, Kenya, Great Britain and the United States, it is impacting on our performance as the resources used to replace the stolen cable should actually be used to roll out new infrastructure and provide new services. We have instituted a number our own contingency measures – the investment of millions of rands in security personnel; cable alarms;
placing
cables
underground;
replacing manhole covers with lockable lids, closer working relationships with the South African Police Services, Non-Ferrous Theft Combating Committee and Business Against Crime, amongst others – to combat the problem. In addition, we believe the amended Second Hand Goods Act, whose aim is to
ent
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regulate the business of dealers in second hand goods in order to combat the trade in stolen goods, will be a valuable tool in the fight against this problem. The Act provides for stiff penalties, including imprisonment, for convicted metal thieves and scrap metal dealers. We are also lobbying to have copper declared in the same category as diamonds and for charging cable thieves with ‘sabotage’ instead of ‘theft’.
Menlyn Park – the flagship of the new generation TelkomDirect stores Since its opening in December 2008, the TelkomDirect store in Pretoria’s up-market Menlyn Park shopping centre has proved to be a huge hit with customers, justifying our faith in launching this ‘third generation’ store offering to South African consumers.
Telkom Business Continuity Management (BCM) In 2002 we established the Telkom Business Continuity/Disaster Recovery unit (Telkom BC/DR) which mainly focused on the readiness of our critical sites in case of a disaster or major incident.
Open seven days a week from 09:00 to 19:00, the store
In February 2008, we reviewed BC/DRs network-driven focus and re-established the function as an enterprise-wide Business Continuity Management organisation. Its focus areas are to improve all disaster-related activities across the Group, ranging from management to operations and systems.
conversions (the phones of the future) to laptops, ADSL units,
A key deliverable in the year under review was the re-establishment of our BCM Institutional Capacity which resulted in an improved BCM Governance, Additionally, we reviewed our BCM company policy and charter, the implementation of a BCM training programme – which 32.1% of Telkom managers and senior managers completed – the review of the BCM website and generic BCM awareness on all managerial levels. The establishment and implementation of operational business continuity plans was also a key deliverable. Going forward Our key focus areas for the year ahead are: • Implement, through a phased approach, the revised ERM strategy and align it to an enterprise-wide view of all risks. • Upgrade our risk management training programme.
55
is one of the 136 we have in major shopping centres across the country. It provides not only a range of goods from fixed mobile mobile phones, play stations and satellite navigation units, but also free technical support. “Basically,” says store manager Thobeng Choeu, “we can fix or help with anything that is software-related. No other operator offers this service, making it a unique plus for Telkom.” With its ‘touch and feel’ ambience, the store is a superb marketing tool for us as it showcases our new technologies and technical expertise. A key customer ‘pull’ factor is the free doBroadband gaming facilities at the rear of the store. Here youngsters – and adults – can play a range of games to their heart’s content. Says Thobeng: “Because of the tactile experience, many customers end up buying the games and play stations”. Group overview
• Align corporate governance and ERM to the draft King III code. • Conduct compliance risk assessments in terms of the agreed framework.
Management review
• Present the first critical element in the determination of our risk appetite – the draft Risk Bearing Capacity (RBC) – to TERMC.
Sustainability review
• Create an independent division by separating ERM from the ARC, but ensuring that audit is still an integral part of our overall risk management; and
Performance review
• A significant enhancement of the quality of ERM reporting to the Board, business units and subsidiaries. We will also continue to improve our communication to internal and external stakeholders through a review and further development of our risk management processes. Our risk management database will also be re-examined to ensure we provide timeous, current, accurate and accessible information to our stakeholders.
Financial statements
Company Financial Information
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56
Enterprise risk management (continued)
Risk factors
investments outside of South Africa,
not be able to pay dividends and our
You should carefully consider the risks
which could adversely affect our
operations and financial condition
described below in conjunction with the
businesses and cause our financial
could be adversely affected.
other information and the consolidated
condition and net income to decline.
financial statements of the Telkom Group and the related notes included elsewhere in this annual report before making an investment decision with regard to Telkom’s ordinary shares or ADSs.
• Continuing
or require us to make substantial
for our fixed-line and mobile businesses
additional investments in technologies
on the African continent is limited.
and equipment, which could reduce our
Moreover,
return on investment and net profit.
the
consummation
of
• We may be affected by global
unsuccessful, which could have a material
operating revenue, net profit and dividends to decline.
in
acquisition and investment opportunities
acquisitions and investments may be
which could cause our growth rates,
changes
technologies could increase competition
Risks related to our business economic and financial conditions
rapid
• The number of commercially attractive
adverse effect on our future growth.
• If we continue to experience high rates of theft, vandalism, network fraud, payphone fraud and lost revenue due to
• The growth in the mobile market in
non-licensed operators in our fixed-line
South Africa has resulted in an increase
business, our fixed-line fault rates could
in the number of Telkom calls terminating
increase and our operating revenue
• Any changes to our mobile strategy or
on mobile networks as opposed to
and net profit could decline.
our inability to successfully implement
our fixed-line network. Telkom’s net
such
interconnect margins and net profit
strategy
and
organisational
changes, could cause our growth rates, operating revenue, net profit and dividends to decline.
• Delays in the development and supply of communications equipment may hinder
could decline if this trend continues.
the deployment of new technologies and
• If we are not able to continue to
services and cause our growth rates and
improve and maintain our management
net profit to decline.
• If we are not able to turn around
information and other systems, we could
the financial performance of our Multi-
• Actual or perceived health risks relating
be subject to losses and inaccuracies in
Links subsidiary, our Group’s financial
to mobile handsets, base stations and
our financial reporting, our ability to
condition could decline.
associated equipment and any related
provide accurate and comprehensive
publicity or litigation could make it
• Increased competition in the South
operating information and to compete
difficult to find attractive sites for base
African communications market may
may be harmed and our share price
stations and impact our ability to grow
result in a reduction in overall average
could decline.
our 3G mobile network business, and
tariffs and market share and an increase in costs in our fixed-line business, which could cause our growth rates, operating revenue and net profit to decline and our churn rates to increase. • Increased competition in the South African data communications market may adversely impact our growth rates, operating revenue and net profit.
• If we lose key personnel or if we are
reduce our customer base, average
unable to hire and retain highly
usage per customer and net profit.
qualified employees and partners, our
Risks related to Telkom’s ownership by
business operations could be disrupted
the government of South Africa and
and could impact on our ability to
major shareholders
compete successfully.
• Telkom’s major shareholders are entitled
• If Telkom is not able to successfully grow revenues, profits and cash flows from its existing and new businesses to replace
to appoint the majority of Telkom’s directors and exercise control over Telkom’s strategic direction and major corporate actions.
in
revenues, profits and cash flows
implementing our strategy of transforming
previously received from Vodacom,
from basic voice and data connectivity
Telkom may not be able to pay
Africa
to fully converged solutions offering
dividends and service its debt and
shareholder of Telkom and policymaker
integrated voice, data, video and internet
could be required to lower or defer
for, and customer of, the telecommuni-
services and managing costs through our
capital expenditures, dividends and
cations industry in a manner that may
restructuring programme, which could
debt reduction, which could cause the
be favourable to our competitors and
adversely impact our ability to maintain
trading prices of Telkom’s ordinary
unfavourable to us.
profitability by growing and protecting
shares and ADSs to decline.
• We
may
not
be
successful
revenue, while managing costs.
• We have negative working capital,
• The government of the Republic of South may
use
its
position
as
Risks related to regulatory and legal matters
political,
which may impair our operating and
• The regulatory environment for the
economic, regulatory, taxation and
financial flexibility and require us to
telecommunications industry in South
legal risks associated with our African
defer capital expenditures and we may
Africa is evolving and regulations
• There
are
significant
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57
addressing a number of significant
portability or are unable to implement
trading prices of Telkom’s ordinary
matters have not yet been made. The
these requirements in a timely manner,
shares and ADSs, to decline.
interpretation of existing regulations, the
our business operations could be
adoption of new policies or regulations
disrupted and our net profit could
that are unfavourable to us, or the
decline. The implementation of carrier
imposition
licence
pre-selection and number portability will
obligations and fees on us, could
also likely further increase competition
disrupt our business operations and
and cause our churn rates to increase.
of
additional
could cause our net profit and the trading prices of Telkom’s ordinary shares and ADSs to decline.
• The implementation of the Regulation of Interception of Communications and Provisions of Communication-Related
• Our tariffs are subject to approval by
Information Act, or RICA, could be
the regulatory authorities, which may
costly and may negatively impact the
limit our flexibility in pricing and could
ability of Telkom to register customers
reduce our revenues and net profit.
and may require us to disconnect
• Should
the
country
continue
to
experience high occurrences of power outages, Telkom’s operational capacity, expenses and revenues will be affected and its operating revenue and net profit could decline. • The high rates of HIV infection in South Africa could cause the size of the South African communications market and our growth rates, operating revenue and net profit to decline. • Significant
labour
disputes,
work
our
stoppages, increased employee expenses
Incorporated, or Telcordia, in the
penetration rates, growth rates, revenue
as a result of collective bargaining and
damages phase of its arbitration
and net profit to decline.
the cost of compliance with South
• Any payments to Telcordia Technologies
existing
customers,
causing
proceedings against Telkom, will be
• If Telkom is required to comply with the
required to be funded by Telkom from
provisions of the South African Public
cash flows or the incurrence of debt, which could have a material adverse effect on its financial condition and results of operations.
Finance Management Act, 1 of 1999, or PFMA, and the provisions of the South African Public Audit Act of 2004,
African labour laws could limit our operating flexibility and disrupt our fixed-line business operations and reduce our net profit. • South
African
exchange
control
or PAA, Telkom could incur increased
restrictions could hinder our ability to
• We are parties to a number of legal
expenses and its net profit could decline
make foreign investments and procure
and arbitration proceedings, including
and compliance with the PFMA and
foreign denominated financing.
complaints before the South African
PAA could result in the delisting of
Risks related to ownership of Telkom’s
Competition Commission. If we lose
Telkom’s ordinary shares from the JSE.
ordinary shares and ADSs
these legal and arbitration proceedings, we could be prohibited from engaging in certain business activities and could be required to pay substantial penalties and damages, which could cause our revenue and net profit to decline and have a material adverse impact on our business and financial condition. • If we are required to unbundle the local
• Our total property taxation expense
• The future sale of a substantial number
could increase significantly and our net
of Telkom’s ordinary shares or ADSs
profit could decline as a result of the
could cause the trading prices of
enactment of the South African Local
Telkom’s ordinary shares and ADSs to
Government: Municipal Property Rates Act, 6 of 2004. Risks related to the Republic of South Africa
decline. • Your rights as a shareholder are governed by South African law, which rights of shareholders under the laws of
• Fluctuations in the value of the rand and
favourable terms and conditions for the
inflation rates in South Africa could have
provision of interconnection services
a significant impact on the amount of
• It may not be possible for you to effect
and facilities leasing services or ICASA
Telkom’s dividends, the trading prices of
service of legal process, enforce
finds that we have significant market
Telkom’s ordinary shares and ADSs, our
judgments of courts outside of South
power
imposes
operating revenue, operating expenses,
Africa or bring actions based on
unfavourable terms and conditions on
net profit, capital expenditures and on
securities laws of jurisdictions other than
us, our business operations could be
the comparability of our results between
South Africa against Telkom or against
disrupted and our net profit could
financial periods.
members of its Board.
otherwise
decline.
other jurisdictions.
• The levels of unemployment, poverty
• Your ability to sell a substantial number
• If we are unable to recover the
and crime in South Africa may cause the
of ordinary shares and ADSs may be
substantial capital and operational costs
size of the South African communications
restricted by the limited liquidity of
associated with the implementation of
market and our growth rates, operating
ordinary shares.
carrier
revenue and net profit, as well as the
pre-selection
and
number
Management review
differs in material respects from the
loop, or are unable to negotiate
or
Group overview
Sustainability review
Performance review
Financial statements
Company Financial Information
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Black economic empowerment
We constantly strive to maintain our
momentum in terms of implementing our BBBEE transformation pillars
In the year under review, we continued to
• In management control, we were
recognised procurement spend from all
make a significant contribution towards the
ranked the second most empowered
suppliers was R8.8 billion, equivalent to
achievement of the objectives of our
company
Securities
70.4% of total measured procurement
government’s Broad-Based Black Economic
Exchange by the Financial Mail Top
spend. Again, this figure significantly
Empowerment (BBBEE) policies and the
Companies
ranking
exceeds the 50% target in the BEE
transformation of the Information and
reflected the total transformation of our
Codes. BEE recognised procurement
Communications Technology (ICT) sector.
Board and top management structures
spend from Qualifying Small Enterprises
to significantly exceed government’s
(QSEs) and Exempted Micro-Enterprises
targets for this element of BBBEE.
(EMEs) declined slightly as many of our
One of our strategic goals is to become one of South Africa’s leading empowered
on
the
Survey.
JSE This
small suppliers graduated to become
companies. Our BBBEE Strategy and
• In preferential procurement, we were
Implementation Roadmap, which are the
again ranked one of the best performers
enablers to achieve the objectives of our
on the JSE Securities Exchange by the
2010 Strategic Plan, have both been
Financial Mail Top Empowerment
approved by the Board.
Companies Survey. Our Preferential
In this regard, we have a dual BEE
Procurement is recognised as a champion
evaluation policy that considers both the
in driving economic transformation
DTI
among JSE Listed companies, state-
evaluation criteria) and levels of black
• In ownership, a series of landmark
owned enterprises and within the ICT
ownership (narrow-based BEE criteria)
transactions – the sale of 15% of our
sector. During the past financial year,
when making procurement decisions.
shares in Vodacom, the declaration of a
we procured goods and services
This policy is in line with best practices in
special dividend and the listing and
worth R4.1 billion from black-owned
the
unbundling of Vodacom shares –
companies, equivalent to 33.2% of total
preferential procurement policy also
unlocked value for our shareholders, the
measured procurement spend. This
seeks
majority of whom are public entities and
figure exceeds the 15% target in the
compliance and achieve other qualitative
black shareholders.
BEE Codes by a significant margin. BEE
and industrial policy objectives such as
Our BBBEE self-assessment has revealed a number of highlights.
large enterprises measured under the Generic Scorecard of the BEE Codes of Good Practice.
scorecard
South to
reducing
(broad-based
African move
our
BEE
economy. beyond
Our
BBBEE
dependence
on
international resources, the development of domestic technology production capabilities
Target
2007/ 08
2008/ 09
BBBEE procurement spend from all suppliers
50%
55%
70.4%
BBBEE procurement spend from qualifying small enterprises or exempted micro-enterprises
10%
6.7%
5.1%
BBBEE procurement from black-owned suppliers
9%
23.4%
33.2%
BBBEE procurement from black women-owned suppliers
6%
6.3%
4.8%
BBBEE element
and
the
creation
of
sustainable black-owned ICT companies. Although our preferential procurement policy is perceived to be stringent, the majority of our large suppliers, many of them multi-national companies, have set up local operations, sold equity to black shareholders and developed BBBEE Commitment Plans that are in line with our policy.
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59
There was a major
improvement
in our BBBEE suppliers spend
Over the past decade, we have made a major contribution towards the economic transformation of our sector by awarding large contracts worth tens of billions of rands that facilitated the creation of sustainable black-owned ICT companies. Through Procurement’s intervention, we have managed to persuade multi-nationals to partner with local BEE companies. These partnerships will provide black-owned companies with the opportunity to upgrade their skills and other capabilities. During the next phase, they will be in a position to develop their own independent brands, products and services that can be marketed in South Africa and the rest of the world. Thank you Telkom for having faith in me, says Maletsati Group overview
Tracking the health of its employees is critical for Telkom as, not only is it a legal requirement but it’s the right thing to do in a company whose employees are subjected
Management review
to various levels of stress in their daily lives. In line with our commitment to sourcing BBBEE suppliers, we regularly put out tenders for the outsourcing of various activities
and, in 2002, a tender for
occupational health testing was awarded to
a
small
company,
Maletsati
We have various programmes in place to attract and retain black employees, particularly women. A total of 87% of new appointments in 2009 were black, bringing overall representation in the workforce to 62%.
Sustainability review
Performance review
Occupational Health. Initially the company, owned and run by Maletsati Mosweu, worked in the Gauteng
Financial statements
region, providing an in-house clinic service from the Telkom Centre For Learning in Johannesburg. We were so impressed with the service and attention to detail that in 2004 we offered Maletsati a national
Company Financial Information
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Black economic empowerment continued
We have developed
progressive employment equity targets
How BBBEE works On February 9, 2007, the Department of Trade and Industry (DTI) released its Broad Based Black Economic Empowerment (BBBEE) Codes of Good Practice (the Codes), a framework to guide government departments in the implementation of BBBEE. The Codes have a generic scorecard (the Scorecard) with seven elements: • Ownership (20 points)
• Preferential procurement (20 points)
• Management control (10 points)
• Enterprise development (15 points)
• Employment equity (15 points)
• Socio-economic development (5 points).
• Skills development (15 points)
The elements in turn have indicators, each of which has its own weightings, measurement principles and compliance targets. Based on its scorecard performance, a business/enterprise is awarded a BEE Status and Recognition Level. The highest BEE Status is Level 1. This is awarded to an enterprise which scores more than 100 points and gives it a BEE recognition level of 135%. Effectively an enterprise purchasing goods and services from a Level 1 supplier can recognise 135% of the procurement on its own scorecard. The lowest BEE Status is Level 8, which is awarded to an enterprise with a score of between 30 and 40 points. This equates to a BEE recognition level of 10%. An enterprise that scores less than 30 is a non-compliant BEE contributor with a BEE recognition level of 0%.
contract for our five regions, creating
through school. Telkom has taught me that
to attract and retain black employees,
additional jobs in the process as she had
supporting the smaller people pays
especially black women. A total of 87%
to set up satellite offices.
dividends all round,” says Maletsati.
of new appointments in 2009 were
Maletsati, who says she is eternally grateful
• We
have
developed
aggressive
to Telkom for the faith shown in her and her
employment equity targets to address
colleagues, tests up to 2,000 employees a
the challenges we face in terms of
year, screening them for ailments such as diabetes, blood pressure, impaired vision and hearing.
increasing
the
diversity
of
our
workforce, especially the representation of black women and black disabled people in the middle and senior
black, bringing overall black representation in the workforce to 62%. The proportion of disabled employees has risen from 0.93% in 2007 to 1.13% in 2009. We continue to drive various initiatives across the organisation to ensure that our policies and guidelines attract and support the recruitment of
“Telkom has been my springboard. It has
management levels of the organisation.
allowed me to pace myself to the point
We have put a Human Capital and
where I am now ready to take on other
Diversity Strategy in place to ensure that
jobs and, at the same time, intensify my
our workforce reflects South African
commitment to the community through the
demographics in terms of race, gender
• As part of our commitment towards
company’s support for, amongst others, the
and disability. We also have various
Enterprise Development, more than
Society For the Blind, mentoring newly
programmes in place, including a
100 black-owned companies are now
qualified nurses and helping some children
dedicated talent management division,
beneficiaries of a new short-term
people
with
disabilities
and
to
encourage the disclosure of current employees with disabilities.
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payment policy that facilitates the
61
settlement of invoices in less than
Guma – smart by name and nature
15 days. Other initiatives include
Success stories include Guma Smart Card. This black-owned company has grown
training provided by senior staff
from small beginnings to become a world-class manufacturer of smart cards that has
members within procurement to enable
replaced imports with local production and employment and developed lucrative
suppliers
export markets. Guma recently produced its 100 millionth smart card.
to
comply
with
quality
standards and the training provided to suppliers at the Telkom Centre for Learning. Khayelihle Projects, which was assisted to develop and implement PCR, an abridged ISO 9000 of 2000
“Today Guma is a role model black company with ownership of Gijima AST, Tourvest, etc. employing over 10,000 value-adding employees including those in our overseas offices like Australia, Canada, America, etc. Thanks to Telkom for having put faith in us as a small company with big dreams. This year we achieved 100 million Telkom
many
phonecards manufactured locally and delivered by Guma Smart Card. Through
beneficiaries of Telkom’s Enterprise
Telkom’s vigorous support and commitment to quality, Guma Smart Card attained
Development. Management has been
ISO 9001 certification over six years ago. Without Telkom’s commitment to BEE, the
working hard at identifying various
success we have achieved thus far would not have been possible. Thanks to Telkom
sustainable initiatives in this area to
management for staying true to the spirit of empowerment,” says Robert Matana
improve
Gumede, Chairman: Guma Group and Gijima AST.
quality
system,
on
is
one
current
of
enterprise
development contributions. Many of the identified
initiatives
have
been
approved by the Company’s top management and are in the process of being implemented. • We recognise that we have a critical role to play in transforming communities and
in
ensuring
that
they
are
sustainable. Our Telkom Foundation is a key driver in this regard and its activities are detailed on pages 78 to 80.
Group overview
Management review
Sustainability review
Performance review
Financial statements
Company Financial Information
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Human capital management
The past year’s performance has given us a platform to critically identify and
prioritise
interventions Introduction The labour dynamics in the global and local integrated communications technology (ICT) industry have been impacted by the rapid pace of change in the industry, and by the changes in the sector-specific and broader economies. These events have led to a marked change in the labour supply and skills retention patterns in recent years. This complex and evolving environment has tested our ability to provide a continuous supply of skills to ensure we achieve our strategy of growing our business and delivering shareholder value. The year under review’s performance has given us a platform to critically identify and prioritise interventions and test our progress in this regard. Our workforce We
currently
have
23,520
full-time
employees, 5.5% less than the previous year, with the majority (68%) in operational and support roles; a further 21% in supervisory roles and 11% in managerial positions. The proportional distribution of our people largely corresponds with our existing and potential customer base. Staffing and staff exits In line with the changing labour dynamics of the industry, our natural attrition (employees We have developed progressive employment equity targets to address the challenges we face in terms of the diversity of our work force.
who resigned and were not replaced) rate rose to 9% (7% in the previous year) and resignations rose to 8% (6% in 2007/08). This , however, is still in line with the South African industry norm.
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Headcount movement
63
In the top management scheme, the financial driver accounts for 45% of the
2006
2007
2008
2009(**)
28,972
25,575
25,864
24,879
Employee gains
706
1,512
918
1,047
Appointments
686
1,486
891
1,034
satisfaction and organisational renewal
Re-instatement
20
26
27
13
components) account for 35% and 20% is
Employee losses
4,103
1,223
1,903
2,406
Employee retrenchments
2,990
20
4
10
674
7
2
5
2,295
13
2
5
21
0
0
0
Natural attrition
1,113
1,203
1,899
2,396
Closing balance
25,575
25,864
24,879
23,520
employees have no right or title to the
4,227
5,807
3,801
4,307
shares and cannot receive dividends until
Opening balance
Voluntary early retirement Voluntary severance Involuntary reductions
Other employees*
* Other employees refer to contract and temporary employees but exclude Board members, learnerships and bursary students. ** Employee retrenchments for 2009 were employee initiated.
total award, and this is measured by the basic earning per share, return on assets (ROA) and the defend and grow revenues strategy. Performance drivers (customer
allocated for individual performance. • Long-term incentive plan All employees receive conditional shares, subject to their individual performance for each year preceding the allocation. The allocation is based on the average share price 10 days before the award date of June 1 each year, using a percentage of the employees’ total package. Our
the shares have vested. The shares will only vest if we meet our annual financial targets which are set out in the relevant team award plan, and employees must remain in
Compensation and benefits
continuous employment. The Company will
• Remuneration
introduce a new share scheme subject to
While the fixed, or guaranteed, remune-
each
ration packages are reviewed each year,
remuneration review process and they are
in certain critical skills areas, depending on
assessed against individual performance.
the supply and demand of those skills in the market, there are ad hoc reviews to ensure we remain competitive. • Non-executive directors The directors, on recommendation of the human resources review and remuneration committee, determine the fees of nonexecutive directors who do not participate in
the
incentive
scheme
for
top
management. These fees are set out on Page • and in Note • in the consolidated annual financial statements. • Executive remuneration Fixed remuneration is currently set at the market median and independent remuneration consultants advise the Board’s remuneration committee on executive management packages.
year
as
part
of
our
overall
shareholders’ approval. • The Telkom Pension Fund and Retirement Fund
The difference between the upper quartile
The old Pension Fund, only had 123
and the market median for guaranteed
members and the Telkom Retirement Fund
packages is used when calculating
had 23,389 members at March 31, 2009
incentives for top management.
and both are financially sound.
• Other employees
Performance management
Salary increases for all employees –
The performance management system has
management and bargaining unit – are
been enhanced to ensure that our
approved by the Board. Non-management
leadership is measured on the right criteria
employees are paid in terms of the
to drive behaviours that will ensure we
negotiated agreements with the relevant
continuously improve on the value we
unions.
obtain from our employees. A five point assessment scale has been introduced that
• Short-term incentive plan There is an incentive scheme for our management based on a balanced set of measures determined by the Board. The measures consist of financial and key performance driven targets, based on the approved
business
plan.
All
other
Guaranteed packages are influenced by the
employees participate in an incentive
scope of each individual’s role, knowledge,
scheme with different measures applied at
skills and experience. These are reviewed
the lower levels.
Group overview
Management review
Sustainability review
Performance review
ranges from ‘consistently exceeds job requirements’ to ‘consistently does not meet job requirements’ to distinguish those who do from those who do not.
Financial statements
Company Financial Information
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Human capital management (continued)
In the past year we focused on building the necessary current and future
competencies
Reward and recognition
Training and development
(CFL) with the balance conducted via the
Our ‘Name In Lights’ programme that
In the past year we focused on building the
virtual (PC-based) campus interactive
recognises outstanding achievement by
necessary current and future competencies
satellite-based facility, Skytrain.
employees or teams who go the extra mile
through training programmes in:
is one of the yardsticks that distinguishes our business from others. Our
Gold
Award
team
award
for
2007/2008 went to Daniel Fourie, Alan Gould, Kevin Burns, Deon Minnie and Willie Engelbrecht, for developing a software application that created a service view for the DSLAM. This application has enabled us to determine within minutes
Telkom invested R300 million in employee
• Customer Service Academy (marketing,
training and development in the year under
sales, call/contact centre and customer
review (2008: R283 million). At CFL,
service competencies).
12,271
• Leadership and management developmanagement, frontline leadership and
The CFL, which conducts most of its training
business development competencies),
in-house, spent R35.0 million with external
and
vendors in the key areas of technical and
major failure. It also provides us with
technical service, ICT infrastructure, IT
valuable information for special investigation
solutions
sections as it identifies problematic networks
innovation management competencies).
EE training 2008–2009
black
trained.
• Technical training (product knowledge,
Daniel also won the CEO Award.
(7,796
ment (enterprise leadership, general
whether a DSLAM has been affected by a
for future investigations.
employees
candidates and 3,641 women) were
and
technology
IT, management, marketing and Safety, Health and Environment (SHE).
and
The bulk of the training (64%) was through the classroom-based Centre For Learning
AA and EE as a % of total trained
EE/AA 2008–2009
African female
AA
African female
Male African
Coloured female
EE
Female coloured
Male coloured
Foreign female
White male
Foreign female
Male Indian
Indian female
Female Indian
Male white
White female
Female white
Male foreigner
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65
• Accelerated development of women, blacks and young talent
Tyron – a fine example of our development programme
In the year under review, 257 employees (50% female and 70% black) were trained in value management and technology management. Some 18 graduates from the ICT GMP obtained their MSc degrees in technology and innovation management. Of these, seven were women and 11 were black. • Technical training Approximately 2,883 field technicians were trained in IP telephony and the installation and maintenance of ADSL and, to date, more than 3,300 students have been trained on IP-related offerings, including LAN technologies, router installation and maintenance programmes.
Tyron Truter, manager of the Cape Town Electronic Business
• Network and IT training
Support Centre (ESBC), is a 20 year Telkom veteran who has
Some 350 ICT diploma and degree graduates and 400 diploma
worked his way up from being an ‘appie’ in the Mitchell’s
students were exposed to the industry via theoretical and field
Plan branch of the old Posts and Telecommunications
training. This resulted in the creation of various talent pools
department in 1989, to where he is today.
including specific functional skills needed by line management; IP
He has worked all over the Western Cape, run call centres
skills and field operations.
on the West Rand of Gauteng and Pretoria and returned to
• Other training
Cape Town in January 2009 to take over the ESBC.
The CFL trained 200 candidates in 22 events relating to IO driven
“This job is what you make of it and I’m having a lot of fun.
Telkom OSS/BSS projects and an additional 240 people were
I’m not a military style manager, I like to get down and dirty
trained in infrastructure and product/service training on emerging
with my team to ensure we deliver on our key performance
technologies. Some 111 employees received IT certification with
indicators (KPIs). Our customers make us responsible for
1,823 attending IT short courses and 154 attending IBM Tivoli
everything so we have to keep them happy. South Africans,
Netcool training.
in the main, are not techno savvy so it’s up to us to help them
Jobs Initiative on Priority Skills Acquisition (JIPSA)
set up their systems. Also, a lot of people don’t realise that we
This is a government initiative aimed at addressing the skills
support all users from MNet to ourselves and we provide a
shortage in certain areas in South Africa and, to date, 1,138
value-added service to them all.”
Group overview
unemployed ICT graduates have participated in internship programmes. Of these, we appointed 644 (75% of total industry appointments). In addition, 40 unemployed female ICT graduates
Management review
were trained and completed advanced Internet Protocol Networking/Solutions development and we offered 22 (55%) of them full-time employment.
Sustainability review
Leadership and management development programmes During the year under review:
Performance review
• 22 employees completed the Implementing Strategy and Managing Performance programme. • 33 employees from the top leadership team enrolled for the
Financial statements
Telkom Global Leadership Development programme. Company Financial Information
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Human capital management (continued)
We remain committed to continuous
engagement with the unions
• 40 employees were nominated for the NGN Professional programme.
• There has been a marked improvement
albeit one that is within our control if we
in our relationship with the unions, and
are prepared to change the way we relate to these employees.
• 100 employees have graduated to
• There is the emerging phenomenon of
date from the Advanced Operations
managerial employees joining trade
Two factors are involved here – a feeling of
Management Development programme
unions.
abandonment
(AOMDP).
The former is, we believe, because of our
• 81 employees attended the Gordon
of
junior
and
middle
management by top management, and the annual general salary increase approach
deliberate action in 2007 to invest in
Institute of Business Science (GIBS)
which
rebuilding
between
programme in managing the customer
employees as immune to the economic
ourselves and the unions following 2006’s
hardships that we are all facing. As a result
industrial action. While the suspicions are
of the increases gained by union members,
• 453 employees have been trained in
still there, the propensity to engage in
the unions are seen as viable vehicles for
the Next Generation Network (NGN)
confrontational conduct has diminished.
channelling frustrations with some of our
Essentials programme.
There is also some semblance of shared
practices.
relationship (PMCR), and
the
relationship
vision and a willingness to co-operate.
Employee engagement
tends
to
treat
management
Industrial action
Two developments stand out in the year
Although the latter increase is not material
Following
under review:
it is, nevertheless, a worrying development,
negotiations in 2008, some 2,500 out of
an
impasse
in
wage
Union memberships – bargaining unit NonNon-
Grand
Union name
CWU
SACU
Solidarity
unions
Total
unionised
total
Number of members
8,205
4,682
2,836
52
15,775
5,259
21,034
% membership: 2008/09
39.0
22.3
13.5
0.2
75.0
25.0
100
% membership: 2007/08
37.6
23.8
13.2
0.2
74.8
25.2
100
recognised
Union memberships – managerial staff NonNon-
Grand
CWU
SACU
Solidarity
unions
Total
unionised
total
149
319
125
225
818
1,668
2,486
% membership: 2008/09
6.0
12.8
5.0
9.1
32.9
67.1
100
% membership: 2007/08
5.7
12.0
4.3
8.7
30.7
69.3
100
recognised Union name Number of members
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67
14,500 union members participated in a short-lived strike in August 2008 and 1,680 bargaining unit employees participated in industrial action in August 2009. Telkom continues to engage with unions in order to find equitable solutions.
Hartebeeshoek keeps track of South Africa The multi-billion rand Hartebeeshoek satellite station lies deep
• Heartbeat The
company
measures
the
level
of
employee
engagement, through the annual Heartbeat Survey.
in a valley between Krugersdorp and Hartbeespoort Dam. Since its opening in 1975 it has relayed literally billions of signals from two satellites deep in space to South Africa’s data,
In the year under review our employees were more
television and voice units, 24 hours a day, seven days a week.
committed to Telkom and indicated that their intention was
Donovan Horn is one of the 28 people that man the station.
to stay with the Company and take up the challenges that come their way. For the first time in a long period employees are proud to say that they are part of the Telkom family. They are willing to continue to focus on the positive in spite of negative economic conditions; internal performance pressures; and changing market forces. The great news is that even in the light of the above challenges the Company’s engagement increased by a pleasing 10%. Some 62% of the Company’s employees were engaged compared to 52% in 2008. It is expected that this will be reflected in increased individual, team and Company performance, as well as in the retention of the right people in the Company.
As a technical specialist, Donovan heads a team of eight technicians who ensure that the station runs smoothly and efficiently. “We have to be fully operational at all times and our equipment is in what we call full redundancy mode so that if anything goes down it kicks in automatically,” he says. For some people, working at the station could be a lonely experience, but not for Donovan. “We are surrounded by prime bushveld with its myriad species of flora and fauna, so there’s always something to see, whether it’s a Piet-my-Vrou whose call echoes from the satellite dishes, or our lone Blesbok. The only thing I do miss about ‘civilisation’ is that there is no canteen on site so, if you forget your lunch, the
Group overview
nearest hamburger is 23km away!”
Engaged employees focus on what’s good for the customer and what’s good for shareholders. There is positive growth in customer satisfaction in most of the customer segments,
Management review
which is indirectly the result of the positive engagement of our employees. Telkom intends to continue its effort to improve employee
Sustainability review
engagement through a particular focus on improving the accessibility and availability of top management and improving Telkom’s ability to attract and retain a quality
Performance review
workforce. Talent management Managing our talent pool is a critical aspect of our
Financial statements
business, from retaining key skills to unearthing the leaders of tomorrow. We have a number of initiatives in place to ensure we are well placed to face current and future challenges.
Company Financial Information
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Human capital management (continued)
Our Graduate Development Schemes division is
dedicated
to growing and developing young talent • Succession planning During the year under review our talent pool bench strength rose to 1,474. Effectively this means that there is at least one candidate in the talent pool for each group executive and executive position who can replace the current incumbent. • Retention programme The four focus areas of our retention strategy are: • Create knowledge (attract and seek talent) • Store and protect knowledge (retain talent) • Share
and
distribute
knowledge
(develop potential talent); and • Use knowledge (deploy talent). The
success
rate
of
our
retention
programme to date is 95%, with 253 employees on retention. • Global talent To ensure we have a sustainable talent pool to staff our international businesses we established a Global Talent Pool and, currently, 48 employees are on short- or long-term assignments with Multi-Links/ Africa Online. • Managed career development for high potential employees In the year under review our employees were more committed to Telkom and indicated their intention to stay.
The six employees who obtained their Masters degrees in engineering and computer science at Cornell University in New York in 2007/08, rejoined us in September
2008
with
two
being
promoted. An additional three employees
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69
were admitted to the university in May 2009.
The voices of Telkom
Six employees, identified by the CEO
Telkom has 34 call centres in South Africa, each geared to providing technical
Rising Stars programme, are attending the
support and service to business and domestic customers. For the men and women
IMD’s Building On Talent programme in
who staff the centres, life can, at times, be challenging and stressful for these
Switzerland.
people are the ‘voice’ of Telkom, the ones who take the brunt of customer
51 female employees attended a Chat
complaints.
and Learn programme which focused on
Hilary Peacock, an agent in the Cape Town Service Activation Unit, says a key
Women Leaders Under Construction –
attribute to surviving in the job is the ability to not take any of the abuse received
Blazing Your Own Path. In addition,
as personal. The other key attributes are learning what tone of voice to adopt
10 female employees attended a two day
when handling calls, good or bad, and having a passion for customers
workshop on Women In Management and Leadership. Graduate and skills pipelines (future talent) Our Graduate Development Schemes Division is dedicated to growing and
“I try to put myself in the customer’s place and take the good with the bad when handling calls. Overall, the good definitely outweighs the bad and I would go as far as to say that about 90% of the calls I receive are good,” she says. Colleague Marlon Ernstzen agrees, particularly when it comes to adopting the right tone of voice.
developing young talent, not only for
“There’s nothing better than talking to an irate customer who’s upset because
ourselves, but for South Africa as a whole.
something he was promised didn’t happen, and then, at the end of the call,
Some R29.7 million was invested in student bursaries in the fields of information
hearing him, or her, calm down and apologising and then saying thank you for the help. That experience energises you for the next day.”
technology, electrical engineering and
Blanche Machelm is an agent in the Electronic Business Support Centre (EBSC) in
marketing management during the year
Cape Town, a unit which handles between 6,000 and 8,000 calls a day, mainly
and an additional R3.7 million was spent
in the areas of ADSL support (90% of the calls) and fault and connectivity issues –
on our Centres Of Excellence programme.
e-mail, for example.
We also funded 833 full-time bursaries;
Blanche, who estimates that she handles approximately 50 calls a day, says all
667 part-time bursaries and 1,121 study
EBSC agents have to have an IT background as they have to have an intimate
loans for employees or their dependants in
technical knowledge in areas such as routing, configurations, outages, modems
the 2008 academic year.
and cable passwords.
Group overview
Management review
Sustainability review
Performance review
Financial statements
Company Financial Information
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70
Human capital management (continued)
Overall, the year under review was our
As part of Telkom’s contribution to the
The various CoEs have been encouraged
most successful to date in terms of bursar
upliftment of advanced research skills in
to
placements (80%) and a pass rate of more
South Africa, several of the previously
universities to expand the ICT blueprint in
than 95%.
under-resourced universities were partnered
Africa as a catalyst for job creation and
with historically white universities. After a
economic development.
Africa Online and Multi-Links Africa Online is our internet service provider (ISP) in Nairobi, Kenya and Multi-
number
of
years
these
previously
disadvantaged institutions have established
build
relationships
with
African
Major progress has already been made in this regard and formal agreements exist,
Links is Nigeria’s first private telecommuni-
themselves as research centres that can
cations
top
operate independently. Examples of these
management employees are on three year
joint research centres are Rhodes University
contracts in Nairobi and 39 are based in
and the University of Fort Hare as well as
Lagos.
the University of KwaZulu-Natal together
The CoE programme enables the various
with the University of Zululand. Currently,
institutions to establish research facilities
there are 16 CoEs across the country, each
that would not otherwise have been
with a unique research focus.
possible without the necessary Telkom,
operator.
Two
of
our
Telkom Centres of Excellence Telkom's Centres of Excellence (CoE) is a collaboration programme between Telkom,
inter alia, with institutions in Egypt, Ethiopia, Uganda, Namibia, Kenya, Libya and Tunisia.
industry and government sponsorship.
and
The CoEs are jointly funded by Telkom, ICT
in
industry players and the Department of
Skills retention in South Africa is a major
communication technology and allied
Trade and Industry - through its Technology
challenge as many talented post-graduate
sciences and to provide facilities to
and
students are attracted to opportunities
encourage young scientists and engineers
Programme (THRIP).
the
telecommunications
government
to
industry
promote
research
to pursue their research interests in South Africa
Human
Resource
for
Industry
overseas. An important feature of the CoE
Sound governance ensures that allocated funds are well managed. Various levels of
The CoE programme was launched in
governance
February 1997 when the then Minister of
established.
Communications,
Mr
Jay
Naidoo
participated in the signing ceremony of the first research agreement between Telkom,
have
been
formally
• Formal CoE Agreement between all stakeholders.
programme is that the extensive research opportunities offered to students effectively contribute to minimising the “brain drain”, thus keeping our talent here to provide a valuable human resource to the industry. Approximately 250 students are currently pursuing post graduate degrees through
Siemens and the University of Cape Town.
• Each CoE is managed by a Steering
the programme and since its inception,
During 1997 a total of seven CoEs were
Committee represented by the research
more than 1,800 post graduate degrees
launched and subsequently, during the
staff, Telkom, the respective industry
have been awarded.
following
sponsor and a representative from the
year
established,
another
including
five
were
several
at
technikons. From the launch of the programme, the current Chief Executive Officer of Telkom, Mr Reuben September, became the patron of the programme and
THRIP management team. • Research project selection mechanisms are aligned with; industry partner/s and THRIP funding criteria.
has guided and supported the initiative. At
• High level governance of the CoE
each of the launches during 1997/98,
programme is provided by an Executive
top ranking government officials, including
Management Council with representivity
Mr Andile Ngcaba, Mr Tokyo Sexwale
from Telkom, industry, academia and
and Minister Sibusiso Bhengu participated
THRIP.
in
the
signing
ceremonies
collaborative research agreements.
of
the
The profile of the current CoE students is: • 84 Doctoral students • 166 Masters students • 20 women • 150 BEE candidates • 38% non-South African students Currently 27 industry partners are involved in
the
CoE
programme.
Industry
stakeholders are more than financiers of the CoE programme as they also play a vital
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71
role in exposing students to the real world
Industry Partner: Telkom and Dimension
University of KwaZulu-Natal
of communication.
Data
Radio access involving CDMA receivers;
Telkom’s CoE programme has been
Optical Fibre Measurements
recognised as a catalyst for ICT research in Africa.
Communications
Intuitions, research areas and industry partners planning:
projects
involve
and resource management. Rural telecommunications with a variety of projects in the wireless networking arena.
Solar Energy Research Industry Partners: Telkom and TFMC
Tshwane University of Technology Radio
Industry Partners: Telkom, Hezeki and MCT
traffic modelling; adaptive antenna arrays
Rhodes University
Industry Partners: Telkom and Alcatel-Lucent University of Zululand Mobile e-Services
comparing the calculated or predicted
Distributed Multimedia: projects deal with
value of radio signals with the measured
virtual reality; Internet Protocol telephony,
signals.
protocols and intelligent agents
Industry Partners: Telkom, Alcatel-Lucent
Industry Partners:
and Molapo Technology
Tellabs and StorTech
North West University (Potchefstroom
University of Fort Hare
networks; congestion control and network
Campus)
Electronic Commerce
performance.
Industry Partners:
Industry Partners: Telkom, Nokia Siemens
Telecommunications Application Modelling includes projects on the Super Parallel Computing facility; data mining; decision support
systems
and
mathematical
programming applications. Industry Partners: Telkom and Saab Grintek University of Johannesburg Modelling Optical communication: involving
Telkom, Comverse,
Telkom, Saab Grintek
Industry Partners: Telkom and Huawei Universities of Cape Town and Stellenbosch ATM/Broadband Networks and their applications with research on MPLS and IP
and Tellabs
Networks and Telesciences
University of Stellenbosch
University of Western Cape
Satellite communication, speech and
Internet Protocol Networks and their
image processing
applications
Industry Partners:
Telkom, Motorola and
Spescom
Industry Partners: Telkom and Cisco University of the Free State
Dense Wave Division Multiplexing (DWDM)
University of Witwatersrand
The identification of usability and human
projects; optical filters and transport
Telecommunications Access and Services
factors that will ensure higher accessibility
networks
based on the TINA Architecture
to Information Technology
Industry Partners: Telkom, CBi Electric and
Industry Partners: Telkom, Vodacom and
Industry Partner: Telkom
Ericsson
Nokia Siemens Networks
Operational Support Systems (OSS)
University of Limpopo
Power (fuel cells etc) and optic fibre
Automatic Speech technology
research
Industry Partners: Telkom and Maredi
Industry partners:
Multimedia software: includes usability
University of Pretoria
TFMC
laboratory projects, virtual classroom;
Next Generation Networks
Industry Partners: Telkom and SAP Nelson Mandela Metropolitan University
programming tools and 3D system design
Group overview
Vaal University of Technology Management review
Telkom, M-Tec and Sustainability review
Industry Partners: Telkom, Unisys, Alvarion, EMC and Tellumat
Performance review
Financial statements
Company Financial Information
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Safety, health and environment
We successfully piloted a
stress
resilience and emotional intelligence workshop Safety, health and environment Our entrenched and integrated Employee Wellness
and
Safety,
Health
and
Environment (SHE) portfolio continues to be one of the most admired in South African industry, as evidenced by the following achievements in the year under review. • We received the coveted international Global
Business
Coalition
(GBC)
Award for Excellence as the best HIV/AIDS workplace programme for our integrated Voluntary Counselling, Testing and Treatment programme for 2008. The award was made by the United Nations Secretary General in New York. • Our
annual
national
HIV/AIDS
celebrations campaign, ‘Don’t hesitate, donate’, was successfully launched on World AIDS Day 2008 with our employees donating thousands of kilograms of food, clothes and toys to 26 adopted HIV/AIDS havens, orphanages and hospices. • Our Direct Retail shops initiated the Thuso Bus concept (Thuso is our employee wellness programme). Outlets in the Eastern Cape, including the former Transkei, were given a working day off to attend Thuso programmes. An industrial theatre show was a key driver in the roll-out of our Thuso Wellness days which highlighted a step-by-step approach to improve employee wellbeing through lifestyle changes.
• We
successfully
piloted
a
stress
resilience and emotional intelligence (EQ) workshop in areas with high degrees of trauma as a result of hijackings, robberies and other criminal activities. This will be rolled out nationally in the new financial year.
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73
Sick leave indices Sick leave measure
2006/2007
2007/2008
2008/2009
% variance
2.24
2.51
2.52
(0.4)
2.45
2.48
2.53
2.0
3.38
3.59
3.30
(8.1)
15.7
17.3
17.3
0
67.2
70.1
71.7
2.3
176,795
194,364
183,679
(5.5)
SAR (%) Defined as a total number of sick days as % of total available man-days ASR (days) Defined as the average number of days used per sick leave incident AFT (incidents) The average number of sick leave incidents per sick leave user SUR (%) Monthly average Number of sick leave users per month as % of total number of employee population SUR (%) Year-to-date Number of sick leave users progressively utilising sick leave as % of total number of employee population (all sick leave users are only calculated once) Total number of man-days/shifts lost due to sick leave implying the progressive and accumulative total of sick leave days over 12-month period
Absenteeism through illness
out of our Thuso Wellness days which
Hygiene surveys thanks to the application
There were no significant variations in the
highlighted a step-by-step approach to
of specific criteria in key areas.
absenteeism through illness and year-to-
improve employee wellbeing through
date sick leave use figures, although there
lifestyle changes. Our challenge remains to
was a 5.5% improvement in overall sick
reconstruct the “Terrible Triangle” of high
leave days used.
stress levels, poor chronic disease profile
• We saved R2 million on our Operational
• Our ISO 14001:2007 and OHSAS 18001:2007 Safety, Occupational Health and Environmental Management
and bad lifestyle habits.
systems were recertified by Dekra
We remain concerned about the high level
Norisko Industrial South Africa.
of sick leave taken (71.7% compared to
• Eye screening
70.1% in the previous year) and we will be
2,113 employees were screened for vision
making planned changes in sick leave
impairment and 194 were identified for
policy
further treatment intervention.
• The
Compensation
Commissioner
granted us a dedicated resource to deal specifically with Telkom-related cases. This resulted in a ‘quicker return to work’ by employees who were injured on duty.
stipulations
and
management
effectiveness to decrease this business risk and impact. In terms of productivity and
• Individual health risk assessments (chronic profile)
direct/indirect cost factors, the data
2,903 employees at selected sites in the
indicates that 791 employees are off sick
Free State, KwaZulu-Natal, Western Cape
significant
each working day. While this is an
and
reductions in three reportable incident
improvement of 2.6% on the previous year,
hypertension, cholesterol, diabetes and
categories – working in elevated
it is still unacceptable and a significant
body mass.
positions (17%); lifting and pushing
improvement is necessary. Our new target
(30%); and vehicle accidents (16%).
is to reduce the sick leave per day to
• As a result of effective risk management controls,
there
were
• We established the Telkom Green
600 employees in 2010/2011.
Gauteng
were
screened
for
# Hypertension profile: While there was a
Group overview
Management review
Sustainability review
Performance review
Financial statements
decrease in the normal range from 63% to 46%, this remains a major risk area as
Initiative (TGI) project team to enable us
Physical wellness
more than 50% of those tested had some
to better manage our environmental
An industrial theatre show, ‘How Do I Eat
abnormality in their blood pressure. The
impact.
This Elephant’ was a key driver in the roll-
high systolic range (heart subtraction)
Company Financial Information
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Safety, health and environment (continued)
Of particular
concern
is the 17.6% increase in stress-related cases due to work related relations, poor performance, incapacity and job security.
The following table shows the diagnostic causal factors for the EAP referrals Diagnosis
2006/2007
2007/2008
2008/2009
% variance
Crisis and trauma
41.7%
41.3%
40.5%
(1.9%)
Family relationships and divorce
15.4%
17.6%
16.1%
(8.5%)
7.6%
6.8%
8.0%
17.6%
Stress related
percentage was similar to the previous
Psychological wellness
year but the diastolic (heart pumping) rate
In the year under review we transformed
work-related
increased from 15% to 25% as a result
this section of the Wellness programme into
incapacity, job security etc) constitutes
of increased cardio-vascular illnesses;
a more proactive, competency-based
almost 14% of all diagnoses and the
increased stress levels and poor lifestyles.
approach, highlighted by the following:
293 cases recorded during the year is
# Cholesterol profile: There was a 7%
• Some 1,216 employees and their
increase in the at-risk category, again due
dependants were referred to our
to lifestyle factors such as lack of exercise
psychological counselling interventions,
and incorrect eating habits. This profile will
a 10% decrease on the previous year.
be a priority going forward in our wellness
This decrease is, we believe, largely
campaigns.
due to the fact that employees did, from
# Diabetes profile: There was an 11% improvement in the diabetes chronic profile, thanks to regular testing and the fact that diabetes remains a high focus area. However, we are concerned that low blood sugar levels rose from 28% to 37%
• The stress category (which includes
time to time, use their own private psychologists.
From
the
referrals,
Renaissance
and
the
resultant
uncertainty of job security and fears of job losses. Preventative interventions
• Stress and resilience;
• Of particular concern is the 3.8%
psycho-sexual, personality disorders
for us as 65% of the employees tested were
and related psychosis. This could be the
overweight or obese. As a result, the
tip
importance of lifestyle modification is a
the problems experienced by our
priority for us in the new financial year.
employees are of such a sensitive nature
and all cases were successfully treated.
in view of the roll-out of Project
patient at a cost to us of R1.8 million.
# Obesity profile: This is a high risk area
were reported in the year under review
the next financial year, particularly
year:
psychological
pleased to note that only six cases of TB
year. This is a major challenge for us in
average of 3.4 sessions per referred
our awareness campaigns.
are
an increase of 17.6% on the previous
Five key workshops were held during the
increase
We
performance,
4,132 sessions were conducted at an
and this will be another key focus area in
# Opportunistic diseases:
poor
of
in
the
cases
in
illnesses’,
iceberg
as
the
such
some
as
of
that they are discussed with their own psychologists.
• Team and value development;
‘other • Trauma and resilience; • Bereavement therapy; and • Conflict management.
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75
These will be augmented by another six workshops in the next financial year: • Psychological and emotional resilience; • Financial wellness; • Prevention of emotional burnout; • Emotional intelligence; • Dealing with challenging circumstances; and • The psychology of customer care. Socio-economic wellness
Our carbon footprint It now takes the earth 16 months to regenerate the resources it uses in a year and so businesses that look ahead and actively manage their ecological risks and opportunities can not only make a major contribution to saving the world’s resources but, at the same time, gain a strong competitive advantage over those that don’t. At Telkom, via our Green Initiative, we are consolidating all our environmental initiatives to ensure we meet our, and legislation’s, targets and, additionally, educate our people and encourage them to lead a greener lifestyle.
range of lifestyle services such as recreational, vocational,
We have 10 key focus management areas – energy, water, waste, greenhouse gas emissions, green procurement, biodiversity, renewable energy, company initiatives, our corporate image and our people. Some of our key objectives in these areas are to offset emissions, participate in carbon trading, provide the greater ICT sector and stakeholders with products and services that will help them to reduce their footprints and provide our shareholders with ‘green’ returns.
household, educational and general lifestyle value offerings at
Some of the areas where we can improve are:
We provided guidance in the areas of lifestyle, finance and debt counselling during the year, three key areas that impact on the wellbeing of our employees with the specific focus to reduce stress and poor lifestyle habits. # Lifestyle: We contracted a lifestyle service provider to run our Telkom Touch Lifestyle Programme which connects employees to a
great prices. # Financial resilience: There was an increase in counselling referrals (three to four a month) for employees with financial problems, which was underscored by the increase in garnishee orders against employees. As a result, a bid for the outsourcing of a financial resilience intervention and a financial advice service has been approved and is in process, # Debt counselling: We have set up a debt counselling service which registers employees who have huge debt under the National Credit Act of 2005. This protects them against parties demanding payment. A debt counselling company will act for such
• Employee business travel (currently 26.7 million km a year). Our aim is to reduce this by 5.3 million km. • Our 2008/09 electricity consumption was 537,300MWh. Our aim is a reduction of 107,460MWh. • EPS generators use 2.3 million litres of diesel. Our aim is to reduce this by 456,000 litres. • Employee business air travel sits at 31.8 million km. Our aim is to reduce this by 6.4 million km. Overall, we believe we can reduce our carbon emissions by between 15% and 30% over the next three to five years.
Group overview
employees, negotiating new payback terms for bonds, vehicle leases and other creditors and preventing repossession of these assets.
Management review
Safety management The Occupational Health and Safety (OHS) of Telkom’s employees
Sustainability review
is a fundamental right and therefore Telkom acknowledges that a healthy and safe working environment enhances performance in the workplace and also contributes to employee wellbeing.
Performance review
Financial statements
Company Financial Information
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76
Safety, health and environment (continued)
To ensure Telkom complies with the
In analysing this data, 32% of HIV positive
educators. It is gratifying to note that the
minimum safety requirements as per
employees are either in the process of
involvement
national legislation and to support Telkom’s
being registered or are unaccounted for.
extended beyond the boundaries of the
OHS policy, a:
This
the
Company into the communities they serve
programme to improve on this conversion
via the adoption of various havens,
rate
positive
orphanages, hospices and presentations to
employees on to the programme. In the
community youth groups. As a result, a
2008/2009 performance cycle, there
Champions Programme will be launched
were
later in 2009 to formalise community
• Well structured SHE Governance policy is developed and revised annually. • Incident on Duty (IOD) system is developed
to
provide
intelligent
remains to
get
74
a
challenge
identified
new
HIV
registrations
for
on
the
information to assist management in
programme (40 via onsite VCT; 32 self-
identifying trends and to implement
identified and two prophylaxis patients).
corrective actions to mitigate future incidents. • Contractor management audit programme is implemented to ensure contractors are audited monthly to meet the requirements of the Construction Regulations; and
of
peer
educators
has
involvement. • Thuso Toll-free Call Centre
The gender distribution on the chronic
Some 4,234 calls were routed via the
programme is 203 (52%) male and 186
Thuso Call Centre for the year under
(48%) female. The median age is 36 years
review. Outbound calls comprised 65.5%
with ranges between four and 56 years.
of these, mainly providing clinical support
We
have
adopted
a
conservative
approach in providing anti-retrovirals for
to patients. Inbound personal advice calls made up 29.7% of all calls.
employees registered on the programme
• KABP Study
• Telkom Subsidiary audit initiative is
with a CD4 count of 350 versus a
The regular KABP (Knowledge, Attitude,
implemented to provide support to the
governmental and NGO norm of 200.
Behaviour and Perception) studies which
subsidiaries to meet minimum statutory
Using this as measurement category, only
test the general level of information,
SHE requirements.
14 (4.9%) of the 284 employees on anti-
understanding and influencing behaviour
HIV/AIDS workplace programme
retrovirals are categorised in the AIDS or
of employees about education and
In addition to our international award, our
fully blown AIDS category.
Thuso programme is recognised for its best
• Preventative strategy
test their understanding and also determine
practices by researchers and academics
Since 1996, we have dispensed free
the level of stigmatisation experienced by
who visit us for benchmarking purposes.
condoms at all sites. In the year under
them in the workplace.
Since the inception of our voluntary
review more than 703,000 condoms
counselling and testing programme (VCT) in
were dispensed and more than 120,000
2004, 23,391 employees have been
expired condoms of previous governmental
tested.
issues were withdrawn.
In
the
year
under
review,
awareness
interventions
have
been
extended to the HIV positive employees to
Environmental management While our environmental impact is not big, our contribution is not totally insignificant and, as a result, during the year under review
2,353 employees, from a target population
• Peer education
we launched our Telkom Green Initiative, a
of 3,178 at 52 sites, were tested.
Currently 594 employees have been
concerted effort to place green issues firmly
We have 280 employees receiving anti-
trained and registered as fully fledged peer
in the mainstream of our operations.
retroviral therapy of which the majority
• Treatment protocols
have a normal sick absence profile, being
In terms of treatment protocols, the following table reflects the current treatment status:
healthy and productive at work.
Treatment aspect HIV positive employees
Number of employees 708
HIV positive status via VCT
512 (72%)
HIV positive status via self-identification
196 (28%)
HIV employees registered on the Chronic Disease Programme
389 (55%)
HIV employees registered on Medical Aid, NGO or Government Programmes
92 (13%)
HIV positive employees on treatment (Expert Treatment Programme (ETP))
284 (40%)
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Some of the key deliverables are: • Measuring our carbon footprint through the monitoring of electricity and fuel use; minimising travel and reducing waste and carbon emissions (there is no carbon trading legislation in South Africa as yet). Reducing our electricity bill through the installation of meters at key sites, a possible return to using more
• Participation
in
national
and
• Improved
functional
efficiency
77
of
international climate change awareness
underfloor cooling requirements in
programmes.
equipment rooms.
• Employee behavioural change awareness programmes. • Computerised
destination
building concept in partnership with our control
elevator system in our high rise buildings.
solar power and the installation of wind chargers.
• The implementation of the Green facility management company; and • Installation of motion sensor light switches and upgrade of existing lighting technology with more efficient technology.
Bats We are currently managing a bat encroachment concern in a remote exchange building in Mpumalanga. A colony of free tailed bats is roosting and raising its young in the ceiling, which creates an unhealthy environment for our technicians performing routine maintenance work. We are allowing the young to mature and will then install a one-way excluder exit. This will allow the mature adults and young to leave but not return. The final phase of the project will be the erection of a bat house on the site to provide an artificial roosting site for the colony. Blue cranes We are delighted to announce that since the installation of ‘flappers’ on our lines in the central region, no blue crane mortalities have been recorded. Raptors As part of our commitment to active environmental stakeholder engagement with both governmental and non-governmental
Group overview
organisations we attended various meetings around the country. One of these is the annual meeting of the Northern Cape Raptor Forum (NCRF). At the last meeting issues relating to the nesting
Management review
habits of sociable weavers on our towers were raised, specifically the environmental impact the removal of these nests would have on the survival of the Pygmy Falcons which prey on the weavers.
Sustainability review
Performance review
Financial statements
Company Financial Information
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Corporate social investment
The Foundation was voted the
Top
Empowerment Company in CSI
All our corporate social investment (CSI) programmes are run and managed by the Telkom Foundation which we established 10 years ago. As a result of the Foundation’s work, we are recognised as one of the largest CSI investors in South Africa and in the year under review we invested more than R47 million, mainly in the areas of education and
the
roll-out of
information
and
technology in disadvantaged communities. As a result of this commitment, the Foundation was voted the Top Empowerment Company in CSI at the 2009 Oliver Empowerment Awards, hosted by Topco. The Foundation’s focus on education and technology is governed by our belief that these areas are key contributors to an equal opportunity society in South Africa. One of the most powerful learning resources is the internet and by bringing this medium into classrooms around the country, educational standards will be enhanced. It is our hope that our continued investment in these fields will help redress skills shortages, particularly in the engineering, science and IT fields. We focused on four main projects in the year under review: • 2,010 for 2010 Schools Connectivity Initiative This is the Foundation’s biggest and most ambitious project ever. Our goal is to provide 2,010 schools across the country with internet access by 2010.
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Group overview
Management review
Fittingly, the initiative was launched in February 2009 by our CEO, Reuben September, at his former school, Grassy Park High School in Cape Town. Each participating school will receive an
We have been a proud supporter of the South African Paralympic team since 1992. Our team achieved 6th place in the overall medal table in the 2008 Beijing Olympics.
Sustainability review
Performance review
internet connection; discounted broadband subscription rates and interactive electronic whiteboards and laptops. Grassy Park also received an Internet Café for use by not only the learners, but the community. If this pilot programme is successful, it will be rolled out to the other schools as part of the overall initiative.
Financial statements
Company Financial Information
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Telkom Annual Report 2009
Corporate social investment (continued)
• Beacon of Hope This programme, which was launched in 2006, is designed to develop promising young learners into future leaders by placing top students from under-resourced schools in some of the country’s leading high schools. The Foundation pays for the tuition and boarding fees; uniforms; books and stationery for the 186 learners enrolled in the programme. • Giving from the Heart Initiated
by
our
Human
Resources
department to encourage employees to give something back to the community, the project was taken over by the Foundation in 2006. Employees can either donate a portion of their salary to Giving from the Heart projects; donate their time and skills to projects, or identify their own charities to which they contribute either money or time. The Telkom Foundation matches every rand an employee donates with the same amount. In the year under review, the Foundation launched an Employee Volunteer Week which resulted in our people working and assisting at the Tumelo Hospice in Mabopane; the Centre of Hope in Mahwelereng; the Nokuthula School for the Intellectually Disabled in Marlboro; the Uthando Orphanage House in Hazyview; St Patrick’s College in Kokstad and the Hospice
Association
of
Transkei
in
Southernworld. • Sponsorships In the year under review various grants were made to organisations ranging from Childline to Nurturing Orphans of AIDS for Humanity (Noah) in line with our commitment to improving the lot of previously disadvantaged communities. Going forward In the next financial year, the Telkom Foundation will launch the Telkom Teacher of the Year awards to honour South Africa’s top maths, science and technology educators at the Further Education and Training and the General Education and Training level. The awards will be made in August 2009.
Our Telkom Business golf sponsorships enable us to position our brand in the business environment. They also help us to introduce new products and reinforce our relationship marketing programme.
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81
Sponsorships
ICT capabilities. In June 2009, the
The programme is sub-divided into the
Sponsorships continue to be an important
Confederations Cup was utilised as a dress
‘Pool Splash’ project which focuses on safe
part of our brand building and reputation
rehearsal for the World Cup finals in
swimming in pools; the ‘Ocean Splash’
management strategies. In the year under
2010.
project
review we focused on soccer, swimming
requirements in ensuring that broadcasting
swimming and the ‘Rural Splash’ project
and golf.
and media requirements were met. Telkom
which concentrates on swimming in rivers
has
and dams.
Soccer For
the
third
consecutive
year
we
sponsored the Telkom Knockout, a Premier Soccer League (‘PSL’) event played by all 16 PSL teams between October and December. It is a knockout event that plays
Telkom
approximately
massive amounts of bandwidth that FIFA will need in 2010.
Since
four competing teams. The teams who receive the most telephone and SMS votes play in a round robin series of games.
cable
is more than enough fibre to support the
skills.
day PSL event where the fans choose the
128,000
FIFA’s
enough to circle the world three times. This
Swimming
sponsored the Telkom Charity Cup, a one
all
kilometres of optical fibre in the ground –
a major role in honing South Africa’s soccer
For the ninth consecutive year we also
exceeded
2000,
which
concentrates
on
sea
Golf Our Telkom Business golf sponsorships – the Telkom PGA Championships, the Telkom PGA Pro-Am on the Sunshine Tour and two Telkom Business Pro-Ams – enable us to position our brand in the business
we
have
sponsored
environment. They also enable us to
Swimming South Africa, a public benefit
introduce new products and reinforce our
organisation which promotes all aquatic
relationship marketing programme.
sports in the country. In addition to many South African swimming stars such as Ryk Neethling, Natalie du Toit and Roland Schoeman, Swimming South Africa has played a key role in boosting public
We also have a presence on Sunshine Tour tournaments such as the SA Open and the Nedbank Golf Challenge. In addition we are a broadcast sponsor of international
A significant portion of the money
awareness of swimming as a life and
events like the European Tour and World
generated by ticket sales and telephone
survival skill. Swimming contributes towards
Gold championships.
voting is given to charities working with
the Company’s objectives of being a
children, the elderly and people with
Paralympics
caring organisation, as the sport offers
disabilities. Some 695,000 fans voted in
Telkom has been a proud supporter of the
opportunities for both able and disabled
the 2008 event and R4.6 million was
South African Paralympics team since
people.
1992. Our team achieved 6th place on
Drowning remains a major cause of death
the overall medal table in the 2008 Beijing
2010 FIFA Soccer World Cup
among children under the age of 14 and,
Olympics. The Paralympics are not only
Telkom is a tier three National Supporter
as a result of our support for Swimming
about sport; they are about hope, pride,
within the fixed-line environment. The
South Africa’s ‘Learn to Swim’ programme,
inspiration
biggest sporting event in the world is the
many children and adults in the country
honoured to align our brand with this
perfect platform for Telkom to showcase its
have the opportunity to learn to swim.
message of upliftment.
raised for the charitable organisations.
and
courage.
Telkom
is
Group overview
Management review
Sustainability review
Performance review
Financial statements
Company Financial Information
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Global reporting initiative (GRI) content index
Telkom has opted for an incremental adoption of the guidelines to the GRI index, the full adoption will include a quality assurance and compliance audit report. In many cases, Telkom’s internal reporting frameworks pre-date external frameworks, hence this is presented as a navigation aid as opposed to a “tick-box” compliance exercise. Item
Comment and reference
Vision and strategy 1.1
Statement of the organisation’s vision and strategy regarding its
See Telkom’s website: www.telkom.co.za/ir
contribution to sustainable development. 1.2
Statement from CEO (or equivalent senior manager) describing
Chief Executive Officer’s review
key elements of the report. Profile Organisational profile 2.1
Name of reporting organisation.
2.2
Major products and/or services including brands if appropriate.
Telkom SA Limited Operational review Further details of products and service can be accessed on the website www.telkom.co.za
2.3 2.4
Operational structure of the organisation.
Group structure
Description of major divisions, operating
Group structure
companies, subsidiaries. 2.5
Countries in which the organisation’s operations are located.
Enterprise risk management
2.6
Nature of ownership; legal form.
Telkom Group structure
2.7
Nature of markets served.
The telecommunications industry
Report scope 2.10
Contact person(s) for the report, including e-mail and
Administration page and www.telkom.co.za/ir
web addresses. 2.11
Reporting period for information provided.
Year ended March 31, 2009
2.12
Date of most recent previous report.
Year ended March 31, 2008
Report profile 2.17
Decisions not to apply GRI principles or protocols.
Sustainability review
2.18
Criteria/definitions used in any accounting for
Notes to the consolidated annual financial statements
economic environment. 2.19
Significant changes from previous years in the
Notes to the consolidated annual financial statements
measurement methods. 2.22
Means by which report users can obtain additional information and reports about economic, environmental and social aspects of the organisation’s activities, including facility-specific information.
See Telkom’s website: www.telkom.co.za/ir
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Telkom Annual Report 2009
Item
83
Comment and reference
Governance structure and management systems Structure and governance 3.1
Governance structure, including major Board committees.
Corporate governance report
3.2
Percentage of the Board of directors that are independent,
Corporate governance report
non-executive directors. 3.3
Board-level processes for overseeing economic, environmental
Corporate governance report
and social risks and opportunities. 3.4
Linkage between executive compensation and achievement
Human capital management report
of goals. 3.5
Organisational structure and key responsibilities.
Chief officers and management team
3.6
Mission and values statements and codes of conduct.
See Telkom’s website: www.telkom.co.za/ir
3.7
Mechanisms for shareholders to provide recommendations to the
Company Secretary (see contact details on ibc;) IR road-
Board of directors.
shows; AGM and the IR website www.telkom.co.za/ir
Stakeholder engagement 3.8
Major stakeholders.
Sustainability review
3.9
Approaches to stakeholder consultation.
Sustainability review
3.10
Type of information generated by stakeholder consultations.
Sustainability review
3.11
Use of information resulting from stakeholder engagements.
Sustainability review
Economic performance indicators EC1
Net sales.
Consolidated income statement
EC2
Geographic breakdown of markets.
Notes to the consolidated annual financial statements
EC3
Cost of all goods, material and services purchased.
Consolidated income statement
EC5
Total payroll benefits.
Consolidated income statement
EC6
Distributions to providers of capital.
Consolidated statement of changes in equity
EC7
Increase/decrease in retained earnings at end of period.
Consolidated statement of changes in equity
EC8
Total sum of taxes of all types paid broken down by country.
Notes to the consolidated annual financial statements
EC10
Donations to community, civil society and other groups.
Corporate social investment report
Group overview
Management review
Sustainability review
Performance review
Financial statements
Company Financial Information
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Global reporting initiative (GRI) content index (continued)
Item
Comment and reference
Environmental performance indicators Materials EN1
Total material use other than water, by type (report in tonnes,
Safety, health and environment report
kilograms or volume). Provide definitions used for types of materials. EN2
Percentage of materials used that are waste (processed
Safety, health and environment report
or unprocessed) from sources external to the reporting organisation. EN5
Total water use.
Safety, health and environment report
EN6
Land owned, leased, or managed in biodiversity-rich habitats.
Safety, health and environment report
Description of major impacts on biodiversity, associated with
Safety, health and environment report
EN7
the organisation’s activities and/or products and services in terrestrial, freshwater and marine environments. Social performance indicators Labour practices and decent work LA1 LA2
Breakdown of workforce.
Human capital management report
Percentage of employees represented by independent
Human capital management report
trade unions. LA3 LA4
Occupational accidents and diseases.
Safety, health and environment report
Standard injury, lost day and absentee rates and number of
Safety, health and environment report
work-related fatalities. LA5 LA6
Description of policies or programmes on HIV/AIDS.
Safety, health and environment report
Average hours of training per year per employee by category
Human capital management report
of employee. LA7 LA8
Equal opportunity policies or programmes.
Human capital management report
Composition of senior management and corporate
Chief officers and management team
governance bodies.
Corporate governance report
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to competitive challenges Performance review Five year operational review Operational review Three year financial review Financial review
86 87 104 105 Group overview
Management review
Sustainability review
Performance review
Financial statements
Company Financial Information
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Five year operational review
for the years ended March 31 Fixed-line operational data ADSL subscribers1 Calling plan subscribers Closer subscribers Supreme call subscribers W-CDMA subscribers Fixed access lines (’000)1 Post-paid – PSTN Post-paid – ISDN channels Prepaid Payphones Fixed-line penetration rate (%) Revenue per fixed access line (ZAR) Total fixed-line traffic (millions of minutes) Local Long distance Fixed-to-mobile International outgoing International VoIP Subscription based calling plans Interconnection Domestic mobile interconnection Domestic fixed interconnection International interconnection Managed data network sites Internet all access subscribers2 Fixed-line employees Fixed access lines per fixed-line employee3 (1) (2)
(3)
2005
2006
2007
2008
2009
CAGR (%)
58,278 – – – – 4,726 3,006 664 887 169 10.1 5,250 31,706 19,314 4,453 3,911 415 89 – 3,524 2,206 – 1,318 11,961 225,280 28,972 163
143,509 62,803 62,803 – – 4,708 2,996 693 854 165 10.0 5,304 31,015 18,253 4,446 4,064 515 83 – 3,654 2,299 – 1,355 16,887 282,927 25,575 184
255,633 272,071 266,300 5,771 – 4,642 2,971 718 795 158 9.8 5,275 29,323 14,764 4,224 4,103 558 38 1,896 3,740 2,419 – 1,321 21,879 302,593 25,864 180
412,190 464,038 451,122 12,916 – 4,533 2,893 754 743 143 9.5 5,250 26,926 11,317 3,870 4,169 635 43 2,997 3,895 2,502 113 1,280 25,112 358,066 24,879 182
548,015 590,590 575,812 14,778 5,253 4,451 2,769 781 766 135 9.1 5,349 24,869 8,822 3,631 4,126 622 34 3,546 4,088 2,484 415 1,189 29,979 423,196 23,520 189
75.1 111.1 109.3 60.0 n/a (1.5) (2.0) 4.1 (3.6) (5.5) (2.6) 0.5 (5.9) (17.8) (5.0) 1.3 10.6 (21.4) 36.8 3.8 3.0 n/a (2.5) 25.8 17.1 (5.1) 3.8
15,483
23,520
30,150
33,994
39,614
26.5
12,838 1,872 10,941 25 27.1 9.1 30.3 56 49.5 14,218 163 624 78 2,321 3,919 3,276
19,162 2,362 16,770 30 17.7 10.0 18.8 58 70.6 17,066 139 572 69 1,796 4,305 4,451
23,004 3,013 19,896 95 33.8 9.7 37.5 58 84.2 20,383 128 517 63 902 4,727 4,867
24,821 3,541 21,177 103 42.3 8.3 47.9 55 94.3 22,769 128 486 62 689 4,849 5,119
27,625 3,946 23,561 118 40.1 9.9 45.4 53 108.0 24,383 133 474 68 534 5,451 5,068
21.1 20.5 21.1 47.4 10.3 2.1 10.6 (1.4) 21.5 14.4 (5.0) (6.6) (3.4) (30.7) 8.6 11.5
2,645 1,074 2,463 –
4,358 1,154 3,776 –
7,146 1,522 4,695 –
9,173 1,992 4,605 –
11,989 2,336 5,132 389
45.9 21.4 20.1 n/a
Excludes Telkom internal lines. Includes Telkom Internet ADSL, ISDN, WiMAX and dial-up subscribers. Based on number of fixed-line employees, excluding subsidiaries.
Mobile operational data4 Total mobile customers (’000) South Africa Mobile customers (’000) Contract Prepaid Community services telephones Mobile churn (%) Contract Prepaid Estimated mobile market share (%)5 Mobile penetration (%) Total mobile traffic (millions of minutes) Mobile ARPU (ZAR)6 Contract Prepaid Community services Mobile employees7 Mobile customers per mobile employee7 Other African countries Mobile customers (’000) Mobile employees8 Mobile customers per mobile employee8 Gateway employees
100% of Vodacom data. Based on Vodacom estimates. With effect from April 1, 2008, ARPU calculations include revenues from national roamers and international visitors roaming on Vodacom’s network. Historical ARPU numbers have been restated in line with this new methodology. (7) Includes Holding company and Mauritian employees and temporary employees. (8) Includes temporary employees. (4) (5) (6)
Multi-Links Subscribers Employees Permanent Expatriate Temporary Africa Online Subscribers9,10 Employees (9)
(10)
– – – – –
– – – – –
185,619 – – – –
813,392 782 680 71 31
2,516,109 1,124 775 95 254
268.2 n/a n/a n/a n/a
– –
– –
n/a 317
17,252 379
18,441 313
n/a (0.6)
From April 1, 2008, Africa Online changed the method of counting subscribers to include all the individual corporate sites as individual customers. The comparative information for 2008 has been restated. Excluding UUNet joint venture partner’s subscribers in Kenya. UU-Net had 300 and 320 subscribers as at March 31, 2008 and 2009, respectively.
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87
Operational review
History and development of the
Sale and unbundling of Vodacom
ineligible
Company
shareholding
proportion to their entitlement to Vodacom
Telkom was incorporated on September
Effective as of April 20, 2009, Telkom
shares. JP Morgan Securities Limited acted
30, 1991 as a public limited liability
concluded the sale and unbundling of its
as the Sole Bookrunner for the placement.
company registered under the South
interest in Vodacom, pursuant to which the
For further information on this transaction
African Companies Act No. 61 of 1973,
following inter-conditional transactions
please refer to the detailed announcements
as amended.
occurred:
posted on the Investor Relations website at
Registration number: 1991/005476/06
• Telkom sold a 15% stake in Vodacom
The Company’s principal executive offices are located at:
foreign
shareholders
in
www.telkom.co.za.
for R22.5 billion of cash less the
Delisting on the New York Stock
attributable net debt of Vodacom as at
Exchange
September 30, 2008 and 15% of any
Given the current global economic climate
Telkom Towers North
dividends, and any secondary taxation
and the business imperative for Telkom to
152 Proes Street
on companies (STC) levied thereon,
reduce its cost base, the Board has
Pretoria
which amounted to R20,583 million.
decided to delist from the New York Stock
0002
• Telkom distributed to its shareholders a
Gauteng Province
sum equal to 50% of the after-tax
South Africa
proceeds from the sale to Vodacom, net
Telephone number: +27 (0)12 311 3566
of any STC levied thereon (R19 per
Website address: http://www.telkom.co.za
share) by way of a special dividend.
Historical background
• Vodacom
converted
to
a
public
Exchange. Maintaining a listing in the United States is expensive and takes considerable management time. The methodology employed and discipline gained from Sarbanes-Oxley
compliance reporting
with
the
requirements
will be retained, where appropriate, to
Prior to 1991, the former Department of
company and was listed on the main
ensure
Posts and Telecommunications of South
board of the JSE Limited on May 18,
compliance and transparent financial
Africa exclusively provided telecommuni-
2009; and
reporting.
cations and postal services in South Africa. In 1991, the government of South Africa transferred the entire telecommunications enterprise of the Department of Posts and Telecommunications of South Africa to a new
entity,
Telkom,
as
part
of
a
commercialisation process intended to liberalise certain sectors of South Africa’s economy. Telkom remained a wholly stateowned enterprise until May 14, 1997,
strict
corporate
governance
• Telkom distributed its remaining 35%
Telkom is comfortable that the JSE provides
stake in Vodacom to eligible Telkom
sufficient access to capital from both South
shareholders in proportion to their
African and global investors. Telkom
shareholdings in Telkom, by way of an
intends to maintain a level 1 American
unbundling in terms of Section 90 of the
Depositary Receipt programme to facilitate
Companies Act 61 of 1973, as
over-the-counter trading in the United States
amended, and Section 46 of the
of America.
Income Tax Act 58 of 1962, as amended.
Group overview
Senior management On November 14, 2008, the Board
when the government of South Africa sold
On June 2, 2009, Telkom completed a
announced that our business would be split
a 30% equity interest in Telkom to Thintana
placement of 28,993,233 shares of
into three operational units – Telkom SA,
Communications LLC, a strategic equity
Vodacom, on behalf of ineligible foreign
Telkom International and Telkom Data
investor beneficially owned by SBC
shareholders, with institutional investors
Centre Operations, effective from April 1,
Communications Inc. and Telekom Malaysia
through an accelerated bookbuild offering,
2009. On April 15, 2009 Thami
S.D.N. Berhard. On March 7, 2003, we
pursuant to Regulation S under the US
Msimango was appointed Managing
completed our initial public offering and
Securities Act of 1933. The Vodacom
Director of the Telkom International business
listing on the JSE and NYSE, pursuant to
shares were placed at a price of R53.00
unit. On May 1, 2009 Nombulelo Moholi
which the government of South Africa sold
per share, raising gross proceeds of
was appointed Managing Director of
a total of 154,199,467 ordinary shares,
R1.54 billion for such ineligible foreign
Telkom SA and on July 30, 2009
including 14,941,513 ordinary shares
shareholders. The proceeds from the
Pierre Marais was appointed as acting
through the exercise of an over-allotment
offering, net of applicable fees, expenses,
Managing Director of Telkom Data Centre
option.
taxes and charges, were distributed to the
Operations.
Management review
Sustainability review
Performance review
Financial statements
Company Financial Information
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Operational review (continued)
Peter
Nelson
was
appointed
Chief
Financial Officer on December 8, 2008. On July 7, 2009 Telkom announced the appointment of Jeffrey Hedberg as Chief Executive Officer of Multi-Links.
• Interconnection
Business summary
services,
including
We are one of the largest companies
terminating and transiting traffic from
registered in South Africa and one of the
South African mobile operators and
largest communications service providers in
international operators, as well as
Africa based on operating revenue and
transiting
assets. As of March 31, 2009, we had
international destinations, and
traffic
from
mobile
to
Segmental reporting and discontinued
total assets of R85.8 billion; operating
operations
revenue from continuing operations of
At the beginning of 2009, Multi-Links was
R35.9 billion; approximately 4.5 million
added as a separate financial reporting
telephone access lines with 99.9% of these
segment. Our four reporting segments are
connected to digital exchanges.
now fixed-line, Multi-Links, mobile and
We offer our customers fixed-line voice
other. The other segment includes Trudon,
managed data networking services, as
services, fixed-line and wireless data
formerly TDS Directory Operations; Africa
well as internet access and related
services and mobile communications
Online; Swiftnet and Telkom Media.
services. Other services include the Trudon
information technology services.
Discontinued operations include Vodacom,
Group, our directory services, Multi-Links
Products and services
Swiftnet and Telkom Media.
and MWEB Africa subsidiaries.
Subscriptions and connections
Acquisitions and investments
Overview
During the year under review we purchased
Our fixed-line segment is our largest
an additional 25% of Multi-Links in Nigeria,
business segment and includes our fixed-
giving us 100% control of the company. In
line voice, data and internet businesses.
addition, after year end we acquired
Telkom’s fixed-line services comprise:
MWEB Africa and 75% of MWEB
• Fixed-line subscription and connection
analogue PSTN line includes one access
Namibia from Naspers and we sold our
services to postpaid, prepaid and
channel, each basic rate ISDN line
75% shareholding in Telkom Media to
private payphone customers using PSTN
includes two access channels and each
Shenzhen Media South Africa.
lines including ISDN lines, and the sale
primary rate ISDN line includes 30 access
of subscription based value-added voice
channels. Each ISDN line transmits signals
services
at speeds of 64 Kbps per channel.
Strategic agreement with AT&T On April 16, 2009 we entered into a strategic memorandum of understanding
• Data and internet services, including domestic
and
international
data
transmission services, such as point-topoint leased lines, ADSL services, W-CDMA packet based services,
Telkom provides post-paid, prepaid and
and
customer
premises
equipment (CPE) rental and sales.
private payphone customers with digital and analogue fixed-line access services including PSTN lines, ISDN lines, and wireless access between a customer’s premises and our fixed-line network. Each
Subscriptions to ADSL are included in our data services revenue.
with global communications leader AT&T to
• Fixed-line traffic services to postpaid,
enable the Company to extend its reach
prepaid and payphone customers
We were the first fixed-line operator
into sub-Saharan Africa to service corporate
including local, long distance, fixed-to-
globally to provide a prepaid service on a
customers and boost our strategy to grow a
mobile, international outgoing and
fixed-line network. Our prepaid service
strong local footprint in Africa.
international Voice over Internet Protocol
offers customers an alternative to the
(VoIP) traffic services.
conventional post-paid fixed-line telephone
Year ended March 31, (in thousands, except percentages)
2007
2008
2009
2008/2007
2009/2008
% change
% change
Post-paid PSTN(1)
2,971
2,893
2,769
(2.6)
(4.3)
Business
1,426
1,429
1,396
0.2
(2.3)
Residential
1,545
1,464
1,373
(5.2)
(6.2)
Prepaid PSTN
795
743
766
(6.5)
3.1
ISDN channels
718
754
781
5.0
3.6
Payphones(2)
158
142
135
(10.1)
(4.9)
4,642
4,532
4,451
(2.4)
(1.8)
Total fixed access lines(3) (1) (2) (3)
Excluding ISDN channels. PSTN lines are provided using copper cable, DECT and fibre. Includes public and private payphones. Total fixed access lines are comprised of PSTN lines, including ISDN channels, prepaid lines, ADSL lines and public and private payphones, but excluding internal lines in service. Each analogue PSTN line includes one access channel, each basic rate ISDN line includes two access channels and each primary rate ISDN line includes 30 access channels.
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89
Year ended March 31, (in thousands, except percentages) Opening balance
2008/2007
2009/2008
% change
% change
2007
2008
2009
4,708
4,642
4,532
(1.4)
(2.4)
(66)
(110)
(81)
(66.7)
(26.4)
Net line growth Connections
572
497
482
(13.1)
(3.0)
Disconnections
(638)
(607)
(563)
(4.9)
(7.2)
4,642
4,532
4,451
(2.4)
(1.8)
13.6
13.3
12.5
(2.2)
(6.0)
Closing balance Chum (%) service. All costs including installation,
and combination payphones, and the
time up to one hour, a discounted per
telephone equipment, line rental and call
remainder card-operated payphones.
record rate for local and long distance
charges are paid in advance, eliminating the need for monthly telephone bills. We target our prepaid service mainly at firsttime residential customers who do not have sufficient credit history, and are located in
The table opposite presents information regarding our post-paid and prepaid lines as well as payphones as at the dates indicated, excluding our internal lines. The table above shows information related
network without significant additional
to the number of our fixed access lines in
investment. Customers who have previously
service, net line growth and churn for the
had their telephone service disconnected
periods. Churn is calculated by dividing
to migrate to our prepaid service option in order to reduce future non-payments while satisfying demand for our services. We also offer a broad range of valueadded voice services on a subscription or usage basis including call forwarding, call waiting, conference calling, voicemail, tollfree calling, ShareCall which permits callers and recipients to share call costs, speed dialling, enhanced fax services and calling card services for payphones. These services complement our basic voice services and provide us with additional
the number of disconnections by the average number of fixed access lines in service during the year.
minutes during off-peak time. Telkom Closer 2 Includes line rental, CallAnswer, unlimited free calls during off-peak time up to one hour, a discounted per record rate for local and long distance calls subject to a minutes during standard time introduced in
primarily from changes in service and, to a
August 2007. In addition, with effect from
lesser extent, new line roll-out. Disconnections
August 2008, this package includes
include both customer-initiated disconnections
60 free local internet minutes during off-
and Telkom-initiated disconnections. Included
peak time.
in disconnections and churn are those customers who have terminated their service
Telkom Closer 3
with Telkom and subsequently subscribed to a
Includes line rental, CallAnswer, 1,300
new service with Telkom as a result of
inclusive free peak-time minutes, unlimited
relocation or change of subscription to a
free calls during off-peak time up to one
different type of service.
hour, a discounted per second rate for
During the year under review, Telkom
customer
continued to focus on customer retention offering
value
for
money
by
to selected international destinations and
service are also bundled with value-added
continuously enhancing packages such as
calling plans such as Telkom Closer, to
PC bundles and Telkom Closer, including
Telkom Closer 4
further enhance the value of these services
the following:
All the benefits of Telkom Closer 3 bundled
to our customers.
From August 1, 2009, Closer customers
calls since August 2007. Performance review
with Fast DSL up to 384 Kbps.
will have the option to choose between
Telkom Closer 5
CallAnswer and Identicall. Currently the
All the benefits of Telkom Closer 3 bundled
package includes only CallAnswer.
with Fastest DSL up to 4096 Kbps.
public payphones and approximately
Telkom Closer 1
Telkom Closer plans 1 to 3 have an option
3,146 private payphones, of which
Includes line rental, CallAnswer, a minimum
to purchase 150 or 75 local internet hours
approximately 39% were coin-operated
flat-rate charge for calls during off-peak
during call more time.
Telkom operated approximately 132,208
Sustainability review
pure per second billing for fixed-to-mobile
and
South Africa. As at March 31, 2009,
Management review
minimum charge, as well as reduced rates
services such as our CallAnswer voicemail
We provide payphone services throughout
Group overview
local and long distance calls subject to a
enhancing our brand and increasing voice
addition, with effect from August 2008,
minimum charge, as well as 30 free local
Value-enhancing bundles
Value-added
time introduced since August 2007. In
Connections include new line orders resulting
revenue while satisfying customer demand, loyalty.
as 30 free local minutes during standard
this package includes 60 free local internet
areas where we can provide access to our
due to non-payment are also encouraged
calls subject to a minimum charge, as well
Financial statements
Company Financial Information
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90
Operational review (continued)
The
Telkom
Closer
packages
have
performed well, increasing by 27.6% to 575,812 plans. Supreme call packages, targeted at the business segment, have increased by 14.4% to 14,778 packages and PC bundles have increased 48.3% to
international norms and improve our
effects of theft, as well as grow market
competitive position; and
share in anticipation of Telkom moving into
• Reduce and rebalance national and international data prices to improve our competitive position.
the mobile market. Connections to our wireless W-CDMA service are included in our numbers of subscribers, but not lines. We also offer telecommunications equip-
11,336. Telkom continues to be successful
The decrease in the number of subscriber
in tying in large corporate customers to
lines was largely in the residential post-
term and volume discount plans. Annuity
paid PSTN line and, to a lesser extent,
revenue streams, which exclude line
business post-paid PSTN lines, partially
installations,
and
offset by an increase in ISDN channels.
CPE sales, have increased by 6.8% to
The decrease in the number of residential
R7.4 billion. Telkom will seek to continue
post-paid PSTN lines was mainly due to the
converting revenue streams to annuity
introduction of competition in the fixed-line
revenues. This will be done largely through
arena from Neotel, including due to
bundling call minutes and ADSL services
customers
with access line rental in attractive
providers, customer migration to mobile
subscription based value propositions. This
and higher bandwidth products and, to a
is an important strategy for delivering
lesser extent, cable theft incidents. The
greater value to our customers. Our current
increase in prepaid services in the 2009
line penetration of bundled products is
financial year was due primarily to our
41.7% and we are targeting a penetration
lower priced “Waya-Waya” offering,
Traffic minutes
of 56% by 2013/14.
which accounted for approximately 60.2%
We offer local, long distance, fixed-to-
of prepaid services as of March 31,
mobile,
2009. The increase in ISDN channels and
international voice over internet protocol
ADSL services was mainly driven by
services to business, residential and
increased demand for higher bandwidth
payphone customers throughout South
and functionality. This is evident in the 6%
Africa at tariffs that vary depending on the
growth in ISDN Primary rates and the 33%
destination, length, day and time of call.
reconnection
fees
Pricing is a key element of the value proposition and our pricing strategy is aimed at improving our competitiveness in areas where competition is expected to intensify and where arbitrage opportunities exist. Telkom’s strategy to counter pricing pressures is as follows:
relocating
and
changing
growth in ADSL services. The upgrading of DSL 1024 to DSL 4096 increased the
• Actively offer value based calling plans
attractiveness of this DSL band, with
and bundles to extend value and
customers migrating from DSL 512 to the
savings to our customers.
high speed offering despite the added
• Reduce international and long distance rates to reduce arbitrage opportunities;
cost.
Telkom’s
aggressive
marketing
campaigns for Do Broadband products, also contributed to the ADSL growth. In the
• Rebalance standard/off-peak local
2009 fiscal year, Telkom introduced a
rates, to better align these with
wireless W-CDMA service to combat the
ment rentals and sales such as telephones and private branch exchange (PABX) systems, as well as related post-sales maintenance and service for residential and business customers in South Africa. The market in South Africa for such equipment and systems, commonly known as customer premises equipment (CPE), is characterised by high competition and low profit margins. We believe, however, that the supply and servicing of CPE is an essential part of providing a full service to our customers and in the process stimulating usage on our network.
international
outgoing
and
The following table presents information regarding our fixed-line traffic minutes, excluding interconnection traffic, for the periods indicated. We calculate fixed-line traffic by dividing fixed-line traffic revenues for the particular category by the weighted average tariff for that category during the relevant period.
Year ended March 31, 2008/2007
2009/2008
2007
2008
2009
% change
% change
Local(1) Long distance(1) Fixed-to-mobile International outgoing International voice over internet protocol Subscription based calling plans
14,764 4,224 4,103 558 38 1,896
11,317 3,870 4,169 635 43 2,997
8,822 3,631 4,126 622 34 3,546
(23.3) (8.4) 1.6 13.8 13.2 58.1
(22.0) (6.2) (1.0) (2.0) (20.9) 18.3
Total
25,583
23,031
20,781
(10.0)
(9.8)
(in millions of minutes, except percentages)
(1)
Local and long distance traffic includes dial-up Internet traffic.
