Telkom AR front.qxp
Telkom AR front.qxp
Telkom AR front.qxp
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We are...<br />
one of Africa’s largest integrated<br />
communication service providers.<br />
We aim...<br />
and resources to<br />
create a powerful<br />
communications platform<br />
for more information please visit our<br />
website at www.telkom.co.za<br />
<strong>Telkom</strong> Annual Report 2009 1<br />
to be Africa’s preferred ICT solutions provider.<br />
edge<br />
Group<br />
overview<br />
Management<br />
review<br />
Sustainability<br />
review<br />
Performance<br />
review<br />
Financial<br />
statements<br />
Company<br />
Financial<br />
Information
2<br />
<strong>Telkom</strong> Annual Report 2009<br />
<strong>Telkom</strong> Group structure and revenue contribution as at March 31, 2009<br />
<strong>Telkom</strong> SA<br />
Our fixed-line segment is our largest business. <strong>Telkom</strong> South Africa provides fixed-line subscription and connection, traffic, interconnection,<br />
data and internet service<br />
Trudon – 64.9%<br />
Trudon (Pty) Ltd, formerly known as TDS Directory Operations, provides Yellow and White page directory services, an electronic directory<br />
service, 10118 “The Talking Yellow Pages”, and an online web directory service.<br />
Multi-Links – 100%<br />
Multi-Links Telecommunications Limited is one of Nigeria’s pioneer private telephone operators. As one of the leading providers of<br />
telecommunications solutions in Nigeria, Multi-Links was one of the first to locally introduce the CDMA technology.<br />
<strong>Telkom</strong> acquired the remaining 25% interest in Multi-Links on January 21, 2009, thereby increasing its ownership of Multi-Links to 100%.<br />
Africa Online – 100%<br />
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<br />
a wide range of services to suit a variety of customer needs. With operations in Cote d’Ivoire, Ghana, Kenya, Namibia, Swaziland,<br />
Tanzania, Uganda, Zambia and Zimbabwe, Africa Online is positioned to provide individuals and organisations with scalable solutions<br />
based on each client’s specific needs.<br />
Joint venture – Vodacom Group – 50%<br />
Vodacom Group (Pty) Ltd is a leading mobile communications company in South Africa, providing mobile communications services as of<br />
March 31, 2009 to 39.6 million customers in South Africa, Tanzania, Lesotho, the Democratic Republic of the Congo and Mozambique.<br />
Vodacom has an estimated market share of 53% in South Africa.<br />
<strong>Telkom</strong> concluded the sale and unbundling of its interest in Vodacom after year end.<br />
Swiftnet – 100%<br />
Swiftnet (Pty) Ltd trades under the name FastNet Wireless Services. FastNet provides synchronous wireless access on <strong>Telkom</strong>’s X.25<br />
network, Saponet-P, to its customer base. Services include retail credit card and check point of sale terminal verification, telemetry, security<br />
and fleet management.<br />
<strong>Telkom</strong>’s Board of directors has decided to dispose of Swiftnet.<br />
<strong>Telkom</strong> Media – 75%<br />
<strong>Telkom</strong> Media is the holder of a commercial satellite and cable subscription broadcasting licence, which allows it to operate both a satellite<br />
pay-TV service and an IPTV service in South Africa.<br />
On May 4, 2009, <strong>Telkom</strong> sold its 75% interest in <strong>Telkom</strong> Media to Shenzhen Media South Africa (Pty) Ltd.
<strong>Telkom</strong> shareholding as at March 31, 2009<br />
Government<br />
The government of the<br />
Republic of South Africa is<br />
the largest shareholder in<br />
<strong>Telkom</strong>, holding 39.8% of<br />
the Company’s issued share<br />
capital. The government is<br />
the Class A shareholder.<br />
Elephant<br />
Consortium<br />
The Elephant Consortium is<br />
a Black Economic<br />
Empowerment group, which<br />
through Newshelf 772 (Pty)<br />
Ltd holds 7.2% of <strong>Telkom</strong>’s<br />
issued share capital.<br />
Black Ginger 33<br />
(Pty) Ltd<br />
Black Ginger 33 (Pty) Ltd is<br />
a wholly owned (100%)<br />
subsidiary of the Public<br />
Investment Corporation<br />
holding 8.9% of the<br />
Company’s issued share<br />
capital. Black Ginger 33 is<br />
the Class B shareholder.<br />
<strong>Telkom</strong> Treasury<br />
Stock<br />
Rossal No 65 (Pty) Ltd holds<br />
11,646,680 shares, 2.2%<br />
of the Company’s issued<br />
share capital which were<br />
purchased for the <strong>Telkom</strong><br />
Conditional Share Plan.<br />
Acajou Investments (Pty) Ltd<br />
holds 8,143,556 shares,<br />
1.6% of the Company’s<br />
issued share capital.<br />
<strong>Telkom</strong> Annual Report 2009 3<br />
Public Investment<br />
Corporation<br />
The Public Investment<br />
Corporation (PIC) is an<br />
investment management<br />
company wholly owned by<br />
the government. It invests<br />
funds on behalf of public<br />
sector entities. The PIC holds<br />
6.7% of the Company’s<br />
issued share capital.<br />
Free float<br />
The free float of 33.6%<br />
makes up the remainder of<br />
the Company’s issued share<br />
capital. Included in the free<br />
float are 11,570,245<br />
shares held by 91,625<br />
retail shareholders<br />
representing 2.2% of the<br />
Company’s issued share<br />
capital.<br />
Group<br />
overview<br />
Management<br />
review<br />
Sustainability<br />
review<br />
Performance<br />
review<br />
Financial<br />
statements<br />
Company<br />
Financial<br />
Information
4<br />
<strong>Telkom</strong> Annual Report 2009<br />
Group Strategy – The evolution of <strong>Telkom</strong><br />
Defend profitable revenue<br />
• Maintain fixed-line<br />
net revenue.<br />
• Retain leading<br />
fixed-line market<br />
share.<br />
• Increase annuity<br />
revenue as a<br />
percentage of total<br />
fixed-line operating<br />
revenue.<br />
• Improve competitiveness through tariff<br />
rebalancing.<br />
• Build customer retention initiatives that entice<br />
customers to stay with <strong>Telkom</strong>.<br />
• Build customer loyalty by providing superior<br />
value propositions that position <strong>Telkom</strong> as the<br />
service provider of choice.<br />
• Convert revenue streams to annuity revenue.<br />
Grow profitable revenue through broadband and converged services<br />
• Increase broadband<br />
penetration.<br />
• Deliver superior data<br />
speed and quality<br />
through fixed-line<br />
network.<br />
• Increase converged<br />
services revenue.<br />
• Partnerships with content<br />
providers.<br />
• Improve market share in<br />
information technology<br />
services sector.<br />
• Expand domestic data<br />
centre operations.<br />
• Improve innovation<br />
capability.<br />
• Grow organically and<br />
through acquisitions.<br />
• Expand our broadband footprint.<br />
• Increase bandwidth to offer higher bandwidth<br />
applications.<br />
• Provide converged information,<br />
communications and technology solutions to<br />
the enterprise market and enable the digital<br />
home in the consumer market.<br />
• Bundle content to provide added value in<br />
subscription and pay-as-you go models.<br />
• Target the medium to large business segment<br />
to meet their demand for end-to-end solutions.<br />
• Satisfy customer demand for converged onestop<br />
solutions for communications and<br />
information technology infrastructure<br />
requirements.<br />
• Develop improved value propositions through<br />
customer understanding enabled by the<br />
customer centricity programme.<br />
• Enhance availability to successfully partner<br />
with others where synergistic opportunities<br />
exist.
Grow profitable revenue through wireless voice and mobile data services<br />
• Provide integrated<br />
bundled offerings.<br />
• Combine with mobility<br />
to enhance fixed-line<br />
offering.<br />
Grow profitable revenue internationally<br />
• Increase revenue<br />
and long-term<br />
profitability from<br />
acquired African<br />
subsidiaries and<br />
international<br />
services.<br />
<strong>Telkom</strong> Annual Report 2009 5<br />
Transform fixed-line business to incorporate key<br />
value-added services, including mobile<br />
converged voice services.<br />
Build a cost-effective wireless voice and mobile<br />
data network in selected areas to offer:<br />
• Wireless access in campus environments,<br />
gated communities, security complexes and<br />
other developments.<br />
• Mobile data services.<br />
• Fixed and nomadic wireless voice services.<br />
Become a Pan-African integrated service<br />
provider, offering:<br />
• International communications and internet<br />
connectivity.<br />
• Hosting and managed data services.<br />
• Wireless voice and mobile broadband<br />
solutions.<br />
Leverage synergies across the <strong>Telkom</strong> Group to<br />
grow revenue from subsidiaries – organically<br />
and through acquisitions.<br />
Introduce converged fixed and mobile service<br />
in the Nigerian market through Multi-Links.<br />
Group<br />
overview<br />
Management<br />
review<br />
Sustainability<br />
review<br />
Performance<br />
review<br />
Financial<br />
statements<br />
Company<br />
Financial<br />
Information
6<br />
<strong>Telkom</strong> Annual Report 2009<br />
Financial review summary<br />
Continuing operations<br />
Solid revenue growth<br />
The 3.3% growth in fixed-line revenue to<br />
R33.7 billion contributed to the Group’s overall<br />
6.9% revenue growth to R35.9 billion.<br />
Operating revenue<br />
Rm<br />
40<br />
35<br />
30<br />
25<br />
20<br />
15<br />
10<br />
5<br />
0<br />
07 08 09<br />
R9,310m<br />
(R8,308m)<br />
Higher demand for data<br />
services, including ADSL, an<br />
increase in internet access<br />
and related services and<br />
managed data network<br />
services.<br />
Operating profit<br />
Rm<br />
10<br />
9<br />
8<br />
7<br />
6<br />
5<br />
4<br />
3<br />
2<br />
1<br />
0<br />
07 08 09<br />
R35,940m<br />
(R33,611m)<br />
Strong growth in data<br />
revenues, higher revenue<br />
from interconnection and<br />
calling plans, partially offset<br />
by lower traffic. Multi-<br />
Links delivered strong<br />
revenue growth as a result<br />
of subscriber growth.<br />
Data revenue<br />
Rm<br />
10<br />
9<br />
8<br />
7<br />
6<br />
5<br />
4<br />
3<br />
2<br />
1<br />
0<br />
07 08 09<br />
R6,388m<br />
(R9,069m)<br />
Excluding the Multi-Links<br />
impairment of R1.8 billion<br />
the South African business<br />
performed well in the current<br />
high inflationary environment.<br />
EPS & HEPS<br />
The decrease in both headline and basic earnings per<br />
share reflects increasing operating expenses, once-off<br />
impairments of Multi-Links and Africa Online and<br />
increased finance charges and fair value movements.<br />
Annuity revenue<br />
Rm<br />
8<br />
7<br />
6<br />
5<br />
4<br />
3<br />
2<br />
1<br />
0<br />
07 08 09<br />
Operating expenditure<br />
Rm<br />
30 000<br />
25 000<br />
20 000<br />
15 000<br />
10 000<br />
5 000<br />
0<br />
07 08 09<br />
557.0 cents<br />
(1,028.9 cents)<br />
600<br />
Decrease in headline<br />
earnings reflects decrease<br />
400<br />
in operating profit and 200<br />
increased finance charges. 0<br />
R7,387m<br />
(R6,917m)<br />
<strong>Telkom</strong> continues to be<br />
successful in tying in large<br />
corporate customers to<br />
term and volume discount<br />
plans.<br />
R29,895m<br />
(R25,014m)<br />
Operating expenses<br />
increased across all<br />
segments and were affected<br />
by a number of once-off<br />
items.<br />
Headline earnings per share<br />
cents<br />
1 400<br />
1 200<br />
1 000<br />
800<br />
07 08 09
600<br />
500<br />
400<br />
300<br />
200<br />
100<br />
0<br />
07 08 09<br />
93% ADSL coverage<br />
93% of our exchanges are ADSL<br />
enabled. They consist of 4,000<br />
digital subscriber line access<br />
multiplexers, serving approximately<br />
548,015 customers, which<br />
represents a growth of 33.0%.<br />
57% self-install ADSL<br />
packages<br />
Our self-install option is very<br />
popular and had a positive<br />
impact on ADSL installation<br />
times.<br />
7.4% increase in<br />
wholesale internet<br />
leased lines<br />
16<br />
14<br />
12<br />
10<br />
8<br />
6<br />
4<br />
2<br />
0<br />
<strong>Telkom</strong> Annual Report 2009 7<br />
Operational review summary<br />
Quality, value for money products delivering strong<br />
growth<br />
58% increase in Do<br />
Broadband packages<br />
Do Broadband subscribers<br />
increased 58.1% to 188,540.<br />
Our current Broadband line<br />
penetration rate is 15%.<br />
The growth in broadband<br />
has stimulated the demand for<br />
leased lines. Wholesale internet<br />
leased lines increased 7.4% to<br />
24,204 lines.<br />
ADSL subscribers (000) Managed data network sites Supreme Call subscribers<br />
(000)<br />
(000)<br />
30<br />
25<br />
20<br />
15<br />
10<br />
5<br />
0<br />
07 08 09<br />
07 08 09<br />
27.3% increase<br />
in calling plan<br />
subscribers<br />
The <strong>Telkom</strong> Closer packages have<br />
performed well, increasing by 27.6%<br />
to 575,812 plans. Supreme call<br />
packages, targeted at the business<br />
segment, have increased by 14.4%<br />
to 14,778 packages and PC<br />
bundles have increased 48.3% to<br />
11,336.<br />
141 W-CDMA base<br />
stations selectively<br />
deployed<br />
<strong>Telkom</strong> has commenced the<br />
deployment of a W-CDMA<br />
wireless local loop network in<br />
the 2100MHz band.<br />
Do Broadband subscribers<br />
(000)<br />
200<br />
180<br />
160<br />
140<br />
120<br />
100<br />
80<br />
60<br />
40<br />
20<br />
0<br />
07 08 09<br />
Group<br />
overview<br />
Management<br />
review<br />
Sustainability<br />
review<br />
Performance<br />
review<br />
Financial<br />
statements<br />
Company<br />
Financial<br />
Information
8<br />
<strong>Telkom</strong> Annual Report 2009<br />
Equity markets<br />
The financial year ended March 31, 2009 was characterised by extreme volatility in global stock markets and currencies as a result of<br />
the sub-prime crisis. Despite these difficulties we managed to conclude:<br />
• The sale of our 15% share in Vodacom to Vodafone Plc for the excellent price of<br />
R22.5 billion. In addition, the remaining 35% share in Vodacom was unbundled<br />
directly to shareholders. Details of the transaction can be found in the performance<br />
review.<br />
• As a result of this transaction <strong>Telkom</strong> was able to pay a special dividend of R19.00 per<br />
share to its shareholders.<br />
• In addition, <strong>Telkom</strong> declared an ordinary dividend of R1.15 and a special dividend of<br />
R2.60 in respect of the 2009 financial year.<br />
<strong>Telkom</strong> remains committed to returning cash to shareholders and growing shareholder value.<br />
Market performance<br />
JSE share price vs volume traded NYSE share price vs volume traded<br />
Share price (R)<br />
160<br />
150<br />
140<br />
130<br />
120<br />
110<br />
100<br />
90<br />
80<br />
20 000 000<br />
17 500 000<br />
15 000 000<br />
12 500 000<br />
10 000 000<br />
7 500 000<br />
5 000 000<br />
2 500 000<br />
0<br />
Mar 08 Jun 08 Aug 08 Nov 08 Jan 09 Mar 09<br />
Mar 08 Jun 08 Aug 08 Nov 08 Jan 09 Mar 09<br />
Telco index<br />
<strong>Telkom</strong><br />
All share<br />
Industrials<br />
-31.2<br />
-32.4<br />
-40<br />
-30<br />
-19.6<br />
-15.5<br />
-20<br />
%<br />
-10<br />
0<br />
Volume<br />
Share price (USD)<br />
85<br />
80<br />
75<br />
70<br />
65<br />
60<br />
55<br />
50<br />
45<br />
40<br />
35<br />
30<br />
25<br />
20<br />
FTSE 250 Telcos<br />
<strong>Telkom</strong> US$<br />
Nasdaq<br />
FTSE Global Telcos<br />
S&P Telecoms<br />
DJI<br />
S&P 500<br />
FTSE 350 Telcos (in USD)<br />
JSE Limited NYSE<br />
(Z<strong>AR</strong> per ordinary share) (USD per ADS)<br />
year ended March 31 year ended March 31,<br />
2008 2009 2008 2009<br />
Closing price 131.20 105.49 65.43 44.93<br />
Highest price 195.02 107.37 113.00 45.03<br />
Market capitalisation (millions) 68,327 54,937 8,519 5,850<br />
Share price (R) Volume Share price (US$) Volume<br />
JSE share price relative to SA indices NYSE share price relative to major international stock<br />
market indices<br />
-46.1<br />
-60<br />
-50<br />
-31.3<br />
-32.9<br />
-34.6<br />
-36.8<br />
-38.0<br />
-39.7<br />
-40<br />
-25.2<br />
-30<br />
%<br />
-20<br />
-10<br />
250<br />
200<br />
150<br />
100<br />
50<br />
0<br />
0<br />
Volume
The telecommunications industry<br />
Conclusion of Vodacom transaction gives <strong>Telkom</strong><br />
Overview<br />
<strong>Telkom</strong> is an integrated communications service provider offering<br />
bundled voice, data, broadband and internet services with its<br />
service offerings expanded to business and residential customers.<br />
Competition in the South African fixed-line communications market<br />
is intense and is increasing as a result of the Electronic<br />
Communications Act and determinations issued by the Minister of<br />
Communications.<br />
The new licensing framework included in the Act has resulted in the<br />
market becoming more horizontally layered with a large number<br />
of separate licences being issued for electronic communications<br />
network services, electronic communications services, broadcasting<br />
services and radio frequency spectrum and, as a result, this will<br />
substantially increase competition in <strong>Telkom</strong>’s fixed-line business.<br />
In the areas where we currently face competition, and expect to<br />
compete for public switched telecommunications services, <strong>Telkom</strong><br />
competes primarily on the basis of customer service, quality,<br />
dependability and price. In addition, we intend to introduce new<br />
products, services and tariff structures to enable us to maintain and<br />
grow revenue.<br />
Fixed-line voice competition<br />
In September 2004, South Africa’s Minister of Communications<br />
granted an additional licence to provide switched telecommunications<br />
services to Neotel, a company that was 30%<br />
owned by Transtel Telecoms, a division of Transnet Limited, and<br />
Esitel, which is beneficially owned by the South African<br />
government and other strategic equity investors, including a 26%<br />
shareholding owned by TATA Africa Holdings (Pty) Ltd, a member<br />
of the TATA Group, a large Indian conglomerate with information<br />
and communications operations. On March 19, 2008, Neotel<br />
announced that the Competition Tribunal of South Africa had<br />
approved its acquisition of Transtel without any conditions.<br />
Subsequently, TATA Africa Holdings (Pty) Ltd acquired the<br />
government’s 30% equity, extending its equity in Neotel to 56%.<br />
Neotel started providing services to large corporations and other<br />
licensees at the start of the 2007 calendar year and on April 25,<br />
2008, announced that the first of its consumer products were<br />
<strong>Telkom</strong> Annual Report 2009 9<br />
freedomto compete<br />
Group<br />
overview<br />
Management<br />
review<br />
Sustainability<br />
review<br />
Performance<br />
review<br />
Financial<br />
statements<br />
Company<br />
Financial<br />
Information
10<br />
<strong>Telkom</strong> Annual Report 2009<br />
The telecommunications industry (continued)<br />
All existing licences have been<br />
converted<br />
available to limited parts of Johannesburg<br />
and Pretoria.<br />
As a result of an amendment to the<br />
Electronic Communications Act to enable<br />
state investment and licensing in the sector,<br />
the government created an infrastructure<br />
company, Broadband Infraco (Pty) Ltd, in<br />
2007, to provide inter-city bandwidth at<br />
cost based prices to Neotel and, later, to<br />
the rest of the industry, which added further<br />
competition to <strong>Telkom</strong>’s communications<br />
network. Broadband Infraco will also be<br />
involved in some of the undersea cable<br />
projects.<br />
Licences<br />
On October 29, 2008, the Minister of<br />
Communications published for public<br />
comment, a draft policy direction<br />
which would direct ICASA to grant<br />
Broadband Infraco individual Electronic<br />
Communications Services (ECS) and<br />
Electronic Communications Network<br />
Services (ECNS) licences.<br />
On March 13, 2009, ICASA published<br />
an ‘invitation for a public entity to apply for<br />
individual ECNS and individual ECS<br />
licences for a public entity’, inviting<br />
Broadband Infraco to submit applications<br />
for these licences.<br />
The process to issue additional licences to<br />
small business operators for the purpose of<br />
providing telecommunications services in<br />
underserviced areas with a teledensity of less<br />
than 5% started in 2005. To date, the<br />
Minister of Communications has identified<br />
27 underserviced areas and ICASA has<br />
issued licences to seven successful bidders<br />
with the Minister issuing invitations to apply<br />
for licences in an additional 14 areas.<br />
All existing USAL licences, including<br />
<strong>Telkom</strong>’s, have been converted into ECS<br />
and ECNS licences, and all future licences<br />
for this category will be issued as ECS and<br />
ECNS licences.<br />
These licences provide the authorisation to<br />
construct, maintain and operate an<br />
electronic communications network and<br />
provide ECNS and ECS. All the obligations<br />
contained in <strong>Telkom</strong>’s public switched<br />
telecommunications service licence,<br />
including licence fees to be paid, minimum<br />
services to be provided to customers and<br />
other service obligations, will be contained<br />
in regulations, some of which have been<br />
promulgated and some of which are in the<br />
process of being promulgated.<br />
<strong>Telkom</strong>’s licence fee under the public<br />
switched telecommunications service<br />
licence amounted to 0.1% of its annual<br />
revenue generated from the provision of the<br />
licensed public switched telecommunications<br />
services. This provision was<br />
retained following the conversion to the<br />
ECS and ECNS licences. However, in<br />
terms of a regulation published on April 1,<br />
2009, <strong>Telkom</strong>’s annual licence fees for<br />
ECS and ECNS were set at 1.5% of gross<br />
profit from licensed activities, defined as<br />
total revenue obtained from the provision of<br />
licensed services, less total costs directly<br />
incurred in the provision of such services.<br />
As a result, there may be a material<br />
increase in <strong>Telkom</strong>’s annual licence fee.<br />
On March 25, 2009, the telecommunications<br />
industry put forward proposals to<br />
ICASA regarding a Service Charter<br />
<strong>Telkom</strong> is in the process of challenging the proposed<br />
new licence fee regulation
egulation that stipulated standard levels of service. The standards<br />
stipulated in the regulation are extremely demanding and, the<br />
communications industry has made representation to ICASA. On<br />
July 24, 2009, ICASA has repeated the previous Service Charter<br />
regulation and published a new regulation that implements many<br />
of the recommendations made by the industry.<br />
Other licences<br />
In August 1995, <strong>Telkom</strong>’s subsidiary, Swiftnet, was granted a telecommunications<br />
licence and a radio frequency spectrum licence<br />
for the provision of:<br />
• The construction, maintenance and operation of a national<br />
wireless data network and the provision of wireless data<br />
telecommunications services; and<br />
• Interconnection with <strong>Telkom</strong>’s network.<br />
In terms of the licence agreement, Swiftnet was required to have<br />
at least a 30% black economic empowerment (BEE) shareholding.<br />
In spite of <strong>Telkom</strong> entering into an agreement in 2007 to sell 30%<br />
of Swiftnet to the Radio Surveillance Consortium, a group of<br />
empowerment investors, an agreement that received Competition<br />
Commission approval, ICASA did not approve the transaction. As<br />
a result, Swiftnet was in breach of its licence.<br />
Swiftnet, assisted by <strong>Telkom</strong>, has subsequently had two meetings<br />
with ICASA on this matter and ICASA has indicated that currently<br />
there is no agreement within the industry as to acceptable BEE<br />
shareholding percentages for all licensees. ICASA also indicated<br />
that the shareholding issue for the Swiftnet licence would have to<br />
be in line with the BEE values applicable to other similar licensees.<br />
Swiftnet received a new licence from ICASA on January 16, 2009<br />
which stipulated that the company still needed to secure a 30%<br />
BEE shareholding. However, ICASA has said that in the 2010<br />
financial year it will be reviewing the equity shareholdings of all<br />
licensees, after which it is anticipated that all licensees will be<br />
given sufficient time to meet their equity shareholding requirements.<br />
<strong>Telkom</strong>’s Board of directors has decided to dispose of Swiftnet,<br />
and <strong>Telkom</strong> is currently seeking potential purchasers that would<br />
comply with Swiftnet’s BEE requirements.<br />
Carrier pre-selection<br />
The now repealed Telecommunications Act mandated that fixed-line<br />
operators were required to implement carrier pre-selection to enable<br />
customers to choose and vary their fixed-line telecommunications<br />
carrier for long distance and international calls. These provisions<br />
were retained in the Electronic Communications Act and on June<br />
24, 2005, regulations were published for the implementation of<br />
carrier pre-selection in two phases (the implementation of call-by-call<br />
pre-selection and fully automatic pre-selection, to be implemented<br />
and provided within two months and 10 months, respectively, of<br />
them being requested by another operator). <strong>Telkom</strong> had already<br />
conditioned its exchanges to handle call-by-call carrier pre-selection<br />
<strong>Telkom</strong> Annual Report 2009 11<br />
The 2010 <strong>Telkom</strong> ‘hotseat’<br />
This is the control room – the ‘hotseat’ – for our 2010 World<br />
Cup soccer national transport network. From here, our highly<br />
skilled team will direct all incoming and outgoing<br />
transmissions for the duration of the tournament.<br />
Group<br />
overview<br />
Management<br />
review<br />
Sustainability<br />
review<br />
Performance<br />
review<br />
Financial<br />
statements<br />
Company<br />
Financial<br />
Information
12<br />
<strong>Telkom</strong> Annual Report 2009<br />
The telecommunications industry (continued)<br />
<strong>Telkom</strong> has made significant progress in<br />
rebalancing<br />
its fixed-line tariffs...<br />
by December 31, 2003. <strong>Telkom</strong> has met<br />
with Neotel to discuss its request for<br />
implementing carrier pre-selection.<br />
Until Neotel’s interconnection systems and<br />
its inter-operator process and systems to<br />
support carrier pre-selection become<br />
available, <strong>Telkom</strong> cannot fully implement<br />
carrier pre-selection. However, <strong>Telkom</strong><br />
does not believe it can meet the 10 months<br />
deadline for automatic carrier preselection.<br />
Number portability<br />
The Telecommunications Act mandated that<br />
number portability, to enable customers to<br />
retain their fixed-line and mobile telephone<br />
numbers if they switch between fixed-line<br />
operators or between mobile operators, be<br />
introduced. These provisions were retained<br />
in the Electronic Communications Act.<br />
A framework number portability regulation<br />
was published at the end of 2004 that<br />
generically provides for the introduction of<br />
fixed-to-fixed and mobile-to-mobile number<br />
portability. <strong>Telkom</strong> is required to implement<br />
number portability in blocks of 10,000<br />
numbers within two months after Neotel<br />
launches such retail services and individual<br />
number portability within 12 months of<br />
receiving a request from Neotel. <strong>Telkom</strong><br />
has received a request from Neotel to<br />
implement both block and individual<br />
number portability and <strong>Telkom</strong> and Neotel<br />
implemented number portability in blocks<br />
of 10,000 and 1,000 numbers in May<br />
2009. After several delays mobile number<br />
portability phase one was launched on<br />
November 11, 2006. Phase 2, which<br />
was implemented during April 2007,<br />
includes multi-line porting, secure file<br />
transfer protocol access to third parties and<br />
operational software upgrades on the<br />
central reference data base.<br />
The set-up and per-operator costs are<br />
typically the largest cost components of<br />
implementing number portability. Similar to<br />
carrier pre-selection, there is a risk of not fully<br />
recovering system set-up costs. The<br />
implementation of these requirements in a<br />
timely manner, could result in <strong>Telkom</strong>’s<br />
business being disrupted and cause its net<br />
profit to decline and the implementation of<br />
these requirements will likely further increase<br />
competition and cause churn rates to<br />
increase.<br />
Fees and tariffs<br />
<strong>Telkom</strong> has made significant progress in<br />
rebalancing its fixed-line tariffs with a view<br />
to focusing more on the relationship<br />
between the actual costs and tariffs of<br />
subscriptions and connections and traffic in<br />
order to more accurately reflect underlying<br />
costs and to be more competitive.<br />
Regulations made under the repealed<br />
Telecommunications Act, but which are still<br />
in effect, imposed a price cap (3.5%<br />
below inflation, effectively implying a<br />
continuous real decrease in prices) on a<br />
basket of <strong>Telkom</strong>’s specified services. These<br />
include installations; pre-paid and postpaid<br />
line rentals; local, long distance and<br />
international calls; fixed-to-mobile calls;<br />
public payphone calls; ISDN services; its<br />
Diginet product and its Megaline product.<br />
A similar cap applies to a sub-basket of<br />
those services provided to residential<br />
customers, including leased lines up to and<br />
including lines of 2 Mbps of capacity and<br />
the rental and installation of business<br />
exchange lines.<br />
Approximately 57% of <strong>Telkom</strong>’s operating<br />
revenue in the year ended March 31,<br />
2008 was included in this basket,<br />
compared to approximately 54% in the<br />
year ended March 31, 2009.