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91
Year ended March 31, 2008/2007
2009/2008
% change
% change
2007
2008
2009
2,419
2,502
2,484
3.4
(0.7)
–
113
415
n/a
267.3
International interconnection traffic
1,321
1,280
1,189
(3.1)
(7.1)
Total
3,740
3,895
4,088
4.1
5.0
(in millions of minutes, except percentages) Domestic mobile interconnection traffic Domestic fixed interconnection traffic
Traffic was adversely affected in both the 2009 and 2008 financial years by the increasing substitution of calls placed using mobile services rather than our fixed-line service and dial-up internet traffic being substituted by our ADSL service, as well as the decrease in the number of residential post-paid PSTN lines and increased
network.
lines up to and including lines of 2 Mbps
Domestic fixed interconnection traffic includes traffic from Neotel, USALs and VANS. The increase in domestic fixed interconnection traffic in the year under review was mainly due to increased competition.
of capacity and the rental and installation of business exchange lines. Approximately 57% of our operating revenue for the year ended March 31,2008 was included in this basket, compared to approximately 54% in the year ended March 31, 2009. Our tariffs for these services are filed with
competition in our payphone business. In
International
interconnection
traffic
addition, the 2009 financial year traffic
decreased in the 2009 and 2008
operates
was adversely affected by customer
financial years due to a decrease in
percentage increase in revenues from all
migration to broadband services offered
volumes as a result of loss of volumes to
services included in the basket that are
by mobile operators.
Neotel, Sentech, the USALs and illegal
attributable solely to changes in annual
operators terminating traffic in the country. The table above sets forth information
inflation, measured by changes in the
The decrease was partially offset by
regarding interconnection traffic terminating
consumer price index, less a specified
increased international hubbing traffic in
on or transiting through our network for
percentage.
the year under review.
traffic,
other
than
international outgoing mobile traffic and international interconnection traffic, by dividing interconnection revenue for the particular category by the weighted average tariff for such category during the relevant period. Fixed-line international outgoing mobile traffic and international interconnection traffic are based on the traffic registered through the respective exchanges and reflected in international interconnection invoices. The
increase
in
domestic
mobile
interconnection traffic in the years ended March 31, 2009 and 2008 was primarily due to an overall increase in mobile calls as a result of growth in the mobile market, partially offset by increased mobile-tomobile calls bypassing our network. The decrease
in
domestic
mobile
inter-
connection traffic in the 2009 financial year was primarily due to increased mobile-to-mobile
calls
bypassing
our
Tariff rebalancing We
made
by
Historically,
the periods indicated. We calculate interconnection
ICASA for approval. The price cap restricting
the
annual
the
annual
permitted
percentage increase in revenues from both in
the whole basket and the residential sub-
rebalancing our fixed-line tariffs. Our tariff
basket was 1.5% below inflation. Effective
rebalancing programme was historically
from August 1, 2005 through July 31,
aimed at better aligning our fixed-line traffic
2008, the annual permitted increase in
charges
and
revenues from both the whole basket and
international norms. We expect that our
the residential sub-basket was lowered to
tariff rebalancing in future will focus more
3.5% below inflation, and ADSL products
on the relationship between the actual
and services have been added to the
costs
subscriptions,
basket. In addition, the price of no
connections and traffic in order to more
individual service within the residential sub-
accurately reflect underlying costs, and in
basket can be increased by more than 5%
response to increased competition.
above inflation except where specific
with
and
significant
underlying
tariffs
of
progress
costs
Regulations under the Telecommunications Act, which remain in effect, impose a price cap on a basket of Telkom’s specified services including installations, prepaid and post-paid line rental, local, long distance and international calls, fixed-tomobile calls, public payphone calls, ISDN services, our Diginet product and our Megaline product. A similar cap applies to a sub-basket of those services provided to residential customers, including leased
Group overview
Management review
Sustainability review
approval has been received from ICASA, and pursuant to the Electronic Communi-
Performance review
cations Act, revenue generated from services where we have significant market power may not be used to subsidise competitive services. Early in 2008,
Financial statements
ICASA commissioned a review of the existing
price
control
regulations
applicable to Telkom; however, ICASA has not initiated the statutory public process of reviewing the existing regulations. Telkom is
Company Financial Information
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92
Operational review (continued)
awaiting communications from ICASA in
links at speeds of 45 Mbps, 155 Mbps
Managed data networking services
respect of proposed timelines for the
and 622 Mbps, and anticipate that we
Our managed data networking services
review.
will soon be providing links at speeds of
combine our data transmission services
2.5 Gbps. Formalised service level
discussed above with active network
agreements as well as term and volume
management provided through our state-of-
based discount structures, as a counter to
the-art national network operations centre.
the
We offer a wide range of integrated and
ICASA approved a 2.1% reduction in the overall tariffs for services in the basket effective August 1, 2006, a 1.2% reduction in the overall tariffs for services in
competitive
challenges
that
are
occurring in this area of the business, have
customised
been implemented.
services, including design, planning,
products and services effective August 1,
Recognising the increasing threat of
installation, management and maintenance
2008. On June 22, 2009, Telkom filed
competition in the provision of leased lines
of corporate-wide data, voice and video
with ICASA proposed average price
to the mobile operators, Telkom introduced
communications networks, as well as other
increases on its regulated basket of
further discounting structures in the 2007
value-added services such as capacity,
products and services of 1.7% as a result
and 2008 financial years to enhance the
configuration
of inflation increases, effective August 1,
attractiveness of Telkom’s product offerings
management on customers’ networks. To
2009. The price control formula would
to this rapidly growing market. Fixed-link
support our service commitment, we offer
have permitted Telkom to apply for a
leasing agreements were also entered into
guaranteed service level agreements on a
19.7% price increase due to the high
with some of the smaller operators,
wide range of our products, which include
consumer price index in South Africa and
including VANS and USALs, as well as with
the basket effective August 1, 2007 and a 2.4% increase on its regulated basket of
excess carryover of lower price increases for prior periods. Our tariffs are subject to approval by the regulatory authorities. All
Neotel. Vodacom and MTN have both indicated that they intend to self-provide some of the leased lines, which they require
networking
and
management
software
version
guaranteed availability, or uptime, of the network through the use of our national network operations centre.
for the build-out of their networks, as an
Our managed data networking services
alternative to leasing from Telkom. We are
include our customer network care service
currently negotiating improved leased line
which facilitates the network management
Data
prices with the mobile operators in order to
of all our data transmission services using
Leased lines
retain revenue from leased lines.
the leased lines or packet based services
The table below indicates the bandwidth
discussed above, and our Spacestream
capacity of our Diginet, Diginet Plus, ATM
and IVSat products, which are satellite
Express
based products. Spacestream is a high
tariffs include value-added tax (VAT) at a rate of 14%.
A large number of leased lines are provided to the mobile operators at negotiated wholesale rates for the build-out of their networks. With the growth in traffic
and
broadcasting
data
quality, flexible satellite networking service
transmission services:
carried on the mobile networks, a need
that supports data, voice, fax, video and
was identified for the deployment within
Leased line
Bandwidth
these networks of transmission links with
Diginet
64 Kbps
Diginet Plus
128 Kbps to 2 Mbps
ATM Express
2 Mbps to 155 Mbps
speeds higher than the 2 Mbps provided by
existing
agreements.
We
have
multimedia applications, both domestically and in the rest of Africa. Managed data networking services are
broadband fixed-link leasing agreements
Broadcasting
billed on a monthly basis and vary by
with Vodacom, MTN and Cell C. These
Analogue audio 7.5 or 15 KHz
customer depending on the particular
agreements have been enhanced over
Analogue video 70 MHz
services provided and the number of
time, and we currently provide broadband
Digital
network sites under management.
2 Mbps to 155 Mbps As of March 31,
Terrestrial based Satellite based Total managed network sites (1)
2009
2008/2007
2009/2008
% change
% change
2007
2008
12,905
17,237
19,042
33.6
10.5
8,974
7,875(1)
10,937(2)
(12.2)
38.9
21,879
25,112
29,979
14.8
19.4
Satellite based managed network sites declined during the 2008 financial year as a result of Uthingo, the South African lottery operator, losing its licence to operate.
(2)
The increase in the 2009 financial year was mainly due to new global and corporate customers and expansion of the networks of existing customers.
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Telkom’s focus on bringing new innovative products to the market that cater for increased data usage and converged services has resulted in our new VPN products gaining increased traction in the market. We have increased VPN sites by 20.7% to 14,659. Our VPN Lite products, which are delivered over the ADSL network, include advanced self-help and online charging solutions. This product was launched during November 2007. Telkom is in the process of building on a culture of research and innovation and fast time-tomarket, in order to cater for customers who are increasingly looking for innovative, easy to use products. Broadband and converged services continue to perform well with ADSL subscribers up 33%
to
548,015.
Do
Broadband
subscribers increased 58.1% to 188,540. Internet all access subscribers increased 18.2% to 423,196. Our current broadband line penetration rate is 15% and our targeted penetration rate is 25 by 2013/14. We have increased DSLAMs throughout the country by 50.4% to 4,000 sites. We have installed 91% of ADSL lines within 21 working days where no network build is required, compared to 79% in the year ended March 31, 2008 and 74% within 21 working days where network build is required compared to 66% in the year ended March 31, 2008. The ADSL Self Install option is expected to continue to improve the installation times. As of March 31, 2009, 57% of all ADSL installations were being done through the Self Install option. ADSL allows provisioning of high speed connections over existing copper wires using digital compression. We have different ADSL services available, aimed at the distinct needs of our customers.
93
The following table indicates our product offerings as at March 31, 2009: DSL
DSL
DSL
384
512
4096
Downstream speed
Up to 384 Kbps
512 Kbps
4096 Kbps
Upstream speed
Up to 128 Kbps
256 Kbps
512 Kbps
Internet access services and other related information technology services Telkom is one of the leading internet access providers in South Africa in the retail and wholesale internet access provision markets. We also package our TelkomInternet product with personal computers, ADSL and ISDN services, as well as our satellite access products, SpaceStream Express and SpaceStream Office.
internet service targeted at African operators and ISPs to enhance additional growth of internet access services north of the equator. Currently, the customers in this region buy their internet services from Europe. By establishing a central SAIX hub in London we believe we can capture this market and increase our revenue.
Our South African Internet exchange (SAIX) is South Africa’s largest internet access provider, offering dedicated and dial-up, aDSL and satellite internet connectivity to internet service providers and value-added network providers. SAIX has offered fixedline network internet access through dial-up service since 1995. SAIX derives revenue for its access services primarily from subscription fees paid by internet service providers and value-added network providers for access services. In order to grow the portfolio, an opportunity has been identified to develop a service targeted mainly at night-time users of the SAIX ADSL service. These customers can be regarded as heavy users as they use the service mainly for games, music and movie downloading. The SAIX customer base has expanded beyond service providers and value-added network providers, and now includes Vodacom and other operators in Africa. These include incumbents in Mozambique, Namibia, Angola, Zimbabwe and Lesotho.
services and customers as at the dates
The table below presents information regarding our wholesale and retail internet indicated.
Voice over Internet Protocol network Softswitch capability has been deployed as an overlay network to enable the communication of VoIP services. Our current VoIP network terminates calls for numerous international voice carriers into our fixed-line network as well as local VANS providers. Call centres from around the world that have relocated to South Africa
due
to
favourable
economic
conditions and lower resource costs are also hosted on our VoIP network. Telkom has points of presence for connectivity to
Group overview
the VoIP network in Amsterdam, London, New York, Ashburn (Washington DC), Hong Kong, Zambia, Zanzibar, Tanzania, Senegal and Madagascar. The network
Management review
has 69 media gateways and can terminate some 32,700 voice circuits. The media gateways compress the traditional voice
Sustainability review
channels of 64 Kbps to 8 Kbps channels, thus enabling us to reduce the cost of
Broadband and converged services We have identified an opportunity to develop a SAIX northern hemisphere
international calls, while maintaining the perceived voice quality of a 64 Kbps call.
Performance review
Year ended March 31, 2008/2007
2009/2008
2007
2008
2009
% change
% change
Internet leased lines-equivalent 64 kbps
19,247
22,541
24,204
17.1
7.4
Dial-up ports
11,462
7,010
4,541
(38.8)
(35.2)
302,593
358,066
423,196
18.3
18.2
Financial statements
Wholesale
Retail Internet all access subscribers
Company Financial Information
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Operational review (continued)
WiFi In February 2005 Telkom launched a hot spot service that provides wireless data access through 802.11b/g WiFi technology. Any user with a wireless-enabled notebook computer or personal digital assistant can connect to the service while in the coverage area. WiFi is mainly targeted at restaurants, hotel groups, major shopping malls and some sites on national routes. At March 31, 2009 Telkom had 335 hotspots, up from 237 at March 31, 2008.
its head office in Kenya and operating in eight other African countries.
WiMAX Telkom has launched services based on fixed (IEEE 802. 16-2004) WiMAX technology. This technology is a standards based broadband wireless access technology that provides throughput connectivity in a point-tomultipoint configuration. The technology is designed to enable Telkom to complement its ADSL service offering and voice services to customers in areas affected by fixed-line copper cable problems. Currently there are 57 WiMAX base stations across all major cities and towns with 2,615 customers, including voice and internet customers as of March 31, 2009.
the above changes to Telkom’s reporting
W-CDMA We have started rolling out a W-CDMA Wireless Local Loop (WLL) network in the 2100MHz band. Initially planned to deliver service in areas plagued by theft, breakages and incidents, the network is now expected to evolve into a full mobile network to compete with other mobile operators. As of March 31, 2009, we had 141 base station sites in major metropolitan areas.
improved the accessibility and distribution
Geographic expansion and other operations Telkom aims to establish itself as a regional voice and data player through providing a range of hosting services, managed solutions, mobile voice and wireless broadband services. We are also entering the field of management consulting to operators. In addition, we are positioning Telkom as a wholesale facilities and infrastructure enabler for regional incumbents.
Operations (Namibia) (Pty) Ltd, which
Our expansion to date has been through Multi-Links, a private telecommunications operator operating in Nigeria and Africa Online, an internet services provider with
access and distribution into new markets.
The Telkom Group added Multi-Links as a new segment to its financial reporting for the 2009 financial year. As a result, the Telkom Group’s four reporting segments for the 2009 financial year are fixed-line, MultiLinks, mobile and other. The other segment includes Telkom’s Trudon, formerly known as TDS Directory Operations, and Africa Online subsidiaries. The information in this annual report has been updated to reflect segments. Trudon Telkom owns 64.9% of Trudon, formerly known as TDS Directory Operations, the largest directory publisher in South Africa providing
white
and
yellow
pages
directory services and electronic white pages. In the year ended March 31, 2009, Trudon published approximately 5.437 million white, 1.995 million yellow and 7.433 million combined directories. Trudon also provides electronic yellow pages and value-added content through full colour
advertisements.
Trudon
has
of directories through door-to-door delivery and electronic media. Trudon also provides national telephone inquiries and directory services. The remaining 35.1% of Trudon is owned by Truvo Services South Africa (Pty) Ltd, formerly known as Maister Directories. On January 23, 2007, Trudon acquired a 100% shareholding in a shell company and subsequently renamed it TDS Directory provides directory services in Namibia. On October 31, 2008, Trudon sold a 25% interest in TDS Directory Operations (Namibia) (Pty) Ltd to Ripanga Investment Holdings (Pty) Ltd, a black economic empowerment partner in Namibia, for two million Namibian dollars. Trudon’s
capital
expenditure
was
R12 million in the 2009 financial year as the company sought to continue to expand Trudon has invested in a new online platform in order to combat declining revenue from printed products.
Trudon’s primary competitors for print materials include Caxton, Easy Info and Brabys. Trudon’s primary internet competitors include Yahoo, Google, Ananzi, as well as vertical search capabilities such as Auto Trader and Supersport. Trudon’s estimated market share as of March 31, 2009 was approximately 11% in respect of print media and approximately 22% in respect of internet directory services. Trudon had 531 employees as of March 31, 2009. Multi-Links With effect from May 1, 2007, Telkom acquired 75% of Multi-Links Telecommunications Limited, or Multi-Links, through Telkom International, a wholly owned South African subsidiary, in Nigeria, for US$280 million, or R1,985 million. The remaining 25% of Multi-Links was owned by Kenston Investment Limited, an investment company based in the Isle of Man in the United Kingdom. With effect from January 21, 2009, Telkom acquired the remaining 25% interest in Multi-Links for US$130 million, thereby increasing its ownership of Multi-Links to 100%. The purchase price was subject to a contractual put option in favour of the minority shareholder. Multi-Links is a private telecommunications operator with a Unified Access Licence allowing fixed, mobile, data, long distance and international telecommunications services to corporate clients, wholesale and mass markets in Nigeria. Multi-Links’ Unified Access Licence was granted on November 1, 2006 and has a term of 10 years, with seven years remaining. There are currently 13 operators licensed with Unified Access Services Licences in Nigeria, making the Nigerian telecommunications market extremely competitive as operators may use any technology to deliver voice, data and video services to their customers. We were disappointed with the performance of Multi-Links. The poor performance is solely attributable to our under-estimation of the competitiveness of the Nigerian market and the aggressive
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response of the CDMA operators to our subsidisation of handsets. We also failed to adequately manage our distribution channels and opened ourselves up to exploitation by the dealers. We have learnt our lessons the hard way. Turning around Multi-Links is our number one priority.
internet protocol/next generation network services to the government, corporate and SMME customers whilst extending its metroethernet services. The reach of its fibre network also allows Multi-Links to concentrate on carrier class corporate and wholesale product and services offerings.
Multi-Links reported a 124.9% increase in revenue to R1.9 billion with subscribers growing 209.3% to 2,516,109 in the year ended March 31, 2009. Voice and data revenue contributed 75.0% to total revenue, handset sales 11.9%, interconnect revenue 12.6% and SMS 0.5%.
Multi-Links has contracted the service of
Multi-Links’s slow start in developing an efficient and well controlled distribution channel, together with a departure from its initial strategy of focusing on high ARPU subscribers, the delayed launch of EVDO and destructive competition in the CDMA market caused ARPU to decline from US$32 at March 31, 2008 to US$9 at March 31, 2009. Telkom is currently addressing these challenges as indicated below.
network
Operating expenses increased 157.1% to R2.4 billion primarily as a result of upfront handset subsidies. The average cost per unit equalled approximately R400 and subsidies totalled R281 million. Payment to other operators contributed 26.9%, selling general and administrative expenses 46.0%, employee expenses 5.2%, operating leases 8.0%, service fees 1.6% and depreciation 12.3%. Multi-Links reported a negative EBITDA margin of 11.9%, an EBITDA loss of R226 million for the year ended March 31, 2009 and a net loss of R1.76 billion after accounting for an impairment of the deferred tax asset of R301 million. Bad debts increased 208.2% to R7.9 million. Multi-Links has begun focusing its attention on the SMME, corporate and wholesale markets and mainly on high ARPU users. Its revenue retention and growth strategy will concentrate on increasing revenue of fixed wireless and mobile customers through brand awareness and promotion; expanding broadband internet to offer high value bundles and services. Through its extensive fibre network it will provide high quality
Blue Label Telecoms Limited to assist with
95
• Extended coverage to 22 states and Abuja. Turning around Multi-Links’s performance is vital to Telkom given the extent of the Group’s investment and the enormous opportunity the Nigerian market provides. US$100 million has been budgeted for the 2009/10 financial year for the completion
the development and management of
of an additional 1,645 km build and
our distribution channels, dealerships,
584 km swop of optic fibre cable for the
promotional campaigns and inventory
DWDM/SDH network. It is anticipated that
management.
the network will connect 80 DWDM/SDH
Operating expenses have been driven by growth,
rehabilitation
of
distribution channels, marketing costs and customer acquisition and maintenance.
sites, covering all major cities in Nigeria, providing us with additional bandwidth connectivity for voice and data customers. In addition, 227 cell towers are to be
Multi-Links is focusing on containing costs
erected and another 300 commissioned on
through
subsidies
third party leased tower infrastructure during
drastically, continuing to migrate to an all IP
the year. Seven new customer service
network in order to reap the benefits of its
centres are planned to facilitate and support
cost
the network growth.
reducing
effective
handset
network
management
capabilities and securing cost effective international connectivity through the SAT-3 and other submarine cables.
We expect Multi-links to be EBITDA positive in 2010/11 and to be cash flow positive by 2011/12.
Capital expenditure increased 112.7% to R2.8 billion in the year ended March 31, 2009. In the 2009 financial year, MultiLinks’s build and expansion programme achieved the following:
Africa Online On February 23, 2007, Telkom acquired 100% of the issued share capital of Africa Online from African Lakes Corporation for a total cost of R150 million. Africa Online
• Deployed additional packet based
is an internet service provider active in
mobile switching centres increasing the
Cote d’Ivoire, Ghana, Kenya, Namibia,
available capacity from 1,000,000 to
Swaziland, Tanzania, Uganda, Zambia
2,800,000 subscribers.
and Zimbabwe. Africa Online’s strategy
• Extended capacities
home from
location
register
800,000
to
5,100,000 subscribers.
focuses on brand development, creation and development of customer channels, resources development and an expansion drive targeting other African countries.
stations increasing its total capacity from
Africa Online offers wireless and fixed
800,000 to 1,800,000 subscribers.
technologies,
service offering by rolling out an EVDO
registration
hosting to
both
and
and
corporate customers. In the 2009 financial year, Africa Online
subscribers.
had
in a total to 3,711 kms.
R194
million
of
Sustainability review
domain
consumer
3G network to a capacity of 100,000
• Added 1,300 kms of optic fibre resulting
Management review
improvement of network systems, human
• Rolled out additional base transmission
• Successfully launched its broadband
Group overview
revenue
and
R216 million of total assets. The major
Performance review
Financial statements
contributors to revenue were corporate and consumer wireless and broadband VSAT
• Increased international capacity by the
services. Consumer wireless revenue
addition of 2 x 155Mb services on the
growth was predominantly in East Africa,
SAT-3 submarine cable system; and
while corporate revenue growth was
Company Financial Information
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Operational review (continued)
Year ended March 31, Restated(1)
2008/2007
2009/2008
% change
% change
2007
2008
2009
Dial-up ports
n/a
12,051
11,437
3.9
(5.1)
Consumer wireless
n/a
4,075
5,754
110.2
41.2
Unbundled local loop
n/a
99
99
(1.0)
–
ADSL
n/a
325
308
8.3
(5.2)
VSAT
n/a
96
210
269.2
118.8
Dedicated corporate
n/a
606
633
4.8
4.5
Total(1)
n/a
17,252
18,441
18.6
6.9
UUNet subscribers(2)
n/a
300
320
–
6.7
(1) In the 2009 financial year, Africa Online changed the method of counting subscribers to include all the individual corporate sites as individual customers. The comparative information for the 2008 financial year has been restated. (2) Includes 100% of UUNet’s subscribers. UUNet is Africa Online’s joint venture partner that provides internet services in Kenya. We own a 40% interest in UUNet and MTN owns the remaining 60% of UUNet.
mainly in Ghana and Uganda. The growth in Pan African business, Ghana and Tanzania accounted for the increase in Broadband VSAT. In the 2008 financial year, Africa Online had R110 million of revenue, and R122 million of total assets. In the 2008 financial year, dedicated corporate links and consumer wireless were the highest revenue streams followed
to increase customers on its own wireless network infrastructure as opposed to dialup and ADSL networks. Africa Online’s distribution is conducted through various channels, including direct sales and different types of resellers depending on the customer segment. Customers are serviced through customer
closely by dial-up business. Dial-up
relationship managers and a 24 hour call
packages are the most popular and
centre. Africa Online’s primary competitors
accounted for approximately 62% of Africa
include
Online’s total customers as of March 31,
companies that have entered the internet
2009. Wireless customers are expected to
service provider market, mobile providers
continue to grow with Africa Online’s
and other private data companies.
continued investment in infrastructure. The reason for the decrease in the number of dial-up and ADSL customers is that Africa Online has shifted its marketing approach
former
telecommunication
Africa Online’s network had 29 points of presence, 46 mobile broadband transceiver stations, 31 fixed broadband wireless access transceiver stations, eight network
Shiletsi Makhofane was appointed as
operation and 17 support centres and eight
acting chief executive officer in October
data centres across nine countries as of
2008.
March 31, 2009. Africa Online’s capital
Africa Online’s footprint covers East Africa, southern Africa and West Africa. The regulatory environments are fairly different in each of Africa Online’s different regions. East Africa is liberalised and Africa Online provides services across the information, communications and technology spectrum, including voice over internet protocol services, in East Africa. Markets in southern Africa are still regulated, limiting the services Africa Online is able to provide to its customers. West Africa is a fairly liberalised market and Africa Online is presently seeking to take advantage of this opportunity.
expenditure was US$7 million in the 2009 financial year, US$5.7 million in the 2008 financial year and US$0.8 million in the 2007 financial year. The increase in Africa Online’s capital expenditure was primarily for the improvement of service quality and to increase
the
range
of
information,
communications and technology services offered in the market. Africa Online had 313 employees as of March 31, 2009. UUNet, Africa Online’s 40%
joint
venture
partner
had
70 employees as of March 31, 2009.
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MWEB Africa On April 21, 2009, we acquired a 100% interest in MWEB Africa Limited, which owns approximately 88% of ASFAT Communications Limited, and a 75% interest in MWEB Namibia (Pty) Ltd, for R498 million. MWEB Africa is a group of companies offering internet services and its own VSAT access services in sub-Saharan Africa (excluding South Africa). MWEB Africa is obliged to acquire the additional 12% of AFSAT Communications Limited and we are currently in negotiations to purchase such shares. MWEB Africa’s VSAT service is mostly focused on the corporate and enterprise markets and is branded iWay. Its VSAT services are using satellite teleport facilities in SA, the USA and Europe. The company had almost 20,175 customers at March 31, 2009. The group is headquartered in Mauritius with operations in Nigeria, Kenya, Tanzania, Uganda, Namibia and Zimbabwe and an agency arrangement in Botswana. There are distributors in 26 subSaharan African countries. Other developments Mobile strategy Mobile Strategy – South Africa The recent liberalisation in the licensing regime, advancements in convergence technology and termination of the Vodafone shareholders’ agreement provide Telkom with the opportunity to enter the mobile market. We believe that an integrated fixed-mobile operator is well positioned to react to, and take advantage of the future requirements of our customers. By developing an integrated fixed-mobile offering Telkom will seek to leverage its customer base, marketing, logistics and distribution channels to increase its share of voice revenue. In addition, internet access demands are increasingly requiring mobility. An integrated bundled offering would offer superior speeds and quality through the fixed-line, including the advantages of mobility when required by the customer. Mobility provides cost
efficiencies and the opportunity to consolidate traffic onto Telkom’s network. Currently mobile customers are experiencing the effects of highly congested networks. Telkom intends to use the strengths of its fixed-line network to differentiate its mobile service on quality with a fully converged array of products and services. Our Next Generation Network and access to the latest technologies will provide further value to our customers. Telkom has rolled out 141 W-CDMA sites in major metropolitan areas throughout South Africa. Our initial focus has been on theft, breakages and incident-prone areas, customers waiting for service and greenfield areas where Telkom has no copper infrastructure. In essence, the W-CDMA technology allows Telkom to deploy fixed-line lookalike services with regional fixed numbering plans instead of deploying copper, especially in high copper theft areas or areas where copper deployment is not feasible or too slow to roll out. This roll-out will be extended to rural areas and to replace expensive to maintain legacy equipment. Our move into offering a fully fledged mobile service is dependent on the finalisation of market research and the outcome of pilot and customer trials planned for the end of 2009. We are however aware of the power of the entrenched mobile companies. With this in mind, Telkom will not commit to further capital expenditure other than that focused on reducing costs before the Company has completed its market research. Future build will be based on maximising our current infrastructure and subscriber numbers in order to reduce operational and build costs and improve value add as far as possible.
Key Next Generation Network, capacity and product developments Telkom is in the fourth year of its Next Generation Network (NGN) build out programme. Customer demand and global
97
standards necessitate the provision of services and particularly bandwidth that is only possible utilising the intelligence of an NGN system. Our NGN build-out achievements are as follows: • In the national layer of the transport network, bandwidth capability has increased by more than 500% in bandwidth and automatic self-healing re-routing of bandwidth has been introduced based on customer service levels. • Optical fibre deployment has been accelerated and Telkom now has around 128,000 cable kilometres of optical fibre in the ground, enough to circle the world three times. • Dense Wave Division Multiplexing (DWDM) systems have been introduced between major metropolitan centres such as Gauteng and Durban. These systems can carry 40 10GB signals over a single fibre pair. • Metro Ethernet has been deployed in the major metros, including Cape Town, Durban, Johannesburg, Pretoria and Port Elizabeth. • Integrated Multi-Service Access Multiplexer (IMAX) has been deployed to carry narrowband and broadband services for Wireline legacy and converged systems. • A Network Interactive Voice Response system has been introduced, giving Telkom and its corporate customers the ability to use advanced speech services such as automated speech recognition and text-to-speech applications. • The SAT-3/WASC/SAFE undersea cable system, which connects South Africa to Europe and the Far East, has been upgraded to treble the amount of international bandwidth available.
Group overview
Management review
Sustainability review
Performance review
Financial statements
Company Financial Information
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Operational review (continued)
Next Generation Network (NGN)
in the longer term, in view of the
longer term customer services will migrate
Telkom has strategic objectives that are
expectation that bandwidth will grow
to an NGN infrastructure where only a few
followed as part of network planning to
exponentially.
Softswitch nodes with multiple Softswitches
ensure that we drive the implementation of the NGN. Telkom’s NGN is based on an evolutionary approach where the NGN is deployed in parallel with the legacy network and migration to the NGN is phased in over time.
are required to fulfil the functionalities of the
The NGN network elements
Class 4 core and Class 5 edge Time
The Metro Ethernet Network An extensive Metro Ethernet Network is
Division Multiplex switches.
being deployed for the provisioning of
IP Network
high-speed
for
Telkom’s IP Network is an extensive
broadband
services
corporate customers and to serve as an
network, providing points of presence
Key to Telkom’s NGN deployment are
access network backhaul to provide cost
country wide. 34 Edge nodes, each with
Softswitches that function in association
effective transport of high bandwidth
multiple routers, have been deployed. At
with Application Servers, next generation
services, typically as a backhaul for access
these
transport networks, and IP and Metro
nodes. Metro Ethernet also serves as an
distribution and aggregation points to
Ethernet networks. In order to leverage on
access network to services provisioned on
IPNet via the Network Access Servers (dial-
Telkom’s ubiquitous network deployment,
the IP Network.
up customers), Access Routers (leased
the transport network will be transformed to support the expected exponential growth in bandwidth. The IP Network has been positioned to differentiate Telkom from its competitors and to leverage on the bandwidth capacity increase of the
nodes,
edge
routers
act
as
line Internet customers), customer edges
The Transport Network To achieve the growth and manageability in the transport network, Telkom is deploying Next Generation Synchronous Digital Hierarchy (NG-SDH) and Dense
(Customer Edges for VPN termination) and also terminate ADSL sessions – 145 Edge routers are deployed at the 34 edge nodes.
Multiplexing
The IPNet routing platforms support
(DWDM). In order to provide automated
business customer requirements (VPN) as
To achieve success with the NGN, two
provisioning,
restoration
well as providing Internet capacity for
objectives are actively pursued; the
capability, Automatic Switching Transport
leased line and broadband internet
consolidation of service offerings and the
Network (ASTN) technology is being
services.
development and marketing of new and
deployed on Telkom’s long haul network.
Separate and dedicated edge routers for
innovative services which are enabled by
The ASTN network will also improve
business traffic and internet traffic provide
the NGN technology.
resilience, reliability and reduce cost of the
physical separation of corporate customer
transport network.
Virtual Private Network (VPN) traffic from
operate
Softswitches and application servers
that of Internet traffic to ensure secure
NGN will provide network convergence
Softswitches have been deployed to
implementation of services to the business
and simplification over the longer term as
control media gateways, access gateways
segment. Separate routing platforms,
separate networks for voice and data
and provide basic voice services while it
dedicated for ADSL termination, are also
converge to one IP based network with
functions in association with application
associated intelligent devices such as
servers
next
An extensive access network that could
softswitches and application servers. NGN
generation voice services. Telkom’s IP
potentially provide connectivity to almost
requires less diverse technology elements
network provides the transport capability
any customer provides access to IP
to maintain that will increase network
between the network elements while media
services. These access networks include
reliability and manageability and result in
gateways mediate between the circuit
legacy networks such as Constant Bit Rate
operational savings.
switched network and the Voice Over
(CBR), and new point to cloud infrastructure
Internet Protocol (VoIP) network. The need
e.g. Synchronous High-bit rate Digital
for such media gateways will diminish as
Subscriber Line and Metro Ethernet.
transport network.
NGN is cheaper to maintain and
NGN is a revenue generator There is a critical mass of NGN equipment that is required before proper converged
Wavelength
to
Division routing
provide
and
advanced
more traffic moves to VoIP.
deployed at the IPNet edge nodes.
To further improve the secure provisioning
services with a viable footprint are
The NGN network will continue to be
of services and create new business
possible. Some NGN services are already
developed towards an IP Multimedia
opportunities, IPNet is evolving to a
functioning, but in small numbers. Pre-
Subsystem (IMS) controlled network where
Carrier-supporting-Carrier (CsC) Multi-
provisioning in the core of the network is
call control will be combined into a single
Protocol
currently taking place that will be beneficial
control layer with IMS architecture. In the
architecture. In short, CsC is a hierarchical
Label
Switching
(MPLS)
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99
VPN model that allows other service
the edge other than physical protection
Data networks
providers or corporate customers to
at the SDH layer where end-to-end path
At the core layer and between the core
interconnect their own IP/MPLS networks
protection,
protection
and the edge nodes, full resilience exists.
over Telkom’s MPLS backbone. This
architecture, i.e. a working path and a hot
Edge devices are connected to two core
eliminates the need for customer carriers
standby
devices, located in physically diverse
and service carriers to build and maintain
deployed.
their
own
MPLS
backbone.
In
the
backbone, the CsC concept provides complete separation of the different service carriers’ traffic.
utilising
protection
1+1 path,
has
been
buildings. The connectivity between the
The traffic leaving or entering edges to or from the network is protected in the core. Core redundancy provides protection in edge to edge and edge to international
A Service Carrier is a collection of
destination
Service (or customer-specific) Provider
redundancy varies across the different
Edge routers (S-PEs), essentially forming a
technologies and networks.
layer around the Backbone Carrier network. Service Carriers also include their respective Customer Edge (CE) routers. S-PE and CE routers can only belong to a single Service Carrier at any one time.
set-ups.
The
degree
of
Voice network Dual connectivity exists between edge to core nodes and core to international gateway nodes. The transmission links between the edge and the core pair nodes
edge and each core router as well as the core infrastructure is dimensioned to carry the full traffic load in the event of a link failure or core node failure. Edge to core, inter-core and edge to International destinations are therefore fully redundant. Connectivity to international destinations is provided from two physically diverse nodes, through different cable landing stations and different submarine cable networks to multiple international nodes on different
continents
interconnected
using
that
are
all
protected
or
In essence, IPNet will consist of a
are geographically separated. These links
Backbone Carrier, supporting various
are protected to eliminate any single point
Service
each
of failure in the transport network. All links
retaining a level of autonomy (e.g. security,
are designed to cater for the busy hour
management,
Service
loads and have been implemented in a
implementation) from the core. At a basic
50:50 load sharing fashion with each
technical level, it means that any number of
route limited to 80% utilisation.
customer VPNs are embedded and treated
In the event of a failure of an international
as a single VPN within the backbone
gateway during the peak hour, about 38%
carrier infrastructure by means of multiple
of the international traffic will be lost. In the
stacked MPLS labels, while preserving the
event of a failure of a core switch during
Power
customer’s unique parameters, such as
the peak hour, about 38% of national and
Only 12V and 48V direct current (DC)
Quality of Service models.
international traffic will be lost from the
equipment is utilised. Some alternating
secondary layer of a particular region.
current (AC) equipment is used, mainly in
Activation of disaster recovery procedures
the server environments, eg data centres
and plans to re-route traffic will further limit
and at sites where DC is not available, eg
the loss of traffic. The Intelligent Network
at customer service branches.
or
Customer Quality
Carriers of
Network resilience Telkom’s networks are generally viewed as three layers, ie access, edge and core. The
different
network
elements
are
interconnected utilising Synchronous Digital Hierarchy (SDH), with the primary physical interconnecting medium being fibre. The
transport
network
equipment
is
connected in a mesh or ring topology, providing for redundancy. To further improve
resilience,
intelligent
ASTN
switches are deployed in the long haul network to provide automatic provisioning, routing, and restoration capability.
platforms, providing advance services, cater for protection of traffic under failure conditions.
restorable transmission systems. In the event of the loss of one of the local nodes, potentially 38% of the IP throughput traffic could be lost. Mechanisms will schedule traffic and prioritisation of traffic will take place. Service level agreements are offered to clients to provide improved resilience from the customer site to the edge.
Operations centres, Core nodes, Edge
Group overview
Management review
Sustainability review
nodes, International gateway nodes and any station carrying core or edge traffic
Signalling
have been defined as critical sites where a
No risk exists from a national perspective
disruption of service cannot be tolerated.
as full redundancy has been implemented.
Power availability is ensured, using a
Due to the fact that the international
combination of battery back up and AC
Signalling Transit Points are not connected
standby plants.
Performance review
Financial statements
as a mated pair to all international destinations, failure of an international gateway Signalling Transit Point may
Generally, at the access, no resilience is
result in the loss of some international
present in the network architecture towards
connections.
Company Financial Information
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Operational review (continued)
Cost, efficiency and productivity
Network in order to reduce maintenance
customer needs more rapidly, and to
management
spend. We continue with the renegotiation
provide appropriate solutions and services.
Faced with competition eroding our
of all supplier contracts and constructive
In order to take advantage of economies of
revenue base, cost management continues
engagement with labour unions. We are
scale, we have consolidated our six voice
to be a key element in creating shareholder
reviewing our IT investment strategy in
installation and fault management centres
value. Combined with the inflationary
order to ensure optimum levels of spend in
into
environment
operating
line with our strategy and network
installation and service appointment sites,
expenses, a number of once-off items
investment. Inventories and capital work-in-
and have consolidated our six data
impacted fixed-line expenditure including:
progress
installation and fault management centres
• R177 million expenses relating to the
attention as we seek to lower just-in-time
affecting
our
are
receiving
considerable
levels of investment and to monetise any
Vodacom transaction;
excessive levels of assets.
• R254 million impairment of Telkom Media; and
the 2009 financial year resulting in an
the cost efficiency and free cash flow initial five year capital expenditure budget
8.1%
by 40% to R34 billion and intends to
increased
by
to
R8.0 billion, payments to other operators increased 9.2% to R7.5 billion, selling general and administrative expenses increased by 68.8% to R6.6 billion, service fees increased by 14.4% to R2.8
billion
and
operating
leases
decreased by 1.0% to R613 million. Depreciation, amortisation, impairment and write-offs increased by 16.8% to R4.4 billion resulting in an EBITDA margin of 25.8%. Excluding the Multi-Links, Telkom Media and Africa Online impairment the fixed-line adjusted EBITDA margin was 32.3%.
Faults reported on residential, business and
financial years.
Employee
expenses
into two centres.
increase in the ADSL installed base during
19.6%
billion.
faults,
2009 financial year mainly due to the 33%
profile of the company. It has reduced the
R29.8
address
reduction of 10% over the following three
Fixed-line operating expenses increased to
to
Telkom is targeting an operating cost
The Telkom Board is focusing on improving
• R1.8 billion impairment of Multi-Links.
centres
ADSL business services increased in the
• R85 million impairment of Africa Online;
two
reduce it further where possible.
increase in the number of reported faults, adverse weather conditions causing many areas to be flooded, mainly in the coastal areas of KwaZulu-Natal, Western Cape and Eastern Cape, and third party damage to Telkom cable infrastructure, rollout of other providers’ services, road
Maintaining the quality of services to our
extensions and other 2010 Soccer World
customers
Cup projects. In addition, many customers
Improved customer service is vital to the
were affected by access equipment that
success
future.
failed following prolonged power outages.
Sustainable and profitable growth in the
Data and ADSL Business services fulfilment
customer base requires creating and
performances improved following the
strengthening capabilities focused on
introduction of more efficient workflow
managing customer relationships and
processes.
learning
of
Telkom
from
into
acquired
the
customer
information. This will allow Telkom to better manage the customer experience and anticipate customer needs.
Faults cleared in 24 hours declined in the 2009 financial year due to the increased number of ADSL services. The ADSL installed base grew by 61% during the
Customer segmentation based on value is
2008 financial year. This growth resulted
enabling Telkom to understand customers
in an increase in the number of reported
better in order to give additional value and
faults and impacted on the time taken to
services to customers. Surveys with our key
clear faults. This growth also impacted on
customer segments have shown that service
data subrate services as they share ADSL
quality perception has improved in the
resources. Network failures consist of cable
small business, medium and large business
breaks, cable theft and failures on other
and corporate and government sectors.
core network elements. We implemented a
The residential market perception survey
self install option for ADSL, which had a
indicates a stable rating.
positive impact on ADSL installation.
mobile technology also allows us to
Network service quality
We expect to continue to change the
replace expensive to maintain legacy
We have made significant investments in
method in which we measure performance
equipment. We intend to expedite the
our national network operations centre and
to align with changes in the information
retirement of costly legacy systems as a
our data centre, designed to increase our
communication technology industry that
result of our growing Next Generation
ability to identify and anticipate future
focus more on broadband and data
The Telkom reorganisation programme – Telkom Renaissance – improves profit and loss
accountability
throughout
the
organisation and will allow us to focus on efficient resource management and cost containment. In addition, the roll-out of our mobile network is expected to enable us to provide connectivity in a more cost effective manner in rural and high cable theft areas. Next Generation Network and
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101
The following table presents information regarding Telkom’s service delivery measurements during the periods indicated. Year ended March 31, 2007
2008
2009
% cleared in 24 hours
50
38
32
Faults per 1,000 lines
Residential voice 485
476
650
% installed within 28 working days initial timeframe – No build
84
91
91
% installed within 80 working days initial timeframe – Build
73
82
80
Business voice % cleared in 24 hours
66
50
45
Faults per 1,000 lines
328
264
369
% installed within 21 working days initial timeframe – No build
77
85
87
% installed within 70 working days initial timeframe – Build
81
84
82
Data subrate % cleared in 24 hours
84
93
94
Faults per 1,000 lines
870
875
816
% installed within 30 working days initial timeframe – No build
49
48
64
% installed within 90 working days initial timeframe – Build
54
79
80
ADSL business % cleared in 24 hours
33
42
37
Faults per 1,000 lines
575
575
649
% installed within 28 working days initial timeframe – No build
56
79
91
% installed within 60 working days initial timeframe – Build
68
66
74
services and also to support Telkom’s
We intend to introduce new products and
our fixed-line service. ICASA has initiated a
customer centricity drive.
services as well as tariff structures with the
review process of mobile termination rates
aim of maintaining and gaining revenue.
aimed
Competition
at
reducing
high
interconnect
charges
which,
mobile once
Competition in the South African fixed-line
Mobile competition
communications market is intense and is
Telkom competes for voice customers with
increasing as a result of the Electronic
the three existing mobile operators,
Communications Act and determinations
Vodacom, MTN and Cell C. Vodacom,
issued by the Minister of Communications.
our previously 50% owned joint venture,
Data competition
was listed on the JSE on May 18, 2009.
Neotel, the former VANS providers such as
The sale and unbundling of our stake in
Internet Solutions and the three existing
Vodacom will further increase competition.
mobile operators are our main competitors
MTN is a public company listed on the JSE
in the data market. Each of Vodacom,
Limited, and Cell C entered into a joint
MTN and Cell C currently offer 3G, HSPA
venture with Virgin Mobile which has
and EDGE mobile broadband data
further increased competition. Telkom also
services that directly compete with our
competes with service providers who use
services. Neotel is entering the market
least cost routing technology that enables
through competitive pricing and niche
fixed-to-mobile calls from corporate private
products such as fibre connections and
branch exchanges to bypass our fixed-line
rings. The mobile operators have also
We compete primarily on the basis
network by being transferred directly to
stated their intention to start competing in
of customer service, quality, reliability
mobile networks. In recent periods, our
the fixed-line market through building their
and price in those areas where we
fixed-line
experienced
own infrastructure. The former VANS
currently face competition and where we
significant customer migration to mobile
provide competitive internet protocol virtual
expect to compete for public-switched
services, as well as substitution of calls
private networks and internet service
telecommunications services in the future.
placed using mobile services rather than
provider services to the business segment.
The new licensing framework included in the Electronic Communications Act is resulting in the market becoming more horizontally layered, with a large number of separate licences
being
issued
for
electronic
communications network services, electronic communications services, broadcasting services and the radio frequency spectrum. This will substantially increase competition in our fixed-line business.
business
has
completed, is also likely to impact Telkom’s own termination rates and interconnection revenues.
Group overview
Management review
Sustainability review
Performance review
Financial statements
Company Financial Information
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102
Operational review (continued)
Consumer orientated internet service
alliances between the VANS and fixed and
and Pretoria. Government has created an
providers such as MWEB are our main
mobile operators. Technological advances
infrastructure company, Broadband Infraco,
competitors in the consumer internet
will
more
which stated that it will provide inter-city
market.
convergence and integration which in turn
bandwidth at cost based prices to Neotel,
will enable more effective competition and
and later to the rest of the industry. This will
usage of bandwidth.
further
In addition, our data services have faced increased competition from iBurst, a
also
enable
more
and
wireless competitor that offers competing
As competition increases in the South
broadband services and, to a lesser extent,
African
Sentech, which owns and operates satellite
communication service providers, including
transmission systems, a packaged, always-
Telkom, are expected to increasingly look
on bidirectional broadband service via
to other developing markets for new
satellite and a wireless high-speed internet
revenue streams, particularly in sub-
service offering. The mobile data providers
Saharan Africa. Internationally, Telkom’s
have reduced prices significantly, leading to
new Africa Online business already
price competition in our data markets. We
competes with Internet Solutions and MTN
believe the former VANS operators and
Network Solutions. In addition, Verizon is
internet service providers will increasingly
already present in a number of other
move into the corporate and voice services
African markets.
market, while telecommunications service providers aim to expand into the managed data network and international traffic markets. We anticipate that alliances will be forged between the former VANS operators,
telecommunications
providers
and
content
service
providers
to
concentrate on the delivery of converged services within the next few years.
market,
South
African
tele-
In September 2004, the Minister of Communications granted an additional to
provide
public-switched
telecommunications services to Neotel. Neotel was 30% owned by Transtel and Esitel, which are beneficially owned by the South African government and other strategic equity investors including 26%
Domestically, expansion into new markets
beneficially
by
Holdings (Pty) Ltd, a member of the large
the
former
companies
will
VANS
mobile
TATA
Africa
Indian conglomerate with information and
development of new products and services
communications operations. On March
will intensify competition. We expect
19, 2008 Neotel announced that the
competition to further increase as a result of
Competition Tribunal of South Africa had
consolidation
with
approved its acquisition of Transtel without
competitors growing through mergers,
any conditions. TATA Africa Holdings (Pty)
acquisitions and alliance-forming activity.
Ltd has subsequently acquired the 30%
The entry of multi-national corporations into
equity stake beneficially owned by the
South Africa is expected to be a further
South African government, increasing its
incentive
communications
shareholding in Neotel to 56%. Neotel
operators, which already service these
was licensed on December 9, 2005 and
corporations abroad, to establish or
commercially launched on August 31,
enhance their presence in South Africa.
2006. Neotel commenced providing
for
the
while
by
the
in
occur,
and
owned
global
market,
Competition in the data market is expected to increase as a result of the VANS providers’ ability to deliver complex
with
our
existing
provider of communications infrastructure, Broadband Infraco will also be involved in some of the undersea cable projects. Broadband Infraco was established by an Act of Parliament: the Broadband Infraco Act, No 33 of 2007. The Electronic Communications Act, No 36 of 2005, has been
amended
by
the
Electronic
Communications Amendment Act, No 37 of
2007,
to
permit
electronic
communications licences to be issued to Broadband Infraco.
Fixed-line voice competition
licence
compete
communications network. As an alternative
services to large corporations and other licensees at the beginning of the 2007 calendar year.
A process to issue additional licences to small business operators to provide telecommunications
services
in
underserviced areas with a teledensity of less than 5% commenced in 2005 and is continuing. The Minister of Communications has identified 27 of these underserviced areas. ICASA has issued licences to successful bidders in seven of these areas and the Minister has issued invitations to apply for licences in 14 additional areas. In August 2006 ICASA recommended to the Minister that licences
be
granted
to
successful
applicants in 13 of these areas. While it was expected that further licences would be issued in the 2007 calendar year, none were
issued.
The
Minister
of
Communications has issued a policy directive to ICASA directing it to, where there is more than one licence in a province, merge the licences and issue one Provincial Under-Serviced Area Network Operator (PUSANO) licence. None of these consolidated licences have yet been issued by ICASA. In his budget speech of June
26,
2009,
the
Minister
of
managed data solutions and integrated
On April 25, 2008, Neotel announced
Communications indicated the intention to
information communications technology
that the first of its consumer products were
review the policy in relation to USALs.
solutions, as well as expected future
available in limited parts of Johannesburg
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103
Telkom’s fixed-line voice business is expected to be further impacted by continuing developments of Voice over Internet Protocol (VoIP) and by the roll-out of limited mobility services. Wireless operator iBurst has started to offer portable voice services
over
its
wireless
network.
Additionally, VoIP and other operators with international
gateway
licences
are
expected to create increased competition for Telkom’s fixed-line voice business in carrying international traffic in and out of South Africa. We expect that the introduction of number portability and carrier pre-selection could further enhance competition in our fixed-line voice business and increase our churn rates. As competition intensifies, the main challenges our fixed-line voice business faces are continuing to improve customer loyalty through improved services and products, and maintaining our leadership in the South African communications market.
As
a
result
of
increasing
competition, we anticipate pressure on our overall average tariffs and a reduction in our market share.
Group overview
Management review
Sustainability review
Performance review
Financial statements
Company Financial Information
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Three year financial review
for the years ended March 31 Amounts in accordance with IFRS (in ZAR millions, except percentages)
2007
2008
2009
CAGR (%)
32,345 8,596 26.6 12,178 37.7 20.4
32,572 8,107 24.9 11,839 36.3 20.9
33,659 4,334 12.9 8,692 25.8 19.9
2.0 (29.0) (30.4) (15.5) (17.3) (1.2)
– – – – – –
845 (97) (11.5) (11) (1.3) 155.3
1,900 (522) (27.5) (226) (11.9) 146.9
124.9 438.1 139.3 1,954.5 813.7 (5.4)
873 411 47.1 430 49.3 5.0
1,040 453 43.6 486 46.7 32.1
1,214 477 39.3 527 43.4 13.8
17.9 7.7 (8.6) 10.7 (6.1) 66.1
Financial review (Group) Income statement data Continuing operations Operating revenue Operating expenses (including depreciation) EBITDA Operating profit Profit before tax Profit from continuing operations Basic earnings per share (cents) Headline earnings per share (cents) Dividend per share (cents)
32,441 23,028 13,352 9,751 9,093 6,290 1,204.7 1,235.5 900.0
33,611 25,014 13,203 9,069 7,681 5,034 963.7 1,028.9 1,100.0
35,940 29,895 11,668 6,388 3,726 2,066 407.4 557.0 660.0
5.3 13.9 (6.5) (19.1) (36.0) (42.7) (41.8) (32.9) (14.4)
Total operations Basic earnings per share (cents) Headline earnings per share (cents)
1,681.0 1,710.7
1,565.0 1,634.8
832.8 994.6
(29.6) (23.8)
Balance sheet data Total assets Current assets Non-current assets Assets of disposal groups held for sale Total liabilities Current liabilities Non-current liabilities Liabilities of disposal groups held for sale Shareholders’ equity
59,146 10,376 48,770 n/a 27,138 18,584 8,554 n/a 32,008
70,372 12,609 57,763 n/a 37,035 21,931 15,104 n/a 33,337
85,779 11,287 51,009 23,482 48,673 17,452 15,348 15,873 37,106
20.4 4.3 2.3
Continuing operations Capital expenditure Total debt Net debt
6,623 11,034 10,026
8,428 18,365 16,617
9,631 18,630 15,497
20.6 29.9 24.3
Total operations Capital expenditure Net debt
10,246 10,026
11,900 16,617
13,234 23,047
13.6 51.6
Cash flow data Cash flow from operating activities Cash flow from investing activities Cash flow from financing activities Capital expenditure excluding intangibles Operating free cash flow
9,356 (10,412) (2,920) 8,648 3,728
10,603 (14,106) 2,943 10,108 2,229
11,432 (17,005) 7,093 8,725 (2,237)
10.5 27.8 – 0.4 –
Financial ratios Continuing operations Operating profit margin (%) EBITDA margin (%) Net profit margin (%) Net debt to EBITDA After tax operating return on assets (%) Capital expenditure to revenue (%)
30.1 41.2 19.4 n/a n/a 20.4
27.0 39.3 15.0 n/a n/a 25.1
17.8 32.5 5.7 1.3 5.0 26.8
(23.1) (11.2) (45.5) – – 14.6
Total operations Net debt to EBITDA After tax operating return on assets (%)
0.5 22.7
0.8 18.3
1.2 9.7
54.9 (34.6)
Fixed-line segment financial data Revenue Operating profit Operating profit margin (%) EBITDA EBITDA margin (%) Capital expenditure to revenue (%) Multi-Links segment financial data Revenue Operating profit Operating profit margin (%) EBITDA EBITDA margin (%) Capital expenditure to revenue (%) Other segment financial data Revenue Operating profit Operating profit margin (%) EBITDA EBITDA margin (%) Capital expenditure to revenue (%)
33.9 (3.1) 33.9 7.7
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105
Financial review
Results of operations The Telkom Group added Multi-Links as a new segment to its financial reporting for the 2009 financial year. As a result, the Telkom Group’s four reporting segments for the 2009 financial year are fixed-line, Multi-Links, mobile and other. The other segment includes Telkom’s Trudon, formerly known as TDS Directory Operations, and Africa Online subsidiaries. The information in this annual report has been updated to reflect the above changes to Telkom’s reporting segments. Telkom concluded the disposal and sale of Vodacom, its mobile segment that provided mobile services through its 50% joint venture interest in Vodacom, effective as of April 20, 2009. In addition, Telkom’s Board of directors determined to dispose of Swiftnet, a wholly owned subsidiary that provides wireless data services, and determined to wind up its Telkom Media subsidiary. The Telkom Group’s consolidated financial statements and information included herein reflects the restatement to Telkom’s consolidated financial statements in prior years as a result of these events to disclose the effect of discontinued operations and the disposal of the subsidiaries held for sale as follows: • Income statement data for all the periods have been restated to reflect our 50% share of Vodacom’s results, our 100% share of Swiftnet’s results and our 75% share of Telkom Media’s results as discontinued operations in accordance with IFRS5; and • Balance sheet data for only the year ended March 31, 2009 reflect our 50% share of Vodacom’s results and our 100% share of Swiftnet’s results as discontinued operations in accordance with IFRS5. The discussion of the business below has been revised from
The Board has decided to delist from the New York Stock
previous years to reflect the changes to Telkom’s segments and its
Exchange. Maintaining a listing in the United States is
discontinued operations.
expensive and takes considerable management time. The
Year ended March 31, 2009 compared to year ended March 31, 2008 and year ended March 31, 2007
methodology employed and discipline gained from compliance
with
the
Sarbanes-Oxley
reporting
ensure strict corporate governance compliance and
The following table shows information related to our operating
transparent financial reporting.
operating profit margin, profit for the year, profit margin, EBITDA and EBITDA margin for the periods indicated.
Management review
requirements will be retained, where appropriate, to
Consolidated results revenue, other income, operating expenses, operating profit,
Group overview
Sustainability review
Telkom is comfortable that the JSE provides sufficient access to capital from both South African and global investors. Performance review
Financial statements
Company Financial Information
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Financial review (continued)
Telkom Group’s segmental results Year ended March 31, 2007 (in millions, except percentages) Operating revenue Fixed-line Multi-Links Other Intercompany eliminations Other income(1) Fixed-line Multi-Links Other Intercompany eliminations Operating expenses Fixed-line Multi-Links Other Intercompany eliminations Operating profit Fixed-line Multi-Links Other Intercompany eliminations Operating profit margin (%)
2009
2008
ZAR
%
ZAR
%
ZAR
%
32,441 32,345 – 873 (777) 338 334 – 50 (46) 23,028 24,083 – 512 (1,567) 9,751 8,596 – 411 744 30.1
100.0 99.7 – 2.7 (2.4) 100.0 98.8 – 14.8 (13.6) 100.0 104.6 – 2.2 (6.8) 100.0 88.2 – 4.2 7.6
33,611 32,572 845 1,040 (846) 472 497 – 61 (86) 25,014 24,962 942 648 (1,538) 9,069 8,107 (97) 453 606 27.0
100.0 96.9 2.5 3.1 (2.5) 100.0 105.3 – 12.9 (18.2) 100.0 99.7 3.8 2.6 (6.1) 100.0 89.4 (1.1) 5.0 6.7
35,940 33,659 1,900 1,214 (833) 343 524 – 64 (245) 29,895 29,849 2,422 801 (3,177) 6,388 4,334 (522) 477 2,099 17.8
100.0 93.7 5.3 3.4 (2.4) 100.0 152.8 – 18.6 (71.4) 100.0 99.8 8.1 2.7 (10.6) 100.0 67.8 (8.2) 7.5 32.9
2008/ 2007 % change
2009/ 2008 % change
3.6 0.7 – 19.1 8.9 39.6 48.8 – 22.0 87.0 8.6 3.6 – 26.6 (1.9) (7.0) (5.7) – 10.2 (18.5) (10.3)
6.9 3.3 124.9 16.7 (1.5) (27.3) 5.4 – 4.9 184.9 19.5 19.6 157.1 23.6 106.6 (29.6) (46.5) (438.1) 5.3 246.4 (34.1)
Fixed-line
26.6
24.9
12.9
(6.4)
(48.2)
Multi-Links
–
(11.5)
(27.5)
–
139.1
47.1
43.6
39.3
(7.4)
(9.9)
(11.6)
Other Profit for the year attributable to equity holders of Telkom Profit margin (%) EBITDA(2)
13,352
100.0
13,203
100.0
11,668
100.0
(1.1)
Fixed-line
12,178
91.2
11,839
89.7
8,692
74.5
(2.8)
(26.6)
Multi-Links
–
–
(11)
(0.1)
(226)
(1.9)
–
(1,954.5)
Other
430
3.2
486
3.7
527
4.5
13.0
8.4
Intercompany eliminations
744
5.6
889
6.7
2,675
22.9
19.5
200.9
EBITDA margin (%)
41.2
39.3
32.5
Notes:
(1) Other income includes profit and losses on disposal of investments, property, plant and equipment and intangible assets. (2) EBITDA represents profit for the year, which includes profit on sale of investments, before taxation, finance charges, investment income and depreciation, amortisation, impairments and write-offs. We believe that EBITDA provides meaningful additional information to investors since it is widely accepted by analysts and investors as a basis for comparing a company’s underlying operating profitability with that of other companies as it is not influenced by past capital expenditures or business acquisitions, a company’s capital structure or the relevant taxation regime. This is particularly the case in a capital intensive industry such as communications. It is also a widely accepted indicator of a company’s ability to service its long-term debt and other fixed obligations and to fund its continued growth. You should not construe EBITDA as an alternative to operating profit or cash flows from operating activities determined in accordance with IFRS or as a measure of liquidity. EBITDA is not defined in the same manner by all companies and may not be comparable to other similarly titled measures of other companies unless the definition is the same. In addition, the calculation of EBITDA for the maintenance of our covenants contained in our TL20 bond is based on accounting policies in use, consistently applied, at the time the indebtedness was incurred. As a result, EBITDA for purposes of those covenants is not calculated in the same manner as it is calculated in the above table.
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107
EBITDA can be reconciled to operating profit as follows: Year ended March 31, 2007
2008
2009
ZAR
ZAR
ZAR
12,178 (3,582)
11,839 (3,732)
8,692 (4,358)
8,596
8,107
4,334
Multi-Links EBITDA Depreciation, amortisation, impairments and write-offs
– –
(11) (86)
(226) (296)
Operating profit
–
(97)
(522)
Other EBITDA Depreciation, amortisation, impairments and write-offs
430 (19)
486 (33)
527 (50)
Operating profit
411
453
477
(in millions) Fixed-line EBITDA Depreciation, amortisation, impairments and write-offs Operating profit
Operating revenue
more properties at a higher value during
expenses,
Operating revenue increased in the years
the 2008 fiscal year.
impairments and write-offs, operating
ended March 31, 2009 and 2008 due to increased operating revenue in our fixedline, Multi-Links and other segment. The increase in fixed-line operating revenue of 3.3% and 0.7% in the 2009 and 2008 financial years, respectively, was primarily
depreciation,
amortisation
leases and service fees.
Operating expenses Operating expenses increased in the years
The increase in fixed-line operating
ended March 31, 2009 and 2008 as a
expenses in the 2009 financial year was
result of increased operating expenses in
primarily due to increased selling, general
Multi-Links and fixed-line segments.
and administrative expenses, payment to other network operators, depreciation,
due to continued growth in data services,
The increase in the Multi-Links segment’s
higher revenue from interconnection and
operating expenses in the 2009 financial
subscription based calling plans, partially
year was primarily due to increased cost of
offset by lower traffic revenue. The increase
sales and associated subsidies as a result
in revenue in our Multi-Links segment in the
of increased sales volumes, increased
2009 financial year was primarily due to
advertising and promotional expenditure
subscriber
in
and an increase in expatriate fees as a
domestic traffic volumes as well as
result of an increase in staff seconded from
increased data revenue. The increase in
Telkom during the year. The increase in the
revenue in our Multi-Links and other
Multi-Links segment’s operating expenses in
segment in the 2008 financial year was
the 2008 financial year was primarily due
primarily due to the inclusion in the 2008
to the inclusion of operating expenses
fiscal year of revenue generated by our
relating to our newly acquired subsidiary,
newly acquired subsidiaries, Multi-Links
Multi-Links, which impacted all expense
and Africa Online.
categories.
Other income
The increase in the other segment’s
equipment. Payments to other operators
Other income includes profit on the
operating expenses in the 2009 financial
increased primarily due to increased
disposal of investments, property, plant and
year was mainly contributed by the
payments to international operators due to
equipment and intangible assets. The
operating expenditure of UUNET, Africa
increased switch hubbing volumes and
decrease in fixed-line other income in the
Online’s 40% joint venture. Increases in the
higher exchange rates and settlement rates.
2009 financial year was primarily due to
other segment’s operating expenses in the
Employee expenses increased in the year
the gain on disposal of properties in the
2008 financial year were primarily driven
ended March 31, 2009 primarily due to a
2008 financial year. The increase in fixed-
by significant increases in payments to
higher provision for medical aid for
line other income in the 2008 financial
other operators, employee expenses,
pensioners as a result of increased interest
year was primarily due to the disposal of
selling,
costs, higher salaries and wages as a result
growth,
an
increase
general
amortisation impairments and write-offs, employee expenses and service fees. Selling,
general
administrative
administrative
impairment of the Multi-Links investment in the 2009 financial year, increased
Group overview
materials and maintenance expenses and higher
bad
debts.
Depreciation,
amortisation, impairments and write-offs
Management review
increased in the year ended March 31, 2009 primarily as a result of higher amortisation of intangible assets and
Sustainability review
increased depreciation due to the on-going investment in telecommunications network equipment
and
and
expenses increased primarily due to the
and
data
processing
Performance review
Financial statements
Company Financial Information
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Financial review (continued)
of average annual salary increases of
due to a discount received on the extension
year to a negative operating margin of
10.86% as well as higher leave benefits.
of our vehicle lease and a reduction in the
25.7% in the 2009 financial year. The
Service fees increased in the year ended
number of vehicles from 9,694 at
operating profit margin for our other
March 31, 2009 primarily due to
March 31, 2007 to 8,792 at March 31,
segment decreased from 47.1% in the
consultancy fees relating to the Vodacom
2008. Selling, general and administrative
2007 financial year to 43.6% in the 2008
sale and unbundling transaction and higher
expenses decreased primarily due to the
financial year and decreased to 39.3% in
security costs to secure the copper network.
provision for probable liabilities in the
the 2009 financial year.
The increase in fixed-line operating expenses in the 2008 financial year was primarily due to increased payments to other operators, higher employee expenses and service fees, partially offset by lower leases
and
selling,
general
and
administrative expenses. Payments to other operators increased primarily due to increased calls from our fixed-line network to mobile and international operators as result of higher call volumes from our fixedline network to the mobile and international networks. Employee expenses increased due to higher salaries and wages as a result of average annual salary increases and higher share compensation expenses,
Telcordia dispute in the 2007 financial year, which were not increased significantly in the 2008 financial year, and lower marketing expense, partially offset by the R217 million impairment of the Telkom Media loan in the 2008 financial year – increased materials and maintenance expenses
and
higher
bad
debts.
Depreciation, amortisation, impairments and write-offs increased in the year ended March 31, 2008 primarily as a result of higher amortisation of intangible assets and increased depreciation due to the on-going investment in telecommunications network equipment and data processing equipment, partially offset by lower asset write-offs.
Investment income Investment income consists of interest received on short-term investments and bank accounts and income received from our investments. Group investment income increased 7.7% to R181 million in the 2009 financial year and decreased 15.6% to R168 million in the 2008 financial year from R199 million in the 2007 financial year. The increase in the 2009 financial year was primarily due to increased
short-term
investments
and
interest rates. The decrease in the 2008 financial year was primarily due to lower interest received from fixed deposits and repurchase agreements mainly due to
partially offset by a reduced provision for
Operating profit
team award and a reduction in the number
Operating profit decreased in the 2009
of employees. Service fees increased
and
primarily due to increased property
decreased operating profit in the fixed-line
management costs mainly related to
and Multi-Links segments as a result of
increased electricity usage, electricity rates
increased operating expenditure. As a
and taxes, payments to consultants to
result, the fixed-line operating profit margin
explore local and international investment
decreased from 26.6% in the 2007
opportunities, higher security costs due to
financial year to 24.9% in the 2008
increases
and
financial year and decreased to 12.9% in
maintenance and monitoring of the cable
the 2009 financial year. The operating
The following table sets forth information
alarm system and legal fees related to
margin
segment
related to our finance charges and fair
Telcordia. Operating leases decreased in
decreased significantly from a negative
value movements for the periods indicated.
the year ended March 31, 2008 primarily
margin of 11.5% in the 2008 financial
in
contract
prices
2008
for
lower cash balances.
financial
our
years
Multi-Links
due
to
Finance charges and fair value movements Finance charges and fair value movements 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.
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109
Finance charges and fair value movements Year ended March 31, 2007
2008
2009
2008/2007
2009/2008
ZAR
ZAR
ZAR
% change
% change
Interest expense
1,142
1,543
1,732
35.1
12.2
Local loans
1,303
1,700
1,895
30.5
11.5
–
18
–
–
–
Finance charges capitalised
(161)
(175)
(163)
8.7
(6.9)
Foreign exchange losses and fair value movements
(285)
13
1,111
(104.6)
–
Fair value (adjustments) on derivative instruments
(344)
(80)
268
(76.7)
(435.0)
59
93
843
57.6
806.5
857
1,556
2,843
81.6
82.7
(in millions, except percentages)
Foreign loans
Foreign exchange losses Total finance charges During the year ended March 31, 2009,
option we have in place relating to Multi-
was raised on the capital gains tax base
finance charges increased primarily due to
Links. This was partially offset by fair value
cost of the 15% investment in Vodacom,
higher foreign exchange losses and fair
adjustments as a result of the significant
that are held for sale and will be utilised for
value movements incurred by Multi-Links on
weakness of the rand against international
the future capital gains tax liability of the
foreign denominated loans and creditor’s
currencies.
sale transaction. This was partially offset by
balances as a result of the devaluation of the naira and the mark to market valuation of the Multi-Links put option as well as increased interest paid as a result of higher
higher non-deductible expenditure relating
Taxation Our consolidated taxation expense from continuing operations decreased 37.3% to R1,660 million in the year ended March
debt levels and interest rates. During the
31, 2009 and decreased 5.6% to
year ended March 31, 2008, finance
R2,647 million in the year ended March
charges increased primarily due to a
31, 2008 from R2,803 million in the year
higher interest expense resulting from
ended March 31, 2007. The decrease in
higher debt levels in the fixed-line, Multi-
the 2009 financial year was primarily due
Links and other segments, and foreign
to the decrease in the STC charge as a
exchange losses and fair value movements
result of lower dividends declared as
decreased primarily due to currency
compared to the previous year and the
movements and fair value losses on the put
R454 million deferred taxation asset that
to the impairment of Multi-Links and Africa Online. The decrease in the 2008 financial year was primarily due to higher non-deductible expenses relating mostly to the impairment of Telkom Media and Africa Online assets, the increase in STC taxation credits utilised in respect of the repurchase of Telkom shares, the utilisation of the MultiLinks assessed losses and the impact of the taxation rate change on deferred taxation from 29% to 28% with effect from April 1,
Group overview
2008.
The following table sets forth information related to our effective taxation rate for the Telkom Group, Telkom Company and Vodacom for
Management review
the periods indicated: Year ended March 31, (in percentages)
2007
2008
2009
2008/2007
2009/2008
%
%
%
% change
% change
Effective tax rate Telkom Group – continuing operations
30.8
34.5
44.5
12.0
29.3
Telkom Company
24.2
24.6
8.9
1.7
(63.8)
Vodacom
36.9
34.1
39.5
(7.6)
15.8
Sustainability review
Performance review
Financial statements
Company Financial Information
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Financial review (continued)
The increase in the Telkom Group effective
in the rate of secondary taxation on
Fixed-line operating revenue
taxation rate in the 2009 financial year
companies from 12.5% to 10%.
Our fixed-line operating revenue is derived
was mainly due to higher non-deductible expenditure relating to the impairment of Multi-Links and Africa Online and Vodacom transaction costs. The increase in the Telkom Group effective taxation rate in the 2008 financial year was mainly due to higher non-deductible expenses relating mostly to the impairment of Telkom Media and Africa Online assets, the increase in STC taxation credits utilised in respect of the repurchases of Telkom shares and the impact of the taxation rate change on deferred taxation from 29% to 28% with effect from April 1, 2008.
effective taxation rate in the 2009 financial year was mainly due to the R1,280 million deferred taxation asset that was raised on the capital gains tax base cost of the 15% investment in Vodacom, that are held for sale and will be utilised for the future capital gains tax liability of the sale partially
offset
by
the
R1,843 million impairment of the MultiLinks investment, R254 million impairment of the Telkom Media loan and R85 million impairment of the Africa Online investment as well as Vodacom transaction costs. The higher effective taxation rate for Telkom Company in the year ended March 31, 2008 was primarily due to higher nondeductible
expenses
relating
to
the
R217 million impairment of the Telkom Media
loan
and
an
Minority interests in the income of subsidiaries decreased significantly to R77 million in the year ended March 31, 2009 primarily due to an increase in the Multi-Links minorities’ share in net losses. Minority interests in the income of subsidiaries decreased 3.0% to R197 million in the year ended March 31, 2008 primarily due to the purchase of the remaining equity interest of 30% in Smartphone on August 31, 2007, partially offset by an increase in profits generated by our Telkom Directory Services subsidiary and Vodacom Tanzania.
The decrease in the Telkom Company
transaction,
principally from fixed-line subscriptions and
Minority interests
increase
of
R198 million in secondary taxation on companies, partially offset by higher
holders of Telkom Profit for the year attributable to equity of
Telkom
decreased
to
R4,170 million in the 2009 financial year primarily due to decreased operating profit in our Multi-Links, fixed-line and mobile segments, partially offset by increased operating profit in our other segment. Higher finance charges were partially offset by lower taxation and higher investment income. Profit for the year attributable to equity holders of Telkom decreased to R7,975 million in the 2008 financial year primarily due to decreased operating profit in our fixed-line and other segments, partially offset by increased operating profit in our mobile segment. Higher
finance
charges
and
lower
investment income were partially offset by lower taxation. Fixed-line segment
received
other
The following is a discussion of the results
subsidiaries. Vodacom’s effective taxation
of operations from our fixed-line segment
rate increased in the 2008 financial year
before
primarily due to the disallowable expenses
transactions with the mobile and other
relating to the BEE deal and non-deductible
segments. Our fixed-line segment is our
interest expenses. Vodacom’s effective
largest segment based on revenue and
taxation rate decreased in the 2008
profit contribution.
Vodacom
and
financial year primarily due to the decrease
traffic, international outgoing traffic and international voice over internet protocol services; and interconnection, which comprise terminating and hubbing traffic. We also derive fixed-line operating revenue from our data business, which includes
data
transmission
services,
managed data networking services and internet access and related information technology services.
eliminations
calling plans as a customer retention strategy in order to defend revenues. These calling
plan
arrangements
comprise
monthly subscriptions for access line rental, value-added
services
and
free
or
discounted rates on calls. The access line rentals and value-added services revenue components of calling plan arrangements are
included
in
subscriptions
and
connections revenue. In response to the significant
growth
in
calling
plan
arrangements, the need arose to separate traffic revenue resulting from subscription based calling plans into annuity revenue and the respective traffic revenue streams. Subscription based on calling plans revenue includes traffic annuity revenue related to calling plans. Discounted and out of plan traffic relating to these calling plans is disclosed under the applicable traffic revenue streams. The following table shows operating
exempt income resulting from dividends from
and long distance traffic, fixed-to-mobile
Telkom has in recent years introduced
Profit for the year attributable to equity
holders
connections; traffic, which comprises local
of
intercompany
revenue for our fixed-line segment broken down by major revenue streams and as a percentage of total revenue for our fixedline segment and the percentage change by major revenue stream for the periods indicated.
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111
Fixed-line operating revenue Year ended March 31, 2007 (in millions, except percentages) Subscriptions and connections Traffic
ZAR
2009
2008 %
ZAR
%
ZAR
%
2008/ 2007 % change
2009/ 2008 % change
6,286
19.4
6,330
19.4
6,614
19.7
0.7
4.5
16,740
51.8
15,950
49.0
15,323
45.5
(4.7)
(3.9)
Local
4,832
14.9
4,076
12.6
3,634
10.8
(15.6)
(10.8)
Long distance
2,731
8.5
2,252
6.9
2,036
6.0
(17.5)
(9.6)
Fixed-to-mobile
(1.8)
7,646
23.6
7,557
23.2
7,420
22.0
(1.2)
International outgoing
988
3.1
986
3.0
933
2.8
(0.2)
(5.4)
Subscription based calling plans
543
1.7
1,079
3.3
1,300
3.9
98.7
20.5 18.6
Interconnection
1,639
5.1
1,757
5.4
2,084
6.2
7.2
Data
7,489
23.1
8,308
25.5
9,310
27.6
10.9
12.1
191
0.6
227
0.7
328
1.0
18.8
44.5
32,345
100.0
32,572
100.0
33,659
100.0
0.7
3.3
Sundry revenue Fixed-line operating revenue
Fixed-line operating revenue increased in
lines as a result of customer migration to
0.5% to R5,250 in the 2008 financial
the 2009 financial year primarily due to
mobile services and our residential post-
year from R5,275 in the 2007 financial
continued growth in data services, higher
paid PSTN services to enable access to
year primarily due to the decline in traffic
revenue from interconnection services and
subscription based calling plans and was
tariffs and local traffic volumes, partially
subscriptions and connections partially
positively impacted by our increase in
offset by increased subscription based
offset by a decrease in traffic revenue,
ISDN channels, ADSL services and, to a
calling
particularly local and long distance traffic
lesser extent, business post-paid PSTN
subscriptions and connections tariffs.
revenue partially offset by an increase in
lines. In addition, traffic was adversely
traffic revenue from subscription based
affected in both years by the increasing
calling plans. Fixed-line operating revenue
substitution of calls placed using mobile
increased in the 2008 financial year primarily due to continued growth in data services
and
subscription
higher based
revenue calling
from plans,
interconnection and subscriptions and connections, partially offset by a decrease in traffic revenue, particularly local and long distance traffic revenue.
services rather than our fixed-line service and dial-up traffic being substituted by our ADSL service, as well as the decrease in the number of prepaid and residential postpaid PSTN lines and increased competition in our payphones business. As a result, traffic declined 7.6% in the 2009 financial year and 8.2% in the 2008 financial year. Revenue per fixed access line increased
Fixed-line operating revenue was adversely
2.1% to R5,349 in the 2009 financial
impacted in both the 2009 and 2008
year from R5,250 in the 2008 financial
financial years due to a decrease in the
year primarily due to a 1.4% decrease in
number of residential post-paid PSTN lines
the average number of access lines
primarily as a result of customer migration
and
to mobile and higher bandwidth products
subscriptions and connection revenue
such as ADSL and lower connections, and
partially offset by lower traffic revenue.
a decrease in the number of prepaid PSTN
Revenue per fixed access line decreased
increased
interconnection
and
plans,
interconnection
and
Subscriptions and connections. Revenue from subscriptions and connections consists of revenue from connection fees, monthly rental charges, value-added voice services and the sale and rental of customer premises equipment for post-paid and
Group overview
prepaid PSTN lines, including ISDN channels
and
private
payphones.
Subscriptions and connections revenue is
Management review
principally a function of the number and mix of residential and business lines in service, the number of private payphones in service and the corresponding charges.
Sustainability review
The following table sets forth information related to our fixed-line subscription and connection revenue during the periods
Performance review
indicated. Financial statements
Company Financial Information
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Financial review (continued)
Fixed-line subscription and connection revenue Year ended March 31, 2007
2009
2008
2008/2007
2009/2008
% change
% change
Total subscriptions and connections revenue (ZAR millions, except percentages)
6,286
6,330
6,614
0.7
4.5
4,490
4,395
4,319
(2.1)
(1.7)
Total subscription access lines (thousands, except percentages)(1) Postpaid 2,971
2,893
2,769
(2.6)
(4.3)
ISDN channels
718
754
781
5.0
3.6
Prepaid PSTN
795
743
766
(6.5)
3.1
6
5
3
(16.7)
(40.0)
PSTN(2)
Private payphones Notes:
(1) Total subscription access lines comprise PSTN lines, including ISDN lines and private payphones, but excluding internal lines in service and public payphones. Each analogue PSTN line includes one access channel, each basic rate ISDN line includes two access channels and each primary rate ISDN line includes 30 access channels. (2) Excluding ISDN channels. PSTN lines are provided using copper cable, DECT and fibre.
Revenue
from
subscriptions
and
increase in the number of post-paid ISDN
Telkom has in recent years introduced
connections increased in the year ended
channels was driven by increased demand
calling plans as a customer retention
March 31, 2009 mainly due to increased
for higher bandwidth and functionality. The
strategy in order to defend revenues. These
tariffs as well as an increase in the number
increase in prepaid PSTN lines in the
calling
of ISDN lines and, to a lesser extent,
2009 financial year was primarily due to
monthly subscriptions for access line rental,
residential prepaid PSTN lines, partially
our affordable Waya Waya offering. The
value-added
offset by lower business and residential
decrease in prepaid PSTN lines in the
discounted rates on calls. The access line
post-paid PSTN lines. The average monthly
2008 financial year was primarily due to
rentals and value-added services revenue
prices for subscriptions increased by
continued migration to mobile services and
components of calling plan arrangements
11.0% on August 1, 2008. Revenue from
our residential post-paid PSTN services to
are
subscriptions and connections increased in
enable access to subscription based
connections revenue. In response to the
the year ended March 31, 2008 mainly
calling plans. In addition, we relaxed our
significant
due to increased tariffs as well as an
credit policies which led to fewer
arrangements, the need arose to separate
increase in the number of ISDN lines and,
migrations of our postpaid customers to
traffic revenue resulting from subscription
to a lesser extent, business post-paid PSTN
prepaid service in the 2008 financial year.
based calling plans into annuity revenue
lines, partially offset by lower residential post-paid PSTN lines and prepaid PSTN lines. The average monthly prices for subscriptions increased by 8.3% on August 1, 2006 and 12.0% on August 1, 2007.
Traffic. Traffic revenue consists of revenue from local, long distance, fixed-to-mobile and
international
outgoing
calls,
international voice over internet protocol services and subscription based calling
The decrease in the number of residential
plans. Traffic revenue is principally a
post-paid PSTN lines in service in both the
function of tariffs and the volume, duration
2009 and 2008 financial years was
and mix between relatively more expensive
primarily as a result of customer migration
domestic long distance, international and
to mobile and higher bandwidth products
fixed-to-mobile calls and relatively less
such as ADSL and lower connections. The
expensive local calls.
plan
arrangements services
included
in
and
comprise free
subscriptions
growth
in
calling
or
and plan
and the respective traffic revenue streams. Subscription based on calling plans revenue includes traffic annuity revenue related to calling plans. Discounted and out of plan traffic relating to these calling plans is disclosed under the applicable traffic revenue streams. Traffic includes dial-up internet traffic.
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113
The following table sets forth information related to our fixed-line traffic revenue for the periods indicated. Fixed-line traffic revenue Year ended March 31, 2007
2008
2009
2008/2007
2009/2008
% change
% change
Local traffic revenue (ZAR millions, except percentages) 4,832
4,076
3,634
(15.6)
(10.8)
Local traffic (millions of minutes, except percentages)(1) 14,764
11,317
8,822
(23.3)
(22.0)
2,731
2,252
2,036
(17.5)
(9.6)
4,224
3,870
3,631
(8.4)
(6.2)
7,646
7,557
7,420
(1.2)
(1.8)
4,103
4,169
4,126
1.6
(1.0)
988
986
933
(0.2)
(5.4)
558
635
622
13.8
(2.0)
38
43
34
13.2
(20.9)
543
1,079
1,300
98.7
20.5
1,896
2,997
3,546
58.1
18.3
16,740
15,950
15,323
(4.7)
(3.9)
29,323
26,926
24,869
(8.2)
(7.6)
456
417
385
(8.6)
(7.7)
Long distance traffic revenue (ZAR millions, except percentages) Long distance traffic (millions of minutes, except percentages)(1) Fixed-to-mobile traffic revenue (ZAR millions, except percentages) Fixed-to-mobile traffic (millions of minutes, except percentages)(1) International outgoing traffic revenue (ZAR millions, except percentages) International outgoing traffic (millions of minutes, except percentages)(1) International voice over internet protocol (millions of minutes, except percentages)(2) Subscription based calling plans revenue (ZAR millions, except percentages) Subscription based calling plans (millions of minutes, except percentages) Total traffic revenue (ZAR millions, except percentages) Total traffic (millions of minutes, except percentages)(1) Average total monthly traffic minutes per average monthly access line (minutes)(3)
Group overview
Notes:
(1) Traffic, other than international voice over internet protocol traffic, is calculated by dividing total traffic revenue by the weighted average tariff during the relevant period. Traffic includes dial-up internet traffic. (2) International voice over internet protocol traffic is based on the traffic reflected in invoices.
Management review
(3) Average monthly traffic minutes per average monthly access line are calculated by dividing the total traffic by the cumulative number of monthly access lines in the period. Sustainability review
Performance review
Financial statements
Company Financial Information
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Financial review (continued)
Traffic revenue declined in the 2009
on August 1, 2006 and August 1, 2007.
and mix of calls to destinations outside
financial year primarily due to lower traffic
On August 1, 2008, we increased the
South Africa. In the 2009 financial year,
volumes partially offset by increased
price of local peak calls after the first unit
international outgoing traffic revenue
subscription based calling plans and
by 3.2% to 39.2 SA cents per minute (VAT
declined primarily as a result of a decrease
revenue and higher average traffic tariffs.
inclusive). On August 1, 2007, the price of
in volumes mainly as a result of the
Traffic revenue declined in the 2008
local off-peak calls increased 4.1% on
increase in the number of Telkom Closer
financial year primarily due to lower
average. On August 1, 2008, the price of
subscribers, thereby decreasing the out of
average traffic tariffs and lower local traffic
local off-peak calls increased 9.2% on
bundle volumes. In the 2008 financial
volumes partially offset by increased
average.
year, international outgoing traffic revenue
subscription based calling plans and revenue, international outgoing and fixedto-mobile traffic.
Long distance traffic revenue decreased in the 2009 and 2008 financial years mainly due to a decrease in average long
declined primarily as a result of a decrease in the average international outgoing tariffs, partially offset by an increase in international outgoing traffic primarily as a
ICASA approved a 2.1% reduction in the
distance tariffs and, to a lesser extent,
overall tariffs for services in the basket
decreased long distance traffic, partially
effective August 1, 2006, 1.2% reduction
offset by increased traffic related to Telkom
in the overall tariffs for services in the
Closer packages and Worldcall. We
basket effective August 1, 2007 and a
decreased our fixed-line long distance
2.4% increase in the overall tariffs for
traffic tariffs by 10% on September 1,
August 1, 2008 the overall international
services in the basket effective August 1,
2005, a further 10% on August 1, 2006
tariffs remained unchanged, but tariffs to
2008. Traffic was adversely affected in
and a further 10% on August 1, 2007. The
certain destinations were increased whilst
both the 2009 and 2008 financial years
tariff remained unchanged on August 1,
others were decreased.
by the increasing substitution of calls
2008.
Revenue from subscription based calling
placed using mobile services rather than
Revenue from fixed-to-mobile traffic consists
plans includes revenue from Telkom’s
our fixed-line service and dial-up traffic
of revenue from calls made by our fixed-line
subscription based plans, Telkom Closer
being substituted by our ADSL service, as
customers to the three mobile networks in
and Supreme Call, which are bundled
well as the decrease in the number of
South Africa and is primarily a function of
products on post-paid PSTN lines that
prepaid and residential post-paid PSTN
fixed-to-mobile tariffs and the number, the
include discounted rates and free minutes
lines and increased competition in our
duration and the time of calls. Fixed-to-
for a fixed monthly subscription fee. In the
payphone business.
mobile traffic revenue decreased in the
2009
2009 and 2008 financial years due to
subscription based calling plans increased
higher discount offered to customers in
by 20.5% primarily due to a 27.6%
order to retain traffic, partially offset by
increase in customers subscribing to these
higher traffic related to the Telkom Closer
packages. In the 2008 financial year,
packages. The decrease in fixed-to-mobile
revenue from subscription based calling
traffic in the 2009 financial year was
plans increased by 98.7% primarily due to
primarily due to an increase in the number
a 69.4% increase in customers subscribing
of Telkom Closer customers, thereby
to these packages.
Local traffic revenue decreased in the 2009 and 2008 financial years primarily due to significantly lower traffic resulting primarily from internet call usage being substituted by our ADSL service, the substitution of calls placed using mobile services
and
discounts
to
business
customers, partially offset by increased local off-peak tariffs and traffic volumes related to Telkom Closer packages. We increased penetration of subscription based calling plans to stimulate usage in the 2009 and 2008 financial years and to
decreasing the out of bundle volumes. The increase in fixed-to-mobile traffic in the 2008 financial year was primarily due to discounts offered to larger customers on fixed-to-mobile calls.
result of the reduced tariffs. The average tariffs to all international destinations decreased by 11.1% on August 1, 2006 and by 9.0% on August 1, 2007. On
financial
year,
revenue
from
Interconnection. We generate revenue from interconnection services for traffic from calls made by other operators’ customers that terminate on or transit through our network. Revenue from interconnection services
counteract mobile substitution, which
Revenue from international outgoing traffic
includes payments from domestic mobile,
effectively lowers the cost to the customer.
consists of revenue from calls made by our
domestic fixed and international operators
On September 1, 2005, we decreased
fixed-line
international
regardless of where the traffic originates or
the price of local peak calls after the first
destinations and from international voice
terminates. The following table sets forth
unit by 5.0% to 38 SA cents per minute
over internet protocol services and is a
information
(VAT inclusive). This price was unchanged
function of tariffs and the number, duration
revenue for the years indicated.
customers
to
related
to
interconnection
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115
Interconnection revenue Year ended March 31, 2007
2008
2009
2008/2007
2009/2008
% change
% change
Interconnection revenue (ZAR millions, except percentages)
1,639
1,757
2,084
7.2
18.6
816
838
916
2.7
9.3
2,419
2,502
2,484
3.4
(0.7)
–
28
111
–
296.4
–
113
415
–
267.3
823
891
1,057
8.3
18.6
1,321
1,280
1,189
(3.1)
(7.1)
Interconnection revenue from domestic mobile operators (ZAR millions, except percentages) Domestic mobile interconnection traffic (millions of minutes, except percentages)(1) Interconnection revenue from domestic fixed-line operators (ZAR millions, except percentages) Domestic fixed-line interconnection traffic (millions of minutes, except percentages)(2) Interconnection revenue from international operators (ZAR millions, except percentages) International interconnection traffic (millions of minutes, except percentages)(2) Notes:
(1) Domestic mobile interconnection traffic, other than international outgoing mobile traffic, is calculated by dividing total domestic mobile and domestic fixedline interconnection traffic revenue, respectively, by the weighted average domestic mobile and domestic fixed-line interconnection traffic tariffs during the relevant period. International outgoing mobile traffic is based on the traffic registered through the respective exchanges and reflected in interconnection invoices. (2) International interconnection and domestic fixed-line interconnection traffic is based on the traffic registered through the respective exchanges and reflected on interconnection invoices.
Interconnection revenue from domestic
interconnection traffic increased in the year
mobile operators includes revenue for call
ended March 31, 2008 primarily due to
termination and international outgoing calls
an overall increase in mobile calls as a
from domestic mobile networks, as well as
result of a growing mobile market, partially
access
as
offset by increased mobile-to-mobile calls
emergency services and directory enquiry
bypassing our network. Interconnection
services. Interconnection revenue from
revenue from domestic mobile operators
domestic mobile operators increased in the
includes fees paid to our fixed-line business
2009 and financial year mainly due to
by Vodacom of R462 million in the year
higher average tariffs, partially offset by
ended March 31, 2009, R468 million in
lower volumes. Interconnection revenue
the year ended March 31, 2008 and
from domestic mobile operators increased
R468 million in the year ended March 31,
in the 2008 financial year mainly due to
2007. Fifty percent of these amounts were
increased traffic from domestic mobile
attributable to our interest in Vodacom and
operators, partially offset by lower average
were eliminated from the Telkom Group’s
tariffs on mobile international outgoing
revenue on consolidation.
to
other
services,
such
calls. Domestic mobile interconnection traffic decreased in the year ended March 31, 2009 primarily due to increased mobile-to-mobile
calls
bypassing
our
network and volumes lost to other international carriers. Domestic mobile
Interconnection revenue from domestic fixed-line operators includes fees paid by Neotel, underserviced area licence holders and value-added network service providers for call termination and international outgoing calls, as well as access to other
services, such as emergency services and directory inquiry services. With effect from May 23, 2007, ICASA approved interconnection rates with Neotel, underserviced area licence holders and value-added network service providers for interconnection on our fixed-line network. In October 2007, Neotel commenced interconnection with Telkom. In July 2007, Telkom began interconnection with the underserviced area licence holders and in November 2007, value added network service providers. We expect interconnection revenue to increase as a result of the entrance of Neotel and the further liberalisation of the South African telecommunications industry, which may partially mitigate declines in revenue in other areas.
Group overview
Management review
Sustainability review
Performance review
Financial statements
Interconnection revenue from international operators includes amounts paid by foreign operators for the use of our network to terminate calls made by customers of such
Company Financial Information
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Financial review (continued)
Data services revenue Year ended March 31, 2007
2008
2009
2008/2007
2009/2008
% change
% change
Data services revenue (ZAR millions, except percentages)
7,489
8,308
9,310
10.9
12.1
Leased lines and other data revenue(1)
5,828
6,460
7,452
10.8
15.4
1,661
1,848
1,858
11.3
0.5
Leased line facilities revenues from mobile operators
21,879
25,112
29,979
14.8
19.4
Internet all access subscribers (at period end)
302,593
358,066
423,196
18.3
18.2
Total ADSL subscribers (at period end)(2)
255,633
412,190
548,015
61.2
33.0
Number of managed network sites (at period end)
Notes:
(1) Leased lines and other data revenue includes all data services revenue other than leased line facilities revenue from mobile operators. (2) Excludes Telkom internal ADSL services of 1,029, 751 and 523 as of March 31, 2009, 2008 and 2007, respectively.
operators and payments from foreign
distance. The table above sets forth
amounts were attributable to our interest in
operators for interconnection hubbing
information related to revenue from data
Vodacom and were eliminated from the
traffic through our network to other foreign
services for the periods indicated.
Telkom Group’s revenue on consolidation.