a - Euros<br />
a - Euros<br />
a - Euros<br />
0.25<br />
0.20<br />
0.15<br />
0.10<br />
0.05<br />
0.00<br />
0.20<br />
0.15<br />
0.10<br />
0.05<br />
0.00<br />
1.0<br />
0.8<br />
0.6<br />
0.4<br />
0.2<br />
0.0<br />
Local peak (3 minute)<br />
Source: Tarifica 4th quarter 2008<br />
Slovak Republic<br />
Slovak Republic<br />
Local off peak (3 minute)<br />
Source: Tarifica 4th quarter 2008<br />
Malta<br />
Ireland<br />
<strong>Telkom</strong><br />
Cyprus<br />
Luxembourg<br />
Turkey<br />
Croatia<br />
UK (BT)<br />
To adjacent country Peak (3 minutes)<br />
Source: Tarifica 4th quarter 2008<br />
Turkey<br />
Cyprus<br />
Cyprus<br />
Malta<br />
Sweden<br />
Slovenia<br />
Norway<br />
Germany<br />
Switzerland<br />
Iceland<br />
Netherlands<br />
<strong>Telkom</strong><br />
Iceland<br />
Bulgaria<br />
Romania<br />
Luxembourg<br />
Slovenia<br />
Estonia<br />
Bulgaria<br />
<strong>Telkom</strong><br />
Hungary<br />
Lithuania<br />
Denmark<br />
Turkey<br />
Slovenia<br />
France<br />
Croatia<br />
Romania<br />
Luxembourg<br />
Italy<br />
Austria<br />
Bulgaria<br />
Latvia<br />
Denmark<br />
Austria<br />
Denmark<br />
Netherlands<br />
Poland<br />
Average<br />
Poland<br />
Czech Republic<br />
Netherlands<br />
Switzerland<br />
Latvia<br />
Sweden<br />
Slovak Republic<br />
Estonia<br />
Spain<br />
Finland<br />
Germany<br />
Lithuania<br />
Average<br />
Czech Republic<br />
Finland<br />
Malta<br />
Latvia<br />
Norway<br />
Spain<br />
Average<br />
Ireland<br />
Estonia<br />
Iceland<br />
Hungary<br />
UK (BT)<br />
Italy<br />
<strong>Telkom</strong> Annual Report 2009 13<br />
Independent benchmarking of <strong>Telkom</strong>’s pricing – Tarifica review, 4th quarter 2008<br />
<strong>Telkom</strong> continues to manage its pricing actively in order to continually offer enhanced value to our customers. We intend to educate all<br />
our customers as to the global attractiveness of our pricing and the value offered by the fixed-line service. <strong>Telkom</strong>’s mobile offering will<br />
follow the lead of the fixed-line in terms of competitive pricing. Below find a selection of Tarifica’s findings.<br />
Ireland<br />
France<br />
Hungary<br />
Greece<br />
Poland<br />
Spain<br />
Belgium<br />
Switzerland<br />
France<br />
Italy<br />
Portugal<br />
Norway<br />
Portugal<br />
Greece<br />
Portugal<br />
Croatia<br />
Czech Republic<br />
Sweden<br />
Germany<br />
Austria<br />
Belgium<br />
UK (BT)<br />
Belgium<br />
Finland<br />
Lithuania<br />
Romania<br />
Greece<br />
Group<br />
overview<br />
Management<br />
review<br />
Sustainability<br />
review<br />
Performance<br />
review<br />
Financial<br />
statements<br />
Company<br />
Financial<br />
Information
14<br />
<strong>Telkom</strong> Annual Report 2009<br />
Independent benchmarking of <strong>Telkom</strong>’s pricing – Tarifica review, 4th quarter 2008<br />
a - Euros<br />
a - Euros<br />
a - Euros<br />
1.5<br />
1.2<br />
0.9<br />
0.6<br />
0.3<br />
0.0<br />
600<br />
500<br />
400<br />
300<br />
200<br />
100<br />
150<br />
120<br />
0<br />
Residential: Installation<br />
Source: Tarifica 4th quarter 2008<br />
90<br />
60<br />
30<br />
0<br />
Germany<br />
Turkey<br />
Cyprus<br />
<strong>Telkom</strong><br />
Switzerland<br />
Norway<br />
Sweden<br />
Netherlands<br />
Business: Installation<br />
Source: Tarifica 4th quarter 2008<br />
Turkey<br />
Iceland<br />
Czech Republic<br />
Romania<br />
Switzerland<br />
<strong>Telkom</strong><br />
Greece<br />
64 kbits / 50kms<br />
Source: Tarifica 4th quarter 2008<br />
Croatia<br />
Iceland<br />
Latvia<br />
<strong>Telkom</strong><br />
Malta<br />
Norway<br />
Finland<br />
Slovak Republic<br />
Iceland<br />
Bulgaria<br />
Hungary<br />
Romania<br />
Netherlands<br />
Bulgaria<br />
France<br />
Estonia<br />
Turkey<br />
Slovenia<br />
France<br />
Denmark<br />
Luxembourg<br />
Luxembourg<br />
Cyprus<br />
Austria<br />
Germany<br />
Greece<br />
Poland<br />
Belgium<br />
Sweden<br />
Slovak Republic<br />
Lithuania<br />
Czech Republic<br />
Average<br />
Luxembourg<br />
Ireland<br />
Hungary<br />
Average<br />
Spain<br />
Sweden<br />
Romania<br />
Bulgaria<br />
Croatia<br />
Germany<br />
Average<br />
Portugal<br />
Ireland<br />
Malta<br />
Slovenia<br />
Spain<br />
Poland<br />
Denmark<br />
Italy<br />
UK (BT)<br />
Estonia<br />
Finland (Elisa)<br />
Italy<br />
Belgium<br />
Spain<br />
Austria<br />
Latvia<br />
Latvia<br />
Netherlands<br />
Italy<br />
Cyprus<br />
Greece<br />
Belgium<br />
Norway<br />
Hungary<br />
France<br />
Malta<br />
Finland<br />
Poland<br />
Denmark<br />
Portugal<br />
Ireland<br />
Portugal<br />
UK (BT)<br />
UK (BT)<br />
Czech republic<br />
Lithuania<br />
Austria<br />
Switzerland<br />
Croatia
ated<br />
management team<br />
with experience to<br />
guide the Group<br />
Management review<br />
Chairman’s review 16<br />
Chief Executive Officer’s review 20<br />
Chief Financial Officer’s review 24<br />
Board of directors 28<br />
Chief officers 30<br />
Management team 31<br />
Group<br />
overview<br />
Management<br />
review<br />
Sustainability<br />
review<br />
Performance<br />
review<br />
Financial<br />
statements<br />
Company<br />
Financial<br />
Information
16<br />
<strong>Telkom</strong> Annual Report 2009<br />
Chairman’s review<br />
We have<br />
strengthened<br />
the Board, our structures and processes<br />
to ensure <strong>Telkom</strong>’s transformation<br />
Shirley Lue Arnold<br />
Chairman<br />
It is with great regret that we<br />
said a final farewell to the<br />
former Minister of<br />
Communications Dr Ivy<br />
Matsepe-Casaburri, who<br />
passed away on April 6,<br />
2009. She was a great source<br />
of strength to us and we will<br />
miss her wise counsel.<br />
The year under review was characterised<br />
by the sale of Vodacom, a fast and<br />
substantively changing competitive local<br />
landscape, and our efforts to grow in other<br />
parts of the African continent. To ensure<br />
consistent growth in value for our<br />
shareholders, among our strategic priorities,<br />
my first year in <strong>Telkom</strong> was to bring stability<br />
to the organisation; the second a<br />
strengthening of the Board; and the third<br />
must embed the ongoing transformation of<br />
the new <strong>Telkom</strong> to defend, grow, and<br />
deliver, competitively. While it has been a<br />
demanding period for the <strong>Telkom</strong> Board,<br />
we have been preparing for our most<br />
challenging year, which lies ahead.<br />
Restructuring <strong>Telkom</strong> SA Limited<br />
This demands <strong>Telkom</strong>’s organisational<br />
structures and operational systems become<br />
more responsive, adaptive and much<br />
quicker in delivering innovative and quality<br />
services. More detail on the strategic<br />
priorities and restructuring of the company is<br />
provided by Reuben September in his<br />
CEO review.<br />
The change is fundamental to our strategy<br />
to grow our market share in South Africa<br />
and build a strong footprint across the<br />
African continent. It is vital to <strong>Telkom</strong>’s<br />
survival to continually retire obsolete legacy<br />
systems and bureaucracies as we review<br />
our performance and restructure to meet<br />
our challenges.<br />
The socio-economic environment<br />
This period is marked by the shrinking local<br />
economy, growing activism of our<br />
shareholders and stakeholders, the socioeconomic<br />
challenges and new political<br />
leadership.<br />
Bold and creative leadership is required to<br />
create employment, and intervene in the<br />
education, health, housing and security<br />
sectors. These socio-economic factors will<br />
strain corporations and increase the focus<br />
on companies as good corporate citizens.<br />
Pressure on the government to further reduce<br />
communication costs and widen services to<br />
boost the economy and public services will<br />
increase. Reporting on sustainability and<br />
environment impacts is also being more<br />
strongly demanded. <strong>Telkom</strong> is addressing<br />
these issues and our efforts are detailed<br />
elsewhere in this report.<br />
The South African Gross Domestic Product<br />
(GDP) dropped 1.5% in the six months to<br />
March 2009, with the mining, manufacturing<br />
and automotive industries being<br />
particularly hard hit. In addition, in the first<br />
quarter of 2009, formal employment fell by<br />
90,000. The rand remained under<br />
pressure with the resultant impact on the<br />
economy and we believe that until world<br />
markets revive, the overall macro-economic<br />
scenario remains parlous.
The regulatory environment<br />
The regulatory environment remains<br />
challenging as the telecommunications<br />
regulator, ICASA, continues to implement<br />
the Electronic Communications Act. Until all<br />
the new regulations are promulgated, an<br />
element of uncertainty will bedevil all<br />
operators. <strong>Telkom</strong> remains committed to<br />
working with ICASA for the greater good<br />
of the South African telecommunications<br />
industry.<br />
The technological environment<br />
Our fully digital fixed-line network provides<br />
service to every major urban area in South<br />
Africa, giving <strong>Telkom</strong> a competitive edge<br />
over other communications service<br />
providers selling value-added voice and<br />
data services. At the end of March 2009,<br />
99.9% of our telephone access lines were<br />
connected to digital exchanges.<br />
Our national network operations centre<br />
provides our corporate and global<br />
customers with managed data networking<br />
services and our investment in a third<br />
upgrade of the South Atlantic Telecommunications<br />
Cable – 3 West African<br />
submarine cable/South Africa Far East –<br />
has increased fibre optic transmission<br />
capability between South Africa and<br />
international destinations. Our supply<br />
contract for the development of the EASSy<br />
submarine cable system will link eight<br />
countries from Sudan to South Africa.<br />
The acquisition of satellite bandwidth from<br />
Intelsat in the Atlantic and Indian Ocean<br />
regions provides services on eight satellites<br />
<strong>Telkom</strong> Annual Report 2009 17<br />
using three satellite operators – Intelsat,<br />
SES-Newskies and Hellas Sat.<br />
Progress continues with the roll-out of the<br />
Next Generation Network (NGN). The<br />
NGN will give us significant advantages<br />
over mobile operators through increased<br />
ability to carry traffic, provide superior<br />
quality services and compete on price.<br />
Changing market dynamics<br />
To counter the continued decrease in voice<br />
revenues through the shift to mobile<br />
units, we are aggressively expanding our<br />
broadband footprint to offer and host<br />
higher bandwidth applications such as<br />
video services. Our enhanced ADSL<br />
offering enables our customers to access a<br />
host of broadband value-added services.<br />
ADSL subscribers increased by a pleasing<br />
33% over the previous financial year.<br />
Group<br />
overview<br />
Management<br />
review<br />
Sustainability<br />
review<br />
Performance<br />
review<br />
Financial<br />
statements<br />
Company<br />
Financial<br />
Information
18<br />
<strong>Telkom</strong> Annual Report 2009<br />
Chairman’s review (continued)<br />
We<br />
explore<br />
continue to<br />
all avenues that will provide<br />
us with growth<br />
Our strategic direction, the implementation<br />
of <strong>Telkom</strong>’s new structure and the increasing<br />
challenges of the competitive and<br />
regulatory environment are explained more<br />
fully in the Chief Executive Officer’s review.<br />
Management continues to identify<br />
opportunities for growth, particularly in sub-<br />
Saharan Africa.<br />
The Vodacom transaction<br />
The conclusion of the sale of 15% of our<br />
shares in Vodacom to Vodafone and the<br />
unbundling of the remaining 35% to<br />
shareholders after year end allows us to<br />
enter the South African mobile market and<br />
provide fully converged services. <strong>Telkom</strong> is<br />
now a smaller company which allows us to<br />
put more focus on our key growth areas.<br />
The Board<br />
In the year under review, Mark Lamberti<br />
resigned on June 3, 2008 and the PIC<br />
representative, Athol Rhoda, resigned<br />
on July 3, 2008. I would like to thank them<br />
both for their commitment and support.<br />
Brian Molefe replaced Athol Rhoda as the<br />
PIC’s representative.<br />
We were pleased to welcome Peter<br />
Joubert, director of companies, on August<br />
12, 2008, and David Barber, former<br />
Chief Financial Officer of AngloCoal, on<br />
September 1, 2008.<br />
The change in our articles of association<br />
allowed our new Chief Financial Officer,<br />
Peter Nelson, to join the Board on<br />
December 8, 2008.<br />
Detailed curriculum vitae can be viewed on<br />
pages 28 and 29.<br />
Empowerment<br />
While we remain a champion of Broad<br />
Based Black Economic Empowerment<br />
(BBBEE) with excellent performances in<br />
some areas (10 out of 10 for management<br />
control and 19.1 out of 20 for preferential<br />
procurement), our overall BBBEE status is<br />
relatively low – a level 6 contributor at the<br />
last verification. A new BBBEE strategy will<br />
be implemented to rectify this situation. See<br />
page 58.<br />
Confederations Cup and the 2010<br />
Soccer World Cup<br />
A significant accolade for the year under<br />
review was being appointed FIFA’s main<br />
partner for the development of fixed-line<br />
network infrastructures for these major<br />
sports events. Some R118 million was<br />
invested in the necessary equipment and<br />
cabling for the soccer stadia around South<br />
Africa during the year under review. An<br />
additional R832 million is expected to be<br />
spent in the 2010 and 2011 financial<br />
years. FIFA’s president, Sepp Blatter has<br />
been most complimentary about <strong>Telkom</strong>’s<br />
services (see box alongside). A major spinoff<br />
of the project is that all the equipment<br />
used will benefit local and other<br />
communities.<br />
Appreciation<br />
A special note of appreciation must go the<br />
<strong>Telkom</strong> Board members for their tireless<br />
commitment to <strong>Telkom</strong> under demanding<br />
conditions, our employees, and all our<br />
customers.<br />
<strong>Telkom</strong> has remained, through even more<br />
difficult times in our history as one of South<br />
Africa’s leading ICT companies, and the<br />
Board and Executive will continue to<br />
provide value to our shareholders and<br />
service to the country as a strategic<br />
national asset.<br />
Shirley Lue Arnold<br />
Chairman
On target for 2010<br />
<strong>Telkom</strong> Annual Report 2009 19<br />
‘For the first time ever, the FIFA World Cup will kick off on African soil. This is an<br />
exciting, historic moment for Africa, and YOU are the people making it happen. For<br />
me, it will be the realisation of a dream. I have seen what football means to Africa.<br />
With so many talented and outstanding African players, coaches, clubs and national<br />
teams it is fitting that the 2010 FIFA World Cup should find a home on this continent.<br />
I have felt South Africa’s enormous enthusiasm – from the blue-collar worker to the top executive. This country has a phenomenal spirit,<br />
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<br />
the world that South Africa can achieve wonders, and there is no doubt in my mind that you will be ready.<br />
<strong>Telkom</strong> 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<br />
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<br />
of voice and data traffic that will be moving through the FIFA event network, your work is critical in facilitating the successful broadcast<br />
of the event.<br />
<strong>Telkom</strong> is on target for meeting the FIFA Confederations Cup 2009 requirements. And the completion of the<br />
network will allow <strong>Telkom</strong> to meet its requirements for 2010. This is how I know <strong>Telkom</strong> can deliver.<br />
Your efforts not only guarantee the smooth running of the games, but also build an infrastructure that will benefit<br />
your country long after we are gone. This is the kind of legacy we hope the 2010 FIFA World Cup will leave<br />
in Africa, and you are delivering an enormous gift, not just to us, but also to your own people.<br />
I have seen what this nation can do – the spirit of Ubuntu that pulls you together. With teamwork you can<br />
achieve anything and <strong>Telkom</strong> is no different. I have every confidence in you, the <strong>Telkom</strong> staff, to make this the<br />
greatest FIFA World Cup we have ever seen’ – Sepp Blatter.<br />
Group<br />
overview<br />
Management<br />
review<br />
Sustainability<br />
review<br />
Performance<br />
review<br />
Financial<br />
statements<br />
Company<br />
Financial<br />
Information
20<br />
<strong>Telkom</strong> Annual Report 2009<br />
Chief Executive Officer’s review<br />
evolve<br />
with the changing trends,<br />
meet the demand<br />
Reuben September<br />
Chief Executive Officer<br />
In South Africa, our on-going<br />
drive to enhance the Next<br />
Generation Network (NGN)<br />
continues to deliver benefits<br />
and gives us a competitive<br />
edge in providing our<br />
customers with a full suite<br />
of converged Information,<br />
Communication and<br />
Technology (ICT) services.<br />
The ICT market is never static,<br />
characterised as it is by fluidity, change<br />
and on-going innovation and those factors<br />
aptly summed up the year under review.<br />
Following the sale of Vodacom at what I<br />
believe was an exceptional price given the<br />
market conditions, and returning substantial<br />
capital to our shareholders, and the sale of<br />
our 75% stake in <strong>Telkom</strong> Media to<br />
Schenzen Media, we are now poised to<br />
compete more aggressively in the<br />
telecommunications market. Our defend<br />
and grow strategies are on track and,<br />
following our restructuring, we are better<br />
placed to manage our resources more<br />
effectively and efficiently.<br />
Our South African operations remain our<br />
core business and cash flow generator and<br />
I am pleased to report that we achieved<br />
good growth in our bundled calling plan<br />
products – <strong>Telkom</strong> Closer and Supreme<br />
Call – and significant growth in our<br />
broadband products. We once again<br />
achieved double digit growth from our<br />
data revenue, up 12.1% to R9.3 billion for<br />
the year.<br />
In Africa, our footprint now covers almost<br />
the entire continent, with the exception of<br />
North Africa, which gives us the<br />
opportunity to extend our services to a very<br />
fast-growing market. We took our holding<br />
in Multi-Links Nigeria up to 100% and,<br />
post the year end, we acquired MWEB<br />
Africa, including AFSAT, from Naspers.<br />
However, on the debit side, our initiatives<br />