Our data services revenue increased in
Sundry revenue. Sundry revenue includes
both the 2009 and 2008 financial years
revenue relating to collocation of other
primarily due to increased revenue from
licensed operators on Telkom owned
data connectivity service, including ADSL
properties, the sale of materials and
connectivity and SAIX, internet access, and
revenue related to the recovery of costs for
managed data networks, including VPN
work performed on behalf of other licensed
Supreme and increased revenue from
operators. Sundry revenue increased by
leased line facilities from mobile operators.
44.5% to R328 million in the 2009
These increases were partially offset by
financial year and 18.8% to R227 million
decreased tariffs for leased line facilities to
in
mobile operators and data connectivity
R191 million in the 2007 financial year.
services. Revenue from leased line facilities
The increase in the 2009 financial year
from mobile operators was relatively flat in
was primarily due to revenue from the FIFA
the year ended March 31, 2009. Revenue
World Cup project. The increase in the
from leased line facilities from mobile
2008 financial year was primarily due to
operators increased in the year ended
an increase in prices for collocation and
March 31, 2008 primarily due to the roll-
recoveries.
networks. Interconnection revenue from international operators increased in the year ended March 31, 2009 primarily due to the weakening of the Rand against the SDR, the notional currency in which international rates are determined, and increased switched hubbing traffic volumes due to a reduction in tariffs to stimulate competitiveness. Interconnection revenue from international operators increased in the year ended March 31, 2008 primarily due to the weakening of the rand against the SDR, the notional currency in which international rates are determined, and increased switched hubbing traffic volumes due to a reduction in tariffs to stimulate competitiveness, partially offset by lower volumes and settlement rates. Data.
Data
services
comprise
out of third generation and universal mobile data
transmission services, including leased lines and packet based services, managed data networking services and internet access and related information technology services. In addition, data services include revenue from ADSL. Revenue from data services is mainly a function of the number of subscriptions, tariffs, bandwidth and
telecommunications system products by the mobile operators.
the
2008
financial
year
from
Fixed-line operating expenses The following table shows the operating expenses of our fixed-line segment broken
Operating revenue from our data services
down
included R1,059 million, R1,028 million
percentage of total revenue and the
and R907 million in revenue received by
percentage change by operating expense
our fixed-line business from Vodacom in the
category for the years indicated.
years ended March 31, 2009, 2008 and 2007, respectively. Fifty percent of these
by
expense
category
as
a
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Fixed-line operating expenses Year ended March 31, 2007 2008 2009 % of % of % of ZAR revenue ZAR revenue ZAR revenue
(in millions, except percentages)
117
2008/ 2007 % change
2009/ 2008 % change
7,096
21.9
7,397
22.7
7,999
23.8
4.2
8.1
6,461
20.0
6,902
21.2
7,536
22.3
6.8
9.2
expenses(2)(3)
3,976
12.3
3,899
11.9
6,582
19.5
(1.9)
68.8
Service fees
2,206
6.8
2,413
7.4
2,761
8.2
9.4
14.4
762
2.4
619
1.9
613
1.8
(18.8)
(1.0)
3,582
11.1
3,732
11.5
4,358
13.0
4.2
16.8
24,083
74.5
24,962
76.6
29,849
88.7
3.6
19.6
Employee expenses(1) Payments to other network operators Selling, general and administrative
Operating leases Depreciation, amortisation, impairments and write-offs Fixed-line operating expenses Notes:
(1) Employee expenses include workforce reduction expenses of R8 million, R3 million and R24 million in the years ended March 31, 2009, 2008 and 2007, respectively. (2) In the year ended March 31, 2007 we recorded a provision of R527 million for probable liabilities related to Telkom’s arbitration with Telcordia, excluding legal fees, of which R510 million is included in selling, general and administrative expenses and R11 million for interest and R6 million for foreign exchange rate effect is included in finance charges. In the year ended March 31, 2008 we recorded a provision of R569 million for probable liabilities related to Telkom’s arbitration with Telcordia, including legal fees. The movement in the provision is due to increased interest of R53 million and foreign exchange rate effect of R52 million, which are included in finance charges, partially offset by a provisional payment made in respect of specific sub-claims within the Telcordia claim. In the year ended March 31, 2009 we recorded a provision of R664 million for probable liabilities related to Telkom’s arbitration with Telcordia, including legal fees. The movement in the provision is due to increased interest of R11 million and foreign exchange rate effect of R94 million, which are included in finance charges, partially offset by a R10 million reversal of the provision which is included in selling, general and administrative expenses. (3) Includes a R254 million and R217 million impairment relating to Telkom Media in the 2009 and 2008 financial years, respectively and R1,843 million relating to the impairment of Multi-Links, R85 million impairment relating to Africa Online in the 2009 financial year.
Fixed-line operating expenses increased in
operating expenses increased in the 2008
Employee expenses. Employee expenses
the 2009 financial year primarily due to
financial year primarily due to increased
consist mainly of salaries and wages for
increased selling, general and administrative
payments to other network operators,
employees, including bonuses and other
expenses, payments to other network
employee expenses, service fees and
incentives,
operators,
depreciation,
amortisation,
depreciation, amortisation, impairment and
reduction expenses.
impairment
and
employee
write-offs, partially offset by lower leases and
expenses and service fees. Fixed-line
selling, general and administrative expenses.
write-offs,
benefits
and
Group overview
workforce
The following table sets forth information
Management review
related to our employee expenses for the years indicated. Sustainability review
Performance review
Financial statements
Company Financial Information
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Financial review (continued)
Fixed-line employee expenses Year ended March 31, (in millions, except percentages and number of employees)
2007
2008
2009
2008/2007
2009/2008
ZAR
ZAR
ZAR
% change
% change
Salaries and wages
5,095
5,509
5,746
8.1
4.3
Benefits
2,673
2,671
2,981
(0.1)
11.6
24
3
8
(87.5)
166.7
(696)
(786)
(736)
12.9
(6.4)
7,096
7,397
7,999
4.2
8.1
25,864
24,879
23,520
(3.8)
(5.5)
Workforce reduction expenses Employee related expenses capitalised Employee expenses Number of full-time, fixed-line employees (at period end) Employee expenses increased in the year
provisions, workmen’s compensation and
employees in the 2008 financial year and
ended March 31, 2009 primarily due to a
levies payable for skills development.
13 employees in the 2007 financial year
higher provision for medical aid for
Benefits increased in the 2009 financial
left Telkom as part of the conclusion of
pensioners as a result of increased interest
year primarily due to a higher provision for
Telkom’s workforce reduction initiatives for
costs, higher salaries and wages as a result
medical aid for pensioners as a result of
the 2005 financial year.
of average annual salary increases of
increased interest costs and a higher
10.85% as well as a higher leave
provision for leave as a result of annual
provision, partially offset by a lower
salary increases and a decrease in leave
number of employees. Employee expenses
days taken. Benefits decreased in the
increased in the year ended March 31,
2008 financial year primarily due to lower
2008 primarily due to higher salaries and
team awards, a lower provision for
wages as a result of average annual salary
medical aid for pensioners as a result of the
increases of 7.0%, and increased share
annuity policy qualifying as a plan asset in
option grant expenses as a result of the
June 2006, a lower provision for leave as
higher number of shares granted in the
a result of the decrease in the number of
year, partially offset by lower team
employees and lower training expenses,
annual salary increases and increased
awards.
partially offset by increased share option
capital expenditures on projects during the
grant expenses as a result of the higher
year.
Salaries and wages increased in the year ended March 31, 2009 primarily due to
number of shares allocated during the year.
Employee related expenses capitalised include
employee
associated infrastructure
with
related
expenses
construction
development
and
projects.
Employee related expenses capitalised decreased in the year ended March 31, 2009 primarily due to an increase in the use of subcontractors. Employee related expenses capitalised increased in the year ended March 31, 2008 primarily due to
Payments to other network operators.
average annual salary increases of
Workforce reduction expenses include the
Payments to other network operators
10.85%,
cost
retirement,
include settlement payments paid to the
headcount. Salaries and wages increased
termination severance packages offered to
three South African mobile communications
in the year ended March 31, 2008
employees and the cost of social plan
network operators and commencing in the
primarily due to average annual salary
expense to prepare affected employees for
2008
increases of 7.0% and were further
new careers outside Telkom. Workforce
terminating calls on their networks and to
impacted by increased payments to
reduction expenses decreased substantially
international
contractors
partially
from
offset
original
by
lower
equipment
of
voluntary
early
financial
year,
network
Neotel, operators
for for
in the years ended March 31, 2009 and
terminating outgoing international calls and
manufacturers.
2008 due to the moratorium on voluntary
traffic transiting through their networks.
Benefits include allowances, such as
severance packages taken in the 2007
The following table sets forth information
bonuses, company contributions to medical
financial year. An additional seven
related to our payments to other network
aid, pension and retirement funds, leave
employees in the 2009 financial year, four
operators for the periods indicated.
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119
Fixed-line payments to other network operators Year ended March 31, 2007
2008
2009
2008/2007
2009/2008
ZAR
ZAR
ZAR
% change
% change
Payments to mobile communications network operators
5,425
5,460
5,432
0.6
(0.5)
Payments to international and other network operators
1,036
1,208
1,853
16.6
53.4
–
234
251
n/a
7.3
6,461
6,902
7,536
6.8
9.2
(in millions, except percentages)
Payments to fixed-line operators Payments to other network operators
Payments to fixed-line operators increased in the 2009 financial year due to higher call volumes from interconnection with Neotel and VANS. Payments to fixed-line operators in the 2008 financial year were derived from interconnection commencing with Neotel, USALS and VANS during the 2008 financial year. Payments to mobile network operators decreased in the 2009 financial year primarily due to lower call volumes from our fixed-line network to the mobile networks due to an increase in mobile-to-mobile calls. Payments to international operators increased during the 2009 financial year due to increased switch hubbing volumes and higher exchange rates. Payments to mobile and international network operators increased in the 2008 financial year primarily due to higher call volumes from our fixed-line network to the mobile networks, resulting from discounts offered on our CellSaver and Telkom Closer products, increased fixed-to-mobile calls by business customers due to growth in the mobile market, increased international outgoing traffic arising from our reduced average international tariffs, a weaker exchange rate in the 2008 financial year and payments to fixed-line operators commencing in the 2008 financial year. Payments to other network operators include payments made by our fixed-line business to Vodacom, which were R3,020 million, R3,017 million and R2,954 million in the years ended March 31, 2009, 2008 and 2007, respectively. Fifty percent of these amounts were attributable to our interest in Vodacom and were eliminated from the Telkom Group’s expenses on consolidation. Selling, general and administrative expenses. Selling, general and administrative expenses include materials and maintenance costs, marketing expenditures, bad debts, theft, losses and other expenses, including obsolete stock and cost of sales. The following table sets forth information related to our fixed-line selling, general and administrative expenses for the periods indicated. Fixed-line selling, general and administrative expenses Year ended March 31, 2007
2008
2009
2008/2007
2009/2008
ZAR
ZAR
ZAR
% change
% change
1,900
1,996
2,295
5.1
15.0
Marketing
604
583
574
(3.5)
(1.5)
Bad debts
137
217
285
58.4
31.3
Other(1)(2)
1,335
1,103
3,428
(17.4)
210.8
Selling, general and administrative expenses(1)(2)
3,976
3,899
6,582
(1.9)
68.8
(in millions, except percentages) Materials and maintenance
Notes:
(1) In the year ended March 31, 2007 we recorded a provision of R527 million for probable liabilities related to Telkom’s arbitration with Telcordia,
Group overview
Management review
Sustainability review
excluding legal fees, of which R510 million is included in selling, general and administrative expenses and R11 million for interest and R6 million for foreign exchange rate effect is included in finance charges. In the year ended March 31, 2008 we increased the provision to R569 million for probable liabilities related to Telkom’s arbitration with Telcordia, including legal fees. The movement in the provision is due to increased interest of R53 million and
Performance review
foreign exchange rate effect of R52 million, which are included in finance charges, partially offset by a provisional payment made in respect of specific sub-claims within the Telcordia claim. In the year ended March 31, 2009 we increased the provision to R664 million for probable liabilities related to Telkom’s arbitration with Telcordia, including legal fees. The movement in the provision is due to increased interest of R11 million and foreign exchange rate effect of R94 million, which are included in finance charges, partially offset by a R10 million reversal of the provision which is included in selling,
Financial statements
general and administrative expenses. (2) Includes a R254 million and R217 million impairment relating to Telkom Media in the 2009 and 2008 financial years, respectively and a R1,843 million impairment of the Multi-Links investment and an R85 million impairment of the Africa Online investment in the 2009 financial year.
Company Financial Information
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Financial review (continued)
administrative
fuel. In the 2009 financial year increased
R1,843 million impairment of the Multi-
expenses increased primarily due to the
maintenance on the submarine cables as a
Links investment, R254 million impairment
impairment of the Multi-Links investment in
result of higher exchange rates also
of the Telkom Media loan and R85 million
the 2009 financial year, increased
contributed.
impairment of the Africa Online investment
Selling,
general
and
materials and maintenance expenses and higher bad debts. Selling, general and administrative
expenses
decreased
primarily due to the provision for probable liabilities in the Telcordia dispute in the 2007 financial year, which were not increased significantly in the 2008
Marketing expenses were relatively flat in the 2009 financial year. Marketing expenses decreased in the year ended March 31, 2008 primarily due to lower sponsorships and decreased calling plan advertising during the year.
in the 2009 financial year. Other expenses decreased in the year ended March 31, 2008 primarily due to the provision for probable liabilities in the Telcordia dispute in the 2007 financial year, which were not increased significantly in the 2008 financial year, partially offset by the R217 million
financial year, and lower marketing
Bad debt increased in the year ended
impairment of the Telkom Media loan in the
expense, partially offset by the R217 million
March 31, 2009 as more debtors
2008 financial year.
impairment of the Telkom Media loan in the
defaulted on payments as a result of poor
2008 financial year – increased materials
economic conditions in South Africa driven
and maintenance expenses and higher
by higher inflation. Bad debt increased in
bad debts.
the year ended March 31, 2008 due to
Materials and maintenance expenses include stock write-offs, subcontractor payments and consumables required to maintain our network. Materials and maintenance expenses increased in the years ended March 31, 2009 and 2008
provisions for higher international bad debts in certain countries, including Nigeria, Gabon and the United Kingdom.
Service fees. Service fees include payments in respect of the management of our properties, to TFMC, a facilities and property management company, consultants and security. Consultants comprise fees paid to collection agents and to providers
Bad debt as a percentage of revenue was
of other professional services and external
1.0%, 0.7% and 0.4% in the 2009, 2008
auditors. Security refers to services to
and 2007 financial years, respectively.
safeguard the network and contracts to ensure a safe work environment, such as
primarily due to increased operating
Other expenses include obsolete stock,
maintenance projects as result of an
cost of sales, subsistence and travel and an
increase in the number of technologies
offset for bad debts recovered. Other
The following table sets forth information
employed in the network and higher fuel
expenses increased in the year ended
relating to service fee expenses for the
costs as a result of the increased price of
March 31, 2009 primarily due to the
periods indicated.
guard services.
Fixed-line service fees Year ended March 31, (in millions, except percentages)
2007
2008
2009
2008/2007
2009/2008
ZAR
ZAR
ZAR
% change
% change
Property management
1,141
1,222
1,262
7.1
3.2
Consultants, security and other
1,065
1,191
1,499
11.8
25.9
Service fees
2,206
2,413
2,761
9.4
14.4
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121
The following table sets forth information relating to depreciation, amortisation, impairments and write-offs for the periods indicate. Fixed-line depreciation, amortisation, impairments and write-offs Year ended March 31, 2007
2008
2009
2008/2007
2009/2008
ZAR
ZAR
ZAR
% change
% change
2,993
3,061
3,399
2.3
11.0
305
409
638
34.1
56.0
284
262
321
(7.7)
22.5
3,582
3,732
4,358
4.2
16.8
(in millions, except percentages) Depreciation of property, plant and equipment Amortisation of intangibles Write-offs of property, plant and equipment and intangible assets Depreciation, amortisation, impairments and write-offs
Service fees increased in the year ended
of vehicles from 9,694 at March 31, 2007
customers in South Africa. In addition to its
March 31, 2009 primarily due to
to 8,792 at March 31, 2008.
South African operations, Vodacom has
consultancy fees relating to the Vodacom sale and unbundling transaction and higher security costs to secure the copper network.
Depreciation, amortisation, impairments and write-offs. Depreciation, amortisation, impairments and write-offs increased in the
Service fees increased in the year ended
year ended March 31, 2009 primarily as
March 31, 2008 primarily as a result of
a result of higher amortisation of intangible
increased property payment costs, mainly
assets and increased depreciation due to
related to increased electricity usage,
the
electricity rates and taxes, payments to
telecommunications network equipment
consultants
and
international
to
explore
and
data
investment
processing
in
equipment.
network operators in Lesotho, Tanzania, the Democratic Republic of the Congo and Mozambique. On December 30, 2008 Vodacom acquired 100% shareholding in Gateway
Telecommunications
Plc,
Gateway Communications (Proprietary) Limited,
Gateway
Mozambique
Communications
LDA,
Gateway
Communications (Tanzania) Limited, GS
opportunities,
Depreciation, amortisation, impairments
higher security costs due to increases in
and write-offs increased in the year ended
contract prices and maintenance and
March 31, 2008 primarily as a result of
monitoring of the cable alarm system and
higher amortisation of intangible assets
legal fees related to Telcordia.
and increased depreciation due to the
The following table shows information
ongoing investment in telecommunications
related to our 50% share of Vodacom’s
network equipment and data processing
operating revenue and operating profit
equipment, partially offset by lower asset
broken down by Vodacom’s South African
write-offs.
operations and operations in other African
Mobile segment
countries and Gateway for the periods
Operating
investment
local
ongoing
investments in mobile communications
leases.
Operating
leases
include payments in respect of equipment, buildings and vehicles. Operating leases decreased by 1.0% primarily due to a 6.0% reduction in the vehicle fleet from 8,792 vehicles at March 31, 2008 to 8,266 vehicles at March 31, 2009. Operating leases decreased in the year ended March 31, 2008 primarily due to a discount received on the extension of our vehicle lease and a reduction in the number
Telecom (Proprietary) Limited and their respective subsidiaries, or Gateway which has customers in 40 countries in Africa.
Mobile encompasses all the operating
indicated. All amounts in this table and the
activities
venture
discussion of our mobile segment that
investment in Vodacom, the largest mobile
follows represent 50% of Vodacom’s results
operator
of operations unless otherwise stated and
of in
our
50%
South
joint
Africa
with
an
approximate 53% market share as of March 31, 2009 based on total estimated
are before the elimination of intercompany transactions with us.
Group overview
Management review
Sustainability review
Performance review
Financial statements
Company Financial Information
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Financial review (continued)
Mobile operating revenue and profits Year ended March 31, 2009/ 2008 % change 14.6
ZAR
%
ZAR
%
ZAR
%
2008/ 2007 % change
Operating revenue
20,573
100.0
24,089
100.0
27,594
100.0
17.1
South Africa
18,504
89.9
21,392
88.8
23,688
85.8
15.6
10.7
2,069
10.1
2,697
11.2
3,502
12.7
30.4
29.8
–
–
–
–
404
1.5
–
n/a
Operating profit(1)
5,430
100.0
6,247
100.0
6,009
100.0
15.0
(3.8)
South Africa
5,170
95.2
5,852
93.7
5,690
94.7
13.2
(2.8)
260
4.8
395
6.3
303
5.0
51.9
(23.3)
–
–
–
–
16
0.3
7,123
100.0
8,217
100.0
8,407
100.0
2007 (in millions, except percentages)
Other African countries Gateway
Other African countries Gateway EBITDA(1)(2)
2009
2008
n/a 15.4
2.3
Notes:
(1) Mobile operating profit and mobile EBITDA include our 50% share of an impairment loss of R23 million, R30 million and R112 million, in the 2007, 2008 and 2009 financial years, respectively, in respect of the assets in Mozambique due to a decrease in the fair value of the assets. R5.8 million of the impairment loss related to available-for-sale investments. (2) Mobile EBITDA comprises our 50% share of Vodacom’s EBITDA, which represents mobile net profit, before taxation, finance charges, investment income and depreciation, amortisation and impairments, but includes the profit on sale of investments and broad-based black economic empowerment expenses. We believe that EBITDA provides meaningful additional information to investors since it is widely accepted by analysts and investors as a basis for comparing a company’s underlying operating profitability with that of other companies as it is not influenced by past capital expenditures or business acquisitions, a company’s capital structure or the relevant taxation regime. This is particularly the case in a capital intensive industry such as communications. It is also a widely accepted indicator of a company’s ability to service its long-term debt and other fixed obligations and to fund its continued growth. EBITDA is not an IFRS measure. You should not construe EBITDA as an alternative to operating profit or cash flows from operating activities determined in accordance with IFRS or as a measure of liquidity. EBITDA is not defined in the same manner by all companies and may not be comparable to other similarly titled measures of other companies unless the definition is the same.
Mobile operating revenue
interconnection
other
customers from other international networks
Vodacom derives revenue from mobile
operators for the termination of calls on
and Vodacom customers who roam abroad.
services as well as other related or value-
Vodacom’s network and national roaming
added goods and services. Vodacom’s
revenue, revenue from equipment sales,
revenue is mainly in the form of airtime
including sales of handsets and accessories;
charges, primarily airtime payments from
and revenue from international services,
customers
Vodacom’s
including airtime charges for the use of
network; data products and services;
Vodacom’s network through roaming of
registered
on
revenue
from
The following table shows our 50% share of Vodacom’s revenue broken down by major revenue type and as a percentage of total operating revenue for our mobile segment and the percentage change by revenue type for the periods indicated.
Mobile operating revenue Year ended March 31,
ZAR
%
ZAR
%
ZAR
%
2008/ 2007 % change
2007 (in millions, except percentages)
2009
2008
2009/ 2008 % change
11,854
57.6
13,548
56.3
15,166
55.0
14.3
11.9
Data
1,671
8.1
2,501
10.4
3,221
11.7
49.7
28.8
Interconnection
3,918
19.0
4,443
18.4
4,899
17.7
13.4
10.3
Equipment sales
2,350
11.4
2,526
10.5
2,650
9.6
7.5
4.9
International airtime
653
3.2
918
3.8
1,043
3.8
40.6
13.6
Other sales and services
127
0.7
153
0.6
615
2.2
20.5
302.0
20,573
100.0
24,089
100.0
27,594
100.0
17.1
14.6
Airtime and access
Mobile operating revenue
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123
Vodacom’s operating revenue from South
year and R517 per month in the 2007
94.4% of all gross connections were
African operations increased in the 2009
financial year. South African prepaid ARPU
prepaid customers in the 2009 financial
financial year mainly due to an increase in
increased to R68 per month in the 2009
year. Vodacom expects the number of
customers driven by retention campaigns
financial year from R62 per month in the
prepaid mobile users to continue to grow
and loyalty programmes, the introduction
2008 financial year, a decrease from
to a greater extent than contract mobile
of more affordable products and lower
R63 per month in the 2007 financial year.
users. The increasing number of prepaid
denomination vouchers. Revenue growth in
In the 2008 and 2007 financial years,
users, who tend to have lower average
the other African operations was mainly
contract and prepaid customer ARPU were
usage, and the lower overall usage as the
due to strong customer growth driven by
also negatively impacted by the high
lower end of the market is penetrated have
the launch of new products and services,
growth in Vodacom’s hybrid contract
historically resulted in decreasing overall
aggressive sales and marketing campaigns
product, Family Top Up, which contributed
average revenue per customer. Total South
as well as enhanced network coverage.
to the migration of higher spending
African ARPU increased to R133 per month
Vodacom’s operating revenue increased in
prepaid customers, who tend to spend less
in the 2009 financial year and remained
the 2008 financial year primarily due to
than existing contract customers, to
stable at R128 per month in the 2008 and
increased airtime, data, interconnection
contracts. In the 2007 financial year,
2007 financial years. Total South African
and equipment sales revenue as a result of
Vodacom changed its definition of active
ARPU remained stable in the 2008
continued customer growth. Vodacom’s
customers to exclude calls forwarded to
financial year, despite declining South
equipment sales further increased in the
voicemail from the definition of revenue
African contract and prepaid ARPU, due to
2008 financial year due to the added
generating activity for a six-month period,
a shift in the customer mix to higher
functionality of new phones based on new
resulting in the deletion of approximately
spending
technologies.
three million customers. Prepaid ARPU was
represented 14.3% of total South African
positively impacted by this temporary rule
customers as of March 31, 2009 and
change in the 2007 financial year.
2008, respectively.
Our 50% share of Vodacom’s revenue from operations outside of South Africa increased to R3,502 million for the year ended March 31, 2009 from R2,697 million for the year ended March 31, 2008 and R2,069
million
in
the
year
ended
March 31, 2007. The increase in Vodacom’s operating revenue from other African countries in the 2009 and 2008 financial years was primarily due to substantial increases in the number of customers
in
Vodacom’s
operations,
particularly in Tanzania, the Democratic Republic of the Congo and Mozambique, and the weakening of the rand in the 2009 and 2008 financial years, which resulted in higher rand converted revenue, partially offset by lower ARPU resulting from the higher volume of lower spending prepaid customers. Revenue from Vodacom’s other African countries as a percentage of
Vodacom
subsequently
changed
its
definition of revenue generating activity back to include calls forwarded to voicemail effective September 1, 2006. Such SIM cards were disconnected from the network after being inactive for a 215 consecutive day period. Since implementing this change, prepaid SIM cards remaining in an active state on the network, with only call forwarding to voicemail and no other revenue generating activities, increased significantly. Vodacom therefore implemented a supplementary disconnection rule in September 2007 to disconnect inactive prepaid SIM cards after 13 months of being kept in an active state, by call forwarding to voicemail only, and not having had any other revenue generating activity on Vodacom’s network.
contract
customers,
which
Service providers in South Africa generally subsidise handsets when a contract customer enters into a new contract or renews an existing contract depending on the airtime and tariff plan and type of handset purchased. Subsidised handset sales give customers an incentive to switch operators to obtain new handsets and have contributed to churn. Handsets for prepaid customers are not subsidised by Vodacom as these users have the freedom of switching operators and contribute to churn than other mobile communications providers in South Africa since it has the Africa. To date, mobile number portability has had no significant impact on churn. The cost to acquire contract customers in a highly developed market is high. Vodacom
of an additional 2.9 million prepaid SIM
has therefore implemented upgrade and
cards in September 2007, which resulted
retention policies over the last few years
in higher prepaid ARPU than would have
and has striven to maintain a high level of
otherwise occurred. Approximately 85.3%
incentives to service providers in order to
South African contract ARPU decreased to
of Vodacom’s South African mobile
reduce churn. Vodacom’s churn rate for
R474 per month in the 2009 financial year
customers were prepaid customers at
contract
from R486 per month in the 2008 financial
March 31, 2009 and approximately
increased to 9.9% in the 2009 financial
March 31, 2009 from 11.2% in the year ended March 31, 2008 and 10.1% in the year ended March 31, 2007.
Sustainability review
largest number of customers in South
disconnection rule led to the disconnection
increased to 12.7% in the year ended
Management review
churn. Vodacom is more vulnerable to
The implementation of the supplementary
Vodacom’s total mobile operating revenue
Group overview
customers
in
South
Africa
Performance review
Financial statements
Company Financial Information
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Financial review (continued)
year from 8.3% in the 2008 financial year
Vodacom’s primary market in South Africa
GPRS, 3G and HSDPA, the volume of data
mainly due to an increase in involuntary
continues
Vodacom
transferred increased to 3,175 Terabytes,
churn driven by the economic conditions.
continues to connect more marginal
a 97.8% increase from the 2008 financial
Vodacom’s
contract
customers in its South African operations,
year.
customers decreased in the 2008 financial
Vodacom expects that growth in airtime in
year to 8.3% from 9.7% in the 2007
South Africa will continue to slow. Total
financial
churn
year
rate
mainly
for
due
to
to
mature
and
an
customers increased 16.5% and 12.7% in
improvement in service and products to
the years ended March 31, 2009 and
customers and the continued high level of
2008, respectively, primarily due to strong
handset support to retain customers.
prepaid customer growth in South Africa
Prepaid churn is adversely impeded by an
and
increasingly competitive market, lower
Vodacom’s operations outside of South
barriers to entry for prepaid customers in
Africa, particularly in Tanzania, the
South Africa and the volatile nature of the
Democratic Republic of Congo and
prepaid customer base. Vodacom’s churn
Mozambique in the 2009 and 2008
rate for prepaid customers in South Africa
financial years.
decreased to 45.4% in the 2009 financial year from 47.9% in the 2008 financial year mainly due to focused campaigns to offer greater value to customers to reduce churn coupled with the marketing of SIM swaps and various loyalty programmes. Vodacom’s
churn
rate
for
prepaid
customers in South Africa increased to 47.9% in the 2008 financial year from 37.5% in the 2007 financial year. The increase in prepaid churn in the 2008 financial year was mainly due to the supplementary implemented,
disconnection which
led
to
rule the
disconnection of an additional 2.9 million prepaid SIM cards in September 2007.
significant
customer
growth
in
Vodacom
generates
interconnection revenue when a call originating from our fixed-line network and more recently, Neotel, or one of the other mobile operators’ networks terminates on Vodacom’s
network.
Interconnection
revenue also includes revenue from Cell C for national roaming services. Vodacom does not have a roaming agreement with MTN.
Vodacom
generates
national
roaming revenue when its mobile network carries a call made from a Cell C customer.
Data revenue. Vodacom derives data
Interconnection revenue depends on the
revenue from mobile data, including short
volume of traffic terminating on Vodacom’s
messaging
and
network, the interconnection termination
multimedia messaging services, or MMSs,
services,
or
SMSs,
rates payable by ourselves and the other
general packet radio services, or GPRS,
mobile operators to Vodacom and national
and third generation services, or 3G. Data
roaming rates.
revenue contributed 11.7% of Vodacom’s total revenue in the year ended March 31, 2009, up from 10.4% in the year ended March 31, 2008 and 8.1% in the year ended March 31, 2007. Vodacom’s mobile data revenue increased in the year ended March 31, 2009 primarily due to growth in the number of messages sent as well as an increase in the number of broadband customers. Vodacom’s mobile
Airtime. Vodacom derives airtime revenue
data revenue increased in the year ended
from connection and monthly rental fees
March 31, 2008 primarily due to higher
and airtime usage fees paid by Vodacom’s
penetration levels influenced by more
contract customers for use of its mobile
affordable product offerings.
networks. Airtime revenue also includes
Interconnection.
Vodacom’s
interconnection
revenue
increased in the years ended March 31, 2009 and March 31, 2008 primarily due to an increase in the number of calls terminating on Vodacom’s network as a result
of
the
increased
number
of
Vodacom’s customers and South African mobile users generally. The increase in the 2009 financial year was mainly driven by an increase in incoming traffic as well as an increase in national roaming revenue from Cell C as a result of their increased market
share
and
increased
calls
terminating on Vodacom’s network. The
In South Africa, Vodacom transmitted
growth in the 2008 financial year was
5.4 billion SMSs and MMSs over its
also attributable to the growth in the
network in the 2009 financial year,
substitution of fixed-line calls by mobile
compared to 5.0 billion in the 2008
calls and incoming traffic resulting from an
financial year. The number of broadband
overall increase in the customer base of
connectivity customers increased by 79.8%
other mobile operators. The increases were
to approximately 720,000 customers from
partially offset by a reduced number of
approximately 400,000 customers as of
fixed-line calls from Telkom’s network
March 31, 2008. The number of
terminating
Vodacom’s airtime revenue increased in the
3G/HSDPA handsets on the network as of
Interconnection revenue in our mobile
years ended March 31, 2009 and March
March 31, 2009 was 2.8 million, as
segment
31, 2008 primarily due to continued
compared to 1.3 million as of March 31,
R1,482 million and R1,454 million in the
customer growth and an increase in
2008. During the 2009 financial year
years ended March 31, 2009, 2008 and
outgoing
there was an increase in the usage of
2007, respectively, for calls received from
fees paid by Vodacom’s prepaid phone customers for prepaid starter phone packages and airtime recharge vouchers utilised, which entitle customers to receive unlimited incoming calls up to 365 days. Airtime revenue depends on the total number of customers, traffic volume, mix of prepaid and contract customers and tariffs.
voice
traffic
minutes.
As
on
Vodacom’s
included
R1,483
network. million,
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125
our fixed-line business, which were
enabled phones, camera phones and
the acquisition of Gateway. Vodacom’s
eliminated from the Telkom Group’s
colour screens.
other sales and services revenue increased
revenue on consolidation.
20.5% to R153 million in the 2008
International airtime. International airtime
financial year primarily due to an increase
Equipment sales. Vodacom generates
revenues
revenue from equipment sales primarily
international calls by Vodacom customers,
from the sale of mobile phones and
roaming
accessories. Vodacom purchases handsets
customers making and receiving calls while
for itself and for external service providers
abroad and revenue from international
in bulk at purchase discounts in order to
customers
lower the cost of handset subsidisation for
networks. International airtime increased
The following is a discussion of our mobile
contract
customers.
Equipment
sales
are
predominantly
revenue
from
roaming
on
from
in inactivated starter packs which do not contain an expiration date, but which are
Vodacom’s
recognised as income after a period of 36 months. Mobile operating expenses
Vodacom’s
13.6% to R1,043 million in the year ended
segment’s operating expenses which
revenue fluctuates based on whether
March
to
comprise our 50% share in Vodacom’s
external providers and Vodacom’s other
R918 million in the year ended March 31,
operating expenses. Vodacom’s operating
African operators source equipment from
2008 primarily as a result of growth in the
expense line items are presented in
Vodacom in South Africa or purchase
customer base.
accordance with the line items reflected in
equipment from third party suppliers.
31,
2009
and
40.6%
the Telkom Group’s consolidated operating
Other. Revenue from other sales and
expenses which are different from the
Vodacom’s equipment sales increased in
services includes revenue from Vodacom’s
the 2009 and 2008 financial years
cell captive insurance vehicle, wireless
primarily due to the growth of Vodacom’s
application services provider, or WASP,
customer base and the continued uptake of
revenue, site sharing rental income as well
The following table shows our 50% share
new handsets in South Africa as a result of
as other revenue from non-core operations.
of Vodacom’s operating expenses and the
cheaper rand prices of new handsets and
Vodacom’s other sales and services
percentage
the added functionality of new phones
revenue increased 302.0% to R615 million
indicated.
based on new technologies such as 3G
in the 2009 financial year primarily due to
operating expense line items contained in Vodacom’s consolidated financial statements.
change
for
the
periods
Mobile operating expenses Year ended March 31, 2007
2008
2009
2008/2007
2009/2008
ZAR
ZAR
ZAR
% change
% change
Employee expenses
1,186
1,488
1,804
25.5
21.2
Payments to other network operators
2,818
3,279
3,822
16.4
16.6
Selling, general and administrative expenses
8,777
10,271
12,553
17.0
22.2
(in millions, except percentages)
Service fees Operating leases Depreciation, amortisation and impairments Mobile operating expenses
82
115
169
40.2
47.0
629
775
958
23.2
23.6
1,693
1,970
2,398
16.4
21.7
15,185
17,898
21,704
17.9
21.3
Group overview
Management review
Sustainability review
Performance review
Financial statements
Company Financial Information
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Financial review (continued)
The increase in mobile operating expenses
Vodacom’s employee expenses increased
payments to other network operators
in the 2009 financial year was mainly due
in the year ended March 31, 2008
increased significantly in the years ended
to the increased cost of connecting prepaid
primarily as a result of a 9.5% increase in
March 31, 2009 and 2008 as a result of
customers and retaining contract customers,
headcount to support the expansion of
increased outgoing traffic in line with
as well as increased network operational
customer care operations, the strengthening
increased customer growth and the
expenditure due to the roll-out of additional
of senior management structures to support
increasing percentage of outgoing traffic
sites,
inter-
the growth in ongoing operations and the
terminating on the other mobile networks
connection rates in the DRC. The increase in
launch of Vodacom Business. Annual salary
rather than Telkom’s fixed-line network as
mobile operating expenses in the 2008
increases and increased provisions for
the cost of terminating calls on other mobile
financial year was primarily due to
other employee incentive schemes also
networks is higher than calls terminating on
inflationary factors and growth in the
contributed to the increase in staff
Telkom’s fixed-line network. As the mobile
business, which led to increased selling,
expenses.
communications market continues to grow
coupled
with
increased
general and administrative expenses to support the expansion of 3G, growth in Vodacom’s South African and African operations and increased competition, increased payments to other network operators due to higher outgoing traffic and the increased percentage of outgoing traffic terminating on other mobile networks, higher employee costs as a result of increased headcount as well as increased depreciation, amortisation and impairment.
Total headcount in Vodacom’s South African operations increased 12.4% to 5,451 employees as of March 31, 2009 and 2.6% to 4,849 employees as of
in South Africa, Vodacom expects that interconnection charges will continue to increase and adversely impact Vodacom’s profit margins.
March 31, 2008 from 4,727 employees
Payments to other network operators in our
as of March 31, 2007. Total headcount in
mobile segment included R231 million,
Vodacom’s
countries
R234 million and R234 million in the years
increased 17.3% to 2,336 employees as
other
African
ended March 31, 2009, 2008 and
of March 31, 2009 and 30.9% to 1,992
2007, respectively, for interconnection fees
employees as of March 31, 2008 from
paid to our fixed-line segment, which were
1,522 employees as of March 31, 2007.
eliminated from the Telkom Group’s
Employee expenses. Employee expenses
Total
operating expenses on consolidation.
consist mainly of salaries and wages of
agency employees. Employees seconded
employees as well as contributions to
to other African countries are included in
employee pension, medical aid funds and
the number of employees of other African
benefits and the deferred bonus incentive
countries and excluded from Vodacom
scheme.
South Africa’s number of employees.
Vodacom’s employee expenses increased
Payments to other network operators.
fees, bad debts and various other general
in the year ended March 31, 2009
Payments to other network operators consist
administrative
primarily as a result of the increase in the
mainly of interconnection payments made
accommodation, information technology
average number of employees and annual
by Vodacom’s South African and other
costs, office administration, consultant
salary increases, partially offset by lower
African operations for terminating calls on
expenses, social economic investment and
performance
other operators’ networks. Vodacom’s
insurance.
based
remuneration.
headcount
includes
temporary
Selling,
general
expenses.
and
Selling,
administrative general
and
administrative expenses include customer acquisition and retention costs, packaging, distribution, marketing, regulatory licence expenses,
including
The following table sets forth information related to our 50% share of Vodacom’s selling, general and administrative expenses for the periods indicated. Mobile selling, general and administrative expenses Year ended March 31, 2007
2008
2009
2008/2007
2009/2008
ZAR
ZAR
ZAR
% change
% change
7,703
9,063
11,105
17.7
22.5
Marketing
573
632
762
10.3
20.6
Regulatory and licence fees
490
527
607
7.6
15.2
11
49
79
345.5
61.2
8,777
10,271
12,553
17.0
22.2
(in millions, except percentages) Selling, distribution and other
Bad debts Selling, general and administrative expenses
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127
connections,
accommodation, office equipment and
administrative expenses increased in the
competition, revenue, cost of equipment as
motor vehicles. Operating leases in our
year ended March 31, 2009 primarily
a result of increased handset sales and
mobile segment included R529 million,
due to an increase in selling, distribution
maintenance of the GSM infrastructure and
R514 million and R453 million in the years
and
billing systems as well as due to the
ended March 31, 2009, 2008 and
Vodafone global alliance fee.
2007, respectively, for operating lease
Vodacom’s
other
selling,
expenses
general
and
and
marketing
expenses to support the launch and expansion of 3G, growth in Vodacom’s South African and African operations and competition. Vodacom’s selling, general
increased
customer
The increase in marketing expenses in the 2009 financial year was mainly as a result of promotion campaigns to counter
payments to our fixed-line segment, which were eliminated from the Telkom Group’s operating expenses on consolidation.
and administrative expenses increased in
competition. The increase in marketing
Depreciation,
the year ended March 31, 2008 primarily
expenses in the 2008 financial year was
impairments. Depreciation, amortisation
due to an increase in selling, distribution
mainly due to promoting new technologies,
and impairments increased in the years
and other expenses, incentive costs,
including 3G and Vodafone live! and
ended March 31, 2009 and 2008
regulatory and licence fees and marketing
further promoting the Vodacom brand in all
primarily due to higher capital expenditure
expenses to support the launch and
operations. The increases in regulatory and
as a result of the implementation and
expansion of 3G, growth in Vodacom’s
licence fees during the reporting periods
expansion of 3G/HSDPA networks, the
South African and African operations and
were directly related to the increase in
weakening of the rand against the other
increased competition.
operating revenues and corresponding
Selling, distribution and other expenses include cost of goods sold, commissions, customer
acquisition
and
expenses,
distribution
expenses
insurance.
The
increase
retention in
and
selling,
payments
under
2008 financial year resulted from a clean-
of
assets
in
Multi-Links operating revenue
consultancy
Service
services
fees for
include technical,
Vodacom
Mozambique.
increase in shareholding to 100%.
2009 financial year was primarily due to
expenditure as a result of the roll-out of
impairment
Multi-Links segment
fees.
and
functional currencies of Vodacom and the
up of Smartphone debtors following the
Service
competition and network operational
existing
licences. The increase in bad debts in the
distribution and other expenses in the increased fuel and electricity costs,
Vodacom’s
amortisation
Multi-Links operating revenue is derived principally from fixed, mobile, data, long
administrative and managerial services,
distance and international communications
audit fees, legal fees and communication
services throughout Nigeria, through our
and information technology costs.
wholly owned subsidiary, Multi-Links.
additional sites. The increase in selling,
Operating
leases
The following table shows the operating
distribution and other expenses in the
include payments in respect of rentals of
revenue for our Multi-Links segment for the
2008 financial year was primarily due to
GSM transmission lines as well as office
periods indicated.
leases.
Operating
Multi-Links operating revenue
Management review
Year ended March 31, (in millions, except percentages) Multi-Links operating revenue
2007
2008
2009
2008/2007
2009/2008
ZAR
ZAR
ZAR
% change
% change
–
845
1,900
–
124.9
The increase in Multi-Links revenue is
which was acquired with effect from May
mainly as a result of subscriber growth and
1, 2007, contributed R845 million in the
an increase in domestic traffic volumes as
2008 financial year from its customers in
well as increased data revenue. Multi-Links,
the Nigerian market since its acquisition.
Group overview
Multi-Links operating expenses The following table shows operating expenses for our Multi-Links segment broken down by major expense categories and the percentage change for the periods indicated.
Sustainability review
Performance review
Financial statements
Company Financial Information
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Financial review (continued)
Multi-Links operating expenses Year ended March 31, (in millions, except percentages)
2007
2008
2009
2008/2007
2009/2008
ZAR
ZAR
ZAR
% change
% change 223.1
Employee expenses
–
39
126
–
Payments to other operators
–
624
652
–
4.5
Selling, general and administrative expenses
–
142
1,117
–
686.6
Service fees
–
14
38
–
171.4
Operating leases
–
37
193
–
421.6
Depreciation, amortisation and impairments
–
86
296
–
244.2
Other operating expenses
–
942
2,422
–
157.1
Employee expenses increased by 223.1% in
The increases in service fees were mainly
Other segment
the 2009 financial year primarily due to an
as a result of increased security cost and
Other operating revenue
increase in the number of employees as well
payments to consultants as a result of an
Our other operating revenue is derived
as salary increases and bonus payments.
increase in operations during the year.
principally from directory services, through
The 686.6% increase in selling, general
Operating leases increased 421.6% as a
and administrative expenditure in the
result of an increase in the number of
2009 financial year primarily related to
leased base stations, warehouses and
increased cost of sales and associated handset subsidies of R281 million as a result
of
increased
sales
volumes,
office buildings as a result of the
our Trudon Group, internet services outside South Africa, through our Africa Online subsidiary. The following table shows the operating revenue for our other segment broken
expanding operations.
down by major revenue streams and the
increased advertising and promotional
Depreciation, amortisation and impairments
percentage change by major revenue
expenditure and an increase in expatriates
increased 244.2% as a result of higher
stream for the periods indicated.
fees as a result of an increase in staff
capital expenditure incurred during the
seconded from Telkom during the year.
year.
Other operating revenue Year ended March 31, (in millions, except percentages) Trudon Africa Online Other operating revenue
2007
2008
2009
2008/2007
2009/2008
ZAR
ZAR
ZAR
% change
% change
865
930
1,020
7.5
9.7
8
110
194
n/a
76.4
873
1,040
1,214
19.1
16.7
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129
The increase in other operating revenue
These additional revenue streams were
Other operating expenses
was mainly attributable to UUNET, Africa
further supported by the continued growth
The following table shows operating
Online’s 40% joint venture. Our other
in advertising revenue from our subsidiary,
expenses for our other segment broken
operating revenue increased in the 2008
Trudon. Revenue from directory services
down by major expense categories and
financial year primarily due the inclusion in
increased in the years ended March 31,
the percentage change for the periods
the current year of revenue generated by
2009 and 2008 primarily due to annual
indicated.
our newly acquired subsidiary, Africa
tariff increases and increased marketing
Online. Africa Online, which was acquired
and online efforts, resulting in increased
with effect from February 23, 2007,
spending on advertising by existing
increased the revenue contribution to the
customers and additional advertising
group from R8 million during the 2007
revenue from new customers.
financial year to R110 million during the 2008 financial year. Other operating expenses Year ended March 31, 2007
2008
2009
2008/2007
2009/2008
ZAR
ZAR
ZAR
% change
% change
158
193
220
22.2
14.0
–
53
89
–
67.9
310
335
404
8.1
20.6
5
12
12
140.0
–
Operating leases
20
23
26
15.0
13.0
Depreciation, amortisation and impairments
19
32
50
68.4
56.3
512
648
801
26.6
23.6
(in millions, except percentages) Employee expense Payments to other operators Selling, general and administrative expenses Service fees
Other operating expenses
Increases in other operating expenses in
driven by increases in payments to other
Online, which impacted all expense
the 2009 financial year were primarily
operators, employee expenses, depre-
categories.
driven by increases in selling, general and
ciation, amortisation and impairments,
administrative expenses, payments to other
operating leases and service fees. The
operators,
and
increase in these operating expenses in the
depreciation, amortisation and impairments.
2008 financial year was primarily due to
Increases in other operating expenses in
the inclusion of operating expenses relating
the 2008 financial year were primarily
to our newly acquired subsidiary, Africa
employee
expenses
The following table shows the contributions to other operating expenses by each of the two subsidiaries contained in our other segment and the percentage change for
Management review
the periods indicated.
Other operating expenses
Sustainability review
Year ended March 31, (in millions, except percentages) Trudon Africa Online Other operating expenses
Group overview
2007
2008
2009
2008/2007
2009/2008
ZAR
ZAR
ZAR
% change
% change
504
530
593
5.2
11.9
8
118
208
1,375.0
76.3
512
648
801
210.7
23.6
Performance review
Financial statements
Company Financial Information
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Financial review (continued)
Liquidity and capital resources Group liquidity and capital resources Cash flows The following table shows information regarding our consolidated cash flows for the periods indicated. Year ended March 31, (in millions, except percentages)
2007
2008
2009
2008/2007
2009/2008
ZAR
ZAR
ZAR
% change
% change
9,356
10,603
11,432
13.3
7.8
Cash flows from investing activities
(10,412)
(14,106)
(17,005)
35.5
20.6
Cash flows from financing activities
(2,920)
2,943
7,093
200.8
141.0
(3,976)
(560)
1,520
85.9
371.4
29
44
(30)
51.7
(168.2)
4,255
308
(208)
(92.8)
(167.5)
308
(208)
1,282
(167.5)
716.3
Cash flows from operating activities
Net (decrease)/increase in cash and cash equivalents Effect of foreign exchange rate differences Net cash and cash equivalents at the beginning of the year Net cash and cash equivalents at the end of the year Cash flows from operating activities
our 50% share of Vodacom’s investments in
In the 2009 financial year, loans raised
Our primary sources of liquidity are cash
its mobile networks in South Africa and
exceeded loans repaid and the increase in
flows
and
other African countries. The increase in
net financial assets. In the 2009 financial
borrowings. We intend to fund our
cash flows used in investing activities in the
year, cash flows from financing activities
expenses, indebtedness and working
2009 financial year was as a result of the
were primarily due to the issuance of
capital requirements from cash generated
increased capital expenditure of Multi-Links
R11,025
from our operations and from capital raised
as well as the acquisition of Gateway by
in the markets. The increase in cash flows
Vodacom and the acquisition of the
from operating activities in the 2009
remaining 25% share in Multi-Links. The
financial year is mainly due to a lower
increase in cash flows used in investing
dividend payment in respect of the 2008
activities in the 2008 financial year was
financial year and lower taxation paid,
mainly the result of R1,985 million cash
This was partially offset by the repayment of
partially offset by higher finance charges
utilised for the purchase of Multi-Links and
a term loan of R1,000 million, a bank
and a decrease in cash generated from
increased equity investments in Smartphone,
facility of R1,000 million, bridging finance
operations. The increase in cash flows from
increased capital expenditures in our fixed-
of R1,600 million and maturing commercial
operating activities in the 2008 financial
line, mobile and other segments and lower
paper bills of R9,849 million nominal value.
year is mainly due to lower taxation
proceeds on the disposal of investments,
payments as well as an increase in cash
partially offset by higher proceeds on the
generated from operations, partially offset
disposal of property, plant and equipment
by higher dividends paid.
and intangibles.
Cash flows from investing activities
Cash flows from financing activities
obligation repaid. In the 2008 financial
Cash flows from investing activities relate
Cash flows from financing activities are
year, cash flows from financing activities
primarily to investments in our fixed-line
primarily a function of borrowing and share
were primarily due to the issuance of
network, our other segment’s networks and
buy-back activities.
R18,806
from
operating
activities
million
nominal
value
of
commercial paper bills, the issue of the new local bonds, the TL12 and TL15 with a nominal value of R1,060 million and R1,160 million, respectively, as well as entering into a syndicated loan agreement with a nominal value of R4,100 million.
In the 2008 financial year, loans raised and the decrease in net financial assets exceeded loans repaid, shares bought back and cancelled and finance lease
million
nominal
value
of
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131
commercial paper bills, as well as entering
R3,731 million in nominal value of
by the TL12 and TL15 bonds after the year
into call and term loans of R5,600 million
commercial paper bill debt. Commercial
end, a reduction in cash available due to
to fund the redemption of the TK01 bond
paper bills having a nominal value of
acquisition activities, increased capital
and other cash flows from investing
R4,651 million were issued in the 2007
expenditure, increased dividends paid,
activities,
financial year.
shares repurchased and an increase in trade
including
R1.6
billion
of
additional bank borrowings and interest bearing debt by Vodacom. This was partially offset by the maturing commercial paper debt of R15,773 million nominal value, the repayment of the TK01 bond with a nominal value of R4,680 million and
R1,647
million
paid
for
the
repurchase of shares during the year.
and other payables. Telkom is of the opinion
Working capital We had negative consolidated working capital from continuing operations of approximately R6.2 billion as of March 31, 2009, we had negative consolidated working capital from total operations of approximately R9.3 billion as of March 31, 2008 and approximately R8.2 billion as of
that the Telkom Group’s cash flows from operations, together with proceeds from the Vodacom transaction and the proceeds from liquidity available under credit facilities and in the capital markets, will be sufficient to meet the Telkom Group’s present working capital requirements for the 12 months following the date of this annual report. We
In the 2007 financial year, loans and finance
March 31, 2007. Negative working
leases repaid and shares repurchased and
capital arises when current liabilities are
cancelled exceeded loans raised and the
greater than current assets. The increase in
decrease in net financial assets, by
the Company’s negative working capital in
R2,920 million. In the 2007 financial year
the 2009 financial year was mainly as a
cash flows used in financing activities
result of an increase in interest bearing debt
increased primarily due to the lower sale of
payable, partially offset by higher financial
repurchase agreements and derivative
assets in the form of repurchase agreements.
Capital expenditures and investments
instruments that were sold in the 2006
The increase in negative working capital in
The following table shows the Telkom
financial year to fund dividends and tax
the 2008 financial year was primarily due
Group’s investments in property, plant and
payments. On October 31, 2006, we
to an increase in the current portion of
equipment including intangible assets,
repaid the TL06 local bond having a nominal
interest bearing debt due to the repayment
including our 50% share of Vodacom’s
value of R2,100 million and during the
of the TK01 local bond with short-term debt
investments, for the periods indicated.
2007
that was subsequently partially refinanced
financial
year,
we
repaid
intend to fund current liabilities through a combination of operating cash flows and with new borrowings and borrowings available under existing credit facilities. We had R6.2 billion available under existing credit facilities as of March 31, 2009.
Year ended March 31, 2007
2008
2009
2008/2007
2009/2008
ZAR
ZAR
ZAR
% change
% change
Fixed-line
6,594
6,794
6,690
3.0
(1.5)
Baseline
3,409
4,039
3,343
18.5
(17.2)
159
57
30
(64.2)
(47.4)
Network evolution
784
1,092
1,373
39.3
25.7
Sustainment
416
277
115
(33.4)
(58.5) (28.3)
(in millions, except percentages)
Group overview
Group capital expenditure
Revenue generating
1,141
841
603
(26.3)
Company support
497
451
790
(9.3)
75.2
Regulatory
188
37
436
(80.3)
1,078.4
3,608
3,460
3,569
(4.1)
3.2
–
1,312
2,791
–
112.7
44
334
184
659.1
(44.9)
10,246
11,900
13,234
16.1
11.2
Effectiveness and efficiencies
Mobile Multi-Links Other
Management review
Sustainability review
Performance review
Financial statements
Total investment in property, plant and equipment and intangible assets
Company Financial Information
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Financial review (continued)
Fixed-line capital expenditure, which
in the 2007 financial year and represented
geographic
includes spending on intangible assets,
20.9% of fixed-line revenue compared to
capacity for both the voice and data
decreased by 1.5% to R6,690 million and
20.4% in the 2007 financial year. The
networks. Mobile capital expenditure (50%
represents 19.9% of fixed-line revenue.
increase
of
Baseline
generating
capital
expenditure
of
in
baseline capital
and
revenue
expenditure
to
coverage
Vodacom’s
and
capital
increase
expenditure)
decreased by 4.1% to R3,460 million
R3,343 million in the 2009 financial year
R4,095 million in the 2008 financial year
in
was largely for the deployment of
from R3,568 million in the 2007 financial
R3,608 million in the 2007 financial year
technologies to support the growing data
year was largely for the deployment of
and represents 14.4% of mobile revenue
services business (including ADSL footprint),
technologies to support the growing data
compared to 17.5% in the 2007 financial
links to the mobile cellular operators and
services business (including ADSL footprint),
year which was mainly spent on the
expenditure for access line deployment in
links to the mobile cellular operators and
cellular network infrastructure consisting of
selected high growth commercial and
expenditure for access line deployment in
radio, switching and transmission network
residential areas. The continued focus on
selected high growth residential areas.
infrastructure and computer software. The
rehabilitating the access network and increasing
the
efficiencies
and
redundancies in the transport network as well as the initiation of the fixed-wireless roll-out contributed to the network evolution and sustainment capital expenditure of R1,488 million.
During the year ended March 31, 2008, R841
million
was
spent
on
the
implementation of systems compared to R1,141 million in the 2007 financial year. Mobile capital expenditure (50% of Vodacom’s capital expenditure) increased
the
2008
financial
year
from
decrease in capital expenditure in other African countries was largely as a result of decreased
investment
in
Tanzania,
Democratic Republic of the Congo and Mozambique offset by an increase in investment in Lesotho.
by 3.2% to R3,569 million in the 2009
Our consolidated capital expenditure in
Telkom continues to focus on its operations
financial year from R3,460 million in the
property, plant and equipment for the
support system investment with current
2008 financial year and represents 12.9%
2010 financial year budgeted to be
emphasis on workforce management,
of mobile revenue compared to 14.4% in
approximately R7.9 billion, of which
provisioning and fulfilment, assurance and
the 2008 financial year which was mainly
approximately R7.0 billion is budgeted to
customer care, hardware technology
spent on the continued investment to
be spent in our fixed-line segment,
upgrades on the billing platform and
improve
and
approximately R847 million is budgeted to
performance and service management and
increase capacity for both the voice and
be spent in our Multi-Links segment, and
property optimisation. During the year
data networks in South Africa and to
approximately R90 million is budgeted to
ended March 31, 2009, R603 million
expand
be spent in our other segment. Our capital
was spent on the implementation of several
Mozambique.
systems.
geographic
coverage
in
coverage
Tanzania
and
Mobile capital expenditure, which includes
Fixed-line capital expenditure, which
spending on intangible assets, increased
includes spending on intangible assets,
by 3.2% to R3,569 million and represents
increased 3.0% to R6,794 million in the
12.9% of mobile revenue and was due to
2008 financial year from R6,594 million
the continued investment to improve
expenditures are continuously examined and evaluated against the perceived economic benefit and may be revised in light of changing business conditions, regulatory
requirements,
investment
opportunities and other business factors.
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133
The following table sets forth our consolidated indebtedness including finance leases as of March 31, 2009
Interest payment dates (in millions)
Interest rate/ coupon (%)
Outstanding as of March 31, 2009 ZAR
Nominal amount out standing as of March 31, 2009 ZAR
2010 ZAR
2011 ZAR
2012 ZAR
2013 ZAR
2014 ZAR
After 2014 ZAR
12.45
1,059
1,060
–
–
–
1,060
–
–
11.9
1,159
1,160
–
–
–
–
–
1,160
6
1,325
2,500
–
–
–
–
–
2,500
–
349
430
–
430
–
–
–
–
– 11.44
1,131 5,476
1,350 5,559
– 5,559
1,350 –
–
– –
– –
– –
11.46 9.67
4,083 2,000
4,100 2,000
– 2,000
– –
820 –
– –
3,280 –
– –
Mutually agreed
Not utilised
Not utilised
–
–
–
–
–
–
Mutually agreed
Not utilised
Not utilised
–
–
–
–
–
–
Mutually agreed
Not utilised
Not utilised
–
–
–
–
–
–
Mutually agreed
Not utilised
Not utilised
–
–
–
–
–
–
Mutually agreed
Not utilised
Not utilised
–
–
–
–
–
–
Mutually agreed
Not utilised
Not utilised
–
–
–
–
–
–
Mutually agreed Various
Not utilised 138 106
Not utilised 138 106
– – 106
– 20 –
– 13 –
– 9 –
– 0
– 96 –
984
984
35
231
–
–
–
718
17,810
19,387
7,700
2,031
833
1,069
3,280
4,474
Maturing Year ended March 31,
Telkom Bonds 12.45% unsecured local bond due 29 Apr & April 29, 2012 (TL12)(1, 2) 29 Oct 11.90% unsecured local bond due 29 Apr & April 29, 2015 (TL15)(1, 3) 29 Oct 6% unsecured local bond due February 24, 2020 (TL20)(1, 4) 22 Feb Zero coupon unsecured loan stock due September 30, 2010 (PP02)(5) – Zero coupon unsecured loan stock due June 15, 2010 (PP03)(6) – Commercial paper – Syndicated loans due December 17, 2011 and 2013(7) Term loans Various Bank facilities R394 million uncommitted overdraft facility with ABSA Bank Limited, repayable on demand, and a R1 billion unsecured committed facility, repayable on 364 days notice – R1 billion unsecured committed facility with The Standard Bank of South Africa Limited, repayable within 365 days of drawdown – R1 billion unsecured committed facility with FirstRand Bank Limited, repayable on 364 days notice – $35 million unsecured short-term loan facility with Calyon Corporate and Investment Bank, repayable on demand – R1 billion uncommitted short term facility with Sumitomo Mitsui Banking Corporation, repayable on demand – R500 million call loan facility with iNkotha Investments Limited, repayable on demand – R1 billion loan agreement with Old Mutual Specialised Finance (Proprietary) Limited, repayable on demand Various bank loans8 – Bank overdraft and other short-term debt – Finance leases(9) Total Telkom
n/a
13.43% – 37.78%
Group overview
Management review
Sustainability review
Performance review
Financial statements
Company Financial Information
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Telkom Annual Report 2009
Financial review (continued)
Nominal amount out standing as of March 31, 2009 ZAR
2010 ZAR
2011 ZAR
2012 ZAR
2013 ZAR
2014 ZAR
After 2014 ZAR
Interest payment dates
Interest rate/ coupon (%)
Outstanding as of March 31, 2009 ZAR
Trudon (Pty) Ltd Various finance leases
–
Various
2
2
1
1
–
–
–
–
Telkom Media (Pty) Ltd Various loans
–
13%
9
9
–
5
2
2
–
–
–
18.5% LIBOR + 1.25% LIBOR + 2%
70
70
70
–
–
–
157
157
35
–
–
122
–
–
323
323
–
–
323
–
–
–
11 20
11 20
4 20
7 –
– –
– –
– –
– –
592
592
130
13
325
124
–
–
18,402
19,979
7,830
2,044
1,158
1,193
3,280
4,474
(in millions)
Maturing Year ended March 31,
Other
Multi-Links Telecommunications Limited Naira 1,100 million Commercial paper $18 million Export Development Bank of Canada funding $41.6 million Huawei Vendor Financing Facility funding Africa Online Limited Various loans Bank overdrafts and other short-term debt
– – – –
Various
Total other Grand total 1. Listed on the Bond Exchange of South Africa.
2. The TL12 was issued on April 29, 2009 at a yield to maturity of 12.47% and listed on the Bond Exchange of South Africa. 3. The TL15 was issued on April 29, 2009 at a yield to maturity of 11.91% and listed on the Bond Exchange of South Africa. 4. 2,500 of these bonds were issued on February 22, 2000 at a yield to maturity of 15.00%. The TL20 bond was listed on the Bond Exchange of South Africa with effect of April 1, 2005. 5. Issued on February 25, 2000. Original amount issued was R430 million. The yield to maturity of this instrument issued by Telkom is 14.37%. 6. Issued on June 15, 2000. Original amount issued was R1,350 million. The yield to maturity of this instrument is 15.175%. 7. Agreement effective from December 17, 2008 for three and five years. 8. R138 million of Telkom's indebtedness outstanding as of March 31, 2009 was guaranteed by the government of South Africa. Euro loans converted at the spot rate. 9. Secured by land and buildings.
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Consolidated financial statements Directors’ responsibility statement Certificate from Group Company Secretary Report of independent auditors Directors’ report Consolidated income statement Consolidated balance sheet Consolidated statement of changes in equity Consolidated cash flow statement Notes to the consolidated annual financial statements
137 137 138 140 142 143 144 145 146
economic conditions contributed to a difficult year
Group overview
1
Management review
2
Sustainability review
3
Performance review
4
Financial statements
5
Company Financial Information
6
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Telkom Annual Report 2009
137
Directors’ responsibility statement
The directors are responsible for the preparation of the annual financial
accountability for assets and liabilities. The directors are satisfied that
statements of the Company and the Group. The directors are also
the Company and the Group have adequate resources to continue in
responsible for maintaining a sound system of internal controls to
operational existence for the foreseeable future. Accordingly, Telkom
safeguard shareholders’ investments and the Group’s assets.
SA Limited continues to adopt the going concern basis in preparing the
In presenting the accompanying financial statements, International
annual financial statements.
Financial Reporting Standards as issued by the International
Against this background, the directors of the Company accept
Accounting Standards Board have been followed and applicable
responsibility for the annual financial statements, which were approved
accounting policies have been used incorporating prudent judgements
by the Board of directors on 10 July 2009 and are signed on their
and estimates.
behalf by:
The external auditors are responsible for independently auditing and reporting on the annual financial statements. In order for the directors to discharge their responsibilities, management continues to develop and maintain a system of internal controls aimed at reducing the risk of error or loss in a cost-effective manner. The internal controls include a risk-based system of internal
Shirley Lue Arnold
Chairman
auditing and administrative controls designed to provide reasonable but not absolute assurance that assets are safeguarded and that transactions are executed and recorded in accordance with generally accepted business practices and the Group’s policies and procedures. The directors, primarily through the audit and risk committee, which consists of non-executive directors, meet periodically with the external
Reuben September
Chief Executive Officer
and internal auditors, as well as executive management to evaluate matters concerning accounting policies, internal controls, auditing and financial reporting. The directors are of the opinion, based on the information and explanations given by management and internal audit, that the internal accounting controls are adequate, so that the financial records may be relied on for preparing the financial statements and maintaining
Peter Nelson
Chief Financial Officer Pretoria
Certificate from Group Company Secretary
I hereby certify that in accordance with section 268G(d) of the Companies Act, 1973, as amended, the Company has lodged with the Registrar of Companies all such returns as are required of a public company in terms of this Act and that all such returns are, to the best of my knowledge and belief, true, correct and up to date.
Mmathoto Lephadi Group Company Secretary Pretoria 10 July 2009
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Telkom Annual Report 2009
Directors’ report
To the members of Telkom SA Limited
SHARE REPURCHASE
The directors have pleasure in submitting the annual financial
Shareholders approved a special resolution granting a general
statements of the Company and the Group for the year ended
authority for the repurchase of shares by the Company at its annual
March 31, 2009.
general meeting of September 15, 2008. The Company repurchased
NATURE OF BUSINESS
286 ordinary shares at a value of R30,425 (including costs) during the
Telkom is a leading integrated communications service provider in South Africa and on the African continent.
year under review. These shares have been cancelled as issued share capital and restored as authorised but unissued share capital.
BORROWING POWERS
FINANCIAL RESULTS Earnings attributable to equity holders of Telkom for the year ended March 31, 2009 were R4,170 million (2008: R7,975 million) representing basic earnings per share from continuing operations of
In terms of the Company’s articles of association, Telkom has unlimited borrowing powers subject to the restrictive financial covenants of the TL20 bond and Syndicated loans.
407.4 cents (2008: 963.7 cents). Full details of the financial position
CAPITAL EXPENDITURE AND COMMITMENTS
and results of the Group are set out in the accompanying Company
Details of the Company’s capital expenditure on property, plant and
and Group financial statements.
equipment as well as intangibles are set out in notes 9 and 10 of the
DIVIDENDS
accompanying financial statements, while details of the Company’s
The following dividend was declared in respect of the year ended March 31, 2009:
capital commitments are set out in note 34. Details of the Group’s capital expenditure on property, plant and
• Ordinary dividend number 14 of 115 cents per share (2008: 660 cents);
equipment as well as intangibles are set out in notes 11 and 12 of the accompanying financial statements, while details of the Group’s capital commitments are set out in note 38.
• Special dividend of 260 cents per share (2008: nil cents).
EVENTS SUBSEQUENT TO BALANCE SHEET DATE
The level of dividend payments will be based upon a number of
Events subsequent to the balance sheet date are set out in note 45 of
factors, including the consideration of financial results, capital and
the accompanying Group financial statements and note 39 of the
operating expenditure requirements, the Group’s debt level, interest
Company financial statements.
coverage, internal cash flows, prospects and available growth opportunities.
DIRECTORATE The following changes occurred in the composition of the Board from
SUBSIDIARIES
April 1, 2008 to date of this report.
Particulars of the significant subsidiaries of the Group are set out in notes 42 and 43 of the accompanying Group financial statements.
Appointments B Molefe
July 3, 2008
The attributable interest of the Group in the after taxation earnings from
PG Joubert
August 12, 2008
continuing operations of its subsidiaries for the year ended March 31,
DD Barber
September 1, 2008
2009 were:
PG Nelson
December 8, 2008
Aggregate amount of loss after taxation
2008
2009
Rm
Rm
(102)
(2,142)
SHARE CAPITAL Details of the authorised, issued and unissued share capital of the Company as at March 31, 2009 are contained in note 22 and note 20 of the accompanying Group and Company financial statements respectively.
Resignations MJ Lamberti
June 3, 2008
AG Rhoda
July 3, 2008
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Telkom Annual Report 2009
Directors’ report
(continued)
The Board of Directors at date of this report are as follows: ST Arnold
(Chairman)
RJ September
(Chief Executive Officer)
PG Nelson
(Chief Financial Officer)
DD Barber B du Plessis RJ Huntley PG Joubert VB Lawrence PCS Luthuli KST Matthews B Molefe E Spio-Garbrah Details of each director may be found on pages 28 and 29 in the Management review section.
DIRECTORS’ INTERESTS At the date of this report, none of Telkom’s directors other than Mr RJ September, Mr PG Nelson, Mr PG Joubert and Mr DD Barber, held any direct and indirect, beneficial and non-beneficial interests in the share capital of the Company. Mr RJ September directly held 90,815 and indirectly held 1,820 ordinary shares, Mr. PG Nelson directly held 19,182 ordinary shares, Mr PG Joubert indirectly held 15,000 ordinary shares and Mr DD Barber indirectly held 1,200 ordinary shares in the capital of Telkom. Details of the Company Secretary’s business address and the Company’s registered office are set out on the inside back cover.
141
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Telkom Annual Report 2009
Consolidated income statement for the three years ended March 31, 2009
Restated* Notes
Restated*
Audited
2007
2008
2009
Rm
Rm
Rm
Total revenue
3.1
32,919
34,084
36,433
Operating revenue
3.2
32,441
33,611
35,940
4
338
472
343
23,028
25,014
29,895
Other income Operating expenses Employee expenses
5.1
7,254
7,629
8,345
Payments to other operators
5.2
5,005
6,098
6,919
Selling, general and administrative expenses
5.3
4,184
4,045
5,772
Service fees
5.4
2,209
2,437
2,756
Operating leases
5.5
775
671
823
Depreciation, amortisation, impairment and write-offs
5.6
3,601
4,134
5,280 6,388
Operating profit
9,751
9,069
Investment income
6
199
168
181
Finance charges and fair value movements
7
857
1,556
2,843
1,142
1,543
1,732
(285)
13
1,111
9,093
7,681
3,726
2,803
2,647
1,660
6,290
5,034
2,066
2,559
3,138
2,181
8,849
8,172
4,247
8,646
7,975
4,170
203
197
77
8,849
8,172
4,247
Interest Foreign exchange and fair value movement (gain)/loss Profit before taxation Taxation
8
Profit from continuing operations Profit for the year from discontinued operations
9
Profit for the year Attributable to: Equity holders of Telkom Minority interest
Total operations Basic earnings per share (cents)
10
1,681.0
1,565.0
832.8
Diluted earnings per share (cents)
10
1,676.3
1,546.9
819.6
Dividend per share (cents)
10
900.0
1,100.0
660.0
Basic earnings per share (cents)
10
1,204.7
963.7
407.4
Diluted earnings per share (cents)
10
1,201.3
952.6
401.0
Continuing operations
* The amounts have been restated for the effect of the discontinued operation and disposal groups held for sale as disclosed in note 9.
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143
Consolidated balance sheet at March 31, 2009
Notes
2007 Rm
2008 Rm
2009 Rm
ASSETS Non-current assets Property, plant and equipment Intangible assets Investments Deferred expenses Finance lease receivables Deferred taxation
48,770
57,763
51,010
41,254 5,111 1,384 270 158 593
46,815 8,468 1,448 221 206 605
41,418 7,232 1,383 55 166 756
10,376
12,609
11,287
14 18 34 15 16 19 20 21
77 1,093 520 287 88 7,303 259 749
51 1,287 9 362 166 8,986 614 1,134
– 1,974 91 – 109 5,980 1,202 1,931
9
–
–
23,482
59,146
70,372
85,779
31,724
32,815
36,253
11 12 14 15 16 17
Current assets Short-term investments Inventories Income taxation receivable Current portion of deferred expenses Current portion of finance lease receivables Trade and other receivables Other financial assets Cash and cash equivalents Assets of disposal groups classified as held for sale Total assets
EQUITY AND LIABILITIES Equity attributable to equity holders of Telkom Share capital Treasury share reserve Share-based compensation reserve Non-distributable reserves Retained earnings Reserves of disposal groups classified as held for sale
22 23 24 25 26 9
5,329 (1,774) 257 1,413 26,499 –
5,208 (1,638) 643 1,292 27,310 –
5,208 (1,517) 1,076 1,758 28,852 876
Minority interest
27
284
522
853
32,008
33,337
37,106
8,554
15,104
15,348
4,338 36 1,443 1,021 1,716
9,403 919 1,675 1,128 1,979
10,653 – 1,875 997 1,823
18,584
21,931
17,452
31 35 28 29 15 34 20 21
7,237 15 6,026 2,095 1,983 594 193 441
8,771 20 6,330 2,181 2,593 323 371 1,342
5,538 23 7,622 2,150 1,714 50 228 127
9
–
–
15,873
Total liabilities
27,138
37,035
48,673
Total equity and liabilities
59,146
70,372
85,779
Total equity Non-current liabilities Interest-bearing debt Other financial liabilities Provisions Deferred revenue Deferred taxation
28 20 29 15 17
Current liabilities Trade and other payables Shareholders for dividend Current portion of interest-bearing debt Current portion of provisions Current portion of deferred revenue Income taxation payable Other financial liabilities Credit facilities utilised Liabilities of disposal groups classified as held for sale
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Telkom Annual Report 2009
Consolidated statement of changes in equity for the three years ended March 31, 2009
Attributable to equity holders of Telkom
Balance at April 1, 2006 Total income and expense for the year
Share capital Rm
Share premium Rm
Treasury share reserve Rm
5,449
1,342
(1,809)
Sharebased compen- Non-distrisation butable reserve reserves Rm Rm 151
Profit for the year Foreign currency translation reserve (net of taxation of R4 million) (refer to note 25) Dividend declared (refer to note 35) Transfer to non-distributable reserves (refer to note 25) Shares vested and re-issued (refer to note 24) Increase in share-based compensation reserve (refer to note 24) Acquisition of subsidiaries and minorities (refer to note 36) Shares bought back and cancelled (refer to note 22) Balance at March 31, 2007 Total income and expense for the year
Total equity Rm
1,128 46
22,904 8,646
– –
29,165 8,692
301 217
29,466 8,909
–
8,646
–
8,646
203
8,849
46
–
–
46
14
60
–
(4,678)
–
(4,678)
(166)
(4,844)
239
(239)
–
–
–
–
–
–
–
–
–
–
–
141
–
–
–
141
–
141
–
–
–
–
–
–
(68)
(68)
(120)
(1,342)
–
–
–
(134)
–
(1,596)
5,329
–
(1,774)
257
1,413 529
26,499 7,975
– –
31,724 8,504
284 226
32,008 8,730
–
7,975
–
7,975
197
8,172
8
–
–
8
–
8
521
–
–
521
29
550
–
(5,627)
–
(5,627)
(65)
(5,692)
11
(11)
–
–
–
–
522
–
–
–
522
–
522
136
(136)
–
–
–
–
–
–
–
–
–
–
–
–
77
77
(661)
(1,526) –
– –
(1,647) (661)
– –
(1,647) (661)
1,292 (4) (181)
27,310 – 4,171
– 4 181
32,815 – 4,171
522 – 93
33,337 – 4,264
–
4,171
–
4,171
77
4,248
–
–
(8)
(8)
–
(8)
(181)
–
189
8
16
24
–
(3,306)
–
(3,306)
(33)
(3,339)
(10)
10
–
–
–
–
Increase in share-based compensation reserve (refer to note 24)
(121) –
– –
– –
– –
5,208
–
(1,638)
643
Profit for the year Revaluation of available-for-sale investment (net of taxation of R1 million) Foreign currency translation reserve (net of taxation of R6 million) (refer to note 25) Dividend declared (refer to note 35) Transfer to non-distributable reserves (refer to note 25) Increase in share-based compensation reserve (refer to note 24) Shares vested and re-issued (refer to note 24) Acquisition of subsidiaries and minorities Shares bought back and cancelled (refer to note 22) Minority put option Broad-based black economic empowerment transaction in Vodacom Balance at March 31, 2009
Minority interest Rm
(35)
Dividend declared (refer to note 35) Transfer to non-distributable reserves (refer to note 25)
Balance at March 31, 2008 Discontinued operations Total income and expense for the year
Total Rm
35
Profit for the year Revaluation of available-for-sale investment (net of taxation of R1 million) Foreign currency translation reserve (net of taxation of R6 million) (refer to note 25)
Shares vested and re-issued (refer to note 24) Acquisition of subsidiaries and minorities (refer to note 36) Shares bought back and cancelled (refer to note 22) Minority put option
Retained earnings Rm
Discontinued operations Rm
5,208
–
(1,596)
554
–
–
–
554
–
554
121 –
(121) –
– –
– 667
– –
– 667
– –
– 667
– –
– –
– 661
– –
– –
– 661
– –
– 661
–
–
–
–
691
691
271
962
(1,517)
1,076
1,758
28,852
876
36,253
853
37,106
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145
Consolidated cash flow statement for the three years ended March 31, 2009
Notes Cash flows from operating activities
2007 Rm 9,356
2008 Rm 10,603
2009 Rm 11,432
Cash receipts from customers
50,979
55,627
61,302
Cash paid to suppliers and employees
(30,459)
(34,371)
(40,908)
20,520
21,256
20,394
422
433
485
6
3
–
–
Finance charges paid
33
(1,115)
(1,077)
(2,164)
Taxation paid
34
(5,690)
(4,277)
(3,947)
14,140
16,335
14,768
(4,784)
(5,732)
(3,336)
(10,412)
(14,106)
(17,005)
54
169
43
Cash generated from operations
32
Interest received Dividends received
Cash generated from operations before dividend paid Dividend paid
35
Cash flows from investing activities Proceeds on disposal of property, plant and equipment and intangible assets Proceeds on disposal of investments Additions to property, plant and equipment and intangible assets Acquisition of subsidiaries and minority interest Additions to other investments Cash flows from financing activities
77
8
–
(10,037)
(11,657)
(13,191)
(445)
(2,462)
(3,778)
(61)
(164)
(79)
(2,920)
2,943
7,093
Loans raised
5,624
23,877
18,168
Loans repaid
(6,922)
(19,315)
(10,212)
Shares bought back and cancelled
(1,596)
(1,647)
–
Finance lease obligation repaid
(37)
(61)
(136)
Decrease/(increase) in net financial assets
11
89
(727)
Net (decrease)/increase in cash and cash equivalents
(3,976)
(560)
1,520
Net cash and cash equivalents at beginning of the year
4,255
308
(208)
29
44
(30)
308
(208)
1,282
Effect of foreign exchange rate differences Net cash and cash equivalents at end of the year
21
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Notes to the consolidated annual financial statements for the three years ended March 31, 2009
1.
CORPORATE INFORMATION
Mobile communications services, wireless data services and
Telkom SA Limited (Telkom) is a company incorporated and
television media services through Vodacom, Swiftnet and Telkom
domiciled in the Republic of South Africa (South Africa)
Media Group respectively have been classified as disposal
whose shares are publicly traded. The main objective of Telkom,
groups held for sale and discontinued operations.
its subsidiaries and joint ventures (the Group) is to supply telecommunication, broadcasting, multimedia, technology, information and other related information technology services to the general public, as well as mobile communication services through the Vodacom Group (Proprietary) Limited (Vodacom) in South Africa and certain other African countries. The principal activities of the Group include: • fixed-line subscription and connection services to post-paid, prepaid and private payphone customers using PSTN (‘Public Switched Telephone Network’) lines, including ISDN (‘Integrated Services Digital Network’) lines, and the sale of
2.
SIGNIFICANT ACCOUNTING POLICIES Basis of preparation The consolidated annual financial statements comply with the International Financial Reporting Standards (IFRS) of the International Accounting Standards Board (IASB) and the Companies Act of South Africa, 1973. The financial statements are prepared on the historical cost basis, with the exception of certain financial instruments which are measured at fair value and share-based payments which are measured at grant date fair value.
subscription based value-added voice services and customer
Details of the Group’s significant accounting policies are set out
premises equipment rental and sales;
below, and are consistent with those applied in the previous
• fixed-line traffic services to post-paid, prepaid and payphone
financial year except for the following:
customers, including local, long distance, fixed-to-mobile,
The Group has adopted certain amendments to IAS39 and
international outgoing and international voice-over-internet
IFRS7, and adopted IFRIC12 and IFRIC14 which are
protocol traffic services;
applicable for annual periods on or after January 1, 2008.
• interconnection services, including terminating and transiting
The principal effects of these changes are discussed below.
traffic from South African mobile operators, as well as from
Adoption of amendments to standards and new
international operators and transiting traffic from mobile to
interpretation
international destinations;
IAS39 Financial Instruments: Recognition and Measurement
• fixed-line data and internet services, including domestic and
and IFRS7 Financial Instruments: Disclosures –
international data transmission services, such as point-to-point
Reclassification of Financial Assets (amended)
leased lines, ADSL (Asymmetrical Digital Subscriber Line)
The amendments, which are effective on or after July 1, 2008,
services, packet-based services, managed data networking
permit an entity to reclassify non-derivative financial assets (other
services and internet access and related information
than those designated at fair value through profit or loss by the
technology services;
entity upon initial recognition) out of the fair value through profit
• e-commerce, including internet access service provider, application provider, hosting, data storage, e-mail and security services;
or loss category in particular circumstances. The amendments also permit an entity to transfer from the available-for-sale category to the loans and receivables category a financial asset that would have met the definition of loans and receivables
• W-CDMA (Wideband Code Division Multiple Access), a
(if the financial asset had not been designated as available-for-
3G next generation network, including fixed voice services,
sale), if the entity has the intention and ability to hold that
data services and nomadic voice services; and
financial asset for the foreseeable future. The amendments do
• other services including directory services, through Trudon (Proprietary) Limited (formerly trading as TDS Directory
not have an impact on the consolidated annual financial statements.
Operations (Proprietary) Limited), wireless data services,
IFRIC12 Service Concession Arrangements
through Swiftnet (Proprietary) Limited, television media
The interpretation, which is effective for annual periods
services, through Telkom Media Group, internet services
beginning on or after January 1, 2008, sets out general
outside South Africa, through Africa Online Limited and
principles on recognising and measuring the obligations and
information,
related rights in service concession arrangements from an
operating
communication services
in
and
Nigeria,
Telecommunications Limited.
telecommunication through
Multi-Links
operator’s perspective. The interpretation does not have an impact on the consolidated annual financial statements.
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Notes to the consolidated annual financial statements
147
(continued)
for the three years ended March 31, 2009
2.
SIGNIFICANT ACCOUNTING POLICIES (continued)
the relative fair values could affect the allocation of arrangement
Adoption of amendments to standards and new
consideration between the various revenue streams.
interpretation (continued)
IFRIC14 The Limit on a Defined Benefit Asset, Minimum Funding Requirements and their Interaction The interpretation, which is effective for annual periods
Judgement is also required to determine the expected customer relationship period. Any changes in these assessments may have a significant impact on revenue and deferred revenue.
beginning on or after January 1, 2008, provides guidance on
Property, plant and equipment and intangible assets
assessing the limit in IAS19 on the amount of the surplus that can
The useful lives of assets are based on management’s
be recognised as an asset. It also explains how the pension
estimation. Management considers the impact of changes in
asset or liability may be affected by a statutory or contractual
technology, customer service requirements, availability of
minimum funding requirement. The interpretation does not have
capital funding and required return on assets and equity to
any impact on the consolidated annual financial statements, as
determine the optimum useful life expectation for each of the
the Group is not subject to minimum funding requirements.
individual categories of property, plant and equipment and
Significant accounting judgements, estimates and assumptions The preparation of financial statements requires the use of estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting periods. Although these estimates and assumptions are based on management’s best knowledge of current events and actions that the Group may undertake in the future, actual results may
intangible assets. Due to the rapid technological advancement in the telecommunications industry as well as Telkom’s plan to migrate to a next generation network over the next few years, the estimation of useful lives could differ significantly on an annual basis due to unexpected changes in the roll-out strategy. The impact of the change in the expected useful life of property, plant and equipment is described more fully in note 5.6. The estimation of residual values of assets is also based on management’s judgement whether the assets will be sold or used to the end of their useful lives and what their condition
ultimately differ from those estimates and assumptions.
will be like at that time.
The presentation of the results of operations, financial position
For intangible assets that incorporate both a tangible and an
and cash flows in the financial statements of the Group is
intangible portion, management uses judgement to assess which
dependent upon and sensitive to the accounting policies,
element is more significant to determine whether it should be
assumptions and estimates that are used as a basis for the
treated as property, plant and equipment or intangible assets.
preparation of these financial statements. Management has
Asset retirement obligations
made certain judgements in the process of applying the Group’s
Management judgement is exercised when determining whether
accounting policies. These, together with the key estimates and
an asset retirement obligation exists, and in determining the
assumptions concerning the future, and other key sources of estimation uncertainty at the balance sheet date, are as follows:
Revenue recognition To reflect the substance of each transaction, revenue recognition criteria are applied to each separately identifiable component of a transaction as disclosed in note 3. In order to account for multiple-element revenue arrangements in developing its accounting policies, the Group considered the guidance contained in the United States Financial Accounting Standards Board (’FASB’) Emerging Issues Task Force No 00-21 Revenue Arrangements with Multiple Deliverables. Judgement is required
present value of expected future cash flows and discount rate when the obligation to dismantle or restore the site arises, as well as the estimated useful life of the related asset.
Impairments of property, plant and equipment and intangible assets Management is required to make judgements concerning the cause, timing and amount of impairment as indicated on notes 11 and 12. In the identification of impairment indicators, management considers the impact of changes in current competitive conditions, cost of capital, availability of funding,
to separate those revenue arrangements that contain the delivery
technological obsolescence, discontinuance of services and
of bundled products or services into individual units of
other circumstances that could indicate that an impairment
accounting, each with its own earnings process, when the
exists. The Group applies the impairment assessment to its
delivered item has stand-alone value and the undelivered item
separate cash-generating units. This requires management to
has fair value. Further judgement is required to determine the
make significant judgements concerning the existence of
relative fair values of each separate unit of accounting to be
impairment indicators, identification of separate cash-generating
allocated to the total arrangement consideration. Changes in
units, remaining useful lives of assets and estimates of projected
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Notes to the consolidated annual financial statements
(continued)
for the three years ended March 31, 2009
2.
SIGNIFICANT ACCOUNTING POLICIES (continued)
Leases in which a significant portion of the risks and rewards of
Significant accounting judgements, estimates and
ownership are retained by the lessor are classified as operating
assumptions (continued)
leases. Payments made under operating leases (net of any
Impairments of property, plant and equipment and
incentives received from the lessor) are charged to the income
intangible assets (continued)
statement on a straight-line basis over the period of the lease.
cash flows and fair value less costs to sell. Management
A lease is classified as a finance lease if it transfers substantially
judgement is also required when assessing whether a previously
all the risks and rewards incidental to ownership.
recognised impairment loss should be reversed.
Deferred taxation asset
Where impairment indicators exist, the determination of
Management judgement is exercised when determining the
the recoverable amount of a cash-generating unit requires
probability of future taxable profits which will determine whether
management to make assumptions to determine the fair value
deferred taxation assets should be recognised or derecognised.
less costs to sell and value in use. Key assumptions on which
The realisation of deferred taxation assets will depend on
management has based its determination of fair value less costs
whether it is possible to generate sufficient taxable income,
to sell include the existence of binding sale agreements, and for
taking into account any legal restrictions on the length and
the determination of value in use include the weighted average
nature of the taxation asset. When deciding whether to
cost of capital, projected revenues, gross margins, average
recognise unutilised taxation credits, management needs to
revenue per customer, capital expenditure, expected customer
determine the extent that the future obligation is likely to be
bases and market share. The judgements, assumptions and
available for set-off. In the event that the assessment of the future
methodologies used can have a material impact on the fair
obligation and future utilisation changes, the change in the
value and ultimately the amount of any impairment.
recognised deferred taxation asset must be recognised in profit
Impairment of other financial assets
or loss.
At each balance sheet date management assesses whether
Taxation
there are indicators of impairment of financial assets, including
The taxation rules and regulations in South Africa as well as the
equity investments. If such evidence exists, the estimated present
other African countries within which the Group operates are
value of the future cash flows of that asset is determined.
highly complex and subject to interpretation. Additionally, for
Management judgement is required when determining the expected future cash flows. To determine whether any decline in fair value in available-for-sale investments is significant or prolonged, reliance is placed on an assessment by management. In measuring impairments, quoted market prices are used, if available, or projected business plan information
the foreseeable future, management expects South African taxation laws to further develop through changes in South Africa’s existing taxation structure as well as clarification of the existing taxation laws through published interpretations and the resolution of actual taxation cases. Refer to notes 8 and 17.
from the investee is used for those financial assets not carried at
Management has made a judgement that all outstanding
fair value.
taxation credits relating to secondary taxation on companies
Impairment of receivables An impairment is recognised on trade receivables that are
(STC) will be available for utilisation before the taxation regime from STC to withholding taxation change is effective.
assessed to be impaired (refer to notes 13 and 19). The
The growth of the Group, following its geographical expansion
impairment is based on an assessment of the extent to which
into other African countries over the past few years, has made
customers have defaulted on payments already due and an
the estimation and judgement required in recognising and
assessment on their ability to make payments based on their
measuring deferred taxation balances more challenging. The
credit worthiness and historical write-offs experience. Should the
resolution of taxation issues is not always within the control of
assumptions regarding the financial condition of the customer
the Group and it is often dependent on the efficiency of the
change, actual write-offs could differ significantly from the
legal processes in the relevant taxation jurisdictions in which
impaired amount.
the Group operates. Issues can, and often do, take many years
Leases The determination of whether an arrangement is, or contains a lease is based on whether, at the date of inception, the fulfilment of the arrangement is dependent on the use of a specific asset or assets or the arrangement conveys a right to use the asset as set out in notes 16 and 38.
to resolve. Payments in respect of taxation liabilities for an accounting period result from payments on account and on the final resolution of open items. As a result there can be substantial differences between the taxation charge in the consolidated income statement and the current taxation payments.
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Notes to the consolidated annual financial statements
149
(continued)
for the three years ended March 31, 2009
2.
SIGNIFICANT ACCOUNTING POLICIES (continued)
Telkom provides equity compensation in the form of the Telkom
Significant accounting judgements, estimates and
Conditional Share Plan to its employees. The related expense
assumptions (continued)
and reserve are determined through an actuarial valuation
Taxation (continued)
which relies heavily on assumptions. The assumptions include
Group entities are regularly subject to evaluation, by the relevant
employee turnover percentages and whether specified
taxation authorities, of their historical taxation filings and in
performance criteria will be met. Changes to these assumptions
connection with such reviews, disputes can arise with the taxation
could affect the amount of expense ultimately recognised in the
authorities over the interpretation or application of certain taxation
financial statements. An actuarial valuation relies heavily on the
rules to the business of the relevant Group entities. These disputes
actual plan experience assumptions as disclosed in note 30.
may not necessarily be resolved in a manner that is favourable for
Provisions and contingent liabilities
the Group. Additionally the resolution of the disputes could result in
Management judgement is required when recognising and
an obligation for the Group that exceeds management’s estimate.
measuring provisions and when measuring contingent liabilities as
The Group has historically filed, and continues to file, all required
set out in notes 29 and 39 respectively. The probability that an
income taxation returns. Management believes that the principles
outflow of economic resources will be required to settle the
applied in determining the Group’s taxation obligations are
obligation must be assessed and a reliable estimate must be made
consistent with the principles and interpretations of the relevant
of the amount of the obligation. Provisions are discounted where
countries’ taxation laws.
the effect of discounting is material based on management’s
Deferred taxation rate Management makes judgements on the taxation rate applicable based on the Group’s expectations at balance sheet date on how the asset is expected to be recovered or the liability is expected to be settled.
judgement. The discount rate used is the rate that reflects current market assessments of the time value of money and, where appropriate, the risks specific to the liability, all of which requires management judgement. The Group is required to recognise provisions for claims arising from litigation when the occurrence of the claim is probable and the amount of the loss can be reasonably
Employee benefits
estimated. Liabilities provided for legal matters require judgements
The Group provides defined benefit plans for certain post-
regarding projected outcomes and ranges of losses based on
employment benefits. The Group’s net obligation in respect of
historical experience and recommendations of legal counsel.
defined benefits is calculated separately for each plan by
Litigation is however unpredictable and actual costs incurred could
estimating the amount of future benefits earned in return for
differ materially from those estimated at the balance sheet date.
services rendered. The obligation and assets related to each of the post-retirement benefits are determined through an actuarial valuation. The actuarial valuation relies heavily on assumptions as disclosed in note 30. The assumptions determined by management make use of information obtained from the Group’s employment agreements with staff and pensioners,
Held-to-maturity financial assets Management has reviewed the Group’s held-to-maturity financial assets in the light of its capital management and liquidity requirements and has confirmed the Group’s positive intention and ability to hold those assets to maturity.
market related returns on similar investments, market related
Summary of significant accounting policies
discount rates and other available information. The assumptions
Basis of consolidation
concerning the expected return on assets and expected change
The consolidated financial statements incorporate the financial
in liabilities are determined on a uniform basis, considering
statements of Telkom and entities (including special purpose
long-term historical returns and future estimates of returns and
entities) controlled by Telkom, its subsidiaries, as well as its joint
medical inflation expectations. In the event that further changes
ventures and associates. Control is achieved where Telkom has
in assumptions are required, the future amounts of post-
the power to govern the financial and operating policies of an
employment benefits may be affected materially.
investee entity so as to obtain benefits from its activities. Joint
The discount rate reflects the average timing of the estimated defined benefit payments. The discount rate is based on longterm South African government bonds with the longest maturity period as reported by the Bond Exchange of South Africa. The discount rate is expected to follow the trend of inflation.
ventures are those enterprises over which the Group exercises joint control in terms of a contractual agreement. Joint ventures are proportionately consolidated. Associates are those entities over which the Group has significant influence and that are neither subsidiaries nor joint ventures. Associates are equity accounted. Significant influence exists when the Group has the
The overall expected rate of return on assets is determined
power to participate in the financial and operating policy
based on the market prices prevailing at that date, applicable
decisions of these entities, but does not have control or joint
to the period over which the obligation is to be settled.
control over those policies.