in Africa to date have been most<br />
challenging, with high start-up costs,<br />
unknown and competitive markets, highly<br />
volatile currency fluctuations, infrastructure<br />
and technology challenges. But, expensive<br />
as they were, we have learned our lessons<br />
and we are ready to capitalise on the<br />
opportunities going forward.<br />
In South Africa, our on-going drive to<br />
enhance the Next Generation Network<br />
(NGN) continues to deliver significant<br />
benefits and gives us a substantial<br />
competitive edge in providing our<br />
customers with a full suite of converged ICT<br />
services. In particular, given the fact that<br />
we can now enter the mobile market, the<br />
NGN’s leading edge technologies will<br />
enable us to carry increased traffic,<br />
provide superior service and compete on<br />
price in a market where quality and<br />
efficiency is key.<br />
Financial overview<br />
Our operating revenue from continuing<br />
operations grew by 6.9% to R35.9 billion<br />
in the year under review. Operating profit<br />
from continuing operations declined by<br />
29.6% to R6.4 billion and cash generated<br />
from operations before dividends paid fell<br />
by 9.6% to R14.8 billion.<br />
The Group EBITDA margin decreased from<br />
39.3% to 32.5% in the year under review,<br />
mainly because of an EBITDA loss of<br />
R226 million recorded by Multi-Links and<br />
higher fixed-line operating expenditure<br />
which reduced the fixed-line EBITDA<br />
margin to 25.8% as at March 31, 2009<br />
compared to 36.3% as at March 31,<br />
2008. The South African business, however,<br />
performed relatively well, and excluding<br />
the Multi-Links, <strong>Telkom</strong> Media and Africa
Online impairments, the fixed-line EBITDA<br />
margin would have been 32.3%.<br />
We experienced a 45.9% decrease in<br />
headline earnings per share to 557 cents a<br />
share and declared an ordinary dividend of<br />
115 cents per share and a special dividend<br />
of 260 cents per share, a decrease of<br />
43.2% from the ordinary dividend of<br />
660 cents per share declared in the 2008<br />
financial year. The dividend was paid to<br />
shareholders on July 20, 2009.<br />
Total traffic revenue decreased by 3.9% to<br />
R15.3 billion, with local traffic revenue<br />
decreasing 10.8% to R3.6 billion and long<br />
distance revenue decreasing by 9.6% to<br />
R2.0 billion, primarily because of the<br />
continuing fixed to mobile substitution.<br />
The <strong>Telkom</strong> Closer packages performed<br />
well, growing by 27.6% to 575,812 plans<br />
and Supreme call packages, targeted at<br />
the business segment, grew by 14.4% to<br />
14,778 packages. Our PC bundles showed<br />
a 48.3% growth to 11,336 packages and<br />
we continued successfully to tie in large<br />
corporate customers to term and volume<br />
discount plans.<br />
Annuity revenue streams, excluding line<br />
installations, reconnection fees and customer<br />
premises equipment sales, grew by 6.8%<br />
to R7.4 billion and we will seek to continue<br />
to convert revenue streams to annuity<br />
revenues, largely through bundling call<br />
minutes with access line rental in attractive<br />
subscription-based value propositions. Our<br />
current line penetration of bundled products<br />
is 41.7%. By 2013/14, we are targeting<br />
a penetration of 56%.<br />
Broadband and converged services<br />
performed very well with a 33% growth in<br />
ADSL subscribers to 548,015. There was<br />
a 58.1% increase in Do Broadband<br />
subscribers to 188,540. Internet all-access<br />
subscribers grew to 423,196, an increase<br />
of 18.2%.<br />
In line with our strategy of growing our data<br />
business, data revenues (including broadband)<br />
increased a very pleasing 12.1% to<br />
R9.3 billion. Data connectivity revenue<br />
increased to R5.0 billion, up 10.9% and<br />
internet access revenues increased by 29.6%<br />
to R1.5 billion. Our managed network<br />
services and VPN revenues were up by<br />
22.3% to R891 million. We intend to continue<br />
to exploit the competitive edge our high-quality<br />
network gives us in the corporate data market.<br />
Cost management is a key element in<br />
creating shareholder value, particularly as<br />
competition continues to erode our revenue<br />
base. As a result of the vicious inflationary<br />
environment; expenses incurred by the<br />
Vodacom transaction; an R85 million<br />
impairment of Africa Online; the R254 million<br />
impairment of <strong>Telkom</strong> Media and the<br />
R1.8 billion impairment of Multi-Links, our<br />
fixed-line operating expenses rose by<br />
19.6% to R29.8 billion.<br />
Employee expenses rose to R8 billion, an<br />
increase of 8.1%; selling, general and<br />
administrative expenses were up 68.8% to<br />
R6.6 billion; service fees rose 14.4% to<br />
R2.8 billion and payments to other<br />
operators increased 9.2% to R7.5 billion,<br />
with operating leases decreasing by 1% to<br />
R613 million. Depreciation, amortisation,<br />
impairment and write-offs increased by<br />
16.8% to R4.4 billion. Headline earnings<br />
from continuing operations decreased<br />
45.9% to 557 cents per share for the year<br />
ended March 31, 2009. The reduced<br />
earnings can be attributed to the significant<br />
impairments contained in operating<br />
expenses and negative foreign exchange<br />
and fair value movements of R1.1 billion<br />
resulting from the depreciation of the rand<br />
and the naira against the US dollar.<br />
Strategic overview<br />
Our core strategy is to defend and grow<br />
profitable revenue, while managing costs.<br />
We will aim to differentiate ourselves from<br />
competitors by moving from a provider of<br />
basic voice and data connectivity to<br />
become Africa’s preferred information,<br />
communications and technology service<br />
provider offering fully converged voice,<br />
data, video and information technology<br />
services.<br />
<strong>Telkom</strong> Annual Report 2009 21<br />
Defend profitable revenue<br />
Our key objectives are to improve our<br />
competitiveness in areas where competition<br />
is expected to intensify by use of tariff<br />
rebalancing, building customer retention,<br />
building customer loyalty and converting<br />
revenue streams to annuity revenue.<br />
Pricing is a key element and our tariff<br />
rebalancing will focus mainly on the<br />
relationship between the actual costs and<br />
tariffs of line rentals and traffic so we can<br />
compete in a liberalised communications<br />
market. We aim to protect our margins and<br />
increase the per second billing benefits as<br />
part of our bundled packages.<br />
• Differentiating retail list prices from<br />
value-based offerings.<br />
Our quest is to convert customers from<br />
usage-based products to adopting<br />
calling plans and bundles.<br />
• Value-based calling packages and<br />
bundles.<br />
Our intention is to deliver value to our<br />
customers and thus improve retention<br />
and loyalty. We will bundle call minutes<br />
with access line rental in an attractive<br />
subscription-based value proposition to<br />
deliver greater value to our customers.<br />
• Converting revenue to annuity-based<br />
revenue.<br />
This will help us offset declining usagebased<br />
revenue and boost annuity<br />
revenue.<br />
• Rebalancing prices of data services.<br />
We will pass on the benefits of<br />
increased network efficiencies to<br />
customers so we can defend our market<br />
share and revenue.<br />
• Differentiated attributes of our offerings.<br />
We will emphasise the offerings that<br />
customers value so that we can<br />
compete on more than just price.<br />
Build customer retention<br />
We will continue to launch initiatives to<br />
attract customers to stay with us and focus on<br />
customer centricity through implementing<br />
value and needs-based customer<br />
Group<br />
overview<br />
Management<br />
review<br />
Sustainability<br />
review<br />
Performance<br />
review<br />
Financial<br />
statements<br />
Company<br />
Financial<br />
Information
22<br />
<strong>Telkom</strong> Annual Report 2009<br />
Chief Executive Officer’s review (continued)<br />
segmentation. Additionally, we will concentrate<br />
on fostering long-term relationships with<br />
enterprise and wholesale customers through<br />
volume and term agreements.<br />
Build customer loyalty<br />
We will continue to position <strong>Telkom</strong> as the<br />
service provider of choice through superior<br />
value propositions and constant product and<br />
service innovations. We will also upgrade<br />
our customer communication programme.<br />
Grow profitable revenue through<br />
broadband and converged services<br />
Profitable revenue growth in our broadband<br />
and converged services area will be driven<br />
by continuing to increase converged services<br />
revenue; pursuing partnerships with content<br />
providers to enhance our products;<br />
aggressively seeking to improve our market<br />
share in the information technology services<br />
sector and improving our innovation<br />
capabilities.<br />
We are in no doubt that the next<br />
battleground of the convergence between<br />
telecommunications and IT will be in the<br />
data management environment. We have<br />
one of the finest National Network<br />
Operating Centres in the world and we<br />
will use it to provide our customers with<br />
cost-effective solutions that support their<br />
total ICT needs. We expect to stimulate the<br />
use of bandwidth over our network through<br />
our data centre business.<br />
Several products, including Metro LAN,<br />
have been introduced to strengthen our<br />
data communications service capabilities<br />
and improve our integrated communications<br />
service offerings in response to increased<br />
demand for higher bandwidth in the<br />
corporate and global segment.<br />
Grow profitable revenue through<br />
wireless voice and mobile data services<br />
By providing customers with an integrated<br />
bundled offering with superior speeds and<br />
quality through our fixed-line network,<br />
combined with mobility when required, we<br />
can grow profitable revenue.<br />
This we can do by transforming our fixedline<br />
business to incorporate services such<br />
as mobile converged voice services and<br />
by building a wireless voice and mobile<br />
data network in areas that use less<br />
vulnerable access technologies, which will<br />
reduce the theft of copper cables and<br />
improve service levels. We will also enter<br />
into, among other things, a roaming<br />
agreement in the areas where we choose<br />
not to build our own network.<br />
To implement this strategy we have<br />
obtained access to the 1800MHz and<br />
2100MHz spectrum bands to utilise 2G<br />
and 3G technologies in pursuit of our voice<br />
and mobile data services. By focusing on<br />
higher value customer segments and<br />
technologies that enable roaming across<br />
networks that use different mobile<br />
technologies, we can offer wireless access<br />
to, amongst others, campuses, gated<br />
communities and security complexes and<br />
provide mobile data services and<br />
fixed/nomadic voice services.<br />
Our move to offering a fully fledged mobile<br />
service depends on the outcome of a<br />
market research programme and a roaming<br />
agreement we are currently negotiating with<br />
the South African mobile operators. At this<br />
stage, we will not commit to any capital<br />
expenditure before completion of the<br />
comprehensive market study.<br />
Grow profitable revenue internationally<br />
<strong>Telkom</strong> aims to increase revenue and longterm<br />
profitability from our African<br />
subsidiaries we have acquired and from<br />
the international services we provide. We<br />
will become a Pan-African integrated<br />
service provider that offers international<br />
communications and internet connectivity,<br />
hosting and managed data services and<br />
wireless voice and mobile broadband<br />
solutions. We have the opportunity to<br />
leverage synergies from <strong>Telkom</strong> South<br />
Africa into our Africa subsidiaries,<br />
capitalise on strategic partnerships, for<br />
example, with AT&T, and advance data<br />
services into a growing market in Africa.<br />
Executing our strategy<br />
We will execute our strategy through the<br />
<strong>Telkom</strong> Renaissance initiative which has<br />
been initiated with the objective of<br />
transforming us into a leading Pan-African<br />
communications company. Delivering on<br />
this requires a compelling and focused<br />
transformation programme. This programme<br />
consists of various initiatives including<br />
defending our market share, seeking new<br />
revenue and businesses, implementing a<br />
structure that enables clear profit and loss<br />
accountability, as well as ensuring that our<br />
business processes and work practices<br />
deliver upon our strategic intent.<br />
This is aimed at achieving certain key<br />
financial targets, such as improving our<br />
EBITDA by increasing the return on our<br />
assets, making effective capital<br />
expenditure investments, as well as<br />
improving our cash flow. We intend to do<br />
this by significantly improving revenue<br />
through our strategic initiatives, capturing<br />
operating expenditure efficiencies,<br />
focusing on expenditure in areas where we<br />
can increase our return on assets and<br />
critically challenging capital expenditure<br />
planned for the next few years.<br />
We embarked on the initiative towards the<br />
end of the year under review and our<br />
inspirational objective is creating a new<br />
<strong>Telkom</strong>. It is a bold, new journey for the<br />
Group and its scope and importance is<br />
such that it will roll out over two years. It is<br />
a phased and planned programme that<br />
will transform our Group’s culture and the<br />
way we do business. It will ensure full profit<br />
and loss accountability throughout the<br />
organisation and will enable us to focus on<br />
efficient resource management and cost<br />
containment. Our financial objective is a<br />
10% reduction in operating expenses by<br />
the financial year ending 2011/2012.<br />
Currently we are conducting a Group-wide<br />
survey to analyse our current culture and<br />
give employees the opportunity to provide<br />
their views on what our culture should look<br />
like. I believe that this is essential if we are<br />
to have a firm foundation on which to build<br />
the remainder of the process.<br />
Underpinning the programme is the four<br />
‘Rs” strategy:
• Remodelling – reaching for new revenue<br />
streams in current and new markets.<br />
• Reorganising – fashioning a structure<br />
that enables clear profit and loss<br />
accountability and focus in a<br />
performance-oriented environment.<br />
• Revitalisation – renewing the entire<br />
Group and reinforcing a positive ‘make<br />
it happen’ attitude among all our<br />
people.<br />
• Re-engineering – ensuring that our<br />
business processes, allocation of<br />
resources and work practices deliver on<br />
our strategic intent.<br />
We are re-building the organisation into a<br />
world class team.<br />
Multi-Links<br />
As mentioned earlier in my report, we<br />
acquired the remaining 25% of Multi-Links<br />
in January 2009 for US$130 million. The<br />
company did not perform well in the last<br />
financial year with a net loss for the period<br />
ending March 31, 2009 of R1.76 billion.<br />
We acknowledge that we under-estimated<br />
the competitiveness of the Nigerian market<br />
and failed to execute on the building and<br />
management of our distribution channels.<br />
Turning Multi-Links’ performance around is<br />
our number one priority, given the extent of<br />
our investment and the enormous<br />
opportunity the Nigerian market provides.<br />
US$100 million has been budgeted for the<br />
2009/10 financial year for the completion<br />
of an additional 1,645 km build and<br />
584 km swop of optic fibre cable for the<br />
DWDM/SDH network. It is anticipated that<br />
the network will connect 80 DWDM/SDH<br />
sites, covering all major cities in Nigeria,<br />
providing us with additional bandwidth<br />
connectivity for voice and data customers.<br />
In addition, 227 cell towers are to be<br />
erected and another 300 commissioned on<br />
third party leased tower infrastructure during<br />
the year. Seven new customer service<br />
centres are planned to facilitate and support<br />
the network growth.<br />
We expect Multi-Links to be EBITDA<br />
positive in 2010/11 and to be cash flow<br />
positive by 2011/12.<br />
MWEB Africa<br />
Our geographic expansion strategy is<br />
geared to establishing us as a regional<br />
voice and data player via a range of<br />
hosting services, managed solutions, and<br />
mobile voice and wireless broadband<br />
services. To this end, in addition to Multi-<br />
Links, we purchased MWEB Africa and<br />
75% of MWEB Namibia for approximately<br />
R498 million. As of March 31, 2009,<br />
MWEB Africa had a customer base of<br />
20,175 with operations in Nigeria, Kenya,<br />
Tanzania, Uganda, Namibia and<br />
Zimbabwe and an agency arrangement in<br />
Botswana. This acquisition, together with our<br />
investment in Africa Online, gives us the<br />
ideal opportunity to service multi-national<br />
and corporate customers across Africa,<br />
particularly in the data products field, which<br />
we believe will deliver enormous future<br />
growth. The memorandum of understanding<br />
signed with AT&T will further enhance our<br />
ability to service multi-national and corporate<br />
customers throughout the continent.<br />
Prospects<br />
<strong>Telkom</strong>’s strategy is designed to deliver<br />
sustainable, profitable growth going<br />
forward and is benchmarked against<br />
global best practice. The creation of<br />
shareholder value is the underlying driver of<br />
every decision made. <strong>Telkom</strong>’s Board of<br />
directors and management team believes<br />
that the share price has not been reflecting<br />
the underlying value of the fixed-line<br />
business and they are committed to<br />
rectifying this.<br />
Over the next few years, we will be<br />
focusing on transforming the business to<br />
deal with competition; concentrating on<br />
delivering innovative products and services<br />
to our customers; expanding our network<br />
and bedding down our growth drivers.<br />
We expect that over the next three years,<br />
competition will continue to constrain<br />
revenue growth and, in a transforming<br />
industry like ours, targets are inherently<br />
risky, particularly in the later years, and<br />
investors should not place undue reliance<br />
on such targets. Increased revenues from<br />
our data, broadband and converged<br />
business and our recently acquired<br />
subsidiaries are projected to mitigate the<br />
impact of increased competition.<br />
<strong>Telkom</strong> Annual Report 2009 23<br />