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Notes to the consolidated annual financial statements
(continued)
for the three years ended March 31, 2009
2.
SIGNIFICANT ACCOUNTING POLICIES (continued)
Revenue is recognised when there is evidence of an
Summary of significant accounting policies (continued)
arrangement, collectability is reasonably assured, and the
Basis of consolidation (continued)
delivery of the product or service has occurred. In certain
The results of subsidiaries acquired or disposed of during the
circumstances revenue is split into separately identifiable
year are included in the income statement from the effective date
components and recognised when the related components are
of acquisition and up to the effective date of disposal, as
delivered in order to reflect the substance of the transaction.
appropriate.
The value of components is determined using verifiable
Where necessary, adjustments are made to the financial
objective evidence. The Group does not provide customers with
statements of subsidiaries, joint ventures and associates to bring
the right to a refund.
the accounting policies used in line with those used by the
Fixed-line and other
Group.
Subscriptions, connections and other usage
Inter-company transactions, balances and unrealised gains on
The Group provides telephone and data communication
transactions between Group companies are eliminated.
services under post-paid and prepaid payment arrangements.
Unrealised profit or losses are also eliminated.
Revenue includes fees for installation and activation, which are
The Group applies a policy of treating transactions with minority interests as transactions with parties external to the Group. Disposals to minority interests result in gains and losses for the Group and are recorded in the income statement. Acquisition of
deferred over the expected customer relationship period. Costs incurred on first time installations that form an integral part of the network are capitalised and depreciated over the expected average customer relationship period. All other installation and activation costs are expensed as incurred.
minority interests results in goodwill, being the difference between any consideration paid and the relevant share
Post-paid
acquired of the carrying value of net assets of the subsidiary.
subscription fees, typically monthly fees, which are recognised
and
prepaid
service
arrangements
include
over the subscription period.
Business combinations The purchase method of accounting is used to account for the acquisition of subsidiaries by the Group. The cost of an acquisition is measured as the fair value of the assets given,
Revenue related to sale of communication equipment, products and value-added services is recognised upon delivery and acceptance of the product or service by the customer.
equity instruments issued and liabilities incurred or assumed at
Traffic (domestic, fixed-to-mobile and international)
the date of exchange, plus costs directly attributable to the
Prepaid
acquisition. Identifiable assets acquired and liabilities and
Prepaid traffic service revenue collected in advance is deferred
contingent liabilities assumed in a business combination are
and recognised based on actual usage or upon expiration of
measured initially at their fair values at the acquisition date,
the usage period, whichever comes first. The terms and
irrespective of the extent of any minority interest. The excess
conditions of certain prepaid products allow the carry over of
of the cost of acquisition over the fair value of the Group’s share
unused minutes. Revenue related to the carry over of unused
of the identifiable net assets acquired is recorded as goodwill.
minutes is deferred until usage or expiration.
If the cost of acquisition is less than the fair value of the net
Payphones
assets of the subsidiary acquired, the difference is recognised
Payphone service coin revenue is recognised when the service
directly in the income statement.
is provided.
Operating revenue
Payphone service card revenue collected in advance is deferred
The Group provides fixed-line communication services, mobile
and recognised based on actual usage or upon expiration of
communication services and other services. Other includes
the usage period, whichever comes first.
data services, directory services and communication related
Post-paid
products. The Group provides such services to business,
Revenue related to local, long distance, network-to-network,
residential, payphone and mobile customers. Revenue
roaming and international call connection services is recognised
represents the fair value of fixed or determinable consideration
when the call is placed or the connection provided.
that has been received or is receivable.
Interconnection
Revenue for services is measured at amounts invoiced to
Interconnection revenue for call termination, call transit, and
customers and excludes Value Added Taxation.
network usage is recognised as the traffic flow occurs.
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Notes to the consolidated annual financial statements
151
(continued)
for the three years ended March 31, 2009
2.
SIGNIFICANT ACCOUNTING POLICIES (continued)
Vodacom revenue from the handset is recognised when the
Summary of significant accounting policies (continued)
product is delivered limited to the amount of cash received.
Fixed-line and other (continued)
Monthly service revenue received from the customer is recognised
Data
in the period in which the service is delivered. Airtime revenue is
The Group provides data communication services under post-
recognised on the usage basis. The terms and conditions of the
paid and prepaid payment arrangements. Revenue includes fees
bundled airtime products, where applicable, allow the carry over
for installation and activation, which are deferred over the
of unused airtime. The unused airtime is deferred in full. Deferred
expected average customer relationship period. Costs incurred
revenue related to unused airtime is recognised when utilised by
on first time installations that form an integral part of the network
the customer. Upon termination of the customer contract, all
are capitalised and depreciated over the life of the expected
deferred revenue for unused airtime is recognised in revenue.
average customer relationship period. All other installation and activation costs are expensed as incurred. Post-paid and prepaid service arrangements include subscription fees, typically monthly fees, which are recognised over the subscription period.
Prepaid products Prepaid products that may include deliverables such as a SIMcard and airtime are defined as arrangements with multiple deliverables. The arrangement consideration is allocated to
Directory services
each deliverable, based on the fair value of each deliverable
Included in other are directory services. Revenue is recognised
on a stand-alone basis as a percentage of the aggregated fair
when printed directories are released for distribution, as the
value of the individual deliverables. Revenue allocated to the
significant risks and rewards of ownership have been transferred
identified deliverables in each revenue arrangement and the
to the buyer. Electronic directories’ revenue is recognised on a
cost applicable to these identified deliverables are recognised
monthly basis, as earned.
based on the same recognition criteria of the individual
Sundry revenue Sundry revenue is recognised when the economic benefit flows to the Group and the earnings process is complete.
Dealer incentives Telkom provides incentives to its retail payphone card distributors as trade discounts. Incentives are based on sales volume and value. Revenue for retail payphone cards is recorded as traffic revenue, net of these discounts as the cards are used. Mobile The Vodacom Group invoices its independent service providers for the revenue billed by them on behalf of the Group. The Group, within its contractual arrangements with its agents, pays them administrative fees. The Group receives in cash, the net amount equal to the gross revenue earned less the administrative fees payable to the agents.
Contract products Contract products that may include deliverables such as a handset and 24-month service are defined as arrangements with multiple deliverables. The arrangement consideration is allocated to each deliverable, based on the fair value of each
deliverable at the time the product or service is delivered. • Revenue from the SIM-card representing activation fees is recognised over the average useful life of a prepaid customer. • Airtime revenue is recognised on the usage basis. Unused airtime is deferred in full. • Deferred revenue related to unused airtime is recognised when utilised by the customer. Upon termination of the customer relationship, all deferred revenue for unused airtime is recognised in revenue. Upon purchase of an airtime voucher the customer receives the right to make outgoing voice and data calls to the value of the airtime voucher. Revenue is recognised as the customer utilises the voucher. Deferred revenue and costs related to unactivated starter packs which do not contain any expiry date, are recognised in the period when the probability of these starter packs being activated by a customer becomes remote. In this regard the Group applies a period of 36 months before these revenue and costs are released to the consolidated income statement.
deliverable on a stand-alone basis as a percentage of the
Data
aggregated fair value of the individual deliverables. Revenue
Revenue, net of discounts, from data services is recognised
allocated to the identified deliverables in each revenue
when the Group has performed the related service and
arrangement and the cost applicable to these identified
depending on the nature of the service, is recognised either at
deliverables are recognised based on the same recognition
the gross amounts billed to the customer or the amount
criteria of the individual deliverable at the time the product or
receivable by the Group as commission for facilitating the
service is delivered.
service.
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Notes to the consolidated annual financial statements
(continued)
for the three years ended March 31, 2009
2.
SIGNIFICANT ACCOUNTING POLICIES (continued)
A deferred taxation asset is recognised to the extent that it is
Summary of significant accounting policies (continued)
probable that future taxable profits will be available against
Mobile (continued)
which the associated unused taxation losses, unused taxation
Equipment sales
credits and deductible temporary differences can be utilised.
All equipment sales are recognised only when delivery and
The carrying amount of deferred taxation assets is reviewed at
acceptance has taken place. Equipment sales to third party
each balance sheet date and is reduced to the extent that it is
service providers are recognised when delivery is accepted.
no longer probable that the related taxation benefit will be
No rights of return exist on sales to third party service providers.
realised. In respect of deductible temporary differences
Mobile number portability
associated with investments in subsidiaries, associates and
Revenue transactions from mobile number portability are
interest in joint ventures, deferred income taxation assets are
accounted for in terms of current business rules and revenue
recognised only to the extent that it is probable that temporary
recognition policies above.
differences will reverse in the foreseeable future and taxable
Interest on debtors’ accounts Interest is raised on overdue accounts on an effective interest
profit will be available against which temporary differences can be utilised.
rate method and recognised in the income statement.
Deferred taxation relating to items recognised directly in equity
Marketing
is recognised in equity and not in the income statement.
Marketing costs are recognised as an expense when incurred.
Deferred taxation assets and liabilities are measured at the
Incentives
taxation rates that are expected to apply to the period when the
Incentives paid to service providers and dealers for products
asset is realised or the liability is settled, based on taxation rates
delivered to the customer are expensed as incurred. Incentives
(and taxation laws) that have been enacted or substantively
paid to service providers and dealers for services delivered are
enacted by the balance sheet date. Deferred taxation assets and
expensed in the period that the related revenue is recognised.
liabilities are not discounted.
Distribution incentives paid to service providers and dealers for
Deferred taxation assets and deferred taxation liabilities are
exclusivity are deferred and expensed over the contractual
offset, if a legally enforceable right exists to set off current
relationship period.
taxation assets against current taxation liabilities and the
Investment income
deferred taxes relate to the same taxable entity and the same
Dividends from investments are recognised on the date that the
taxation authority.
Group is entitled to the dividend. Interest is recognised on a time
Exchange differences arising from the translation of foreign
proportionate basis taking into account the principal amount outstanding and the effective interest rate.
Taxation Current taxation The charge for current taxation is based on the results for the year and is adjusted for non-taxable income and non-deductible expenditure. Current taxation is measured at the amount expected to be paid to the taxation authorities, using taxation rates and
deferred taxation assets and liabilities of foreign entities where the functional currency is different to the local currency, are classified as a deferred taxation expense or income.
Secondary taxation on companies Secondary taxation on companies (STC) is provided for at a rate of 10% (12.5% before October 1, 2007) on the amount by which dividends declared by the Group exceeds dividends
laws that have been enacted or substantively enacted by the
received. Deferred taxation on unutilised STC credits is
balance sheet date.
recognised to the extent that STC payable on future dividend
Deferred taxation Deferred taxation is accounted for using the balance sheet liability method on all temporary differences at the balance sheet date between the taxation bases of assets and liabilities and their carrying amounts for financial reporting purposes. Deferred taxation is not provided on the initial recognition of assets or liabilities which is not a business combination and at the time of the transaction affects neither accounting nor taxable profit or loss.
payments is likely to be available for set-off.
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Notes to the consolidated annual financial statements
153
(continued)
for the three years ended March 31, 2009
2.
SIGNIFICANT ACCOUNTING POLICIES (continued)
The estimated useful lives assigned to groups of property, plant
Summary of significant accounting policies (continued)
and equipment are:
Property, plant and equipment
Years
At initial recognition acquired property, plant and equipment are recognised at their purchase price, including import duties
Freehold buildings
and non-refundable purchase taxes, after deducting trade
Leasehold buildings
discounts and rebates. The recognised cost includes any directly
Network equipment
attributable costs for preparing the asset for its intended use. The cost of an item of property, plant and equipment is recognised as an asset if it is probable that the future economic benefits associated with the item will flow to the Group and the cost of the item can be measured reliably.
Cables
15 to 50 7 to 50 20 to 40
Switching equipment
2 to 25
Transmission equipment
3 to 18
Other
1 to 20
Support equipment
3 to 13
Furniture and office equipment
2 to 25
Property, plant and equipment is stated at historical cost less
Data processing equipment and software
3 to 10
accumulated depreciation and any accumulated impairment
Other
2 to 20
losses. Each component of an item of property, plant and equipment with a cost that is significant in relation to the total cost of the item is depreciated separately. Depreciation is charged from the date the asset is available for use on a straight-line basis over the estimated useful life and ceases at the earlier of the date that the asset is classified as held for sale and the date the asset is derecognised. Idle assets continue to attract depreciation. The estimated useful life of individual assets and the depreciation method thereof are reviewed on an annual basis at balance sheet date. The depreciable amount is determined after taking into account the residual value of the asset. The
An item of property, plant and equipment is derecognised upon disposal or when no future economic benefits are expected from its use or disposal. Any gain or loss arising on derecognition of the asset (calculated as the difference between the net disposal proceeds and the carrying amount of the asset) is included in the income statement in the year the asset is derecognised. Assets held under finance leases are depreciated over their expected useful lives on the same basis as owned assets or, where shorter, the term of the relevant lease if there is no reasonable certainty that the Group will obtain ownership by the end of the lease term.
residual value is the estimated amount that the Group would
Intangible assets
currently obtain from the disposal of the asset, after deducting
Goodwill
the estimated cost of disposal, if the asset were already of the
Goodwill arising on the acquisition of a subsidiary is
age and in the condition expected at the end of its useful life.
recognised as an asset at the date that control is acquired (the
The residual values of assets are reviewed on an annual basis
acquisition date). Goodwill is measured as the excess of the
at balance sheet date.
sum of the consideration transferred, the amount of any minority interest in the acquiree and the fair value of the acquirer’s
Assets under construction represents freehold buildings, integral
previously-held equity interest (if any) in the entity over the net fair
operating software, network and support equipment and
value of the identifiable net assets recognised.
includes all direct expenditure as well as related borrowing costs capitalised, but excludes the costs of abnormal amounts of waste material, labour or other resources incurred in the production of self-constructed assets.
If, after reassessment, the Group’s interest in the net fair value of the acquiree’s identifiable net assets exceeds the sum of the consideration transferred, the amount of any minority interest in the acquiree and the fair value of the acquirer’s previously-held
Freehold land is stated at cost and is not depreciated. Amounts
equity interest (if any), the excess is recognised immediately in
paid by the Group on improvements to assets which are held in
profit or loss as a bargain purchase gain.
terms of operating lease agreements are depreciated on a straight-line basis over the shorter of the remaining useful life of the applicable asset or the remainder of the lease period. Where it is reasonably certain that the lease agreement will be
Goodwill is not amortised, but is reviewed for impairment at least annually. Any impairment loss is recognised immediately in profit or loss and is not subsequently reversed.
renewed, the lease period equals the period of the initial
On disposal of a subsidiary, the attributable amount of goodwill
agreement plus the renewal periods.
is included in the determination of the profit or loss on disposal.
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Notes to the consolidated annual financial statements
(continued)
for the three years ended March 31, 2009
2.
SIGNIFICANT ACCOUNTING POLICIES (continued)
use and no future economic benefit is expected from its
Intangible assets (continued)
disposal. Any gains or losses on the retirement or disposal of
Licences, software, trademarks, copyrights and other
assets are recognised in the income statement in the year in
At initial recognition acquired intangible assets are recognised
which they arise.
at their purchase price, including import duties and nonrefundable purchase taxes, after deducting trade discounts and
The expected useful lives assigned to intangible assets are: Years
rebates. The recognised cost includes any directly attributable costs for preparing the asset for its intended use. Internally
Licences
5 to 30
generated intangible assets are recognised at cost comprising
Software
2 to 10
all directly attributable costs necessary to create and prepare
Trademarks, copyrights and other
1 to 15
the asset to be capable of operating in the manner intended by management. Licences, software, trademarks, copyrights and other intangible assets are carried at cost less accumulated amortisation and any accumulated impairment losses. Amortisation commences when the intangible assets are
Asset retirement obligations Asset retirement obligations related to property, plant and equipment and intangible assets are recognised at the present value of expected future cash flows when the obligation to dismantle or restore the site arises. The increase in the related
available for their intended use and is recognised on a straight-
asset’s carrying value is depreciated over its estimated useful
line basis over the assets’ expected useful lives. Amortisation
life. The unwinding of the discount is included in finance
ceases at the earlier of the date that the asset is classified as
charges and fair value movements. Changes in the
held for sale and the date that the asset is derecognised.
measurement of an existing liability that result from changes in
The residual value of intangible assets is the estimated amount that the Group would currently obtain from the disposal of the asset, after deducting the estimated cost of disposal, if the asset were already of the age and in the condition expected at the end of its useful life. Due to the nature of the asset the residual value is assumed to be zero unless there is a commitment by a third party
the estimated timing or amount of the outflow of resources required to settle the liability, or a change in the discount rate are accounted for as increases or decreases to the original cost of the recognised assets. If the amount deducted exceeds the carrying amount of the asset, the excess is recognised immediately in profit or loss.
to purchase the asset at the end of its useful life or when there is an
Non-current assets held for sale
active market that is likely to exist at the end of the asset’s useful life,
Non-current assets and disposal groups are classified as held
which can be used to estimate the residual values. The residual
for sale if their carrying amount will be recovered through a sale
values of intangible assets, amortisation methods and their useful
transaction rather than through continuing use. This condition is
lives are reviewed on an annual basis at balance sheet date.
regarded as met only when the sale is highly probable and the asset (or disposal group) is available for immediate sale in its
Intangible assets with indefinite useful lives and intangible assets
present condition. Management must be committed to the sale,
not yet available for use are tested for impairment annually
which should be expected to qualify for recognition as a
either individually or at the cash-generating unit level. Such
complete sale within one year from the date of classification and
intangible assets are not amortised. The useful life of an
marketed at a reasonable value. Assets are no longer
intangible asset with an indefinite life is reviewed annually to
depreciated when they are classified into the category.
determine whether indefinite life assessment continues to be supportable. If not, the change in the useful life assessment from indefinite to finite is made on a prospective basis.
If a non-current asset or disposal group is classified as held for sale, but the criteria for classification as held for sale are no longer met, the disclosure of such non-current asset or disposal
Assets under construction represents application and other non-
group as held for sale is ceased. Where the disposal group
integral software and includes all direct expenditure as well as
was also classified as a discontinued operation, the subsequent
related borrowing costs capitalised, but excludes the costs of
classification as held for use also requires that the discontinued
abnormal amounts of waste material, labour or other resources
operation be included in continuing operations.
incurred in the production of self-constructed assets.
Non-current assets (and disposal groups) classified as held for
Intangible assets are derecognised when they have been
sale are measured at the lower of the assets’ previous carrying
disposed of or when the asset is permanently withdrawn from
amount and fair value less cost to sell.
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Notes to the consolidated annual financial statements
155
(continued)
for the three years ended March 31, 2009
2.
SIGNIFICANT ACCOUNTING POLICIES (continued)
being deferred and recognised systematically over the expected
Summary of significant accounting policies (continued)
duration of the customer relationship because it is considered to
Impairment of property, plant and equipment and
be part of the customers’ ongoing rights to telecommunication
intangible assets
services and the operator’s continuing involvement. Any excess
The Group regularly reviews its non-financial assets and cash-
of the costs over revenues is expensed immediately.
generating units for any indication of impairment. When indicators, including changes in technology, market, economic, legal and operating environments occur and could result in changes of the asset’s or cash-generating unit’s estimated recoverable amount, an impairment test is performed.
Inventories Installation material, maintenance and network equipment inventories are stated at the lower of cost, determined on a weighted average basis, or estimated net realisable value. Merchandise inventories are stated at the lower of cost,
The recoverable amount of assets or cash-generating units is
determined on a first-in first-out (FIFO) basis, or estimated net
measured using the higher of the fair value less costs to sell and
realisable value. Write-down of inventories arises when, for
its value in use, which is the present value of projected cash
example, goods are damaged or when net realisable value is
flows covering the remaining useful lives of the assets.
lower than carrying value.
Impairment losses are recognised when the asset’s carrying value exceeds its estimated recoverable amount. Where applicable, the recoverable amount is determined for the cashgenerating unit to which the asset belongs.
Financial instruments Recognition and initial measurement All financial instruments are initially recognised at fair value, plus, in the case of financial assets and liabilities not at fair value through
Previously recognised impairment losses, other than goodwill, are
profit or loss, transaction costs that are directly attributable to the
reviewed annually for any indication that it may no longer exist or
acquisition or issue. Financial instruments are recognised when the
may have decreased. If any such indication exists, the recoverable
Group becomes a party to their contractual arrangements. All
amount of the asset is estimated. Such impairment losses are
regular way transactions are accounted for on settlement date.
reversed through the income statement if the recoverable amount
Regular way purchases or sales are purchases or sales of financial
has increased as a result of a change in the estimates used to
assets that require delivery of assets within the period generally
determine the recoverable amount, but not to an amount higher
established by regulation or convention in the marketplace.
than the carrying amount that would have been determined (net of depreciation or amortisation) had no impairment loss been recognised in prior years. Impairment on goodwill is not reversed.
Subsequent measurement Subsequent to initial recognition, the Group classifies financial assets as ’at fair value through profit or loss’, ’held-to-maturity
Repairs and maintenance
investments’, ’loans and receivables’, or ’available-for-sale’.
The Group expenses all costs associated with repairs and
Financial liabilities are classified ’at fair value through profit or
maintenance, unless it is probable that such costs would result in
loss’ or ’other financial liabilities’. The measurement of each is
increased future economic benefits flowing to the Group, and
set out below and presented in a table in note 13.
the costs can be reliably measured.
The fair value of financial assets and liabilities that are actively
Borrowing costs
traded in financial markets is determined by reference to quoted
Financing costs directly associated with the acquisition or
market prices at the close of business on the balance sheet date.
construction of assets that require more than three months to
Where there is no active market, fair value is determined using
complete and place in service are capitalised at interest rates
valuation techniques such as discounted cash flow analysis.
relating to loans specifically raised for that purpose, or at the weighted average borrowing rate where the general pool of Group borrowings was utilised. Other borrowing costs are expensed as incurred.
Financial assets at fair value through profit or loss The Group classifies financial assets that are held for trading in the category ’financial assets at fair value through profit or loss’. Financial assets are classified as held for trading if they are
Deferred revenue and expenses
acquired for the purpose of selling in the future. Derivatives not
Activation revenue and costs are recognised in accordance with
designated as hedges are also classified as held for trading. On
the principles contained in Emerging Issues Task Force Issue
remeasurement to fair value the gains or losses on held for trading
No 00-21, Revenue Arrangements with Multiple Deliverables
financial assets are recognised in net finance charges and fair
(EITF 00-21), issued in the United States. This results in activation
value movements for the year.
revenue and costs up to the amount of the deferred revenue
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Notes to the consolidated annual financial statements
(continued)
for the three years ended March 31, 2009
2.
SIGNIFICANT ACCOUNTING POLICIES (continued)
Financial liabilities at fair value through profit or loss
Financial instruments (continued)
Financial liabilities are classified as ‘at fair value through profit
Financial assets at fair value through profit or loss
or loss’ (FVTPL) where the financial liability is held for trading.
(continued) Gains and losses arising from changes in the fair value of the ’financial assets at fair value through profit or loss’ category are presented in the income statement within ’finance charges and fair value movements’ in the period which they arise.
A financial liability is classified as held for trading: • if it is acquired for the purpose of settling in the near term; or • if it is a derivative that is not designated and effective as a hedging instrument.
Held-to-maturity financial assets The Group classifies non-derivative financial assets with fixed or
Financial liabilities at a FVTPL are stated at fair value, with any
determinable payments and fixed maturity dates as held-to-
resultant gains or losses recognised in profit or loss. The net
maturity when the Group has the positive intention and ability to
gain or loss recognised in profit or loss incorporates any interest
hold to maturity. These assets are subsequently measured at
paid on the financial liability.
amortised cost. Amortised cost is computed as the amount initially recognised minus principal repayments, plus or minus the cumulative amortisation using the effective interest rate method. This calculation includes all fees paid or received between parties to the contract. For investments carried at amortised cost, gains and losses are recognised in net profit or
Other financial liabilities Other financial liabilities are subsequently measured at amortised cost using the effective interest rate method, with interest expense recognised in finance charges and fair value movements, on an effective interest rate basis.
loss when the investments are sold or impaired.
The effective interest rate is the rate that accurately discounts
Loans and receivables
estimated future cash payments through the expected life of the
Loans and receivables are non-derivative financial assets with
financial liability or, where appropriate, a shorter period.
fixed or determinable payments that are not quoted in an active
Financial guarantee contracts
market. Such assets are carried at amortised cost using the effective interest rate method. Trade receivables are subsequently measured at the original invoice amount where the effect of discounting is not material.
Available-for-sale financial assets Available-for-sale financial assets are those non-derivative assets that are designated as available-for-sale, or are not classified in
Financial guarantee contracts are subsequently measured at the higher of the amount determined in accordance with IAS37 Provisions, Contingent Liabilities and Contingent Assets or the amount initially recognised less, when appropriate, cumulative amortisation, recognised in accordance with IAS18 Revenue.
Cash and cash equivalents
any of the three preceding categories. Equity instruments are all
Cash and cash equivalents are measured at amortised cost. This
treated as available-for-sale financial instruments. After initial
comprises cash on hand, deposits held on call and term
recognition, available-for-sale financial assets are measured at
deposits with an initial maturity of less than three months when
fair value, with gains and losses being recognised as a
entered into.
separate component of equity, net of taxation. Dividend income is recognised in the income statement as part of other income when the Group’s right to receive payment is established. Changes in the fair value of monetary items denominated in a foreign currency and classified as available-for-sale are analysed between translation differences resulting from changes
For the purpose of the cash flow statement, cash and cash equivalents consist of cash and cash equivalents defined above, net of credit facilities utilised.
Capital and money market transactions New bonds and commercial paper bills issued are subsequently
in amortised cost of the security and other changes in carrying
measured at amortised cost using the effective interest rate
amount of the item. The translation differences on monetary
method.
items are recognised in profit or loss, while translation
Bonds issued where Telkom is a buyer and seller of last resort
differences on non-monetary securities are recognised in equity.
are carried at fair value. The Group does not actively trade in
Changes in the fair value of monetary and non-monetary items classified as available-for-sale are recognised directly in equity. When an investment is derecognised or determined to be impaired, the cumulative gain or loss previously recorded in equity is recognised in profit or loss.
bonds.
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Notes to the consolidated annual financial statements
157
(continued)
for the three years ended March 31, 2009
2.
SIGNIFICANT ACCOUNTING POLICIES (continued)
If, in a subsequent period, the amount of the impairment loss for
Financial instruments (continued)
financial assets decreases and the decrease can be related
Derecognition
objectively to an event occurring after the impairment was
A financial instrument or a portion of a financial instrument will
recognised, the previously recognised impairment loss is
be derecognised and a gain or loss recognised when the
reversed except for those financial assets classified as available-
Group’s contractual rights expire, financial assets are transferred
for-sale and carried at cost that are not reversed. Any
or financial liabilities are extinguished. On derecognition of a
subsequent reversal of an impairment loss is recognised in the
financial asset or liability, the difference between the
income statement, to the extent that the carrying value of the
consideration and the carrying amount on the settlement date is
asset does not exceed its amortised cost at the reversal date.
included in finance charges and fair value movements for the
Reversals in respect of equity instruments classified as available-
year. For available-for-sale assets, the fair value adjustment
for-sale are not recognised in profit or loss. Reversals of
relating to prior revaluations of assets is transferred from equity
impairment losses on debt instruments classified as available-for-
and recognised in finance charges and fair value movements for
sale are reversed through the income statement, if the increase
the year.
in fair value of the instrument is objectively related to an event
Bonds and commercial paper bills are derecognised when the
occurring after the impairment loss was recognised through the
obligation specified in the contract is discharged. The difference
income statement.
between the carrying value of the bond and the amount paid to
Remeasurement of embedded derivatives
extinguish the obligation is included in finance charges and fair
The Group assesses whether an embedded derivative is
value movements for the year.
required to be separated from the host contract and accounted
Impairment of financial assets
for as a derivative when it first becomes party to the contract.
At each balance sheet date an assessment is made of whether
The Group reassesses the contract when there is a change in the
there are any indicators of impairment of a financial asset or
terms of the contract which significantly modifies the cash flows
a group of financial assets based on observable data about
that would otherwise be required under the contract.
one or more loss events that occurred after the initial recognition
Financial instruments: Disclosures
of the asset or the group of assets. For loans and receivables
The Group groups its financial instruments into classes of similar
carried at amortised costs, if there is objective evidence that an impairment loss has been incurred, the amount of the loss is measured at the difference between the asset’s carrying amount and the present value of estimated future cashflows. The carrying amount of the assets is reduced through the use of an
instruments and where disclosure is required, it discloses them by class. It also discloses information about the nature and extent of risks arising from its financial instruments as indicated in note 13.
allowance account and the amount of the loss is recognised in
Foreign currencies
the income statement. In the case of equity securities classified
Each entity within the Group determines its functional currency.
as available-for-sale, a significant or prolonged decline in the
The Group’s presentation currency is the South African rand
fair value of the security below its cost is considered as an
(ZAR).
indicator that the securities are impaired.
Transactions denominated in foreign currencies are measured at
If any such evidence exists for available-for-sale assets, the
the rate of exchange at transaction date. Monetary items
cumulative loss – measured as the difference between the
denominated in foreign currencies are remeasured at the rate of
acquisition cost and the current fair value, less any impairment
exchange at settlement date or balance sheet date, whichever
loss on that financial asset previously recognised in profit or loss
occurs first. Exchange differences on the settlement or translation
– is removed from equity and recognised in the income
of monetary assets and liabilities are included in finance
statement. Impairment losses recognised in the income statement
charges and fair value movements in the period in which they
on equity instruments are not reversed through the income
arise. Non-monetary items that are measured in terms of
statement. The recoverable amount of financial assets carried at
historical cost in a foreign country are translated using the
amortised cost is calculated as the present value of expected
exchange rates as at the dates of the initial transactions. Non-
future cash flows discounted at the original effective interest rate
monetary items measured at fair value in a foreign currency are
of the asset.
translated using the exchange rates at the date when the fair value is determined.
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Notes to the consolidated annual financial statements
(continued)
for the three years ended March 31, 2009
2.
SIGNIFICANT ACCOUNTING POLICIES (continued)
The land and buildings elements of a lease of land and
Foreign currencies (continued)
buildings are considered separately for the purposes of lease
The annual financial statements of foreign operations are
classification unless it is impracticable to do so.
translated into South African rand, the Group’s presentation currency, for incorporation into the consolidated annual financial statements. Assets and liabilities are translated at the foreign exchange rates ruling at the balance sheet date.
Lessee Operating lease payments are recognised in the income statement on a straight-line basis over the lease term.
Income, expenditure and cash flow items are measured at the
Assets acquired in terms of finance leases are capitalised at the
actual foreign exchange rate or average foreign exchange rates
lower of fair value or the present value of the minimum lease
for the period. All resulting unrealised exchange differences are
payments at inception of the lease and depreciated over the
classified as equity. On disposal, the cumulative amounts of
lesser of the useful life of the asset or the lease term. The capital
unrealised exchange differences that have been deferred are
element of future obligations under the leases is included as a
recognised in the consolidated income statement as part of the
liability in the balance sheet. Lease finance costs are amortised
gain or loss on disposal.
in the income statement over the lease term using the interest rate
All gains and losses on the translation of equity loans to foreign
implicit in the lease. Where a sale and leaseback transaction
operations that are intended to be permanent, whether they are
results in a finance lease, any excess of sale proceeds over the
denominated in one of the entities’ functional currencies or in a
carrying amount is deferred and recognised in the income
third currency, are recognised in equity.
statement over the term of the lease.
Goodwill and intangible assets arising on the acquisition of a
Lessor
foreign operation are treated as assets of the foreign operation
Operating lease revenue is recognised in the income statement
and translated at the foreign exchange rates ruling at balance
on a straight-line basis over the lease term.
sheet date.
Assets held under a finance lease are recognised in the balance
Treasury shares
sheet and presented as a receivable at an amount equal to the
Where the Group acquires, or in substance acquires, Telkom
net investment in the lease. The recognition of finance income is
shares, such shares are measured at cost and disclosed as a
based on a pattern reflecting a constant periodic rate of return
reduction of equity. No gain or loss is recognised in profit or loss
on the net investment in the finance lease.
on the purchase, sale, issue or cancellation of the Group’s own equity instruments. Such shares are not remeasured for changes in fair value.
Employee benefits Post-employment benefits The Group provides defined benefit and defined contribution
Where the Group chooses or is required to buy equity instruments
plans for the benefit of employees. These plans are funded by
from another party to satisfy its obligations to its employees under
the employees and the Group, taking into account
the share-based payment arrangement by delivery of its own
recommendations of the independent actuaries. The post-
shares, the transaction is accounted for as equity-settled. This
retirement telephone rebate liability is unfunded.
applies regardless of whether the employees’ rights to the equity instruments were granted by the Group itself or by its shareholders or was settled by the Group itself or its shareholders.
Leases A lease is classified as a finance lease if it transfers substantially all the risks and rewards incidental to ownership. All other leases are classified as operating leases.
Defined contribution plans The Group’s funding of the defined contribution plans is charged to employee expenses in the same year as the related service is provided.
Defined benefit plans The Group provides defined benefit plans for pension, retirement, post-retirement medical aid benefits and telephone
Where the Group enters into a service agreement as a supplier or
rebates to qualifying employees. The Group’s net obligation in
a customer that depends on the use of a specific asset, and conveys
respect of defined benefits is calculated separately for each
the right to control the use of the specific asset, the arrangement is assessed to determine whether it contains a lease. Once it has been concluded that an arrangement contains a lease, it is assessed against the criteria in IAS17 to determine if the arrangement should be recognised as a finance lease or operating lease.
plan by estimating the amount of future benefits earned in return for services rendered.
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Notes to the consolidated annual financial statements
159
(continued)
for the three years ended March 31, 2009
2.
SIGNIFICANT ACCOUNTING POLICIES (continued)
Deferred bonus incentives
Employee benefits (continued)
Employees of the wholly owned subsidiaries of Vodacom,
Defined benefit plans (continued)
including executive directors, are eligible for compensation
The amount recognised in the balance sheet represents the present
benefits in the form of a Deferred Bonus Incentive Scheme. The
value of the defined benefit obligations, calculated by using the
benefit is recorded at the present value of the expected future
projected unit credit method, as adjusted for unrecognised
cash outflows.
actuarial gains and losses, unrecognised past service costs and reduced by the fair value of the related plan assets. The amount of any surplus recognised and reflected as deferred expenses is limited to unrecognised actuarial losses and past service costs plus the present value of available refunds and reductions in future contributions to the plan. To the extent that there is uncertainty as to the entitlement to the surplus, no asset is recognised. No gain is recognised solely as a result of an actuarial loss or past service cost in the current period and no loss is recognised solely as a result of an actuarial gain or past service cost in the current period.
Share-based compensation The grants of equity instruments, made to employees in terms of the Telkom Conditional Share Plan, are classified as equitysettled share-based payment transactions. The expense relating to the services rendered by the employees, and the corresponding increase in equity, is measured at the fair value of the equity instruments at their date of grant based on the market price at grant date, adjusted for the lack of entitlement to dividends during the vesting period. This compensation cost is recognised over the vesting period, based on the best available
Actuarial gains and losses are recognised as employee
estimate at each balance sheet date of the number of equity
expenses when the cumulative unrecognised gains and losses
instruments that are expected to vest.
for each individual plan exceed 10% of the greater of the present value of the Group’s obligation and the fair value of plan assets at the beginning of the year. These gains or losses are amortised on a straight-line basis over 10 years for all the defined benefit plans, except gains or losses related to the pensioners in the Telkom Retirement Fund or unless the standard requires faster recognition. For the Telkom Retirement Fund pensioners, the cumulative unrecognised actuarial gains and
Short-term employee benefits The cost of all short-term employee benefits is recognised during the year the employees render services, unless the Group uses the services of employees in the construction of an asset and the benefits received meet the recognition criteria of an asset, at which stage it is included as part of the related property, plant and equipment or intangible asset item.
losses in excess of the 10% corridor at the beginning of the year
Long-term incentive provision
are recognised immediately.
The Vodacom Group provides long-term incentives to eligible
Past service costs are recognised immediately to the extent that the benefits are vested, otherwise they are recognised on a straight-line basis over the average period the benefits become vested.
Leave benefits Annual leave entitlement is provided for over the period that the leave accrues and is subject to a cap of 22 days.
employees payable on termination or retirement. The Group’s liability is based on an actuarial valuation. Actuarial gains and losses are recognised as employee expenses.
Provisions Provisions are recognised when the Group has a present obligation (legal or constructive) as a result of a past event, it is probable that an outflow of resources will be required to settle the obligation, and a reliable estimate can be made of the
Workforce reduction
amount of the obligation. Provisions are reviewed at each
Workforce reduction expenses are payable when employment
balance sheet date and adjusted to reflect the current best
is terminated before the normal retirement age or when an
estimate. Where the effect of the time value of money is
employee accepts voluntary redundancy in exchange for
material, the amount of the provision is the present value of the
benefits. Workforce reduction benefits are recognised when the
expenditures expected to be required to settle the obligation.
entity is demonstrably committed and it is probable that the expenses will be incurred. In the case of an offer made to encourage voluntary redundancy, the measurement of termination benefits is based on the number of employees expected to accept the offer.
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Notes to the consolidated annual financial statements
(continued)
for the three years ended March 31, 2009
2007 Rm
2008 Rm
2009 Rm
3.
REVENUE
3.1
Total revenue
32,919
34,084
36,433
Operating revenue
32,441
33,611
35,940
equipment, intangible assets and investments, refer to note 4)
279
305
312
Investment income (refer to note 6)
199
168
181
Operating revenue
32,441
33,611
35,940
Fixed-line
32,345
32,572
33,659
Other income (excluding profit on disposal of property, plant and
3.2
–
845
1,900
Other
873
1,040
1,214
Eliminations
(777)
(846)
(833)
32,345
32,572
33,659
Multi-Links
Fixed-line
6,286
6,330
6,614
16,740
15,950
15,323
Domestic (local and long distance)
7,563
6,328
5,670
Fixed-to-mobile
7,646
7,557
7,420
International (outgoing)
988
986
933
Subscription based calling plans
543
1,079
1,300
Subscriptions, connections and other usage Traffic
4.
Interconnection
1,639
1,757
2,084
Data
7,489
8,308
9,310
Sundry revenue
191
227
328
OTHER INCOME
338
472
343
Other income (included in Total revenue, refer to note 3)
279
305
312
188
254
270
91
51
42
Profit on disposal of property, plant and equipment and intangible assets
16
167
31
Profit on disposal of investment
43
–
–
Interest received from trade receivables Sundry income
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Notes to the consolidated annual financial statements
161
(continued)
for the three years ended March 31, 2009
2007 Rm
5.
2008 Rm
2009 Rm
OPERATING EXPENSES Operating expenses comprise:
5.1
Employee expenses
7,254
7,629
8,345
Salaries and wages
5,215
5,710
6,050
Medical aid contributions
384
415
410
Retirement contributions
446
470
472
33
5
29
Post-retirement pension and retirement fund (refer to note 30)
5
5
4
Interest cost
329
509
633
Expected return on plan assets
(508)
(713)
(825)
Actuarial gain
(136)
(16)
–
21
(2)
(3)
322
222
220
330
278
457
Current service cost
Settlement loss/(gain) Asset limitation Post-retirement medical aid (refer to notes 29 and 30)
83
84
95
Interest cost
286
322
428
Expected return on plan asset
(188)
(257)
(223)
Actuarial loss
149
129
157
104
27
61
Current service cost
Telephone rebates (refer to notes 29 and 30)
4
3
6
Interest cost
19
22
39
Past service cost
76
2
2
5
–
14
141
522
554
1,297
988
1,048
(696)
(786)
(736)
5,005
6,098
6,919
Current service cost
Actuarial loss Share-based compensation expense (refer to note 24) Other benefits* Employee expenses capitalised * Other benefits include annual leave, performance incentive,
service bonuses, skills development and workforce reduction expenses.
5.2
Payments to other operators
Payments to other network operators consist of expenses in respect of interconnection with other network operators.
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Notes to the consolidated annual financial statements
(continued)
for the three years ended March 31, 2009
5.
OPERATING EXPENSES (continued)
5.3
Selling, general and administrative expenses
2007 Rm
2008 Rm
2009 Rm
4,184
4,045
5,772
Selling and administrative expenses
1,533
1,220
2,374
Maintenance
1,870
1,966
2,319
Marketing
640
614
711
Bad debts
141
245
368
Service fees
2,209
2,437
2,756
Facilities and property management
1,275
The increase in the current year’s selling and administrative expenses is attributable to the focus on expanding the customer base in Nigeria. 5.4
1,142
1,228
Consultancy services
192
169
295
Security and other
821
982
1,121
54
58
65
53
57
58
48
46
47
47
43
47
1
3
–
5
11
11
–
1
–
–
1
–
1
–
7
Operating leases
775
671
823
Land and buildings
135
160
244
8
35
118
80
48
72
552
428
389
Depreciation, amortisation, impairment and write-offs
3,601
4,134
5,280
Depreciation of property, plant and equipment
3,011
3,151
3,733
306
469
724
–
229
501
284
285
322
Auditors’ remuneration Audit services Company auditors Current year Prior year underprovision Other auditors – current year Audit related services Other auditors Other services Included in the current year’s consultancy services is an amount of R177 million relating to services rendered in respect of the transaction to dispose of Telkom’s shareholding in Vodacom Group (Proprietary) Limited. The increase in the current year’s security and other costs is mainly attributable to the new contract negotiated to secure the copper network in Telkom’s drive to cut down on cable thefts. 5.5
Transmission and data lines Equipment Vehicles 5.6
Amortisation of intangible assets Impairment of property, plant and equipment and intangible assets Write-offs of property, plant and equipment and intangible assets
Included in the current year’s amortisation of intangible assets is an amount of R134 million relating to the FIFA brand intangible asset. The impairment charge for the 2009 financial year consists of R462 million and R39 million relating to Multi-Links and Africa Online respectively.
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Notes to the consolidated annual financial statements
163
(continued)
for the three years ended March 31, 2009
6.
INVESTMENT INCOME Interest income Dividend income from investments
2009 Rm
2007 Rm
2008 Rm
199
168
181
196
168
181
3
–
–
857
1,556
2,843
1,142
1,543
1,732
1,303
1,700
1,895
–
18
–
(161)
(175)
(163)
(285)
13
1,111
Included in investment income is an amount of R160 million (2008: R142 million; 2007: R196 million) which relates to interest earned from financial assets not measured at fair value through profit or loss.
7.
FINANCE CHARGES AND FAIR VALUE MOVEMENTS Finance charges on interest-bearing debt Local debt Foreign debt Finance charges capitalised Foreign exchange gains and losses and fair value movement Foreign exchange losses Fair value adjustments on derivative instruments Capitalisation rate
59
93
843
(344)
(80)
268
14.77%
12.60%
12.40%
Included in finance charges is an amount of R1,655 million (2008: R1,499 million; 2007: R1,142 million) which relates to interest paid on financial liabilities not measured at fair value through profit or loss. Included in foreign exchange losses and fair value adjustments are forex losses of R961 million in respect of the loan that Multi-Links received from Telkom and R409 million loss in respect of the Multi-Links put option, offset by the R318 million gain in Telkom.
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Telkom Annual Report 2009
Notes to the consolidated annual financial statements
(continued)
for the three years ended March 31, 2009
2007 Rm
8.
2008 Rm
2009 Rm
TAXATION
2,803
2,647
1,660
South African normal company taxation
1,989
2,018
1,658
2,023
2,018
1,686
(34)
–
(28)
490
254
(164)
534
121
241 (89)
Current taxation Overprovision for prior year Deferred taxation Temporary differences – normal company taxation Temporary difference – secondary taxation on companies (STC) taxation credits (raised)/utilised
(45)
190
Change in taxation rate
–
(54)
–
Capital gains taxation (CGT) asset
–
–
(454)
1
(3)
138
324
381
164
–
(6)
2
%
%
%
Effective rate
30.8
34.5
44.5
South African normal rate of taxation
29.0
29.0
28.0
1.8
5.5
16.5
Underprovision/(overprovision) for prior year Secondary taxation on companies Foreign taxation Included in the current year’s deferred taxation expense is a credit of R454 million relating to the deferred taxation on temporary differences associated with the disposal groups which are classified as held for sale. The decrease in the deferred taxation expense is mainly due to the temporary difference associated with the disposal groups which are classified as held for sale. The STC expense was provided for at a rate of 10% (12.5% before October 1, 2007) on the amount by which dividends declared exceeded dividends received. Deferred taxation expense relating to STC credits is provided for at a rate of 10% (2008: 10%; 2007: 12.5%). Reconciliation of taxation rate
Adjusted for:
–
(0.5)
–
Exempt income
(2.2)
(2.5)
(26.8)
Disallowable expenditure
0.7
2.9
47.7
Change in taxation rate
–
(0.7)
1.6
STC credits (raised)/utilised
(0.3)
1.5
(2.4)
STC charge
3.1
5.3
4.4
CGT asset
1.1
–
(11.0)
Net (overprovision)/underprovision for prior year
(0.5)
(0.5)
3.0
Utilisation of assessed loss
(0.1)
–
–
Taxation losses not utilised
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Notes to the consolidated annual financial statements
165
(continued)
for the three years ended March 31, 2009
2007 Rm
9.
DISCONTINUED OPERATIONS AND DISPOSAL GROUPS HELD FOR SALE
9.1
Discontinued operations
2008 Rm
2009 Rm
Telkom Media (Proprietary) Limited Telkom Media was classified as held for sale in the September 2008 interim financials. At year end March 31, 2009, the subsidiary did not meet the held for sale criteria as management were unable to sell the disposal group for its expected price and therefore decided to abandon it. The results and cash flows of the subsidiary are disclosed as a discontinued operation in accordance with IFRS. Analysis of the results of discontinued operations: 14
26
Expenses*
157
305
Loss before taxation of discontinued operations
143
279
(1)
2
142
281
(95)
(140)
Revenue*
Taxation Loss after taxation of discontinued operations The net cash flows attributable to the operating, investing and financing activities of discontinued operations: Operating cash flows Investing cash flows
(218)
(39)
Financing cash flows
319
149
6
(30)
Total cash inflow/(outflow) 9.2
Disposal groups held for sale
9.2.1 Vodacom Group (Proprietary) Limited In the current year, the Group announced a decision to dispose of its entire interest in Vodacom through selling 15% of its shareholding to Vodafone, a wholly owned subsidiary of Vodafone Group Plc (Vodafones) and unbundling its remaining 35% shareholding to its shareholders pursuant to a listing of Vodacom on the main board of the JSE Limited. This decision was taken in line with the Group’s strategy to unlock shareholder value; consequently, all assets and liabilities of Vodacom and its subsidiaries were classified as a discontinued operation. Analysis of the results of discontinued operations: Revenue*
19,157
22,653
26,215
Expenses*
14,709
17,334
21,749
Profit before taxation of discontinued operations
4,448
5,319
4,466
Taxation
1,918
2,055
2,023
Profit after taxation of discontinued operations
2,530
3,264
2,443
* Revenue comprises operating revenue, other income and investment income. Expenses comprises operating expenses and finance charges.
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Notes to the consolidated annual financial statements
(continued)
for the three years ended March 31, 2009
2007 Rm
9.
2008 Rm
2009 Rm
DISCONTINUED OPERATIONS AND DISPOSAL GROUPS HELD FOR SALE (continued)
9.2 Disposal groups held for sale (continued) 9.2.1 Vodacom Group (Proprietary) Limited (continued) The major classes of assets and liabilities of the business classified as a disposal group: Assets
23,410 10,922 5,897 4,283 2,308
Property, plant and equipment Intangible assets Trade and other receivables Other non-current and current assets Liabilities
15,858 4,170 4,679 2,882 1,260 1,102 1,765
Interest-bearing debt Trade and other payables Current portion of interest-bearing debt Current portion of deferred revenue Credit facilities utilised Other non-current and current liabilities Reserve of disposal group held for sale
876 Property, plant and equipment
Reconciliation of carrying value transferred to disposal groups at year end:
9,585 2,979 (28) 340 143 (53) (1,974) (33) (37)
Carrying value at beginning of year Additions Disposals Foreign currency translation reserve Business combinations Impairments and write-offs Depreciation Transfers Other transfers
10,922
Carrying value at end of year
Intangible assets Carrying value at beginning of year Additions Foreign currency translation reserve Business combinations Amortisation Transfers
2,111 590 26 3,503 (366) (33)
Carrying value at end of year
5,897
The net cash flows attributable to the operating, investing and financing activities of the disposal group: Operating cash flows Investing cash flows Financing cash flows Total cash (outflow)/inflow
2,429 (3,292) (100)
2,563 (3,751) 1,617
2,092 (6,375) 4,436
(963)
429
153
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Notes to the consolidated annual financial statements
167
(continued)
for the three years ended March 31, 2009
2007 Rm
9.
DISCONTINUED OPERATIONS AND DISPOSAL GROUPS HELD FOR SALE (continued)
9.2
Disposal groups held for sale (continued)
2008 Rm
2009 Rm
9.2.2 Swiftnet (Proprietary) Limited In February 2009, Telkom’s Board of directors took a decision to dispose of its 100% investment in Swiftnet (Proprietary) Limited. The investment is classified as held for sale. Analysis of the results of discontinued operations: 103
98
97
Expenses*
64
79
82
Profit before taxation of discontinued operations
39
19
15
Taxation
10
3
(4)
Profit after taxation of discontinued operations
29
16
19
Revenue*
The major classes of assets and liabilities of the business classified as a disposal group: Assets
72 24
Property, plant and equipment and intangible assets Income taxation receivable
2
Trade and other receivables
18
Cash and cash equivalents
28
Liabilities
15 1
Provisions
10
Trade and other payables
4
Current portion of provisions The net cash flows attributable to the operating, investing and financing activities of the disposal group: Operating cash flows
43
22
31
Investing cash flows
(15)
(11)
(33)
Financing cash flows
(23)
–
10
5
11
8
Total cash inflow
* Revenue comprises operating revenue, other income and investment income. Expenses comprises operating expenses and finance charges.
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Notes to the consolidated annual financial statements
(continued)
for the three years ended March 31, 2009
2007
10.
2008
2009
EARNINGS PER SHARE Total operations Basic earnings per share (cents)
1,681.0
1,565.0
832.8
1,676.3
1,546.9
819.6
1,710.7
1,634.8
994.6
1,706.0
1,616.0
978.8
1,204.7
963.7
407.4
1,201.3
952.6
401.0
The calculation of earnings per share is based on profit attributable to equity holders of Telkom for the year of R4,170 million (2008: R7,975 million; 2007: R8,646 million) and 500,700,538 (2008: 509,595,092; 2007: 514,341,284) weighted average number of ordinary shares in issue. Diluted earnings per share (cents) The calculation of diluted earnings per share is based on earnings for the year of R4,170 million (2008: R7,975 million; 2007: R8,646 million) and 508,782,641 (2008: 515,541,968; 2007: 515,763,581) diluted weighted average number of ordinary shares. The adjustment in the weighted average number of shares is as a result of the expected future vesting of shares already allocated to employees under the Telkom Conditional Share Plan. Headline earnings per share (cents)* The calculation of headline earnings per share is based on headline earnings of R4,980 million (2008: R8,331 million; 2007: R8,799 million) and 500,700,538 (2008: 509,595,092; 2007: 514,341,284) weighted average number of ordinary shares in issue. Diluted headline earnings per share (cents)* The calculation of diluted headline earnings per share is based on headline earnings of R4,980 million (2008: R8,331 million; 2007: R8,799 million) and 508,782,641 (2008: 515,541,968; 2007: 515,763,581) diluted weighted average number of ordinary shares in issue. The adjustment in the weighted average number of shares is as a result of the expected future vesting of shares already allocated to employees under the Telkom Conditional Share Plan. Continuing operations Basic earnings per share (cents) The calculation of earnings per share is based on profit attributable to equity holders of Telkom for the year of R2,040 million (2008: R4,911 million; 2007: R6,196 million) and 500,700,538 (2008: 509,595,092; 2007: 514,341,284) weighted average number of ordinary shares in issue. Diluted earnings per share (cents) The calculation of diluted earnings per share is based on earnings for the year of R2,040 million (2008: R4,911 million; 2007: R6,196 million) and 508,782,641 (2008: 515,541,968; 2007: 515,763,581) diluted weighted average number of ordinary shares. The adjustment in the weighted average number of shares is as a result of the expected future vesting of shares already allocated to employees under the Telkom Conditional Share Plan.
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Notes to the consolidated annual financial statements
169
(continued)
for the three years ended March 31, 2009
2007
10.
2008
2009
EARNINGS PER SHARE (continued) Continuing operations (continued) Headline earnings per share (cents)*
1,235.5
1,028.9
557.0
1,232.2
1,017.0
548.2
476.3
601.3
425.4
475.0
594.3
418.6
475.2
606.0
437.6
473.9
599.0
430.6
The calculation of headline earnings per share is based on headline earnings of R2,789 million (2008: R5,243 million; 2007: R6,355 million) and 500,700,538 (2008: 509,595,092; 2007: 514,341,284) weighted average number of ordinary shares in issue. Diluted headline earnings per share (cents)* The calculation of diluted headline earnings per share is based on headline earnings of R2,789 million (2008: R5,243 million; 2007: R6,355 million) and 508,782,641 (2008: 515,541,968; 2007: 515,763,581) diluted weighted average number of ordinary shares in issue. The adjustment in the weighted average number of shares is as a result of the expected future vesting of shares already allocated to employees under the Telkom Conditional Share Plan. Discontinuing operations Basic earnings per share (cents) The calculation of earnings per share is based on profit attributable to equity holders of Telkom for the year of R2,130 million (2008: R3,064 million; 2007: R2,450 million) and 500,700,538 (2008: 509,595,092; 2007: 514,341,284) weighted average number of ordinary shares in issue. Diluted earnings per share (cents) The calculation of diluted earnings per share is based on earnings for the year of R2,130 million (2008: R3,064 million; 2007: R2,450 million) and 508,782,641 diluted weighted average number of ordinary shares (2008: 515,541,968; 2007: 515,763,581). The adjustment in the weighted average number of shares is as a result of the expected future vesting of shares already allocated to employees under the Telkom Conditional Share Plan. Headline earnings per share (cents)* The calculation of headline earnings per share is based on headline earnings of R2,191 million (2008: R3,088 million; 2007: R2,444 million) and 500,700,538 (2008: 509,595,092; 2007: 514,341,284) weighted average number of ordinary shares in issue. Diluted headline earnings per share (cents)* The calculation of diluted headline earnings per share is based on headline earnings of R2,191 million (2008: R3,088 million; 2007: R2,444 million) and 508,782,641 (2008: 515,541,968; 2007: 515,763,581) diluted weighted average number of ordinary shares in issue. The adjustment in the weighted average number of shares is as a result of the expected future vesting of shares already allocated to employees under the Telkom Conditional Share Plan.
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Notes to the consolidated annual financial statements
(continued)
for the three years ended March 31, 2009
2007
10.
2008
2009
EARNINGS PER SHARE (continued) Reconciliation of weighted average number of ordinary shares: Ordinary shares in issue (refer to note 22)
532,855,530
(7,442,253)
(1,594,241)
(27)
(23,161,364)
(21,666,197)
(20,083,621)
514,341,284
509,595,092
500,700,538
514,341,284
509,595,092
500,700,538
1,422,297
5,946,876
8,082,103
515,763,581
515,541,968
508,782,641
Weighted average number of treasury shares Weighted average number of shares outstanding
520,784,186
544,944,901
Weighted average number of shares bought back
Reconciliation of diluted weighted average number of ordinary shares Weighted average number of shares outstanding Expected future vesting of shares Diluted weighted average number of shares outstanding
Total operations
Gross**
Net
Rm
Rm
2009 Reconciliation between earnings and headline earnings: 4,170
Earnings as reported Profit on disposal of property, plant and equipment and intangible assets
(25)
(21)
Impairment loss on property, plant and equipment and intangible assets
557
557
Write-offs of property, plant and equipment and intangible assets
322
274 4,980
Headline earnings 2008 Reconciliation between earnings and headline earnings: Earnings as reported Profit on disposal of investments (available-for-sale)
7,975 (4)
(3)
Profit on disposal of property, plant and equipment and intangible assets
(147)
(104)
Impairment loss on property, plant and equipment and intangible assets
248
244
Write-offs of property, plant and equipment and intangible assets
285
219
Headline earnings
8,331
2007 Reconciliation between earnings and headline earnings: Earnings as reported
8,646
Profit on disposal of investments (available-for-sale)
(52)
(37)
Profit on disposal of property, plant and equipment and intangible assets
(29)
(21)
Reversal of impairment loss on property, plant and equipment and intangible assets
12
9
284
202
Write-offs of property, plant and equipment and intangible assets Headline earnings
8,799
* The disclosure of headline earnings is a requirement of the JSE Limited and is not a recognised measure under IFRS. It has been calculated in accordance with the South African Institute of Chartered Accountants’ circular issued in this regard. ** These are the gross amounts, before deducting taxation and minority interests.
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Notes to the consolidated annual financial statements
171
(continued)
for the three years ended March 31, 2009
10.
EARNINGS PER SHARE (continued) Gross* Continuing operations
Rm
Net Rm
2009 Reconciliation between earnings and headline earnings: 2,066
Profit from continuing operations
26
Minority interest
2,040
Earnings from continuing operations attributable to equity holders of Telkom Profit on disposal of property, plant and equipment and intangible assets
(32)
(26)
Impairment loss on property, plant and equipment and intangible assets
501
499
Write-offs of property, plant and equipment and intangible assets
322
276 2,789
Headline earnings 2008 Reconciliation between earnings and headline earnings: Profit from continuing operations
5,034
Minority interest
123
Earnings from continuing operations attributable to equity holders of Telkom
4,911
Profit on disposal of property, plant and equipment and intangible assets
(166)
Impairment loss on property, plant and equipment and intangible assets
233
233
Write-offs of property, plant and equipment and intangible assets
285
217
Headline earnings
(118)
5,244
2007 Reconciliation between earnings and headline earnings: Profit from continuing operations
6,290
Minority interest
94
Earnings from continuing operations attributable to equity holders of Telkom Profit on disposal of investments (available-for-sale) Profit on disposal of property, plant and equipment and intangible assets Write-offs of property, plant and equipment and intangible assets Headline earnings * These are the gross amounts, before deducting taxation and minority interests.
6,196 (43)
(31)
(16)
(11)
284
201 6,355
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Notes to the consolidated annual financial statements
(continued)
for the three years ended March 31, 2009
10.
EARNINGS PER SHARE (continued) Gross* Discontinuing operations
Net
Rm
Rm
2009 Reconciliation between earnings and headline earnings: 2,181
Profit from discontinued operations
51
Minority interest
2,130
Earnings from discontinued operations attributable to equity holders of Telkom Profit on disposal of property, plant and equipment and intangible assets
7
5
Impairment loss on property, plant and equipment and intangible assets
56
56 2,191
Headline earnings 2008 Reconciliation between earnings and headline earnings: Profit from discontinued operations
3,138
Minority interest
74
Earnings as reported
3,064
Profit on disposal of investments (available-for-sale)
(4)
(4)
Profit on disposal of property, plant and equipment and intangible assets
19
13
Impairment loss on property, plant and equipment and intangible assets
15
15
Headline earnings
3,088
2007 Reconciliation between earnings and headline earnings: Profit from discontinued operations
2,559
Minority interest
109
Earnings as reported
2,450
Profit on disposal of investments (available-for-sale)
(9)
(6)
Profit on disposal of property, plant and equipment and intangible assets
(13)
(9)
Reversal of impairment loss on property, plant and equipment and intangible assets
12
9
Headline earnings
2,444 2007
Dividend per share (cents)
900.0
2008 1,100.0
2009 660.0
The calculation of dividend per share is based on dividends of R3,306 million (2008: R5,627 million; 2007: R4,678 million) declared on June 6, 2008 and 500,941,027 (2008: 511,513,237; 2007: 519,711,236) number of ordinary shares outstanding on the date of dividend declaration. The reduction in the number of shares represents the number of treasury shares held on date of payment. * These are the gross amounts, before deducting taxation and minority interests.
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Notes to the consolidated annual financial statements
173
(continued)
for the three years ended March 31, 2009
2007 Accumulated depreciation and impairCost ment Rm Rm
11.
Carrying value Rm
2008 Accumulated depreciation and impairCost ment Rm Rm
Carrying value Rm
2009* Accumulated depreciation and impairCost ment Rm Rm
Carrying value Rm
PROPERTY, PLANT AND EQUIPMENT Freehold land and 4,594
(1,837)
2,757
4,931
(2,010)
2,921
4,950
(2,136)
2,814
Leasehold buildings
926
(362)
564
1,052
(418)
634
805
(477)
328
Network equipment
63,003
(31,820)
31,183
69,572
(35,214)
34,358
59,765
(29,982)
29,783
4,045
(2,436)
1,609
4,355
(2,635)
1,720
3,921
(2,482)
1,439
536
(366)
170
568
(377)
191
453
(328)
125
5,836
(3,707)
2,129
6,279
(3,904)
2,375
5,543
(3,518)
2,025
2,536
–
2,536
4,200
–
4,200
4,612
–
4,612
860
(554)
306
1,046
(630)
416
721
(429)
292
82,336
(41,082)
41,254
92,003
(45,188)
46,815
80,770
(39,352)
41,418
buildings
Support equipment Furniture and office equipment Data processing equipment and software Under construction Other
Fully depreciated assets with a cost of R155 million (2008: R498 million; 2007: R1,225 million) were derecognised in the 2009 financial year. This has reduced both the cost price and accumulated depreciation of property, plant and equipment. Property, plant and equipment with a carrying value of R158 million (2008: R681 million; 2007: R574 million) are pledged as security. Details of the loans are disclosed in note 28. * Net of assets of disposal groups classified as held for sale.
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Notes to the consolidated annual financial statements
(continued)
for the three years ended March 31, 2009
11.
PROPERTY, PLANT AND EQUIPMENT (continued) The carrying amounts of property, plant and equipment can be reconciled as follows:** Carrying Transfers Impairment, value at to Business Foreign write-offs beginning disposal combicurrency and of year groups Additions nations Transfers* translation reversals Disposals Rm Rm Rm Rm Rm Rm Rm Rm 2009 Freehold land and buildings 2,921 Leasehold buildings 634 Network equipment 34,358 Support equipment 1,720 Furniture and office equipment 191 Data processing equipment and software 2,375 Under construction 4,200 Other 416 46,815 2008 Freehold land and buildings 2,757 Leasehold buildings 564 Network equipment 31,183 Support equipment 1,609 Furniture and office equipment 170 Data processing equipment and software 2,129 Under construction 2,536 Other 306 41,254 2007 Freehold land and buildings 2,699 Leasehold buildings 618 Network equipment 28,941 Support equipment 1,321 Furniture and office equipment 134 Data processing equipment and software 2,082 Under construction 1,320 Other 159 37,274
Depreciation Rm
Carrying value at end of year Rm
(293) (360) (7,951) (235) (72)
283 119 2,913 137 19
– – – – –
82 24 3,378 112 13
(4) (64) 30 1 1
(5) – (141) (12) –
(2) – (71) – –
(168) (25) (2,733) (284) (27)
2,814 328 29,783 1,439 125
(370) – (304)
154 4,872 228
– – –
310 (4,120) 13
(1) (238) (1)
(5) (102) (1)
(1) – –
(437) – (59)
2,025 4,612 292
(9,585)
8,725
–
(188)
(276)
(266)
(74)
(3,733)
41,418
– – – – –
300 136 5,167 316 78
22 26 404 1 3
27 32 1,301 116 1
2 1 272 3 1
(3) (67) (136) (8) (8)
(8) (1) (107) – (1)
(176) (57) (3,726) (317) (53)
2,921 634 34,358 1,720 191
– – –
525 3,416 170
31 135 8
150 (1,737) 11
6 2 7
(19) (152) (2)
(2) – (3)
(445) – (81)
2,375 4,200 416
–
10,108
630
(99)
294
(395)
(122)
(4,855)
46,815
– – – – –
209 – 5,154 442 51
– – 1 – 3
– 1 849 109 8
2 – 240 2 1
17 – (199) (15) –
(1) (14) (270) – –
(169) (41) (3,533) (250) (27)
2,757 564 31,183 1,609 170
– – –
466 2,165 161
12 – –
(36) (912) 58
8 – 4
(10) (37) (1)
(2) – (3)
(391) – (72)
2,129 2,536 306
–
8,648
16
77
257
(245)
(290)
(4,483)
41,254
Full details of land and buildings are available for inspection at the registered offices of the Group. The Group does not have temporarily idle property, plant and equipment. A major portion of this capital expenditure relates to the expansion of existing networks and services. An extensive build programme that provides capacity for growth in services, with focus on Next Generation Network technologies, roll-out of the W-CDMA network and Multi-Links’s expansion of network equipment, has resulted in an increase in property, plant and equipment additions. During the 2008 financial year, the Group recognised an impairment loss relating to Telkom Media assets. The recoverable amount for certain items of property, plant and equipment was estimated, and an impairment loss of R217 million was recognised in order to reduce the carrying amount of those assets to their recoverable amount. The impairment has been included in impairment, write-offs and reversals. Included in the current year’s additions in the other category, is an amount of R179 million (2008: R31 million; 2007: RNil) that relates to finance leases. An amount of R71 million (2008: R88 million; 2007: R240 million) under property, plant and equipment disposals relates to the reclassification of Customer Premises Equipment at the start of the lease. These disposals are as a result of the Group entering into a leasing arrangement. * An amount of R21 million was transferred from network equipment to cash and cash equivalents for Telkom Media.
** The 2009 reconciliation excludes assets held in the disposal groups held for sale, refer to note 9.
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Notes to the consolidated annual financial statements
175
(continued)
for the three years ended March 31, 2009
2007 Accumulated amortisation and impairCost ment Rm Rm
Carrying value Rm
2008 Accumulated amortisation and impairCost ment Rm Rm
2009* Accumulated amortisation and impairCost ment Rm Rm
Carrying value Rm
Carrying value Rm
12. INTANGIBLE ASSETS Goodwill Trademarks, copyrights and other Licences Software Under construction
673
–
673
3,267
(12)
3,255
3,461
(501)
2,960
761 222 6,720 1,109
(521) (116) (3,737) –
240 106 2,983 1,109
1,127 311 8,106 740
(633) (140) (4,298) –
494 171 3,808 740
677 228 7,045 488
(332) (35) (3,799) –
345 193 3,246 488
9,485
(4,374)
5,111
13,551
(5,083)
8,468
11,899
(4,667)
7,232
* Net of assets of disposal groups classified as held for sale.
The carrying amounts of intangible assets can be reconciled as follows:** Carrying Transfers value at to Business beginning disposal combiof year groups Additions nations Rm Rm Rm Rm 2009 Goodwill Trademarks, copyrights and other Licences Software Under construction
2008 Goodwill Trademarks, copyrights and other Licences Software Under construction
2007 Goodwill Trademarks, copyrights and other Licences Software Under construction
ImpairForeign ment currency and Transfers translation write-offs Rm Rm Rm
Amortisation Rm
Carrying value at end of year Rm
3,255
(947)
–
1,309
–
(156)
(501)
–
2,960
494 171 3,808 740
(178) (104) (882) –
300 41 209 356
– – – –
(28) 137 613 (555)
(22) (42) (8) 2
– – (1) (55)
(221) (10) (493) –
345 193 3,246 488
8,468
(2,111)
906
1,309
167
(226)
(557)
(724)
7,232
673
–
492
1,727
–
375
(12)
–
3,255
240 106 2,983 1,109
– – – –
174 32 739 354
165 36 – –
– – 713 (614)
20 15 9 –
– (3) (10) (109)
(105) (15) (626) –
494 171 3,808 740
5,111
–
1,791
1,928
99
419
(134)
(746)
8,468
305
–
186
173
–
9
–
–
673
213 60 2,269 1,063
– – – –
8 47 628 729
69 1 – –
– – 559 (636)
– 8 7 –
– – (4) (47)
(50) (10) (476) –
240 106 2,983 1,109
3,910
–
1,598
243
(77)
24
(51)
(536)
5,111
Intangible assets that are material to the Group consist of Software and Goodwill. The average remaining amortisation period for Software is between 2 and 10 years. ** The 2009 reconciliation excludes assets held in the disposal groups held for sale, refer to note 9.
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Telkom Annual Report 2009
Notes to the consolidated annual financial statements
(continued)
for the three years ended March 31, 2009
12.
INTANGIBLE ASSETS (continued) Impairment testing of goodwill For the purposes of impairment testing, goodwill is allocated to the smallest cash-generating unit. A cash-generating unit is the smallest identifiable group of assets that generates cash inflows that are largely independent of the cash inflows from other assets or groups of assets. The Group reviews goodwill for impairment annually by comparing the recoverable amounts of cash-generating units to the carrying amounts. Goodwill acquired through business combinations has been allocated to two cash-generating units for impairment testing as follows: Africa Online Limited (Kenya) Multi-Links Telecommunications Limited (Nigeria)
Kenya The carrying amount of goodwill is R144 million. For the period ending March 31, 2009, Africa Online was treated as one cash-generating unit for impairment testing purposes. This represents the lowest level within the Group at which the goodwill is monitored for internal management purposes. Goodwill relating to Africa Online was tested for impairment on March 31, 2009. The recoverable amount of goodwill relating to Africa Online was determined on the basis of value in use calculations. Key assumptions used to determine the value in use include the discount rate and cash flows. Cash flows are based on a five year forecast of future cash flows, extrapolated in perpetuity to reflect the long-term plans for the entity, using a weighted average cost of capital of 15.4% (2008: 11.59%) and a terminal growth rate of 3%. An impairment loss of R39 million (2008: R12 million) was recognised.
Nigeria The carrying amount of goodwill is R2,749 million. Multi-Links has been identified as a single cash-generating unit within the Group. The recoverable amount of goodwill relating to Multi-Links was determined using the discounted cash flow method. The key assumptions in determining cash flows are a five year forecast of future cash flows, extrapolated in perpetuity to reflect the longterm plans for the entity, using a weighted average cost of capital of 18.8%. The calculated perpetuity value for Multi-Links assumes that the company will continue to grow at 3% p.a. (nominal). Key assumptions used in the testing of goodwill for impairment:
Applicable to all cash-generating units Expected customer base: The basis for determining value(s) assigned to key assumptions is based on the closing customer base in the period immediately preceding the budget period and increased for expected growth. The value assigned to key assumptions reflects past experience, and has an element of potential growth. The growth is based on market assumptions. Gross margin: The basis for determining value(s) assigned to key assumptions is based on the average gross margin achieved in the period immediately before the budget period and increased for expected efficiences. The value assigned reflects past experience and efficiency improvements. Capital expenditure: The basis for determining value(s) assigned to key assumptions is based on the total capital expenditure achieved in the period immediately before the budget period and adjusted for expected network coverage roll-out. The value assigned is based on management’s expected network coverage roll-out.
Applicable to all cash-generating units except for the Africa Online cash-generating units ARPU: The basis for determining value(s) assigned to key assumptions is based on past experience and expected growth which is based on market forces and external sources of information. Applicable to all non-South African cash-generating units Exchange rates: The basis for determining value(s) assigned to key assumptions is based on the average market forward exchange rate over the budget period in respect of the ZAR/US$. The value assigned to the key assumption is consistent with external sources of information.
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Telkom Annual Report 2009
Notes to the consolidated annual financial statements
177
(continued)
for the three years ended March 31, 2009
13.
FINANCIAL INSTRUMENTS AND RISK MANAGEMENT Risk management Exposure to continuously changing market conditions has made management of financial risk critical for the Group. As a result of the financial instruments held, the Group is exposed to market risk (comprising interest rate risk and currency risk), credit risk and liquidity risk. Treasury policies, risk limits and control procedures are continuously monitored by the Board of directors through its audit and risk management committee. The Group holds or issues financial instruments to finance its operations, for the temporary investment of short-term funds and to manage currency and interest rate risks. In addition, financial instruments, for example trade receivables and payables, arise directly from the Group’s operations. The Group finances its operations primarily by a mixture of issued share capital, retained earnings, long-term and short-term loans. The Group uses derivative financial instruments to manage its exposure to market risks from changes in interest and foreign exchange rates. The derivatives used for this purpose are principally interest rate swaps and forward exchange contracts. The Group does not speculate in derivative instruments. The table below sets out the Group’s classification of financial assets and liabilities: At fair value through
Note
profit or
Financial
loss
liabilities at
held for
amortised
Held-to-
Available-
Loans and
carrying
trading
cost
maturity
for-sale
receivables
value
Fair value
Rm
Rm
Rm
Rm
Rm
Rm
Rm
1,442
–
1,046
–
7,976
10,464
10,464
Total
2009 Classes of financial instruments per balance sheet Assets 14
1,286
–
–
–
97
1,383
1,383
Trade and other receivables* 19
–
–
–
–
5,673
5,673
5,673
156
–
1,046
–
–
1,202
1,202
4
–
–
–
–
4
4
152
–
–
–
–
152
152
–
–
1,046
–
–
1,046
1,046
Investments Other financial assets
20
Interest rate swaps Forward exchange contracts Repurchase agreements Finance lease receivables
16
–
–
–
–
275
275
275
Cash and cash equivalents
21
–
–
–
–
1,931
1,931
1,931
(228)
(23,963)
–
–
–
(24,191)
(25,265)
–
(18,275)
–
–
–
(18,275)
(19,349)
Liabilities Interest-bearing debt
28
Trade and other payables
31
–
(5,538)
–
–
–
(5,538)
(5,538)
Other financial liabilities
20
(228)
–
–
–
–
(228)
(228)
Interest rate swaps Forward exchange contracts
(72)
–
–
–
–
(72)
(72)
(156)
–
–
–
–
(156)
(156)
Credit facilities utilised
21
–
(127)
–
–
–
(127)
(127)
Shareholders for dividends
35
–
(23)
–
–
–
(23)
(23)
* Trade and other receivables are disclosed net of prepayments of R307 million (2008: R404 million; 2007: R256 million).
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Notes to the consolidated annual financial statements
(continued)
for the three years ended March 31, 2009
13.
FINANCIAL INSTRUMENTS AND RISK MANAGEMENT (continued) Risk management (continued) At fair value through profit or
Financial
loss
liabilities at
held for
amortised
Held-to-
Available-
Loans and
carrying
trading
cost
maturity
for-sale
receivables
value
Fair value
Rm
Rm
Rm
Rm
Rm
Rm
Rm
1,991
–
–
55
10,155
12,201
12,201
14
1,377
–
–
55
67
1,499
1,499
Trade and other receivables* 19
–
–
–
–
8,582
8,582
8,582
614
–
–
–
–
614
614
9
–
–
–
–
9
9
589
–
–
–
–
589
589
16
–
–
–
–
16
16
Note
Total
2008 Classes of financial instruments per balance sheet Assets Investments Other financial assets
20
Interest rate swaps Forward exchange contracts Other financial assets Finance lease receivables
16
–
–
–
–
372
372
372
Cash and cash equivalents
21
–
–
–
–
1,134
1,134
1,134
(1,290)
(25,866)
–
–
–
(27,156)
(27,692) (16,269)
Liabilities Interest-bearing debt
28
–
(15,733)
–
–
–
(15,733)
Trade and other payables
31
–
(8,771)
–
–
–
(8,771)
(8,771)
Other financial liabilities
20
(1,290)
–
–
–
–
(1,290)
(1,290)
Put option (Multi-Links)
(919)
–
–
–
–
(919)
(919)
Put option (Vodacom DRC)
(198)
–
–
–
–
(198)
(198)
Forward exchange contracts
(173)
–
–
–
–
(173)
(173)
Credit facilities utilised
21
–
(1,342)
–
–
–
(1,342)
(1,342)
Shareholders for dividend
35
–
(20)
–
–
–
(20)
(20)
* Trade and other receivables are disclosed net of prepayments of R307 million (2008: R404 million; 2007: R256 million).
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Notes to the consolidated annual financial statements
179
(continued)
for the three years ended March 31, 2009
13.
FINANCIAL INSTRUMENTS AND RISK MANAGEMENT (continued) Risk management (continued) At fair value through profit or
Financial
loss
liabilities at
held for
amortised
Held-to-
Available-
Loans and
carrying
trading
cost
maturity
for-sale
receivables
value
Fair value
Rm
Rm
Rm
Rm
Rm
Rm
Rm
1,608
–
246
47
7,861
9,762
9,762
14
1,349
–
–
47
65
1,461
1,461
Trade and other receivables* 19
–
–
–
–
7,047
7,047
7,047
259
–
–
–
–
259
259
98
–
–
–
–
98
98
Note
Total
2007 Classes of financial instruments per balance sheet Assets Investments Other financial assets
20
Bills of exchange Interest rate swaps
16
–
–
–
–
16
16
145
–
–
–
–
145
145
16
–
–
246
–
–
246
246
Cash and cash equivalents 21
–
–
–
–
749
749
749
(327)
(17,959)
–
–
–
(18,286)
(19,676)
(98)
(10,266)
–
–
–
(10,364)
(11,754)
Forward exchange contracts Finance lease receivables
Liabilities Interest-bearing debt
28
Trade and other payables
31
–
(7,237)
–
–
–
(7,237)
(7,237)
Other financial liabilities
20
(229)
–
–
–
–
(229)
(229)
(125)
–
–
–
–
(125)
(125)
Interest rate swaps
Put option (Vodacom DRC)
(26)
–
–
–
–
(26)
(26)
Forward exchange contracts
(42)
–
–
–
–
(42)
(42)
Other financial liabilities
(36)
–
–
–
–
(36)
(36)
Credit facilities utilised
21
–
(441)
–
–
–
(441)
(441)
Shareholders for dividend
35
–
(15)
–
–
–
(15)
(15)
* Trade and other receivables are disclosed net of prepayments of R307 million (2008: R404 million; 2007: R256 million).
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Notes to the consolidated annual financial statements
(continued)
for the three years ended March 31, 2009
13. 13.1
FINANCIAL INSTRUMENTS AND RISK MANAGEMENT (continued) Fair value of financial instruments Carrying value of all financial instruments noted in the balance sheet approximates fair value except as disclosed below. The estimated net fair values as at March 31, 2009, have been determined using available market information and appropriate valuation methodologies as outlined below. Derivatives are recognised at fair value. The fair values of derivatives are determined using quoted prices or, where such prices are not available, discounted cash flow analysis is used. These amounts reflect the approximate values of the net derivative position at the balance sheet date. The fair value of receivables, bank balances, repurchase agreements and other liquid funds, payables and accruals, approximate their fair amount due to the short-term maturities of these instruments. The fair values of the borrowings disclosed above are based on quoted prices or, where such prices are not available, the expected future payments discounted at market interest rates, as a result they differ from carrying values. The fair values of listed investments are based on quoted market prices.
13.2
Interest rate risk management Interest rate risk arises from the repricing of the Group’s forward cover and floating rate debt as well as incremental funding or new borrowings and the refinancing of existing borrowings. The Group’s policy is to manage interest cost through the utilisation of a mix of fixed and floating rate debt. In order to manage this mix in a cost efficient manner and to hedge specific exposure in the interest rate repricing profile of the existing borrowings and anticipated peak additional borrowings, the Group makes use of interest rate derivatives as approved in terms of the Group policy limits. Fixed rate debt represents approximately 64.86% (2008: 51.88%; 2007: 90.37%) of the total debt, after taking the instruments listed below into consideration. There were no changes in the policies and processes for managing and measuring the risk from the previous period. The table below summarises the interest rate swaps outstanding as at March 31: Notional Average
Weighted
amount
average
maturity
Currency
Rm
coupon rate
2-5 years
ZAR
2,000
10.84%
Pay fixed
< 1 year
ZAR
27
13.62%
Receive fixed
1-5 years
ZAR
58
13.30%
2009 Interest rate swaps outstanding Pay fixed 2008 Interest rate swaps outstanding
2007 Interest rate swaps outstanding Pay fixed
< 1 year
ZAR
1,000
14.67%
Receive fixed
1-5 years
ZAR
38
11.45%
>5 years
ZAR
61
11.44%
Pay fixed The floating rate is based on the three month JIBAR, and is settled quarterly in arrears. The interest rate swaps are used to manage interest rate risk on debt instruments.
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Telkom Annual Report 2009
Notes to the consolidated annual financial statements
181
(continued)
for the three years ended March 31, 2009
13. 13.3
FINANCIAL INSTRUMENTS AND RISK MANAGEMENT (continued) Credit risk management Credit risk is the risk due to uncertainty in a counterparty’s ability to meet its obligations as they fall due. Credit risk arises from derivative contracts entered into with financial institutions with a rating of A1 or better. The Group is not exposed to significant concentrations of credit risk. Credit limits are set on an individual basis. The maximum exposure to the Group from counterparties is a net favourable position of R29 million (2008: R438 million; 2007: R144 million). No collateral is required when entering into derivative contracts. Credit limits are reviewed on an annual basis or when information becomes available in the market. The Group limits the exposure to any counterparty and exposures are monitored daily. The Group expects that all counterparties will meet their obligations. With regard to credit risk arising from other financial assets of the Group, which comprises held-to-maturity investments, financial assets held at fair value through profit or loss, loans and receivables and available-for-sale assets, the Group’s exposure to credit risk arises from a potential default by a counterparty, with a maximum exposure equal to the carrying amount of these instruments. The Group’s exposure to credit risk is influenced mainly by the individual characteristics of each type of customer. Management reduces the risk of irrecoverable debt by improving credit management through credit checks and limits. To reduce the risk of counterparty failure, limits are set based on the individual ratings of counterparties by well-known ratings agencies. Trade receivables comprise a large widespread customer base, covering residential, business, government, wholesale, global and corporate customer profiles. Credit checks are performed on all customers, other than prepaid customers, on application for new services on an ongoing basis where appropriate. The Group establishes an allowance for impairment that represents its estimate of incurred losses in respect of trade and other receivables. The collective loss allowance is determined based on historical data of payment statistics for similar financial assets as well as expected future cash flows. Refer to note 19. The Group has provided a financial guarantee to Africa Online Limited for bank loans to the value of R26 million as at March 31, 2009 (2008: R23 million; 2007: RNil). Telkom guarantees a certain portion of employees’ housing loans. The amount guaranteed differs depending on facts 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 payout can be made to the employee. There is no provision outstanding in respect of these contingencies. The maximum amount of the guarantee in the event of a default is R12 million. The fair value of the guarantee at March 31, 2009 was RNil (2008: RNil; 2007: RNil). Given the deterioration of credit markets, stricter objectives, policies and processes were applied for managing and measuring the risk than in the previous period.
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Notes to the consolidated annual financial statements
(continued)
for the three years ended March 31, 2009
13. 13.3
FINANCIAL INSTRUMENTS AND RISK MANAGEMENT (continued) Credit risk management (continued) The maximum exposure to credit risk for financial assets at the reporting date by type of customer was: Carrying amount 2007
2008
2009
Rm
Rm
Rm
3,926
4,401
4,231
Business and residential
1,924
1,824
1,870
Global, corporate and wholesale
1,643
1,875
1,708
318
368
444
41
334
209
2,299
2,880
–
Trade receivables Fixed-line
Government Other customers Mobile
–
38
72
Other
567
666
720
Impairment of trade receivables
(235)
(290)
(324) 4,699
Multi-Links
Subtotal for trade receivables
6,557
7,695
Other receivables*
490
887
974
Other financial assets
259
614
1,202
7,306
9,196
6,875
5,829
6,840
3,582
21 to 60 days
331
384
441
61 to 90 days
80
110
135
91 to 120 days
59
71
84
258
290
457
6,557
7,695
4,699
* Excluding prepayments.
The ageing of trade receivables at the reporting date was: Not past due/current Ageing of past due but not impaired
120+ days
The ageing in the allowance for the impairment of trade receivables at reporting date was: Fixed-line and other Current defaulted trade
24
53
70
21 to 60 days
21
25
30
61 to 90 days
19
31
19
91 to 120 days 120+ days
Mobile
15
19
74
118
121
131
197
249
324
38
41
–
235
290
324
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Notes to the consolidated annual financial statements
183
(continued)
for the three years ended March 31, 2009
13. 13.3
FINANCIAL INSTRUMENTS AND RISK MANAGEMENT (continued) Credit risk management (continued) The movement in the allowance for impairment in respect of trade receivables during the year is disclosed in note 19. Included in the allowance for doubtful debts are individually impaired receivables with a balance of R49 million (2008: R32 million; 2007: R49 million) which have been identified as being unable to service their debt obligation. The impairment recognised represents the difference between the carrying amount of these trade receivables and the present value of the expected liquidation proceeds. The Group does not hold any collateral over these balances. During the 2009 year end the Group renegotiated the terms of trade receivables amounting to R1,9 million from a long outstanding customer. No impairment losses were recognised.
13.4
Liquidity risk management Liquidity risk is the risk that the Group will not be able to meet its financial obligations as they fall due. The Group is exposed to liquidity risk as a result of uncertain cash flows as well as capital commitments. Liquidity risk is managed by the Group’s various Corporate Finance divisions in accordance with policies and guidelines formulated by the Group’s executive committees. In terms of its borrowing requirements the Group ensures that sufficient facilities exist to meet its immediate obligations. In terms of its long-term liquidity risk, the Group maintains a reasonable balance between the period over which assets generate funds and the period over which the respective assets are funded. Short-term liquidity gaps may be funded through repurchase agreements and commercial paper bills. There were no material changes in the exposure to liquidity risk and its objectives, policies and processes for managing and measuring the risk from the previous period. The table below summarises the maturity profile of the Group’s financial liabilities based on undiscounted contractual cash flow at the balance sheet date: Carrying
Contractual
0 – 12
1–2
2–5
>5
amount
cash flows
months
years
years
years
Note
Rm
Rm
Rm
Rm
Rm
Rm
38
986
1,848
165
172
516
995
finance leases)
28
17,291
18,866
7,670
1,817
5,621
3,758
Trade and other payables
31
5,538
5,778
5,778
–
–
–
Credit facilities utilised
21
127
127
127
–
–
–
20
228
228
156
72
–
–
2009 Non-derivative financial liabilities Finance lease liabilities Interest-bearing debt (excluding
Derivative financial liabilities Other financial liabilities Interest rate swaps Forward exchange contracts
72
72
–
72
–
–
156
156
156
–
–
–
24,170
26,847
13,896
2,061
6,137
4,753
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Notes to the consolidated annual financial statements
(continued)
for the three years ended March 31, 2009
13.
FINANCIAL INSTRUMENTS AND RISK MANAGEMENT (continued)
13.4
Liquidity risk management (continued) Carrying
Contractual
0 – 12
1–2
2–5
>5
amount
cash flows
months
years
years
years
Note
Rm
Rm
Rm
Rm
Rm
Rm
38
1,167
2,198
257
202
589
1,150
leases)
28
14,566
16,672
6,350
4,835
2,733
2,754
Trade and other payables
31
8,771
8,771
8,771
–
–
–
Credit facilities utilised
21
1,342
1,342
1,342
–
–
–
20
1,290
1,290
371
919
–
–
Put option (Multi-Links)
919
919
–
919
–
–
Put option (Vodacom DRC)
198
198
198
–
–
–
Forward exchange contracts
173
173
173
–
–
–
27,136
30,273
17,091
5,956
3,322
3,904
38
1,220
2,424
231
276
585
1,332
finance leases)
28
9,144
11,329
6,133
1
2,551
2,644
Trade and other payables
31
7,237
7,237
7,237
–
–
–
Credit facilities utilised
21
441
441
441
–
–
–
20
229
229
229
–
–
–
2008 Non-derivative financial liabilities Finance lease liabilities Interest-bearing debt (excluding finance
Derivative financial liabilities Other financial liabilities
2007 Non-derivative financial liabilities Finance lease liabilities Interest-bearing debt (excluding
Derivative financial liabilities Other financial liabilities Put option (Vodacom DRC)
125
125
125
–
–
–
Interest rate swaps
26
26
26
–
–
–
Forward exchange contracts
42
42
42
–
–
–
Other financial liability
36
36
36
–
–
–
18,271
21,660
14,271
277
3,136
3,976
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Telkom Annual Report 2009
Notes to the consolidated annual financial statements
185
(continued)
for the three years ended March 31, 2009
13. 13.5
FINANCIAL INSTRUMENTS AND RISK MANAGEMENT (continued) Foreign currency exchange rate risk management The Group manages its foreign currency exchange rate risk by economically hedging all identifiable exposures via various financial instruments suitable to the Group’s risk exposure. Forward exchange contracts have been entered into to reduce the foreign currency exposure on the Group’s operations and liabilities. The Group also enters into foreign forward exchange contracts to economically hedge interest expense and purchase and sale commitments denominated in foreign currencies (primarily United States dollars and euros). The purpose of the Group’s foreign currency hedging activities is to protect the Group from the risk that the eventual net cash flows will be adversely affected by changes in exchange rates. There were no changes in the exposure to foreign currency exchange rate risk and its objectives, policies and processes for managing and measuring the risk from the previous period. The following table details the foreign forward exchange contracts outstanding at year end: Foreign contract
Forward
amount
amount
Fair value
m
Rm
Rm
US$
155
1,477
14
Euro
92
1,205
(24)
Other
36
69
(3)
To buy 2009 Currency
2,751 2008 Currency US$
139
1,042
109
Euro
252
2,826
444
Pound Sterling
19
281
30
Other
31
32
6
4,181 2007 Currency US$
181
1,329
(1)
Euro
196
1,899
23
Pound Sterling
19
261
6
Other
66
49
(1)
3,538
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Telkom Annual Report 2009
Notes to the consolidated annual financial statements
(continued)
for the three years ended March 31, 2009
13.
FINANCIAL INSTRUMENTS AND RISK MANAGEMENT (continued)
13.5
Foreign currency exchange rate risk management (continued) Foreign contract
Forward
amount
amount
Fair value
m
Rm
Rm
US$
99
947
(22)
Euro
35
485
28
Other
21
43
4
To sell 2009 Currency
1,475 2008 Currency US$
78
596
(68)
Euro
73
848
(103)
5
89
(1)
17
22
(1)
Pound Sterling Other
1,555 2007 Currency US$
122
994
88
Euro
52
505
(5)
4
51
1
29
17
–
Pound Sterling Other
1,567 The Group has various monetary assets and liabilities in currencies other than the Group’s functional currency. The following table represents the net currency exposure (net carrying amount of foreign denominated monetary assets and liabilities) of the Group according to the different foreign currencies. South
United
African
Pound
States
Rand
Euro
Sterling
Dollar
Other
Rm
Rm
Rm
Rm
Rm
South African rand
–
204
–
650
19
Naira
–
–
–
(1,611)
–
South African Rand
–
481
(133)
224
(13)
United States Dollar
–
8
–
–
(17)
Naira
–
–
–
(446)
–
2009 Net foreign currency monetary assets/(liabilities) Functional currency of company operation
2008 Net foreign currency monetary assets/(liabilities) Functional currency of company operation
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Telkom Annual Report 2009
Notes to the consolidated annual financial statements
187
(continued)
for the three years ended March 31, 2009
13.