The ordinary dividend of 115 cents per<br />
share declared for the 2009 financial year<br />
provides the new targeted base established<br />
by the Board for the determination of future<br />
dividends for <strong>Telkom</strong> as a stand-alone entity.<br />
The level of dividend payments going<br />
forward will be based on a number of<br />
factors, including the consideration of the<br />
financial results, capital and operating<br />
expenditure requirements, the Group's<br />
debt level, interest coverage, internal cash<br />
flows, prospects and available growth<br />
opportunities.<br />
Appreciation<br />
As ever, on behalf of the Executive<br />
Committee, I extend my sincere gratitude to<br />
the <strong>Telkom</strong> Board of directors for the<br />
guidance and insights its members have<br />
provided. I must also thank the executive<br />
team and all our employees for their<br />
dedication and commitment in executing<br />
our defend and grow strategies. Thanks<br />
also to our customers for their continued<br />
and valued support.<br />
Conclusion<br />
In summing up the year I am reminded of<br />
something one of our call centre operators in<br />
Cape Town said about her job: ”You have<br />
to take the good with the bad and, overall,<br />
the good outweighs the bad.” And that was<br />
the year under review. Tremendous pressures<br />
on all <strong>front</strong>s; a lot of angst around the<br />
Vodacom deal – externally and internally –<br />
the on-going fight against the cable thieves,<br />
etc. But then we had the restructuring of the<br />
business, a force for good, and the<br />
opportunity, via our appointment by FIFA, to<br />
design and provision the infrastructure for the<br />
Confederations Cup and 2010 Soccer<br />
World Cup stadia, to show the world just<br />
how good we are. The fact that our diverse<br />
customer base includes the majority of the<br />
country’s large corporates also contributed to<br />
the ‘good’ part of the year.<br />
<strong>Telkom</strong> is now poised to maximise value for<br />
all our shareholders.<br />
Reuben September<br />
Chief Executive Officer<br />
Group<br />
overview<br />
Management<br />
review<br />
Sustainability<br />
review<br />
Performance<br />
review<br />
Financial<br />
statements<br />
Company<br />
Financial<br />
Information
24<br />
<strong>Telkom</strong> Annual Report 2009<br />
Chief Financial Officer’s review<br />
The roll-out of our mobile network is<br />
expected to enable us to provide<br />
connectivity<br />
cost-effectively<br />
Peter Nelson<br />
Chief Financial Officer<br />
It is my pleasure to present <strong>Telkom</strong>’s<br />
financial review for the year ended<br />
March 31, 2009. It has been a challenging<br />
year and despite difficult economic<br />
conditions, <strong>Telkom</strong> managed to deliver<br />
value to shareholders by declaring a<br />
special dividend of R19 per share upon<br />
conclusion of the Vodacom transaction<br />
after year end and declaring an ordinary<br />
dividend of R1.15 per share and special<br />
dividend of R2.60 per share in June 2009.<br />
Faced with competition eroding our<br />
revenue base, cost management continues<br />
to be a key element in creating shareholder<br />
value. Combined with the inflationary<br />
environment affecting our operating<br />
expenses, a number of once-off items<br />
impacted Group earnings including:<br />
• R691 million cost relating to the<br />
Vodacom BEE deal;<br />
• R462 million impairment of Multi-Links;<br />
• R409 million fair value loss on the<br />
acquisition of the additional 25% in<br />
Multi-Links;<br />
• R204 million foreign exchange loss on<br />
the acquisition of Gateway by<br />
Vodacom;<br />
• R177 million expenses relating to the<br />
Vodacom transaction;<br />
• R39 million impairment of Africa<br />
Online; and<br />
• R454 million deferred tax credit on the<br />
Vodacom transaction.<br />
In addition, Multi-Links reported a<br />
R1.76 billion loss before eliminations<br />
during the 2009 financial year. Turning<br />
around Multi-Links’s performance is vital to<br />
<strong>Telkom</strong> given the extent of the Group’s<br />
investment and the enormous opportunity<br />
the Nigerian market provides.<br />
The roll-out of our mobile network is<br />
expected to enable us to provide<br />
connectivity in a more cost effective<br />
manner in rural and high cable theft areas.<br />
Next Generation Network and mobile<br />
technology also allows us to replace<br />
expensive to maintain legacy equipment.<br />
We continue with the renegotiation of all<br />
supplier contracts and constructive<br />
engagement with labour unions. We are<br />
reviewing our IT investment strategy in<br />
order to ensure optimum levels of spend in<br />
line with our strategy and network<br />
investment. Inventories and capital work-inprogress<br />
are receiving considerable<br />
attention as we seek to lower just-in-time<br />
levels of investment and to monetise any<br />
excessive levels of assets.<br />
<strong>Telkom</strong> is targeting an operating cost<br />
reduction of 10% over the following three<br />
financial years. The <strong>Telkom</strong> Board is<br />
focusing on improving the cost efficiency<br />
and free cash flow profile of the Company.<br />
It has reduced the initial five year capital<br />
expenditure budget by 40% to R34 billion<br />
and is targeting lower levels of inventory.<br />
The <strong>Telkom</strong> Group added Multi-Links as a<br />
new segment to its financial reporting for<br />
the 2009 financial year. As a result, the<br />
<strong>Telkom</strong> Group’s four reporting segments for<br />
the 2009 financial year are fixed-line,<br />
Multi-Links, mobile and other. The other<br />
segment includes <strong>Telkom</strong>’s Trudon, formerly<br />
known as TDS Directory Operations, and<br />
Africa Online, subsidiaries. The information
in this annual report has been updated to<br />
reflect the above changes to <strong>Telkom</strong>’s<br />
reporting segments. <strong>Telkom</strong> currently<br />
expects its <strong>Telkom</strong> SA, <strong>Telkom</strong> International<br />
and <strong>Telkom</strong> Data Centre businesses will<br />
constitute distinct reporting segments in the<br />
2010 financial year due to the<br />
implementation of its new organisational<br />
structure, which became effective as of<br />
April 1, 2009.<br />
<strong>Telkom</strong> concluded the disposal and sale of<br />
Vodacom, its mobile segment that provided<br />
mobile services through its 50% joint venture<br />
interest in Vodacom, effective as of April<br />
20, 2009. In addition, <strong>Telkom</strong>’s Board of<br />
directors has decided to dispose of<br />
Swiftnet, a wholly owned subsidiary that<br />
provides wireless data services, and<br />
determined to abandon its <strong>Telkom</strong> Media<br />
subsidiary. The <strong>Telkom</strong> Group’s<br />
consolidated financial statements and<br />
information included herein reflects the<br />
restatement to <strong>Telkom</strong>’s consolidated<br />
financial statements in prior years as a result<br />
of these events to disclose the effect of<br />
discontinued operations and the disposal of<br />
the subsidiaries held for sale as follows:<br />
• Income statement data for all the<br />
periods have been restated to reflect our<br />
50% share of Vodacom’s results, our<br />
100% share of Swiftnet’s results and our<br />
75% share of <strong>Telkom</strong> Media’s results as<br />
discontinued operations in accordance<br />
with IFRS5; and<br />
• Balance sheet data for only the year<br />
ended March 31, 2009 reflects our<br />
50% share of Vodacom’s results and our<br />
100% share of Swiftnet’s results as<br />
discontinued operations in accordance<br />
with IFRS5.<br />
The discussion of the business below has<br />
been revised from previous years to reflect<br />
the changes to <strong>Telkom</strong>’s segments and its<br />
discontinued operations.<br />
Group operating revenue<br />
Group operating revenue increased by<br />
6.9% to R35,940 million (March 31,<br />
2008: R33,611 million) in the year ended<br />
March 31, 2009. Fixed-line operating<br />
revenue, before inter-segmental eliminations,<br />
increased by 3.3% to R33,659 million due<br />
to growth in data revenues, higher revenue<br />
from interconnection and subscriptionbased<br />
calling plans, partially offset by<br />
lower traffic revenue. Multi-Links’s operating<br />
revenue increased 124.9% due to a<br />
209.3% growth in its subscriber base.<br />
<strong>Telkom</strong>’s defend and growth strategies are<br />
on track. We have achieved good growth<br />
in our bundled calling plan products,<br />
<strong>Telkom</strong> Closer and Supreme Call, and<br />
strong growth in our broadband products.<br />
Data revenue continues to achieve double<br />
digit growth, delivering a 12.1% revenue<br />
growth to R9,310 million for the year<br />
ended March 31, 2009.<br />
Group operating expenses<br />
Group operating expenses increased by<br />
19.5% to R29,895 million (March 31,<br />
2008: R25,014 million) in the year ended<br />
March 31, 2009, due to a 19.6%<br />
increase in operating expenses in the fixedline<br />
segment to R29,849 million (before<br />
inter-segmental eliminations) and a<br />
157.1% increase in operating expenses in<br />
Multi-Links to R2,422 million (before intersegmental<br />
eliminations). Fixed-line operating<br />
expenses increased due to increased selling,<br />
general and administrative expenses,<br />
payments to other network operators,<br />
depreciation, amortisation, impairment and<br />
write-offs, employee expenses and service<br />
fees. The increase in Multi-Links’s operating<br />
expenses was primarily due to increased<br />
cost of sales and associated subsidies as a<br />
result of increased sales volumes,<br />
increased advertising and promotional<br />
expenditure and an increase in expatriate<br />
fees as a result of an increase in staff<br />
seconded from <strong>Telkom</strong> during the year.<br />
Investment income<br />
Investment income consists of interest<br />
received on short-term investments and<br />
bank accounts. Investment income<br />
increased by 7.7% to R181 million<br />
(March 31, 2008: R168 million), largely<br />
as a result of increased short-term deposits<br />
and interest rates.<br />
<strong>Telkom</strong> Annual Report 2009 25<br />
Finance charges and fair value<br />
movements<br />
Finance charges include interest paid on<br />
local and foreign borrowings, amortised<br />
discounts on bonds and commercial paper<br />
bills, fair value gains and losses on<br />
financial instruments and foreign exchange<br />
gains and losses on foreign currency<br />
denominated transactions and balances.<br />
Finance charges and fair value movements<br />
increased by 82.7% to R2,843 million<br />
(March 31, 2008: R1,556 million) in the<br />
year ended March 31, 2009, primarily<br />
due to a 12.2% increase in interest<br />
expense to R1,732 million (March 31,<br />
2008: R1,543 million) mainly as a result<br />
of the 38.7% increase in the Group’s net<br />
debt to R23,047 million (March 31,<br />
2008: R16,617 million). In addition to the<br />
increase in the interest expense, net fair<br />
value and foreign exchange rate<br />
movements resulted in a loss of<br />
R1,111 million for the year ended<br />
March 31, 2009 (March 31, 2008:<br />
R13 million). The increase in the loss was<br />
mainly attributable to foreign exchange<br />
losses incurred by Multi-Links on foreign<br />
denominated loans and creditors’ balances<br />
as a result of the devaluation of the Naira<br />
as well as the mark to market valuation of<br />
the Multi-Links put option.<br />
Taxation<br />
Consolidated taxation expense from<br />
continuing operations decreased by<br />
37.3% to R1,660 million (March 31,<br />
2008: R2,647 million) in the year ended<br />
March 31, 2009. The consolidated<br />
effective taxation rate for the year ended<br />
March 31, 2009 was 44.6% (March 31,<br />
2008: 34.5%). <strong>Telkom</strong> company’s effective<br />
taxation rate was 8.9% (March 31, 2008:<br />
24.6%). The lower effective taxation rate<br />
for <strong>Telkom</strong> Company in the year ended<br />
March 31, 2009 was mainly due to the<br />
deferred taxation asset that was raised on<br />
the capital gains tax base cost of the 15%<br />
investment in Vodacom which is held for<br />
sale that will be utilised in the future capital<br />
gains tax liability of the sale transaction,<br />
partially offset by the R1,843 million<br />
Group<br />
overview<br />
Management<br />
review<br />
Sustainability<br />
review<br />
Performance<br />
review<br />
Financial<br />
statements<br />
Company<br />
Financial<br />
Information
26<br />
<strong>Telkom</strong> Annual Report 2009<br />
Chief Financial Officer’s review (continued)<br />
impairment of the Multi-Links investment, a<br />
R254 million impairment of the <strong>Telkom</strong><br />
Media loan and R85 million impairment of<br />
the Africa Online investment at company<br />
level.<br />
Profit for the year and earnings per<br />
share<br />
Profit attributable to the equity holders of<br />
<strong>Telkom</strong> decreased by 47.7% to<br />
R4,170 million (March 31, 2008:<br />
R7,975 million) in the year ended<br />
March 31, 2009. A major contributor to<br />
the decrease was the net loss of<br />
R1.76 billion reported by Multi-Links.<br />
Group basic earnings per share from<br />
continuing operations decreased 57.7% to<br />
407.4 cents per share (March 31, 2008:<br />
963.7 cents) and Group headline<br />
earnings per share from continuing<br />
operations decreased by 45.9% to<br />
557.0 cents per share (March 31, 2008:<br />
1,028.9 cents).<br />
Group balance sheet<br />
Net debt, after financial assets and<br />
liabilities, including discontinued<br />
operations, increased by 38.7% to<br />
R23,047 million (March 31, 2008:<br />
R16,617 million) resulting in a net debt to<br />
EBITDA ratio of 1.2 times from 0.8 times at<br />
March 31, 2008. On March 31, 2009,<br />
the Group had cash balances of<br />
R1,931 million (March 31, 2008:<br />
R1,134 million). Net debt, after financial<br />
assets and liabilities of continuing<br />
operations, was R15,497 million with a<br />
net debt to EBITDA ratio of 1.3 times.<br />
<strong>Telkom</strong> Company issued new local bonds,<br />
the TL12 and TL15 with a nominal value of<br />
R1,060 million and R1,160 million,<br />
respectively as well as syndicated loans<br />
with a nominal value of R4,100 million<br />
during the year ended March 31, 2009.<br />
The Company issued commercial paper bills<br />
with a nominal value of R11,025 million for<br />
the year ended March 31, 2009 of which<br />
commercial paper bills with a nominal value<br />
of R9,849 million were repaid by<br />
March 31, 2009.<br />
Group cash flow<br />
Cash flows from operating activities<br />
increased by 7.8% to R11,432 million<br />
(March 31, 2008: R10,603 million),<br />
primarily due to a lower dividend paid in<br />
respect of the 2008 financial year and<br />
lower taxation payments partially offset by<br />
higher finance charges. Cash flows utilised<br />
in investing activities increased by 20.6%<br />
to R17,005 million (March 31, 2008:<br />
R14,106 million), primarily due to higher<br />
capital expenditure in the Multi-Links and<br />
mobile segments and the acquisition of<br />
Gateway by Vodacom. Cash flows from<br />
financing activities includes loans raised of<br />
R18,168 million, partially offset by loans<br />
repaid of R10,212 million.<br />
Group capital expenditure<br />
Group capital expenditure, which includes<br />
spend on intangible assets, increased by<br />
11.2% to R13,234 million (March 31,<br />
2008: R11,900 million) and represents<br />
36.8% of Group revenue (March 31,<br />
2008: 35.4%).<br />
Fixed-line capital expenditure, which<br />
includes spending on intangible assets,<br />
decreased by 1.5% to R6,690 million<br />
(March 31, 2008: R6,794 million) and<br />
represents 19.9% of fixed-line revenue<br />
(March 31, 2008: 20.9%). Baseline<br />
capital expenditure of R3,343 million<br />
(March 31, 2008: R4,039 million) was<br />
largely for the deployment of technologies<br />
to support the growing data services<br />
business (including the ADSL footprint), links<br />
to the mobile cellular operators and<br />
expenditure for access line deployment in<br />
selected high growth commercial and<br />
residential areas. The continued focus on<br />
rehabilitating the access network and<br />
increasing the efficiencies and reducing<br />
redundancies in the transport network as<br />
well as the initiation of the fixed-wireless<br />
roll-out contributed to the network evolution<br />
and sustainment capital expenditure of<br />
R1,488 million (March 31, 2008:<br />
R1,369 million).<br />
<strong>Telkom</strong> continues to focus on its operations<br />
support system investment with current<br />
emphasis on workforce management,<br />
provisioning and fulfilment, assurance and<br />
customer care, hardware technology<br />
upgrades on the billing platform and<br />
performance and service management and<br />
property optimisation. During the year<br />
ended March 31, 2009, R603 million<br />
(March 31, 2008: R841 million) was spent<br />
on the implementation of several systems.<br />
Multi-Links’s capital expenditure, which<br />
includes spending on intangible assets,<br />
increased by 112.7% to R2,791 million<br />
(March 31, 2008: R1,312 million) and<br />
represents 146.9% of Multi-Links’s revenue<br />
(March 31, 2008: 155.3%) and was due<br />
to the continued investment to improve<br />
geographic coverage and increase<br />
capacity for both the voice and data<br />
networks.<br />
Mobile capital expenditure, which includes<br />
spending on intangible assets, increased<br />
by 3.2% to R3,569 million (March 31,<br />
2008: R3,460 million) and represents<br />
12.9% of mobile revenue (March 31,<br />
2008: 14.4%) and was due to the<br />
continued investment to improve geographic<br />
coverage and increase capacity for both the<br />
voice and data networks.<br />
Other capital expenditure consists of<br />
additions to property, plant and equipment<br />
and intangible assets for our subsidiaries<br />
Trudon (Pty) Ltd, formerly known as TDS<br />
Directory Operations, Swiftnet (Pty) Ltd,<br />
Africa Online Ltd and <strong>Telkom</strong> Media (Pty)<br />
Ltd. Other capital expenditure decreased to<br />
R184 million (March 31, 2008:<br />
R334 million) and represents 13.8% of<br />
other revenue (March 31, 2008: 29.1%).<br />
Prospects<br />
<strong>Telkom</strong>’s strategy is designed to deliver<br />
sustainable, profitable growth going<br />
forward and is benchmarked against<br />
global best practice. The creation of<br />
sustainable shareholder value is the<br />
underlying driver of every decision made.<br />
<strong>Telkom</strong>’s Board of directors and<br />
management team believe in the cost<br />
efficiencies and cash flows of the fixed-line<br />
business and are committed to addressing<br />
this while we invest for growth in new<br />
areas of business.