FINANCIAL INSTRUMENTS AND RISK MANAGEMENT (continued)
13.5
Foreign currency exchange rate risk management (continued) South African Rand Rm 2007 Net foreign currency monetary assets/(liabilities) Functional currency of company operation South African rand United States dollar
– 26
Euro Rm
Pound Sterling Rm
United States Dollar Rm
Other Rm
475 (25)
(166) –
159 –
32 (17)
Currency swaps There were no currency swaps in place at March 31, 2009, 2008 and 2007. 13.6
Sensitivity analysis Interest rate risk The following table illustrates the sensitivity to a reasonably possible change in the interest rates, with all other variables held constant: +1% movement Other movements Profit in equity Rm Rm 2009 Classes of financial instruments per balance sheet Assets Trade and other receivables Other financial assets
–1% movement Other movements Profit in equity Rm Rm
5 28
– –
(5) (28)
– –
18 10
– –
(18) (10)
– –
Liabilities Interest-bearing debt Other financial liabilities
(67) 15
– –
67 (15)
– –
Interest rate swaps
15
–
(15)
–
(19)
–
19
–
Interest rate swaps Repurchase agreements
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Telkom Annual Report 2009
Notes to the consolidated annual financial statements
(continued)
for the three years ended March 31, 2009
13. 13.6
FINANCIAL INSTRUMENTS AND RISK MANAGEMENT (continued) Sensitivity analysis (continued) Interest rate risk (continued) +1% movement
–1% movement
Other
Other
movements
movements
Profit
in equity
Profit
in equity
Rm
Rm
Rm
Rm
5
–
(5)
–
(62)
–
62
–
(57)
–
57
–
4
–
(4)
–
2008 Classes of financial instruments per balance sheet Assets Trade and other receivables Liabilities Interest-bearing debt
2007 Classes of financial instruments per balance sheet Assets Trade and other receivables Liabilities Interest-bearing debt
(1)
–
1
–
Other financial liabilities
2
–
(2)
–
2
–
(2)
5
–
(5)
Forward exchange contract
–
Foreign exchange currency risk The following table illustrates the sensitivity to a reasonably possible change in the exchange rates, with all other variables held constant. +10% movement
–10% movement
(depreciation)
(appreciation)
Other
Other
movements
movements
Profit
in equity
Profit
in equity
Rm
Rm
Rm
Rm
40
–
(40)
1
–
(1)
–
1
–
(1)
–
2009 Classes of financial instruments per balance sheet Assets Trade and other receivables Other financial assets Forward exchange contract Liabilities (70)
–
70
–
Trade and other payables
(173)
–
173
–
Other financial liabilities
128
–
(128)
–
128
–
(128)
–
(74)
–
74
–
Interest-bearing debt
Forward exchange contract
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189
Telkom Annual Report 2009
Notes to the consolidated annual financial statements
(continued)
for the three years ended March 31, 2009
13. 13.6
FINANCIAL INSTRUMENTS AND RISK MANAGEMENT (continued) Sensitivity analysis (continued) Foreign exchange currency sensitivity (continued) +10% movement
–10% movement
(depreciation)
(appreciation)
Other
Other
movements
movements
Profit
in equity
Profit
in equity
Rm
Rm
Rm
Rm
2008 Classes of financial instruments per balance sheet Assets Trade and other receivables Other financial assets Forward exchange contract
10
–
(10)
–
331
–
(331)
–
331
–
(331)
–
Liabilities Interest-bearing debt
68
–
(68)
–
Trade and other payables
(95)
–
95
–
(153)
–
153
–
(153)
–
153
–
161
–
(161)
–
Trade and other receivables
10
–
(10)
–
Other financial assets
74
–
(74)
–
74
–
(74)
–
Interest-bearing debt
10
–
(10)
–
Trade and other payables
(40)
–
40
–
Other financial liabilities
11
–
(11)
–
11
–
(11)
–
45
–
(45)
–
Other financial liabilities Forward exchange contract
2007 Classes of financial instruments per balance sheet Assets
Forward exchange contract Liabilities
Forward exchange contract
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Telkom Annual Report 2009
Notes to the consolidated annual financial statements
(continued)
for the three years ended March 31, 2009
13.
FINANCIAL INSTRUMENTS AND RISK MANAGEMENT (continued)
13.7
Exchange rate table (closing rate)
United States Dollar
2008
2009
R
R
R
7.248
8.132
9.484
9.649
12.854
12.617
14.189
16.166
13.555
Swedish Krona
1.033
1.370
1.153
Japanese Yen
0.061
0.082
0.097
Euro Pound Sterling
13.8
2007
Capital management The Group’s policy is to maintain a strong capital base so as to sustain investor, creditor and market confidence and to sustain future development of the business. Capital comprises equity attributable to equity holders of Telkom. The Group monitors capital using net debt to EBITDA ratio. Telkom’s policy is to keep the net debt to EBITDA ratio between 1 and 2 times. Included in net debt are interest-bearing loans and borrowings, credit facilities and other financial liabilities, less cash and cash equivalents and other financial assets. Telkom plans on continuing its share buy-back strategy based on certain criteria, including market conditions, availability of cash and other investment opportunities and needs. All of Telkom’s issued and outstanding ordinary shares, including the class A ordinary share and the class B ordinary share, rank equal for dividends. No dividend may be declared to a holder of the class A ordinary share or class B ordinary share, unless the same dividend is declared to holders of all ordinary shares. Telkom’s current dividend policy aims to provide shareholders with a competitive return on their investment, while assuring sufficient reinvestment of profits to enable the Group to achieve its strategy. Telkom may revise its dividend policy from time to time. The determination to pay dividends and the amount of the dividends, will depend upon, among other things, the earnings, financial position, capital requirements, general business conditions, cash flows, net debt levels and share buy-back plans. The Group has access to financing facilities; the total unused amount is R6,237 million (2008: R7,565 million; 2007: R8,658 million) at the balance sheet date. There were no changes in the Group’s approach to capital management during the year. Neither the Group nor any of its subsidiaries are subject to externally imposed capital requirements. The net debt to EBITDA ratio is as follows: 2007
2008
2009
Rm
Rm
Rm
Non-current portion of interest-bearing debt
4,338
9,403
10,653
Current portion of interest -bearing debt
6,026
6,330
7,622
441
1,342
127
36
919
–
193
371
228
Less: Cash and cash equivalents
(749)
(1,134)
(1,931)
Less: Other financial assets
(259)
(614)
(1,202)
Net debt
10,026
16,617
15,497
EBITDA
13,352
13,203
11,668
0.75
1.26
1.33
Credit facilities utilised Non-current portion of other financial liabilities Current portion of other financial liabilities
Net debt to EBITDA ratio
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Telkom Annual Report 2009
Notes to the consolidated annual financial statements
191
(continued)
for the three years ended March 31, 2009
14.
INVESTMENTS Available-for-sale
2007
2008
2009
Rm
Rm
Rm
1,384
1,444
1,383
47
55
–
–
–
–
40
23
–
7
32
–
65
63
97
Unlisted investments Rascom WBS Holdings (Proprietary) Limited 2 500 ordinary shares at R0.01 each Other investments Loans and receivables
–
60
–
Planetel Communications Limited
25
–
–
Caspian Limited
29
–
–
Number Portability Company (Proprietary) Limited
3
3
–
Sekha-Metsi Investment Consortium Limited
8
–
–
Empresa Mocambicana de Telecommunicacoes S.A.R.L. (’Emotel’)
–
4
–
Other unlisted investments
–
–
97
At fair value through profit or loss
1,349
1,377
1,286
Linked insurance policies – Coronation
1,280
1,291
1,286
69
51
–
–
35
–
(77)
(51)
–
(8)
–
–
–
(13)
–
(69)
(38)
–
Mirambo Limited
Other money market investments Other unlisted investments Less: Short-term investments Sekha-Metsi Investment Consortium Limited WBS Holdings (Proprietary) Limited (included in other unlisted investments) Other money market investments
Included in held-for-trading investments is R1,286 million (2008: R1,290 million, 2007: R1,279 million) that will be used to fund the postretirement medical aid liability. These investments are made through a cell captive, in which Telkom holds 100% of the preference shares of the cell captive, and represent the fair value of the underlying investments of the cell captive. The initial cost of the investment amounts to R535 million (2008: R535 million; 2007: R535 million). Telkom bears all the risks and rewards of the investment, as the returns/losses on the preference shares are dependent on the performance of the underlying investments made by the cell captive. On this basis Telkom as the preference shareholder receives any residual gains or losses made by the cell captive. The ordinary shareholders of the cell captive do not bear any of the risks and rewards. The cell captive has been consolidated in full.
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Notes to the consolidated annual financial statements
(continued)
for the three years ended March 31, 2009
2007 Rm
15.
2008 Rm
2009 Rm
DEFERRED REVENUE AND DEFERRED EXPENSES Deferred revenue
3,004
3,721
Non-current deferred revenue
1,021
1,128
997
Current portion of deferred revenue
1,983
2,593
1,714
557
583
55
Deferred expenses
2,711
Non-current deferred expenses
270
221
55
Current portion of deferred expenses
287
362
–
Included in non-current deferred expenses and revenue for the financial year end March 31, 2008 and 2007 is Vodacom unactivated starter packs.
16.
FINANCE LEASE RECEIVABLES The Group provides voice and non-voice services to its customers, which make use of router and PABX equipment that is dedicated to specific customers. The disclosed information relates to those arrangements which were assessed to be finance leases in terms of IAS17. Total
< 1 year
1 – 5 years
> 5 years
Rm
Rm
Rm
Rm
Lease payments receivable
360
142
219
–
Unearned finance income
(85)
(33)
(53)
–
Present value of minimum lease payments
275
109
166
–
Lease receivables
275
109
166
–
452
196
256
–
(80)
(30)
(50)
–
Present value of minimum lease payments
372
166
206
–
Lease receivables
372
166
206
–
312
110
202
–
(66)
(22)
(44)
–
Present value of minimum lease payments
246
88
158
–
Lease receivables
246
88
158
–
2009 Minimum lease payments
2008 Minimum lease payments Lease payments receivable Unearned finance income
2007 Minimum lease payments Lease payments receivable Unearned finance income
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Telkom Annual Report 2009
Notes to the consolidated annual financial statements
193
(continued)
for the three years ended March 31, 2009
17.
2009 Rm
2007 Rm
2008 Rm
(1,123)
(1,374)
(1,068)
(587) – (516)
(1,123) – (219)
(1,374) 281 164
(515) (1) – –
(331) 53 – 59
(152) (138) 454 –
(16) (4)
(65) 33
(137) (2)
The balance comprises:
(1,123)
(1,374)
(1,067)
Capital allowances Provisions and other allowances Taxation losses Capital gains taxation asset STC taxation credits
(3,325) 1,719 113 – 370
(3,841) 2,008 276 – 183
3,210) 1,416 – 454 273
Deferred taxation balance is made up as follows:
(1,123)
(1,374)
(1,067)
Deferred taxation assets Deferred taxation liabilities
593 (1,716)
605 (1,979)
756 (1,823)
Unutilised STC credits
2,958
1,830
2,730
INVENTORIES
1,093
1,287
1,974
Gross inventories Write-down of inventories to net realisable value
1,275 (182)
1,535 (248)
2,165 (191)
Inventories consist of the following categories:
1,093
1,287
1,974
Installation material, maintenance material and network equipment Merchandise
811 282
895 392
1,051 923
Write-down of inventories to net realisable value
182
248
191
Opening balance Transferred to disposal group Charged to selling, general and administrative expenses Inventories written-off
102 – 154 (74)
182 – 164 (98)
248 (50) 167 (174)
DEFERRED TAXATION Opening balance Transferred to disposal group Income statement movements Temporary differences (Underprovision)/overprovision prior year Capital gains taxation asset Change in taxation rate Business combinations Foreign currency translation reserve and foreign equity revaluation
Secondary taxation on companies (STC) is provided for a rate of 10% on the amount by which dividends declared by Telkom exceeds dividends received. The deferred taxation asset is raised as it is probable that it will be utilised in future. The asset will be released as a taxation expense when dividends are declared. The deferred taxation asset represents STC credits on past dividends received that are available to be utilised against dividends declared. The deferred taxation asset also includes deferred taxation on temporary differences arising on investments that were classified as held for sale in the period as well as STC credits on past dividends received.
18.
Inventory levels as at March 31, 2009, 2008 and 2007 have increased due to the accelerated roll-out of the Next Generation Network required to improve customer service, and the acquisition of merchandise for the W-CDMA roll-out.
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Notes to the consolidated annual financial statements
(continued)
for the three years ended March 31, 2009
2007 Rm
19.
2008 Rm
2009 Rm
TRADE AND OTHER RECEIVABLES
7,303
8,986
5,980
Trade receivables
6,557
7,695
4,698
6,792
7,985
5,022
(235)
(290)
(324)
Prepayments and other receivables
746
1,291
1,282
Impairment allowance account for receivables
235
290
324
Opening balance
290
235
290
Charged to selling, general and administrative expenses
153
300
368
Receivables written-off
(208)
(245)
(334)
259
614
1,202
–
–
1,046
259
614
156
Gross trade receivables Impairment of receivables
Refer to note 13 for detailed credit risk analysis.
20.
OTHER FINANCIAL ASSETS AND LIABILITIES Other financial assets consist of:
Held-to-maturity Repurchase agreements
At fair value through profit or loss Bills of exchange
98
–
–
Interest rate swaps
16
9
4
145
589
152
–
16
–
(229)
(1,290)
(228)
(36)
–
–
–
(919)
–
(193)
(371)
(228)
Forward exchange contracts Other financial assets Repurchase agreements Telkom manages a portfolio of repurchase agreements in the South African capital and money markets, with a view to generating additional investment income on the favourable interest rates provided on these transactions. Interest received from the borrower is based on the current market related yield. There were no repurchase agreements held at March 31, 2008 and 2007. Bills of exchange The fair value of bills of exchange has been calculated at with reference to the Bond Exchange of South Africa quoted prices. Other financial liabilities consist of: Non-current portion of other financial liabilities Other Put option at fair value through profit or loss Current portion of other financial liabilities
At fair value through profit or loss
(125)
(198)
–
Interest rate swaps
(26)
–
(72)
Forward exchange contracts
(42)
(173)
(156)
Put option at fair value through profit or loss
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Notes to the consolidated annual financial statements
195
(continued)
for the three years ended March 31, 2009
21.
2007 Rm
2008 Rm
2009 Rm
NET CASH AND CASH EQUIVALENTS
308
(208)
1,282
Net cash and cash equivalents attributable to continuing operations
308
(208)
1,804
Cash shown as current assets
749
1,134
1,931
Cash and bank balances
649
664
1,361
Short-term deposits
100
470
570
Credit facilities utilised
(441)
(1,342)
(127)
–
–
(522)
Net cash and cash equivalents attributable to disposal groups Cash at banks and short-term deposits attributable to disposal groups
–
–
580
Credit facilities utilised
–
–
(1,102)
8,658
7,565
6,237
Undrawn borrowing facilities
The undrawn borrowing facilities are unsecured, when drawn bear interest at a rate that will be mutually agreed between the borrower and lender at the time of drawdown, have no specific maturity date and are subject to annual review. The facilities are in place to ensure liquidity. At March 31, 2009, R3,000 million of these undrawn facilities were committed by Telkom. Borrowing powers To borrow money, Telkom’s directors may mortgage or encumber Telkom’s property or any part thereof and issue debentures, whether secured or unsecured, whether outright or as security for debt, liability or obligation of Telkom or any third party. For this purpose the borrowing powers of Telkom are unlimited, but are subject to the restrictive financial covenants of the loan facilities indicated on note 28.
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Notes to the consolidated annual financial statements
(continued)
for the three years ended March 31, 2009
2007 Rm
22.
2009 Rm
2008 Rm
SHARE CAPITAL Authorised and issued share capital is made up as follows: Authorised
10,000
10,000
10,000
999,999,998 ordinary shares of R10 each
10,000
10,000
10,000
1 class A ordinary share of R10
–
–
–
1 class B ordinary share of R10
–
–
–
5,329
5,208
5,208
Issued and fully paid 520,783,898 (2008: 520,784,184; 2007: 532,855,528)
5,329
5,208
5,208
1 (2008: 1; 2007: 1) class A ordinary share of R10
–
–
–
1 (2008: 1; 2007: 1) class B ordinary share of R10
–
–
–
Number of
Number of
Number of
shares
shares
shares
544,944,901
532,855,530
520,784,186
(12,089,371)
(12,071,344)
(286)
532,855,530
520,784,186
520,783,900
ordinary shares of R10 each
The following table illustrates the movement within the number of shares issued:
Shares in issue at beginning of year Shares bought back and cancelled Shares in issue at end of year
Full details of the voting rights of ordinary, class A and class B shares are documented in the articles of association of Telkom. Share buy-back During the financial year Telkom bought back 286 ordinary shares at a total consideration of R30,425. The shares were bought back and cancelled in order to allow Telkom shareholders to participate in the proposed unbundling of Vodacom Group on a one to one basis. This reduced share capital by R2,860 and retained earnings by R27,565. During the financial year ended March 31, 2008, Telkom bought back 12,071,344 ordinary shares at a total consideration of R1,647 million. This reduced share capital by R121 million and retained earnings by R1,526 million. During the financial year ended March 31, 2007, Telkom bought back 12,089,371 ordinary shares at a total consideration of R1,596 million. This reduced share capital by R120 million, share premium by R1,342 million and retained earnings by R134 million. Capital management Refer to note 13 for detailed capital management disclosure.
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Notes to the consolidated annual financial statements
197
(continued)
for the three years ended March 31, 2009
23.
TREASURY SHARE RESERVE
2007 Rm
2008 Rm
(1,774)
(1,638)
2009 Rm (1,517)
This reserve represents amounts paid by Telkom to Rossal No 65 (Proprietary) Limited and Acajou Investments (Proprietary) Limited, subsidiaries, for the acquisition of Telkom’s shares to be utilised in terms of the Telkom Conditional Share Plan (’TCSP’). At March 31, 2009, 11,646,680 (2008: 10,493,141; 2007: 12,237,016) and 8,143,556 (2008: 10,849,058; 2007: 10,849,058) ordinary shares in Telkom, with a fair value of R1,229 million (2008: R1,377 million; 2007: R2,031 million) and R859 million (2008: R1,423 million; 2007: R1,801 million) are held as treasury shares by its subsidiaries Rossal No 65 (Proprietary) Limited and Acajou Investments (Proprietary) Limited, respectively. The shares held by Rossal No 65 (Proprietary) Limited and Acajou Investments (Proprietary) Limited are reserved for issue in terms of the Telkom Conditional Share Plan (’TCSP’). The reduction in the number of treasury shares is due to 1,552,029 (2008: 1,743,785; 2007: 450,505) shares that vested in terms of the TCSP during the year. The fair value of these shares at the date of vesting was R228 million (2008: R301 million; 2007: R63 million).
24.
SHARE-BASED COMPENSATION RESERVE This reserve represents the cumulative grant date fair value of the equitysettled share-based payment transactions recognised in employee expenses during the vesting period of the equity instruments granted to employees in terms of the Telkom Conditional Share Plan (refer to note 30). No consideration is payable on the shares issued to employees, but performance criteria will have to be met in order for the granted shares to vest. The ultimate number of shares that will vest may differ based on certain individual and Telkom performance conditions being met. The related compensation expense is recognised over the vesting period of shares granted, commencing on the grant date. The following table illustrates the movement within the share-based compensation reserve: Balance at beginning of year
151
257
643
Net increase in equity
106
386
433
Employee cost Vesting and transfer of shares Balance at end of year
141
522
554
(35)
(136)
(121)
257
643
1,076
At March 31, 2009 the estimated total compensation expense to be recognised over the vesting period was R1,824 million (2008: R2,151 million; 2007: R580 million), of which R554 million (2008: R522 million; 2007: R141 million) was recognised in employee expenses for the year.
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Notes to the consolidated annual financial statements
(continued)
for the three years ended March 31, 2009
25.
2007
2008
2009
Rm
Rm
Rm
NON-DISTRIBUTABLE RESERVES
1,413
1,292
1,758
Opening balance
1,128
1,413
1,292
285
(121)
470
(4)
Transferred to disposal groups Movement during the year Foreign currency translation reserve (net of taxation of R6 million 46
521
(181)
Minority put option
–
(661)
661
Revaluation of an available-for-sale investment (net of taxation of R1 million)
–
8
–
239
11
(10)
1,413
1,292
1,758
(2008: R6 million; 2007: R4 million)
Available-for-sale financial asset Life fund reserve (cell captive) The balance comprises:
(58)
463
286
1,471
1,482
1,472
Available-for-sale investment
–
8
–
Minority put option
–
(661)
–
RETAINED EARNINGS
26,499
27,310
28,852
Opening balance
Foreign currency translation reserve Cell captive reserve
The Group has a consolidated cell captive, used as an investment to fund Telkom’s post-retirement medical aid liability. The earnings from the cell captive are recognised in the income statement and then transferred to non-distributable reserves. Gains and losses from changes in the fair value of available-for-sale investments are recognised directly in equity until the financial asset is disposed of.
26.
22,904
26,499
27,310
Movement during year
3,729
2,337
1,542
Net profit for the year
8,646
7,975
4,171
(239)
(11)
10
–
–
667
(4,678)
(5,627)
(3,306)
(134)
(1,526)
–
The balance comprises:
26,499
27,310
28,852
Company
Transfer to non-distributable reserves (refer to note 25) Premium on acquisition of minority interest in Multi-Links Dividend declared (refer to note 35) Shares bought back (refer to note 22)
21,906
22,484
24,323
Joint venture
4,762
5,697
6,132
Subsidiaries
786
428
223
Eliminations
(955)
(1,299)
(1,826)
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Notes to the consolidated annual financial statements
199
(continued)
for the three years ended March 31, 2009
27.
2008 Rm
MINORITY INTEREST
284
522
853
Opening balance
301
284
522
(17)
238
331
284
522
853
Movement during the year Reconciliation: Balance at beginning of year
301
284
522
Share of earnings
203
197
77
Acquisition of subsidiaries and minority interests
(68)
77
–
Foreign currency translation reserves
14
29
16
(166)
(65)
(33)
–
–
271
4,338
9,403
10,653
Total interest-bearing debt (refer to note 13)
10,364
15,733
18,275
Gross interest-bearing debt
Dividend declared Broad-based black economic empowerment transaction in Vodacom
28.
2009 Rm
2007 Rm
INTEREST-BEARING DEBT Non-current interest-bearing debt
12,549
17,839
19,851
Discount on debt instruments issued
(2,185)
(2,106)
(1,576)
Less: Current portion of interest-bearing debt
(6,026)
(6,330)
(7,622)
Local debt
(5,772)
(6,001)
(7,546)
Locally registered Telkom debt instruments
(4,432)
–
(2,000)
Commercial paper bills
(1,339)
(3,401)
(5,546)
(1)
–
–
–
(2,600)
–
(193)
(202)
(40)
(61)
(124)
(36)
–
(3)
–
Short-term interest-free loans Call borrowings Foreign debt Finance leases Licence obligation
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Notes to the consolidated annual financial statements
(continued)
for the three years ended March 31, 2009
2007 Rm
28.
2008 Rm
2009 Rm
INTEREST-BEARING DEBT (continued) 10,364
15,733
18,275
(a) Local debt
8,131
12,923
16,660
Locally registered Telkom debt instruments
6,786
8,164
11,106
4,432
–
–
–
–
1,059
–
–
1,159
1,246
1,283
1,325
264
304
349
844
977
1,131
–
2,600
–
–
3,000
2,000
–
–
4,083
1,339
4,202
5,546
– – 6
500 47 10
– – 8
Total interest-bearing debt is made up as follows:
Name, maturity, rate p.a., nominal value TK01, 2009, 10%, RNil (2008: RNil; 2007: R4,680 million) TL12, 2012, 12.45%, R1,060 million (2008: RNil; 2007: RNil) TL15, 2015, 11.9%, R1,160 million (2008: RNil; 2007: RNil) TL20, 2020, 6%, R2,500 million (2008: R2,500 million; 2007: R2,500 million) PP02, 2010, 0%, R430 million (2008: R430 million; 2007: R430 million) PP03, 2010, 0%, R1,350 million (2008: R1,350 million; 2007: R1,350 million) Call borrowings, 2009, 11.58%, RNil (2008: R2,600 million; 2007: RNil) Term loans, 2010, 9.67%, R2,000 million (2008: R3,000 million; 2007: RNil) Syndicated loans, 2014, 11.46%, R4,100 million (2008: RNil; 2007: RNil) Total interest-bearing debt is made up of R18,275 million debt at amortised cost (2008: R15,733 million debt at amortised cost; 2007: R10,266 million debt at amortised cost and R98 million debt at fair value through profit and loss). Local bonds The local Telkom bonds are unsecured, but a Side letter to the Subscription Agreement (as amended) of the TL20 bond contains a number of restrictive covenants, which, if not met, could result in the early redemption of the loan. The local bonds limit Telkom’s ability to create encumbrances on revenue or assets, and secure any indebtedness without securing the outstanding bonds equally and rateably with such indebtedness. The Term loan agreements limit Telkom’s ability to encumber, cede, assign, sell or otherwise dispose of a material portion of its assets without prior written consent of the Lenders, which will not be unreasonably withheld. The syndicated loan agreement contains restrictive covenants as well as restrictions on encumbrances, disposals, Group guarantees and Group loans. Commercial paper bills Rate p.a., nominal value 2009, 11.44% (2008: 11.71%; 2007: 9.04%), R5,559 million (2008: R4,383 million; 2007: R1,350 million) Asset Backed Arbitraged Securities (Proprietary) Limited Licence obligation Other debt
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Notes to the consolidated annual financial statements
201
(continued)
for the three years ended March 31, 2009
2007 Rm
28.
2008 Rm
2009 Rm
INTEREST-BEARING DEBT (continued) (b) Foreign debt
Maturity, rate p.a., nominal value
1,013
1,643
629
106
141
138
907
957
–
–
45
–
–
87
–
–
82
157
–
319
323
–
12
11
1,220
1,167
986
Euro: 2010 – 2025, 0.10% – 0.14% (2008: 0.10% – 0.14%; 2007: 0.10% – 0.14%), e11 million (2008: e11 million; 2007: e11 million) Interest-bearing debt held in Vodacom disposal group The local and foreign debt, for both the non-current and current portion, is disclosed in note 9.2 in the disposal group. Zenith Bank Multi-Links Telecommunications Limited took out a loan with Zenith Bank. The original loan amounted to US$14 million against which full repayments were made in 2009. The loan bore interest at LIBOR plus 3.5%. FCMB loan Multi-Links Telecommunications Limited took out a FCMB loan.The original loan amounted to naira 1,500 million against which full repayments were made in 2009. The loan bore interest at 13%. Export Development Bank of Canada Multi-Links Telecommunications Limited has a long-term funding facility in place with Export Development Bank of Canada (EDC), through First Bank of Nigeria plc. The original funding amounted to US$18 million against which US$1,6 million repayments were made.The loan bears interest at LIBOR plus 1.25%, and will be fully repaid during 2013. Huawei Vendor Financing Facility (‘VFF’) Multi-Links Telecommunications Limited entered into a Bridge Financing Agreement with Huawei Tech Investment Co. Limited for the supply of telecommunications equipment and services. The original funding amounted to US$41.6 million against which repayments of US$5 million have already been made. The loan bears interest at LIBOR plus 2% and will be repaid by 2012. The above arrangement is temporary until financing facilities are obtained from China Development Bank. PTA Bank and Barclays Bank Africa Online Group has taken out a loan with PTA Bank and Barclays Bank to the value of US$1.5 million in total. Of this amount US$0.8 million bears interest at LIBOR plus 6% and the remaining US$0.4 million bears interest at 11.5%. (c) Finance leases The finance leases are secured by buildings with a carrying value of R152 million (2008: R174 million; 2007: R197 million) and office equipment with a book value of R6 million (2008: R14 million; 2007: R6 million) (refer to note 11). These amounts are repayable within periods ranging from 1 to 12 years. Interest rates vary between 13.43% and 37.78%.
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Notes to the consolidated annual financial statements
(continued)
for the three years ended March 31, 2009
2007 Rm
28.
2008 Rm
2009 Rm
INTEREST-BEARING DEBT (continued) Included in non-current and current debt is: Debt guaranteed by the South African Government Telkom may issue or re-issue locally registered debt instruments in terms of the Post Office Amendment Act 85 of 1991. The borrowing powers of Telkom are set out as per note 21.
4,537
141
138
PROVISIONS
1,443
1,675
1,875
Employee related
3,005
3,186
3,169
413
438
428
356 – 66 (9)
413 – 44 (19)
438 (67) 72 (15)
1,139
1,356
1,745
2,607 286 83 (188) 149 – (1,720) (78)
1,139 322 84 (257) 129 – – (61)
1,356 428 95 (223) 157 (5) – (63)
282
287
325
198 19 4 76 5 (20)
282 22 3 2 – (22)
287 39 6 2 14 (23)
1,090
992
671
1,071 – 965 (946)
1,090 – 797 (895)
992 (397) 577 (501)
Repayments/refinancing of current portion of interest-bearing debt Telkom issued new local bonds, the TL12 and TL15 with a nominal value of R1,060 million and R1,160 million respectively and entered into Syndicated loan agreements with a nominal value of R4,100 million during the current year. Commercial Paper Bills with a nominal value of R11,025 million were issued and Commercial Paper debt with a nominal value of R9,849 million was repaid during the current year. The repayment/refinancing of R7,622 million 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 repayment/refinancing.
29.
Annual leave Balance at beginning of year Transferred to disposal groups Charged to employee expenses Leave paid
Post-retirement medical aid (refer to note 30) Balance at beginning of year Interest cost Current service cost Expected return on plan asset Actuarial loss Termination settlement Plan asset – initial recognition Contributions paid
Telephone rebates (refer to note 30) Balance at beginning of year Interest cost Current service cost Past service cost Actuarial loss Benefits paid
Bonus Balance at beginning of year Transferred to disposal groups Charged to employee expenses Payment
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203
Telkom Annual Report 2009
Notes to the consolidated annual financial statements
(continued)
for the three years ended March 31, 2009
29.
2009 Rm
2007 Rm
2008 Rm
81
113
–
61 – 21 (1)
81 – 41 (9)
113 (113) – –
Non-employee related
533
670
856
Supplier dispute (refer to note 39)
527
569
664
PROVISIONS (continued) Long-term incentive provision Balance at beginning of year Transferred to disposal groups Charged to employee expenses Payment
–
527
569
527
42
95
–
–
–
Balance at beginning of year
16
–
–
Provision utilised
(16)
–
–
6
101
192
(2,095)
(2,181)
(2,150)
Annual leave
(402)
(417)
(425)
Post-retirement medical aid
(186)
(186)
(227)
(26)
(26)
(29)
Bonus
(911)
(921)
(654)
Supplier dispute
(527)
(569)
(664)
(43)
(62)
(151)
Balance at beginning of year Charged to expenses
Warranty provision
Other Less: Current portion of provisions
Telephone rebates
Other
Annual leave In terms of Telkom’s policy, employees are entitled to accumulate vested leave benefits not taken within a leave cycle, to a cap of 22 days which must be taken within an 18 month leave cycle. The leave cycle is reviewed annually and is in accordance with legislation.
Bonus The Telkom bonus scheme consists of performance bonuses which are dependent on achievement of certain financial and non-financial targets. The bonus is to all qualifying employees payable bi-annually after Telkom’s results have been made public.
Supplier dispute Telkom provided R664 million (2008: R569 million; 2007: R527 million) for its estimate of the probable liability as discussed in note 39. The net movement in the provision of R95 million consists of finance charges and fair value movements.
Other Included in other provisions is an amount provided for asset retirement obligations and the onerous lease obligation recognised in Telkom Media.
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Notes to the consolidated annual financial statements
(continued)
for the three years ended March 31, 2009
30.
EMPLOYEE BENEFITS The Group provides benefits for all its permanent employees through the Telkom Pension Fund and the Telkom Retirement Fund. Membership of one of the funds is compulsory. In addition, certain retired employees receive medical aid benefits and a telephone rebate. The liabilities for all of the benefits are actuarially determined in accordance with accounting requirements each year. In addition, statutory funding valuations for the retirement and pension funds are performed at intervals not exceeding three years. At March 31, 2009, the Group employed 25,445 employees (2008: 33,616; 2007: 33,047). Actuarial valuations were performed by qualified actuaries to determine the benefit obligation, plan asset and service costs for the pension and retirement funds for each of the financial periods presented. The Telkom Pension Fund The Telkom Pension Fund is a defined benefit fund that was created in terms of the Post Office Amendment Act 85 of 1991. The latest actuarial valuation performed at March 31, 2009 indicates that the pension fund is in a surplus position of R94 million after unrecognised losses. The recognition of the surplus is limited due to the application of the asset limitation criteria in IAS19 (revised). With effect from July 1, 1995, the Telkom Pension Fund was closed to new members. During the year ended March 31, 2007, a settlement event occurred in the Telkom Pension Fund whereby 106 members were transferred to the Telkom Retirement Fund. The funded status of the Telkom Pension Fund is disclosed below: 2007 Rm
2008 Rm
2009 Rm
The Telkom Pension Fund The net periodic pension costs includes the following components: Interest and service cost on projected benefit obligations
22
21
21
Expected return on plan assets
(19)
(27)
(28)
Recognised actuarial loss/(gain) Settlement loss/(gain) Asset limitation Net periodic pension expense recognised Pension fund contributions (refer to note 5.1)
9
(16)
–
21
(2)
(3)
–
29
39
33
5
29
8
5
(1)
281
205
204
22
21
21
2
2
2
The status of the pension plan obligation is as follows: At beginning of year Interest and service cost Employee contributions
(2)
(3)
(5)
Settlements
(70)
(15)
(22)
Actuarial gain
(28)
(6)
(1)
205
204
199
243
284
311
19
27
28
(2)
(3)
(5)
Benefits paid
Benefit obligation at end of year Plan assets at fair value: At beginning of year Expected return on plan assets Benefits paid Contributions
10
8
2
Settlements
(61)
(15)
(22)
Actuarial gain/(loss)
75
10
(67)
284
311
247
Plan assets at end of year
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Notes to the consolidated annual financial statements
205
(continued)
for the three years ended March 31, 2009
2007 Rm
30.
2008 Rm
2009 Rm
EMPLOYEE BENEFITS (continued) The Telkom Pension Fund (continued) Present value of funded obligation
205
204
199
Fair value of plan assets
(284)
(311)
(247)
Fund surplus
(79)
(107)
(48)
Unrecognised net actuarial gain/(loss)
25
23
(46)
Fund surplus
(54)
(84)
(94)
–
29
39
Recognised net asset
(54)
(55)
(55)
Expected return on plan assets
19
27
28
Actuarial return/(loss) on plan assets
75
10
(67)
Actual return/(loss) on plan assets
94
37
(39)
Asset limitation
Principal actuarial assumptions were as follows: Discount rate (%)
7.5
9.0
8.7
Yield on government bonds (%)
7.5
9.0
8.7
Long-term return on equities (%)
10.5
11.0
12.0
Long-term return on cash (%)
5.5
7.0
7.5
Expected return on plan assets (%)
9.7
9.8
10.5
Salary inflation rate (%)
6.0
7.5
7.2
Pension increase allowance (%)
2.9
4.3
4.0
100.0
100.0
100.0
153
146
123
The overall long-term expected rate of return on assets is 10.5%. This is based on the portfolio as a whole and not the sum of the returns of individual asset categories. The expected return takes into account the asset allocation of the Telkom Pension Fund and expected long-term return of these assets, of which South African equities and bonds are the largest contributors. The assumed rates of mortality are determined by reference to the SA85-90 (Light) Ultimate table, as published by the Actuarial Society of South Africa, for pre-retirement purposes and the PA(90) Ultimate table, minus one year age rating as published by the Institute and Faculty of Actuaries in London and Scotland, for retirement purposes.
Funding level per statutory actuarial valuation (%) The number of employees registered under the Telkom Pension Fund The fund portfolio consists of the following:
74
54
57
Bonds (%)
5
5
25
Cash (%)
3
23
3
16
18
15
2
–
–
Equities (%)
Foreign investments (%) Insurance policies (%)
The total expected contributions payable to the pension fund for the next financial year are R1 million.
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Telkom Annual Report 2009
Notes to the consolidated annual financial statements
(continued)
for the three years ended March 31, 2009
30.
EMPLOYEE BENEFITS (continued) The Telkom Retirement Fund The Telkom Retirement Fund was established on July 1, 1995 as a hybrid defined benefit and defined contribution plan. Existing employees were given the option to either remain in the Telkom Pension Fund or to be transferred to the Telkom Retirement Fund. All pensioners of the Telkom Pension Fund and employees who retired after July 1, 1995 were transferred to the Telkom Retirement Fund. Upon transfer the government ceased to guarantee the deficit in the Telkom Retirement Fund. Subsequent to July 1, 1995 further transfers of existing employees occurred. The Telkom Retirement Fund is a defined contribution fund with regard to in-service members. On retirement, an employee is transferred from the defined contribution plan to a defined benefit plan. Telkom, as a guarantor, is contingently liable for any deficit in the Telkom Retirement Fund. Moreover, all of the assets in the fund, including any potential excess, belong to the participants of the scheme. Telkom is unable to benefit from the excess in the form of future reduced contributions or refunds. Telkom guarantees any actuarial shortfall of the pensioner pool in the retirement fund. This liability is initially funded through assets of the retirement fund. The latest actuarial valuation performed at March 31, 2009 indicates that the retirement fund is in a surplus funding position of R1,549 million after unrecognised losses. The Telkom Retirement Fund is governed by the Pension Funds Act 24 of 1956. In terms of section 37A of this Act, the pension benefits payable to the pensioners cannot be reduced. If therefore the present value of the funded obligation were to exceed the fair value of plan assets. Telkom would be required to fund the statutory deficit. The information presented below is intended only to comply with the disclosure requirements of IAS19 (revised) and not to suggest that Telkom has a potential asset with regard to this fund. The funded status of the Telkom Retirement Fund is disclosed below: 2009 Rm
2007 Rm
2008 Rm
Interest and service cost on projected benefit obligations
312
493
616
Expected return on plan assets
(489)
(686)
(796)
Recognised actuarial gain
(145)
–
–
Net periodic pension expense not recognised (asset limitation)
(322)
(193)
(180)
Retirement fund contributions (refer to note 5.1)
439
460
460 7,101
The Telkom Retirement Fund The net periodic retirement costs include the following components:
Benefit obligation: At beginning of year
4,377
6,581
Interest
312
493
616
Benefits paid
(486)
(488)
(520)
44
14
143
Actuarial loss/(gain)
2,334
501
(636)
Benefit obligation at end of year
6,581
7,101
6,704
7,991
Liability for new pensioners
Plan assets at fair value: At beginning of year
5,973
7,661
Expected return on plan assets
489
686
796
Benefits paid
(486)
(488)
(520)
44
14
143
Actuarial gain/(loss)
1,641
118
(1,735)
Plan assets at end of year
7,661
7,991
6,675
Asset backing new pensioners’ liabilities
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Notes to the consolidated annual financial statements
207
(continued)
for the three years ended March 31, 2009
2007 Rm
30.
2008 Rm
2009 Rm
EMPLOYEE BENEFITS (continued) The Telkom Retirement Fund (continued) Present value of funded obligation
6,581
7,101
6,704
Fair value of plan assets
(7,661)
(7,991)
(6,675)
Fund (surplus)/deficit
(1,080)
(890)
29
(96)
(478)
(1,578)
(1,176)
(1,368)
(1,549)
489
686
796
Actuarial gain/(loss) on plan assets
1,641
118
(1,735)
Actual gain/(loss) on plan assets
2,130
804
(939)
371
596
619
Unrecognised net actuarial loss Unrecognised net asset Expected return on plan assets
Included in the fair value of plan assets is: Office buildings occupied by Telkom Telkom bonds
21
10
–
Telkom shares
284
141
132
2007
2008
The Telkom Retirement Fund invests its funds in South Africa and internationally. Twelve fund managers invest in South Africa and five of these managers specialise in trades with bonds on behalf of the Retirement Fund. The international investment portfolio consists of global equity and hedged funds. 2009
Principal actuarial assumptions were as follows: Discount rate (%)
7.5
9.0
8.7
Yield on government bonds (%)
7.5
9.0
8.7
Long-term return on equities (%)
10.5
11.0
12.0
Long-term return on cash (%)
5.5
7.0
7.5
Expected return on plan assets (%)
9.3
10.3
10.7
Pension increase allowance (%)
4.5
6.0
4.0
The overall long-term expected rate of return on assets is 10.7%. This is based on the portfolio as a whole and not the sum of the returns of individual asset categories. The expected return takes into account the asset allocation of the Retirement Fund and expected long-term return on these assets, of which South African equities, foreign investments and South African index-linked bonds are the largest contributors.
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Notes to the consolidated annual financial statements
(continued)
for the three years ended March 31, 2009
2007
30.
2008
2009
EMPLOYEE BENEFITS (continued) The Telkom Retirement Fund (continued) The assumed rates of mortality are determined by reference to the SA85-90 (Light) Ultimate table, as published by the Actuarial Society of South Africa, for pre-retirement purposes and the PA(90) Ultimate table, minus one year age rating as published by the Institute and Faculty of Actuaries in London and Scotland, for retirement purposes. Funding level per statutory actuarial valuation (%) The number of pensioners registered under the Telkom Retirement Fund
100
100
100
14,451
14,255
13,617
25,766
24,939
23,389
59
70
55
The number of in-service employees registered under the Telkom Retirement Fund
The fund portfolio consists of the following: Equities (%) Property (%) Bonds (%) Cash (%) Foreign investments (%) Index linked (%)
2
2
–
19
11
5
7
1
5
13
16
20
–
–
15
The total expected pension benefit payments for the year ending March 31, 2010 are R541,000. Medical benefits Telkom makes certain contributions to medical funds in respect of current and retired employees. The scheme is a defined benefit plan. The expense in respect of current employees’ medical aid is disclosed in note 5.1. The amounts due in respect of post-retirement medical benefits to current and retired employees have been actuarially determined and provided for as set out in note 29. Telkom has terminated future post-retirement medical benefits in respect of employees joining after July 1, 2000. There are three major categories of members entitled to the post-retirement medical aid: pensioners who retired before 1994 (Pre-94); those who retired after 1994 (Post-94); and the in-service members. The Post-94 and the in-service members’ liability is subject to a Rand cap, which increases annually with the average salary increase. Eligible employees must be employed by Telkom until retirement age to qualify for the post-retirement medical aid benefit. The most recent actuarial valuation of the benefit was performed as at March 31, 2009. Telkom has allocated certain investments to fund this liability as set out in note 14.
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Notes to the consolidated annual financial statements
209
(continued)
for the three years ended March 31, 2009
2007 Rm
30.
2008 Rm
2009 Rm
EMPLOYEE BENEFITS (continued) Medical benefits (continued) Medical aid Benefit obligation: 3,904
4,384
4,850
286
322
428
83
84
95
283
246
246
–
–
(5)
Benefits paid from plan assets
(94)
(125)
(141)
Contributions paid by Telkom
(78)
(61)
(63)
4,384
4,850
5,410
1,929
At beginning of year Interest cost Current service cost Actuarial loss Termination settlement
Benefit obligation at end of year Plan assets at fair value: At beginning of year
–
1,961
Plan asset – initial recognition
1,720
–
–
Expected return on plan assets
188
257
223
Benefits paid from plan assets
(94)
(125)
(141)
147
(164)
(393)
1,961
1,929
1,618
Actuarial gain/(loss) Plan assets at end of year Present value of funded obligation
4,384
4,850
5,410
Fair value of plan assets
(1,961)
(1,929)
(1,618)
Funded status
2,423
2,921
3,792
Unrecognised net actuarial loss
(1,284)
(1,565)
(2,047)
Liability as disclosed in the balance sheet (refer to note 29)
1,139
1,356
1,745
Expected return on plan assets
188
257
223
Actuarial return on plan assets
147
(164)
(393)
Actual return on plan assets
335
93
(170)
2007
2008
2009
Principal actuarial assumptions were as follows: 7.5
9.0
8.7
13.5
12.0
11.0
Salary inflation rate (%)
6.0
7.5
7.2
Medical inflation rate (%)
6.5
8.0
7.7
Contractual retirement age
65
65
65
Average retirement age
60
60
60
17,119
15,526
13,883
8,494
8,430
8,397
Discount rate (%) Expected return on plan assets (%)
The assumed rates of mortality are determined by reference to the SA85-90 (Light) Ultimate table, as published by the Actuarial Society of South Africa, for pre-retirement purposes and the PA(90) Ultimate table, minus one year age rating as published by the Institute and Faculty of Actuaries in London and Scotland, for retirement purposes.
Number of members Number of pensioners
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Notes to the consolidated annual financial statements
(continued)
for the three years ended March 31, 2009
30.
EMPLOYEE BENEFITS (continued) Medical benefits (continued) The valuation results are extremely sensitive to changes in the underlying assumptions. The following table provides an indication of the impact of changing some of the valuation assumptions above: The Trudon benefit obligation of R21 million has been excluded from the sensitivity analysis below. Current assumption Rm
Medical cost inflation rate
7.7%
Decrease Rm
Increase Rm
-1.0%
+1.0%
5,389
(736) (13.7)%
921 17.1%
Service cost and interest cost 2009/2010 Percentage change
555
(84) (15.1)%
108 19.5 %
Discount rate
8.7%
-1.0%
+1.0%
5,389
933 17.3%
(734) (13.6)%
555
46 8.3%
(37) (6.7)%
PA(90) Ultimate-1
-10.0%
+10.0%
5,389
221 4.1%
(197) (3.7)%
555
23 4.1%
(20) (3.6)%
Benefit obligation Percentage change
Benefit obligation Percentage change Service cost and interest cost 2009/2010 Percentage change
Post-retirement mortality rate Benefit obligation Percentage change Service cost and interest cost 2009/2010 Percentage change
2007
2008
2009
59 3 21 9 8
56 2 33 9 –
30 2 10 9 49
2007 Rm
2008 Rm
The status of the telephone rebate liability is disclosed below: Benefit obligation opening balance Service cost Interest cost Actuarial (gain)/loss Amendments Benefits paid
251 4 19 (39) 93 (21)
307 3 22 133 – (22)
443 6 39 19 – (23)
Present value of unfunded obligation Unrecognised net actuarial loss and service cost*
307 (25)
443 (156)
484 (159)
Liability as disclosed in the balance sheet (refer to note 29)
282
287
325
The fund portfolio consists of the following: Equities (%) Bonds (%) Cash and money market investments (%) Foreign investments (%) Insurance policies (%) Telephone rebates Telkom provides telephone rebates to its pensioners. The most recent actuarial valuation was performed as at March 31, 2009. Eligible employees must be employed by Telkom until retirement age to qualify for the telephone rebates. The scheme is a defined benefit plan.
* The major increase in 2008 is attributable to the change in the rebate inflation rate.
2009 Rm
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Notes to the consolidated annual financial statements
211
(continued)
for the three years ended March 31, 2009
30.
2009
2007
2008
Discount rate (%)
7.5
9.0
8.7
Rebate inflation rate (%)
0.0
4.0
4.0
Contractual retirement age
65
65
65
Average retirement age
60
60
60
Number of members
19,515
18,766
17,034
Number of pensioners
10,918
10,680
10,499
EMPLOYEE BENEFITS (continued) Telephone rebates (continued)
Principal actuarial assumptions were as follows:
The assumed rates of mortality are determined by reference to the PA(90) Ultimate table, minus one year age rating as published by the Institute and Faculty of Actuaries in London and Scotland.
Telkom Conditional Share Plan Telkom’s shareholders approved the Telkom Conditional Share Plan at the January 2004 Annual General Meeting. The scheme covers both operational and management employees and is aimed at giving shares to Telkom employees, at a RNil exercise price, at the end of the vesting period. The vesting period for the operational employees shares awarded in 2004 and 2005 is 0% in year one, 33% in each of the three years thereafter, while the shares allocated in 2006 and 2007 together with management shares vest fully after three years. Although the number of shares awarded to employees will be communicated at the grant date, the ultimate number of shares that vest may differ based on certain performance conditions being met (refer to note 24). The Telkom Board approved the fourth enhanced allocation of shares to employees as at September 24, 2007, with a grant date of September 27, 2007, the day that the employees and Telkom shared a common understanding of the terms and conditions of the grant. A total number of 6,089,810 shares were granted. The Board has also approved an enhanced allocation for the November 2006 grant on September 4, 2007 with a grant date of September 27, 2007. The number of additional shares granted with regard to the 2006 allocation is 4,966,860 shares. The weighted average remaining vesting period for the shares outstanding as at March 31, 2009 is 0.71 years (2008: 1.25 years; 2007: 1.75 years). 2007
2008
2009
The following table illustrates the movement of the maximum number of shares that will vest to employees for the August 2004 grant: Outstanding at beginning of the year
2,414,207
1,883,991
420,590
Granted during the year
1,212
252
–
Forfeited during the year
(80,923)
(43,790)
(3,985)
(450,505)
(1,419,863)
(416,605)
1,883,991
420,590
–
Vested during the year Outstanding at end of the year The following table illustrates the movement of the maximum number of shares that will vest to employees for the June 2005 grant:
1,930,687
1,864,041
1,435,387
Granted during the year
1,005
3,469
52,954
Forfeited during the year
(67,651)
(108,177)
(45,188)
–
(323,946)
(1,135,424)
1,864,041
1,435,387
307,729
Outstanding at beginning of the year
Vested during the year Outstanding at end of the year
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Telkom Annual Report 2009
Notes to the consolidated annual financial statements
(continued)
for the three years ended March 31, 2009
2007
30.
2008
2009
EMPLOYEE BENEFITS (continued) Telkom Conditional Share Plan (continued) The following table illustrates the movement of the maximum number of shares that will vest to employees for the November 2006 grant: Outstanding at beginning of the year
1,640,980
–
1,773,361
Granted during the year
1,825,488
833
–
Forfeited during the year
(52,127)
(133,214)
(132,614)
1,773,361
1,640,980
1,508,366
4,812,305
Outstanding at end of the year The following table illustrates the movement of the maximum number of shares that will vest to employees relating to the additional November 2006 grant: Outstanding at beginning of the year
–
–
Granted during the year
–
4,984,693
25,775
Forfeited during the year
–
(172,388)
(389,357)
Outstanding at end of the year
–
4,812,305
4,448,723
The following table illustrates the movement of the maximum number of shares that will vest to employees for the September 2007 grant: Outstanding at beginning of the year
–
–
5,846,636
Granted during the year
–
6,117,163
23,650
Forfeited during the year
–
(270,527)
(509,185)
Outstanding at end of the year
–
5,846,636
5,361,101
The fair value of the shares granted have been calculated by an actuary using Black-Scholes-Merton model and the following values at grant date:
Market share price (R) Dividend yield (%)
August 8,
June 23,
November 2,
September 4,
2004
2005
2006
2007
Grant
Grant
Grant
Grant
77.50
111.00
141.25
173.00
2.60
3.60
3.50
3.50
2007
2008
2009
The principal assumptions used in calculating the expected number of shares that will vest are as follows: Employee turnover (%) Meeting specified performance criteria (%)
5
5
9
100
100
75
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Notes to the consolidated annual financial statements
213
(continued)
for the three years ended March 31, 2009
30.
EMPLOYEE BENEFITS (continued) The amounts for the current and previous four years are as follows: 2005
2006
2007
2008
2009
Rm
Rm
Rm
Rm
Rm
Defined benefit obligation
(186)
(281)
(205)
(204)
(199)
Plan assets
231
243
284
311
247
45
(38)
79
107
48
–
–
–
(29)
(39)
89
118
(25)
(23)
46
134
80
54
55
55
Experience adjustment on assets
–
–
75
10
(67)
Experience adjustment on liabilities
–
–
25
(6)
1
Defined benefit obligation
(4,020)
(4,377)
(6,581)
(7,101)
(6,704)
Plan assets
4,477
5,973
7,661
7,991
6,675
Telkom Pension Fund
Surplus/(deficit) Asset limitation Unrecognised actuarial loss/(gain) Unrecognised/recognised net asset
Telkom Retirement Fund
Surplus/(deficit)
457
1,596
1,080
890
(29)
Unrecognised actuarial gain/(loss)
312
(742)
96
478
1,578
Unrecognised net asset
769
854
1,176
1,368
1,549
Experience adjustment on assets*
–
–
1,641
118
(1,735)
Experience adjustment on liabilities*
–
–
1,234
485
(645)
(3,079)
(3,904)
(4,384)
(4,850)
(5,410)
–
–
1,961
1,929
1,618
(3,079)
(3,904)
(2,423)
(2,921)
(3,792)
649
1,297
1,284
1,565
2,047
(2,430)
(2,607)
(1,139)
(1,356)
(1,745)
Experience adjustment on assets
–
–
147
(164)
(393)
Experience adjustment on liabilities
–
–
28
193
246
(177)
(251)
(307)
(443)
(484)
(2)
53
25
156
159
(179)
(198)
(282)
(287)
(325)
–
–
(25)
2
2
Medical benefits Defined benefit obligation Plan assets Deficit Unrecognised actuarial loss Liability recognised
Telephone rebates Defined benefit obligation Unrecognised actuarial (gain)/loss Liability recognised Experience adjustment on liabilities
The experience adjustments on asset and liabilities for each of the financial periods ended March 31, 2005 and 2006 have not been disclosed due to the fact that it was impractical to determine the information. * During the March 31, 2007 year end Telkom actuaries performed a full valuation while for the March 31, 2006 year end a roll forward method was used, as permitted under IAS19, to determine the present value of the benefit obligation and the fair value of the plan assets using the March 31, 2005 statutory valuation as a base applying the relevant assumptions determined by management to arrive at the present value of the benefit obligation, and the fair value of the plan assets. This change in estimate resulted in a movement to the actuarial loss of R700 million and the fair value of the plan assets of R350 million in respect of the March 31, 2007 estimates. The remaining R1,291 million is a result of the actual investment returns exceeding the expected return for the March 31, 2007 year end.
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Telkom Annual Report 2009
Notes to the consolidated annual financial statements
(continued)
for the three years ended March 31, 2009
2007 Rm
31.
2008 Rm
2009 Rm
TRADE AND OTHER PAYABLES
7,237
8,771
5,538
Trade payables
5,511
6,768
2,955
22
39
156
1,704
1,964
2,427
20,520
21,256
20,394
Profit for the year
8,849
8,172
4,247
Finance charges and fair value movements
1,125
1,803
3,765
Taxation
4,731
4,704
3,681
Investment income
(235)
(197)
(216)
Interest received from debtors
(190)
(257)
(273)
6,582
6,930
10,292
5,315
6,130
8,155
240
88
71
1,107
857
1,387
(29)
(147)
(29)
–
–
691
Finance cost accrued Accruals and other payables Accruals and other payables mainly represent amounts payable for goods received, net of Value Added Taxation obligations.
32.
RECONCILIATION OF PROFIT FOR THE YEAR TO CASH GENERATED FROM OPERATIONS* Cash generated from operations
Non-cash items Depreciation, amortisation, impairment and write-offs Cost of equipment disposed when recognising finance leases Increase in provisions Profit on disposal of property, plant and equipment and intangible assets Vodacom broad-based black economic empowerment charge
(52)
–
–
1
2
17
(342)
101
(1,102)
Inventories
(393)
(354)
(1,130)
Accounts receivable
(758)
(784)
(812)
Accounts payable
809
1,239
840
FINANCE CHARGES PAID*
(1,115)
(1,077)
(2,164)
Finance charges per income statement
(1,125)
(1,803)
(3,765)
10
726
1,601
Movements in interest accruals
(119)
101
105
Net discount amortised
409
568
698
Capitalised finance leases
–
–
178
Capitalised foreign exchange
–
–
38
(338)
(243)
183
58
300
399
Profit on disposal of investment and subsidiaries Loss on disposal of property, plant and equipment and intangible assets (Increase)/decrease in working capital
33.
Non-cash items
Fair value adjustment Unrealised gain
* Cash flows includes the cash flows related to assets held for sale and disposal groups.
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Notes to the consolidated annual financial statements
215
(continued)
for the three years ended March 31, 2009
34.
TAXATION PAID*
2007 Rm
2008 Rm
(5,690)
(4,277)
2009 Rm (3,947)
Taxation payable at beginning of year
(1,549)
(74)
(314)
Current taxation (excluding deferred taxation)
(3,545)
(3,807)
(3,412)
–
(32)
2
Foreign currency translation reserve
–
–
2
(670)
(678)
(425)
Taxation payable at end of year
74
314
200
Reconciliation of net taxation liability at end of year**
(74)
(314)
(200)
Income taxation receivable
520
9
125
Continuing operations
520
9
91
–
–
34
Income taxation payable
(594)
(323)
(325)
Continuing operations
(594)
(323)
(50)
–
–
(275)
(4,784)
(5,732)
(3,336)
Business combinations Secondary taxation on companies
Disposal groups
Disposal groups * Cash flows includes the cash flows related to assets held for sale and disposal groups. ** The split income taxation receivable and income taxation payable was split in 2009 to disclose the effect of the discontinued operations.
35.
DIVIDEND PAID
(4)
(15)
(20)
(4,678)
(5,627)
(3,306)
Final dividend for 2006: 500 cents
(2,599)
–
–
Special dividend for 2006: 400 cents
(2,079)
–
–
Final dividend for 2007: 600 cents
–
(3,069)
–
Special dividend for 2007: 500 cents
–
(2,558)
–
Final dividend for 2008: 660 cents
–
–
(3,306)
(117)
(110)
(33)
15
20
23
Dividend payable at beginning of year Declared during the year – Dividend on ordinary shares:
Dividends paid to minority interest Dividend payable at end of year
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Telkom Annual Report 2009
Notes to the consolidated annual financial statements
(continued)
for the three years ended March 31, 2009
36. 36.1
ACQUISITION AND DISPOSALS OF SUBSIDIARIES, JOINT VENTURES AND MINORITY INTERESTS Acquisitions By Telkom 2007 Rm
2008 Rm
2009 Rm
Multi-Links Telecommunications Limited (Multi-Links Telecommunications) (25%) Telkom International (Proprietary) Limited acquired 75% of the issued share capital of Multi-Links Telecommunications Limited from Kenston Investment Limited on May 1, 2007. Telkom also granted Kenston the irrevocable right and option (put option) to require Telkom to acquire all of the shares held by Kenston (25% shareholding) in Multi-Links, at any time during the 90 day period following the second anniversary of the effective date. On initial recognition, a liability of R661 million, representing the higher of the transaction share price and the fair value, was recognised under non-current other financial liabilities. A corresponding debit was recognised in non-distributable reserves. The put option was exercised on January 21, 2009 for R1,328 million (US$130 million at US$1 = R10.2188). The liability was derecognised and a corresponding credit consisting of R661 million reversal of equity and R667 million relating to changes in the fair value of the put option subsequent to initial recognition, was recognised directly in equity. –
–
1,328
Fair value of intangible assets (licences R1 million, brand R42 million)
43
–
–
Less: Deferred taxation raised on intangible assets
(12)
–
–
Less: Net liabilities acquired (excluding fair value of intangible assets)
(26)
–
–
Put option Africa Online Limited (Africa Online) On February 23, 2007 Telkom acquired a 100% shareholding of Africa Online from African Lakes Corporation for a total cost of R150 million, with a resulting goodwill of R145 million. Africa Online is an internet service provider active in Cote d’Ivoire, Ghana, Kenya, Namibia, Swaziland, Tanzania, Uganda, Zambia and Zimbabwe. Africa Online is incorporated in the Republic of Mauritius. At acquisition date the company was not IFRS compliant and thus no fair value information based on IFRS was available. The process of calculating a fair value of the identified assets, liabilities and contingent liabilities has been finalised. The fair value of the assets and liabilities acquired were determined as follows:
5
–
–
Goodwill
145
–
–
Purchase price
150
–
–
Fair value of net assets acquired
The goodwill has been allocated to the various cash-generating units (’CGU’) representative of the countries in which Africa Online Limited operates.
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Telkom Annual Report 2009
Notes to the consolidated annual financial statements
217
(continued)
for the three years ended March 31, 2009
36. 36.1
2007
2008
2009
Rm
Rm
Rm
ACQUISITION AND DISPOSALS OF SUBSIDIARIES, JOINT VENTURES AND MINORITY INTERESTS (continued) Acquisitions (continued) By the Group’s subsidiaries Multi-Links Telecommunications Limited (’Multi-Links Telecommunications’) (75%) On May 1, 2007 Telkom acquired a 75% shareholding in Multi-Links Telecommunications through Telkom International, a wholly owned South African subsidiary, for a total cost of R1,985 million. Multi-Links Telecommunications is a Nigerian Private Telecommunications Operator with a Unified Access Licence providing fixed, mobile, data, long distance and international telecommunications services throughout Nigeria. Multi-Links is domiciled and incorporated in Nigeria. The purchase price allocation was completed during the 2008 financial year, and has resulted in goodwill being adjusted. The following intangible assets were identified and valued at the end of the year: –
Customer relationship
–
61
Licence
–
36
–
Brand
–
105
–
Fair value of intangible assets
–
202
–
Net assets acquired (excluding fair value of intangible assets)
–
236
–
Fair value of intangible assets
–
202
–
Less: Contingencies recognised
–
(35)
–
Less: Deferred taxation raised on intangible assets
–
(65)
–
Fair value of net assets acquired
–
338
–
Less: Minority interest
–
(80)
–
Goodwill
–
1,727
–
Purchase price*
–
1,985
–
The fair value of the assets and liabilities acquired were determined as follows:
* The purchase price was settled in cash.
Disposal group By the Group’s 50% joint venture, Vodacom Storage Technology Services (Proprietary) Limited
–
–
69
Gateway
–
–
2,846
168
468
–
4
9
– –
Smartphone SP (Proprietary) Limited and subsidiaries Smartcom (Proprietary) Limited Africell Cellular Services (Proprietary) Limited
40
–
InterConnect s.p.r.l
10
–
–
Cointel VAS (Proprietary) Limited
73
–
–
Disposals By the Group’s 50% joint venture, Vodacom Ithuba Smartcall (Proprietary) Limited
–
–
–
Stand 13 Eastwood Road Dunkeld (Proprietary) Limited
–
8
–
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Telkom Annual Report 2009
Notes to the consolidated annual financial statements
(continued)
for the three years ended March 31, 2009
37. 37.1
UNDRAWN BORROWING FACILITIES AND GUARANTEES Rand denominated facilities and guarantees Telkom has general banking facilities of R6,226 million. The facilities are unsecured, when drawn bear interest at a rate linked to prime, have no specific maturity date and are subject to annual review. R3,000 million of these undrawn facilities were committed.
37.2
Foreign denominated facilities and guarantees Guarantor Telkom SA Limited
Details
Beneficiary
Punctual payment and performance by
Various
US$3 million
Africa Online under the Trade Finance
(2008:
Facility Agreement to various banks
US$3 million)
First Bank of Nigeria plc
Guarantee on lending facility from Export
Nortel Networks US$18 million
(on behalf of Multi-links
Bank of Canada to Nortel Networks for
Canada
Telecommunications
the purchase of Telecommunications
Limited)
equipment phases – 9a, 9b, 9c and 9d
Zenith Bank plc (on
Guarantee payment to Gilat Satcom
Gilat Satcom
behalf of Multi-links
Limited in respect of interconnect
Limited
Telecommunications
service (standby letter of credit)
2007
2008
2009
Rm
Rm
Rm
–
23
26
–
147
171
–
1
1
–
1
1
–
250
294
–
88
104
–
510
597
(2008: US$18 million)
US$0.1 million (2008: US$0.1 million)
Limited) Zenith Bank plc (on
Support the bid award of the contract
behalf of Multi-links
for the submission of the proposal to
NCC
(2008:
US$0.1 million
Telecommunications
provide wire to Nigerian Telecommuni-
US$0.1 million)
Limited)
cations Services
Zenith Bank plc (on
Issued in favour of Huawei Technology
Huawei
US$31 million
behalf of Multi-links
Investment Company Limited for the
Technology
(2008:
Telecommunications
supply of core telecommunications
Investment
US$31 million)
Limited)
services
Company Limited
Zenith Bank plc (on
Issued in favour of Huawei Technology
Huawei
US$11 million
behalf of Multi-links
Investment Company Limited for the
Technology
(2008: US$11 million)
Telecommunications
supply of core telecommunications
Investment
Limited)
services
Company Limited
Disposal group Rand denominated facilities and guarantees The Group exposure is 50% of the following items: Vodacom has Rand denominated credit facilities totalling R15,675 million with R12,335 million utilised as at March 31, 2009. The facilities that are uncommitted can also be utilised for loans to foreign entities and are subject to review at various dates (usually on an annual basis). Certain of the facilities are still subject to the Group’s final acceptance.
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219
Telkom Annual Report 2009
Notes to the consolidated annual financial statements
(continued)
for the three years ended March 31, 2009
37. 37.2
UNDRAWN BORROWING FACILITIES AND GUARANTEES (continued) Foreign denominated facilities and guarantees Rand denominated facilities and guarantees (continued) Guarantor
2007
2008
2009
Rm
Rm
Rm
Various
3
2
2
Various
3
3
2
27
32
35
Various
3
–
–
Various
1
–
–
Details
Beneficiary
Vodacom (Proprietary)
All guarantees individually less than
Limited
R2 million
Vodacom Service
All guarantees individually less than
Provider Company
R2 million
(Proprietary) Limited Vodacom Service
Guarantee in respect of receipt of
SA Insurance
Provider Company
independent intermediaries of premiums
Association
(Proprietary) Limited
on behalf of short-term insurers and
for benefit
Lloyd’s underwriters, and relating to
of insurers
short-term insurance business carried on in RSA. Renewable annually Smartcom (Proprietary)
Guarantees for salary bank account
Limited
and debit orders
Cointel VAS (Proprietary) Guarantees for operating lease Limited
and debit orders
Vodacom (Proprietary)
Letter of undertaking in respect of land
Attorneys
7
17
33
Lease guarantees
Various
–
–
3
44
54
75
Limited Vodacom Properties No.2 (Proprietary) Limited
The Group exposure is 50% of the following items: Vodacom Congo (RDC) s.p.r.l. has various facilities of US$31 million which was fully utilised as at March 31, 2009. Vodacom International Limited has a revolving term loan of US$180 million which was fully utilised at March 31, 2009. Vodacom Lesotho (Proprietary) Limited has overdraft facilities with various banks of M25 million of which M13 million was utilised at March 31, 2009. Vodacom Tanzania Limited has medium-term loans for US$47 million and TZS54,000 million of which US$40 million and TZSNil was utilised at March 31, 2009. Foreign currency term facilities are predominantly US Dollar based, at various maturities and are utilised for bridging and short-term working capital needs.
Guarantor
2007
2008
2009
Rm
Rm
Rm
Standard Bank
US$180 million 1,312
1,463
1,735
plc and RMB
(2008:
International
US$180 million;
(Dublin) Limited
2007:
1,463
1,735
Details
Beneficiary
Vodacom Group
Guarantees issued for the obligation of
(Proprietary) Limited
Vodacom International Limited’s term loan facility*#
US$180 million) 1,312
* Foreign denominated guarantees amounting to R1,735 million (2008: R1,463 million; 2007: R1,312 million) issued in support of Vodacom Congo (RDC) s.p.r.l. are included as liabilities in the disposal group held for sale. # The Group is in compliance with the covenants attached to the term loan facility.
Companies within the Group have provided the following guarantees: Vodacom (Proprietary) Limited provides an unlimited guarantee for borrowings entered into by Vodacom Group (Proprietary) Limited.
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Telkom Annual Report 2009
Notes to the consolidated annual financial statements
(continued)
for the three years ended March 31, 2009
2007 Rm
38.
2008 Rm
2009 Rm
COMMITMENTS Capital commitments 11,167
15,198
7,928
Fixed-line
7,000
7,000
6,991
Mobile
4,159
5,211
–
Multi-Links
–
355
847
Other
8
2,632
90
1,099
3,504
1,393
Fixed-line
506
652
539
Mobile
591
800
–
Multi-Links
–
355
847
Other
2
1,697
7
10,068
11,694
6,535
Fixed-line
6,494
6,348
6,452
Mobile
3,568
4,411
–
Multi-Links
–
–
–
Other
6
935
83
Capital commitments authorised
Commitments against authorised capital expenditure
Authorised capital expenditure not yet contracted
Capital commitments comprise commitments for property, plant and equipment and software included in Intangible assets. Management expects these commitments to be financed from proceeds of the Vodacom sale. 2010 FIFA World Cup commitments The FIFA World Cup commitment is an executory contract which requires Telkom to develop the fixed-line components of the necessary telecommunications infrastructure needed to broadcast this event to the world. This encompasses the provisioning of the fixed-line telecommunications related products and services and, where applicable, the services of qualified personnel necessary for the planning, management, delivery, installation and de-installation, operation, maintenance and satisfactory functioning of these products and services. Furthermore as a National Supporter. Telkom owns a tier 3 sponsorship that grants Telkom a package of advertising, promotional and marketing rights that are exercisable within the borders of South Africa. Telkom entered into a barter transaction in return for which it has an outstanding commitment to FIFA of R243 million (2008: R260 million) as at March 31, 2009. This has been recognised in intangible assets (note 12) and has been included in the disclosure note. Total
<1 year
1 – 5 years
>5 years
Rm
Rm
Rm
Rm
Land and buildings
583
290
281
12
Rental receivable on buildings
(271)
(99)
(170)
(2)
Operating lease commitments and receivables 2009
1,137
261
876
–
Equipment
15
6
9
–
Customer premises equipment receivables
(87)
(48)
(39)
–
1,377
410
957
10
Vehicles
Total
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Telkom Annual Report 2009
Notes to the consolidated annual financial statements
221
(continued)
for the three years ended March 31, 2009
38.
COMMITMENTS (continued) Total
<1 year
1 - 5 years
>5 years
Rm
Rm
Rm
Rm
807
Operating lease commitments and receivables (continued) 2008 Land and buildings
2,061
341
913
Rental receivable on buildings
(266)
(94)
(169)
(3)
Transmission and data lines
709
134
490
85
1,444
233
1,211
–
13
10
3
–
680
282
395
3
(84)
(45)
(39)
–
4,557
861
2,804
892
405
Vehicles Equipment Sport and marketing contracts Customer premises equipment receivables Total 2007 Land and buildings
1,465
289
771
Rental receivable on buildings
(269)
(91)
(174)
(4)
Transmission and data lines
262
68
159
35
Vehicles
573
568
5
–
23
6
17
–
441
164
275
2
(57)
(30)
(27)
–
2,438
974
1,026
438
Equipment Sport and marketing contracts Customer premises equipment receivables Total Customer premises equipment receivable
The disclosed information relates to those arrangements which were assessed to be operating leases in terms of IAS17. Operating leases The Group leases certain buildings, vehicles and equipment. The majority of the lease terms negotiated for equipment-related premises are 10 years with other leases signed for five and three years. The majority of the leases contain an option clause entitling Telkom to renew the lease agreements for a period usually equal to the main lease term. The minimum lease payments under these agreements are subject to annual escalations, which range from 6% to 15%. Penalties in terms of the lease agreements are only payable should Telkom vacate a premises and negotiate to terminate the lease agreement prior to the expiry date, in which case the settlement payment will be negotiated in accordance with the market conditions of the premises. Future minimum lease payments under operating leases are included in the above note. Onerous leases for buildings, of which Telkom has no further use, no possibility of sub-lease and no option to cancel, are provided for in full and included in other provisions (refer to note 29). The master lease agreement for vehicles was for a period of five years and then extended for an additional three years which resulted in the lease expiring on March 31, 2008. During August 2007 new terms were negotiated and approved and as a result the operating lease commitments for vehicles are based on the new agreement which expires on March 31, 2013. In accordance with this agreement Telkom is not allowed to lease any similar vehicle as specified in the contract from any other service provider during the five year period except for the rentals at airport which are utilised in cases of subsistence and travel as well as vehicles which are not part of the agreement. The agreement is structured to have no lease increases on vehicles that are continually leased from the lessor. If a vehicle is, however, replaced by a new similar vehicle, the lease costs of the newest vehicle will increase by the Consumer Price Index. All leased vehicles are, however, subject to any variance in the interest rate fluctuations and are adjusted as and when the adjustments are announced by the South African Reserve Bank. The leases of individual vehicles are renewed annually. The master lease agreements for office equipment are with two suppliers with initial periods of 36 months effective from November 25, 2005. Upon expiry of the initial lease agreement on November 25, 2008, an extension of the lease was negotiated until November 24, 2009. In terms of these agreements the leases of individual equipment shall be valid for 36 months at a fixed fee for the entire period.
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Telkom Annual Report 2009
Notes to the consolidated annual financial statements
(continued)
for the three years ended March 31, 2009
38.
COMMITMENTS (continued) Total Rm
<1 year Rm
1 – 5 years Rm
>5 years Rm
1,654 (822)
113 (112)
546 (426)
995 (284)
832
1
120
711
Equipment Minimum lease payments Finance charges
7 (2)
5 (1)
2 (1)
– –
Finance lease obligation
5
4
1
–
Vehicles Minimum lease payments Finance charges
187 (38)
47 (15)
140 (23)
– –
Finance lease obligation
149
32
117
–
2008 Building Minimum lease payments Finance charges
2,198 (1,031)
257 (152)
791 (496)
1,150 (383)
Finance lease obligation
1,167
105
295
767
Equipment Minimum lease payments Finance charges
16 (2)
4 –
12 (2)
– –
Finance lease obligation
14
4
10
–
Vehicles Minimum lease payments Finance charges
242 (59)
48 (20)
194 (39)
– –
Finance lease obligation
183
28
155
–
2007 Building Minimum lease payments Finance charges
2,412 (1,198)
227 (166)
853 (540)
1,332 (492)
Finance lease obligation
1,214
61
313
840
Equipment Minimum lease payments Finance charges
6 –
– –
6 –
– –
Finance lease obligation
6
–
6
–
Finance lease commitments 2009 Building Minimum lease payments Finance charges Finance lease obligation
Finance leases Finance leases on vehicles relates to the lease of Swap bodies. The lease term for the Swap bodies is April 2008 to April 2013. A major portion of the finance leases relates to the sale and lease-back of the Group’s office buildings. The lease term negotiated for the buildings is for a period of 25 years ending 2019. The minimum lease payments are subject to an annual escalation of 10% p.a. Telkom has the right to sublet part of the buildings. In case of breach of contract, the lessor is entitled to cancel the lease agreement and claim damages. Finance leases on equipment mainly relates to office equipment. The lease term negotiated for the finance leases is for a period of three years ending in 2011.
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Telkom Annual Report 2009
Notes to the consolidated annual financial statements
223
(continued)
for the three years ended March 31, 2009
39.
2009 Rm
2007 Rm
2008 Rm
Third parties
28
27
18
Fixed-line
19
18
18
4
4
–
CONTINGENCIES
Mobile Multi-Links
–
–
–
Other
5
5
–
Third parties These amounts represent sundry disputes with suppliers that are not individually significant and that the Group does not intend to settle. Supplier dispute Telcordia instituted arbitration proceedings against Telkom in March 2001 before a single arbitrator of the International Court of Arbitration, operating under the auspices of the International Chamber of Commerce. Telcordia is seeking to recover approximately US$130 million for monies outstanding and damages, plus costs and interest at a rate of 15.5% per year which was increased by Telcordia to US$172 million in the 2007 financial year and subsequently decreased to US$128 million in the 2008 financial year. The arbitration proceeding relates to the cancellation of an agreement entered into between Telkom and Telcordia during June 1999 for the development and supply of an integrated end-to-end customer assurance and activation system by Telcordia. In September 2002, the arbitrator found that Telkom had wrongfully repudiated the contract and a partial award was issued by the arbitrator in favour of Telcordia. Telkom subsequently filed an application in the South African High Court to review and set aside the partial award. On November 27, 2003, the South African High Court set aside the partial award and issued a cost order in favour of Telkom. On May 3, 2004, the South African High Court dismissed an application by Telcordia for leave to appeal and ordered Telcordia to pay the legal costs of Telkom. On November 29, 2004 the Supreme Court of Appeals granted Telcordia leave to appeal. Telcordia filed a notice of appeal and also petitioned the United States District Court for the District of Columbia to confirm the partial award, which petition was dismissed, along with a subsequent appeal. Following the dismissal of the appeal, Telcordia filed a similar petition in the United States District Court of New Jersey. The United States District Court of New Jersey also dismissed Telcordia’s petition, reaffirming the decision of the United States District Court of Columbia. Telcordia appealed this dismissal, which was later dismissed by the Appeals Court of New Jersey. The appeal by Telcordia in the Supreme Court of Appeals was set down for and heard on October 30 and October 31, 2006. Following the successful upholding of the appeal, Telkom filed an application for leave to appeal to the Constitutional Court on only the issue revolving around the Supreme Court of Appeals’ failure to recognise Telkom’s rights of access to the courts under the South African Arbitration Act. The Constitutional Court has since dismissed Telkom’s appeal with costs. The Constitutional Court judgment brought finality to the dispute over the merits of Telcordia’s claim against Telkom and the parties reconvened the arbitration in May 2007 to deal with the amount of damages to which Telcordia is entitled. Two hearings were held at the International Dispute Resolutions Centre (IDRC). The first hearing was held in London on May 21, 2007 and was a ’directions hearing’, in terms of which the parties consented to a ruling by the arbitrator setting out a consolidated list of proposals and issues to form part of the damages hearing. The second hearing was held in London at the IDRC on June 25 and 26, 2007 and dealt with the application by Telcordia for the striking out of part of Telkom’s defence on the basis that Telkom had raised issues in its defence that had already been heard by the arbitrator prior to his partial award. This application was dismissed by the arbitrator. The arbitrator also made a ruling compelling Telcordia to provide certain particulars requested by Telkom with regard to the claims by Telcordia. In his ruling, the arbitrator also set out a list of issues for determination of the damages.
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Telkom Annual Report 2009
Notes to the consolidated annual financial statements
(continued)
for the three years ended March 31, 2009
39.
CONTINGENCIES (continued) Supplier dispute (continued) The mediation took place in London in February and April of 2008 without success. In the interim the parties agreed to the appointment by the arbitrator of a third party expert to deal with the technical issues in relation to the software that was required to be provided by Telcordia, who will make a recommendation to the arbitrator in dealing with the amount of the claims. A further hearing was held before the arbitrator in October 2008 during which the arbitrator permitted Telkom to amend its statement of defence. Further hearings were held before the software expert in November 2008 and he has made his report available. The parties have now agreed that the whole question of “integration” of the software will be done at an experts only hearing (no lawyers) before Mr P Burns, a software expert in Johannesburg during October 2009. The hearings before the software expert will have an impact on the quantum of the other claims. The arbitrator has confirmed that the final hearing will be from January 25 to February 10, 2010, in Johannesburg. Although Telkom is currently unable to predict the exact amount that it may eventually be required to pay Telcordia, it has made provisions for estimated liabilities in respect of the Telcordia claim in the sum of US$70 million (R664 million), including interest and legal fees. Telkom will be required to fund any payments to Telcordia from cash flows or the incurrence of debt and the amount of any damages above Telkom’s provision would increase Telkom’s liabilities and decrease its net profit, which could have a material adverse effect on its financial condition, cash flows and results of operations. A provision has been raised based on management’s best estimate of the probable payments in this regard.
Supplier dispute liability included in current portion of provisions
2007
2008
Rm
Rm
527
569
2009 Rm 664*
The provision has not increased from March 31, 2007, except for foreign exchange movements. * US$70 million (2008: US$70 million; 2007: US$70 million).
Competition Commission Telkom is party to a number of legal and arbitration proceedings filed by parties with the South African Competition Commission alleging anti-competitive practices described below. If Telkom were found to have committed prohibited practices as contained in the Competition Act, 1998, as amended. Telkom could be required to cease these practices, divest these businesses and be fined a penalty of up to 10% of Telkom’s annual turnover, excluding the turnover of subsidiaries and joint ventures, for each complaint for the financial years prior to the dates of the complaints. The Competition Commission has to date not imposed the maximum penalty on any offender. On July 31, 2008, Telkom received a summons issued by the Competition Commission requesting information in connection with investigations being conducted by the Competition Commission into five complaints against Telkom described in greater detail below by the Internet Service Association, MWEB, Internet Solutions and Verizon SA Limited. The summons was subsequently withdrawn by the Competition Commission following an agreement with Telkom in a co-operative process with the Competition Commission as part of the Competition Commission’s ongoing investigations into these complaints. The investigation is expected to be finalised in the 2009 calendar year. As competition continues to increase, Telkom expects that we will become involved in an increasing number of disputes regarding the legality of services and products provided by Telkom and third parties. These disputes may range from court lawsuits to complaints lodged by or against Telkom with various regulatory bodies. Telkom is currently unable to predict the amount that it may eventually be required to pay in these proceedings. However, Telkom has not included provisions for any of these claims in our financial statements. In addition, Telkom might need to spend substantial amounts defending or prosecuting these claims even if it is ultimately successful. If Telkom is required to cease these practices, divest from the relevant businesses or pay significant fines, Telkom’s business and financial condition could be materially and adversely affected and its revenue and net profit could decline. Telkom may be required to fund any penalties or damages from cash flows or drawings on our credit facilities, which could cause its indebtedness to increase.
Independent Cellular Services Provider Association of South Africa (ICSPA) In 2002, the ICSPA filed a complaint against Telkom at the Competition Commission in terms of the Competition Act, alleging that Telkom had entered into contracts with large corporations, providing large discounts with the effect of discouraging the corporates from using the ’premicell’ device installed by their members. ICSPA also alleged various contraventions of the Competition Act by Telkom. Telkom provided the Competition Commission with certain information requested. Telkom also referred the Competition Commission to its High Court application in respect of utilisation of the ’premicell’ device. The Competition Commission declined to refer the matter to the Competition Tribunal. ICSPA then referred the matter to the Competition Tribunal on September 18, 2003. Telkom filed its answering affidavit on November 28, 2003. ICSPA has taken no further action since then.
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Telkom Annual Report 2009
Notes to the consolidated annual financial statements
225
(continued)
for the three years ended March 31, 2009
39.
CONTINGENCIES (continued) Competition Commission (continued)
The South African Value Added Network Services (SAVA) On May 7, 2002, the South African Value Added Network Services Providers’ Association, an association of VANS providers, filed complaints against Telkom at the Competition Commission of the Republic of South Africa under the South African Competition Act, 89 of 1998, alleging, among other things, that Telkom was abusing its dominant position in contravention of the Competition Act, 89 of 1998, and that it was engaged in price discrimination. The Competition Commission determined, among other things, that several aspects of Telkom’s conduct contravened the Competition Act, 89 of 1998, and referred certain of the relevant complaints to the Competition Tribunal for adjudication. The referred complaints deal with Telkom’s alleged refusal to provide telecommunications facilities to certain VANS providers to construct their networks, refusal to lease access facilities to VANS providers, provision of bundled and cross subsidised competitive services with monopoly services, discriminatory pricing with regard to leased line services and alleged refusal to peer with certain VANS providers. Telkom brought an application for review against the Competition Commission and the Competition Tribunal in the South African High Court, in respect of the decision by the Competition Commission to refer the matters to the Competition Tribunal. Telkom is of the view that the Competition Tribunal does not have jurisdiction to adjudicate these matters and argued that ICASA has the requisite jurisdiction. In the review application, Telkom also sought to set aside the decision by the Competition Commission to refer the complaints to the Competition Tribunal on the basis that the Competition Commission was biased, that the referral was out of time and that the Competition Commission had not adhered to the memorandum of understanding between it and ICASA. Only the Competition Commission opposed the application and filed an answering affidavit. The main complaint at the Competition Commission was held over pending the outcome of the review application. The application for review was heard on April 24 and 25, 2008. The South African High Court judge set aside the decision of the Competition Commission to refer the SAVA complaints and the Omnilink complaint against Telkom discussed below to the Competition Tribunal. The decision was made based on three grounds, namely that: • the Competition Commission failed to comply with the peremptory provisions of the memorandum of understanding between the Competition Commission and ICASA; • the referral was out of time, on the basis that the agreements with the complainants to extend the time which the Competition Commission was allowed to investigate the complaints were invalid; and • the Competition Commission’s reliance on a report by the Link Centre created reasonable apprehension of bias, since some of the complainants contribute financially to the Link Centre and the Link Centre’s advisory board includes employees of the complainants in the SAVA complaints. The judge did not make a decision on the question of jurisdiction (ie, whether ICASA or the Competition Tribunal has the jurisdiction to deal with competition matters in the electronic communications industry). On July 3, 2008 the Competition Commission filed an application for leave to appeal the decision of the High Court on the basis that the judge erred on the issue of bias as well as his finding that issues surrounding the extension of time to investigate the issues constitutes a ground for review. Telkom then filed an application for leave to cross-appeal on July 11, 2008. The main basis of Telkom’s cross-appeal is that Telkom believes that the judge erred in failing to make a decision as to whether ICASA or the Competition Commission and Competition Tribunal should deal with this type of complaint. The application for leave to appeal as well as the application for leave to cross-appeal were granted by the Pretoria High Court on October 9, 2008. The parties are attending to the filing of the record of proceedings before the High Court as well as the parties’ heads of argument, after which the Registrar of the Supreme Court of Appeal will inform the parties of the date for the hearing. The main complaint before the Competition Tribunal will continue to be held over pending the outcome of the appeal and cross-appeal. This matter is not expected to be finalised within the 2010 financial year.
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Notes to the consolidated annual financial statements
(continued)
for the three years ended March 31, 2009
39.
CONTINGENCIES (continued) Competition Commission (continued)
Omnilink On August 22, 2002 Omnilink filed a complaint against Telkom at the Competition Commission alleging that Telkom was abusing its dominance by discriminating in its price for Diginet services as against those charged to VANS and the price charged to customers who apply for a Telkom VPN solution. The Competition Commission conducted an enquiry and subsequently referred the complaint, together with the SAVA complaint, to the Competition Tribunal for adjudication. This matter is currently being dealt with together with the SAVA matter discussed previously.
Orion/Telkom (Standard Bank and Edcon): Competition Tribunal In April 2003, Orion filed a complaint against Telkom, Standard Bank and Edcon at the Competition Commission concerning Telkom’s discounts offered on public switched telecommunication services to corporate customers. In terms of the rules of the Competition Commission, the Competition Commission, who acts as an investigator, had one year to investigate the complaint. Orion, simultaneously with the filing of the complaint, also filed an application against Telkom, Standard Bank and Edcon at the Competition Tribunal, for an interim order interdicting and restraining Telkom from offering Orion’s corporate customers reduced rates associated with Telkom’s Cellsaver discount plan. The Competition Commission completed its investigation and decided that there was no prima facie evidence of any contravention of the Competition Act. Orion however referred the matter to the Competition Tribunal in terms of section 51 of the Competition Act, which allows for parties to refer matters to the Competition Tribunal themselves. Telkom has not yet filed its answering affidavit in the main complaint before the Competition Tribunal. To date there have been no further developments on this matter.
The Internet Service Providers Association (ISPA) In December 2005, the ISPA, an association of ISPs, filed complaints against Telkom at the Competition Commission regarding alleged anti-competitive practices on the part of Telkom. The complaints deal with the cost of access to SAIX, the prices offered by TelkomInternet, the alleged delay in provision of facilities to ISPs and the alleged favourable installation timelines offered to TelkomInternet customers. The Competition Commission has formally requested Telkom to provide it with certain records of orders placed for certain services, in an attempt to first investigate the latter aspects of the complaint. Telkom provided the Competition Commission with the information.
MWEB and Internet Solutions (IS) On June 29, 2005, MWEB and Internet Solutions, or IS, jointly lodged a complaint with the Competition Commission against Telkom and also requested interim relief at the Competition Tribunal. The complaint at the Competition Commission mainly deals with Telkom’s pricing for ADSL retail products and its IP Connect products, the termination of the peering link between Telkom and IS, the wholesale pricing of SAIX bandwidth for ADSL users of other internet service providers, the architecture of Telkom’s ADSL access route and the manner in which internet service providers can only connect to Telkom’s edge service router via IP Connect as well as alleged excessive pricing for bandwidth on Telkom’s international undersea cable. The application for interim relief at the Competition Tribunal dealt with allegations that Telkom should maintain the peering link between IS and Telkom in terms of its current peering agreement, and demanded that Telkom treat the traffic generated by ADSL customers of MWEB as traffic destined for the peering link and that Telkom upgrade its peering link to accommodate the increased ADSL traffic emanating from MWEB and maintain a maximum of 65% utilisation. Telkom filed its answering affidavit, and is awaiting IS and MWEB’s replying affidavit. Since then, Telkom has entered into a new peering agreement with IS and has responded to numerous documentation and information requests from the Competition Commission. To date neither MWEB nor IS has filed a replying affidavit in the interim relief application.
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Notes to the consolidated annual financial statements
227
(continued)
for the three years ended March 31, 2009
39.
CONTINGENCIES (continued) Competition Commission (continued)
MWEB On June 5, 2007, MWEB brought an application against Telkom for interim relief at the Competition Tribunal with regard to the manner in which Telkom provides wholesale ADSL internet connections. MWEB requested the Competition Tribunal to grant an order of interim relief against Telkom to charge MWEB a wholesale price for the provision of ADSL internet connections which is not higher than the lowest retail price. MWEB further applied for an order that Telkom implement the migration of end customers from Telkom PSTS ADSL access to MWEB without interruption of the service. Telkom raised the objection that the Competition Tribunal does not have jurisdiction to hear the matter in its answering affidavit filed at the Competition Tribunal. Telkom still had to “plead over” as to the merits of the matter. Telkom also filed an application in the Transvaal Provincial Division of the South African High Court on July 3, 2007 for an order declaring that the Competition Tribunal does not have jurisdiction to hear the application for interim relief made to it by MWEB. The application before the High Court was set down for hearing during the first quarter of the 2009 financial year. The parties however entered into settlement negotiations, which resulted in the withdrawal of the interim relief application at the Competition Tribunal by MWEB as well as a withdrawal of the jurisdictional challenge filed at the South African High Court by Telkom. The parties are in further negotiations.
Verizon SA Limited (Verizon) Verizon filed a complaint against Telkom on March 22, 2007 alleging that Telkom charges an excessive price on services rendered to Verizon thereby inducing Verizon’s customers not to deal with Verizon, engages in exclusionary conduct through “margin squeeze” in offering prices to end-users which are lower than the prices at which it sells rights of access to its infrastructure on a wholesale basis to Verizon, and that Telkom engages in price discrimination against Verizon.
Internet Solutions (IS) IS filed a complaint against Telkom at the Competition Commission during December 2007. The complaint alleges abusive conduct by Telkom. IS specifically alleges that Telkom is charging excessive prices that bear no reasonable relation to the economic value of the goods or services, that Telkom has raised the wholesale cost to downstream competitors, while also reducing the downstream retail price to clients; engaging in margin squeeze, that Telkom has introduced a series of bundled products (namely Telkom Closer Products) that limit the ability of rivals in particular markets to compete effectively, and Telkom is offering discriminatory prices in relation to a number of infrastructural and service items that IS is compelled to purchase from Telkom. While that complaint was being investigated by the Competition Commission IS brought an application to the Competition Commission for interim relief requesting: that Telkom be ordered to charge IS a wholesale price for telecommunication facilities to provide virtual private network services to its customers no higher than the lowest retail price for such connection charged to Telkom’s VPN Supreme customers and ordering that the costs of the application be paid by Telkom. Telkom opposed the application of by IS at the Competition Tribunal although it is unable to finalise its opposing papers due to difficulties associated with the manner in which IS claimed confidentiality over the application. No further activity has taken place with regard to the interim relief application to date.
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Notes to the consolidated annual financial statements
(continued)
for the three years ended March 31, 2009
39.