Capital expenditure for the Group is<br />
expected to range between 20% and 23%<br />
of revenue over the next financial year.<br />
In the long term the targeted net debt to<br />
EBITDA ratio is expected to be below<br />
1.4 times. However, in the shorter term,<br />
debt levels will be considerably lower<br />
given the retention in part of the proceeds<br />
from the sale of 15% of Vodacom.<br />
Targets in a transforming industry such as<br />
ours are inherently risky, particularly in later<br />
years and investors should not place undue<br />
reliance on such targets. Our ability to meet<br />
such targets is subject to a number of risks<br />
and uncertainties and there could be no<br />
assurance that we could meet such targets.<br />
The level of dividend going forward will be<br />
based on a number of factors including the<br />
consideration of the financial results,<br />
available growth opportunities, capital and<br />
operational requirements, the Group’s debt<br />
level, interest coverage, internal cash<br />
flows, prospects and available growth<br />
opportunities.<br />
New York Stock Exchange Listing<br />
Given the current global economic climate<br />
and the business imperative for <strong>Telkom</strong> to<br />
reduce its cost base, the Board has<br />
decided to delist from the New York Stock<br />
Exchange. Maintaining a listing in the<br />
United States is expensive and takes<br />
considerable management time. The<br />
methodology employed and discipline<br />
gained from compliance with the<br />
Sarbanes-Oxley reporting requirements will<br />
be retained, where appropriate, to ensure<br />
strict corporate governance compliance<br />
and transparent financial reporting.<br />
<strong>Telkom</strong> is comfortable that the JSE provides<br />
sufficient access to capital from both South<br />
<strong>Telkom</strong> Annual Report 2009 27<br />
African and global investors. <strong>Telkom</strong><br />
intends to maintain a level 1 American<br />
Depositary Receipt programme to facilitate<br />
over-the-counter trading in the United States<br />
of America.<br />
Conclusion<br />
With a year of unprecedented global<br />
financial conditions behind us, I certainly<br />
look forward to the challenges of the year<br />
ahead. The management team is committed<br />
to turning the performance of Multi-Links<br />
around, reducing operating and capital<br />
expenditures and continuing to deliver value<br />
to our shareholders. I remain confident in<br />
our ability to meet these challenges.<br />
Peter Nelson<br />
Chief Financial Officer<br />
Group<br />
overview<br />
Management<br />
review<br />
Sustainability<br />
review<br />
Performance<br />
review<br />
Financial<br />
statements<br />
Company<br />
Financial<br />
Information
28<br />
<strong>Telkom</strong> Annual Report 2009<br />
Board of directors<br />
SIBUSISO LUTHULI<br />
Independent<br />
Mr Luthuli, managing director of Ithala<br />
Limited since 2004, was appointed to<br />
the <strong>Telkom</strong> Board in July 2005.<br />
A qualified chartered accountant (CA),<br />
Mr Luthuli holds a BComm degree and<br />
a post graduate diploma in<br />
accountancy. He is non-executive<br />
Chairman of Cipla Medro SA and a<br />
member of the KwaZulu-Natal<br />
Provincial Government audit<br />
committee.<br />
SHIRLEY LUE <strong>AR</strong>NOLD<br />
Chairman<br />
Shirley Lue Arnold was appointed Chairman and non-executive director<br />
on November 1, 2006. Holder of a BA degree and a Certificate in<br />
Education, Ms Arnold is a former non-executive director of Peermont Global<br />
Limited and Ernst & Young South Africa. Currently she is a member of the<br />
Chairpersons Forum, Gordon Institute of Business, the Independent Directors’<br />
Initiative and the Institute of Directors in South Africa. She is a trustee of the<br />
Thutuka Bursary Fund (SAICA) and the Maths Centre and is a patron of the<br />
Student Sponsorship Programme.<br />
REUBEN SEPTEMBER<br />
Chief Executive Officer<br />
With 32 years’ experience in the IT and telecommunications industry, Reuben<br />
September was appointed acting Chief Executive Officer in April 2007;<br />
appointed to the Board in May 2007 and appointed CEO of <strong>Telkom</strong> in<br />
November 2007. He has worked in various engineering and commercial<br />
positions at <strong>Telkom</strong> since 1977, including Managing Executive of Technology<br />
and Network Services; Chief Technical Officer and Chief Operating Officer<br />
and also served as a director of Vodacom. Mr September has a BSc in<br />
electrical and electronic engineering from the University of Cape Town and is a<br />
member of the Professional Institute of Engineers of South Africa (ECSA).<br />
Government, independent and PIC representatives<br />
PETER NELSON<br />
Chief Financial Officer<br />
Peter Nelson, BComm, BAcc (Honours), CA,<br />
was appointed to the Board on December 8,<br />
2008. Previously he was the Chief Financial<br />
Officer of Netcare. Mr Nelson has also<br />
served at board level for a number of major<br />
corporations for the past 20 years, including<br />
BMW, Mondi Paper and Pretoria Portland<br />
Cement.<br />
BRAHM DU PLESSIS<br />
Independent<br />
Brahm du Plessis was appointed to the Board in<br />
December 2004. A practising advocate at the<br />
Johannesburg Bar since 1987, Advocate Du Plessis,<br />
who holds BA and LLB degrees from the University of<br />
Stellenbosch and an LLM degree from the University<br />
of London, is a member of Advocates For<br />
Transformation and has served as a member of the<br />
Johannesburg Bar Council.<br />
KEITUMETSE MATTHEWS<br />
Government representative<br />
Appointed to the Board in June<br />
2006, Ms Matthews is a<br />
businesswoman and former Chief<br />
Legal Advisor for the South African<br />
Broadcasting Corporation (SABC)<br />
and a former special advisor to the<br />
Minister of Communications. She<br />
has a BA (Hons) degree and is a<br />
Barrister-at-Law.
More than100 years<br />
of combined<br />
telecommunications<br />
experience<br />
DR VICTOR LAWRENCE<br />
Government representative<br />
Dr Lawrence was appointed to the<br />
Board in September 2007, holds BSc,<br />
MSc and PhD degrees in Electrical<br />
and Computer Engineering from the<br />
University of London, is the Charles W<br />
Bachelor Chair Professor of Electrical<br />
and Computer Engineering and<br />
Associate Dean for Special Programs<br />
at Stevens Institute of Technology.<br />
BRIAN MOLEFE<br />
Public Investment Corporation representative<br />
Appointed to the Board in July 2008, Mr Molefe is the Chief<br />
Executive Officer of the PIC. A former deputy Director<br />
General at the National Treasury and Chief Director:<br />
strategic planning in the office of the Premier of Limpopo,<br />
Mr Molefe holds a Masters of Business Leadership and<br />
BCom degrees from the University of South Africa. He also<br />
has a post-graduate Diploma in Economics from London<br />
University, School of Oriental and African Studies.<br />
DAVID B<strong>AR</strong>BER<br />
Independent<br />
Appointed to the Board in September 2008,<br />
Mr Barber is the former global Chief Financial Officer<br />
of AngloCoal and former Chief Financial Officer for<br />
the Anglo American Corporation of South Africa.<br />
Mr Barber is a chartered accountant (South Africa)<br />
and FCA (England and Wales) and serves as an<br />
independent non-executive director and member of<br />
the audit committee for Murray & Roberts.<br />
<strong>Telkom</strong> Annual Report 2009 29<br />
DR EKWOW<br />
SPIO-G<strong>AR</strong>BRAH<br />
Government representative<br />
Appointed to the Board in September 2007.<br />
Dr Spio-Garbrah is the Chief Executive<br />
Officer of the London-based Commonwealth<br />
Telecom Organisation and Ghana’s former<br />
Minister of Communication and Education.<br />
He holds a BA (Hons), English from the<br />
University of Ghana, a Graduate Certificate<br />
in International Banking from the New York<br />
University; a Graduate Diploma in Journalism<br />
and Communication and an MA in<br />
International Affairs from Ohio University and<br />
an LLD (Honorary Doctorate in Laws) from<br />
Middlebury University in the USA.<br />
JACKIE HUNTLEY<br />
Government representative<br />
Ms Huntley who was appointed to the Board in September 2007, is an<br />
attorney and senior partner at Mkhabela Huntley Adekeye Inc, one of the<br />
major black law firms in South Africa. She has extensive experience in<br />
commercial and corporate law, including telecommunications law. She holds<br />
BProc and LLB degrees from the University of the Witwatersrand along with a<br />
Management Advanced Programme certificate.<br />
PETER JOUBERT<br />
Independent<br />
Mr Joubert was appointed to the Board in August<br />
2008. Previously he was the Chief Executive<br />
Officer and chairman of Afrox. He has served as<br />
the chairman of numerous companies. He is the<br />
current Chairman of BDFM Publishers and<br />
Sandvik and is a director of SAA and Transnet<br />
and external advisor to General Motors SA. He<br />
holds a BA degree from Rhodes University, a<br />
DPWM from Rhodes and has completed<br />
Harvard Business School’s Advanced<br />
Management Programme.<br />
Group<br />
overview<br />
Management<br />
review<br />
Sustainability<br />
review<br />
Performance<br />
review<br />
Financial<br />
statements<br />
Company<br />
Financial<br />
Information
30<br />
<strong>Telkom</strong> Annual Report 2009<br />
Chief officers<br />
THAMI MSIMANGO<br />
Chief of Global Operations and Subsidiaries<br />
Mr Msimango was appointed Managing Director of <strong>Telkom</strong><br />
International on April 15, 2009. Previously he served as Chief of<br />
Global Operations and Subsidiaries since November 1, 2007 and<br />
Chief Technical Officer from September 2005. He joined <strong>Telkom</strong> in<br />
1984 and held a number of senior positions, including Managing<br />
Executive of Technology and Network Services and Executive<br />
Technology, Direction and Integration.<br />
CH<strong>AR</strong>LOTTE MOKOENA<br />
Chief of Human Resources<br />
Ms Mokoena, former Group Executive of Human Resources from<br />
December 2002 to October 2007, was appointed Chief of Human<br />
Resources in November 2007. She holds a BA (Hons) degree in<br />
human resources development from the University of Johannesburg;<br />
a BSoc Sciences from the University of the North West and a postgraduate<br />
diploma in training and performance management from<br />
Leicester University in the UK.<br />
NAAS FOURIE<br />
Chief of Strategy<br />
Mr Fourie was appointed Chief of Strategy in April 2008 having<br />
acted in the position from November 2007. He joined <strong>Telkom</strong> in<br />
1994. He is a former Managing Executive of Commercial Services<br />
and Executive of Marketing Services. He holds a BA, BDivinity and<br />
BAcc Science (Honours) degrees and has completed the advanced<br />
executive programme of the Kellogg School of Business.<br />
OUMA RASETHABA<br />
Chief of Corporate Governance<br />
Appointed Chief Corporate Governance Officer in November<br />
2007, Advocate Rasethaba joined <strong>Telkom</strong> in 2006 as Group<br />
Executive of Regulatory and Public Policy. She is a former special<br />
director of Public Prosecutions at the National Prosecuting Authority.<br />
She holds a BProc degree from the University of the North, an LLB<br />
(Hons) and Higher Diploma in Company Law from the University of<br />
the Witwatersrand and an LLM from the University of Pretoria.
Management team<br />
<strong>Telkom</strong> Annual Report 2009 31<br />
Age at <strong>Telkom</strong> Position<br />
Name 30 June Portfolio Responsibilities appointment appointment<br />
Marius Mostert 54 Network Infrastructure Responsible for network technology, 1973 2007<br />
Provisioning strategy, planning, technical product<br />
development and all associated network<br />
infrastructure deployment.<br />
Casper Kondo 48 Network Responsible for customer service 1993 2007<br />
Chihaka Field Operations fulfilment and assurance network<br />
restoration.<br />
Pierre Marais 50 Network Core Responsible for the technical and 1976 2007<br />
Operations operational management associated<br />
with <strong>Telkom</strong>’s core network.<br />
Zethembe Khoza 51 Contact Centre Responsible for managing all contact 1980 2007<br />
Operations points in which customers contact<br />
<strong>Telkom</strong>, such as call centres,<br />
<strong>Telkom</strong>Direct shops, commercial<br />
services and credit management.<br />
Godfrey Ntoele 48 National Sales and Responsible for the national sales and 1997 2007<br />
Marketing Operations marketing operations for <strong>Telkom</strong>’s retail<br />
consumers and business enterprises and<br />
direct sales to business customers and<br />
government entities.<br />
Bashier Sallie 41 Information Responsible for enterprise wide IT 1986 2007<br />
Operations activities including infrastructure,<br />
architecture, applications, support<br />
and internet service providers.<br />
Theo Hess 51 Capability Responsible for ensuring that <strong>Telkom</strong> has 1996 2007<br />
Management the right groups of processes, relationships,<br />
assets and resources that enable it to<br />
deliver on its strategic objectives.<br />
Amith Maharaj 34 Fixed Mobile Responsible for the development and 2008 2008<br />
Convergence Services implementation of the mobile and<br />
fixed-mobile converged business and<br />
technical strategy.<br />
Thami Magazi 51 Multi-National Responsible for national and 2001 2007<br />
Customers international sales revenue for multinational<br />
customers and also service and<br />
project management to support both<br />
national and multi-national sales<br />
teams. The portfolio directs <strong>Telkom</strong>’s<br />
service delivery obligations for 2010<br />
FIFA Soccer World Cup.<br />
Alphonzo Samuels 43 Wholesale and Responsible for national and international 1984 2007<br />
Marketing Operations wholesale revenue and customer<br />
relationship management.<br />
Group<br />
overview<br />
Management<br />
review<br />
Sustainability<br />
review<br />
Performance<br />
review<br />
Financial<br />
statements<br />
Company<br />
Financial<br />
Information
32<br />
<strong>Telkom</strong> Annual Report 2009<br />
Management team (continued)<br />
Age at <strong>Telkom</strong> Position<br />
Name 30 June Portfolio Responsibilities appointment appointment<br />
Brenda Kali 55 Corporate Guided by the company’s business 2008 2008<br />
Communications plan, vision and brand strategy,<br />
the role of Corporate Communication<br />
is to influence stakeholder behaviour<br />
through effective, timely and measureable<br />
communication making use of world-class<br />
reputation management solutions.<br />
Mike Mlengana 49 Corporate Development Responsible for implementing <strong>Telkom</strong>’s<br />
international expansion strategy through<br />
business development and merger and<br />
acquisition activities across Africa and<br />
other emerging markets.<br />
1995 2005<br />
Nicola White 37 Investor Relations Responsible for liaising with the investor<br />
community which includes retail<br />
shareholders, analysts and institutional<br />
investors.<br />
2006 2006<br />
Nicolene Rossouw 40 Performance Centre Responsible for the Performance 1997 2007<br />
(Acting) Centre in support of the company’s<br />
customer centricity strategy, marketing<br />
intelligence and to management the<br />
business improvement function.<br />
David Lupafya 36 Strategy (Acting) Responsible for <strong>Telkom</strong> Group strategy 2008 2008<br />
Deon Fredericks 48 Accounting Services Responsible for financial accounting,<br />
reporting and analysis, financial services,<br />
external and regulatory reporting, capital<br />
work in progress and asset management<br />
1993 2008<br />
Robin Coode 43 Corporate Finance, Overall responsible for taxation, treasury 1992 2008<br />
Specialised Services and corporate investment with specific<br />
focus areas that include share buy-back<br />
evaluations, trustee responsibilities on<br />
retirement funds and a merger and<br />
acquisition role through strategy.<br />
Stafford Augustine 40 Procurement Services Responsible for overall management<br />
of procurement services encompassing<br />
strategic sourcing management of<br />
outsourced entities, corporate support<br />
and BEE.<br />
2007 2007
<strong>Telkom</strong> Annual Report 2009 33<br />
Age at <strong>Telkom</strong> Position<br />
Name 30 June Portfolio Responsibilities appointment appointment<br />
Mohammed Dukandar 37 Internal Audit Accountable for developing and 2009 2009<br />
implementing internal audit strategies for<br />
<strong>Telkom</strong> Group and its subsidiaries and<br />
to ensure proper management of the<br />
internal audit function. Ensure that<br />
significant risks are understood and<br />
managed by management and ensure<br />
that significant risks are independently<br />
and objectively reviewed periodically.<br />
Anton Klopper 47 Legal Services Responsible for managing the provision<br />
of legal advice and assistance to<br />
various business units within <strong>Telkom</strong>.<br />
1991 2005<br />
Andrew Barendse 42 Regulatory Affairs Responsible for regulatory affairs which<br />
include regulatory strategy and analysis,<br />
regulatory compliance, regulatory pricing<br />
and costing and protecting <strong>Telkom</strong>’s<br />
regulatory rights.<br />
2006 2007<br />
Charmaine Houvet 36 Governance Responsible for improved governance<br />
in the organisation through the design<br />
and implementation of the Enterprise<br />
Programme office and key company<br />
governance process and policies.<br />
1991 2008<br />
Prelene Schmidt 38 CEO <strong>Telkom</strong> Responsible for all facets of the 1996 2008<br />
Foundation (Acting) <strong>Telkom</strong> Foundation.<br />
Group<br />
overview<br />
Management<br />
review<br />
Sustainability<br />
review<br />
Performance<br />
review<br />
Financial<br />
statements<br />
Company<br />
Financial<br />
Information
34<br />
<strong>Telkom</strong> Annual Report 2009
uild<br />
a partnership<br />
with communities,<br />
creating synergies<br />
that benefit<br />
Sustainability review<br />
Sustainability review 36<br />
Corporate governance 42<br />
Enterprise risk management 50<br />
Black economic empowerment 58<br />
Human capital management 62<br />
Safety, health and environment 72<br />
Corporate social investment 78<br />
GRI content index 82<br />
Group<br />
overview<br />
Management<br />
review<br />
Sustainability<br />
review<br />
Performance<br />
review<br />
Financial<br />
statements<br />
Company<br />
Financial<br />
Information
36<br />
<strong>Telkom</strong> Annual Report 2009<br />
Sustainability review<br />
The modern corporation must meet the<br />
expectations<br />
of a diverse range of stakeholders<br />
As one of South Africa’s largest<br />
corporations, <strong>Telkom</strong>’s public visibility is<br />
enormous. Our activities impact on the lives<br />
of every South African in one way or<br />
another and so our sustainability must be<br />
beyond reproach.<br />
As the draft King Report III notes: “Although<br />
a company is an economic institution, it<br />
remains a corporate citizen and therefore<br />
has to balance economic, social and<br />
environmental value. The triple bottom line<br />
approach enhances the potential of a<br />
company to create economic value…”<br />
<strong>Telkom</strong> has long subscribed to this<br />
philosophy and sustainability is a key driver<br />
of our business strategy. It is a business<br />
opportunity for us, an opportunity we<br />
pursue with relentless vigour in all our<br />
operations.<br />
Last year we reported that we continue to<br />
focus on the transformation of our business<br />
and, to this end, in the latter part of the<br />
year under review we embarked on a<br />
focused internal transformation programme,<br />
<strong>Telkom</strong> Renaissance, a programme geared<br />
to ensuring that we become Africa’s<br />
leading ICT service provider. It is, at least,<br />
a two year initiative during which time the<br />
Company will completely renew itself in<br />
terms of markets, processes, skills,<br />
capabilities and a new behaviour. Our goal<br />
is to create a high performance company<br />
that is capable of executing our ‘defend and<br />
grow’ strategy; a company that is<br />
characterised by profitability, sustainability<br />
and an ability to realise its vision; a<br />
company that is customer-focused with<br />
leading edge value solutions, and where the<br />
creation of value through excellence is the<br />
norm and not the exception.<br />
To date, we have distinguished ourselves<br />
as an entity that subscribes to the values of<br />
good corporate governance but, we can<br />
do better. We can, like the Renaissance<br />
Period of the 14th to 16th centuries that our<br />
initiative is named after, expand our vision<br />
beyond the conventional and traditional,<br />
and sustainability is a key focus area in this<br />
regard.<br />
Stakeholder engagement<br />
The modern corporation must meet the<br />
expectations of a diverse range of<br />
stakeholders and, as such, the<br />
management of stakeholder relationships is<br />
not a nice to have but a critical must.<br />
Throughout the year we refined our<br />
stakeholder management policy to ensure<br />
systematic engagements with:<br />
• Employees<br />
• Customers<br />
• Investors<br />
• Government<br />
• Regulators<br />
• Media<br />
• Suppliers<br />
• Unions<br />
• Civil society<br />
As a result, we achieved:<br />
Employees: A significant improvement in<br />
levels of employee engagement over the<br />
last three years via briefing sessions,<br />
training initiatives and electronic and print<br />
communication. In the year under review<br />
there was an on-going refinement in<br />
promoting a culture of engagement and<br />
internal communication channels. Greater<br />
prominence was given to face-to-face<br />
communication, especially between top<br />
leaders and the next management level, as<br />
well as electronic communication from the<br />
CEO across the company.<br />
As one of South Africa’s largest corporations,<br />
<strong>Telkom</strong>’s public visibility is enormous
Customers: Through our Customer<br />
Centricity project we have seen<br />
improvements in customer call centre<br />
operations; our ability to keep our promises<br />
and the reaction time in identifying and<br />
dealing with complaints.<br />
Investors: An improvement in sharing with<br />
them our strategic plans, operational<br />
performance and financial results through<br />
one-on-one briefings; daily consultations;<br />
roadshows and the Investor Relations<br />
website.<br />
Government: A substantial improvement in<br />
our relations with national government as a<br />
result of extensive consultations in which<br />
emerging issues were pre-empted and<br />
promptly dealt with. In addition, our<br />
support for the government’s Programme of<br />
Action, especially in the areas of economic<br />
growth, infrastructure development and the<br />
provision of telecommunications for public<br />
schools, was well received. Our success in<br />
engaging with government is evident in the<br />
irrevocable support provided by<br />
government which resulted in the successful<br />
conclusion of the Vodacom transaction.<br />
Regulators: Regular submissions on new<br />
regulations and responses to enquiries to,<br />
in particular, the Independent Communications<br />
Authority of South Africa<br />
(ICASA) and total compliance, where<br />
technically possible, with all the regulatory<br />
requirements in our operational areas.<br />
Media: Media management was<br />
conducted in a structured manner guided<br />
by three focus areas: reactive engagement,<br />
<strong>Telkom</strong> Annual Report 2009 37<br />
proactive engagement and relationship<br />
building.<br />
Suppliers: The top company award in the<br />
2008 Empowerdex Preferential Procurement<br />
on overall spend survey.<br />
Unions: We continued to engage with the<br />
unions through the Restructuring Forum, a<br />
purely consultative body where we share<br />
information with union leaders; the<br />
Company Forum, the only decision-making<br />
structure on issues that require negotiations;<br />
the National Employment Equity and Skills<br />
Development Forum and Task Teams which<br />
consist of both management and union<br />
representatives and which deal with<br />
specific issues.<br />
Civil society: Traditionally, telecommunications<br />
companies and utilities are at the<br />
Group<br />
overview<br />
Management<br />
review<br />
Sustainability<br />
review<br />
Performance<br />
review<br />
Financial<br />
statements<br />
Company<br />
Financial<br />
Information
38<br />
<strong>Telkom</strong> Annual Report 2009<br />
Sustainability review (continued)<br />
Group communication<br />
and brand was<br />
infused<br />
with a renewed<br />
sense of purpose<br />
bottom of global reputation studies as they<br />
face an uphill battle to communicate with<br />
the public. As a result of this, we embarked<br />
on a reputation study in May 2008 to<br />
measure and analyse attitudes and<br />
perceptions about us amongst various<br />
stakeholder groups. In the year under<br />
review approximately 3,700 interviews<br />
were conducted. It was gratifying to note<br />
that our reputation improved significantly,<br />
albeit from a low base. There was<br />
increased recognition in our key areas<br />
of products/service; leadership and<br />
governance and a significant improvement<br />
in the perceptions of our corporate social<br />
investment programme.<br />
Going forward<br />
In the 2009/10 financial year we will<br />
focus on developing unambiguous<br />
stakeholder value statements that detail our<br />
promises to our stakeholders and, equally<br />
importantly, internal scorecards for us to<br />
check how we live up to those promises.<br />
Group communication and brand<br />
Group communication and brand was<br />
infused with a renewed sense of purpose<br />
following the appointment of one of South<br />
Africa’s leading communications experts,<br />
Brenda Kali, as Group Executive<br />
responsible for this function.<br />
Guided by the decision to integrate and<br />
align communication processes and<br />
practices with <strong>Telkom</strong>’s brand position and<br />
values system to ensure greater credibility<br />
amongst our stakeholders, we focused on<br />
two specifics – the management of<br />
stakeholder relationships and reputation,<br />
and brand and image management.
• Interfacing with the media<br />
While the media is an influential stakeholder in its own right, it is<br />
also a vehicle through which we can communicate to our<br />
broader stakeholder base. To this end, a dedicated media unit<br />
was established to ensure we sent out a consistent message to<br />
enhance our reputation and create greater brand awareness.<br />
On the reactive <strong>front</strong>, the vast scope of our activities ensured a<br />
very high level of media interest in the year under review. Media<br />
enquiries ranged from our growth and expansion plans to cable<br />
theft, the provision of broadband, regulatory issues, the evolution<br />
of the network, our financial results, service delivery, customer<br />
complaints and corporate governance.<br />
As a result of our commitment to providing accurate and strategic<br />
information to the media, our reputation took a turn for the better.<br />
During the year under review, the value of proactive media<br />
engagement was underscored in three areas – the 2010 Soccer<br />
World Cup; the sale of our shares in Vodacom and the strategic<br />
agreement with AT&T.<br />
2010 World Cup<br />
As FIFA’s main partner in the development of fixed-line network<br />
infrastructure, we are responsible for providing infrastructure and<br />
communication services. Our capabilities in this regard were<br />
highlighted through media site visits and face-to-face interviews<br />
with the key people in our 2010 project office.<br />
The Vodacom transaction<br />
Throughout the transaction process from November 2008 to<br />
June 2009, journalists were given as much access as they<br />
requested to our key top management team.<br />
The AT&T agreement<br />
At the announcement of the strategic memorandum of<br />
understanding, journalists had the opportunity to spend time with<br />
the role players from both companies.<br />
We pride ourselves not only on building strong relationships<br />
between the media and our management team, but also on<br />
enhancing the media’s knowledge of the IT industry as a whole.<br />
In the year under review we hosted a number of well attended<br />
functions, including inviting key media to the Southern African<br />
Telecommunication and Applications conference.<br />
• Connecting with our employees<br />
In addition to refining our internal communication channels, we<br />
provided effective and timeous communication to all employees<br />
on the progress of our transformation programme, <strong>Telkom</strong> Renaissance.<br />
The programme’s specific communication was given a<br />
highlighted visual appearance to distinguish it from other<br />
electronic communications and to emphasise the status of each<br />
message. Weekly messages containing detailed information on<br />
the project’s progress were issued and a tailor-made web site<br />
<strong>Telkom</strong> Annual Report 2009 39<br />
Group<br />
overview<br />
Management<br />
review<br />
Sustainability<br />
review<br />
Performance<br />
review<br />
Financial<br />
statements<br />
Company<br />
Financial<br />
Information
40<br />
<strong>Telkom</strong> Annual Report 2009<br />
Sustainability review continued<br />
To reinforce the visibility of our involvement with the<br />
World Cup<br />
two giant footballs are being erected on two<br />
prominent Johannesburg and Pretoria landmarks<br />
was set up to enable employees to ask<br />
questions, make suggestions and receive<br />
feedback.<br />
As the torch bearer of the programme, the<br />
CEO was highly active in all internal<br />
communications via our Skytrain interactive<br />
satellite-based network; our digital media<br />
services and ‘from the desk of the CEO’<br />
e-mails.<br />
On a more generic level, a number of<br />
initiatives were launched during the<br />
reporting period, for example a crossfunctional<br />
editorial committee for our<br />
Online print channel; the opening of a<br />
weekly E-news channel and an e-mail<br />
based desktop broadcast system.<br />
We also put together a number of face-toface<br />
sessions at top and senior<br />
management level where the Group’s<br />
strategy and business approach was<br />
debated.<br />
To ensure greater credibility amongst our<br />
stakeholders we focused on two specifics<br />
– the management of stakeholder<br />
relationships and reputation, and brand<br />
and image management.