CONTINGENCIES (continued) Competition Commission (continued)
Telecom and Broadcasting (Proprietary) Limited (Maredi) Maredi Maredi served a notice of motion on Telkom, Ericsson SA and Telsaf Data (Pty) Ltd on January 8, 2009. The matter relates to a tender published by Telkom for the supply of point-to-point split mount microwave equipment. Maredi, Telsaf, Ericsson and a fourth company, Mobax, were shortlisted. The tender was awarded by Telkom to Telsaf and Ericsson. Maredi applied for a court order, with a court hearing date set for February 3, 2009, requesting that the court prevent Telkom from entering into a contract with Ericsson and Telsaf or either party, and from ordering goods or services from Ericsson and Telsaf pursuant to the tender. Maredi also requested an order that the court review and set aside the award of the tender to Telsaf and Ericsson or either of the aforementioned parties, and refer the tender back to Telkom in order for Telkom to reconsider its award. Maredi alleged that there were certain irregularities in the tender process in that Telkom did not follow fair procedures by failing to comply with its own mandatory procedural requirements, that Telkom acted arbitrarily and in bad faith, that Telkom was biased in favour of Ericsson and that Ericsson should have been disqualified as it failed to meet Telkom’s critical criteria as set out in the tender. Numerous allegations in the application, including accusations against certain members of the Procurement Review Council and allegations by Maredi of compliance by them to the technical critical criteria, were refuted by Telkom. Telkom and Ericsson opposed the application and filed their respective opposing affidavits. Telsaf did not oppose the application. The matter was ultimately set down for hearing on February 20, 2009 and Maredi’s application was dismissed with costs. However, Maredi is proceeding with a review application in the ordinary course and Telkom is opposing the application. Telkom is not currently able to predict when these disputes may be resolved or the amount that Telkom may eventually be required to pay, however, Telkom has not included provisions for all of these claims in our consolidated financial statements. In addition, Telkom may need to spend substantial amounts defending or prosecuting these claims even if Telkom is ultimately successful. If Telkom were to lose these or future legal and arbitration proceedings, Telkom could be prohibited from engaging in certain business activities and could be required to pay substantial penalties and damages, which could cause Telkom’s revenue and net profit to decline and have a material adverse impact on the business and financial condition. Telkom may be required to fund any penalties or damages from cash flows or drawings on our credit facilities, which could cause Telkom’s indebtedness to increase. Telkom is party to various additional proceedings and lawsuits in the ordinary course of our business, which management does not believe will have a material adverse impact. Negative working capital ratio At each of the financial years ended March 31, 2009, 2008 and 2007 the Group had a negative working capital ratio. A negative working capital ratio arises when current liabilities are greater than current assets. Current liabilities are intended to be financed from operating cash flows, new borrowings and borrowings available under existing credit facilities.
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Telkom Annual Report 2009
Notes to the consolidated annual financial statements
(continued)
for the three years ended March 31, 2009
40.
DIRECTORS’ INTERESTS ST Arnold, RJ Huntley, E Spio-Garbrah, KST Matthews and VB Lawrence, five of Telkom’s Board members, are the South African Government’s representatives on Telkom’s Board of directors. At March 31, 2009, the Government held 39.76% (2008: 39.42%; 2007: 38.83%) of Telkom’s shares. B Molefe is a Public Investment Corporation (PIC) representative on Telkom’s Board of directors. As at March 31, 2009 the PIC held 15.63% (2008: 15.23%, 2007: 15.27%) of Telkom’s shares. Beneficial
Non-beneficial
Direct
Indirect
Direct
Indirect
RJ September
90,815
1,820
–
–
PG Nelson
19,182
–
109,997
1,820
–
–
PG Joubert
–
15,000
–
–
D Barber
–
1,200
–
–
–
16,200
–
–
RJ September
7,155
–
–
–
Total
7,155
–
–
–
TF Mosololi
455
–
–
–
Total
455
–
–
–
Directors’ shareholding (Number of shares) 2009
Executive
Total
Non-executive
2008
Executive
Non-executive At March 31, 2008 there were no non-executive directors’ shareholdings. 2007
Non-executive
The directors’ shareholding changed between the balance sheet date and the date of issue of the financial statements and this has been reflected in the above information.
Directors’ emoluments
2007
2008
2009
Rm
Rm
Rm
7
36
20
4
31
15
3
5
5
Executive For services as directors
Non-executive For services as directors
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Telkom Annual Report 2009
Notes to the consolidated annual financial statements
(continued)
for the three years ended March 31, 2009
40.
DIRECTORS’ INTEREST (continued) Directors’ emoluments (continued) Fees R
Remuneration R
Performance bonus R
Fringe and other benefits R
Total R
2009 Emoluments per director: Non-executive
5,028,084
–
–
–
5,028,084
ST Arnold B du Plessis PSC Luthuli KST Matthews B Molefe AG Rhoda RJ Huntley Dr E Spio-Garbrah** Dr VB Lawrence** DD Barber PG Joubert
1,030,000 498,000 642,000 441,000 159,551 124,001 533,000 622,750 359,000 293,667 302,778
– – – – – – – – – – –
– – – – – – – – – – –
– – – – – – – – – – –
1,030,000 498,000 642,000 441,000 159,551 124,001 533,000 622,750 359,000 293,667 302,778
Executive
–
4,530,912
2,289,947
7,848,357
14,669,216
RJ September CEO* PG Nelson CFO*
– –
3,555,800 975,112
1,841,396 448,551
7,430,452 417,905
12,827,648 1,841,568
5,005,747
4,530,912
2,289,947
7,848,357
19,674,963
2008 Emoluments per director: Non-executive
4,633,933
–
–
–
4,633,933
ST Arnold B du Plessis MJ Lamberti PSC Luthuli TD Mahloele KST Matthews TF Mosololi M Mostert*** DD Tabata YR Tenza PL Zim B Molefe A Rhoda RJ Huntley Dr E Spio-Garbrah** Dr VB Lawrence**
1,124,373 393,967 – 502,117 357,684 501,217 174,960 229,433 250,583 305,633 5,333 20,497 14,286 193,833 273,841 286,176
– – – – – – – – – – – – – – – –
– – – – – – – – – – – – – – – –
– – – – – – – – – – – – – – – –
1,124,373 393,967 – 502,117 357,684 501,217 174,960 229,433 250,583 305,633 5,333 20,497 14,286 193,833 273,841 286,176
Executive
–
14,489,833
3,436,308
13,244,896
31,171,037
R September*
–
2,453,757
3,436,308
13,218,772
19,108,837
CEO Acting CEO
– –
1,016,524 1,437,233
3,436,308 –
10,438,538 2,780,234
14,891,370 4,217,467
LRR Molotsane*
–
12,036,076
–
26,124
12,062,200
4,633,933
14,489,833
3,436,308
13,244,896
35,804,970
Total emoluments – paid by Telkom
Total emoluments – paid by Telkom
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Telkom Annual Report 2009
Notes to the consolidated annual financial statements
(continued)
for the three years ended March 31, 2009
40.
DIRECTORS’ INTEREST (continued) Directors’ emoluments (continued) Fees R
Remuneration R
Performance bonus R
Fringe and other benefits R
Total R
2,641,168
–
–
–
2,641,168
NE Mtshotshisa
463,050
–
–
–
463,050
ST Arnold
353,719
–
–
–
353,719
32,670
–
–
–
32,670
B du Plessis
213,367
–
–
–
213,367
PSC Luthuli
205,417
–
–
–
205,417
TD Mahloele
166,667
–
–
–
166,667
KST Matthews
109,643
–
–
–
109,643
TF Mosololi
214,417
–
–
–
214,417
M Mostert
232,417
–
–
–
232,417
DD Tabata
175,367
–
–
–
175,367
YR Tenza
321,767
–
–
–
321,767
PL Zim
152,667
–
–
–
152,667
Executive
–
2,272,785
–
1,653,202
3,925,987
LRR Molotsane*
–
2,272,785
–
1,653,202
3,925,987
2,641,168
2,272,785
–
1,653,202
6,567,155
2007 Emoluments per director:
Non-executive
TCP Chikane
Total emoluments – paid by Telkom
*Included in fringe and other benefits is a pension contribution for LRR Molotsane of RNil (2008: R4,690; 2007: R295,462), RJ September of R462,254 (2008: R280,261; 2007: RNil) and PG Nelson of R125,765 (2008: RNil; 2007: RNil) at March 31, 2009 paid to the Telkom Retirement Fund. ** Foreign directors. *** In the absence of an internal corporate finance division, and pending the structuring and staffing thereof, the Telkom Board resolved that it was in the best interest of the Company and shareholders to deploy the highest quality skills currently resident in Telkom, to evaluate, structure and make recommendations to the Board on major transactions. During 2008, Dr Mostert led all efforts in this regard and was remunerated accordingly. Moreover, in compliance with the principles of good governance, the Board took legal advice and established that there was no conflict of interest arising out of this involvement in the transaction evaluated.
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Notes to the consolidated annual financial statements
(continued)
for the three years ended March 31, 2009
2007 Rm
41.
2008 Rm
2009 Rm
SEGMENT INFORMATION Eliminations represent the inter-segmental transactions that have been eliminated against segment results. The mobile segment represents the Group’s joint venture Vodacom. Business segment 32,441
33,611
35,940
32,345
32,572
33,659
(772)
(830)
(817)
–
845
1,900
873
1,040
1,214
(5)
(16)
(16)
19,178
22,674
26,174
20,573
24,089
27,594
(1,494)
(1,519)
(1,531)
106
108
123
(7)
(4)
(12)
338
472
343
334
497
524
Elimination
(46)
(86)
(245)
Other
50
61
64
46
62
129
42
56
119
4
6
10
23,028
25,014
29,895
24,083
24,962
29,849
(1,505)
(1,709)
(3,624)
Multi-Links
–
942
2,422
Elimination
–
56
469
512
928
801
(62)
(165)
(22)
14,505
17,323
21,214
15,185
17,898
21,704
(745)
(805)
(876)
Other
77
245
607
Elimination
(12)
(15)
(221)
Consolidated operating revenue Fixed-line Elimination Multi-Links Other Elimination Discontinued operations Mobile Elimination Other Elimination Consolidated other income Fixed-line
Discontinued operations Mobile Other Consolidated operating expenses Fixed-line Elimination
Other Elimination Discontinued operations Mobile Elimination
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Telkom Annual Report 2009
Notes to the consolidated annual financial statements
233
(continued)
for the three years ended March 31, 2009
2007 Rm
41.
2008 Rm
2009 Rm
SEGMENT INFORMATION (continued) Consolidated operating profit Fixed-line Elimination
9,751
9,069
6,388
8,596
8,107
4,334
687
793
2,562
Multi-Links
–
(97)
(522)
Elimination
–
(56)
(469)
411
173
477
57
149
6
4,719
5,413
5,089
5,430
6,247
6,009
(749)
(714)
(655)
33
(131)
(474)
5
11
209
199
168
181
Other Elimination Discontinued operations Mobile Elimination Other Elimination Consolidated investment income Fixed-line
3,041
3,975
2,807
Elimination
(2,850)
(3,832)
(2,646)
Multi-Links
–
7
5
Other
8
18
15
37
29
35
37
27
33
–
2
2
857
1,556
2,843
Fixed-line
857
1,277
1,464
Multi-Links
–
(4)
1,201
Discontinued operations Mobile Other Consolidated finance charges
Elimination
–
(33)
(164)
Other
–
318
353
Elimination
–
(2)
(11)
269
247
922
269
240
921
–
7
1
2,803
2,647
1,660
2,652
2,630
560
Discontinued operations Mobile Other Consolidated taxation Fixed-line Elimination
–
–
825
Multi-Links
–
(131)
141
Elimination
–
–
(24)
151
148
158
Other
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Notes to the consolidated annual financial statements
(continued)
for the three years ended March 31, 2009
2007 Rm
41.
2008 Rm
2009 Rm
SEGMENT INFORMATION (continued) Discontinued operations Mobile Other Minority interests
1,928
2,057
2,021
1,918
2,055
2,023
10
2
(2)
94
123
26
–
12
(96)
94
111
122
109
74
51
109
73
51
–
1
–
6,196
4,911
2,040
Fixed-line
8,128
8,175
5,117
Elimination
(2,163)
(3,039)
(909)
–
33
(1,763)
Multi-Links Other Discontinued operations Mobile Other Profit attributable to equity holders of Telkom
Multi-Links Elimination Other Elimination Discontinued operations Mobile Elimination Other Elimination Consolidated assets Fixed-line Elimination Mobile Elimination Multi-Links Elimination Other Elimination Disposal group Mobile Elimination
–
(23)
(281)
174
(386)
(141)
57
151
17
2,450
3,064
2,130
3,171
3,906
3,047
(749)
(714)
(655)
23
(139)
(471)
5
11
209
57,426
68,259
59,712
44,224
47,829
54,593 (1,167)
(1,547)
(1,604)
14,026
16,743
–
(353)
(278)
–
–
2,451
5,834
–
–
(860)
1,188
3,283
1,285
(112)
(165)
27
–
–
23,215 23,412 (269)
Other
94
Elimination
(22)
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Telkom Annual Report 2009
Notes to the consolidated annual financial statements
235
(continued)
for the three years ended March 31, 2009
2007 Rm
41.
2008 Rm
2009 Rm
SEGMENT INFORMATION (continued) Investments
1,461
Fixed-line
1,499
1,383
1,621
4,917
10,910
Elimination
(341)
(3,607)
(9,540)
Mobile
181
176
–
–
13
13
–
–
Other Disposal group
194
Mobile 259
614
1,202
230
445
1,200
28
169
–
1
–
2
–
–
73
Total assets
59,146
70,372
85,779
Consolidated liabilities
15,951
19,689
14,247
10,154
11,892
13,002
(458)
(495)
(514)
Multi-Links
–
639
1,564
Elimination
–
–
(265)
Mobile
7,416
8,871
–
Elimination
(1,468)
(1,542)
–
374
332
165
(67)
(8)
295
–
–
8,498
Other financial assets Fixed-line Mobile Other Disposal group Mobile
Fixed-line Elimination
Other Elimination Disposal group Mobile
9,611
Elimination
(1,128) 15
Other 10,364
15,733
18,275
Fixed-line
9,082
13,362
17,704
Mobile
Interest-bearing debt
1,278
1,815
–
Multi-Links
–
532
550
Other
4
24
21
–
–
7,052
Disposal group Mobile Other
7,052 –
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Notes to the consolidated annual financial statements
(continued)
for the three years ended March 31, 2009
2007 Rm
41.
2008 Rm
2009 Rm
SEGMENT INFORMATION (continued) Other financial liabilities Fixed-line Mobile Other
229
1,290
228
58
167
226
158
204
–
13
919
2
–
–
48
594
323
50
Disposal group Mobile Taxation liabilities Fixed-line Mobile Other Disposal group
–
7
12
556
290
–
38
26
38
–
–
275 275
Mobile
–
Other 27,138
37,035
48,673
8,648
10,108
8,725
Fixed-line
5,545
6,044
5,866
Mobile
3,069
2,475
–
–
1,312
2,754
34
277
105
–
–
3,013
Total liabilities Other segment information Capital expenditure for property, plant and equipment
Multi-Links Other Disposal group
2,979
Mobile
34
Other Capital expenditure for intangible assets Fixed-line Mobile Multi-Links Other Disposal group
1,598
1,791
906
1,049
749
824
539
985
–
–
–
37
10
57
45
–
–
590 590
Mobile
–
Other 3,316
3,621
4,458
Fixed-line
3,298
3,470
4,037
Multi-Links
–
119
296
Elimination
–
–
69
18
32
50
–
–
6
Depreciation and amortisation
Other Elimination
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Notes to the consolidated annual financial statements
237
(continued)
for the three years ended March 31, 2009
2007 Rm
41.
2008 Rm
2009 Rm
SEGMENT INFORMATION (continued) 1,703
1,980
2,373
1,681
1,955
2,341
22
25
32
284
514
822
Fixed-line
284
262
321
Multi-Links
–
23
462
Other
–
229
39
12
15
57
12
15
57
–
–
–
24
3
8
32,441
33,611
35,940
Discontinued operations Mobile Other Impairment and asset write-offs
Discontinued operations Mobile Other Workforce reduction expense – Fixed-line Geographical segment Consolidated operating revenue
32,428
32,671
33,847
Other African countries
29
956
2,093
Elimination
(16)
(16)
–
Disposal group
19,178
22,674
26,174
South Africa
17,130
19,997
22,298
2,070
2,697
3,932
(22)
(20)
(56)
9,751
9,069
6,388
South Africa
Other African countries Elimination Consolidated operating profit
9,744
9,254
7,435
Other African countries
18
(169)
(533)
Elimination
(11)
(16)
(514)
Disposal group
4,719
5,413
5,089
South Africa
South Africa
4,622
5,089
4,726
Other African countries
276
414
400
Elimination
(179)
(90)
(37)
59,146
70,372
62,297
Consolidated assets
56,797
63,772
57,056
Other African countries
3,489
8,785
6,101
Eliminations
(1,140)
(2,185)
(860)
South Africa
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Notes to the consolidated annual financial statements
(continued)
for the three years ended March 31, 2009
2007 Rm
41.
2008 Rm
2009 Rm
SEGMENT INFORMATION (continued) Disposal group
–
–
23,482 20,693
South Africa Other African countries
9,597
Elimination
(6,808)
Capital expenditure for property, plant and equipment and intangible assets South Africa Other African countries Disposal group
10,246
11,899
9,631
9,459
9,780
6,735
787
2,119
2,896
–
–
3,603
South Africa
2,443
Other African countries
1,213
Elimination
(53)
’South Africa’, which is also the country of domicile for Telkom, comprises the segment information relating to Telkom and its South African subsidiaries as well as Vodacom’s South African-based mobile communications network, the segment information of its service providers is included in the disposal group. ‘Other African countries’ comprises Telkom’s subsidiaries Africa Online Limited and Multi-Links Telecommunications Limited as well as Vodacom’s mobile communications network in Tanzania, Lesotho, the Democratic Republic of the Congo and Mozambique.
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Notes to the consolidated annual financial statements
239
(continued)
for the three years ended March 31, 2009
42.
RELATED PARTIES Details of material transactions and balances with related parties not disclosed separately in the consolidated annual financial statements were as follows: 2007 2008 2009 Rm Rm Rm With joint venture: Vodacom Group (Proprietary) Limited Related party balances Trade receivables Trade payables
61 (353)
51 (346)
61 (325)
(755) 1,494 3
(816) 1,525 3
(891) 1,533 2
271
326
386
(2,458)
(2,623)
(2,767)
59 (6)
28 (25)
52 (3)
Related party transactions Revenue Expenses Rent received Rent paid
(435) 238 (29) 27
(486) 243 (21) 22
(446) 212 (20) 19
Key management personnel compensation: (Including directors’ emoluments) Related party transactions Short-term employee benefits Post-employment benefits Termination benefits Equity compensation benefits Other long-term benefits
116 4 – 8 17
155 4 27 29 –
62 6 – 39 –
Related party transactions Revenue Expenses Audit fees Revenue includes interconnect fees and lease and installation of transmission lines. Expenses mostly represent interconnect expenses. With shareholders: Public Investment Corporation There were no material transactions between Telkom and the Public Investment Corporation. Government Related party balances Trade receivables
Related party transactions Revenue With entities under common control: Major public entities Related party balances Trade receivables Trade payables The outstanding balances are unsecured and will be settled in cash in the ordinary course of business.
The fair value of the shares that vested in the current year is R11 million (2008: R12 million; 2007: RNil). Terms and conditions of transactions with related parties The sales to and purchases from related parties of telecommunication services are made at arm’s length prices. Except as indicated above, outstanding balances at the year end are unsecured, interest-free and settlement occurs in cash. Apart from the bank guarantee to the amount not exceeding R23 million provided to Africa Online Limited, there have been no guarantees provided or received for related party receivables or payables.
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Notes to the consolidated annual financial statements
(continued)
for the three years ended March 31, 2009
43.
INTEREST IN MATERIAL SUBSIDIARIES Country of incorporation: RSA – Republic of South Africa; TZN – Tanzania; LES – Lesotho; MZ – Mozambique; DRC – Democratic Republic of Congo; MAU – Mauritius; NIG – Nigeria; GUE – Guernsey. Nature of business: C – Cellular; S – Satellite; MSC – Management services company; PROP – Property company; OTH – Other. * Dormant at March 31, 2008. Interest in issued Issued share capital Country of
2007
2008
ordinary share capital 2009
incorporation
2007
2008
2009
%
%
%
Directory advertising Trudon (Proprietary) Limited (formerly trading as TDS Directory Operations (Proprietary) Limited)
RSA
R100,000
R100,000
R100,000
64.9
64.9
64.9 100
Other group entities Rossal No 65 (Proprietary) Limited
RSA
R100
R100
R100
100
100
Acajou Investments (Proprietary) Limited
RSA
R100
R100
R100
100
100
100
Africa Online Limited
MAU
US$1,000
US$1,000
US$1,000
100
100
100
Multi-Links Telecommunications Limited
NIG
–
NGN300,000,000
NGN300,000,000
–
75
100
Telkom Management Services (Proprietary) Limited
RSA
–
–
R100
–
–
100
Intekom (Proprietary) Limited
RSA
R10,001,000
R10,001,000
R10,001,000
100
100
100
Q-Trunk (Proprietary) Limited
RSA
R10,001,000
R10,001,000
R10,001,000
100
100
100
Telkom International (Proprietary) Limited
RSA
R100
R100
R100
100
100
100
The aggregate net loss of the nine subsidiaries is R2,168 million (2008: R186 million) and profit of (2007: R564 million) Disposal group Telkom Media (Proprietary) Limited
RSA
R100
R100
R100
100
100
100
Swiftnet (Proprietary) Limited
RSA
R25,000,000
R5,000,000
R5,000,000
100
100
100
Vodacom has an interest in the following companies (Group share: 50% of the interest in ordinary share capital as indicated):
Cellular network operators Vodacom (Proprietary) Limited (C)
RSA
R100
R100
R100
100
100
100
Vodacom Lesotho (Proprietary) Limited (C)
LES
M4,180
M4,180
M4,180
88.3
88.3
88.3
TZN
TZS10,000
TZS10,000
TZS10,000
65
65
65
MZ US$60,000,000
US$60,000,000
US$60,000,000
98
90
90
US$1,000,000
US$1,000,000
51
51
51
Vodacom Tanzania Limited (C) VM, S.A.R.L. (C) Vodacom Congo (RDC) s.p.r.l. (C)
DRC
US$1,000,000
Service providers Vodacom Service Provider Company (Proprietary) Limited (C)
RSA
R20
R20
R20
100
100
100
Smartphone SP (Proprietary) Limited (C)*
RSA
R20,000
R20,000
R20,000
70
100
100
Smartcom (Proprietary) Limited (C)*
RSA
R1,000
R1,000
R1,000
61.7
100
100
Cointel VAS (Proprietary) Limited (C)*
RSA
R10,204
R10,204
R10,204
70
100
100
Limited (MSC)*
RSA
R1,020
R1,023
R1,023
100
100
100
Vodacom Satellite Services (Proprietary) Limited (OTH)*
RSA
R100
R100
R100
100
100
100
GSM Cellular (Proprietary) Limited (OTH)*
RSA
R1,200
R1,200
R1,200
100
100
100
Vodacom Venture No.1 (Proprietary) Limited (OTH)*
RSA
R810
R810
R810
100
100
100
Vodacom Equipment Company (Proprietary) Limited (OTH)*
RSA
R100
R100
R100
100
100
100
Vodacare (Proprietary) Limited* (OTH)
RSA
R100
R100
R100
100
100
100
Other significant subsidiaries of the Group’s Joint Venture Vodacom Service Provider Holdings Company (Proprietary)
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Notes to the consolidated annual financial statements
241
(continued)
for the three years ended March 31, 2009
43.
INTEREST IN MATERIAL SUBSIDIARIES (continued) Interest in issued Issued share capital Country of
2007
2008
ordinary share capital 2009
incorporation
2007
2008
2009
%
%
%
RSA
R100
R100
R100
100
100
100
MAU
US$100
US$100
US$100
100
100
100
Vodacom Properties No.1 (Proprietary) Limited (PROP)
RSA
R100
R100
R100
100
100
100
Vodacom Properties No.2 (Proprietary) Limited (PROP)
RSA
R1,000
R1,000
R1,000
100
100
100 –
Vodacom International Holdings (Proprietary) Limited (MSC) Vodacom International Limited (MSC)
Stand 13 Eastwood Road Dunkeld West (Proprietary) Limited (PROP)
RSA
R100
–
–
70
–
Ithuba Smartcall (Proprietary) Limited (OTH)
RSA
R100
–
–
36.4
–
–
Smartcall Smartlife (Proprietary) Limited (OTH)
RSA
R100
–
–
63
–
–
Vodacom Tanzania Limited (Zanzibar) (OTH)*
TZN
TZS10,000
TZS10,000
TZS10,000
99
99
99
Joycell Shops (Proprietary) Limited (OTH)*
RSA
R100
R100
R100
100
100
100
Marble Gold Investments (Proprietary) Limited (OTH) *
RSA
R100
R100
R100
100
100
100
Vodacom Ventures (Proprietary) Limited (OTH)
RSA
R120
R120
R120
100
100
100
Skyprops 134 (Proprietary) Limited (PROP)
RSA
R100
R100
R100
100
100
100
Storage Technology Services (Proprietary) Limited
RSA
–
–
R136
–
–
51
UK
–
–
£49,567,569
–
–
100
Gateway Telecommunications Plc
UK
–
–
£1
–
–
100
Gateway Communications SA
BLG
–
–
e62,000
–
–
100
Gateway Telecoms Integrated Services Limited
NIG
–
–
NGN1,250,000
–
–
100
GS Telecom Limited
GUE
–
–
US$193
–
–
100
Rm
Rm
Rm (23)
Gateway Communications Africa (UK) Limited
Indebtedness of Telkom subsidiary companies Intekom (Proprietary) Limited
RSA
–
–
–
–
–
Q-Trunk (Proprietary) Limited
RSA
–
–
–
30
26
22
Rossal No 65 (Proprietary) Limited
RSA
–
–
–
–
30
(342) 285
RSA
–
–
–
–
–
Africa Online Limited
MAU
–
–
–
–
74
236
Multi-Links Telecommunications Limited
NIG
–
–
–
–
841
5,225
Telkom International (Proprietary) Limited
RSA
–
–
–
–
1,985
1,985
Acajou Investments (Proprietary) Limited
Disposal group Swiftnet (Proprietary) Limited
RSA
–
–
–
–
–
10
Telkom Media (Proprietary) Limited
RSA
–
–
–
–
326
470
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Telkom Annual Report 2009
Notes to the consolidated annual financial statements
(continued)
for the three years ended March 31, 2009
44.
SIGNIFICANT EVENTS Telkom Renaissance On November 14, 2008, Telkom’s Board of directors approved the new organisation structure which is designed to fit Telkom’s defend and growth strategy. The new structure is effective April 1, 2009 and is being managed through a project called Telkom Renaissance. The Group has been restructured into three operating Business Units namely Telkom South Africa, Telkom International and Telkom Data Centre Operations. The Telkom Renaissance initiative will occur over the next 24 months to ensure that all the necessary remodelling, reorganising, revitalising and re-engineering happens in order to make the new structure function optimally. This initiative is a complete transformation of the way Telkom focuses on servicing its customers and creating value for its stakeholders. It is a positive, purposeful change towards a more accountable and competitive company. This change is a necessary part of Telkom’s strategy to maintain and grow market share in South Africa whilst building a strong footprint on the African continent. Capability Management Telkom will seek to manage costs and address service delivery constraints by realigning its structure and resources to better match its transforming information, communications and technology business. The transformation of the communications industry and increasing market and competitive pressure has put communication companies such as Telkom under increasing revenue and expense constraints while being required to improve customer service. As a result Capability Management is designed to ensure that the capabilities needed to succeed in a converged communications market are established through the optimal utilisation of external as well as internal capabilities, extracting efficiencies, where possible, through scale of a rapidly maturing retail and wholesale market and better organised functional areas in a more deregulated and liberalised communications market. Capability Management includes the internal consolidation of certain functional areas and the optimisation of strategic supplier and service provider relationships improving performance in other functional areas. Capability Management will be concerned with assisting in addressing the margin and service delivery pressures by reassessing the operational service delivery methodology currently deployed with a view of increasing flexibility, reducing expense while improving service delivery across the Telkom Group. Given the challenges Telkom faces in rolling out broadband, converged and data services, maintaining our legacy network and expanding our operations across the African continent, employees’ skills and performance must be aligned with our strategy to ensure financial, operational and transformational targets, customer expectations and shareholder expectations are met. The immediate objective therefore is to remodel service delivery. This is one of the strategic initiatives under Project Renaissance and will focus on the following: • Identify and assess existing capabilities; • Establish a Telkom Group Capability Inventory; • Determine future capability requirements; • Identify and develop a set of optimal service delivery options for achieving current and future strategic objectives; and • Enable Telkom South Africa, Telkom International and Telkom Data Centre Operations to: – Improve resource efficiency; – Improve capital productivity; and – Improve service delivery. A memorandum of understanding was entered into between Telkom and organised labour which included issues such as the deferment of the Managed Services Partner outsourcing project implementation post April 2009 and the establishment of a Restructuring Forum where all restructuring initiatives will be debated between the parties concerned. Telkom Management Services (Proprietary) Limited (TMS) TMS was registered as a company during August 2008. Telkom’s Board approved the establishment of TMS as a part of Telkom’s strategic plan to grow revenue and expand geographic reach. Appointment of director On November 10, 2008 Telkom announced the appointment of Mr Peter Nelson as Chief Financial Officer and director in Telkom with effect from December 8, 2008.
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Telkom Annual Report 2009
Notes to the consolidated annual financial statements
243
(continued)
for the three years ended March 31, 2009
45.
SUBSEQUENT EVENTS Dividends The Telkom Board declared an ordinary dividend of 115 cents (2008: 660 cents, 2007: 600 cents) per share and a special dividend of 260 cents (2008: Nil cents, 2007: 500 cents) per share on June 19, 2009, payable on July 20, 2009 to shareholders registered on July 17, 2009. Acquisition of MWEB Africa Limited and majority equity stake in MWEB Namibia (Proprietary) Limited On November 10, 2008, Telkom International (Proprietary) Limited, a wholly owned subsidiary of Telkom, announced it has entered into agreements to acquire 100% of MWEB Africa Limited ("MWEB Africa") and 75% of MWEB Namibia (Proprietary) Limited (“MWEB Namibia”). The purchase price for the MWEB Africa Group including AFSAT and MWEB Namibia is US$55 million (approximately R498 million) with a deferred payment of US$14.18 million due when the profits of MWEB Group for the year ended March 31, 2009 are finalised. These shareholdings will be acquired from Multichoice Africa Limited and MIH Holdings Limited respectively, which are members of the Naspers Limited Group. MWEB Africa is an internet services provider in sub-Saharan Africa (excluding South Africa) which also provides network access services in some countries and is headquartered in Mauritius with operations in Namibia, Nigeria, Kenya, Tanzania, Uganda and Zimbabwe, an agency arrangement in Botswana and distributors in 26 sub-Saharan African countries. The acquisition of MWEB is part of the Group’s strategy of growing its broadband and solidifying its market position through acquisitions. Based on an independent valuation, the MWEB Africa Group does not have any significant contingent liabilities at acquisition date. The only possible contingent liability, the AFSAT bonus scheme, is reasonably quantified and included in the balance sheet of MWEB Africa Group at March 31, 2009. The purchase price of US$69.168 million was determined as follows: • Namibian cash-generating unit for US$1.5 million; • Mauritian cash-generating unit for US$53.5 million; and • US$14.18 million deferred until the profits of the MWEB Group for the year ended March 31, 2009 are finalised. The successful conclusion of the agreements being entered into is subject to conditions precedent, including regulatory approvals being obtained in certain African jurisdictions. Subsequent to year end, on April 21, 2009, the conditions precedent to the sale were fulfilled. The acquisition will have the following effect on the Group’s assets and liabilities on acquisition: Carrying amounts Rm
Fair values Rm
Fixed assets Intangible assets Deferred taxation asset Cash and cash equivalents Trade and other receivables Inventory Deferred taxation liability Taxation Trade and other payables
43 138 2 75 26 16 (18) (4) (69)
43 209 2 75 26 16 (19) (4) (69)
Fair value of net assets acquired Minority interests
209 (2)
279 (2)
Net asset value Goodwill on acquisition
207 –
277 352
Purchase price* Capitalised transaction costs
– –
629 3
Total cash consideration
–
632
* Of the R629 million purchase price, R498 million has been settled. The outstanding amount of US$14.18 million (approximately R105 million) is deferred payment.
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Notes to the consolidated annual financial statements
(continued)
for the three years ended March 31, 2009
45.
SUBSEQUENT EVENTS (continued) The goodwill from the acquisition is partially attributable to the following: • Certain licences that could not be valued separately from the MWEB Group as no secondary licensing market exists, but contribute significantly to goodwill as the MWEB business’s would cease to exist without the licence rights. • The skills and technical talent of the acquired business’s workforce, and the synergies expected to be achieved from integrating the acquiree into the Group’s existing internet service provision. • The goodwill is also attributable to the MWEB Group’s position as Africa’s largest satellite-based internet service provider in Sub-Saharan Africa. There was RNil revenue in the consolidated annual financial statements. AT&T strategic agreement On April 16, 2009, Telkom and AT&T, the global communications leader, entered into a strategic agreement which aims to extend AT&T’s global networking reach to sub-Saharan Africa and boost Telkom’s strategy to grow a strong ICT footprint on the African continent. The agreement will allow both companies to explore ways to provide global seamless communication and technology solutions and services to multinational customers, either based in or seeking to extend their operations in sub-Saharan Africa. Under the terms of the memorandum of understanding, the two companies will begin work towards definitive agreements that would: • directly connect the Telkom regional network and the AT&T global network; • deliver a wider geographic footprint of telecommunication services, in both sub-Saharan Africa and other global points; • enhance mobile service capabilities for corporate customers in sub-Saharan Africa; • extend global VPN (Virtual Private Network) services to support the state of art network requirements of customers either headquartered in or seeking to expand sites in sub-Saharan Africa; • explore other potential opportunities in areas such as Telepresence, hosting and professional services; and • expand the existing global wholesale voice services relationship between Telkom Group and AT&T. Telkom Media (Proprietary) Limited (Telkom Media) On August 31, 2006 Telkom created a new subsidiary, Telkom Media (Proprietary) Limited, with a black economic empowerment (’BEE’) shareholding. ICASA awarded Telkom Media a commercial satellite and cable subscription broadcast licence on September 12, 2007. On March 31, 2008, the Telkom Board took a decision to substantially reduce its investment in Telkom Media and as such Telkom Media reduced its operational expenses and commitments to a minimum. Telkom Media did not meet the held for sale criteria at year end as management were unable to sell the disposal group for its expected price and therefore decided to abandon it. Subsequent to year end Telkom was approached by potential buyers of Telkom’s interest in Telkom Media and negotiations with the potential buyer were concluded. On May 4, 2009, Telkom sold its 75% interest in Telkom Media to Shenzhen Media South Africa (Proprietary) Limited for a nominal amount. Disposal and unbundling of stake in Vodacom In 2008 Telkom announced a decision to dispose of its entire shareholding in Vodacom through selling 15% of its shareholding to Vodafone, a wholly owned subsidiary of Vodafone Group plc, and unbundling its remaining 35% shareholding to its shareholders pursuant to a listing of Vodacom on the main board of JSE Limited. On May 18, 2009 Vodacom was successfully listed on the main board of JSE Limited and a special divided of R19 was distributed to all Telkom shareholders. Telkom successfully completed the unbundling of Vodacom shares to its shareholders on May 25, 2009.
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Telkom Annual Report 2009
Notes to the consolidated annual financial statements
245
(continued)
for the three years ended March 31, 2009
45.
SUBSEQUENT EVENTS (continued) Bookbuilding of Vodacom Group (Proprietary) Limited shares On June 2, 2009 Telkom announced the successful completion of the accelerated bookbuilding of Vodacom shares, raising R1,540 million for "ineligible shareholders". The directors of Telkom, in consultation with Vodafone, determined that Telkom shareholders in the United States of America would be regarded as "ineligible shareholders" for the unbundling of Vodacom shares to shareholders of Telkom, which was completed on May 25, 2009, and would therefore not receive Vodacom shares in such distributions. The proceeds from the offering, net of applicable fees, expenses, taxes and charges, will be distributed to the "ineligible shareholders" in proportion to their entitlement to Vodacom shares. New York Stock Exchange listing Given the current global economic climate and the absolute necessity for Telkom to reduce its cost profile, the Board has decided to delist from the New York Stock Exchange. Maintaining a listing in the United States of America is expensive and takes considerable management time. The methodology employed and discipline gained from Sarbanes-Oxley reporting requirements will be retained to ensure strict governance compliance and transparent financial reporting. Telkom is comfortable that the Johannesburg Stock Exchange provides sufficient access to capital for both South African and global investors. Telkom intends to maintain a level 1 American Depository Receipt programme to facilitate over-the-counter- trading in the United States of America. Telkom Communications International (Proprietary) Limited The Abacus Financial Services (Mauritius) Limited issued a notice under section 265 (5) of the Companies Act 1984 that Telkom Communications International (Proprietary) Limited has been dissolved with effect from May 12, 2009. Other matters The directors are not aware of any other matter or circumstance since the financial year ended March 31, 2009 and the date of this report, or otherwise dealt with in the financial statements, which significantly affects the financial position of the Group and the results of its operations.
46.
ACCOUNTING PRONOUNCEMENTS NOT YET ADOPTED The Group has not early adopted the following standards, interpretations and amendments that have been issued and are not yet effective:
IFRS1 First-time Adoption of International Financial Reporting Standards: Cost of an Investment in a Subsidiary, Jointly Controlled Entity or Associate (amended) This amendment is effective for annual periods beginning on or after January 1, 2009. This standard is amended to allow an entity, in its separate financial statements, to determine the cost of investments in subsidiaries, jointly controlled entities or associates (in its opening IFRS financial statements) as one of the following amounts: • Cost determined in accordance with IAS27 • At the fair value of the investment at the date of the transition to IFRS, determined in accordance with IAS39 Financial Instruments: Recognition and Measurement • The previous GAAP carrying amount of the investment at the date of transition to IFRS This determination is made for each investment, rather than being a policy decision. The amendment does not have an impact on the annual financial statements.
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Telkom Annual Report 2009
Notes to the consolidated annual financial statements
(continued)
for the three years ended March 31, 2009
46.
ACCOUNTING PRONOUNCEMENTS NOT YET ADOPTED (continued) IFRS2 Share-Based Payment: Vesting Conditions and Cancellations (amended) This amendment is effective for annual periods beginning on or after January 1, 2009. The amendments to IFRS2 Share-Based Payment clarifies the definition of vesting conditions and the accounting treatment of cancellations by the counterparty to a share-based arrangement. The amendment will not have a material impact on the consolidated financial statements.
IFRS2 Share-Based Payment: Group Cash-Settled Share-Based Payment Arrangements (amended) This amendment is effective for annual periods beginning on or after January 1, 2010. The amendment clarifies how an individual subsidiary in a group should account for some share-based payment arrangements in its own financial statements. The amendment will not have a material impact on the Company’s/Group’s financial statements.
IFRS3 Business Combinations (revised) The revisions are effective for annual periods beginning on or after 1 July 2009 .The revised standard still applies the acquisition method of accounting for business combinations, with some significant changes. For example, all payments to purchase a business are to be recorded at fair value at the acquisition date, with contingent payments classified as debt subsequently re-measured through the income statement. There is a choice on an acquisition-by-acquisition basis to measure the non-controlling interest in the acquiree either at fair value or at the non-controlling interest’s proportionate share of the acquiree’s net assets. All acquisition-related costs should be expensed. The impact of the revised standard is being evaluated.
IFRS7 Financial Instruments: Disclosures (amended) The interpretation is applicable for annual periods beginning on or after January 1, 2009. The amendment requires enhanced disclosures about fair value measurements and liquidity risk. The impact of the amendment is being evaluated.
IFRS8 Operating Segments This standard is effective for annual periods beginning on or after January 1, 2009. The standard requires operating segments to be identified on the basis of internal reports about components of the entity that are regularly reviewed by the chief operating decision maker in order to allocate resources to the segment and to assess its performance. The impact of this standard is currently being evaluated.
IFRIC9 Reassessment of Embedded Derivatives (amended) The amendment is effective for annual periods ending on or after June 30, 2009. The amendment clarifies that on reclassification of a financial asset out of the ’fair value through profit or loss’ category, all embedded derivatives have to be assessed and, if necessary, separately accounted for in financial statements. The amendment will not have an impact on the consolidated financial statements as the Group does not have material embedded derivatives.
IFRIC13 Customer Loyalty Programmes The interpretation is effective for annual periods beginning on or after July 1, 2008. The interpretation requires loyalty award credits granted to customers in connection with a sales transaction to be accounted for as a separate component of the sales transaction. The consideration received in the sales transaction would, therefore, be allocated between the loyalty award credits and the other components of the sale. The interpretation is not relevant to the Group’s operations because none of the Group entities operate any loyalty programmes. Where the cost of fulfilling the awards is expected to exceed the consideration received, the Group will have to recognise an onerous contract liability. The impact of this interpretation is being evaluated.
IFRIC15 Agreements for the Construction of Real Estate The interpretation is effective for annual periods beginning on or after January 1, 2009. The aim of this interpretation is to determine whether an agreement for the construction of real estate is within the scope of IAS11 Construction Contracts or IAS18 Revenue. This interpretation is not relevant to the Group’s operations as the Group does not construct real estates.
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Notes to the consolidated annual financial statements
247
(continued)
for the three years ended March 31, 2009
46.
ACCOUNTING PRONOUNCEMENTS NOT YET ADOPTED (continued) IFRIC16 Hedges of a Net Investment in a Foreign Operation The interpretation is effective for annual periods beginning on or after October 1, 2008. The interpretation provides guidance in respect of hedges of foreign currency gains and losses on a net investment in a foreign operation. This includes the fact that net investment hedging relates to differences in functional currency and not presentation currency, and hedging instruments may be held anywhere in the Group. The interpretation will not have an impact on the consolidated annual financial statements.
IFRIC17 Distributions of Non-Cash Assets to Owners The interpretation is effective for annual periods beginning on or after July 1, 2009. The interpretation provides guidance on how an entity should account for non-cash distributions to its owners and/or distributions that give owners a choice of receiving either non-cash assets or a cash alternative. The impact of this interpretation is being evaluated.
IFRIC18 Transfer of Assets from Customers The interpretation is effective for annual periods beginning on or after July 1, 2009. The interpretation clarifies the requirements of IFRSs for agreements in which an entity receives from a customer an item of property, plant and equipment (’PPE’) that the entity must then use either to connect the customer to a network or to provide the customer with ongoing access to a supply of goods or services. The interpretation also provides guidance where an entity receives cash from a customer that must be used only to acquire or construct an item of PPE in order to connect the customer to a network or provide the customer with ongoing access to a supply of goods or services. The impact of this interpretation is currently being evaluated.
IAS1 Presentation of Financial Statements (revised) The revised standard is effective for annual periods beginning on or after January 1, 2009. IAS1R introduces a statement of comprehensive income with two optional formats and refers to the balance sheet and cash flow statement by different names: the ’statement of financial position’ and ’statement of cash flows’, respectively. The revision to the standard will result in changes in the way the consolidated annual financial statements are presented.
IAS7 Cash Flow Statement: Consequential Amendments Arising from Amendments to IAS16 The amendment is effective for annual periods beginning on or after January 1, 2009. IAS7 as amended requires cash receipts and payments relating to purchase, rental and sale of property, plant and equipment held for rental to be treated as cash flows from operating activities. The impact of this amendment is being evaluated.
IAS23 Borrowing Costs (revised) The revised standard applies to borrowing costs relating to qualifying assets for which the commencement date for capitalisation is on or after January 1, 2009. The revised standard requires all borrowing costs that are directly attributable to the acquisition, construction or production of qualifying assets to be capitalised. The Group does not expect the adoption of the standard to have a material impact.
IAS27 Consolidated and Separate Financial Statements (revised) The revisions are effective for annual periods beginning on or after July 1, 2009. The revised standard requires the effects of all transactions with non-controlling interests to be recorded in equity if there is no change in control and these transactions will no longer result in goodwill or gains and losses. The standard also specifies the accounting when control is lost. Any remaining interest in the entity is re-measured to fair value, and a gain or loss is recognised in profit or loss. The impact of the revised standard is being evaluated. IAS27 Consolidated and Separate Financial Statements – Cost of an Investment in a Subsidiary, Jointly Controlled Entity or Associate (amended) The amended standard is effective for annual periods beginning on or after January 1, 2009. The amended standard is for the following changes in respect of the holding company’s separate financial statements: • The deletion of the ’cost method’. Making the distinction between pre- and post- acquisition profits is no longer required. All dividends will be recognised in profit or loss. However, the payment of such dividends requires the entity to consider whether there is an indicator of impairment; and • In cases of reorganisations where a new parent is inserted above an existing parent of the group (subject to meeting specific requirements), the cost of the subsidiary is the previous carrying amount of its share of equity items in the subsidiary rather than its fair value. The impact of this amended standard is currently being evaluated.
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Notes to the consolidated annual financial statements
(continued)
for the three years ended March 31, 2009
46.
ACCOUNTING PRONOUNCEMENTS NOT YET ADOPTED (continued) Amendment to IAS32 Financial Instruments Presentation and IAS1 Presentation of Financial Statements, Puttable Financial Instruments The amendment is effective for periods beginning January 1, 2009. The amendments classify puttable financial instruments, or components of instruments, that impose on the entity an obligation to deliver to another party a pro-rata share of the net assets of the entity only on liquidation, as equity, provided they have particular features and meet specific conditions. The impact of this amendment is being evaluated.
IAS39 Financial Instruments: Recognition and Measurement (amended) The amendment is effective for annual periods ending on or after June 30, 2009. The amendment clarifies that on reclassification of a financial asset out of the ’fair value through profit or loss’ category, all embedded derivatives have to be assessed and, if necessary, separately accounted for in financial statements. The amendment will not have an impact on the financial statements as Telkom does not have material embedded derivatives.
IAS39 Financial Instruments: Recognition and Measurement – Eligible Hedged Items (amended) The amendment to the standard is effective for annual periods beginning on or after July 1, 2009. The amendment clarifies that an entity is permitted to designate a portion of the fair value changes or cash flow variability of a financial instrument as a hedged item. The amendment will not have an impact on the financial statements as Telkom does not apply hedge accounting.
Changes as a result of the annual improvements project A number of standards were amended as a result of the annual improvements project of the IASB in May 2008 effective for annual periods beginning on or after January 1, 2009, with the exception of IFRS5 which is effective for annual periods beginning on or after July 1, 2009. These standards were as follows: IFRS5 Non-Current Assets Held for Sale and Discontinued Operations IAS1 Presentation of Financial Statements – Non-Current/Current Classification of Derivatives IAS16 Property, Plant and Equipment IAS19 Employee Benefits IAS20 Government Grants IAS23 Borrowing Costs – Components of Borrowing Costs IAS27 Consolidated and Separate Financial Statements IAS28 Investments in Associates IAS29 Financial Reporting in Hyperinflationary Economies IAS31 Interests in Joint Ventures IAS36 Impairment of Assets IAS38 Intangible Assets IAS39 Financial Instruments: Recognition and Measurement IAS40 Investment Property IAS41 Agriculture The Group will adopt the changes to these standards during the 2010 financial year with the exception of IFRS5, which will be adopted during the 2011 financial year. The Group is currently evaluating the effects of the improvements.
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Company financial statements Company income statement Company balance sheet Company statement of changes in equity Company cash flow statement Notes to the Company annual financial statements
250 251 252 253 254
business shows resilience
Company Financial Information
6
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Company income statement for the three years ended March 31, 2009
Notes
2007
2008
2009
Rm
Rm
Rm
Total revenue
3.1
35,818
36,641
37,058
Operating revenue
3.2
32,340
32,571
33,659
Other income
4
Operating expenses
655
498
524
24,089
24,953
29,837
Employee expenses
5.1
7,077
7,386
7,990
Payments to other operators
5.2
6,461
6,902
7,536
Selling, general and administrative expenses
5.3
3,970
3,904
6,580
Service fees
5.4
2,236
2,410
2,760
Operating leases
5.5
762
619
613
Depreciation, amortisation, impairment and write-offs
5.6
3,583
3,732
4,358
8,906
8,116
4,346
Operating profit Investment income
6
3,202
3,739
2,907
Finance charges and fair value movements
7
1,027
1,289
1,460
1,142
1,499
1,655
(115)
(210)
(195)
11,081
10,566
5,793
2,690
2,599
516
8,391
7,967
5,277
Interest Foreign exchange and fair value movement gain Profit before taxation Taxation Profit for the year
8
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251
Company balance sheet at March 31, 2009
Notes
2007
2008
2009
Rm
Rm
Rm
ASSETS Non-current assets
37,533
43,360
50,796
9
32,614
35,273
37,345
Intangible assets
10
3,502
3,806
3,988
Investments
11
887
3,883
7,693
Finance lease receivables
13
136
160
166
Deferred taxation
14
340
183
1,549
Deferred expenses
25
54
55
55
7,754
8,763
10,090
873
1,331
Property, plant and equipment
Current assets Inventories
15
839
Income tax receivable
31
519
–
91
Current portion of finance lease receivables
13
71
105
109
Trade and other receivables
17
5,920
6,859
6,420
Other financial assets
18
229
443
1,198
Cash and cash equivalents
19
176
483
941
Assets held for sale and discontinued operations
16
–
–
34
45,287
52,123
60,920
25,714
26,693
29,086
Total assets
EQUITY AND LIABILITIES Capital and reserves Share capital
20
5,329
5,208
5,208
Treasury share reserve
21
(1,778)
(1,642)
(1,521)
Share-based compensation reserve
22
257
643
1,076
21,906
22,484
24,323
6,580
11,181
14,766
Retained earnings Non-current liabilities Interest-bearing debt
23
3,308
7,336
10,193
Provisions
24
1,203
1,445
1,830
Deferred revenue
26
739
870
996
Deferred taxation
14
1,330
1,530
1,747
12,993
14,249
17,068 5,424
Current liabilities Trade and other payables
27
4,333
4,923
Shareholders for dividend
32
15
20
23
Current portion of interest-bearing debt
23
5,775
6,026
7,511
Current portion of provisions
24
1,706
1,640
1,953
Current portion of deferred revenue
26
1,107
1,424
1,826
Income tax payable
31
–
7
–
Other financial liabilities
18
57
168
225
Credit facilities utilised
19
–
41
106
Total liabilities
19,573
25,430
31,834
Total equity and liabilities
45,287
52,123
60,920
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Company statement of changes in equity for the three years ended March 31, 2009
Balance at April 1, 2006
Treasury
Share-based
Share
Share
share
compensation
Retained
capital
premium
reserve
reserve
earnings
Total
Rm
Rm
Rm
Rm
Rm
Rm
5,449
1,342
(1,786)
151
18,534
23,690
Total income and expense for the year
–
–
–
–
8,391
8,391
Dividend declared (refer to note 32)
–
–
–
–
(4,885)
(4,885)
Payment made for treasury shares
–
–
(27)
–
–
(27)
–
–
–
141
–
141
–
–
35
(35)
–
–
(120)
(1,342)
–
–
(134)
(1,596)
Increase in share-based compensation reserve (refer to note 22) Shares vested and re-issued (refer to note 22) Shares bought back and cancelled (refer to note 20) Balance at March 31, 2007
5,329
–
(1,778)
257
21,906
25,714
Total income and expense for the year
–
–
–
–
7,967
7,967
Dividend declared (refer to note 32)
–
–
–
–
(5,863)
(5,863)
–
–
–
522
–
522
–
–
136
(136)
–
–
(121)
–
–
–
(1,526)
(1,647) 26,693
Increase in share-based compensation reserve (refer to note 22) Shares vested and re-issued (refer to note 22) Shares bought back and cancelled (refer to note 20)
5,208
–
(1,642)
643
22,484
Total income and expense for the year
Balance at March 31, 2008
–
–
–
–
5,277
5,277
Dividend declared (refer to note 32)
–
–
–
–
(3,438)
(3,438)
–
–
–
554
–
554
–
–
121
(121)
–
–
5,208
–
(1,521)
1,076
24,323
29,086
Increase in share-based compensation reserve (refer to note 22) Shares vested and re-issued (refer to note 22) Balance at March 31, 2009
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253
Company cash flow statement for the three years ended March 31, 2009
Notes Cash flows from operating activities
Restated
Restated
2007
2008
2009
Rm
Rm
Rm
6,383
8,172
9,948
Cash receipts from customers
32,109
32,375
34,239
Cash paid to suppliers and employees
(19,449)
(19,713)
(22,212)
12,660
12,662
12,027
385
390
343
Cash generated from operations
28
Interest received Dividends received
29
2,950
3,536
3,242
Finance charges paid
30
(886)
(842)
(466)
Taxation paid
31
(3,852)
(1,716)
(1,764)
11,257
14,030
13,382
(4,874)
(5,858)
(3,434)
(6,662)
(9,994)
(12,129)
4
164
21
(6,598)
(6,763)
(6,428)
(2,409)
(4,142)
(3,344)
(3,189)
(2,621)
(3,084)
Cash generated from operations before dividend paid Dividend paid
32
Cash flows from investing activities Proceeds on disposal of property, plant and equipment and intangible assets Additions to property, plant and equipment and intangible assets Expansions to property, plant and equipment and intangible assets Maintenance to property, plant and equipment and intangible assets Acquisition of subsidiary and minority interest in subsidiary
11
Loans to subsidiaries Loans repaid by subsidiaries Cash flows from financing activities
(150)
–
(1,339)
–
(3,395)
(4,383)
82
–
–
(2,777)
2,088
2,574
Loans raised
5,624
23,878
18,168
Loans repaid
(6,843)
(20,204)
(14,649)
Shares bought back and cancelled
(1,596)
(1,647)
–
38
61
(945)
Net (decrease)/increase in cash and cash equivalents
(3,056)
266
393
Net cash and cash equivalents at beginning of the year
3,232
176
442
176
442
835
Decrease/(increase) in net financial assets
Net cash and cash equivalents at end of the year
19
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Notes to the annual financial statements for the three years ended March 31, 2009
1.
CORPORATE INFORMATION
are measured at fair value and share-based payments which are
Telkom SA Limited (the Company) is a company incorporated
measured at grant date fair value. Details of the Company’s
and domiciled in the Republic of South Africa (’South Africa’)
significant accounting policies are set out below, and are
whose shares are publicly traded. The Company’s main
consistent with those applied in the previous financial year
objective and main business is to supply telecommunication,
except for the following:
broadcasting, multimedia, technology, information and other related information technology services to the general public. The principal activities of the Company’s services and products include: • fixed-line subscription and connection services to post-paid, prepaid and private payphone customers using PSTN (Public
and IFRS7, and adopted IFRIC12 and IFRIC14, which are applicable for annual periods beginning on or after January 1, 2008. The principal effects of these changes are discussed below.
Switched Telephone Network) lines, including ISDN
Adoption of amendments to standards and new
(Integrated Service Digital Network) lines, and the sale of
interpretations
subscription based value-added voice services and customer
IAS39 Financial Instruments: Recognition and Measurement
premises equipment rental and sales;
and IFRS7 Financial Instruments: Disclosures –
• fixed-line traffic services to post-paid, prepaid and payphone customers, including local, long distance, fixed-to-mobile, international outgoing and international voice-over-internet protocol traffic services;
Reclassification of Financial Assets (amended) The amendments which are effective on or after July 1, 2008, permit an entity to reclassify non-derivative financial assets (other than those designated at fair value through profit or loss by the entity upon initial recognition) out of the fair value through profit
• interconnection services, including terminating and transiting
or loss category in particular circumstances. The amendments
traffic from South African mobile operators, as well as from
also permit an entity to transfer from the available-for-sale
international operators and transiting traffic from mobile to
category to the loans and receivables category a financial asset
international destinations;
that would have met the definition of loans and receivables (if
• fixed-line data and internet services, including domestic and international data transmission services, such as point-to-point leased lines, ADSL (Asymmetrical Digital Subscriber Line) services, packet-based services, managed data networking
the financial asset had not been designated as available-forsale), if the entity has the intention and ability to hold that financial asset for the foreseeable future. The amendments do not have an impact on the annual financial statements.
services and internet access and related information
IFRIC12 Service Concession Arrangements
technology services; and
The interpretation which is effective for annual periods
• W-CDMA (Wideband Code Division Multiple Access), a 3G next generation network, including fixed voice services, data services and nomadic voice services. These separate annual financial statements are prepared in compliance with the South African Companies Act, 1973. In addition, the Group presents consolidated financial statements which include all subsidiaries, special purpose entities and joint ventures, which are included in these financial statements as investments.
2.
• The Company has adopted certain amendments to IAS39
beginning on or after January 1, 2008, sets out general principles on recognising and measuring the obligations and related rights in service concession arrangements from an operator’s perspective. This interpretation does not have an impact on the annual financial statements.
IFRIC14 The Limit on a Defined Benefit Asset, Minimum Funding Requirements and their Interaction The interpretation which is effective for annual periods beginning on or after January 1, 2008, provides guidance on assessing the limit in IAS19 on the amount of the surplus that can
SIGNIFICANT ACCOUNTING POLICIES
be recognised as an asset. It also explains how the pension
Basis of preparation
asset or liability may be affected by a statutory or contractual
The financial statements comply with the International Financial
minimum funding requirement. This interpretation does not have
Reporting Standards (IFRS) of the International Accounting
any impact on the annual financial statements, as the Company
Standards Board (IASB) and the Companies Act of South Africa,
is not subject to minimum funding requirements.
1973. The financial statements are prepared on the historical cost basis, with the exception of certain financial instruments which
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Notes to the annual financial statements
255
(continued)
for the three years ended March 31, 2009
2.
SIGNIFICANT ACCOUNTING POLICIES (continued)
capital funding and required return on assets and equity to
Significant accounting judgements, estimates and
determine the optimum useful life expectation for each of the
assumptions
individual categories of property, plant, equipment and
The preparation of financial statements requires the use of
intangible assets. Due to the rapid technological advancement
estimates and assumptions that affect the reported amounts of
in the telecommunications industry as well as the Company’s
assets and liabilities and disclosure of contingent assets and
plan to migrate to a next generation network over the next few
liabilities at the date of the financial statements and the reported
years, the estimation of useful lives could differ significantly on
amounts of revenue and expenses during the reporting periods.
an annual basis due to unexpected changes in the roll-out
Although these estimates and assumptions are based on
strategy. The impact of the change in the expected useful life of
management’s best knowledge of current events and actions that
property, plant and equipment is described more fully in note
the Company may undertake in the future, actual results may
5.6. The estimation of residual values of assets is also based on
ultimately differ from those estimates and assumptions.
management’s judgement whether the assets will be sold or
The presentation of the results of operations, financial position and cash flows in the financial statements of the Company is
used to the end of their useful lives and what their condition will be like at that time.
dependent upon and sensitive to the accounting policies,
For intangible assets that incorporate both a tangible and
assumptions and estimates that are used as a basis for the
intangible portion, management uses judgement to assess which
preparation of these financial statements. Management has
element is more significant to determine whether it should be
made certain judgements in the process of applying the
treated as property, plant and equipment or intangible assets.
Company’s accounting policies. These, together with the key estimates and assumptions concerning the future, and other key sources of estimation uncertainty at the balance sheet date, are as follows:
Asset retirement obligations Management judgement is exercised when determining whether an asset retirement obligation exists, and in determining the present value of expected future cash flows and discount rate
Revenue recognition
when the obligation to dismantle or restore the site arises, as
To reflect the substance of each transaction, revenue recognition
well as the estimated useful life of the related asset.
criteria are applied to each separately identifiable component of a transaction. In order to account for multiple-element revenue arrangements in developing its accounting policies, the Company considered the guidance contained in the United States Financial Accounting Standards Board (FASB) Emerging Issues Task Force No 00-21 Revenue Arrangements with Multiple Deliverables. Judgement is required to separate those revenue arrangements that contain the delivery of bundled products or services into individual units of accounting, each with its own earnings process, when the delivered item has stand-alone value and the undelivered item has fair value. Further judgement is required to determine the relative fair values of each separate unit of accounting to be allocated to the total arrangement consideration. Changes in the relative fair values could affect the allocation of arrangement consideration between the various revenue streams. Judgement is also required to determine the expected customer relationship period. Any changes in these assessments may have a significant impact on revenue and deferred revenue.
Property, plant and equipment and intangible assets The useful lives of assets are based on management’s estimation. Management considers the impact of changes in technology, customer service requirements, availability of
Impairments of property, plant and equipment and intangible assets Management is required to make judgements concerning the cause, timing and amount of impairment as indicated on notes 9 and 10. In the identification of impairment indicators, management considers the impact of changes in current competitive conditions, cost of capital, availability of funding, technological obsolescence, discontinuance of services and other circumstances that could indicate that an impairment exists. The Company applies the impairment assessment to its separate cash-generating units. This requires management to make significant judgements concerning the existence of impairment indicators, identification of separate cash-generating units, remaining useful lives of assets and estimates of projected cash flows and fair value less costs to sell. Management judgement is also required when assessing whether a previously recognised impairment loss should be reversed.
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Notes to the annual financial statements
(continued)
for the three years ended March 31, 2009
2.
SIGNIFICANT ACCOUNTING POLICIES (continued)
incentives received from the lessor) are charged to the income
Significant accounting judgements, estimates and
statement on a straight-line basis over the period of the lease.
assumptions (continued)
A lease is classified as a finance lease if it transfers substantially
Impairments of property, plant and equipment and
all the risks and rewards incidental to ownership.
intangible assets (continued)
Deferred taxation asset
Where impairment indicators exist, the determination of the
Management judgement is exercised when determining the
recoverable amount of a cash-generating unit requires
probability of future taxable profits which will determine whether
management to make assumptions to determine the fair value
deferred tax assets should be recognised or derecognised. The
less costs to sell and value in use. Key assumptions on which
realisation of deferred tax assets will depend on whether it is
management has based its determination of fair value less costs
possible to generate sufficient taxable income, taking into
to sell include the existence of binding sale agreements, and for
account any legal restrictions on the length and nature of the
the determination of value in use include the weighted average
taxation asset. When deciding whether to recognise unutilised
cost of capital, projected revenues, gross margins, average
taxation credits, management needs to determine the extent that
revenue per customer, capital expenditure, expected customer
the future obligation is likely to be available for set-off. In the
bases and market share. The judgements, assumptions and
event that the assessment of future payments and future utilisation
methodologies used can have a material impact on the fair
changes, the change in the recognised deferred tax asset must
value and ultimately the amount of any impairment.
be recognised in profit or loss.
Impairment of other financial assets
Taxation
At each balance sheet date management assesses whether
The taxation rules and regulations in South Africa within which
there are indicators of impairment of financial assets, including
the Company operates are highly complex and subject to
equity investments. If such evidence exists, the estimated present
interpretation. Additionally, for the foreseeable future,
value of the future cash flows of that asset is determined. Management judgement is required when determining the expected future cash flows. To determine whether any decline in fair value of available-for-sale investments is prolonged, reliance is placed on an assessment by management regarding the
management expects South African taxation laws to further develop through changes in South Africa’s existing taxation structure as well as clarification of the existing taxation laws through published interpretations and the resolution of actual tax cases (refer to notes 8 and 14).
future prospects of the investee. In measuring impairments,
Management has made a judgement that all outstanding
quoted market prices are used, if available, or projected
taxation credits relating to secondary taxation on companies
business plan information from the investee is used for those
(STC) will be available for utilisation before the taxation regime
financial assets not carried at fair value.
change, from STC to withholding taxation, is effective.
Impairment of receivables
The Company is regularly subject to evaluation by the South
An impairment is recognised on trade receivables that are
African taxation authorities of its historical income taxation filings
assessed to be impaired (refer to notes 12 and 17). The impairment is based on an assessment of the extent to which customers have defaulted on payments already due and an assessment on their ability to make payments based on their credit worthiness and historical write-offs experience. Should the assumptions regarding the financial condition of the customer change, actual write-offs could differ significantly from the impaired amount.
and in connection with such reviews disputes can arise with the taxing authorities over the interpretation or application of certain taxation rules to the business of the Company. These disputes may not necessarily be resolved in a manner that is favourable for the Company. Additionally the resolution of the disputes could result in an obligation for the Company that exceeds management’s estimate. The Company has historically filed, and continues to file, all required income taxation returns. Management believes that the principles applied in determining
Leases
the Company’s taxation obligations are consistent with the
The determination of whether an arrangement is, or contains a
principles and interpretations of the South African taxation laws.
lease is based on whether, at the date of inception, the fulfilment
Deferred taxation rate
of the arrangement is dependent on the use of a specific asset
Management makes judgements on the taxation rate applicable
or assets or the arrangement conveys a right to use the asset.
based on the Company’s expectations at balance sheet date on
Leases in which a significant portion of the risks and rewards of
how the asset is expected to be recovered or the liability is
ownership are retained by the lessor are classified as operating
expected to be settled.
leases. Payments made under operating leases (net of any
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Notes to the annual financial statements
257
(continued)
for the three years ended March 31, 2009
2.
SIGNIFICANT ACCOUNTING POLICIES (continued)
and, where appropriate, the risks specific to the liability, all of
Significant accounting judgements, estimates and
which requires management judgement. The Company is
assumptions (continued)
required to recognise provisions for claims arising from litigation
Employee benefits
when the occurrence of the claim is probable and the amount
The Company provides defined benefit plans for certain post-
of the loss can be reasonably estimated. Liabilities provided for
employment benefits. The Company’s net obligation in respect
legal matters require judgements regarding projected outcomes
of defined benefits is calculated separately for each plan by
and ranges of losses based on historical experience and
estimating the amount of future benefits earned in return for
recommendations of legal counsel. Litigation is however
services rendered. The obligation and assets related to each of
unpredictable and actual costs incurred could differ materially
the post-retirement benefits are determined through an actuarial
from those estimated at the balance sheet date.
valuation. The actuarial valuation relies heavily on assumptions as disclosed in note 25. The assumptions determined by management make use of information obtained from the Company’s employment agreements with staff and pensioners, market related returns on similar investments, market related discount rates and other available information. The assumptions
Held-to-maturity financial assets Management has reviewed the Company’s held-to-maturity financial assets in the light of its capital management and liquidity requirements and has confirmed the Company’s positive intention and ability to hold those assets to maturity.
concerning the expected return on assets and expected change
Summary of significant accounting policies
in liabilities are determined on a uniform basis, considering
Operating revenue
long-term historical returns and future estimates of returns and
The Company provides fixed-line and data communication
medical inflation expectations. In the event that further changes
services and communication-related products. The Company
in assumptions are required, the future amounts of post-
provides such services to business, residential and payphone
employment benefits may be affected materially.
customers. Revenue represents the fair value of fixed or
The discount rate reflects the average timing of the estimated
determinable consideration that has been received or is receivable.
defined benefit payments. The discount rate is based on long-
Revenue for services is measured at amounts invoiced to
term South African government bonds with the longest maturity
customers and excludes Value Added Tax.
period as reported by the Bond Exchange of South Africa. The
Revenue is recognised when there is evidence of an arrangement,
discount rate is expected to follow the trend of inflation.
collectability is probable, and the delivery of the product or
The overall expected rate of return on assets is determined
service has occurred. In certain circumstances, revenue is split into
based on the market prices prevailing at that date, applicable
separately identifiable components and recognised when the
to the period over which the obligation is to be settled.
related components are delivered in order to reflect the substance
Telkom provides equity compensation to its employees in the form of the Telkom Conditional Share Plan. The related expense and reserve are determined through an actuarial valuation
of the transaction. The value of components is determined using verifiable objective evidence. The Company does not provide customers with the right to a refund.
which relies heavily on assumptions. The assumptions include
Dealer incentives
employee turnover percentages and whether specified
The Company provides incentives to its retail payphone card
performance criteria will be met. Changes to these assumptions
distributors as trade discounts. Incentives are based on sales
could affect the amount of expense ultimately recognised in the
volume and value. Revenue for retail payphone cards is recorded
financial statements. An actuarial valuation relies heavily on the
as traffic revenue, net of these discounts as the cards are used.
actual plan experience assumptions as disclosed in note 25.
Subscriptions, connections and other usage
Provisions and contingent liabilities
The Company provides telephone and data communication
Management judgement is required when recognising and
services under post-paid and prepaid payment arrangements.
measuring provisions and when measuring contingent liabilities
Revenue includes fees for installation and activation, which are
as set out in notes 24 and 35 respectively. The probability that
deferred and recognised over the expected customer
an outflow of economic resources will be required to settle the
relationship period. Costs incurred on first time installations that
obligation must be assessed and a reliable estimate must be
form an integral part of the network are capitalised and
made of the amount of the obligation. Provisions are discounted
depreciated over the expected average customer relationship
where the effect of discounting is material based on
period. All other installation and activation costs are expensed
management’s judgement. The discount rate used is the rate that
as incurred.
reflects current market assessments of the time value of money
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Notes to the annual financial statements
(continued)
for the three years ended March 31, 2009
2.
SIGNIFICANT ACCOUNTING POLICIES (continued)
Directory services
Summary of significant accounting policies (continued)
Included in other revenue are directory services. Revenue is
Operating revenue (continued)
recognised when printed directories are released for
Subscriptions, connections and other usage (continued)
distribution, as the significant risks and rewards of ownership
Post-paid
have been transferred to the buyer. Electronic directories’
and
prepaid
service
arrangements
include
subscription fees, typically monthly fees, which are recognised
revenue is recognised on a monthly basis, as earned.
over the subscription period. Revenue related to sale of communication equipment, products and value-added services is recognised upon delivery and acceptance of the product or service by the customer.
Traffic (domestic, fixed-to-mobile and international) Prepaid Prepaid traffic service revenue collected in advance is deferred
Sundry revenue Sundry revenue is recognised when the economic benefit flows to the Company and the earnings process is complete.
Interest on debtors’ accounts Interest is raised on overdue accounts by using the effective interest rate method and recognised in the income statement.
and recognised based on actual usage or upon expiration of
Marketing
the usage period, whichever comes first. The terms and
Marketing costs are recognised as an expense as incurred.
conditions of certain prepaid products allow the carry over of unused minutes. Revenue related to the carry over of unused
Incentives
minutes is deferred until usage or expiration.
Incentives paid to service providers and dealers for products
Payphones Payphone service coin revenue is recognised when the service is provided. Payphone service card revenue collected in advance is deferred and recognised based on actual usage or upon expiration of the usage period, whichever comes first.
delivered to the customer are expensed as incurred. Incentives paid to service providers and dealers for services delivered are expensed in the period that the related revenue is recognised. Distribution incentives paid to service providers and dealers for exclusivity are deferred and expensed over the contractual relationship period.
Post-paid
Investment income
Revenue related to local, long distance, network-to-network,
Dividends from investments are recognised on the date that the
roaming and international call connection services is recognised
Company is entitled to the dividend. Interest is recognised on a
when the call is placed or the connection provided.
time proportionate basis taking into account the principal
Interconnection Interconnection revenue for call termination, call transit and
amount outstanding and the effective interest rate.
Taxation
network usage is recognised as the traffic flow occurs.
Current taxation
Data
The charge for current taxation is based on the results for the
The Company provides data communication services under
year and is adjusted for non-taxable income and non-deductible
post-paid and prepaid payment arrangements. Revenue
expenditure. Current taxation is measured at the amount
includes fees for installation and activation, which are deferred
expected to be paid to the taxation authorities, using taxation
over the expected average customer relationship period. Costs
rates and laws that have been enacted or substantively enacted
incurred on first time installations that form an integral part of the
by the balance sheet date.
network are capitalised and depreciated over the life of the expected average customer relationship period. All other
Deferred taxation
installation and activation costs are expensed as incurred. Post-
Deferred taxation is accounted for using the balance sheet
paid and prepaid service arrangements include subscription
liability method on all temporary differences at the balance
fees, typically monthly fees, which are recognised over the
sheet date between taxation bases of assets and liabilities and
subscription period.
their carrying amounts for financial reporting purposes.
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Notes to the annual financial statements
259
(continued)
for the three years ended March 31, 2009
2.
SIGNIFICANT ACCOUNTING POLICIES (continued)
and non-refundable purchase taxes, after deducting trade
Summary of significant accounting policies (continued)
discounts and rebates. The recognised cost includes any directly
Taxation (continued)
attributable costs for preparing the asset for its intended use.
Deferred taxation (continued) Deferred taxation is not provided on the initial recognition of goodwill or initial recognition of assets or liabilities which is not a business combination and at the time of the transaction affects neither accounting nor taxable profit or loss. A deferred taxation asset is recognised to the extent that it is probable that future taxable profits will be available against which the associated unused taxation losses, unused taxation credits and deductible temporary differences can be utilised. The carrying amount of deferred taxation assets is reviewed at each balance sheet date and is reduced to the extent that it is no longer probable that the related taxation benefit will be realised. In respect of deductible temporary differences associated with investments in subsidiaries, associates and interest in joint ventures, deferred income tax assets are
The cost of an item of property, plant and equipment is recognised as an asset if it is probable that the future economic benefits associated with the item will flow to the Company and the cost of the item can be measured reliably. Property, plant and equipment is stated at historical cost less accumulated depreciation and any accumulated impairment losses. Each component of an item of property, plant and equipment with a cost that is significant in relation to the total cost of the item is depreciated separately. Depreciation is charged from the date the asset is available for use on a straight-line basis over the estimated useful life and ceases at the earlier of the date that the asset is classified as held for sale or the date the asset is derecognised. Idle assets continue to attract depreciation.
recognised only to the extent that it is probable that temporary
The estimated useful life of individual assets and the
differences will reverse in the foreseeable future and taxable
depreciation method thereof are reviewed on an annual basis
profit will be available against which temporary differences can
at balance sheet date. The depreciable amount is determined
be utilised.
after taking into account the residual value of the asset. The
Deferred taxation relating to items recognised directly in equity is recognised in equity and not in the income statement.
residual value is the estimated amount that the Company would currently obtain from the disposal of the asset, after deducting the estimated cost of disposal, if the asset were already of the
Deferred taxation assets and liabilities are measured at the
age and in the condition expected at the end of its useful life.
taxation rates that are expected to apply to the period when the
The residual values of assets are reviewed on an annual basis
asset is realised or the liability is settled, based on taxation rates
at balance sheet date.
(and taxation laws) that have been enacted or substantively enacted by the balance sheet date.
Assets under construction represents freehold buildings, operating software, network and support equipment and
Deferred taxation assets and deferred taxation liabilities are
includes all direct expenditure as well as related borrowing
offset, if a legally enforceable right exists to set off current
costs capitalised, but excludes the costs of abnormal amounts of
taxation assets against current taxation liabilities and the
waste material, labour or other resources incurred in the
deferred taxes relate to the same taxable entity and the same
production of self-constructed assets.
taxation authority.
Freehold land is stated at cost and is not depreciated. Amounts
Secondary taxation on companies
paid by the Company on improvements to assets which are held
Secondary taxation on companies (’STC’) is provided for at a
in terms of operating lease agreements are depreciated on a
rate of 10% (12.5% before October 1, 2007) on the amount
straight-line basis over the shorter of the remaining useful life of
by which dividends declared by the Company exceed
the applicable asset or the remainder of the lease period.
dividends received. Deferred taxation on unutilised STC credits
Where it is reasonably certain that the lease agreement will be
is recognised to the extent that STC payable on future dividend
renewed, the lease period equals the period of the initial
payments is likely to be available for set-off.
agreement plus the renewal periods.
Property, plant and equipment At initial recognition acquired property, plant and equipment are recognised at their purchase price, including import duties
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Notes to the annual financial statements
(continued)
for the three years ended March 31, 2009
2.
SIGNIFICANT ACCOUNTING POLICIES (continued)
the end of its useful life. Due to the nature of the asset the
Summary of significant accounting policies (continued)
residual value is assumed to be zero unless there is a
Property, plant and equipment (continued)
commitment by a third party to purchase the asset at the end of
The estimated useful lives assigned to groups of property, plant
its useful life or when there is an active market that is likely to
and equipment are:
exist at the end of the asset’s useful life, which can be used to Years
Freehold buildings Leasehold buildings
15 to 40 7 to 25
Network equipment: Cables
20 to 40
Switching equipment
2 to 18
Transmission equipment
5 to 18
Other
1 to 20
Support equipment
5 to 13
Furniture and office equipment
2 to 15
Data processing equipment and software
3 to 10
Other
2 to 20
An item of property, plant and equipment is derecognised upon disposal or when no future economic benefits are expected from its use or disposal. Any gain or loss arising on derecognition of the asset (calculated as the difference between the net disposal
estimate the residual values. The residual values of intangible assets and their useful lives are reviewed on an annual basis at balance sheet date. Intangible assets with indefinite useful lives and intangible assets not yet available for use are tested for impairment annually either individually or at the cash-generating unit level. Such intangibles are not amortised. The useful life of an intangible asset with an indefinite life is reviewed annually to determine whether indefinite life assessment continues to be supportable. If not, the change in the useful life assessment from indefinite to finite is made on a prospective basis. Assets under construction represent application and other nonintegral software and includes all direct expenditure as well as related borrowing costs capitalised, but excludes the costs of abnormal amounts of waste material, labour or other resources incurred in the production of self-constructed assets.
proceeds and the carrying amount of the asset) is included in
Intangible assets are derecognised when they have been
the income statement in the year the asset is derecognised.
disposed of or when the asset is permanently withdrawn from use
Assets held under finance leases are depreciated over their expected useful lives on the same basis as owned assets or, where shorter, the term of the relevant lease if there is no reasonable certainty that the Company will obtain ownership by
and no future economic benefit is expected from its disposal. Any gains or losses on the retirement or disposal of assets are recognised in the income statement in the year in which they arise. The expected useful lives assigned to intangible assets are:
the end of the lease term.
Intangible assets At initial recognition acquired intangible assets are recognised at their purchase price, including import duties and non-refundable purchase taxes, after deducting trade discounts and rebates. The recognised cost includes any directly attributable costs for preparing
Years Licences
5 to 30
Software
2 to 10
Trademarks, copyrights and other including FIFA brand
1 to 15
the asset for its intended use. Internally generated intangible assets
Asset retirement obligations
are recognised at cost comprising all directly attributable costs
Asset retirement obligations related to property, plant and
necessary to create and prepare the asset to be capable of
equipment and intangible assets are recognised at the present
operating in the manner intended by management. Licences,
value of expected future cash flows when the obligation to
software, trademarks, copyrights and other intangible assets are
dismantle or restore the site arises. The increase in the related
carried at cost less accumulated amortisation and any accumulated
asset’s carrying value is depreciated over its estimated useful
impairment losses. Amortisation commences when the intangible
life. The unwinding of the discount is included in finance
assets are available for their intended use and is recognised on a
charges and fair value movements. Changes in the
straight-line basis over the assets’ expected useful lives. Amortisation
measurement of an existing liability that result from changes in
ceases at the earlier of the date that the asset is classified as held
the estimated timing or amount of the outflow of resources
for sale and the date that the asset is derecognised.
required to settle the liability, or a change in the discount rate,
The residual value of intangible assets is the estimated amount that the Company would currently obtain from the disposal of the asset, after deducting the estimated cost of disposal, if the asset were already of the age and in the condition expected at
are accounted for as increases or decreases to the original cost of the recognised assets. If the amount deducted exceeds the carrying amount of the asset, the excess is recognised immediately in profit and loss.
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Notes to the annual financial statements
261
(continued)
for the three years ended March 31, 2009
2.
SIGNIFICANT ACCOUNTING POLICIES (continued)
Borrowing costs
Summary of significant accounting policies (continued)
Financing costs directly associated with the acquisition or
Non-current assets held for sale
construction of assets that require more than three months to
Non-current assets and disposal groups are classified as held
complete and place in service are capitalised at interest rates
for sale if their carrying amount will be recovered through a sale
relating to loans specifically raised for that purpose, or at the
transaction rather than through continuing use. This condition is
weighted average borrowing rate where the general pool of
regarded as met only when the sale is highly probable and the
Company borrowings was utilised. Other borrowing costs are
asset (or disposal group) is available for immediate sale in its
expensed as incurred.
present condition. Management must be committed to the sale, which should be expected to qualify for recognition as a complete sale within one year from the date of classification. Assets are no longer depreciated when they are classified into this category.
Deferred revenue and expenses Activation revenue and costs are recognised in accordance with the principles contained in Emerging Issues Task Force Issue No 00-21, Revenue Arrangements with Multiple Deliverables (’EITF 00-21’), issued in the United States. This results in
Non-current assets (and disposal groups) classified as held for
activation revenue and costs up to the amount of the deferred
sale are measured at the lower of the assets’ previous carrying
revenue being deferred and recognised systematically over the
amount and fair value less costs to sell.
expected duration of the customer relationship because it is
Impairment of property, plant and equipment and intangible assets The Company regularly reviews its non-financial assets and cash-generating units for any indication of impairment. When
considered to be part of the customers’ ongoing rights to telecommunication services and the operator’s continuing involvement. Any excess of the costs over revenues is expensed immediately.
indicators, including changes in technology, market, economic,
Subsidiaries and joint venture
legal and operating environments occur and could result in
Investments in subsidiaries, special purpose entities and joint
changes of the asset’s or cash-generating unit’s estimated
ventures are carried at cost and adjusted for any impairment
recoverable amount, an impairment test is performed.
losses.
The recoverable amount of assets or cash-generating units is
Inventories
measured using the higher of the fair value less costs to sell and
Installation material, maintenance and network equipment
its value in use, which is the present value of projected cash
inventories are stated at the lower of cost, determined on a
flows covering the remaining useful lives of the assets.
weighted average basis and estimated net realisable value.
Impairment losses are recognised when the asset’s carrying
Merchandise inventories are stated at the lower of cost,
value exceeds its estimated recoverable amount. Where
determined on a first-in first-out (’FIFO’) basis and estimated net
applicable, the recoverable amount is determined for the cash-
realisable value. Write-down of inventories arises when, for
generating unit to which the asset belongs.
example, goods are damaged or when net realisable value is
Previously recognised impairment losses are reviewed annually
lower than carrying value.
for any indication that it may no longer exist or may have
Financial instruments
decreased. If any such indication exists, the recoverable amount
Recognition and initial measurement
of the asset is estimated. Such impairment losses are reversed
All financial instruments are initially recognised at fair value,
through the income statement if the recoverable amount has
plus, in the case of financial assets and liabilities not at fair
increased as a result of a change in the estimates used to
value through profit or loss, transaction costs that are directly
determine the recoverable amount, but not to an amount higher
attributable to the acquisition or issue. Financial instruments are
than the carrying amount that would have been determined (net
recognised when the Company becomes a party to their
of depreciation or amortisation) had no impairment loss been
contractual arrangements. All regular way transactions are
recognised in prior years.
accounted for on settlement date. Regular way purchases or
Repairs and maintenance The Company expenses all costs associated with repairs and maintenance, unless it is probable that such costs would result in increased future economic benefits flowing to the Company, and the costs can be reliably measured.
sales are purchases or sales of financial assets that require delivery of assets within the period generally established by regulation or convention in the marketplace.
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Notes to the annual financial statements
(continued)
for the three years ended March 31, 2009
2.
SIGNIFICANT ACCOUNTING POLICIES (continued)
Available-for-sale financial assets
Summary of significant accounting policies (continued)
Available-for-sale financial assets are those non-derivative assets
Financial instruments (continued)
that are designated as available-for-sale, or are not classified in
Subsequent measurement
any of the three preceding categories. Equity instruments are all
Subsequent to initial recognition, the Company classifies
treated as available-for-sale financial instruments. After initial
financial assets as ’at fair value through profit or loss’, ’held-to-
recognition, available-for-sale financial assets are measured at
maturity investments’, ’loans and receivables’, or ’available-for-
fair value, with gains and losses being recognised as a
sale'. Financial liabilities are classified ’at fair value through
separate component of equity, net of taxation. Dividend income
profit or loss’ or ’other financial liabilities’. The measurement of
is recognised in the income statement as part of other income
each is set out below and presented in a table in note 12.
when the Company’s right to receive payment is established.
The fair value of financial assets and liabilities that are actively
Changes in the fair value of monetary items denominated in a
traded in financial markets is determined by reference to quoted
foreign currency and classified as available-for-sale are
market prices at the close of business on the balance sheet date.
analysed between translation differences resulting from changes
Where there is no active market, fair value is determined using
in amortised cost of the security and other changes in carrying
valuation techniques such as discounted cash flow analysis.
amount of the item. The translation differences on monetary
Financial assets at fair value through profit or loss The Company classifies financial assets that are held for trading in the category ’financial assets at fair value through profit or loss’. Financial assets are classified as held for trading if they are acquired for the purpose of selling in the future. Derivatives not designated as hedges are also classified as held for trading. On remeasurement to fair value the gains or losses on held for
items are recognised in profit or loss, while translation differences on non-monetary securities are recognised in equity. Changes in the fair value of monetary and non-monetary items classified as available-for-sale are recognised directly in equity. When an investment is derecognised or determined to be impaired, the cumulative gain or loss previously recorded in equity is recognised in profit or loss.
trading financial assets are recognised in net finance charges
Financial liabilities at fair value through profit or loss
and fair value movements for the year.
Financial liabilities are classified as ‘at fair value through profit
Gains and losses arising from changes in the fair value of the ’financial assets at fair value through profit or loss’ category are presented in the income statement within ’finance charges and fair value movements’ in the period which they arise.
Held-to-maturity financial assets The Company classifies non-derivative financial assets with fixed
or loss’ (’FVTPL’) where the financial liability is held for trading. A financial liability is classified as held for trading: • if it is acquired for the purpose of settling in the near term; or • if it is a derivative that is not designated and effective as a hedging instrument.
or determinable payments and fixed maturity dates as held-to-
Financial liabilities at a FVTPL are stated at fair value, with any
maturity when the Company has the positive intention and
resultant gains or losses recognised in profit or loss. The net gain
ability to hold to maturity. These assets are subsequently
or loss recognised in profit or loss incorporates any interest paid
measured at amortised cost. Amortised cost is computed as the
on the financial liability.
amount initially recognised minus principal repayments, plus or
Other financial liabilities
minus the cumulative amortisation using the effective interest
Other financial liabilities are subsequently measured at
method. This calculation includes all fees paid or received
amortised cost using the effective interest rate method, with
between parties to the contract. For investments carried at
interest expense recognised in finance charges and fair value
amortised cost, gains and losses are recognised in net profit or
movements, on an effective interest rate basis.
loss when the investments are sold or impaired. The effective interest rate is the rate that accurately discounts
Loans and receivables
estimated future cash payments through the expected life of the
Loans and receivables are non-derivative financial assets with
financial liability or, where appropriate, a shorter period.
fixed or determinable payments that are not quoted in an active market. Such assets are carried at amortised cost using the effective interest method. Trade receivables are subsequently measured at the original invoice amount where the effect of discounting is not material.
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Notes to the annual financial statements
263
(continued)
for the three years ended March 31, 2009
2.
SIGNIFICANT ACCOUNTING POLICIES (continued)
the asset or the group of assets. In the case of equity securities
Summary of significant accounting policies (continued)
classified as available-for-sale, a significant or prolonged
Financial instruments (continued)
decline in the fair value of the security below its cost is
Financial guarantee contracts
considered as an indicator that the securities are impaired. For
Financial guarantee contracts are subsequently measured at the
loans and receivables carried at amortised cost, if there is
higher of the amount determined in accordance with IAS37
objective evidence that an impairment loss has been incurred,
Provisions, Contingent Liabilities and Contingent Assets or the
the amount of the loss is measured at the difference between the
amount initially recognised less, when appropriate, cumulative
asset’s carrying amount and the present value of estimated future
amortisation, recognised in accordance with IAS18 Revenue.
cashflows. The carrying amount of the asset is reduced through
Cash and cash equivalents Cash and cash equivalents are measured at amortised cost. This
the use of an allowance account and the amount of the loss is recognised in the income statement.
comprises cash on hand, deposits held on call and term
If any such evidence exists for available-for-sale assets, the
deposits with an initial maturity of less than three months when
cumulative loss – measured as the difference between the
entered into.
acquisition cost and the current fair value, less any impairment
For the purpose of the cash flow statement, cash and cash equivalents consist of cash and cash equivalents defined above, net of credit facilities utilised.
loss on that financial asset previously recognised in profit or loss – is removed from equity and recognised in the income statement. Impairment losses recognised in the income statement on equity instruments are not reversed through the income
Capital and money market transactions
statement. The recoverable amount of financial assets carried at
New bonds and commercial paper bills issued are subsequently
amortised cost is calculated as the present value of expected
measured at amortised cost using the effective interest rate
future cash flows discounted at the original effective interest rate
method.
of the asset.
Bonds issued where the Company is a buyer and seller of last
If, in a subsequent period, the amount of the impairment loss for
resort are carried at fair value. The Company does not actively
financial assets decreases and the decrease can be related
trade in bonds.
objectively to an event occurring after the impairment was
Derecognition A financial instrument or a portion of a financial instrument will be derecognised and a gain or loss recognised when the Company’s contractual rights expire, financial assets are transferred or financial liabilities are extinguished. On derecognition of a financial asset or liability, the difference between the consideration and the carrying amount on the settlement date is included in finance charges and fair value movements for the year. For available-for-sale assets, the fair value adjustment relating to prior revaluations of assets is transferred from equity and recognised in finance charges and fair value movements for the year. Bonds and commercial paper bills are derecognised when the obligation specified in the contract is discharged. The difference between the carrying value of the bond and the amount paid to extinguish the obligation is included in finance charges and fair value movements for the year.
recognised, the previously recognised impairment loss is reversed except for those financial assets classified as availablefor-sale and carried at cost that are not reversed. Any subsequent reversal of an impairment loss is recognised in the income statement, to the extent that the carrying value of the asset does not exceed its amortised cost at the reversal date. Reversals in respect of equity instruments classified as availablefor-sale are not recognised in profit and loss. Reversals of impairment losses on debt instruments classified as available-forsale are reversed through the income statement, if the increase in fair value of the instrument can be objectively related to an event occurring after the impairment loss was recognised through the income statement.
Embedded derivatives The Company assesses whether an embedded derivative is required to be separated from the host contract and accounted for as a derivative when it first becomes party to the contract. The Company reassesses the contract when there is a change
Impairment of financial assets
in the terms of the contract which significantly modifies the cash
At each balance sheet date an assessment is made of whether
flows that would otherwise be required under the contract.
there are any indicators of impairment of a financial asset or a group of financial assets based on observable data about one or more loss events that occurred after the initial recognition of
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Notes to the annual financial statements
(continued)
for the three years ended March 31, 2009
2.
SIGNIFICANT ACCOUNTING POLICIES (continued)
Where the Company enters into a service agreement as a
Summary of significant accounting policies (continued)
supplier or a customer that depends on the use of a specific
Financial instruments (continued)
asset, and conveys the right to control the use of the specific
Financial instruments: Disclosures
asset, the arrangement is assessed to determine whether it
The Company groups its financial instruments into classes of
contains a lease. Once it has been concluded that an
similar instruments and where disclosure is required, it discloses
arrangement contains a lease, it is assessed against the criteria
them by class. It also discloses information about the nature and
in IAS17 to determine if the arrangement should be recognised
extent of risks arising from its financial instruments (refer to
as a finance lease or operating lease.
note 12).
The land and buildings elements of a lease of land and
Foreign currencies
buildings are considered separately for the purposes of lease
The functional and presentation currency of the Company is the
classification unless it is impractical to do so.
South African Rand (ZAR).
Lessee
Transactions denominated in foreign currencies are measured at
Operating lease payments are recognised in the income
the rate of exchange at transaction date. Monetary items
statement on a straight-line basis over the lease term.
denominated in foreign currencies are remeasured at the rate of
Assets acquired in terms of finance leases are capitalised at the
exchange at settlement date or balance sheet date, whichever
lower of fair value and the present value of the minimum lease
occurs first. Exchange differences on the settlement or translation
payments at inception of the lease and depreciated over the
of monetary assets and liabilities are included in finance
lesser of the useful life of the asset and the lease term. The
charges and fair value movements in the period in which they
capital element of future obligations under the leases is included
arise. Non-monetary items that are measured in terms of
as a liability in the balance sheet. Lease finance costs are
historical cost in a foreign currency are translated using the
amortised in the income statement over the lease term using the
exchange rates as at the dates of the initial transactions. Non-
interest rate implicit in the lease. Where a sale and leaseback
monetary items measured at fair value in a foreign currency are
transaction results in a finance lease, any excess of sale
translated using the exchange rates at the date when the fair
proceeds over the carrying amount is deferred and recognised
value is determined.
in the income statement over the term of the lease.
Treasury shares
Lessor
Where the Company acquires, or in substance acquires, its
Operating lease revenue is recognised in the income statement
own shares, such shares are measured at cost and disclosed as
on a straight-line basis over the lease term.
a reduction of equity. No gain or loss is recognised in profit or
Assets held under a finance lease are recognised in the balance
loss on the purchase, sale, issue or cancellation of the
sheet and presented as a receivable at an amount equal to the
Company’s own equity instruments. Such shares are not
net investment in the lease. The recognition of finance income
remeasured for changes in fair value.
is based on a pattern reflecting a constant periodic rate of return
Where the Company chooses or is required to buy equity
on the net investment in the finance lease.
instruments from another party to satisfy its obligations to its
Employee benefits
employees under the share-based payment arrangement by
Post-employment benefits
delivery of its own shares, the transaction is accounted for as
The Company provides defined benefit and defined contribution
equity-settled. This applies regardless of whether the employee’s
plans for the benefit of employees. These plans are funded by
rights to the equity instruments were granted by the Company
the employees and the Company, taking into account
itself or by its shareholders or was settled by the Company itself
recommendations of the independent actuaries. The post-
or its shareholders.
retirement telephone rebate liability is unfunded.
Leases
Defined contribution plans
A lease is classified as a finance lease if it transfers substantially
The Company’s funding of the defined contribution plans is
all the risks and rewards incidental to ownership. All other
charged to employee expenses in the same year as the related
leases are classified as operating leases.
service is provided.
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Notes to the annual financial statements
265
(continued)
for the three years ended March 31, 2009
2.
SIGNIFICANT ACCOUNTING POLICIES (continued)
Workforce reduction
Summary of significant accounting policies (continued)
Workforce reduction expenses are payable when employment
Employee benefits (continued)
is terminated before the normal retirement age or when an
Defined benefit plans
employee accepts voluntary redundancy in exchange for
The Company provides defined benefit plans for pension,
benefits. Workforce reduction benefits are recognised when the
retirement, post-retirement medical aid benefits and telephone
entity is demonstrably committed and it is probable that the
rebates to qualifying employees. The Company’s net obligation
expenses will be incurred. In the case of an offer made to
in respect of defined benefits is calculated separately for each
encourage voluntary redundancy, the measurement of
plan by estimating the amount of future benefits earned in return
termination benefits is based on the number of employees
for services rendered.
expected to accept the offer.
The amount recognised in the balance sheet represents the
Share-based compensation
present value of the defined benefit obligations, calculated by
The grants of equity instruments, made to employees in terms of
using the projected unit credit method, as adjusted for
the Telkom Conditional Share Plan, are classified as equity-
unrecognised actuarial gains and losses, unrecognised past
settled share-based payment transactions. The expense relating
service costs and reduced by the fair value of the related plan
to the services rendered by the employees, and the
assets. The amount of any surplus recognised and reflected as
corresponding increase in equity, is measured at the fair value
a defined benefit asset is limited to unrecognised actuarial
of the equity instruments at their date of grant based on the
losses and past service costs plus the present value of available
market price at grant date, adjusted for the lack of entitlement to
refunds and reductions in future contributions to the plan. To the
dividends during the vesting period. This compensation cost is
extent that there is uncertainty as to the entitlement to the surplus,
recognised over the vesting period, based on the best available
no asset is recognised. No gain is recognised solely as a result
estimate at each balance sheet date of the number of equity
of an actuarial loss or past service cost in the current period and
instruments that are expected to vest.
no loss is recognised solely as a result of an actuarial gain or past service cost in the current period.
Short-term employee benefits The cost of all short-term employee benefits is recognised during
Actuarial gains and losses are recognised as employee
the year the employees render services, unless the Company
expenses when the cumulative unrecognised gains and losses
uses the services of employees in the construction of an asset
for each individual plan exceed 10% of the greater of the
and the benefits received meet the recognition criteria of an
present value of the Company’s obligation and the fair value of
asset, at which stage it is included as part of the related
plan assets at the beginning of the year. These gains or losses
property, plant and equipment or intangible asset item.
are amortised on a straight-line basis over 10 years for all the defined benefit plans, except gains or losses related to the pensioners in the Telkom Retirement Fund or unless the standard requires faster recognition. For the Telkom Retirement Fund pensioners, the cumulative unrecognised actuarial gains and losses in excess of the 10% corridor at the beginning of the year are recognised immediately.
Provisions Provisions are recognised when the Company has a present obligation (legal or constructive) as a result of a past event, it is probable that an outflow of resources will be required to settle the obligation, and a reliable estimate can be made of the amount of the obligation. Provisions are reviewed at each balance sheet date and adjusted to reflect the current best
Past service costs are recognised immediately to the extent that
estimate. Where the effect of the time value of money is
the benefits are vested, otherwise they are recognised on a
material, the amount of the provision is the present value of the
straight-line basis over the average period the benefits become
expenditures expected to be required to settle the obligation.
vested.
Leave benefits Annual leave entitlement is provided for over the period that the leave accrues and is subject to a cap of 22 days.
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Notes to the annual financial statements
(continued)
for the three years ended March 31, 2009
2007
2008
2009
Rm
Rm
Rm
3.
REVENUE
3.1
Total revenue
35,818
36,641
37,058
Operating revenue
32,340
32,571
33,659
Other income (excluding profit on disposal of property, plant and equipment, intangible assets and investments, refer to note 4) Investment income (refer to note 6) 3.2
Operating revenue
331
492
3,739
2,907
32,340
32,571
33,659
6,286
6,330
6,614
16,740
15,949
15,323
Domestic (local and long distance)
7,563
6,327
5,670
Fixed-to-mobile
7,646
7,557
7,420
International (outgoing)
988
986
933
Subscription based calling plans
543
1,079
1,300
Interconnection
1,639
1,757
2,084
Data
Subscriptions, connections and other usage Traffic
4.
276 3,202
7,489
8,308
9,310
Sundry revenue
186
227
328
OTHER INCOME
655
498
524
Other income (included in Total revenue, refer to note 3)
276
331
492
181
211
214
Interest received from trade receivables Other interest Sundry income
8
37
189
87
83
89
15
167
32
364
–
–
Profit on disposal of property, plant and equipment and intangible assets Profit on disposal of investment The increase in the current year’s other interest is a result of the increase in loans to subsidiaries (refer to note 11).
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Notes to the annual financial statements
267
(continued)
for the three years ended March 31, 2009
5.
2007
2008
2009
Rm
Rm
Rm
OPERATING EXPENSES Operating expenses comprise:
5.1
Employee expenses
7,077
7,386
7,990
Salaries and wages
5,076
5,519
5,742
Medical aid contributions
377
407
404
Retirement contributions
439
460
460
33
5
29
5
5
4
Post-retirement pension and retirement fund (refer to note 25) Current service cost Interest cost
329
509
633
Expected return on plan assets
(508)
(713)
(825)
Actuarial gain
(136)
(16)
–
21
(2)
(3)
322
222
220
329
277
455
Settlement loss/(gain) Asset limitation Post-retirement medical aid (refer to note 25)
83
84
95
Interest cost
285
321
426
Expected return on plan asset
(188)
(257)
(223)
Actuarial loss
149
129
157
104
27
61
4
3
6
Interest cost
19
22
39
Past service cost
76
2
2
5
–
14
Current service cost
Telephone rebates (refer to note 25) Current service cost
Actuarial loss Share-based compensation expense (refer to note 22 and 25) Other benefits* Employee expenses capitalised
141
522
554
1,274
969
1,021
(696)
(800)
(736)
6,461
6,902
7,536
3,970
3,904
6,580
* Other benefits include annual leave, performance incentive, service bonuses, skills development and workforce reduction expenses.
5.2
Payments to other operators Payments to other network operators consist of expenses in respect of interconnection with other network operators.
5.3
Selling, general and administrative expenses Selling and administrative expenses
1,329
1,108
3,428
Maintenance
1,900
1,996
2,293
Marketing
604
583
574
Bad debts (refer to note 17)
137
217
285
Included in the current year’s selling and administrative expenses, a total impairment loss of R2,178 million (2008: R229 million; 2007: RNil) has been recognised on investments.
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Notes to the annual financial statements
(continued)
for the three years ended March 31, 2009
2007
2008
2009
Rm
Rm
Rm
5.
OPERATING EXPENSES (continued)
5.4
Service fees
2,236
2,410
2,760
Facilities and property management
1,140
1,221
1,261
Consultancy services
209
160
324
Security and other
833
978
1,122
54
51
53
53
51
50
47
46
46
47
43
46
–
3
–
6
5
4
1
–
3
Operating leases
762
619
613
Land and buildings
131
142
166
79
49
58
552
428
389
Depreciation, amortisation and write-offs
3,583
3,732
4,358
Depreciation of property, plant and equipment (refer to note 9)
Auditors’ remuneration Audit services Company auditors Current year Prior year underprovision Other auditors – current year Other services Included in the current year’s consultancy services is an amount of R177 million relating to services rendered in respect of the transaction to dispose of the Company’s stake in Vodacom Group (Proprietary) Limited. The increase in the current year’s security and other costs is mainly attributable to the new contract negotiated to secure the copper network in the Company’s drive to cutting down on cable thefts. 5.5
Equipment Vehicles 5.6
2,994
3,062
3,398
Amortisation of intangible assets (refer to note 10)
305
408
638
Write-offs of property, plant and equipment and intangible assets
284
262
322
Previous life
Revised life
Years
Years
2 – 15
2 – 20
Included in the current year’s amortisation of intangible assets is an amount of R134 million relating to the FIFA brand intangible asset. In recognition of the changed usage patterns of certain items of property, plant and equipment and intangible assets, the Company revised their remaining useful lives as at March 31. The assets affected were individual items of Network equipment, Data processing equipment, Support equipment, Freehold land and buildings and Intangible assets. The revised estimated useful lives of these assets as set out below, resulted in a decrease of the current year depreciation and amortisation charges of R11,4 million (2008: R196 million; 2007: R942 million).
Property, plant and equipment Other
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Notes to the annual financial statements
269
(continued)
for the three years ended March 31, 2009
6.
2007
2008
2009
Rm
Rm
Rm
3,202
3,739
2,907
196
142
160
Dividend income from joint venture
2,700
2,970
2,600
Dividend income from subsidiaries
306
627
147
FINANCE CHARGES AND FAIR VALUE MOVEMENTS
1,027
1,289
1,460
Finance charges on interest-bearing debt
1,142
1,499
1,655
1,303
1,675
1,818
(161)
(176)
(163)
(115)
(210)
(195)
INVESTMENT INCOME Interest income
Included in investment income is an amount of R160 million (2008: R142 million; 2007: R196 million) which relates to interest earned from financial assets not measured at fair value through profit or loss.
7.
Local debt Finance charges capitalised Foreign exchange gains and losses and fair value movements Foreign exchange losses/(gains) Fair value adjustments on derivative instruments Capitalisation rate
58
116
(318)
(173)
(326)
123
14.8%
12.6%
12.4%
Included in finance charges is an amount of R1,655 million (2008: R1,499 million; 2007: R1,142 million) which relates to interest paid on financial liabilities not measured at fair value through profit or loss.
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Telkom Annual Report 2009
Notes to the annual financial statements
(continued)
for the three years ended March 31, 2009
8.
2007
2008
2009
Rm
Rm
Rm
TAXATION
2,690
2,599
516
South African normal company taxation
1,874
1,879
1,510
1,907
1,879
1,540
(33)
–
(30)
521
357
(1,150)
561
255
111
(41)
157
(87) (1,280)
Current taxation Overprovision for prior year Deferred taxation Temporary differences – normal company taxation Temporary difference – secondary taxation on companies (’STC’) taxation credits (raised)/utilised Capital gains taxation (’CGT’)
–
–
Change in taxation rate
–
(55)
–
Underprovision in prior year
1
–
106
295
363
156
Secondary taxation on companies
%
%
%
Effective rate
Reconciliation of taxation rate
24.2
24.6
8.9
South African normal rate of taxation
29.0
29.0
28.0
(4.8)
(4.4)
(19.1)
Adjusted for:
–
(0.5)
–
(8.3)
(10.6)
(13.9)
Disallowable expenditure
1.5
1.8
13.8
STC taxation credits (raised)/utilised
(0.4)
1.5
(1.5)
STC taxation charge
2.7
3.4
2.7
–
–
(22.1)
–
–
0.6
(0.3)
–
1.3
Change in taxation rate Exempt income
CGT asset Other Net (overprovision)/underprovision for prior year
The Company has historically filed, and continues to file, all required income taxation returns. Management believes that the principles applied in determining the Company’s taxation obligations are consistent with the principles and interpretations of South African taxation laws. Included in the current year’s deferred taxation expense is an amount of R1,280 million relating to the deferred taxation on the CGT base cost of the investments which are held for sale. The decrease in the deferred taxation expense is mainly due to the temporary difference on CGT as well as the decrease in STC taxation credits. South African normal rate of taxation has decreased from 29% to 28% effective from the March 31, 2009 financial year.
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Notes to the annual financial statements
271
(continued)
for the three years ended March 31, 2009
2007
9.
2009
2008
Accumulated
Carrying
Accumulated
Carrying
Accumulated
Carrying
Cost depreciation
value
Cost depreciation
value
Cost depreciation
value
Rm
Rm
Rm
Rm
Rm
Rm
Rm
Rm
Rm
4,381
(1,829)
2,552
4,581
(1,988)
2,593
4,886
(2,128)
2,758
496
(299)
197
534
(348)
186
519
(355)
164
49,780
(25,774)
24,006
52,952
(27,366)
25,586
57,438
(29,470)
27,968
3,584
(2,209)
1,375
3,863
(2,377)
1,486
3,916
(2,479)
1,437
345
(236)
109
372
(265)
107
387
(286)
101
4,758
(3,022)
1,736
4,951
(3,103)
1,848
5,041
(3,309)
1,732
2,530
–
2,530
3,362
–
3,362
2,907
–
2,907
456
(347)
109
476
(371)
105
694
(416)
278
66,330
(33,716)
32,614
71,091
(35,818)
35,273
75,788
(38,443)
37,345
PROPERTY, PLANT AND EQUIPMENT Freehold land and buildings Leasehold buildings Network equipment Support equipment Furniture and office equipment Data processing equipment and software Under construction Other
Fully depreciated assets with a cost of R155 million (2008: R498 million; 2007: R1,225 million) were derecognised in the 2009 financial year. This has reduced both the cost and accumulated depreciation of property, plant and equipment. Property, plant and equipment with a carrying value of R158 million (2008: R188 million; 2007: R203 million) are pledged as security. Details of the loans are disclosed in note 23.
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Telkom Annual Report 2009
Notes to the annual financial statements
(continued)
for the three years ended March 31, 2009
9.
PROPERTY, PLANT AND EQUIPMENT (continued) The carrying amounts of property, plant and equipment can be reconciled as follows:
2009 Freehold land and buildings Leasehold buildings Network equipment Support equipment Furniture and office equipment Data processing equipment and software Under construction Other
2008 Freehold land and buildings Leasehold buildings Network equipment Support equipment Furniture and office equipment Data processing equipment and software Under construction Other
2007 Freehold land and buildings Leasehold buildings Network equipment Support equipment Furniture and office equipment Data processing equipment and software Under construction Other
Carrying value at beginning of year Rm
Additions Rm
Transfers Rm
Write-offs and reversals Rm
2,593 186 25,586 1,486 107
258 2 2,830 127 7
81 – 2,292 118 8
(5) – (141) (12) –
(2) – (71) – –
(167) (24) (2,528) (282) (21)
2,758 164 27,968 1,437 101
1,848 3,362 105
145 2,281 216
63 (2,627) 14
(4) (109) (1)
– – –
(320) – (56)
1,732 2,907 278
35,273
5,866
(51)
(272)
(73)
(3,398)
37,345
2,552 197 24,006 1,375 109
198 7 2,693 257 26
22 30 1,308 117 1
(3) – (96) (7) –
(8) – (88) – –
(168) (48) (2,237) (256) (29)
2,593 186 25,586 1,486 107
1,736 2,530 109
268 2,588 7
161 (1,725) 10
(14) (31) –
– – –
(303) – (21)
1,848 3,362 105
32,614
6,044
(76)
(151)
(96)
(3,062)
35,273
2,610 240 23,253 1,134 104
102 – 2,599 352 11
(8) – 847 105 5
17 – (190) (13) –
– (14) (240) – –
(169) (29) (2,263) (203) (11)
2,552 197 24,006 1,375 109
1,779 1,316 52
303 2,163 16
(48) (912) 72
(9) (37) (1)
– – –
(289) – (30)
1,736 2,530 109
30,488
5,546
61
(233)
(254)
(2,994)
32,614
Disposals Depreciation Rm Rm
Carrying value at end of year Rm
Full details of land and buildings are available for inspection at the registered offices of the Company. The Company does not have temporarily idle property, plant and equipment. A major portion of this capital expenditure relates to the expansion of existing networks and services. An extensive build programme that provides capacity for growth in services, with focus on the Next Generation Network technologies, has resulted in an increase in property, plant and equipment additions which is expected to continue over the next few years. Included in the current year’s additions in the other category is an amount of R179 million (2008: R31 million; 2007: RNil) that relates to finance leases. An amount of R71 million (2008: R88 million; 2007: R240 million) under property, plant and equipment disposals relates to the reclassification of Customer Premises Equipment at the start of the lease. These disposals are as a result of the Company entering into a leasing arrangement.
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Notes to the annual financial statements
273
(continued)
for the three years ended March 31, 2009
2007
10.
2009
2008 Accumulated
Carrying
Accumulated
Carrying
Cost
amortisation
value
Cost amortisation
value
Rm
Rm
Rm
Rm
Rm
Rm
Rm
(52) (2,913)
– 2,393
197 6,239
(59) (3,312)
138 2,927
457 7,031
(203) (3,785)
254 3,246
1,109
–
1,109
741
–
741
488
–
488
6,467
(2,965)
3,502
7,177
(3,371)
3,806
7,976
(3,988)
3,988
Accumulated
Carrying
Cost
amortisation
value
Rm
Rm
52 5,306
INTANGIBLE ASSETS Trademarks, copyrights and FIFA brand Software Under construction
The carrying amounts of intangible assets can be reconciled as follows: Carrying value at beginning of year Additions Transfers
Write-offs
Disposals Amortisation
Carrying value at end of year
Rm
Rm
Rm
Rm
Rm
Rm
Rm
138 2,927 741
260 207 357
– 607 (555)
– (1) (55)
– – –
(144) (494) –
254 3,246 488
3,806
824
52
(56)
–
(638)
3,988
2008 Trademarks and copyrights Software
– 2,393
144 250
– 688
– (2)
– –
(6) (402)
138 2,927
Under construction
1,109
353
(612)
(109)
–
–
741
3,502
747
76
(111)
–
(408)
3,806
2007 Software
1,804
323
575
(4)
–
(305)
2,393
Under construction
1,063
729
(636)
(47)
–
–
1,109
2,867
1,052
(61)
(51)
–
(305)
3,502
2009 Trademarks, copyrights and FIFA brand Software Under construction
There are no intangible assets whose title is restricted, or that have been pledged as security for liabilities at March 31, 2009. Intangible assets that are material to the Company consist of Software, Copyrights and Trademarks whose average remaining amortisation period is 5.6 years (2008: 5.9 years; 2007: 6.58 years). No intangible asset has been assessed as having an indefinite useful life.
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Telkom Annual Report 2009
Notes to the annual financial statements
(continued)
for the three years ended March 31, 2009
11.
2007
2008
2009
Rm
Rm
Rm
INVESTMENTS
887
3,883
7,693
Special purpose entity – cell captive Cost Subsidiaries
535 352
535 3,348
535 7,158
167
167
167
25 – –
25 – –
– – –
–
–
–
10 –
10 –
10 –
10 30 (40)
10 26 (36)
10 22 (32)
Telkom Media (Proprietary) Limited**
–
109
–
75% shareholding at cost (R2,868) Loan Impairment of loan
– – –
– 326 (217)
– – –
Africa Online Limited
150
212
275
100% shareholding at cost Impairment of investment Loan
150 – –
150 (12) 74
150 (97) 222
Multi-Links Telecommunications Limited*
–
840
5,595
25% shareholding at cost Impairment of investment Loan
– – –
– – 840
1,339 (969) 5,225
Telkom Communications International (Proprietary) Limited 100% shareholding at cost (R12) Telkom International (Proprietary) Limited*
– –
– 1,985
– 1,111
– – –
– 1,985 –
– 1,985 (874)
–
–
–
Trudon (formerly TDS Directory Operations) (Proprietary) Limited 64.90% shareholding at cost Swiftnet (Proprietary) Limited** 100% shareholding at cost Rossal No 65 (Proprietary) Limited 100% shareholding at cost (R100) Acajou Investments (Proprietary) Limited 100% shareholding at cost (R100) Intekom (Proprietary) Limited 100% shareholding at cost Q-Trunk (Proprietary) Limited 100% shareholding at cost Loan Impairment
100% shareholding at cost (R100) Loan Impairment of loan Available-for-sale Unlisted investment Rascom 0.69% (2008: 0.69%; 2007: 0.69%) interest in Regional African Satellite Communications Organisation, headquartered in Abidjan, Ivory Coast, at cost
Cost 1 1 1 Impairment (1) (1) (1) Incorporation The subsidiaries and joint venture are all incorporated in the Republic of South Africa, with the exception of Telkom Communications International (Proprietary) Limited and Africa Online Limited that are incorporated in the Republic of Mauritius, and Multi-Links Telecommunications (Proprietary) Limited, which is incorporated in Nigeria. * The 75% shareholding in Multi-Links Telecommunications Limited is an indirect investment through Telkom International (Proprietary) Limited. ** The investments Swiftnet (Proprietary) Limited and Telkom Media (Proprietary) Limited are both classified as assets held for sale in the 2009 financial year in terms of IFRS5. (Refer to note 16.)
The aggregate directors’ valuation of the above investments is R321 million (2008: R7,658 million; 2007: R6,690 million) based on net asset values.
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Telkom Annual Report 2009
Notes to the annual financial statements
275
(continued)
for the three years ended March 31, 2009
12.
FINANCIAL INSTRUMENTS AND RISK MANAGEMENT Risk management Exposure to continuously changing market conditions has made management of financial risk critical for the Company. Treasury policies, risk limits and control procedures are continuously monitored by the Board of Directors through its audit and risk committee. The Company holds or issues financial instruments to finance its operations, for the temporary investment of short-term funds and to manage currency and interest rate risks. In addition, financial instruments such as trade receivables and payables arise directly from the Company’s operations. The Company finances its operations primarily by a mixture of issued share capital, retained earnings, long-term and short-term loans. The Company uses derivative financial instruments to manage its exposure to market risks from changes in interest and foreign exchange rates. The derivatives used for this purpose are principally interest rate swaps and forward exchange contracts. The Company does not speculate in derivative instruments. The table below sets out the classification of financial assets and liabilities: At fair value through
Financial
profit
liabilities
or loss
at
Loans
Available
Total
held for amortised
Held-to-
and
for
carrying
Fair
trading
cost
maturity receivables
sale
value
value
Rm
Rm
Rm
Rm
Rm
Rm
Rm
154
–
1,044
15,062
34
16,294
16,460
17
–
–
–
6,153
–
6,153
6,153
Investments
11
–
–
–
7,693
–
7,693
7,693
Finance lease receivable
13
–
–
–
275
–
275
275
16
–
–
–
–
34
34
200
154
–
1,044
–
–
1,198
1,198
–
–
1,044
–
–
1,044
1,044
Notes Classes of financial instruments per balance sheet 2009 Assets Trade and other receivables*
Assets held for sale and discontinued operations Other financial assets Repurchase agreements
18
Interest rate swaps
18
4
–
–
–
–
4
4
Forward exchange contracts
18
150
–
–
–
–
150
150
19
–
–
–
941
–
941
941
(225)
(23,257)
–
–
–
(23,482)
(24,555)
Cash and cash equivalents Liabilities Interest-bearing debt
23
–
(17,704)
–
–
–
(17,704)
(18,777)
Trade and other payables
27
–
(5,424)
–
–
–
(5,424)
(5,424)
Shareholders for dividend
32
–
(23)
–
–
–
(23)
(23)
Credit facilities utilised
19
–
(106)
–
–
–
(106)
(106)
(225)
–
–
–
–
(225)
(225)
Other financial liabilities Interest rate swaps
18
(72)
–
–
–
–
(72)
(72)
Forward exchange contracts
18
(153)
–
–
–
–
(153)
(153)
(71)
(23,257)
1,044
15,062
34
(7,188)
(8,095)
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Notes to the annual financial statements
(continued)
for the three years ended March 31, 2009
12.
FINANCIAL INSTRUMENTS AND RISK MANAGEMENT (continued) At fair value through Financial profit or liabilities at loss held amortised for trading cost Notes Rm Rm Classes of financial instruments per balance sheet 2008 Assets
Held-to- Loans and maturity receivables Rm Rm
Available for sale Rm
Total carrying value Rm
Fair value Rm
443
–
–
11,224
–
11,667
11,667
Trade and other receivables* Investments Finance lease receivable Other financial assets
17 11 13
– – – 443
– – – –
– – – –
6,593 3,883 265 –
– – – –
6,593 3,883 265 443
6,593 3,883 265 443
Forward exchange contracts
18
443
–
–
–
–
443
443
19
–
–
–
483
–
483
483
(168)
(18,346)
–
–
–
(18,514)
(19,029)
23 27 32 19
– – – – (168)
(13,362) (4,923) (20) (41) –
– – – – –
– – – – –
– – – – –
(13,362) (4,923) (20) (41) (168)
(13,877) (4,923) (20) (41) (168)
18
(168)
–
–
–
–
(168)
(168)
275
(18,346)
–
11,224
–
(6,847)
(7,362)
229
–
–
7,025
–
7,254
7,254
Cash and cash equivalents Liabilities Interest bearing debt Trade and other payables Shareholders for dividend Credit facilities utilised Other financial liabilities Forward exchange contracts
Classes of financial instruments per balance sheet 2007 Assets Trade and other receivables* Investments Finance lease receivable Other financial assets
17 11 13
– – – 229
– – – –
– – – –
5,755 887 207 –
– – – –
5,755 887 207 229
5,755 887 207 229
Bills of exchange Forward exchange contracts
18 18
98 131
– –
– –
– –
– –
98 131
98 131
19
–
–
–
176
–
176
176
(155)
(13,333)
–
–
–
(13,488)
(14,849)
23 27 32 19
(98) – – – (57)
(8,985) (4,333) (15) – –
– – – – –
– – – – –
– – – – –
(9,083) (4,333) (15) – (57)
(10,444) (4,333) (15) – (57)
18 18
(26) (31)
– –
– –
– –
– –
(26) (31)
(26) (31)
74
(13,333)
–
7,025
–
(6,234)
(7,595)
Cash and cash equivalents Liabilities Interest bearing debt Trade and other payables Shareholders for dividend Credit facilities utilised Other financial liabilities Interest rate swaps Forward exchange contracts
* Trade and other receivables are disclosed net of prepayments of R267 million (2008: R266 million; 2007: R165 million).
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277
Telkom Annual Report 2009
Notes to the annual financial statements
(continued)
for the three years ended March 31, 2009
12.
FINANCIAL INSTRUMENTS AND RISK MANAGEMENT (continued)
12.1. Fair value of financial instruments Carrying value of all financial instruments noted in the balance sheet approximates fair value except as disclosed below. The estimated net fair values as at March 31, 2009, have been determined using available market information and appropriate valuation methodologies as outlined below. This value is not necessarily indicative of the amounts that the Company could realise in the normal course of business. Derivatives are recognised at fair value. The fair values of derivatives are determined using quoted prices or, where such prices are not available, discounted cash flow analysis is used. These amounts reflect the approximate values of the net derivative position at the balance sheet date. The carrying value of receivables, bank balances, repurchase agreements and other liquid funds, payables and accruals, approximate their fair value due to the short-term maturities of these instruments. The fair values of the borrowings disclosed above are based on quoted prices or, where such prices are not available, the expected future payments discounted at market interest rates, as a result they differ from carrying values. The fair values of listed investments are based on quoted market prices. 12.2
Interest rate risk management Interest rate risk arises from the repricing of the Company’s forward cover and floating rate debt as well as incremental funding or new borrowings and the refinancing of existing borrowings. The Company’s policy is to manage interest cost through the utilisation of a mix of fixed and floating rate debt. In order to manage this mix in a cost efficient manner and to hedge specific exposure in the interest rate repricing profile of the existing borrowings and anticipated peak additional borrowings, the Company makes use of interest rate derivatives as approved in terms of the Company policy limits. Fixed rate debt represents approximately 64.86% (2008: 57.03%; 2007: 98.83%) of the total debt. The debt profile of mainly fixed rate debt has been maintained to limit the Company’s exposure to interest rate increases given the size of the Company’s debt portfolio. There were no changes in the policies and processes for managing and measuring the risk from the previous period. The table below summarises the interest rate swaps outstanding as at March 31: Weighted average Average
Notional
coupon
amount
rate
maturity
Currency
Rm
%
2-5 years
ZAR
2,000
10.84
–
–
–
–
< 1 year
ZAR
1,000
14.67
2009 Interest rate swaps outstanding Pay fixed 2008 Interest rate swaps outstanding Pay fixed 2007 Interest rate swaps outstanding Pay fixed Pay fixed The floating rate is based on the three months JIBAR, and is settled quarterly in arrears. The interest rate swaps are used to manage interest rate risk on debt instruments.
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Notes to the annual financial statements
(continued)
for the three years ended March 31, 2009
12.
FINANCIAL INSTRUMENTS AND RISK MANAGEMENT (continued)
12.3. Credit risk management Credit risk is the risk due to uncertainty in a counterparty’s ability to meet its obligations as they fall due. Credit risk arises from derivative contracts entered into with financial institutions with a rating of A1 or better. The Company is not exposed to significant concentrations of credit risk. Credit limits are set on an individual basis. The maximum exposure to the Company from counterparties in respect of derivative contracts is a net favourable position of R29 million (2008: R289 million; 2007: R103 million). No collateral is required when entering into derivative contracts. Credit limits are reviewed on an annual basis or when information becomes available in the market. The Company limits the exposure to any counterparty and exposures are monitored daily. The Company expects that all counterparties will meet their obligations. With regard to credit risk arising from other financial assets of the Company, which comprises held-to-maturity investments, financial assets held at fair value through profit or loss, loans and receivables and available-for-sale assets (other than equity investments), the Company’s exposure to credit risk arises from a potential default by a counterparty, with a maximum exposure equal to the carrying amount of these instruments. The Company’s exposure to credit risk is influenced mainly by the individual characteristics of each type of customer. Management reduces the risk of irrecoverable debt by improving credit management through credit checks and limits. To reduce the risk of counterparty failure, limits are set based on the individual ratings of counterparties by well-known ratings agencies. Trade receivables comprise a large widespread customer base, covering residential, business, government, wholesale, global and corporate customer profiles. Credit checks are performed on all customers, other than prepaid customers, on application for new services on an ongoing basis where appropriate. The Company establishes an allowance for impairment that represents its estimate of incurred losses in respect of trade and other receivables. The collective loss allowance is determined based on historical data of payment statistics for similar financial assets as well as expected future cash flows. Refer to note 17. The Company has provided a financial guarantee to Africa Online Limited for bank loans. At March 31, 2009 there was R26 million (2008: R23 million; 2007: RNil) outstanding. Telkom guarantees a certain portion of employees’ housing loans. The amount guaranteed differs depending on facts 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 payout can be made to the employee. The Company recognises a provision when it becomes probable that a guarantee will be called. There is no provision outstanding in respect of these contingencies. The maximum amount of the guarantee in the event of the default is R12 million. The fair value of the guarantee at March 31, 2009 was RNil (2008: RNil; 2007: RNil). Given the deterioration of credit markets, stricter objectives, policies and processes were applied for managing and measuring the risk than in the previous period.
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Telkom Annual Report 2009
Notes to the annual financial statements
279
(continued)
for the three years ended March 31, 2009
12. 12.3
FINANCIAL INSTRUMENTS AND RISK MANAGEMENT (continued) Credit risk management (continued) The maximum exposure to credit risk for financial assets at the reporting date by type of customer was: Carrying amount 2007
2008
2009
Rm
Rm
Rm
3,831
4,316
4,239
Business and residential
1,924
1,824
1,870
Global, corporate and wholesale
1,701
1,950
1,921
318
368
444
41
334
209
(153)
(160)
(205)
Trade receivables
Government Other Impairment of trade receivables
229
443
154
–
3,008
6,558
1,924
2,277
1,914
5,984
10,044
12,865
2007
2008
2009
Rm
Rm
Rm
3,250
3,654
3,361
21 to 60 days
290
320
379
61 to 90 days
70
83
92
91 to 120 days
41
55
62
180
204
345
3,831
4,316
4,239
Current defaulted
24
26
23
21 to 60 days
21
25
29
61 to 90 days
14
23
18
Derivatives Loans receivable Other receivables*
* Excluding prepayments.
The ageing of trade receivables at the reporting date was:
Not past due/current Ageing of past due but not impaired
120+ days
The ageing in the allowance for the impairment of trade receivables at reporting date was: Ageing of impaired trade receivables:
91 to 120 days 120+ days
13
16
28
81
70
107
153
160
205
The movement in the allowance for impairment in respect of trade receivables during the year is disclosed in note 17. Included in the allowance for doubtful debts are individually impaired receivables with a balance of R49 million (2008: R32 million; 2007: R49 million) which have been identified as being unable to service their debt obligation. The impairment recognised represents the difference between the carrying amount of these trade receivables and the present value of the expected liquidation proceeds. The Company does not hold any collateral over these balances. During the 2009 year end the Company renegotiated the terms of trade receivables amounting to R1.9 million from a long outstanding customer. No impairment losses were recognised.
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Notes to the annual financial statements
(continued)
for the three years ended March 31, 2009
12.
FINANCIAL INSTRUMENTS AND RISK MANAGEMENT (continued)
12.4. Liquidity risk management Liquidity risk is the risk that the Company will not be able to meet its financial obligations as they fall due. The Company is exposed to liquidity risk as a result of uncertain cash flows as well as capital commitments of the Company. Liquidity risk is managed by Telkom’s Corporate Finance division in accordance with policies and guidelines formulated by Telkom’s executive committee. In terms of its borrowing requirements the Company ensures that sufficient facilities exist to meet its immediate obligations. In terms of its long-term liquidity risk, the Company maintains a reasonable balance between the period over which assets generate funds and the period over which the respective assets are funded. Short-term liquidity gaps may be funded through repurchase agreements and commercial paper bills. There were no material changes in the exposure to liquidity risk and its objectives, policies and processes for managing and measuring the risk during the 2009 financial year. The table below summarises the maturity profile of the Company’s financial liabilities based on undiscounted contractual cash flow at the balance sheet date: Contractual Carrying
cash
<6
6 – 12
1–2
2–5
amount
flows
months
months
years
years
> 5 years
Notes
Rm
Rm
Rm
Rm
Rm
Rm
Rm
finance leases)
23
16,720
18,297
5,059
2,500
1,815
5,167
3,756
Credit facilities utilised
19
106
106
106
–
–
–
–
Trade and other payables
27
5,424
5,528
5,399
129
–
–
–
Finance lease liabilities
34
984
1,846
82
82
171
516
995
18
225
235
147
6
82
–
–
2009 Non-derivative financial liabilities Interest-bearing debt (excluding
Derivative financial liabilities Other financial liabilities Interest rate swaps Forward exchange contracts
72
82
–
–
82
–
–
153
153
147
6
–
–
–
23,459
26,012
10,793
2,717
2,068
5,683
4,751
2,598
2008 Non-derivative financial liabilities Interest-bearing debt (excluding finance leases)
23
12,505
14,403
4,882
1,200
3,900
1,823
Credit facilities utilised
19
41
41
41
–
–
–
–
Trade and other payables
27
4,923
4,923
4,609
314
–
–
–
Finance lease liabilities
34
857
1,794
64
62
123
395
1,150
18
168
168
83
85
–
–
–
18,494
21,329
9,679
1,661
4,023
2,218
3,748
Derivative financial liabilities Other financial liabilities Forward exchange contracts
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Telkom Annual Report 2009
Notes to the annual financial statements
281
(continued)
for the three years ended March 31, 2009
12.
FINANCIAL INSTRUMENTS AND RISK MANAGEMENT (continued)
12.4. Liquidity risk management (continued) Contractual Carrying
cash
<6
6 – 12
1–2
2–5
amount
flows
months
months
years
years
> 5 years
Notes
Rm
Rm
Rm
Rm
Rm
Rm
Rm
finance leases)
23
8,231
10,416
1,350
4,680
–
1,806
2,580
Trade and other payables
27
4,333
4,333
3,887
446
–
–
–
Finance lease liabilities
34
852
1,903
59
61
137
356
1,290
18
57
57
51
6
–
–
–
Interest rate swaps
26
26
26
–
–
–
–
Forward exchange contracts
31
31
25
6
–
–
–
13,473
16,709
5,347
5,193
137
2,162
3,870
2007 Non-derivative financial liabilities Interest-bearing debt (excluding
Derivative financial liabilities Other financial liabilities
12.5. Foreign currency exchange rate risk management The Company manages its foreign currency exchange rate risk by economically hedging all identifiable exposures via various financial instruments suitable to the Company’s risk exposure. Forward exchange contracts have been entered into to reduce the foreign currency exposure on the Company’s operations and liabilities. The Company also enters into foreign forward exchange contracts to economically hedge interest expense and purchase and sale commitments denominated in foreign currencies (primarily United States dollars and euros). The purpose of the Company’s foreign currency hedging activities is to protect the Company from the risk that the eventual net cash flows will be adversely affected by changes in exchange rates. There were no changes in the exposure to foreign currency exchange rate risk and its objectives, policies and processes for managing and measuring the risk from the previous period.
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Notes to the annual financial statements
(continued)
for the three years ended March 31, 2009
12.
FINANCIAL INSTRUMENTS AND RISK MANAGEMENT (continued)
12.5. Foreign currency exchange rate risk management (continued) The following table details the foreign forward exchange contracts outstanding at year end: Foreign contract
Forward
amount
amount
Fair value
m
Rm
Rm
US$
155
1,477
14
Euro
92
1,205
(24)
Other
36
69
(3)
To buy 2009 Currency
2,751 2008 Currency US$
123
915
107
Euro
173
1,923
319
40
166
17
Other
3,004 2007 Currency US$
165
1,209
2
Euro
102
991
12
68
80
2
Other
2,280 To sell 2009 Currency US$
99
947
(22)
Euro
35
485
28
Other
21
43
4
1,475 2008 Currency US$
78
593
(67)
Euro
69
803
(98)
Other
22
105
(2)
1,501 2007 Currency US$
122
994
88
Euro
50
483
(5)
Other
31
40
1
1,517
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Telkom Annual Report 2009
Notes to the annual financial statements
283
(continued)
for the three years ended March 31, 2009
12.
FINANCIAL INSTRUMENTS AND RISK MANAGEMENT (continued)
12.5. Foreign currency exchange rate risk management (continued) The Company has various monetary assets and liabilities in currencies other than the Company’s functional currency. The following table represents the net currency exposure (net carrying amount of foreign denominated monetary assets and liabilities) of the Company according to the different foreign currencies. United States Euro
Dollar
Other
Rm
Rm
Rm
203
6,097
19
219
1,117
51
282
90
70
2009 Net foreign currency monetary assets/(liabilities) Functional currency of company operation South African rand 2008 Net foreign currency monetary assets/(liabilities) Functional currency of company operation South African rand 2007 Net foreign currency monetary assets/(liabilities) Functional currency of company operation South African rand Currency swaps There were no currency swaps in place at March 31, 2009, 2008 and 2007.
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Telkom Annual Report 2009
Notes to the annual financial statements
(continued)
for the three years ended March 31, 2009
12. 12.6
FINANCIAL INSTRUMENTS AND RISK MANAGEMENT (continued) Sensitivity analysis Interest rate risk The following table illustrates the sensitivity to a reasonably possible change in the interest rates, with all other variables held constant: +1% movement
–1% movement Other
Other
movements
movements
Profit
in equity
Profit
in equity
Rm
Rm
Rm
Rm
–
Classes of financial instruments per balance sheet 2009 Assets 5
–
(5)
Investments
56
–
(56)
Other financial assets
28
–
(28)
–
Trade and other receivables
Repurchase agreements
10
–
(10)
–
Interest rate swaps
18
–
(18)
–
Liabilities Interest-bearing debt
(62)
Other financial liabilities
15
–
(15)
–
15
–
(15)
–
42
–
(42)
–
Trade and other receivables
5
–
(5)
–
Investments
9
–
(9)
–
(57)
–
57
–
(43)
–
43
–
Interest rate swaps
62
2008 Assets
Liabilities Interest-bearing debt
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Telkom Annual Report 2009
Notes to the annual financial statements
285
(continued)
for the three years ended March 31, 2009
12. 12.6
FINANCIAL INSTRUMENTS AND RISK MANAGEMENT (continued) Sensitivity analysis (continued) Interest rate risk (continued) +1% movement
–1% movement Other
Other
movements
movements
Profit
in equity
Profit
in equity
Rm
Rm
Rm
Rm
4
–
(4)
–
2007 Assets Trade and other receivables Liabilities Interest-bearing debt
1
–
–
–
Other financial liabilities
2
–
(2)
–
2
–
(2)
–
7
–
(6)
–
Interest rate swaps
Foreign exchange currency risk The following table illustrates the sensitivity to a reasonably possible change in the exchange rates, with all other variables held constant. +10% movement
–10% movement
(depreciation)
(appreciation) Other
Other
movements
movements
Profit
in equity
Profit
in equity
Rm
Rm
Rm
Rm
–
Classes of financial instruments per balance sheet 2009 Assets Trade and other receivables Investments Other financial assets Forward exchange contract
40
–
(40)
545
–
(545)
–
1
–
(1)
–
1
–
(1)
Liabilities Interest-bearing debt
(14)
–
14
–
Trade and other payables
(60)
–
60
–
128
–
(128)
–
128
–
(128)
–
640
–
(640)
–
Other financial liabilities Forward exchange contract
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Telkom Annual Report 2009
Notes to the annual financial statements
(continued)
for the three years ended March 31, 2009
12. 12.6
FINANCIAL INSTRUMENTS AND RISK MANAGEMENT (continued) Sensitivity analysis (continued) Foreign exchange currency risk (continued) +10% movement
–10% movement
(depreciation)
(appreciation) Other
Other
movements
movements
Profit
in equity
Profit
in equity
Rm
Rm
Rm
Rm
Trade and other receivables
10
–
(10)
–
Investments
91
–
(91)
–
331
–
(331)
–
331
–
(331)
–
Interest-bearing debt
(10)
–
10
–
Trade and other payables
(95)
–
95
–
(153)
–
153
–
174
–
(174)
–
Trade and other receivables
10
–
(10)
–
Other financial assets
74
–
(74)
–
74
–
(74)
–
2008 Assets
Other financial assets Forward exchange contract Liabilities
Other financial liabilities Forward exchange contract
2007 Assets
Forward exchange contract Liabilities Interest-bearing debt
(10)
–
10
–
Trade and other payables
(40)
–
40
–
Other financial liabilities
11
–
(11)
–
11
–
(11)
–
45
–
(45)
–
Forward exchange contract
2007
2008
2009
R
R
R
12.7. Exchange rate table (closing rate) United States dollar
7.248
8.132
9.484
Euro
9.649
12.854
12.617 13.555
Pound Sterling
14.189
16.166
Swedish krona
1.033
1.370
1.153
Japanese yen
0.061
0.082
0.097
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Notes to the annual financial statements
287
(continued)
for the three years ended March 31, 2009
12.
FINANCIAL INSTRUMENTS AND RISK MANAGEMENT (continued)
12.8. Capital management The Board’s policy is to maintain a strong capital base so as to sustain investor, creditor, market confidence and future development of the business. Capital comprises equity attributable to equity holders of the Company. The Company monitors capital using net debt to EBITDA ratio. The Company’s policy is to keep the net debt to EBITDA ratio of between 1 and 2 times. Included in net debt are interest-bearing debts, credit facilities and other financial liabilities, less cash and cash equivalents and other financial assets. Telkom plans on continuing its share buy-back strategy based on certain criteria, including market conditions, availability of cash and other investment opportunities and needs. All of Telkom’s issued and outstanding ordinary shares, including the class A ordinary share and the class B ordinary share, rank equal for dividends. No dividend may be declared to a holder of the class A ordinary share or class B ordinary share, unless the same dividend is declared to holders of all ordinary shares. Telkom’s current dividend policy aims to provide shareholders with a competitive return on their investment, while assuring sufficient reinvestment of profits to enable us to achieve our strategy. Telkom may revise its dividend policy from time to time. The determination to pay dividends, and the amount of the dividends, will depend upon, among other things, the earnings, financial position, capital requirements, general business conditions, cash flows, net debt levels and share buy-back plans. The Company has access to financing facilities, the total unused amount of which is R6,226 million at the balance sheet date. There were no changes in the Company’s approach to capital management during the year. The Company is not subject to externally imposed capital requirements. The net debt to EBITDA ratio is as follows: 2007
2008
2009
Rm
Rm
Rm
Non-current portion of interest-bearing debt
3,308
7,336
10,193
Current portion of interest -bearing debt
5,775
6,026
7,511
57
168
225
(176)
(483)
(941)
Plus: Credit facilities utilised
–
41
106
Less: Other financial assets
(229)
(443)
(1,198)
8,735
12,645
15,896
12,489
11,848
8,704
0.70
1.07
1.83
Other financial liabilities Less: Cash and cash equivalents
Net debt EBITDA Net debt to EBITDA ratio
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Notes to the annual financial statements
(continued)
for the three years ended March 31, 2009
13.
FINANCE LEASE RECEIVABLES The Company provides voice and non-voice services to its customers, which make use of router and PABX equipment that is dedicated to specific customers. The disclosed information relates to certain customer arrangements which were assessed to be finance leases in terms of IAS17. Total
< 1 year
1 – 5 years
> 5 years
Rm
Rm
Rm
Rm
Lease payments receivable
360
142
219
–
Unearned finance income
(85)
(33)
(53)
–
Present value of minimum lease payments
275
109
166
–
Lease receivables
275
109
166
–
345
135
210
–
(80)
(30)
(50)
–
Present value of minimum lease payments
265
105
160
–
Lease receivables
265
105
160
–
273
92
181
–
(66)
(21)
(45)
–
Present value of minimum lease payments
207
71
136
–
Lease receivables
207
71
136
–
2009 Minimum lease payments
2008 Minimum lease payments Lease payments receivable Unearned finance income
2007 Minimum lease payments Lease payments receivable Unearned finance income
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Notes to the annual financial statements
289
(continued)
for the three years ended March 31, 2009
14.
2007
2008
2009
Rm
Rm
Rm
DEFERRED TAXATION
(990)
(1,347)
(198)
Opening balance
(469)
(990)
(1,347)
Income statement movements
(521)
(357)
1,149
Temporary differences
(520)
(412)
1,255
Capital allowances
(467)
(446)
(310)
(94)
191
199
–
–
1,279
41
(157)
87
(1)
–
(106)
–
55
–
(990)
(1,347)
(198)
Capital allowances
(2,527)
(2,870)
(3,181)
Provisions and other allowances
1,197
1,340
1,434
–
–
1,279
STC taxation credits
340
183
270
Deferred taxation balance is made up as follows:
(990)
(1,347)
(198)
Provisions and other allowances Capital gains taxation asset Secondary taxation credits raised/(utilised) Underprovision prior year Change in taxation rate The balance comprises:
Capital gains taxation asset
340
183
1,549
Deferred taxation liabilities
(1,330)
(1,530)
(1,747)
Unutilised STC credits
2,718
1,830
2,700
Deferred taxation assets
Secondary taxation on companies (STC) is provided for at a rate of 10% on the amount by which dividends declared by the Company exceeds dividends received. The deferred taxation asset is raised as it is probable that it will be utilised in future. The asset will be released as a taxation expense when dividends are declared. The deferred taxation asset represents STC credits on past dividends received that are available to be utilised against dividends declared. The deferred taxation asset also includes deferred tax on capital gains tax (CGT) base cost of the Vodacom Group (Proprietary) Limited and Swiftnet (Proprietary) Limited (Swiftnet) investments that will be utilised against the future CGT liability on the Vodacom and Swiftnet transactions. It is considered probable that these credits will be utilised in the future. The asset will be released as a taxation expense when dividends are declared and when the CGT liability arises. The deferred taxation liability increased mainly due to the increase in the difference between the carrying value and taxation value of assets, as a result of the change in the estimate of useful lives of assets.
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Notes to the annual financial statements
(continued)
for the three years ended March 31, 2009
15.
2007
2008
2009
Rm
Rm
Rm
INVENTORIES
839
873
1,331
Gross inventories
972
1,072
1,522
Write-down of inventories to net realisable value
(133)
(199)
(191)
Inventories consist of the following categories:
839
873
1,331
771
827
1,048
68
46
284
133
199
191
Installation material, maintenance material and network equipment Merchandise Write-down of inventories to net realisable value Opening balance Charged to selling, general and administrative expenses Inventories written-off
63
133
199
152
164
167
(82)
(98)
(174)
Inventory levels as at March 31, 2009, 2008 and 2007 have increased due to the accelerated roll-out of the Next Generation Network required to improve customer service, and the acquisition of merchandise for the W-CDMA roll-out.
16. 16.1
ASSETS HELD FOR SALE AND DISCONTINUED OPERATIONS
34
Assets held for sale
34
Joint venture Vodacom Group (Proprietary) Limited (Vodacom)
–
50% shareholding at cost (R50) In the current financial year the Company announced a decision to dispose of its entire shareholding in Vodacom through selling 15% of its shareholding to Vodafone, a wholly owned subsidiary of Vodafone Group Plc and unbundling its remaining 35% stake to its shareholders pursuant to a listing of Vodacom on the main board of the JSE Limited. The decision was taken in line with the Company’s strategy to unlock shareholder value. This investment is reclassified as held-for-sale in terms of IFRS5 as all the requirements for being classified as held-for-sale are met. Subsidiary Swiftnet (Proprietary) Limited (Swiftnet)
34
100% shareholding at cost
25
Loan
9
In February 2009, Telkom’s management took a decision to dispose of its 100% investment in Swiftnet, trading under the name Fastnet Wireless Services. Swiftnet has been classified as held for sale as all criteria for this classification have been met.
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Notes to the annual financial statements
291
(continued)
for the three years ended March 31, 2009
16.
ASSETS HELD FOR SALE AND DISCONTINUED OPERATIONS (continued)
16.2
Discontinued operations Subsidiary Telkom Media (Proprietary) Limited On August 31, 2006, Telkom created a new subsidiary, Telkom Media (Proprietary) Limited with a black economic empowerment (BEE) shareholding. ICASA awarded Telkom Media a commercial satellite and cable subscription broadcast licence on September 12, 2007. On March 31, 2008, the Telkom Board took a decision to substantially reduce its investment in Telkom Media and as such Telkom Media reduced its operational expenses and commitments to a minimum. Telkom Media was classified as held for sale in September 2008 interim financial statements. At year end the investment did not meet the held for sale criteria as management was unable to sell the investment for its expected price and therefore decided to abandon it.
17.
TRADE AND OTHER RECEIVABLES
2007 Rm
2008 Rm
2009 Rm
5,920
6,859
6,420
3,831
4,316
4,239
3,984 (153)
4,476 (160)
4,444 (205)
2,089
2,543
2,181
153
160
205
184 137 (168)
153 217 (210)
160 285 (240)
229
443
1,198
Held-to-maturity Repurchase agreements At fair value through profit or loss
– 229
– 443
1,044 154
Bills of exchange Derivative instruments (refer to note 12)
98 131
– 443
– 154
(57)
(168)
(225)
Trade receivables Gross trade receivables Impairment of receivables Prepayments and other receivables Impairment allowance account for receivables Opening balance Charged to selling, general and administrative expenses Receivables written-off Refer to note 12 for detailed credit risk analysis.
18.
OTHER FINANCIAL ASSETS AND LIABILITIES Other financial assets consist of:
Repurchase agreements The Company manages a portfolio of repurchase agreements in the South African capital and money markets, with a view to generating additional investment income on the favourable interest rates provided on these transactions. Interest received from the borrower is based on the current market related yield. There were no repurchase agreements held at March 31, 2008 and 2007. Bills of exchange The fair value of bills of exchange has been calculated with reference to the Bond Exchange of South Africa quoted prices. Derivative instruments Derivative assets at fair value consists of interest rate swaps of R4 million (2008: RNil; 2007: RNil) and forward exchange contracts of R150 million (2008: R443 million; 2007: R131 million). Other financial liabilities consist of: At fair value through profit or loss Derivative instruments
Derivative liabilities at fair value consists of interest rate swaps of R72 million (2008: RNil; 2007: R26 million) and forward exchange contracts of R153 million (2008: R168 million; 2007: R31 million).
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Notes to the annual financial statements
(continued)
for the three years ended March 31, 2009
19.
2007
2008
2009
Rm
Rm
Rm
CASH AND CASH EQUIVALENTS Cash shown as current assets
176
483
941
76
83
601
100
400
340
–
(41)
(106)
Net cash and cash equivalents
176
442
835
Undrawn borrowing facilities
6,566
5,894
6,226
Cash and bank balances Short-term deposits Credit facilities utilised
The undrawn borrowing facilities are unsecured when drawn, bear interest at a rate that will be mutually agreed between the borrower and lender at the time of drawdown, have no specific maturity date, are subject to annual review and are in place to ensure liquidity. At March 31, 2009, R3,000 million of these undrawn facilities were committed. Borrowing powers To borrow money, Telkom’s directors may mortgage or encumber Telkom’s property or any part thereof and issue debentures, whether secured or unsecured, whether outright or as security for debt, liability or obligation of Telkom or any third party. For this purpose the borrowing powers of Telkom are unlimited, but are subject to restrictive financial covenants of the loan facility as indicated on note 23.
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293
Telkom Annual Report 2009
Notes to the annual financial statements
(continued)
for the three years ended March 31, 2009
20.
2007
2008
2009
Rm
Rm
Rm
SHARE CAPITAL Authorised and issued share capital and share premium are made up as follows: Authorised
10,000
10,000
10,000
999,999,998 ordinary shares of R10 each
10,000
10,000
10,000
1 class A ordinary share of R10
–
–
–
1 class B ordinary share of R10
–
–
–
5,329
5,208
5,208
Issued and fully paid 520,783,898 (2008: 520,784,184; 2007: 532,855,528)
5,329
5,208
5,208
1 (2008: 1; 2007: 1) class A ordinary share of R10
–
–
–
1 (2008: 1; 2007: 1) class B ordinary share of R10
–
–
–
Number of
Number of
Number of
shares
shares
shares
544,944,901
532,855,530
520,784,186
(12,089,371)
(12,071,344)
(286)
532,855,530
520,784,186
520,783,900
ordinary shares of R10 each
The following table illustrates the movement in the number of shares issued:
Shares in issue at beginning of year Shares bought back and cancelled Shares in issue at end of year
Full details of the voting rights of ordinary, class A and class B shares are documented in the articles of association of the Company. Share buy-back During the financial year Telkom bought back 286 ordinary shares at a total consideration of R30,425. The shares were bought back and cancelled in order to allow Telkom shareholders to participate in the proposed unbundling of Vodacom Group on a one to one basis. This reduced share capital by R2,860 and retained earnings by R27,565. During the year ended March 31, 2008 Telkom bought back 12,071,344 ordinary shares at a total consideration of R1,647 million. This reduced share capital by R121 million and retained earnings by R1,526 million. During the year ended March 31, 2007, Telkom bought back 12,089,371 ordinary shares at a total consideration of R1,596 million. This reduced share capital by R120 million, share premium by R1,342 million and retained earnings by R134 million. Capital management Refer to note 12 for detailed capital management disclosure.
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Notes to the annual financial statements
(continued)
for the three years ended March 31, 2009
21.
TREASURY SHARE RESERVE
2007
2008
2009
Rm
Rm
Rm
(1,778)
(1,642)
(1,521)
151 106
257 386
643 433
This reserve represents amounts paid by Telkom to Rossal No 65 (Proprietary) Limited and Acajou Investments (Proprietary) Limited, subsidiaries, for the acquisition of the Company’s shares to be utilised in terms of the Telkom Conditional Share Plan (TCSP). Treasury shares At March 31, 2009, 11,646,680 (2008: 10,493,141; 2007: 12,237,016) and 8,143,556 (2008: 10,849,058; 2007: 10,849,058) ordinary shares in Telkom, with a fair value of R1,229 million (2008: R1,377 million; 2007: R2,031 million) and R859 million (2008: R1,423 million; 2007: R1,801 million) are held as treasury shares by its subsidiaries Rossal No 65 (Proprietary) Limited and Acajou Investments (Proprietary) Limited, respectively. The shares held by Rossal No 65 (Proprietary) Limited and Acajou Investments (Proprietary) Limited are reserved for issue in terms of the TCSP. The decrease in the number of treasury shares is due to 1,552,029 (2008: 1,743,375; 2007: 450,505) shares that vested in terms of the TCSP during the current financial year. The fair value of these shares at the date of vesting was R228 million (2008: R301 million; 2007: R59 million).
22.
SHARE-BASED COMPENSATION RESERVE This reserve represents the cumulative grant fair value of the equitysettled share-based payment transactions recognised in employee expenses over the vesting period of the equity instruments granted to employees in terms of the Telkom Conditional Share Plan (refer to note 25). No consideration is payable on the shares issued to employees, but performance criteria will have to be met in order for the granted shares to vest. The ultimate number of shares that will vest may differ based on certain individual and Telkom performance conditions being met. The related compensation expense is recognised over the vesting period of the shares granted, commencing on the grant date. The following table illustrates the movement within the share-based compensation reserve: Balance at beginning of year Net increase in equity Employee cost Vesting and transfer of shares Balance at end of year
141
522
554
(35)
(136)
(121)
257
643
1,076
At March 31, 2009 the estimated total compensation expense to be recognised over the vesting period was R1,824 million (2008: R2,151 million; 2007: R580 million), of which R554 million (2008: R522 million; 2007: R141 million) was recognised in employee expenses for the year.
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Notes to the annual financial statements
295
(continued)
for the three years ended March 31, 2009
23.
2007
2008
2009
Rm
Rm
Rm
INTEREST-BEARING DEBT Non-current interest-bearing debt
3,308
7,336
10,193
Total interest-bearing debt (refer to note 12)
9,083
13,362
17,704
10,416
14,403
18,296
(2,185)
(1,898)
(1,576)
852
857
984
Less: Current portion of interest-bearing debt
(5,775)
(6,026)
(7,511)
Local debt
(5,771)
(6,000)
(7,476)
(4,432)
–
–
–
(2,600)
–
–
–
(2,000)
(1,339)
(3,400)
(5,476)
Gross interest-bearing debt Discount on debt instruments issued Finance leases
Locally registered Telkom debt instruments Call borrowings Term loans Commercial paper bills
–
–
–
(4)
(26)
(35)
Total interest-bearing debt is made up as follows:
9,083
13,362
17,704
(a) Local debt
8,125
12,365
16,582
Locally registered Telkom debt instruments
6,786
8,164
11,106
4,432
–
–
–
–
1,059
–
–
1,159
1,246
1,283
1,325
264
304
349
844
977
1,131
–
2,600
–
–
3,000
2,000
–
–
4,083
Foreign debt Finance leases
Name, maturity, rate p.a., nominal value TK01, 2008, 10%, RNil (2008: RNil; 2007: R4,680 million) TL12, 2012, 12.45%, R1,060 million (2008: RNil; 2007: RNil) TL15, 2015, 11.9%, R1,160 million (2008: RNil; 2007: RNil) TL20, 2020, 6%, R2,500 million (2008: R2,500 million; 2007: R2,500 million) PP02, 2010, 0%, R430 million (2008: R430 million; 2007: R430 million) PP03, 2010, 0%, R1,350 million (2008: R1,350 million; 2007: R1,350 million) Call borrowings, 2009, 11.58%, RNil (2008: R2,600 million; 2007: RNil) Term loans, 2010, 9.67%, R2,000 million (2008: R3,000 million; 2007: RNil) Syndicated loans, 2014, 11.46%, R4,100 million (2008: RNil; 2007: RNil)
Total interest-bearing debt is made up of R17,704 million debt at amortised cost (2008: R13,362 million debt at amortised cost; 2007: R8,985 million debt at amortised cost and R98 million debt at fair value through profit or loss).
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Notes to the annual financial statements
(continued)
for the three years ended March 31, 2009
23.
2007
2008
2009
Rm
Rm
Rm
INTEREST-BEARING DEBT (continued) Local bonds The local Telkom bonds are unsecured, but a Side letter to the Subscription Agreement (as amended) of the TL20 bond contains a number of restrictive covenants which, if not met, could result in the early redemption of the loan. The local bonds limit Telkom’s ability to create encumbrances on revenue or assets, and secure any indebtedness without securing the outstanding bonds equally and rateably with such indebtedness. The term loan agreements limit Telkom’s ability to encumber, cede, assign, sell or otherwise dispose of a material portion of its assets without prior written consent of the Lenders, which will not be unreasonably withheld. The syndicated loan agreement contains restrictive covenants as well as restrictions on encumbrances, disposals, Group guarantees and Group loans. Commercial paper bills
1,339
4,201
5,476
106
140
138
852
857
984
4,537
140
138
Rate p.a., nominal value 2009, 11.44% (2008: 11.71%; 2007: 9.04%), R5,559 million (2008: R4,383 million; 2007: R1,350 million) (b) Foreign debt
Maturity, rate p.a., nominal value Euro: 2010 – 2025, 0.10% – 0.14% (2008: 0.10% – 0.14%; 2007: 0.10% – 0.14%), e11 million (2008: e11 million; 2007: e11 million) (c) Finance leases The finance leases are secured by buildings with a carrying value of R152 million (2008: R174 million; 2007: R197 million) and office equipment with a book value of R6 million (2008: R14 million; 2007: R6 million) (refer to note 9). These amounts are repayable within periods ranging from 1 to 11 years. Interest rates vary between 13.43% and 37.78%. Included in non-current and current debt is: Debt guaranteed by the South African Government
The Company may issue or re-issue locally registered debt instruments in terms of the Post Office Amendment Act 85 of 1991. The borrowing powers of the Company are set out as per note 19. Repayments/refinancing of current portion of interest-bearing debt The Company issued new local bonds, the TL12 and TL15 with a nominal value of R1,060 million and R1,160 million respectively and entered into a syndicated loan agreement with a nominal value of R4,100 million during the current year. Commercial Paper Bills with a nominal value of R11,025 million were issued and Commercial Paper debt with a nominal value of R9,849 million was repaid during the current year. The R7,559 million nominal value of current portion of interest-bearing debt as at March 31, 2009 is expected to be repaid/refinanced from proceeds of the Vodacom sale. Management believes that sufficient funding facilities will be available at the date of repayment/refinancing.
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Notes to the annual financial statements
297
(continued)
for the three years ended March 31, 2009
24.
2007
2008
2009
Rm
Rm
Rm
PROVISIONS
1,203
1,445
1,830
Employee related
2,351
2,477
3,079
363
364
415
316
363
364
53
10
66
(6)
(9)
(15)
1,120
1,336
1,723
2,589
1,120
1,336
285
321
426
83
84
95
Expected return on plan asset
(188)
(257)
(223)
Actuarial loss
149
129
157
–
–
(5)
(1,720)
–
–
(78)
(61)
(63)
282
287
325
198
282
287
19
22
39
Annual leave Balance at beginning of year Charged to employee expenses Leave paid
Post-retirement medical aid (refer to note 25) Balance at beginning of year Interest cost Current service cost
Termination settlement Plan asset – initial recognition Contributions paid
Telephone rebates (refer to note 25) Balance at beginning of year Interest cost Current service cost Past service cost
4
3
6
76
2
2
Actuarial loss
5
–
14
Benefits paid
(20)
(22)
(23)
586
490
616 490
Bonus Balance at beginning of year
637
586
Charged to employee expenses
656
473
577
Payments made
(707)
(569)
(451)
Non-employee related
558
608
704
Supplier dispute (refer to note 35)
527
569
664
–
527
569
527
42
95
31
39
40
(1,706)
(1,640)
(1,953)
Annual leave
(363)
(364)
(415)
Post-retirement medical aid
(185)
(185)
(224)
(26)
(26)
(29)
Bonus
(586)
(490)
(616)
Supplier dispute (refer to note 35)
(527)
(569)
(664)
(19)
(6)
(5)
Balance at beginning of year Net movements
Other Less: Current portion of provisions
Telephone rebates
Other
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Notes to the annual financial statements
(continued)
for the three years ended March 31, 2009
24.
PROVISIONS (continued) Annual leave In terms of the Company’s policy, employees are entitled to accumulate vested leave benefits not taken within a leave cycle, to a cap of 22 days which must be taken within an 18 month leave cycle. The leave cycle is reviewed annually and is in accordance with legislation.
Bonus The bonus scheme consists of performance bonuses which are dependent on achievement of certain financial and non-financial targets. The bonus is payable to all qualifying employees bi-annually after the Company’s results have been made public.
Supplier dispute The Company provided R664 million (2008: R569 million; 2007: R527 million) for its estimate of the probable liability as discussed in note 35. The net movement in the provision of R95 million consists of finance charges and fair value movements.
Other Included in other provisions is an amount provided for asset retirement obligations.
25.
EMPLOYEE BENEFITS The Company provides benefits for all its permanent employees through the Telkom Pension Fund and the Telkom Retirement Fund. Membership to one of the funds is compulsory. In addition, certain retired employees receive medical aid benefits and a telephone rebate. The liabilities for all of the benefits are actuarially determined in accordance with accounting requirements each year. In addition, statutory funding valuations for the retirement and pension funds are performed at intervals not exceeding three years. At March 31, 2009, the Company employed 23,520 employees (2008: 24,879; 2007: 25,864). Actuarial valuations were performed by qualified actuaries to determine the benefit obligation, plan asset and service costs for the pension and retirement funds for each of the financial periods presented. The Telkom Pension Fund The Telkom Pension Fund is a defined benefit fund that was established in terms of the Post Office Amendment Act 85, of 1991. The latest actuarial valuation performed at March 31, 2009 indicates that the pension fund is in a surplus position of R94 million after unrecognised gains. The recognition of the surplus is limited due to the application of the asset limitation criteria in IAS19 (revised). With effect from July 1, 1995, the Telkom Pension Fund was closed to new members. During the year ended March 31, 2007 a settlement event occurred in the Telkom Pension Fund whereby 106 members were transferred to the Telkom Retirement Fund. The funded status of the Telkom Pension Fund is disclosed below.
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Notes to the annual financial statements
299
(continued)
for the three years ended March 31, 2009
25.
2007
2008
2009
Rm
Rm
Rm
EMPLOYEE BENEFITS (continued) The Telkom Pension Fund The net periodic retirement costs include the following components: Interest and service cost on projected benefit obligations
22
21
21
Expected return on plan assets
(19)
(27)
(28)
9
(16)
–
21
(2)
(3)
–
29
39
33
5
29
8
5
(1)
281
205
204
22
21
21
2
2
2
Recognised actuarial loss/(gain) Settlement loss/(gain) Asset limitation Net periodic pension expense recognised Pension fund contributions (refer to note 5.1) The status of the pension plan obligation is as follows: At beginning of year Interest and service cost Employee contributions
(2)
(3)
(5)
Settlements
(70)
(15)
(22)
Actuarial gain
(28)
(6)
(1)
205
204
199
243
284
311
19
27
28
(2)
(3)
(5)
Benefits paid
Benefit obligation at end of year Plan assets at fair value: At beginning of year Expected return on plan assets Benefits paid Contributions
10
8
2
Settlements
(61)
(15)
(22)
Actuarial gain/(loss)
75
10
(67)
284
311
247
Plan assets at end of year
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Notes to the annual financial statements
(continued)
for the three years ended March 31, 2009
25.
2007
2008
2009
Rm
Rm
Rm
EMPLOYEE BENEFITS (continued) The Telkom Pension Fund (continued) Present value of funded obligation
205
204
199
Fair value of plan assets
(284)
(311)
(247)
Fund surplus
(79)
(107)
(48)
Unrecognised net actuarial gain/(loss)
25
23
(46)
Net surplus
(54)
(84)
(94)
–
29
39
Recognised net asset
(54)
(55)
(55)
Asset limitation
Expected return on plan assets
19
27
28
Actuarial return/(loss) on plan assets
75
10
(67)
Actual return/(loss) on plan assets
94
37
(39)
Principal actuarial assumptions were as follows: Discount rate (%)
7.5
9.0
8.7
Yield on government bonds (%)
7.5
9.0
8.7
Long-term return on equities (%)
10.5
11.0
12.0
Long-term return on cash (%)
5.5
7.0
7.5
Expected return on plan assets (%)
9.7
9.8
10.5
Salary inflation rate (%)
6.0
7.5
7.2
Pension increase allowance (%)
2.9
4.3
4.0
100.0
100.0
100.0
153
146
123
The overall long-term expected rate of return on assets is 10.5%. This is based on the portfolio as a whole and not the sum of the returns of individual asset categories. The expected return takes into account the asset allocation of the Telkom Pension Fund and expected long-term return of these assets, of which South African equities and bonds are the largest contributors. The assumed rates of mortality are determined by reference to the SA85-90 (Light) Ultimate table, as published by the Actuarial Society of South Africa, for pre-retirement purposes and the PA(90) Ultimate table, minus one year age rating as published by the Institute and Faculty of Actuaries in London and Scotland, for retirement purposes. Funding level per statutory actuarial valuation (%) The number of employees registered under the Telkom Pension Fund The fund portfolio consists of the following: 74
54
57
Bonds (%)
5
5
25
Cash (%)
3
23
3
16
18
15
2
–
–
Equities (%)
Foreign investments (%) Insurance policies (%)
The total expected contributions payable to the pension fund for the next financial year are R1 million.
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Notes to the annual financial statements
301
(continued)
for the three years ended March 31, 2009
25.
EMPLOYEE BENEFITS (continued) The Telkom Retirement Fund The Telkom Retirement Fund was established on July 1, 1995 as a hybrid defined benefit and defined contribution plan. Existing employees were given the option to either remain in the Telkom Pension Fund or to be transferred to the Telkom Retirement Fund. All pensioners of the Telkom Pension Fund and employees who retired after July 1, 1995 were transferred to the Telkom Retirement Fund. Upon transfer the Government ceased to guarantee the deficit in the Telkom Retirement Fund. Subsequent to July 1, 1995 further transfers of existing employees occurred. The Telkom Retirement Fund is a defined contribution fund with regard to in-service members. On retirement, an employee is transferred from the defined contribution plan to a defined benefit plan. Telkom, as a guarantor, is contingently liable for any deficit in the Telkom Retirement Fund. Moreover, all of the assets in the Fund, including any potential excess, belong to the participants of the scheme. The Company is unable to benefit from the excess in the form of future reduced contributions. Telkom guarantees any actuarial shortfall of the pensioner pool in the retirement fund. This liability is initially funded through assets of the retirement fund. The latest actuarial valuation performed at March 31, 2009 indicates that the retirement fund is in a surplus funding position of R1,549 million after unrecognised losses. The Telkom Retirement Fund is governed by the Pension Funds Act 24 of 1956. In terms of section 37A of this Act, the pension benefits payable to the pensioners cannot be reduced. If therefore the present value of the funded obligation were to exceed the fair value of plan assets, Telkom would be required to fund the statutory deficit. The information presented below is intended only to comply with the disclosure requirements of IAS19 (revised) and not to suggest that the Company has a potential asset with regard to this Fund. The funded status of the Telkom Retirement Fund is disclosed below: 2007
2008
2009
Rm
Rm
Rm
Telkom Retirement Fund The net periodic retirement costs include the following components: Interest and service cost on projected benefit obligations
312
493
616
Expected return on plan assets
(489)
(686)
(796)
Recognised actuarial gain
(145)
–
–
Net periodic pension expense not recognised (asset limitation)
(322)
(193)
(180)
Retirement fund contributions (refer to note 5.1)
439
460
460
4,377
6,581
7,101
Benefit obligation: At beginning of year Interest cost
312
493
616
Benefits paid
(486)
(488)
(520)
44
14
143
Actuarial loss/(gain)
2,334
501
(636)
Benefit obligation at end of year
6,581
7,101
6,704
Liability for new pensioners
Plan assets at fair value: 5,973
7,661
7,991
Expected return on plan assets
489
686
796
Benefits paid
(486)
(488)
(520)
44
14
143
Actuarial gain/(loss)
1,641
118
(1,735)
Plan assets at end of year
7,661
7,991
6,675
At beginning of year
Asset backing new pensioners’ liabilities
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Notes to the annual financial statements
(continued)
for the three years ended March 31, 2009
25.
2007
2008
2009
Rm
Rm
Rm
EMPLOYEE BENEFITS (continued) The Telkom Retirement Fund (continued) Present value of funded obligation
6,581
7,101
6,704
Fair value of plan assets
(7,661)
(7,991)
(6,675)
Fund (surplus)/deficit
(1,080)
(890)
29
(96)
(478)
(1,578)
(1,176)
(1,368)
(1,549)
Unrecognised net actuarial loss Unrecognised net asset
489
686
796
Actuarial gain/(loss) on plan assets
1,641
118
(1,735)
Actual gain/(loss) on plan assets
2,130
804
(939)
619
Expected return on plan assets
Included in the fair value of plan assets is: 371
596
Telkom bonds
Office buildings occupied by Telkom
21
10
–
Telkom shares
284
141
132
The Telkom Retirement Fund invests its funds in South Africa and internationally. Twelve fund managers invest in South Africa and five of these managers specialise in trades with bonds on behalf of the Retirement Fund. The international investment portfolio consists of global equity and hedged funds.
Principal actuarial assumptions were as follows: Discount rate (%)
7.5
9.0
8.7
Yield on government bonds (%)
7.5
9.0
8.7
Long-term return on equities (%)
12.0
10.5
11.0
Long-term return on cash (%)
5.5
7.0
7.5
Expected return on plan assets (%)
9.3
10.3
10.7
Pension increase allowance (%)
4.5
6.0
4.0
The overall long-term expected rate of return on assets is 10.7%. This is based on the portfolio as a whole and not the sum of the returns of individual asset categories. The expected return takes into account the asset allocation of the Telkom Retirement Fund and expected longterm return on these assets, of which South African equities, foreign investments and South African index-linked bonds are the largest contributors. The assumed rates of mortality are determined by reference to the SA85-90 (Light) Ultimate table, as published by the Actuarial Society of South Africa, for pre-retirement purposes and the PA(90) Ultimate table, minus one year age rating as published by the Institute and Faculty of Actuaries in London and Scotland, for retirement purposes. Funding level per statutory actuarial valuation (%) The number of pensioners registered under the Telkom Retirement Fund
100
100
100
14,451
14,255
13,617
25,766
24,939
23,389
The number of in-service employees registered under the Telkom Retirement Fund
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Notes to the annual financial statements
303
(continued)
for the three years ended March 31, 2009
25.
2007
2008
2009
Rm
Rm
Rm
EMPLOYEE BENEFITS (continued) The Telkom Retirement Fund (continued) The fund portfolio consists of the following: Equities (%)
59 2
2
–
11
5
7
1
5
13
16
20
–
–
15
Cash (%) Foreign investments (%)
55
19
Property (%) Bonds (%)
70
Index linked (%)
The expected pension benefits payments for the year ending March 31, 2010 are R541,000. Medical benefits The Company makes certain contributions to medical funds in respect of current and retired employees. The scheme is a defined benefit plan. The expense in respect of current employees’ medical aid is disclosed in note 5.1. The amounts due in respect of post-retirement medical benefits to current and retired employees have been actuarially determined and provided for as set out in note 24. The Company has terminated future post-retirement medical benefits in respect of employees joining after July 1, 2000. There are three major categories of members entitled to the post-retirement medical aid: pensioners who retired before 1994 (Pre-94); those who retired after 1994 (Post-94); and the in-service members. The Post-94 and the in-service members’ liability is subject to a Rand cap, which increases annually with the average salary increase. Eligible employees must be employed by Telkom until retirement age to qualify for the post-retirement medical aid benefit. The most recent actuarial valuation of the benefit was performed as at March 31, 2009. The Company has allocated certain investments to fund this liability as set out in note 11. 2007
2008
2009
Rm
Rm
Rm
Medical aid Benefit obligation: 3,889
4,366
4,831
285
321
426
83
84
95
281
246
246
–
–
(5)
Benefits paid from plan assets
(94)
(125)
(141)
Contributions paid by the Company
(78)
(61)
(63)
4,366
4,831
5,389
At beginning of year Interest cost Current service cost Actuarial loss Termination settlement
Benefit obligation at end of year
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Notes to the annual financial statements
(continued)
for the three years ended March 31, 2009
25.
2007
2008
2009
Rm
Rm
Rm
EMPLOYEE BENEFITS (continued) Medical benefits (continued)
Plan assets at fair value: At beginning of year
–
1,961
1,929
Plan asset – initial recognition
1,720
–
–
Expected return on plan assets
188
257
223
Benefits paid from plan assets Actuarial gain/(loss) Plan assets at end of year
(94)
(125)
(141)
147
(164)
(393)
1,961
1,929
1,618
Present value of funded obligation
4,366
4,831
5,389
Fair value of plan assets
(1,961)
(1,929)
(1,618)
Fund deficit
2,405
2,902
3,771
Unrecognised net actuarial loss
(1,285)
(1,566)
(2,048)
Liability as disclosed in the balance sheet (refer to note 24)
1,120
1,336
1,723
Expected return on plan assets
188
257
223
Actuarial return on plan assets
147
(164)
(393)
Actual gain/(loss) on plan assets
335
93
(170)
Principal actuarial assumptions were as follows: 7.5
9.0
8.7
13.5
12.0
11.0
Salary inflation rate (%)
6.0
7.5
7.2
Medical inflation rate (%)
6.5
8.0
7.7
Contractual retirement age
65
65
65
Average retirement age
60
60
60
17,119
15,526
13,883
8,494
8,430
8,397
Discount rate (%) Expected return on plan assets (%)
The assumed rates of mortality are determined by reference to the SA85-90 (Light) Ultimate table, as published by the Actuarial Society of South Africa, for pre-retirement purposes and the PA(90) Ultimate table, minus one year age rating as published by the Institute and Faculty of Actuaries in London and Scotland, for retirement purposes.
Number of members Number of pensioners
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Notes to the annual financial statements
305
(continued)
for the three years ended March 31, 2009
25.
EMPLOYEE BENEFITS (continued) Medical benefits (continued) The valuation results are sensitive to changes in the underlying assumptions. The following table provides an indication of the impact of changing some of the valuation assumptions: Current
Medical cost inflation rate Benefit obligation
assumption
Decrease
Increase
Rm
Rm
Rm
7.7%
-1.0%
+1.0%
5,389
Percentage change Service cost and interest cost 2009/2010
555
Percentage change
Discount rate Benefit obligation
8.7% 5,389
Percentage change Service cost and interest cost 2009/2010
555
Percentage change
(736)
921
(13.7)%
17.1%
(84)
108
(15.1)%
19.5%
-1.0%
+1.0%
933
(734)
17.3%
(13.6)%
46
(37)
8.3%
(6.7)%
Post-retirement mortality rate
PA(90) ultimate- 1 -10.0%
Benefit obligation
5,389
Percentage change Service cost and interest cost 2009/2010
555
Percentage change
+10.0%
221
(197)
4.1%
(3.7)%
23
(20)
4.1%
(3.6)%
2007
2008
2009
59
56
30
The fund portfolio consists of the following: Equities (%)
3
2
2
21
33
10
Foreign investments (%)
9
9
9
Insurance policies (%)
8
–
49
Bonds (%) Cash and money market investments (%)
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Notes to the annual financial statements
(continued)
for the three years ended March 31, 2009
25.
EMPLOYEE BENEFITS (continued) Telephone rebates The Company provides telephone rebates to its pensioners. The most recent actuarial valuation was performed at March 31, 2009. Eligible employees must be employed by the Company until retirement age to qualify for the telephone rebates. The scheme is a defined benefit plan. The status of the telephone rebate liability is disclosed below: 2007 Rm Benefit obligation opening balance
251
2008 Rm 307
2009 Rm 443
Service cost
4
3
6
Interest cost
19
22
39 19
Actuarial (gain)/loss
(39)
133
Amendments
93
–
–
Benefits paid
(21)
(22)
(23)
307
443
484
(25)
(156)
(159)
282
287
325
7.5
9.0
8.7
–
4.0
4.0
Contractual retirement age
65
65
65
Average retirement age
60
60
60
Number of members
19,515
18,766
17,034
Number of pensioners
10,918
10,680
10,499
Present value of unfunded obligation Unrecognised net actuarial loss and past service cost Liability as disclosed in the balance sheet (refer to note 24)
Principal actuarial assumptions were as follows: Discount rate (%) Rebate inflation rate (%)
The assumed rates of mortality are determined by reference to the standard published mortality table PA (90) Ultimate standard tables, as published by the Institute and Faculty of Actuaries in London and Scotland, rated down one year to value the pensioners.
Telkom Conditional Share Plan Telkom’s shareholders approved the Telkom Conditional Share Plan at the January 2004 Annual General Meeting. The scheme covers both operational and management employees and is aimed at giving shares to Telkom employees, at a RNil exercise price, at the end of the vesting period. The vesting period for the operational employees awarded in 2004 and 2005 is 0% in year one and 33% in each of the three years thereafter, while the shares allocated in 2006 and 2007 together with management shares vest fully after three years. Although the number of shares awarded to employees will be communicated at the grant date, the ultimate number of shares that vest may differ based on certain performance conditions being met. The Telkom Board approved the fourth enhanced allocation of shares to employees as at September 4, 2007, with a grant date of September 27, 2007, the day that the employees and the Company shared a common understanding of the terms and conditions of the grant. A total number of 6,089,810 shares were granted. The Board has also approved an enhanced allocation for the November 2006 grant on September 4, 2007 with a grant date of September 27, 2007. The number of additional shares granted with regard to the 2006 allocation is 4,966,860 shares.
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Telkom Annual Report 2009
Notes to the annual financial statements
307
(continued)
for the three years ended March 31, 2009
25.
EMPLOYEE BENEFITS (continued) Telkom Conditional Share Plan (continued) The weighted average remaining vesting period for the shares outstanding as at March 31, 2009 is 0.71 years (2008: 1.25 years; 2007: 1.75 years). 2007
2008
2009
The following table illustrates the movement of the maximum number of shares that will vest to employees for the August 2004 grant: Outstanding at beginning of the year
420,590
2,414,207
1,883,991
Granted during the year
1,212
252
–
Forfeited during the year
(80,923)
(43,790)
(3,985)
(450,505)
(1,419,863)
(416,605)
1,883,991
420,590
–
1,930,687
1,864,041
1,435,387
Vested during the year Outstanding at end of the year The following table illustrates the movement of the maximum number of shares that will vest to employees for the June 2005 grant: Outstanding at beginning of the year Granted during the year
1,005
3,469
52,954
Forfeited during the year
(67,651)
(108,177)
(45,188)
–
(323,946)
(1,135,424)
1,864,041
1,435,387
307,729
Vested during the year Outstanding at end of the year The following table illustrates the movement of the maximum number of shares that will vest to employees for the November 2006 grant:
–
1,773,361
1,640,980
Granted during the year
1,825,488
833
–
Forfeited during the year
(52,127)
(133,214)
(132,614)
1,773,361
1,640,980
1,508,366
4,812,305
Outstanding at beginning of the year
Outstanding at end of the year The following table illustrates the movement of the maximum number of shares that will vest to employees relating to the additional November 2006 grant: Outstanding at beginning of the year
–
–
Granted during the year
–
4,984,693
25,775
Forfeited during the year
–
(172,388)
(389,357)
Outstanding at end of the year
–
4,812,305
4,448,723
Outstanding at beginning of the year
–
–
5,846,636
Granted during the year
–
6,117,163
23,650
Forfeited during the year
–
(270,527)
(509,185)
Outstanding at end of the year
–
5,846,636
5,361,101
The following table illustrates the movement of the maximum number of shares that will vest to employees for the September 2007 grant:
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Notes to the annual financial statements
(continued)
for the three years ended March 31, 2009
25.
EMPLOYEE BENEFITS (continued) Telkom Conditional Share Plan (continued) The fair value of the shares granted have been calculated by an actuary using the Black-Scholes-Merton model and the following values at grant date:
Market share price (R) Dividend yield (%)
August 8,
June 23,
November 2,
September 4,
2004
2005
2006
2007
Grant
Grant
Grant
Grant
77.50
111.00
141.25
173.00
2.60
3.60
3.50
3.50
2007
2008
2009
Rm
Rm
Rm
The principal assumptions used in calculating the expected number of shares that will vest are as follows: Employee turnover (%) Meeting specified performance criteria (%)
5
5
9
100
100
75
The amounts for the current and previous four years are as follows: 2005
2006
2007
2008
2009
Rm
Rm
Rm
Rm
Rm
Defined benefit obligation
(186)
(281)
(205)
(204)
(199)
Plan assets
231
243
284
311
247
45
(38)
79
107
48
–
–
–
(29)
(39)
89
118
(25)
(23)
46
134
80
54
55
55
Experience adjustment on assets
75
10
(67)
Experience adjustment on liabilities
28
(6)
1
Telkom Pension Fund
Surplus/(deficit) Asset limitation Unrecognised actuarial loss/(gain) Recognised net asset
Telkom Retirement Fund Defined benefit obligation
(4,020)
(4,377)
(6,581)
(7,101)
(6,704)
Plan assets
4,477
5,973
7,661
7,991
6,675
Surplus/(deficit)
457
1,596
1,080
890
(29)
Unrecognised actuarial gain/(loss)
312
(742)
96
478
1,578
Unrecognised net asset
769
854
1,176
1,368
1,549
Experience adjustment on assets*
1,641
118
(1,735)
Experience adjustment on liabilities*
1,234
485
(645)
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Notes to the annual financial statements
309
(continued)
for the three years ended March 31, 2009
25.
2005
2006
2007
2008
2009
Rm
Rm
Rm
Rm
Rm
(3,057)
(3,889)
(4,366)
(4,831)
(5,389)
–
–
1,961
1,929
1,618
(3,057)
(3,889)
(2,405)
(2,902)
(3,771)
648
1,300
1,285
1,566
2,048
(2,409)
(2,589)
(1,120)
(1,336)
(1,723)
147
(164)
(393)
28
193
246
EMPLOYEE BENEFITS (continued) Medical benefits Defined benefit obligation Plan assets Deficit Unrecognised actuarial loss Liability recognised Experience adjustment on assets Experience adjustment on liabilities Telephone rebates Defined benefit obligation Unrecognised actuarial (gain)/loss Liability recognised
(177)
(251)
(307)
(443)
(484)
(2)
53
25
156
159
(179)
(198)
(282)
(287)
(325)
(25)
2
2
Experience adjustment on liabilities
The experience adjustments on assets and liabilities for each of the financial periods ended March 31, 2005 and 2006 have not been disclosed due to the fact that it was impractical to determine the information. * During the March 31, 2007 year end Telkom actuaries performed a full valuation while for the March 31, 2006 year end a roll forward method was used, as permitted under IAS19, to determine the present value of the benefit obligation and the fair value of the plan assets using the March 31, 2005 statutory valuation as a base applying the relevant assumptions determined by management to arrive at the present value of the benefit obligation, and the fair value of plan assets. This change in estimate resulted in a movement to the actuarial loss of R700 million and the fair value of the plan assets of R350 million in respect of the March 31, 2007 estimates. The remaining R1,291 million is a result of the actual investment returns exceeding the expected return for the March 31, 2007 year end.
26.
DEFERRED REVENUE Non-current deferred revenue Current portion of deferred revenue
2007
2008
2009
Rm
Rm
Rm
1,846
2,294
2,822
739
870
996
1,107
1,424
1,826
Included in deferred revenue is profit on the sale and leaseback of certain Telkom buildings of R107 million, consisting of a non-current portion of R96 million (2008: R107 million; 2007: R118 million) and a current portion of R11 million (2008: R11 million; 2007: R11 million). A profit of R11 million per annum is recognised in income on a straight-line basis, over the period of the lease ending 2019 (refer to note 34).
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Notes to the annual financial statements
(continued)
for the three years ended March 31, 2009
27.
2007
2008
2009
Rm
Rm
Rm
TRADE AND OTHER PAYABLES
4,333
4,923
5,424
Trade payables
2,761
3,267
3,035
22
39
156
1,550
1,617
2,233
12,660
12,662
12,027
Profit for the year
8,391
7,967
5,277
Finance charges and fair value movements
1,027
1,289
1,459
Taxation
2,690
2,599
516
Investment income
(3,202)
(3,739)
(2,906)
Finance cost accrued Accruals and other payables Accruals and other payables mainly represent amounts payable for goods received, net of Value Added Tax obligations and licence fees. Included in accruals and other payables are amounts owed to Rossal No 65 (Proprietary) Limited of R342 million (2008: RNil; 2007: R148 million) and Intekom (Proprietary) Limited of R23 million (2008: R13 million; 2007: R5 million).
28.
RECONCILIATION OF PROFIT FOR THE YEAR TO CASH GENERATED FROM OPERATIONS Cash generated from operations
Interest received from debtors Non-cash items Depreciation, amortisation and write-offs Cost of equipment disposed when recognising finance leases Recognition of the FIFA brand intangible asset from deferred revenue Increase in provisions
(189)
(248)
(404)
4,565
4,637
7,981
3,583
3,732
4,358
240
88
71
–
–
(261)
1,103
757
1,439 (32)
Profit on disposal of property, plant and equipment and intangible assets Profit on disposal of investment Interest received from subsidiaries
(15)
(167)
(364)
–
–
–
–
221
Loss on disposal of property, plant and equipment and intangible assets Impairment of investments and loans (Increase)/decrease in working capital
1
2
6
17
225
2,179
(622)
157
104 (627)
Inventories
(459)
(202)
Accounts receivable
(319)
(196)
848
Accounts payable
156
555
(117)
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Notes to the annual financial statements
311
(continued)
for the three years ended March 31, 2009
29.
DIVIDEND RECEIVED Dividend income per income statement (refer to note 6)
Rm
2,950
3,536
3,242
3,006
3,597
2,747
1,479
1,535
1,595
(1,535)
(1,596)
(1,100)
2,950
3,536
3,242
Dividend received from joint venture
2,650
2,825
3,095
Dividend received from subsidiaries
300
711
147
(886)
(842)
(466)
(1,027)
(1,289)
(1,460)
141
447
994
(81)
49
255
FINANCE CHARGES PAID
Non-cash items Movements in interest accruals Net discount amortised
409
568
698
Fair value adjustment
(172)
(275)
(29)
(15)
105
70
TAXATION PAID
(3,852)
(1,716)
(1,764)
Taxation (payable)/receivable at beginning of year
(1,164)
519
(7)
South African normal company taxation (excluding deferred taxation)
Unrealised (loss)/gain
32.
2009
Rm
Dividend accrued for the current year
Finance charges per income statement
31.
2008
Rm
Dividend accrued for the previous year
Dividend received consists of:
30.
2007
(1,874)
(1,879)
(1,510)
Secondary taxation on companies
(295)
(363)
(156)
Taxation (payable)/receivable at end of year
(519)
7
(91)
(4,874)
(5,858)
(3,435)
DIVIDEND PAID
(4)
(15)
(20)
(4,885)
(5,863)
(3,438)
Final dividend for 2006: 500 cents
(2,714)
–
–
Special dividend for 2006: 400 cents
(2,171)
–
–
Final dividend for 2007: 600 cents
–
(3,198)
–
Special dividend for 2007: 500 cents
–
(2,665)
–
Dividend payable at beginning of year Declared during the year – dividend on ordinary shares:
(3,438)
Final dividend for 2008 : 660 cents Dividend payable at end of year
15
20
23
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Notes to the annual financial statements
(continued)
for the three years ended March 31, 2009
33.
ACQUISITION OF MINORITY INTEREST IN SUBSIDIARY Multi-Links Telecommunications (Proprietary) Limited (Multi-Links) Telkom acquired 75% of the issued share capital of Multi-Links Telecommunications Limited through Telkom International (Proprietary) Limited, from Kenston Investment Limited on May 1, 2007. Telkom also granted Kenston the irrevocable right and option (put option) to require Telkom to acquire all of the shares held by Kenston (25% shareholding) in Multi-Links, at any time during the 90 day period following the second anniversary of the effective date. The put option was exercised on January 21, 2009 for R1,328 million (US$130 million at US$1 = R10,2188).
34.
2007
2008
2009
Rm
Rm
Rm
COMMITMENTS Capital commitments Capital commitments authorised Commitments against authorised capital expenditure Authorised capital expenditure not yet contracted
7,000
7,000
6,991
507
652
539
6,493
6,348
6,452
Capital commitments comprise commitments for property, plant and equipment and software included in intangible assets. Management expects these commitments to be financed from proceeds of Vodacom sale. 2010 FIFA World Cup commitments The FIFA World Cup commitment is an executory contract which requires the Company to develop the fixed-line components of the necessary telecommunications infrastructure needed to broadcast this event to the world. This encompasses the provisioning of the fixedline telecommunications related products and services and, where applicable, the services of qualified personnel necessary for the planning, management, delivery, installation and de-installation, operation, maintenance and satisfactory functioning of these products and services. Furthermore as a National Supporter, Telkom owns a tier 3 sponsorship that grants Telkom a package of advertising, promotional and marketing rights that are exercisable within the borders of South Africa. Telkom entered into a barter transaction in return for which it has an outstanding commitment to FIFA of R243 million (2008: R260 million). This has been recognised in intangible assets (note 10).
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Notes to the annual financial statements
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(continued)
for the three years ended March 31, 2009
34.
Total
<1 year
1 – 5 years
>5 years
Rm
Rm
Rm
Rm
Land and buildings
432
158
262
12
Rental receivable on buildings
(271)
(99)
(170)
(2)
1,137
261
876
–
Equipment
15
6
9
–
Customer premises equipment receivable
88
49
39
–
1,401
375
1,016
10
399
152
237
10
COMMITMENTS (continued) Operating lease commitments and receivables 2009 Cash flow
Vehicles
Total cash flow The above figures represent actual cash flows relating to operating leases expected during the periods specified. However, due to the straight-lining effect of operating leases, the amounts that would be recognised in the income statement in the periods specified, would be as follows: Income statement Land and buildings
(250)
(96)
(153)
(1)
1,137
261
876
–
Equipment
15
6
9
–
Customer premises equipment receivable
88
49
39
–
1,389
372
1,008
9
Land and buildings
366
141
224
1
Rental receivable on buildings
(266)
(94)
(169)
(3)
1,430
226
1,204
–
Rental receivable on buildings Vehicles
Total to be recognised in the income statement Vehicles, equipment and customer premises equipment have no fixed annual escalation, therefore the cash flows and income statement recognition would be the same. 2008 Cash flow
Vehicles Equipment
13
10
3
–
Customer premises equipment receivable
(84)
(45)
(39)
–
1,459
238
1,223
(2)
Land and buildings
330
133
196
1
Rental receivable on buildings
(246)
(92)
(152)
(2)
Total cash flow Income statement
Vehicles
1,430
226
1,204
–
Equipment
13
10
3
–
Customer premises equipment receivable
(84)
(45)
(39)
–
1,443
232
1,212
(1)
Total to be recognised in the income statement
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Notes to the annual financial statements
(continued)
for the three years ended March 31, 2009
34.
Total
<1 year
1 – 5 years
>5 years
Rm
Rm
Rm
Rm
COMMITMENTS (continued) Operating lease commitments and receivables (continued) 2007 Cash flow Land and buildings
371
134
236
1
Rental receivable on buildings
(269)
(91)
(174)
(4)
Vehicles
564
564
–
–
Equipment
23
6
17
–
Customer premises equipment receivable
(57)
(30)
(27)
–
632
583
52
(3)
Land and buildings
332
128
203
1
Rental receivable on buildings
(249)
(90)
(156)
(3)
Vehicles
564
564
–
–
Equipment
23
6
17
–
Customer premises equipment receivable
(57)
(30)
(27)
–
613
578
37
(2)
Total cash flow Income statement
Total to be recognised in the income statement Operating leases
The Company leases certain buildings, vehicles and equipment. The majority of the lease terms negotiated for equipment-related premises are ten years with other leases signed for five and three years. The majority of the leases normally contain an option clause entitling Telkom to renew the lease agreements for a period usually equal to the main lease term. The minimum lease payments under these agreements are subject to annual escalations, which range from 6% to 15%. Penalties in terms of the lease agreements are only payable should Telkom vacate the premises and negotiate to terminate the lease agreement prior to the expiry date, in which case the settlement payment will be negotiated in accordance with the market conditions of the premises. Future minimum lease payments under operating leases are included in the note above. Onerous leases for buildings, of which the Company has no further use, no possibility of sub-lease and no option to cancel, are provided for in full and included in other provisions, refer to note 24. The master lease agreement for vehicles was for a period of five years and then extended for an additional three years which resulted in the lease expiring on March 31, 2008. During August 2007 new terms were negotiated and approved and as a result the operating lease commitments for vehicles are based on the new agreement which expires on March 31, 2013. In accordance with this agreement Telkom is not allowed to lease any similar vehicle as specified in the contract from any other service provider during the five year period except for the rentals at airports which are utilised in cases of subsistence and travel as well as vehicles which are not part of the agreement. The agreement is structured to have no lease increases on vehicles that are continually leased from the lessor. If a vehicle is, however, replaced by a new similar vehicle, the lease costs of the newest vehicle will increase by the Consumer Price Index. All leased vehicles are, however, subject to any variance in the interest rate fluctuations and are adjusted as and when the adjustments are announced by the South African Reserve Bank. The leases of individual vehicles are renewed annually.
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Notes to the annual financial statements
315
(continued)
for the three years ended March 31, 2009
34.
COMMITMENTS (continued) Operating leases (continued) The master lease agreements for office equipment are with two suppliers with initial periods of 36 months effective from November 25, 2005. Upon expiry of the initial lease agreement on November 25, 2008, an extension of the lease was negotiated until November 24, 2009. In terms of these agreements the leases of individual equipment shall be valid at a fixed fee for the entire period. Total
<1 year
1 – 5 years
>5 years
Rm
Rm
Rm
Rm
187
47
140
–
(38)
(15)
(23)
–
149
32
117
–
242
48
194
–
(59)
(20)
(39)
–
183
28
155
–
Finance lease commitments Vehicles 2009 Minimum lease payments Finance charges Finance lease obligation 2008 Minimum lease payments Finance charges Finance lease obligation Buildings 2009 1,652
111
545
995
Finance charges
(822)
(111)
(426)
(284)
Finance lease obligation
830
–
119
711
Minimum lease payments
2008 Minimum lease payments
1,778
126
502
1,150
Finance charges
(936)
(114)
(439)
(383)
Finance lease obligation*
842
12
63
767
2007 Minimum lease payments
1,897
120
487
1,290
Finance charges
(1,051)
(116)
(446)
(489)
846
4
41
801
Minimum lease payments
7
5
2
–
Finance charges
(2)
(1)
(1)
–
Finance lease obligation
5
4
1
–
Finance lease obligation Equipment 2009
*These prior year figures have been restated to include the finance lease obligation with regard to the Campus property.
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Notes to the annual financial statements
(continued)
for the three years ended March 31, 2009
34.
Total
<1 year
1 - 5 years
>5 years
Rm
Rm
Rm
Rm
16
–
16
–
(2)
–
(2)
–
14
–
14
–
Minimum lease payments
6
–
6
–
Finance charges
–
–
–
–
Finance lease obligation
6
–
6
–
COMMITMENTS (continued) Finance lease commitments (continued) Equipment (continued) 2008 Minimum lease payments Finance charges Finance lease obligation 2007
Finance leases Finance leases on vehicles relates to the lease of Swap bodies. The lease term for the Swap bodies is April 2008 to April 2013. A major portion of the finance leases on buildings relates to the sale and lease-back of the Company’s office buildings. The lease term negotiated for the buildings is for a period of 25 years ending 2019. The minimum lease payments are subject to an annual escalation of 10% p.a. Telkom has the right to sublet part of the buildings. In case of breach of contract, the lessor is entitled to cancel the lease agreement and claim damages. Finance charges accruing on one of the Company’s building leases exceed the lease payments for the next three years. Minimum lease payments for the next five years do not result in any income accruing to the Company. Finance leases on equipment mainly relates to office equipment. The lease term negotiated for the finance leases is for the period of three years ending in 2011.
35.
CONTINGENCIES Supplier dispute Telcordia instituted arbitration proceedings against Telkom in March 2001 before a single arbitrator of the International Court of Arbitration, operating under the auspices of the International Chamber of Commerce. Telcordia is seeking to recover approximately US$130 million for monies outstanding and damages, plus costs and interest at a rate of 15.5% per year which was increased by Telcordia to US$172 million in the 2007 financial year and subsequently decreased to US$128 million in the 2008 financial year. The arbitration proceeding relates to the cancellation of an agreement entered into between Telkom and Telcordia during June 1999 for the development and supply of an integrated end-to-end customer assurance and activation system by Telcordia. In September 2002, the arbitrator found that Telkom had wrongfully repudiated the contract and a partial award was issued by the arbitrator in favour of Telcordia. Telkom subsequently filed an application in the South African High Court to review and set aside the partial award. On November 27, 2003, the South African High Court set aside the partial award and issued a cost order in favour of Telkom. On May 3, 2004, the South African High Court dismissed an application by Telcordia for leave to appeal and ordered Telcordia to pay the legal costs of Telkom. On November 29, 2004, the Supreme Court of Appeals granted Telcordia leave to appeal. Telcordia filed a notice of appeal and also petitioned the United States District Court for the District of Columbia to confirm the partial award, which petition was dismissed, along with a subsequent appeal. Following the dismissal of the appeal, Telcordia filed a similar petition in the United States District Court of New Jersey. The United States District Court of New Jersey also dismissed Telcordia’s petition, reaffirming the decision of the United States District Court of Columbia. Telcordia appealed this dismissal, which was later dismissed by the Appeals Court of New Jersey.
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Notes to the annual financial statements
317
(continued)
for the three years ended March 31, 2009
35.
CONTINGENCIES (continued) Supplier dispute (continued) The appeal by Telcordia in the Supreme Court of Appeals was set down for and heard on October 30 and October 31, 2006. Following the successful upholding of the appeal, Telkom filed an application for leave to appeal to the Constitutional Court on only the issue revolving around the Supreme Court of Appeals’ failure to recognise Telkom’s rights of access to the courts under the South African Arbitration Act. The Constitutional Court has since dismissed Telkom’s appeal with costs. The Constitutional Court judgment brought to finality the dispute over the merits of Telcordia’s claim against Telkom and the parties reconvened the arbitration in May 2007 to deal with the amount of damages to which Telcordia is entitled. Two hearings were held at the International Dispute Resolutions Centre, or IDRC. The first hearing was held in London on May 21, 2007 and was a ’directions hearing’, in terms of which the parties consented to a ruling by the arbitrator setting out a consolidated list of proposals and issues to form part of the damages hearing. The second hearing was held in London at the IDRC on June 25 and 26, 2007 and dealt with the application by Telcordia for the striking out of part of Telkom’s defence on the basis that Telkom had raised issues in its defence that had already been heard by the arbitrator prior to his partial award. This application was dismissed by the arbitrator. The arbitrator also made a ruling compelling Telcordia to provide certain particulars requested by Telkom with regard to the claims by Telcordia. In his ruling, the arbitrator also set out a list of issues for determination of the damages. The mediation took place in London in February and April of 2008 without success. In the interim the parties have agreed to the appointment by the arbitrator of a third party expert to deal with the technical issues in relation to the software that was required to be provided by Telcordia, who will make a recommendation to the arbitrator in dealing with the amount of the claims. A further hearing was held before the arbitrator in October 2008 during which the arbitrator permitted Telkom to amend its statement of defence. Further hearings were held before the software expert in November 2008 and he has made his report available. Further hearings took place before the arbitrator in April 2009. The parties have now agreed that the whole question of “integration” of the software will be done at an experts only hearing (no lawyers) before Mr P Burns, a software expert in Johannesburg during October 2009. The hearings before the software expert will have an impact on the quantum of the other claims. The arbitrator has confirmed that the final hearing will be from January 25 to February 10, 2010 in Johannesburg. Although Telkom is currently unable to predict the exact amount that it may eventually be required to pay Telcordia, it has made provisions for estimated liabilities in respect of the Telcordia claim in the sum of US$70 million (R664 million), including interest and legal fees. Telkom will be required to fund any payments to Telcordia from cash flows or the incurrence of debt and the amount of any damages above Telkom’s provision would increase Telkom’s liabilities and decrease its net profit, which could have a material adverse effect on its financial condition, cash flows and results of operations. A provision has been raised based on management’s best estimate of the probable payments in this regard. 2007
2008
2009
Rm
Rm
Rm
527
569
Supplier dispute liability included in current portion of provisions The provision has increased from March 31, 2007 due to exchange rate movements. * US$70 million (2008: US$70 million; 2007 US$70 million).
664*
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Notes to the annual financial statements
(continued)
for the three years ended March 31, 2009
35.
CONTINGENCIES (continued) Competition Commission Telkom is a party to a number of legal and arbitration proceedings filed by parties with the South African Competition Commission alleging anti-competitive practices described below. If Telkom were found to have committed prohibited practices as contained in the Competition Act, 1998, as amended, Telkom could be required to cease these practices, divest these businesses and be fined a penalty of up to 10% of Telkom’s annual turnover, excluding the turnover of subsidiaries and joint ventures, for each complaint for the financial years prior to the dates of the complaints. The Competition Commission has to date not imposed the maximum penalty on any offender. On July 31, 2008, Telkom received a summons issued by the Competition Commission requesting information in connection with investigations being conducted by the Competition Commission into five complaints against Telkom described in greater detail below by the Internet Service Association, MWEB, Internet solutions and Verizon SA Limited. The summons was subsequently withdrawn by the Competition Commission following on agreement with Telkom in a co-operative process with the Competition Commission as part of the Competition Commission’s ongoing investigations into these complaints. The investigation is expected to be finalised in the 2009 calendar year. As competition continues to increase, we expect that we will become involved in an increasing number of disputes regarding the legality of services and products provided by us and third parties. These disputes may range from court lawsuits to complaints lodged by or against us with various regulatory bodies. We are currently unable to predict the amount that we may eventually be required to pay in these proceedings, however, we have not included provisions for any of these claims in our financial statements. In addition, we may need to spend substantial amounts defending or prosecuting these claims even if we are ultimately successful. If Telkom is required to cease these practices, divest itself of the relevant businesses or pay significant fines, Telkom’s business and financial condition could be materially adversely affected and its revenue and net profit could decline. We may be required to fund any penalties or damages from cash flows or drawings on our credit facilities, which could cause our indebtedness to increase.
Independent Cellular Services Provider Association of South Africa (ICSPA) In 2002, the ICSPA filed a complaint against Telkom at the Competition Commission in terms of the Competition Act, alleging that Telkom had entered into contracts with large corporations, providing large discounts with the effect of discouraging the corporates from using the ‘premicell’ device installed by their members. ICSPA also alleged various contraventions of the Competition Act by Telkom. Telkom provided the Competition Commission with certain information requested. Telkom also referred the Competition Commission to its High Court application in respect of utilisation of the ‘premicell’ device. The Competition Commission declined to refer the matter to the Competition Tribunal. ICSPA then referred the matter to the Competition Tribunal on September 18, 2003. Telkom filed its answering affidavit on November 28, 2003. ICSPA has taken no further action since then.
The South African Value Added Network Services (SAVA) On May 7, 2002, the South African Value Added Network Services Providers’ Association, an association of VANS providers, filed complaints against Telkom at the Competition Commission of the Republic of South Africa under the South African Competition Act, 89 of 1998, alleging, among other things, that Telkom was abusing its dominant position in contravention of the Competition Act, 89 of 1998, and that it was engaged in price discrimination. The Competition Commission determined, among other things, that several aspects of Telkom’s conduct contravened the Competition Act, 89 of 1998, and referred certain of the relevant complaints to the Competition Tribunal for adjudication. The referred complaints deal with Telkom’s alleged refusal to provide telecommunications facilities to certain VANS providers to construct their networks, refusal to lease access facilities to VANS providers, provision of bundled and cross subsidised competitive services with monopoly services, discriminatory pricing with regard to leased line services and alleged refusal to peer with certain VANS providers.
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Notes to the annual financial statements
319
(continued)
for the three years ended March 31, 2009
35.
CONTINGENCIES (continued) Competition Commission (continued)
The South African Value Added Network Services (SAVA) (continued) Telkom brought an application for review against the Competition Commission and the Competition Tribunal in the South African High Court, in respect of the decision by the Competition Commission to refer the matters to the Competition Tribunal. Telkom is of the view that the Competition Tribunal does not have jurisdiction to adjudicate these matters and argued that ICASA has the requisite jurisdiction. In the review application, Telkom also sought to set aside the decision by the Competition Commission to refer the complaints to the Competition Tribunal on the basis that the Competition Commission was biased, that the referral was out of time and that the Competition Commission had not adhered to the memorandum of understanding between it and ICASA. Only the Competition Commission opposed the application and filed an answering affidavit. The main complaint at the Competition Commission was held over pending the outcome of the review application. The application for review was heard on April 24 and 25, 2008. The South African High Court judge set aside the decision of the Competition Commission to refer the SAVA complaints and the Omnilink complaint against Telkom discussed below to the Competition Tribunal. The decision was made based on three grounds, namely that: • the Competition Commission failed to comply with the peremptory provisions of the memorandum of understanding between the Competition Commission and ICASA; • the referral was out of time, on the basis that the agreements with the complainants to extend the time which the Competition Commission was allowed to investigate the complaints were invalid; and • the Competition Commission’s reliance on a report by the Link Centre created reasonable apprehension of bias, since some of the complainants contribute financially to the Link Centre and the Link Centre’s advisory board includes employees of the complainants in the SAVA complaints. The judge did not make a decision on the question of jurisdiction (ie, whether ICASA or the Competition Tribunal has the jurisdiction to deal with competition matters in the electronic communications industry). On july 3, 2008, the Competition Commission filed an application for leave to appeal the decision of the High Court on the basis that the judge erred on the issue of bias as well as his finding that issues surrounding the extension of time to investigate the issues constitutes a ground for review. Telkom then filed an application for leave to cross-appeal on July 11, 2008. The main basis of Telkom’s cross-appeal is that Telkom believes that the judge erred in failing to make a decision as to whether ICASA or the Competition Commission and Competition Tribunal should deal with this type of complaint. The application for leave to appeal as well as the application for leave to cross-appeal were granted by the Pretoria High Court on October 9, 2008. The parties are attending to the filing of the record of proceedings before the High Court as well as the parties’ heads of argument, after which the Registrar of the Supreme Court of Appeal will inform the parties of the date for the hearing. The main complaint before the Competition Tribunal will continue to be held over pending the outcome of the appeal and cross-appeal. This matter is not expected to be finalised within the 2010 financial year.
Omnilink On August 22, 2002, Omnilink filed a complaint against Telkom at the Competition Commission alleging that Telkom was abusing its dominance by discriminating in its price for Diginet services as against those charged to VANS and the price charged to customers who apply for a Telkom VPN solution. The Competition Commission conducted an enquiry and subsequently referred the complaint, together with the SAVA complaint, to the Competition Tribunal for adjudication. This matter is currently being dealt with together with the SAVA matter discussed above.
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Telkom Annual Report 2009
Notes to the annual financial statements
(continued)
for the three years ended March 31, 2009
35.
CONTINGENCIES (continued) Competition Commission (continued)
Orion/Telkom (Standard Bank and Edcon): Competition Tribunal In April 2003, Orion filed a complaint against Telkom, Standard Bank and Edcon at the Competition Commission concerning Telkom’s discounts offered on public switched telecommunication services to corporate customers. In terms of the rules of the Competition Commission, the Competition Commission, who acts as an investigator, had one year to investigate the complaint. Orion simultaneously with the filing of the complaint, also filed an application against Telkom, Standard Bank and Edcon at the Competition Tribunal, for an interim order interdicting and restraining Telkom from offering Orion’s corporate customers reduced rates associated with Telkom’s Cellsaver discount plan. The Competition Commission completed its investigation and decided that there was no prima facie evidence of any contravention of the Competition Act. Orion however referred the matter to the Competition Tribunal in terms of section 51 of the Competition Act, which allows for parties to refer matters to the Competition Tribunal themselves. Telkom has not yet filed its answering affidavit in the main complaint before the Competition Tribunal. To date there have been no further developments on this matter.
The Internet Service Providers Association (ISPA) In December 2005, the ISPA, an association of ISPs, filed complaints against Telkom at the Competition Commission regarding alleged anti-competitive practices on the part of Telkom. The complaints deal with the cost of access to SAIX, the prices offered by TelkomInternet, the alleged delay in provision of facilities to ISPs and the alleged favourable installation timelines offered to TelkomInternet customers. The Competition Commission has formally requested Telkom to provide it with certain records of orders placed for certain services, in an attempt to first investigate the latter aspects of the complaint. Telkom provided the Competition Commission with the information.
MWEB and Internet Solutions (IS) On June 29, 2005, MWEB and Internet Solutions, or IS, jointly lodged a complaint with the Competition Commission against Telkom and also requested interim relief at the Competition Tribunal. The complaint at the Competition Commission mainly deals with Telkom’s pricing for ADSL retail products and its IP Connect products, the termination of the peering link between Telkom and IS, the wholesale pricing of SAIX bandwidth for ADSL users of other internet service providers, the architecture of Telkom’s ADSL access route and the manner in which internet service providers can only connect to Telkom’s edge service router via IP Connect as well as alleged excessive pricing for bandwidth on Telkom’s international undersea cable. The application for interim relief at the Competition Tribunal dealt with allegations that Telkom should maintain the peering link between IS and Telkom in terms of its current peering agreement, and demanded that Telkom treat the traffic generated by ADSL customers of MWEB as traffic destined for the peering link and that Telkom upgrade its peering link to accommodate the increased ADSL traffic emanating from MWEB and maintain a maximum of 65% utilisation. Telkom filed its answering affidavit, and is awaiting IS and MWEB’s replying affidavit. Since then, Telkom has entered into a new peering agreement with IS and has responded to numerous documentation and information requests from the Competition Commission. To date neither MWEB nor IS has filed a replying affidavit in the interim relief application.
MWEB On June 5, 2007, MWEB brought an application against Telkom for interim relief at the Competition Tribunal with regard to the manner in which Telkom provides wholesale ADSL internet connections. MWEB requested the Competition Tribunal to grant an order of interim relief against Telkom to charge MWEB a wholesale price for the provision of ADSL internet connections which is not higher than the lowest retail price. MWEB further applied for an order that Telkom implement the migration of end customers from Telkom PSTS ADSL access to MWEB without interruption of the service. Telkom raised the objection that the Competition Tribunal does not have jurisdiction to hear the matter in its answering affidavit filed at the Competition Tribunal. Telkom still had to “plead over” as to the merits of the matter. Telkom also filed an application in the Transvaal Provincial Division of the South African High Court on July 3, 2007 for an order declaring that the Competition Tribunal does not have jurisdiction to hear the application for interim relief made to it by MWEB.
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Notes to the annual financial statements
321
(continued)
for the three years ended March 31, 2009
35.
CONTINGENCIES (continued) Competition Commission (continued)
MWEB (continued) The application before the High Court was set down for hearing during the first quarter of the 2009 financial year. The parties however entered into settlement negotiations, which resulted in the withdrawal of the interim relief application at the Competition Tribunal by MWEB as well as a withdrawal of the jurisdictional challenge filed at the South African High Court by Telkom. The parties are in further negotiations.
Verizon SA Limited (Verizon) Verizon filed a complaint against Telkom on March 22, 2007 alleging that Telkom charges an excessive price on services rendered to Verizon, thereby inducing Verizon’s customers not to deal with Verizon, engages in exclusionary conduct through “margin squeeze” in offering prices to end-users which are lower than the prices at which it sells rights of access to its infrastructure on a wholesale basis to Verizon, and that Telkom engages in price discrimination against Verizon.
Internet Solutions (IS) IS filed a complaint against Telkom at the Competition Commission during December 2007. The complaint alleges abusive conduct by Telkom. IS specifically alleges that Telkom is charging excessive prices that bear no reasonable relation to the economic value of the goods or services, that Telkom has raised the wholesale cost to downstream competitors, while also reducing the downstream retail price to clients; engaging in margin squeeze, that Telkom has introduced a series of bundled products (namely Telkom Closer Products) that limit the ability of rivals in particular markets to compete effectively, and Telkom is offering discriminatory prices in relation to a number of infrastructural and service items that IS is compelled to purchase from Telkom. While that complaint was being investigated by the Competition Commission, IS brought an application to the Competition Commission for interim relief requesting: that Telkom be ordered to charge IS a wholesale price for telecommunication facilities to provide virtual private network services to its customers no higher than the lowest retail price for such connection charged to Telkom’s VPN Supreme customers and ordering that the costs of the application be paid by Telkom. Telkom opposed the application by IS at the Competition Tribunal although it is unable to finalise its opposing papers due to difficulties associated with the manner in which IS claimed confidentiality over the application. No further activity has taken place with regard to the interim relief application to date.
Maredi Telecom and Broadcasting (Proprietary) Limited (Maredi) Maredi served a notice of motion on Telkom, Ericsson SA and Telsaf Data (Pty) Limited on January 8, 2009. The matter relates to a tender published by Telkom for the supply of point-to-point split mount microwave equipment. Maredi, Telsaf, Ericsson and a fourth company, Mobax, were shortlisted. The tender was awarded by Telkom to Telsaf and Ericsson.
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Notes to the annual financial statements
(continued)
for the three years ended March 31, 2009
35.
CONTINGENCIES (continued) Competition Commission (continued)
Maredi Telecom and Broadcasting (Proprietary) Limited (Maredi) (continued) Maredi applied for a court order, with a court hearing date set for February 3, 2009, requesting that the court prevent Telkom from entering into a contract with Ericsson and Telsaf or either party, and from ordering goods or services from Ericsson and Telsaf pursuant to the tender. Maredi also requested an order that the court review and set aside the award of the tender to Telsaf and Ericsson or either of the aforementioned parties, and refer the tender back to Telkom in order for Telkom to reconsider its award. Maredi alleged that there were certain irregularities in the tender process in that Telkom did not follow fair procedures by failing to comply with its own mandatory procedural requirements, that Telkom acted arbitrarily and in bad faith, that Telkom was biased in favour of Ericsson and that Ericsson should have been disqualified as it failed to meet Telkom’s critical criteria as set out in the tender. Numerous allegations in the application, including accusations against certain members of the Procurement Review Council and allegations by Maredi of compliance by them to the technical critical criteria, were refuted by Telkom. Telkom and Ericsson opposed the application and filed their respective opposing affidavits. Telsaf did not oppose the application. The matter was ultimately set down for hearing on February 20, 2009 and Maredi’s application was dismissed with costs. However, Maredi is proceeding with a review application in the ordinary course and Telkom is opposing the application. Telkom is not currently able to predict when these disputes may be resolved or the amount that it may eventually be required to pay, however, it has not included provisions for all of these claims in its annual financial statements. In addition, Telkom may need to spend substantial amounts defending or prosecuting these claims even if it was ultimately successful. If Telkom were to lose these or future legal and arbitration proceedings, it could be prohibited from engaging in certain business activities and could be required to pay substantial penalties and damages, which could cause its revenue and net profit to decline and have a material adverse impact on its business and financial condition. Telkom may be required to fund any penalties or damages from cash flows or drawings on its credit facilities, which could cause its indebtedness to increase. Telkom is party to various additional proceedings and lawsuits in the ordinary course of its business, which management does not believe will have a material adverse impact on Telkom. Negative working capital ratio At each of the financial periods ended March 31, 2009, 2008 and 2007 the Company had a negative working capital ratio. A negative working capital ratio arises when current liabilities are greater than current assets. Current liabilities are intended to be financed from operating cash flows, new borrowings and borrowings available under existing credit facilities.
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Notes to the annual financial statements
323
(continued)
for the three years ended March 31, 2009
36.
DIRECTORS’ INTERESTS ST Arnold, RJ Huntley, E Spio-Garbrah, KST Matthews and VB Lawrence, five of Telkom’s Board members, are the South African Government’s representative on Telkom’s Board of Directors. At March 31, 2009, the Government held 39.76% (2008: 39.42%, 2007: 38.83%) of Telkom’s shares. B Molefe is a Public Investment Corporation (‘PIC’) representative on Telkom’s Board of Directors. As at March 31, 2009 the PIC held 15.63% (2008: 15.23%, 2007: 15.27%) of Telkom’s shares. Beneficial
Non-beneficial
Direct
Indirect
Direct
Indirect
RJ September
90,815
PG Nelson
19,182
1,820
–
–
–
–
–
109,997
1,820
–
–
PG Joubert
–
15,000
–
–
D Barber
–
1,200
–
–
–
16,200
–
–
RJ September
7,155
–
–
–
Total
7,155
–
–
–
TF Mosololi
455
–
–
–
Total
455
–
–
–
Directors’ shareholding (Number of shares) 2009
Executive
Non-executive
2008
Executive
2007
Non-executive
The directors’ shareholding changed between the balance sheet date and the date of issue of the financial statements and this has been reflected in the above information.
Directors’ emoluments
2007
2008
2009
Rm
Rm
Rm
7
36
20
4
31
15
3
5
5
Executive For services as directors
Non-executive For services as directors
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Notes to the annual financial statements
(continued)
for the three years ended March 31, 2009
36.
DIRECTORS’ INTERESTS (continued) Directors’ emoluments (continued) Fees R
Remuneration R
Performance bonus R
Fringe and other benefits R
Total R
2009 Emoluments per director: Non-executive
5,028,084
–
–
–
5,028,084
ST Arnold B du Plessis PSC Luthuli KST Matthews B Molefe AG Rhoda RJ Huntley Dr E Spio-Garbrah** Dr VB Lawrence** DD Barber PG Joubert
1,030,000 498,000 642,000 441,000 159,551 124,001 533,000 622,750 359,000 293,667 302,778
– – – – – – – – – – –
– – – – – – – – – – –
– – – – – – – – – – –
1,030,000 498,000 642,000 441,000 159,551 124,001 533,000 622,750 359,000 293,667 302,778
Executive
–
4,530,912
2,289,947
7,848,357
14,669,216
RJ September* PG Nelson*
– –
3,555,800 975,112
1,841,396 448,551
7,430,452 417,905
12,827,648 1,841,568
5,005,747
4,530,912
2,289,947
7,848,357
19,674,963
2008 Emoluments per director: Non-executive
4,633,933
–
–
–
4,633,933
ST Arnold B du Plessis MJ Lamberti PSC Luthuli TD Mahloele KST Matthews TF Mosololi M Mostert *** DD Tabata YR Tenza PL Zim B Molefe A Rhoda RJ Huntley Dr E Spio-Garbrah** Dr VB Lawrence**
1,124,373 393,967 – 502,117 357,684 501,217 174,960 229,433 250,583 305,633 5,333 20,497 14,286 193,833 273,841 286,176
– – – – – – – – – – – – – – – –
– – – – – – – – – – – – – – – –
– – – – – – – – – – – – – – – –
1,124,373 393,967 – 502,117 357,684 501,217 174,960 229,433 250,583 305,633 5,333 20,497 14,286 193,833 273,841 286,176
Executive
–
14,489,833
3,436,308
13,244,896
31,171,037
RJ September*
–
2,453,757
3,436,308
13,218,772
19,108,837
CEO Acting CEO
– –
1,016,524 1,437,233
3,436,308 –
10,438,538 2,780,234
14,891,370 4,217,467
LRR Molotsane*
–
12,036,076
–
26,124
12,062,200
4,633,933
14,489,833
3,436,308
13,244,896
35,804,970
Total emoluments – paid by Telkom
Total emoluments – paid by Telkom
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Notes to the annual financial statements
325
(continued)
for the three years ended March 31, 2009
36.
DIRECTORS’ INTERESTS (continued) Directors’ emoluments (continued) Performance
Fringe and
Fees
Remuneration
bonus
other benefits
Total
R
R
R
R
R
2,641,168
–
–
–
2,641,168
NE Mtshotshisa
463,050
–
–
–
463,050
ST Arnold
353,719
–
–
–
353,719
32,670
–
–
–
32,670
B du Plessis
213,367
–
–
–
213,367
PSC Luthuli
205,417
–
–
–
205,417
2007 Emoluments per director:
Non-executive
TCP Chikane
TD Mahloele
166,667
–
–
–
166,667
K Matthews
109,643
–
–
–
109,643
TF Mosololi
214,417
–
–
–
214,417
M Mostert
232,417
–
–
–
232,417
DD Tabata
175,367
–
–
–
175,367
YR Tenza
321,767
–
–
–
321,767
PL Zim
152,667
–
–
–
152,667
Executive
–
2,272,785
–
1,653,202
3,925,987
LRR Molotsane*
–
2,272,785
–
1,653,202
3,925,987
2,641,168
2,272,785
–
1,653,202
6,567,155
Total emoluments – paid by Telkom *
Included in fringe and other benefits is a pension contribution for LRR Molotsane of RNil (2008: R4,690; 2007: R295,462), RJ September of R462,254 (2008: R280,261; 2007: RNil) and PG Nelson of R126,765 (2008: RNil; 2007: RNil) at March 31, 2009 paid to the Telkom Retirement Fund.
** Foreign directors. *** In the absence of an internal corporate finance division, and pending the structuring and staffing thereof, the Telkom Board resolved that it was in the best interest of the Company and the shareholders to deploy the highest quality skills currently resident in Telkom, to evaluate, structure and make recommendations to the Board on major transactions. During 2008 M Mostert led all efforts in this regard and was remunerated accordingly. Moreover in compliance with the principles of good governance, the Board took legal advice and established that there was no conflict of interest arising out of his involvement in the transaction evaluated.
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Notes to the annual financial statements
(continued)
for the three years ended March 31, 2009
37.
RELATED PARTIES Details of material transactions and balances with related parties not disclosed separately in the annual financial statements were as follows: 2007
2008
2009
Rm
Rm
Rm
With joint venture: Vodacom Group (Proprietary) Limited
Related party balances Trade receivables Dividend receivable Trade payables
122
99
121
1,450
1,595
1,100
(706)
(691)
(650)
(1,510)
(1,632)
(1,781)
Related party transactions Revenue Expenses
2,974
3,050
3,066
Dividend received
(2,700)
(2,970)
(2,600)
6
5
4
271
326
386
(2,458)
(2,623)
(2,767)
6
7
10
(100)
(151)
(141)
84
–
–
Revenue
(57)
(59)
(62)
Expenses
12
20
15
(149)
(120)
(47)
Audit fees Revenue includes interconnect fees and lease and installation of transmission lines. Expenses mostly represent interconnect expenses. With shareholders: Public Investment Corporation There were no material transactions between the Company and the Public Investment Corporation. Government
Related party balances Trade receivables
Related party transactions Revenue With subsidiaries: Trudon Proprietary Limited (formerly trading as TDS Directory Operations (Proprietary) Limited)
Related party balances Trade receivables Trade payables Dividend receivable
Related party transactions
Dividend received
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Notes to the annual financial statements
327
(continued)
for the three years ended March 31, 2009
37.
2007
2008
2009
Rm
Rm
Rm
RELATED PARTIES (continued) With subsidiaries: (continued) Swiftnet (Proprietary) Limited
Related party balances Trade receivables Trade payables Loan from subsidiary
–
–
1
(14)
(12)
(15)
–
–
10
(16)
(18)
(17)
–
–
1
(148)
–
(342)
–
30
–
110
115
59
(56)
(290)
(29)
(98)
–
285
Related party transactions Revenue Expenses Income includes data calls and billing fees. Rossal No 65 (Proprietary) Limited
Related party balances Accruals and other payables Loan to subsidiary The loan is unsecured, interest-free and has no fixed repayment terms. The loan has been subordinated in favour of other creditors.
Related party transactions Dividend paid Dividend received Acajou Investments (Proprietary) Limited
Related party balances (Accruals and other payables)/receivables
Related party transactions Dividend paid Dividend received
98
119
72
(100)
(217)
(71)
(5)
(13)
(23)
7
8
10
Intekom (Proprietary) Limited
Related party balances Accruals and other payables
Related party transactions Expenses Q-Trunk (Proprietary) Limited
Related party balances Loan to subsidiary
30
26
22
Impairment of loan
(30)
(26)
(22)
6
6
6
The loan is unsecured, interest-free and has no fixed repayment terms. The loan has been subordinated in favour of other creditors.
Related party transactions Expenses
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Notes to the annual financial statements
(continued)
for the three years ended March 31, 2009
37.
2007
2008
2009
Rm
Rm
Rm
RELATED PARTIES (continued) With subsidiaries: (continued) Special purpose entity – cell captive
Related party balances Investment – sinking fund (refer to note 11)
535
535
535
(19)
–
–
Related party transactions Investment income Africa Online Limited (Africa Online)
Related party balances Loan to subsidiary
–
74
236
Trade receivables
–
–
4
Trade payables
–
(4)
–
Revenue
–
(4)
–
Investment income
–
(2)
(11)
Loan to subsidiary
–
840
5,225
Trade receivables
–
–
75
Trade payables
–
(21)
–
Revenue
–
(21)
(55)
Investment income
–
(34)
(178)
Loan to subsidiary
–
1,985
1,985
Impairment of loan
–
–
(874)
Related party transactions
The loan is unsecured and bears interest at 3 month US$ LIBOR plus 5%. The loan has no fixed repayment terms. Multi-Links Telecommunications (Proprietary) Limited (Multi-Links)
Related party balances
Related party transactions
The loan is unsecured and bears interest at 3 month US$ LIBOR plus 5%. The loan may be prepaid in full or in whole, provided that each part prepayment may not be less than US$1 million. The advances must be repaid on May 1, 2009, July 1, 2009 and January 29, 2010. Telkom International (Proprietary) Limited
Related party transactions
The loan has been used to purchase a 75% shareholding in Multi-Links Telecommunications (Proprietary) Limited. The loan is unsecured and has no fixed repayment term.
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Notes to the annual financial statements
329
(continued)
for the three years ended March 31, 2009
37.
2007
2008
2009
Rm
Rm
Rm
RELATED PARTIES (continued) With subsidiaries: (continued) Telkom Media (Proprietary) Limited
Related party transactions Loan to subsidiary
–
326
471
Impairment of loan
–
(217)
(471)
54
58
54
51
26
50
(2)
(5)
(3)
Revenue
(400)
(485)
(445)
Expenses
206
201
180
Rent received
(29)
(21)
(20)
Rent paid
18
18
19
The loan is interest-free and has no repayment terms. Telkom Foundation
Related party transactions Expenses With entities under common control: Major public entities
Related party balances Trade receivables Trade payables The outstanding balances are unsecured and will be settled in cash in the ordinary course of business.
Related party transactions
Income with major public entities for the year ended March 31, 2007 has been restated due to additional BAN numbers being included in our calculation of income with major public entities. The effect of this is only on the disclosure of the related party note and has a RNil effect on the Company’s profit. Key management personnel compensation: (Including directors’ emoluments)
Related party transactions 108
114
54
Post-employment benefits
3
3
5
Termination benefits
–
27
–
Equity compensation benefits
8
24
36
Short-term employee benefits
The fair value of the shares that vested in the current year is R11 million (2008: R12 million; 2007: RNil).
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Notes to the annual financial statements
(continued)
for the three years ended March 31, 2009
37.
RELATED PARTIES (continued) Terms and conditions of transactions with related parties The sales to and purchases from related parties of telecommunication services are made at arm’s length prices. Except as indicated above, outstanding balances at the year end are unsecured, interest-free (except for interest charged on overdue telephone accounts) and settlement occurs in cash. Apart from the bank guarantee to the amount not exceeding R23 million (US$3 million) provided to Africa Online Limited, there have been no guarantees provided or received for related party receivables or payables. Except as indicated above for the year ended March 31, 2009, the Company has not impaired any amounts owed by related parties (2008: RNil; 2007: RNil). This assessment is undertaken each financial year through examining the financial position of the related party and the market in which the related party operates.
38.
SIGNIFICANT EVENTS Telkom Renaissance On November 14, 2008, Telkom’s Board of Directors approved the new organisation structure which is designed to fit Telkom’s defend and growth strategy. The new structure is effective April 1, 2009 and is being managed through a project called Telkom Renaissance. The Group has been restructured into three operating Business Units namely Telkom South Africa, Telkom International and Telkom Data Centre Operations. The Telkom Renaissance initiative will occur over the next 24 months to ensure that all the necessary remodelling, reorganising, revitalising and re-engineering happens in order to make the new structure function optimally. This initiative is a complete transformation of the way Telkom focuses on servicing its customers and creating value for its stakeholders. It is a positive, purposeful change towards a more accountable and competitive company. This change is a necessary part of Telkom’s strategy to maintain and grow market share in South Africa whilst building a strong footprint on the African continent. Capability Management Telkom will seek to manage costs and address service delivery constraints by realigning its structure and resources to better match its transforming information, communications and technology business. The transformation of the communications industry and increasing market and competitive pressure has put communication companies such as Telkom under increasing revenue and expense constraints while being required to improve customer service. As a result capability management is designed to ensure that the capabilities needed to succeed in a converged communications market are established through the optimal utilisation of external as well as internal capabilities, extracting efficiencies, where possible, through scale of a rapidly maturing retail and wholesale market and better organised functional areas in a more deregulated and liberalised communications market. Capability management includes the internal consolidation of certain functional areas and the optimisation of strategic supplier and service provider relationships improving performance in other functional areas. Capability Management will be concerned with assisting in addressing the margin and service delivery pressures by reassessing the operational service delivery methodology currently deployed with a view of increasing flexibility, reducing expense while improving service delivery across Telkom. Given the challenges Telkom faces in rolling out broadband, converged and data services, maintaining our legacy network and expanding our operations across the African continent, employees’ skills and performance must be aligned with our strategy to ensure financial, operational and transformational targets, customer expectations and shareholder expectations are met. The immediate objective therefore is to remodel service delivery. This is one of the strategic initiatives under Project Renaissance and will focus on the following: • Identify and assess existing capabilities; • Establish a Telkom Capability Inventory; • Determine future capability requirements; • Identify and develop a set of optimal service delivery options for achieving current and future strategic objectives; and
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Notes to the annual financial statements
331
(continued)
for the three years ended March 31, 2009
38.
SIGNIFICANT EVENTS (continued) Capability Management (continued) • Enable Telkom South Africa, Telkom International and Telkom Data Centre Operations to: – Improve resource efficiency; – Improve capital productivity; and – Improve service delivery. A memorandum of understanding was entered into between Telkom and organised labour which included issues such as the deferment of the Managed Services Partner outsourcing project implementation post April 2009 and the establishment of a restructuring forum where all restructuring initiatives will be debated between the parties concerned. Telkom Management Services (Proprietary) Limited (TMS) TMS was registered as a company during August 2008. Telkom’s Board approved the establishment of TMS as a part of Telkom’s strategic plan to grow revenue and expand geographic reach. Appointment of director On November 10, 2008, Telkom announced the appointment of Mr Peter Nelson as Chief Financial Officer and director of the Company with effect from December 8, 2008.
39.
SUBSEQUENT EVENTS Dividends The Telkom Board declared an ordinary dividend of 115 cents (2008: 660 cents, 2007: 600 cents) per share and a special dividend of 260 cents (2008: Nil cents, 2007: 500 cents) per share on June 19, 2009, payable on July 20, 2009 to shareholders registered on July 17, 2009. Acquisition of MWEB Africa Limited and majority equity stake in MWEB Namibia (Proprietary) Limited On November 10, 2008, Telkom International (Proprietary) Limited, a wholly owned subsidiary of Telkom, announced it had entered into agreements to acquire 100% of MWEB Africa Limited (‘MWEB Africa’) and 75% of MWEB Namibia (Proprietary) Limited (’MWEB Namibia‘) . The purchase price for the MWEB Africa Group including AFSAT and MWEB Namibia is US$55 million (approximately R498 million) with a deferred payment of US$14,18 million due when the profits of MWEB Group for the year ended March 31, 2009 are finalised. These shareholdings will be acquired from Multichoice Africa Limited and MIH Holdings Limited respectively, which are members of the Naspers Limited Group. MWEB Africa is an internet services provider in sub-Saharan Africa (excluding South Africa) which also provides network access services in some countries and is headquartered in Mauritius with operations in Namibia, Nigeria, Kenya, Tanzania, Uganda and Zimbabwe, an agency arrangement in Botswana and distributors in 26 sub-Saharan African countries. The acquisition of MWEB is part of the Group’s strategy of growing its broadband and solidifying its market position through acquisitions. The successful conclusion of the agreements being entered into is subject to conditions precedent, including regulatory approvals being obtained in certain African jurisdictions. Subsequent to year end, on April 21, 2009, the conditions precedent to the sale were fulfilled. AT&T strategic agreement On April 16, 2009, Telkom and AT&T, the global communications leader, entered into a strategic agreement which aims to extend AT&T’s global networking reach to sub-Saharan Africa and boost Telkom’s strategy to grow a strong ICT footprint on the African continent. The agreement will allow both companies to explore ways to provide global seamless communication and technology solutions and services to multinational customers, ether based in or seeking to extend their operations in sub-Saharan Africa. Under the terms of the memorandum of understanding, the two companies will begin work towards definitive agreements that would • directly connect the Telkom regional network and the AT&T global network; • deliver a wider geographic footprint of telecommunication services, in both sub-Saharan Africa and other global points; • enhance mobile service capabilities for corporate customers in sub-Saharan Africa; • extend global VPN (Virtual Private Network) services to support the state of art network requirements of customers either headquartered in or seeking to expand sites in sub-Saharan Africa; • explore other potential opportunities in areas such as Telepresence, hosting and professional services; and • expand the existing global wholesale voice services relationship between Telkom Group and AT&T.
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Notes to the annual financial statements
(continued)
for the three years ended March 31, 2009
39.
SUBSEQUENT EVENTS (continued) Telkom Media (Proprietary) Limited (Telkom Media) On August 31, 2006, Telkom created a new subsidiary, Telkom Media (Proprietary) Limited, with a black economic empowerment (‘BEE’) shareholding. ICASA awarded Telkom Media a commercial satellite and cable subscription broadcast licence on September 12, 2007. On March 31, 2008, the Telkom Board took a decision to substantially reduce its investment in Telkom Media and as such Telkom Media reduced its operational expenses and commitments to a minimum. Telkom Media did not meet the held for sale criteria at year end as management were unable to sell the disposal group for its expected price and therefore decided to abandon it. Subsequent to year end Telkom was approached by potential buyers of Telkom’s interest in Telkom Media and negotiations with the potential buyer were concluded. On May 4, 2009, Telkom sold its 75% interest in Telkom Media to Shenzhen Media South Africa (Proprietary) Limited for a nominal amount. Disposal and unbundling of stake in Vodacom In 2008 Telkom announced a decision to dispose of its entire stake in Vodacom through selling of 15% of its stake to Vodafone, a wholly owned subsidiary of Vodafone Group plc and unbundling its remaining 35% stake to its shareholders pursuant to a listing of Vodacom on the main board of JSE Limited. On May 18, 2009 Vodacom was successfully listed on the main board of the JSE Limited and a special dividend of R19 was distributed to all Telkom shareholders. Telkom successfully completed the unbundling of Vodacom shares to its shareholders on May 25, 2009. Bookbuilding of Vodacom Group (Proprietary) Limited shares On June 2, 2009, Telkom announced the successful completion of the accelerated bookbuilding of Vodacom shares, raising R1,540 million for "ineligible shareholders". The directors of Telkom, in consultation with Vodafone, determined that Telkom shareholders in the United States of America would be regarded as "ineligible shareholders" for the unbundling of Vodacom shares to shareholders of Telkom, which was completed on May 25, 2009, and would therefore not receive Vodacom shares in such distributions. The proceeds from the offering, net of applicable fees, expenses, taxes and charges, will be distributed to the "ineligible shareholders" in proportion to their entitlement to Vodacom shares. New York Stock Exchange listing Given the current global economic climate and the absolute necessity for Telkom to reduce its cost profile, the Board has decided to delist from the New York Stock Exchange. Maintaining a listing in the United States of America is expensive and takes considerable management time. The methodology employed and discipline gained from Sarbanes-Oxley reporting requirements will be retained to ensure strict governance compliance and transparent financial reporting. Telkom is comfortable that the Johannesburg Stock Exchange provides sufficient access to capital for both South African and global investors. Telkom intends to maintain a level 1 American Depository Receipt programme to facilitate over-the-counter- trading in the United States of America. Telkom Communications International (Proprietary) Limited The Abacus Financial Services (Mauritius) Limited issued a notice under section 265 (5) of the Companies Act 1984 that Telkom Communications International (Proprietary) Limited has been dissolved with effect from May 12, 2009. Other matters The directors are not aware of any other matter or circumstance since the financial year ended March 31, 2009 and the date of this report, or otherwise dealt with in the financial statements, which significantly affects the financial position of the Company and the results of its operations.
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Notes to the annual financial statements
333
(continued)
for the three years ended March 31, 2009
40.
ACCOUNTING PRONOUNCEMENTS NOT YET ADOPTED The Company has not early adopted the following standards, interpretations and amendments that have been issued and are not yet effective:
IFRS1 First-time Adoption of International Financial Reporting Standards: Cost of an Investment in a Subsidiary, Jointly Controlled Entity or Associate (amended) This amendment is effective for annual periods beginning on or after January 1, 2009. This standard is amended to allow an entity, in its separate financial statements, to determine the cost of investments in subsidiaries, jointly controlled entities or associates (in its opening IFRS financial statements) as one of the following amounts: • Cost determined in accordance with IAS27 • At the fair value of the investment at the date of the transition to IFRS, determined in accordance with IAS39 Financial Instruments: Recognition and Measurement • The previous GAAP carrying amount of the investment at the date of transition to IFRS This determination is made for each investment, rather than being a policy decision. The amendment does not have an impact on the annual financial statements.
IFRS2 Share-based Payment: Vesting Conditions and Cancellations (amended) This amendment is effective for annual periods beginning on or after January 1, 2009. The amendments to IFRS2 Share-based Payment clarifies the definition of vesting conditions and the accounting treatment of cancellations by the counterparty to a share-based arrangement. The amendment will not have a material impact on the Company’s financial statements.
IFRS2 Share-Based Payment: Group Cash-Settled Share-Based Payment Arrangements (amended) This amendment is effective for annual periods beginning on or after January 1, 2010. The amendment clarifies how an individual subsidiary in a group should account for some share-based payment arrangements in its own financial statements. The amendment will not have a material impact on the Company’s financial statements.
IFRS3 Business Combinations (revised) The revisions are effective for annual periods beginning on or after July 1, 2009 .The revised standard still applies the acquisition method of accounting for business combinations, with some significant changes. For example, all payments to purchase a business are to be recorded at fair value at the acquisition date, with contingent payments classified as debt subsequently re-measured through the income statement. There is a choice on an acquisition-by-acquisition basis to measure the non-controlling interest in the acquiree either at fair value or at the non-controlling interest’s proportionate share of the acquiree’s net assets. All acquisition-related costs should be expensed. The revised standard will not have an impact on the annual financial statements.
IFRS7 Financial Instruments: Disclosures (amended) The interpretation is applicable for annual periods beginning on or after January 1, 2009. The amendment requires enhanced disclosures about fair value measurements and liquidity risk. The impact of the amendment is being evaluated.
IFRS8 Operating Segments This standard is effective for annual periods beginning on or after January 1, 2009. The standard requires operating segments to be identified on the basis of internal reports about components of the entity that are regularly reviewed by the chief operating decision maker in order to allocate resources to the segment and to assess its performance. The impact of this standard is currently being evaluated.
IFRIC9 Reassessment of Embedded Derivatives (amended) The amendment is effective for annual periods ending on or after June 30, 2009. The amendment clarifies that on reclassification of a financial asset out of the ‘fair value through profit or loss’ category, all embedded derivatives have to be assessed and, if necessary, separately accounted for in financial statements. The amendment will not have an impact on the financial statements as Telkom does not have material embedded derivatives.
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Notes to the annual financial statements
(continued)
for the three years ended March 31, 2009
40.
ACCOUNTING PRONOUNCEMENTS NOT YET ADOPTED (continued) IFRIC13 Customer Loyalty Programmes The interpretation is effective for annual periods beginning on or after July 1, 2008. The interpretation requires loyalty award credits granted to customers in connection with a sales transaction to be accounted for as a separate component of the sales transaction. The consideration received in the sales transaction would, therefore, be allocated between the loyalty award credits and the other components of the sale. IFRIC13 is not relevant to the Company’s operations because none of the Company’s companies operate any loyalty programmes. Where the cost of fulfilling the awards is expected to exceed the consideration received, the entity will have to recognise an onerous contract liability. The impact of this amendment is being evaluated.
IFRIC15 Agreements for the Construction of Real Estate The interpretation is effective for annual periods beginning on or after January 1, 2009. The aim of this interpretation is to determine whether an agreement for the construction of real estate is within the scope of IAS11 Construction Contracts or IAS18 Revenue. This interpretation is not relevant to the Company’s operations as the Company does not construct real estates.
IFRIC16 Hedges of a Net Investment in a Foreign Operation The interpretation is effective for annual periods beginning on or after October 1, 2008. The interpretation provides guidance in respect of hedges of foreign currency gains and losses on a net investment in a foreign operation. This includes the fact that net investment hedging relates to differences in functional currency and not presentation currency, and hedging instruments may be held anywhere in the Group. The interpretation will not have an impact on the Company’s financial statements.
IFRIC17 Distributions of Non-Cash Assets to Owners The interpretation is effective for annual periods beginning on or after July 1, 2009. The interpretation provides guidance on how an entity should account for non-cash distributions to its owners and/or distributions that give owners a choice of receiving either non-cash assets or a cash alternative. The impact of the amendment is being evaluated.
IFRIC 18 Transfer of Assets from Customers The interpretation is effective for annual periods beginning on or after July 1, 2009. IFRIC18 clarifies the requirements of IFRSs for agreements in which an entity receives from a customer an item of property, plant and equipment (‘PPE’) that the entity must then use either to connect the customer to a network or to provide the customer with ongoing access to a supply of goods or services. The IFRIC also provides guidance where an entity receives cash from a customer that must be used only to acquire or construct an item of PPE in order to connect the customer to a network or provide the customer with ongoing access to a supply of goods or services. The impact of this interpretation is currently being evaluated.
IAS1 Presentation of Financial Statement (revised) The revised standard is effective for annual periods beginning on or after January 1, 2009. IAS1R introduces a statement of comprehensive income with two optional formats and refers to the balance sheet and cash flow statement by different names: the ‘statement of financial position’ and ‘statement of cash flows’, respectively. The revision to the standard will result in changes in the way the annual financial statements are presented.
IAS7 Cash Flow Statement: Consequential Amendments arising from Amendments to IAS16 The amendment is effective for annual periods beginning on or after January 1, 2009. IAS7 as amended requires cash receipts and payments relating to purchase, rental and sale of property, plant and equipment held for rental to be treated as cash flows from operating activities. The impact of this amendment is being evaluated.
IAS23 Borrowing Costs (revised) The revised standard applies to borrowing costs relating to qualifying assets for which the commencement date for capitalisation is on or after January 1, 2009. The revised standard requires all borrowing costs that are directly attributable to the acquisition, construction or production of qualifying assets to be capitalised. The Company does not expect the adoption of the standard to have a material impact.
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Notes to the annual financial statements
335
(continued)
for the three years ended March 31, 2009
40.
ACCOUNTING PRONOUNCEMENTS NOT YET ADOPTED (continued) IAS27 Consolidated and Separate Financial Statements (revised) The revisions are effective for annual periods beginning on or after July 1, 2009. The revised standard requires the effects of all transactions with non-controlling interests to be recorded in equity if there is no change in control and these transactions will no longer result in goodwill or gains and losses. The standard also specifies the accounting when control is lost. Any remaining interest in the entity is re-measured to fair value, and a gain or loss is recognised in profit or loss. The impact of the revised standard is being evaluated. IAS27 Consolidated and Separate Financial Statements – Cost of an Investment in a Subsidiary, Jointly Controlled Entity or Associate (amended) The amended standard is effective for annual periods beginning on or after January 1, 2009. The amended standard is for the following changes in respect of the holding company’s separate financial statements: • The deletion of the ‘cost method’. Making the distinction between pre- and post-acquisition profits is no longer required. All dividends will be recognised in profit or loss. However, the payment of such dividends requires the entity to consider whether there is an indicator of impairment; and • In cases of reorganisations where a new parent is inserted above an existing parent of the Group (subject to meeting specific requirements), the cost of the subsidiary is the previous carrying amount of its share of equity items in the subsidiary rather than its fair value. The impact of this amended standard is currently being evaluated.
Amendment to IAS32 Financial Instruments Presentation and IAS1 Presentation of Financial Statements, Puttable Financial Instruments The amendment is effective for periods beginning January 1, 2009. The amendments classify puttable financial instruments, or components of instruments, that impose on the entity an obligation to deliver to another party a pro-rata share of the net assets of the entity only on liquidation, as equity, provided they have particular features and meet specific conditions. The impact of this amended standard is being evaluated.
IAS39: Financial Instruments: Recognition and Measurement (amended) The amendment is effective for annual periods ending on or after June 30, 2009. The amendment clarifies that on reclassification of a financial asset out of the ‘fair value through profit or loss’ category, all embedded derivatives have to be assessed and, if necessary, separately accounted for in financial statements. The amendment will not have an impact on the financial statements as Telkom does not have material embedded derivatives.
IAS39 Financial Instruments: Recognition and Measurement – Eligible Hedged Items (amended) The amendment to the standard is effective for annual periods beginning on or after July 1, 2009. The amendment clarifies that an entity is permitted to designate a portion of the fair value changes or cash flow variability of a financial instrument as a hedged item. The amendment will not have an impact on the financial statements as Telkom does not apply hedge accounting.
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Notes to the annual financial statements
(continued)
for the three years ended March 31, 2009
40.
ACCOUNTING PRONOUNCEMENTS NOT YET ADOPTED (continued) Changes as a result of the annual improvements project A number of standards were amended as a result of the annual improvements project of the IASB in May 2008 effective for annual periods beginning on or after January 1, 2009, with the exception of IFRS5 which is effective for annual periods beginning on or after July 1, 2009. These standards were as follows: IFRS5 Non-Current Assets Held for Sale and Discontinued Operations IAS1 Presentation of Financial Statements IAS16 Property, Plant and Equipment IAS19 Employee Benefits IAS20 Accounting for Government Grants and Disclosure of Government Assistance IAS23 Borrowing Costs IAS27 Consolidated and Separate Financial Statements IAS28 Investments in Associates IAS29 Financial Reporting in Hyperinflationary Economies IAS31 Interests in Joint Ventures IAS36 Impairment of Assets IAS38 Intangible Assets IAS39 Financial Instruments: Recognition and Measurement IAS40 Investment Property IAS41 Agriculture. The Company will adopt the changes to these standards during the 2010 financial year with the exception of IFRS5, which will be adopted during the 2011 financial year. The Company is currently evaluating the effects of the amendments.
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Shareholder analysis at March 31, 2009
Number of shareholders
%
Holdings
%
1 – 100 shares
68,789
71.69
2,392,802
0.46
101 – 1 000 shares
24,353
25.38
6,839,429
1.31
Range of shareholders
2,031
2.12
5,683,371
1.09
10 001 – 50 000 shares
1 001 – 10 000 shares
380
0.40
9,281,138
1.78
50 001 – 100 000 shares
157
0.16
11,252,414
2.16
100 001 – 1 000 000 shares
217
0.23
59,384,767
11.40
33
0.03
425,949,977
81.80
95,960
100.00
520,783,898
100.00
Banks
147
0.15
56,436,518
10.84
Close corporations
163
0.17
236,071
0.05
1
0.00
37,506,809
7.20 0.14
1 000 001 and more shares
Type of shareholder
Empowerment Endowment funds
232
0.24
734,227
91,625
95.48
11,570,245
2.22
Insurance companies
78
0.08
26,072,715
5.01
Investment companies
67
0.07
13,538,084
2.60 0.08
Individuals
Medical aid schemes
20
0.02
437,317
422
0.44
40,790,503
7.83
2,438
2.54
2,869,011
0.55
126
0.13
207,218,515
39.79
2
0.00
19,790,236
3.80
Retirement funds
350
0.36
101,615,937
19.51
Private companies
263
0.27
1,583,493
0.30
Public companies
25
0.03
375,871
0.07
1
0.00
8,346
0.00
95,960
100.00
520,783,898
100.00
95,522
99.54
447,187,584
85.87
128
0.13
51,178,233
9.83
99
0.10
15,573,222
2.99
Mutual funds Nominees and trusts Other corporations (including the Government of the Republic of South Africa) Own holdings
Share trusts
Geographical holdings by owner South Africa United States United Kingdom Europe Other
65
0.07
5,506,841
1.06
146
0.15
1,338,018
0.26
95,960
100.00
520,783,898
100.00
Beneficial shareholders of more than 2% The government of the Republic of South Africa
207,038,058
39.76
Black Ginger 33 (Proprietary) Limited
46,604,996
8.95
Public Investment Corporation
34,773,817
6.67
Elephant Consortium NewShelf 772 (Proprietary) Limited
37,506,809
7.20
Liberty Group
18,151,712
3.49
Rossal No 65 (Proprietary) Limited Equities
11,646,680
2.24
355,722,072
68.31
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Shareholder analysis
continued
at March 31, 2009
Holdings
%
Non-public shareholders
260,388,774
50.78
The Government of the Republic of South Africa
207,038,058
39.76
37,506,809
7.20
Government buffer account
9,461
0.00
Diabo share trust
8,346
0.00
19,790,236
3.80
Public and non-public shareholders
Empowerment
Telkom Treasury Stock Executive and non-executive directors*
83,544
0.02
Subsidiaries directors*
24,098
0.00
256,323,346
49.22
520,783,898
100.00
Public shareholders Institutional and retail investors
* Director holdings consists of direct and indirect holdings.
The information above is based on registered shareholders, except where only beneficial shareholders’ information was available.
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339
Definitions
3G
CARRIER PRE-SELECTION
The generic term, 3G, is used to denote the next generation of mobile
Carrier pre-selection is usually initiated by the telecoms Regulator.
systems designed to support high-speed data transmission (144 Kbps and higher) and Internet Protocol (IP)-based services in fixed, portable and mobile environments. As envisaged by the ITU, the 3G system will integrate different service coverage zones and be a global platform
It enables individuals to choose which telecom will carry their traffic (mainly long distance) by a signalling contract rather than having to dial extra digits.
and the necessary infrastructure for the distribution of converged
CDMA (CODE DIVISION MULTIPLE ACCESS)
service, whether mobile or fixed, voice or data, telecommunications,
CDMA is one of many technologies for digital transmission of radio
content or computing.
signals between, for example, mobile telephones and radio base
ADSL (ASYMMETRICAL DIGITAL SUBSCRIBER LINE) ADSL is a broadband access standard which uses existing copper lines to offer high-speed digital connections over the local loop. ADSL transmits data asymmetrically, meaning that the bandwidth usage is much higher in one direction than the other. ADSL provides greater
stations. In CDMA, which is a spread-spectrum modulation technology, each call is assigned a unique “pseudorandom” sequence of frequency shifts that serve as a code to distinguish it. The mobile phone is then instructed to decipher only a particular code to pluck, as it were, the right conversation off the air.
bandwidth from the exchange to the customer (ie. downloading) than
CIRCUIT
from the customer to the exchange (ie. sending).
A circuit is a connection or line between two points. This connection
ARPU Vodacom’s average monthly revenue per customer, or ARPU, is
can be made through various media, including copper, coaxial cable, fibre or microwave. A telephone exchange is a circuit switch.
by the average monthly total reported customer base during the period.
DECT (DIGITAL ENHANCED CORDLESS TELECOMMUNICATIONS)
ARPU excludes revenue from equipment sales, other sales and services
DECT is the standard for cordless telephones. DECT phones
and revenue from national and international users roaming on
communicate using the PSTN (public switched telephone network)
Vodacom’s networks.
through a small base station in the home or office and have a working
calculated by dividing the average monthly revenue during the period
ATM (ASYNCHRONOUS TRANSFER MODE)
radius of between 50 and 300 metres.
ATM is a high-speed Wide Area Network (WAN), connection-
EBITDA
oriented, packet-switching data communications protocol that allows
EBITDA represents profit for the year before taxation, finance charges,
voice, data and video to be delivered across existing local and Wide
investment income and depreciation, amortisation, impairment and
Area Networks. ATM divides data into cells and can handle data
write-offs.
traffic in bursts. It is asynchronous, in that the stream of cells from one
EDGE (ENHANCED DATA FOR GSM EVOLUTION)
particular user is not necessarily continuous.
EDGE is a technology designed to enhance GSM and TDMA systems
BANDWIDTH
with respect to data rates and is widely considered to be the GSM
Bandwidth is a measure of the quantity of signals that can travel over
evolution beyond GPRS. It enhances the data capabilities of GSM and
a transmission medium such as copper or a glass fibre strand. It is the
TDMA systems by altering the RF modulation scheme to allow greater
available space available to carry a signal. The greater the
data rates per time slot. Because it uses a different modulation
bandwidth, the greater the information carrying capacity. Bandwidth is
technique across the air-interface, EDGE requires different mobile
measured in bits per second.
terminals/ handsets than those designed for the GSM air-interface.
BROADBAND
EFFECTIVE TAX RATE
Broadband is a method of measuring the capacity of different types of
The effective tax rate is the tax charge in the income statement divided
transmission. Digital bandwidth is measured in the rate of bits
by pre-tax profit.
transmitted per second (bps). For example, an individual ISDN channel
ETHERNET
has a bandwidth of 64 Kbps, meaning that it transmits 64,000 bits (digital signals) every second.
CAGR Compound Annual Growth Rate.
Ethernet is a protocol that defines how data is transmitted to and received from LANs. It is the most prevalent LAN protocol, with speeds of up to 10 Mbps.
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Definitions
continued
EVDO (EVOLUTION-DATA OPTIMISED OR EVOLUTIONDATA ONLY)
local area networks and between end-points in a wide area network.
EVDO is a telecommunications standard for the wireless transmission of
the customer sees a continuous, dedicated connection, but does not
data through radio signals, typically for broadband Internet access.
pay for a full-time leased line.
It uses multiplexing techniques including code division multiple access
GPRS (GENERAL PACKET RADIO SERVICE)
(CDMA) as well as time division multiple access (TDMA) to maximise both individual user’s throughput and the overall system throughput.
The network effectively provides a permanent circuit, which means that
GPRS is a packet rather than a circuit-based technology. GPRS allows for faster data transmission speed to both GSM and TDMA (IS-136)
FIBRE OPTICS
networks. GPRS is a packet-switched technology that overlays the
Fibre optics is where messages or signals are sent via light rather than
circuit-switched GSM network. The service can be introduced to
electrical signals down a very thin strand of glass. Light transmission
cellular networks by infrastructure.
enables much higher data rates than conventional wire, coaxial cable
GSM (GLOBAL SYSTEM FOR MOBILE)
and many forms of radio. Signals travel at the speed of light and do not generate nor are subject to interference.
GSM is a second generation digital mobile cellular technology using a combination of frequency division multiple access (FDMA) and time
FIBRE RINGS
division multiple access (TDMA). GSM operates in several frequency
Fibre rings have come to be used in many fibre networks as it provides
bands: 400 MHz, 900 MHz and 1800 MHz. On the TDMA side,
more network resiliency: if there is a failure along a route and a ring is
there are eight timeslots or channels carrying calls, which operate on
broken, the direction of the traffic can be reversed and the traffic will
the same frequency. Unlike other cellular systems, GSM provides a
still reach its final destination.
high degree of security by using subscriber identity module (SIM) cards and GSM encryption.
FIXED ACCESS LINES Fixed
access
lines
are
comprised
of
public
switched
HSDPA
telecommunications network lines, or PSTN lines, including integrated
High Speed Downlink Packet Access.
services digital network channels, or ISDN channels, and public and
IAS
private payphones, but excluding internal lines in service.
FIXED ACCESS LINES PER EMPLOYEE To calculate the number of access lines per employee the total number of access lines is divided by the number of employees at the end of the period.
FIXED-LINE PENETRATION Fixed-line penetration or teledensity is based on the total number of telephone lines in service at the end of the period per 100 persons in the population of South Africa. Population is the estimated South African population at the mid-year in the periods indicated as
International Accounting Standards.
IFRS International Financial Reporting Standards.
INTERCONNECTION Interconnection refers to the joining of two or more networks. Networks need to interconnect to enable traffic to be transmitted to and from destinations. The amounts paid and received by the operators vary according to distance, time, the direction of traffic, and the type of networks involved.
published by Statistics South Africa, a South African Government
INTEREST COVER
department.
Interest cover is calculated by dividing EBIT by the net interest charge
FIXED-LINE TRAFFIC
in the income statement. It is a measure of income gearing.
Fixed-line traffic, other than international outgoing mobile traffic,
ISDN (INTEGRATED SERVICES DIGITAL NETWORK)
international interconnection traffic and international Voice over Internet
ISDN is a data communications standard used to transmit digital
Protocol traffic, is calculated by dividing traffic operating revenue for
signals over ordinary copper telephone cables. This is one technology
the particular category by the weighted average tariff for such
for overcoming the “last mile” of copper cables from the local
category during the relevant period. Fixed-line international outgoing
exchange to the subscribers premises, which has proved a bottleneck
mobile traffic and international interconnection traffic are based on the
for Internet access, for example. ISDN allows to carry voice and data
traffic registered through the respective exchanges and reflected in
simultaneously, in each of at least two channels capable of carrying
international interconnection invoices. International Voice over Internet
64 Kbps. It provides up to 128 Kbps and a total capacity of 144
Protocol traffic is based on the traffic reflected in invoices.
Kbps exist.
FRAME RELAY
ITU (INTERNATIONAL TELECOMMUNICATIONS UNION)
Frame relay is a widely implemented telecommunications service
ITU
designed for cost-efficient data transmission for data traffic between
telecommunications services.
is
the
global
technical
standard-setting
body
for
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Definitions
341
continued
LAN (LOCAL AREA NETWORK)
NET DEBT TO TOTAL EQUITY
A LAN is a group of devices that communicate with each other within
Net debt to total equity is a measure of book leverage (gearing): net
a limited geographic area, such as an office.
debt in the balance sheet divided by total equity (the sum of
LEASED LINE
shareholders’ funds plus minority interests).
A leased line is a telecommunications transmission circuit that is
NGN (NEXT GENERATION NETWORK)
reserved by a communications provider for the private use of a
A Next Generation Network is a packet-based network able to
customer.
provide services including telecommunication services and able to
LIBOR London Interbank Offer Rate.
LOCAL LOOP The local loop is the final connection between the exchange and the home or office. It is also known as the last mile.
MICROWAVE Microwave is radio transmission using very short wavelengths.
make use of multiple broadband, QoS-enabled transport technologies. It offers unrestricted access by users to different service providers.
OPERATING FREE CASH FLOW Operating free cash flow is defined as cash flow from operating activities, after interest and taxation, before dividends paid, less cash flow from investing activities.
PACKET SWITCHING Packet switching is designed specifically for data traffic, as it cuts the
MMS (MULTIMEDIA MESSAGING SERVICES)
information up into small packets, which are each sent across the
MMS is a service developed jointly together with 3GPP, allows users
network separately and are then reassembled at the final destination.
to combine sounds with images and text when sending messages,
This allows more users to share a given amount of bandwidth. X.25,
much like the text-only SMS.
ATM and frame relay are all packet switching techniques.
MOBILE CHURN
POP (POINT OF PRESENCE)
Vodacom’s churn is calculated by dividing the average monthly number
A POP is a service provider’s location for connecting to users.
of disconnections during the period by the average monthly total
Generally, POPs refer to the location where people can dial into the
reported customer base during the period.
provider’s computer. Most providers have several POPs to allow low-
MOBILE PENETRATION
cost local access via telephone lines.
Vodacom calculates penetration, or teledensity, based on the total
PSTN (PUBLIC SWITCHED TELEPHONE NETWORK)
number of customers at the end of the period per 100 persons in the
The PSTN is a collection of interconnected voice telephone networks,
population of South Africa. Population is the estimated South African
either for a given country or the whole world. It is the sum of the parts.
population at the mid-year in the periods indicated as published by Statistics South Africa, a South African Governmental department.
It was originally entirely analog, but now increasingly digital (indeed in many developed countries digitisation has reached 100%), these
MOBILE TRAFFIC
networks can be either state-owned or commercially owned. PSTN is
Vodacom’s traffic comprises total traffic registered on Vodacom’s
distinct from closed private networks (although these may interconnect
network, including bundled minutes, outgoing international roaming
to the PSTN) and from public data networks (PDN).
calls and calls to free services, but excluding national and incoming
REVENUE PER FIXED ACCESS LINE
international roaming calls.
Revenue per fixed access line is calculated by dividing total fixed-line
MOU (MOBILE MINUTES OF USE)
revenue during the period, excluding data and directories and other
Vodacom’s average monthly minutes of use per customer, or average MOU, is calculated by dividing the average monthly minutes during
revenue, by the average number of fixed access lines during the period.
the period by the average monthly total reported customer base during
RICA
the period. MOU excludes calls to free services, bundled minutes and
Regulation of Interception of Communication and Provision of
data minutes.
Communication- related Information Act.
NET DEBT
ROA (RETURN ON ASSETS)
Net debt is all interest-bearing debt finance (long-term and short-term)
Return on Assets is calculated by dividing net profit (annualised) by total
less cash and marketable securities.
assets.
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Definitions
continued
ROE (RETURN ON EQUITY)
WAN (WIDE AREA NETWORK)
Return on Equity is calculated by dividing net income by the average
A WAN comprises LANs in different geographic locations that are
of the shareholders’ funds.
connected, often over the public network.
SDH (SYNCHRONOUS DIGITAL HIERARCHY)
WAP (WIRELESS APPLICATION PROTOCOL)
SDH is used in most modern systems, where multimedia can be
WAP is an application environment designed to bridge the gap
transmitted at high speeds. The networks are shaped in a ring, so that
between the mobile and Internet worlds. It is a set of communication
if there is a problem, the traffic can be redirected in the other direction
protocols for wireless devices designed to provide vendor-neutral and
and the caller will not detect the interruption.
technology-
SMS (SHORT MESSAGE SERVICE)
neutral
access
to
the
Internet
and
advanced
telecommunications services.
SMS refers to short, usually text-based messages sent by or to a
W-CDMA (WIDEBAND CODE DIVISION MULTIPLE ACCESS)
wireless subscriber. They are not delivered to the recipient instantly and
W-CDMA is a 3G mobile network that supports services like high-
have some degree of transmission time delay. SMS messages are
speed Internet access, video and high quality voice transmission.
usually limited to total character lengths of 140 to 160 characters.
WIMAX
SWITCH
WiMAX is a standard for extending broadband wireless access to new
A switch is a computer that acts as a conduit and director of traffic. It
locations and over longer distances. The technology is expected to
is a means of sharing resources as a network.
enable multimedia applications with wireless connectivity and typically
TOTAL INTEREST-BEARING DEBT Total interest-bearing debt is defined as short- and long-term interest-
with a range of up to 30 km. It is a standard for fixed wireless access with substantially higher bandwidth capabilities than cellular networks.
bearing debt, including credit facilities, finance leases and other
The emergence of further enhancements to the standard will enable
financial liabilities.
nomadic data communications across an entire metropolitan area
UMTS (UNIVERSAL MOBILE TELECOMMUNICATIONS SYSTEM) UMTS is the Western European name for the 3G WCDMA standard adopted as an evolutionary path by the GSM world. However, it utilises the radio spectrum in a fundamentally different manner than GSM. UMTS is based on DCMA technology and the GSM standard is based on TDMA technology.
VOIP (VOICE OVER INTERNET PROTOCOL) Voice over Internet Protocol is a protocol enabling voice calls to be made over the Internet. Rather than a dedicated circuit being set up between the caller and receiver, as with ordinary phone calls, the voice conversation is digitised and transmitted over Internet Protocol using packet-switched data networks.
network linking homes and businesses to the core telecommunications network. WiMAX can be viewed as a technology complementing existing ADSL broadband offerings.
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Special note regarding forward-looking statements
Many of the statements included in this annual report, as well as oral
Competition Commission and others; any requirements that we
statements that may be made by us or by officers, directors or
unbundle the local loop, our ability to negotiate favourable terms, rates
employees acting on behalf of us, constitute or are based on forward
and conditions for the provision of interconnection services and
looking statements within the meaning of the U.S. Private Securities
facilities leasing services or if ICASA finds that we have significant
Litigation Reform Act of 1995, specifically Section 27A of the U.S.
market power or otherwise imposes unfavourable terms and conditions
Securities Act of 1933, as amended, and Section 21E of the U.S.
on us; our ability to implement and recover the substantial capital and
Securities Exchange Act of 1934, as amended. All statements, other
operational costs associated with carrier preselection, number
than statements of historical facts, including, among others, statements
portability and the monitoring, interception and customer registration
regarding our mobile and other strategies, future financial position and
requirements contained in the South African Regulation of Interception
plans, objectives, capital expenditures, projected costs and
of Communications and Provisions of Communication-Related
anticipated cost savings and financing plans, as well as projected
Information Act and the impact of these requirements on our business;
levels of growth in the communications market, are forward looking
Telkom’s ability to comply with the South African Public Finance
statements. Forward looking statements can generally be identified by
Management Act and South African Public Audit Act and the impact of
the use of terminology such as “may”, “will”, “should”, “expect”,
the Municipal Property Rates Act; fluctuations in the value of the Rand
“envisage”, “intend”, “plan”, “project”, “estimate”, “anticipate”,
and inflation rates; the impact of unemployment, poverty, crime, HIV
“believe”, “hope”, “can”, “is designed to” or similar phrases, although
infection, labour laws and labour relations, exchange control
the absence of such words does not necessarily mean that a statement
restrictions and power outages in South Africa; and other matters not
is not forward looking.
yet known to us or not currently considered material by us.
These forward looking statements involve a number of known and
We caution you not to place undue reliance on these forward looking
unknown risks, uncertainties and other factors that could cause our
statements. All written and oral forward looking statements attributable
actual results and outcomes to be materially different from historical
to us, or persons acting on our behalf, are qualified in their entirety by
results or from any future results expressed or implied by such forward
these cautionary statements. Moreover, unless we are required by law
looking statements. Among the factors that could cause our actual
to update these statements, we will not necessarily update any of these
results or outcomes to differ materially from our expectations are those
statements after the date of this annual report, either to conform them
risks identified in the Sustainability report – Enterprise Risk Management
to actual results or to changes in our expectations.
– Risk factors, including, but not limited to, the effect of global economic and financial conditions on us, any changes to our mobile strategy and our inability to successfully implement such strategy and organisational changes thereto, our ability to turn around Multi-Links’s financial performance; increased competition in the South African communications and data communications markets; our ability to implement our strategy of transforming from basic voice and data connectivity to fully converged solutions, developments in the regulatory environment; continued mobile growth and reductions in Telkom’s net interconnect margins; Telkom’s ability to expand its operations and make investments and acquisitions in other African countries and the general economic, political, social and legal conditions in South Africa and in other countries where Telkom invests; our ability to improve and maintain our management information and other systems; our ability to attract and retain key personnel and partners; our ability to replace revenue, profits and cash flows previously received from Vodacom with revenue, profits and cash flows from our existing and new businesses; our negative working capital; changes in technology and delays in the implementation of new technologies; our ability to reduce theft, vandalism, network and payphone fraud and lost revenue to nonlicensed operators; the amount of damages Telkom is ultimately required to pay to Telcordia Technologies Incorporated; the outcome of regulatory, legal and arbitration proceedings, including tariff approvals, and the outcome of Telkom’s hearings before the
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Notice of annual general meeting
Telkom SA Limited (Incorporated in the Republic of South Africa) (Registration number 1991/005476/06 (JSE and NYSE share code: TKG) ISIN: ZAE000044897) (Telkom or the Company)
Notice is hereby given that the seventeenth annual general meeting of members will be held on Wednesday 16 September 2009 in The Bill Gallagher Room, Sandton Convention Centre, Maude Street, Sandton, South Africa at 10:00 to conduct the following business: 1.
To receive and consider the annual financial statements for the year ended 31 March 2009.
2.
To elect Mr DD Barber as a director who in terms of the articles of association retires by rotation. Being eligible, Mr Barber is available for re-election. His profile may be found on page 29 of the annual report.
3.
To re-appoint Ernst & Young Inc as auditors of the Company, to hold office until the conclusion of the next annual general meeting of the Company and to note that the individual registered auditor who will undertake the audit during the financial year ending 31 March 2010 is Mr R Hillen.
SPECIAL BUSINESS To consider and if deemed fit, pass the following special resolutions: Special resolution number 1 It is resolved that the Company’s articles of association be and are hereby amended as follows – 1.
In article 1.1.1.58 in line 4 the words “and the Company’s subsidiaries expressly include Vodacom and its subsidiaries” are deleted
2.
Article 1.1.1.66 is deleted.
Reason for and effect of special resolution number 1: The reason for and effect of special resolution number 1 is to clean up the Articles by deleting all references in the Articles that are no longer applicable, namely references to Vodacom, as Vodacom is no longer an associate company of the Company. Special resolution number 2 RESOLVED THAT the directors of the Company be and are hereby authorised to approve the purchase by the Company, or by any of its subsidiaries, of the Company’s ordinary shares subject to the provisions of the Companies Act, 1973, as amended, and the Listings Requirements of JSE Limited (JSE) provided that: a)
the general authority granted to the directors shall be valid only until the Company’s next annual general meeting and shall not extend beyond 15 (fifteen) months from the date of this resolution;
b)
any general purchase by the Company and/or any of its subsidiaries of the Company’s ordinary shares in issue shall not in aggregate in any one financial year exceed 20% (twenty percent) of the Company’s issued ordinary share capital at the time that the authority is granted;
c)
no acquisition may be made at a price more than 10% (ten percent) above the weighted average of the market value of the ordinary share for the 5 (five) business days immediately preceding the date of such acquisition;
d)
the repurchase of the ordinary shares are effected through the order book operated by the JSE trading system and done without any prior understanding or arrangement between the Company and the counter party (reported trades are prohibited);
e)
the Company may only appoint one agent at any point in time to effect any repurchase(s) on the Company’s behalf;
f)
the Company or its subsidiary may not repurchase ordinary shares during a prohibited period;
g)
the general authority may be varied or revoked by special resolution of the members prior to the next annual general meeting of the Company; and
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h)
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should the Company or any subsidiary cumulatively repurchase, redeem or cancel 3% (three percent) of the initial number of the Company’s ordinary shares in terms of this general authority and for each 3% (three percent) in aggregate of the initial number of that class acquired thereafter in terms of this general authority, and announcement shall be made in terms of the Listings Requirements of the JSE.”
Having considered the effect on the Company of the maximum repurchase under this general authority, the directors are of the opinion that: •
the Company and the Group will be able in the ordinary course of business to pay its debts for a period of 12 (twelve) months after the date of this notice of annual general meeting;
•
the assets of the Company and the Group will be in excess of the liabilities of the Company and the Group for a period of 12 (twelve) months after the date of this notice of annual general meeting which assets and liabilities have been valued in accordance with the accounting policies used in the audited financial statements of the Group for the year ended March 31, 2009;
•
the share capital and reserves of the Company and the Group will be adequate for the ordinary business purposes for a period of 12 (twelve) months after the date of this notice of annual general meeting; and
•
the working capital of the Company and Group are considered adequate for ordinary business purposes for a period of 12 (twelve) months after the date of this notice of annual general meeting.
The Board will ensure that the Company’s sponsor provides the JSE with the necessary report on the adequacy of the working capital of the Company and its subsidiaries in terms of the JSE Listings Requirements prior to the commencement of any share repurchase in terms of this special resolution.
Reasons for and effect of special resolution number 2: The reason for this special resolution is to grant the Company’s directors a renewable general authority or permit a subsidiary Company to acquire ordinary shares of the Company. The effect of this special resolution is to confer a general authority on the directors of the Company to repurchase ordinary shares of the Company which are in issue from time to time. The Board has considered the impact of a repurchase of up to 20% (twenty percent) of the Company’s shares, being the maximum permissible under a general authority in terms of the JSE Listings Requirements. Should the opportunity arise and should the directors deem it in all respects to be advantageous to the Company to repurchase such shares, it is deemed appropriate that the directors be authorised to repurchase the Company’s shares.
Additional disclosures required in terms of the JSE Listings Requirements Directors and management – refer to pages 28 to 32 of the annual report. Major shareholders – refer to page 3 of the annual report. Directors’ interests in securities – refer to page 229 of the annual report. Share capital of the Company – refer to page 196 of the annual report.
Directors’ responsibility statement The directors, whose names appear on pages 28 and 29 of the annual report collectively and individually accept full responsibility for the accuracy of the information pertaining to this special resolution and certify to the best of their knowledge and belief there are no facts that have been omitted which would make any statement false or misleading and that all reasonable enquiries to ascertain such facts have been made and that this special resolution contains all information required by the Listings Requirements of the JSE.
Litigation statement The directors, whose names appear on pages 28 and 29 of the annual report , are not aware of any legal or arbitration proceedings, including proceedings that are pending or threatened other than what has been disclosed on page 223, that may have or have had in the previous twelve months a material effect on the Group’s financial position.
Material change Other than the facts and developments reported on in the annual report which was posted to shareholders [with this notice/or similar wording], there have been no material changes in the affairs or financial position of the Company and its subsidiaries since the date of signature of the annual financial statements and the date of this notice.
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Notice of annual general meeting
continued
VOTING AND PROXIES Ordinary shareholders are entitled to attend, speak and vote at the annual general meeting. Ordinary shareholders may appoint a proxy to attend, speak and vote in their stead. A proxy need not be a shareholder of the Company. Shareholders holding dematerialised shares, but not in their own name, must furnish their Central Securities Depositary Participant (CSDP) or broker with their instructions for voting at the annual general meeting. If your CSDP or broker, as the case may be, does not obtain instructions from you, it will be obliged to act in terms of your mandate furnished to it, or if the mandate is silent in this regard, complete the relevant form of proxy attached. Unless you advise your CSDP or broker, in terms of the agreement between you and your CSDP or broker by the cut off time stipulated therein, that you wish to attend the annual general meeting or send a proxy to represent you at this annual general meeting, your CSDP or broker will assume that you do not wish to attend the annual general meeting or send a proxy. If you wish to attend the annual general meeting or send a proxy, you must request your CSDP or broker to issue the necessary letter of authority to you. Shareholders holding dematerialised shares in their own name, or holding shares that are not dematerialised, and who are unable to attend the annual general meeting and wish to be represented thereat, must complete the relevant form of proxy attached in accordance with the instructions therein and lodge it with or mail it to the transfer secretaries. Forms of proxy should be forwarded to reach the transfer secretaries, Computershare Investor Services (Pty) Ltd by no later than 10:00 on Tuesday 15 September 2009. The completion of a form of proxy will not preclude a shareholder from attending the annual general meeting. By order of the Board
Per: ML Lephadi
Group Secretary 10 July 2009
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Form of proxy
Telkom SA Limited (Incorporated in the Republic of South Africa) (Registration number 1991/005476/06 (JSE and NYSE share code: TKG) ISIN: ZAE000044897) (Telkom or the Company)
(For completion by certificated shareholders and own-name dematerialised shareholders . Members entitled to attend and vote at the annual general meeting may appoint one or more proxies to attend ,vote and speak at the annual general meeting in his stead.Such proxy/ies need not be a member/s of Telkom.) For use at the seventeenth annual general meeting of shareholders of Telkom to be held on Wednesday 16 September 2009 in The Bill Gallagher Room, Sandton Convention Centre, Maude Street, Sandton, South Africa, South Africa at 10:00 I/We
(name in BLOCK LETTERS)
Of
(address in BLOCK LETTERS)
Being a member/members of the Company holding
ordinary shares in the Company,
do hereby appoint: of or failing him/her of or of or failing him/her, the Chairman of the annual general meeting as my/our proxy to represent me/us at the annual general meeting to be held on Wednesday 16 September 2009 at 10:00 or at any adjournment thereof, as follows: For
Against
Abstain
1. To receive and adopt the annual financial statements for the year ended 31 March 2009 2. To re-elect Mr DD Barber as a director in terms of the company’s articles of association 3. To re-appoint Ernst & Young Inc as auditors of the company, to hold office until the conclusion of the next annual general meeting 4.
Special resolution number 1
5.
Special resolution number 2
and generally to act as my/our proxy at the said annual general meeting. (Indicate with an “x” or the relevant number of shares, in the applicable space, how you wish your votes to be cast.) Unless otherwise directed the proxy will vote as he/she thinks fit. Signed at Signature of member Please read the notes on the reverse side hereof.
this
day of assisted by (where applicable)
2009
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Notes
1.
A member entitled to attend and vote at the annual general meeting may appoint one or more proxies to attend, vote and speak in his/her stead at the annual general meeting. A proxy need not be a member of the Company.
2.
A shareholder may insert the name of a proxy or the names of two alternative proxies of his/her choice in the space(s) provided, with or without deleting “the Chairman of the annual general meeting”, but any such deletion or insertion must be initialled by the shareholder. Any insertion or deletion not complying with the aforegoing will be declared not to have been validly effected. The person whose name stands first on this form of proxy and who is present at the annual general meeting will be entitled to act as proxy to the exclusion of those whose names follow. In the event that no names are
3.
A shareholder’s instructions to the proxy must be indicated by the insertion of an “X” or the relevant number of votes exercisable by that shareholder in the appropriate box provided. An “X” in the appropriate box indicates the maximum number of votes exercisable by that shareholder. Failure to comply with the above will be deemed to authorise the proxy to vote or abstain from voting at the annual general meeting as he/she deems fit in respect of all the shareholder’s votes exercisable thereat. A shareholder or his/her proxy is not obliged to use all the votes exercisable by the shareholder or by his/her proxy, but the total of the votes cast and in respect of which abstention is recorded, may not exceed the maximum number of votes exercisable by the shareholder or by his/her proxy
4.
To be effective, completed forms of proxy must be lodged with the company’s South African transfer secretaries, Computershare Investor Services (Proprietary) Limited, no less than 24 hours before the time appointed for the holding of the annual general meeting, excluding Saturdays, Sundays and public holidays. As the annual general meeting is to be held at 10:00 on Wednesday, 16 September 2009 forms of proxy must be lodged no later than 10:00 on Tuesday, 15 September 2009.
5.
The completion and lodging of this form of proxy will not preclude the relevant shareholder from attending the annual general meeting and speaking and voting in person thereat instead of any proxy appointed in terms hereof.
6.
The Chairman of the annual general meeting may reject or accept any form of proxy which is not completed and/or received other than in compliance with these notes.
7.
Any alteration to this form, of proxy other than a deletion of alternatives, must be initialled by the signatory.
8.
Documentary evidence establishing the authority of the person signing this form of proxy in a representative or other legal capacity must be attached to this form of proxy unless previously recorded by the Company or the transfer secretaries or waived by the Chairman of the annual general meeting.
9.
Where there are joint holders of shares: • any one holder may sign this form of proxy; and • the vote of the senior shareholder (for that purpose, seniority will be determined by the order in which the names of the shareholders appear in the Company’s register) who tenders a vote (whether in person or by proxy) will
10. This form of proxy is not for completion by those shareholders who have dematerialised their shares (other than those whose shareholding is recorded in their own name in the sub-register maintained by their Central Securities Depository Participant (CSDP). Such shareholders should provide their CSDP, broker or nominee with their voting instructions. South African transfer secretaries Computershare Investor Services (Proprietary) Limited Ground Floor, 70 Marshall Street Johannesburg, South Africa, 2001 (PO Box 61051, Marshalltown, 2107)