Partnering with Human Resources<br />
Group communication and brand played a pivotal role in<br />
communicating Human Resource initiatives to employees. These<br />
ranged from changes in employee benefits to the Renaissance<br />
programme. Where necessary, the communications function was<br />
supplemented by event management.<br />
Brand and image management<br />
In our view, the brand concept is much more than just logos and<br />
products. It also promises an experience and a relationship. As a<br />
result, in the year under review, the full spectrum of brand activities<br />
was incorporated into the communication function.<br />
Our brand has matured since <strong>Telkom</strong> was formed in 1991 and,<br />
as a result, a process was initiated during the year to rebuild it and<br />
create a fresh, innovative look and feel to give us a more modern,<br />
vibrant and customer-focused brand.<br />
To support this, a new Vision, Mission and Value (VMV) statement,<br />
together with a VMV-wired concept, was developed to ensure that<br />
our employees wholeheartedly embrace and accept the brand<br />
and, in the process, deliver the brand promise to our customers.<br />
2010 Soccer World Cup sponsorship<br />
To reinforce the visibility of our involvement with the World Cup,<br />
two giant footballs are being erected on two prominent<br />
Johannesburg and Pretoria landmarks – the Hillbrow and<br />
Lukasrand towers. As a further reminder of our commitment and<br />
expertise, a number of TV commercials were produced and<br />
broadcast.<br />
Artist’s impression of the Lukasrand tower<br />
<strong>Telkom</strong> Annual Report 2009 41<br />
Group<br />
overview<br />
Management<br />
review<br />
Sustainability<br />
review<br />
Performance<br />
review<br />
Financial<br />
statements<br />
Company<br />
Financial<br />
Information
42<br />
<strong>Telkom</strong> Annual Report 2009<br />
Corporate governance<br />
The Board takes overall responsibility for the Group and its role is to exercise leadership<br />
and judgement in directing it to achieve continued prosperity and to act in the best<br />
interests of stakeholders.<br />
Compliance<br />
The <strong>Telkom</strong> Board subscribes to and is fully<br />
committed to sound business principles and<br />
practices of integrity and accountability,<br />
and values of good corporate governance<br />
as espoused in the Code of Corporate<br />
Practices and Conduct of King II (the<br />
Code). In so doing, the directors recognise<br />
the need to conduct the enterprise in<br />
accordance with best corporate practices.<br />
The Board is of the view that <strong>Telkom</strong><br />
complies in all material respects to the<br />
principles of the Code. While it<br />
acknowledges the importance of good<br />
governance, the Board is aware that<br />
<strong>Telkom</strong> does not strictly comply with certain<br />
principles set out in the Code. These areas<br />
of non-compliance stem mainly from certain<br />
provisions in <strong>Telkom</strong>’s articles of<br />
association. Most of the areas of noncompliance<br />
will be resolved by no later<br />
than March 2011, when the provisions of<br />
<strong>Telkom</strong>’s articles of association resulting in<br />
non-compliance with the Code fall away or<br />
earlier if the shareholding of a significant<br />
shareholder falls below certain stipulated<br />
levels.<br />
Chairman and Board of directors<br />
The Board takes overall responsibility for<br />
the company and its role is to exercise<br />
leadership and sound judgement in<br />
directing it to achieve continued prosperity<br />
and to act in the best interests of<br />
stakeholders.<br />
<strong>Telkom</strong> has a unitary Board comprising 12<br />
directors. In accordance with <strong>Telkom</strong>’s<br />
articles of association, five non-executives<br />
including the Chairman have been<br />
appointed by the government of South<br />
Africa (the Class A shareholder) and one<br />
non-executive appointed by Black Ginger<br />
33 (the Class B shareholder).<br />
There are four other non-executive directors<br />
who are appointed at the company’s<br />
annual general meeting and are<br />
considered to be independent, as set out in<br />
King II and the JSE Listings Requirements.<br />
The executive directors on the Board are<br />
the Chief Executive Officer and the Chief<br />
Financial Officer. In line with best practice,<br />
the roles of the Chairman and Chief<br />
Executive Officer have been separated.<br />
The Board is led by Ms ST Arnold, the<br />
Chairman, while operational management<br />
of the Group is the responsibility of<br />
Mr RJ September, Chief Executive Officer.<br />
In terms of the articles of association, the<br />
non-executive directors appointed by the<br />
Class A shareholder have a fixed term of<br />
three years and may be re-elected to the<br />
Board by those shareholders. The<br />
Chairman has a term of one year and is reelected<br />
as Chairman for the ensuing year<br />
by the Class A shareholder. The four<br />
independent non-executive directors are<br />
subject to retirement by rotation and reelection<br />
by shareholders at least every<br />
three years in accordance with the articles<br />
of association and JSE Listings<br />
Requirements.<br />
The holders of the Class A and B ordinary<br />
shares are the government of South Africa<br />
and Black Ginger respectively. The only<br />
significant shareholder is the Class A<br />
shareholder who currently holds 39.8% of<br />
the issued ordinary shares in the company.<br />
The significant shareholder has certain<br />
Board-reserved matters which are detailed<br />
in the company’s articles of association.<br />
Pursuant to the articles of association, whilst<br />
the government is a significant shareholder,<br />
neither <strong>Telkom</strong> nor any of its subsidiaries<br />
may take action with respect to certain<br />
reserved matters unless authorised by the<br />
Board. In addition, the authorising<br />
resolution of the Board must have received<br />
the affirmative vote of at least one of the<br />
directors appointed by the government.
The members’ resignations and appointments<br />
to the <strong>Telkom</strong> Board of directors during the<br />
year under review are as follows:<br />
Resignations<br />
MJ Lamberti 3 June 2008<br />
AG Rhoda 3 July 2008<br />
Appointments<br />
B Molefe 3 July 2008<br />
PG Joubert 12 August 2008<br />
DD Barber 1 September 2008<br />
PG Nelson 8 December 2008<br />
Company Secretary<br />
All directors have access to the advice and<br />
services of the Group Company Secretary,<br />
who is responsible for ensuring the proper<br />
administration of the board and corporate<br />
governance procedures. The Group<br />
Company Secretary provides guidance to<br />
the directors on their responsibilities within<br />
the prevailing regulatory and statutory<br />
environment and the manner in which such<br />
responsibilities should be discharged.<br />
Details of the secretary’s business address<br />
and the company’s registered office are set<br />
out on inside back cover.<br />
Delegation of authority<br />
The ultimate responsibility for the Group’s<br />
operations rests with the Board. The Board<br />
retains effective control through a welldeveloped<br />
governance structure of Board<br />
committees which specialise in certain<br />
areas of the business. Certain authorities<br />
have been delegated to the Chief<br />
Executive Officer to manage the day-to-day<br />
business affairs of the company. The Group<br />
executives assist the Chief Executive Officer<br />
in discharging his duties and the duties of<br />
the Board when it is not in session.<br />
However, in terms of statute and the<br />
company’s constitution, together with the<br />
revised delegation of authority, certain<br />
matters are still reserved for Board and/or<br />
shareholder approval.<br />
Committees<br />
The Board is assisted in discharging its<br />
duties through its committees. During the<br />
year under review, the Board merged the<br />
Investment and Strategy Committees.<br />
<strong>Telkom</strong> Annual Report 2009 43<br />
Board meetings<br />
Board meetings are held at least once a quarter. In addition to these meetings, whenever<br />
circumstances dictate the necessity, special Board meetings are convened. During the year<br />
under review, four scheduled Board meetings were held and 11 additional special Board<br />
meetings were convened. Details of attendance by each director including attendance at<br />
committee meetings of the Board are set out in the table below. Certain members of senior<br />
management attend Board meetings when invited to make presentations on particular<br />
company issues of interest to the Board. A majority of directors, one of whom must be a<br />
representative of the Class A shareholder, is required for a quorum for Board meetings.<br />
The following table presents the attendance of meetings held during the 2009 financial<br />
year by directors:<br />
Scheduled Special<br />
Number of Number of<br />
meetings1 Attendance meetings1 Attendance<br />
Non-executive<br />
ST Arnold (Chairman) 4 4 11 11<br />
DD Barber 3 3 4 4<br />
B du Plessis 4 4 11 11<br />
RJ Huntley 4 4 11 10<br />
PG Joubert 3 2 5 4<br />
MJ Lamberti 0 0 4 3<br />
VB Lawrence 4 4 11 11<br />
PCS Luthuli 4 4 11 9<br />
KST Matthews 4 3 11 10<br />
B Molefe 4 1 6 3<br />
AG Rhoda 0 0 5 4<br />
E Spio-Garbrah 4 4 11 10<br />
Executive<br />
RJ September 4 4 11 11<br />
PG Nelson 1 1 1 1<br />
1 The table represents the possible meetings based on the appointment and resignation dates of<br />
members.<br />
Executive committee<br />
This committee consists of the two executive<br />
directors that serve on the Board of<br />
directors and chief executives of the <strong>Telkom</strong><br />
Group. The Chief Executive Officer is the<br />
Chairman of this committee and has the<br />
power of authority to, among other things:<br />
• Implement approved business plans,<br />
annual budgets and all other matters<br />
and issues relating to the achievement<br />
of <strong>Telkom</strong>’s obligations under its<br />
licences, including without limitations<br />
network expansion, equipment<br />
procurement, tariff setting and<br />
packaging, customer service and<br />
marketing; and<br />
• Prepare, review and recommend to the<br />
Board the annual budgets and any<br />
amendments thereto.<br />
Audit and risk committee (<strong>AR</strong>C)<br />
The <strong>AR</strong>C is chaired by Mr PCS Luthuli, a<br />
non-executive director; it held four<br />
scheduled meetings and six special<br />
meetings during the financial year.<br />
Mr Luthuli is considered an audit committee<br />
financial expert within the meaning of the<br />
requirements of the US Securities and<br />
Exchange Commission (SEC). He is a<br />
chartered accountant.<br />
In terms of its charter, the <strong>AR</strong>C evaluates the<br />
Group’s systems of internal and financial<br />
control; reviews accounting policies and<br />
financial information issued to the public;<br />
reviews the performance of the internal and<br />
external auditors and determines the fees<br />
payable to the external auditors. It also<br />
determines and monitors the use of the<br />
external auditors for non-audit related<br />
Group<br />
overview<br />
Management<br />
review<br />
Sustainability<br />
review<br />
Performance<br />
review<br />
Financial<br />
statements<br />
Company<br />
Financial<br />
Information
44<br />
<strong>Telkom</strong> Annual Report 2009<br />
Corporate governance (continued)<br />
Board committees<br />
specialise<br />
in distinctive business areas<br />
services. The committee examines, reviews<br />
financial results and recommends same to<br />
the Board for approval. A quorum for a<br />
meeting is two members.<br />
As at March 31, 2009, the committee<br />
comprised four non-executive directors of<br />
which three are considered independent:<br />
Mr PCS Luthuli (independent)<br />
Mr RJ Huntley<br />
Mr DD Barber (independent)<br />
Mr PG Joubert (independent)<br />
The new terms of reference of the<br />
committee were approved during the year.<br />
At the time of the Chief Financial Officer’s<br />
appointment on December 8, 2008 the<br />
audit and risk committee satisfied itself of<br />
the appropriateness of his credentials,<br />
professionalism, technical competency and<br />
experience.<br />
The audit and risk committee will conduct a<br />
similar review on an annual basis as<br />
required by the JSE Listings Requirements.<br />
The internal and external auditors have<br />
unlimited access to the Chairman of the<br />
audit and risk committee.<br />
The audit and risk committee is satisfied<br />
that Ernst & Young is independent in<br />
accordance with section 270A of the<br />
Corporate Laws Amendment Act, and<br />
nominated the re-appointment of Ernst &<br />
Young as registered auditors for the<br />
2009/2010 financial year.<br />
Nominations committee<br />
The nomination committee, which must have<br />
a minimum of three members and is chaired<br />
by an independent non-executive director,<br />
consists of Mr PCS Luthuli (Chairman),<br />
Ms ST Arnold and Mr B du Plessis. A quorum<br />
for a meeting is two members.<br />
The committee makes recommendations to<br />
the Board on the composition of the Board,<br />
and the balance between executive, nonexecutive<br />
and independent non-executive<br />
directors with regard to all aspects of<br />
diversity and experience.<br />
The committee is responsible for identifying<br />
and nominating candidates and formulating<br />
succession plans for the approval of the<br />
Board.<br />
In addition, the committee recommends to<br />
the Board continuation (or not) of services<br />
of any director who has reached the<br />
retirement age as well as directors who are<br />
retiring by rotation, for re-election.<br />
Investment and strategy committee<br />
The investment and strategy committee,<br />
consists of Mr DD Barber (Chairman),<br />
Dr E Spio-Garbrah, Mr RJ Huntley,<br />
Mr RJ September, Mr PG Nelson and<br />
Dr VB Lawrence.<br />
The function of the committee is to assist the<br />
Board in evaluating investments, corporate<br />
actions and key funding and financial<br />
proposals.<br />
Human resources review and<br />
remuneration committee (HRRRC)<br />
The committee consists entirely of nonexecutive<br />
directors. Mr B du Plessis, an<br />
independent non-executive director, was<br />
appointed as Chairman of the HRRRC as<br />
of June 2008. The HRRRC comprises the<br />
following non-executive directors, of which<br />
two must be independent:<br />
Mr B du Plessis (Chairman)<br />
Mr PG Joubert (independent)<br />
Ms KST Matthews<br />
Mr E Spio-Garbrah<br />
The HRRRC held four scheduled meetings<br />
and one special meeting during the<br />
financial year. This committee, in<br />
consultation with management, ensures that<br />
the Group’s directors and senior executives<br />
are fairly rewarded for their individual<br />
contribution to the Group’s performance. In<br />
fulfilling its duties, the HRRRC gives<br />
consideration to industry and local<br />
benchmarks to ensure that remuneration<br />
packages remain competitive. Senior<br />
executives receive a salary, short-term<br />
incentive and an allocation in terms of the<br />
rules of the Conditional Share Plan.<br />
Medical and retirement benefits are also<br />
offered. Remuneration packages are<br />
reviewed annually and performance<br />
bonuses are linked both to individual<br />
performance and to the performance of the<br />
Group. Non-executive directors are paid<br />
fees for their services as directors of the<br />
Company and for their participation as<br />
members of the Board committees.<br />
Board effectiveness<br />
An appraisal of the effectiveness of the<br />
Board was conducted externally during the<br />
year. The appraisal was benchmarked<br />
against the strategic requirements of <strong>Telkom</strong><br />
SA to ensure the capacity to deliver these<br />
requirements and strengthen the diversity<br />
and sector expertise of directors. The<br />
appraisal was positive and its<br />
recommendation will be followed through<br />
implementation.
Share dealings<br />
In line with JSE Listings Requirements and<br />
the Group’s insider trading policy,<br />
executives who wish to trade in <strong>Telkom</strong><br />
securities are required to obtain prior<br />
written approval from the Chairman of the<br />
Board and the Group Company Secretary<br />
before dealing in <strong>Telkom</strong> securities. The<br />
Group operates closed periods as defined<br />
in the JSE Listings Requirements. Additional<br />
closed periods are enforced, when<br />
required, in terms of corporate activities as<br />
and when these occur.<br />
Compliance with Sarbanes-Oxley<br />
The Sarbanes-Oxley Act of 2002 was<br />
passed in the United States of America to<br />
protect investors by improving the accuracy<br />
and reliability of corporate disclosures,<br />
accounting practices and corporate<br />
governance. <strong>Telkom</strong>, as a listed company<br />
on the New York Stock Exchange (NYSE),<br />
registered in terms of the US Securities<br />
Exchange Act of 1934, is required to<br />
comply with the Sarbanes-Oxley Act.<br />
<strong>Telkom</strong> is committed to good corporate<br />
governance practices and compliance with<br />
the Act as directed by the US Securities<br />
and Exchange Commission (SEC).<br />
<strong>Telkom</strong>’s Sarbanes-Oxley steering committee<br />
represents divisions directly impacted by<br />
the requirements of the Act. Working<br />
closely with line management, a Sarbanes-<br />
Oxley compliance team is responsible for<br />
ensuring that risks and controls that may<br />
impact on the integrity of financial<br />
reporting are properly documented,<br />
reviewed and reported on. The<br />
independent external auditor attested to<br />
and reported on management’s assessment<br />
of the effectiveness of internal control over<br />
financial reporting for the year ended<br />
March 31, 2009.<br />
The Chief Executive Officer and the Chief<br />
Financial Officer (CFO) have certified that<br />
the requirements of Section 302 have been<br />
met for the year ended March 31, 2009.<br />
In addition to the Sarbanes-Oxley Act, the<br />
NYSE corporate governance rules,<br />
approved by the SEC, permit NYSE-listed<br />
companies that are foreign private issuers,<br />
such as <strong>Telkom</strong>, to follow home-country<br />
practices in lieu of the requirements<br />
applicable to listed US companies, subject<br />
to certain exceptions.<br />
In particular, foreign private issuers must<br />
have an audit committee that satisfies the<br />
requirements of Rule 10A-3 under the<br />
Securities Exchange Act of 1934, as<br />
amended and must disclose the significant<br />
ways in which their corporate governance<br />
practices differ from those followed by US<br />
companies under the NYSE listing<br />
standards. In addition, the CEO of a<br />
foreign private issuer must promptly notify<br />
the NYSE in writing after any executive<br />
officer of the listed company becomes<br />
aware of any material non-compliance with<br />
any applicable provisions of the NYSE<br />
corporate governance standards and<br />
foreign private issuers must submit an<br />
annual and interim written affirmation to the<br />
NYSE with regard to compliance with the<br />
foregoing requirements and certain<br />
changes to their audit committees.<br />
As a foreign private issuer the definition of<br />
independence of directors for <strong>Telkom</strong> is<br />
only relevant to the audit committee and is<br />
included in Rule 10A-3 of the US Security<br />
Exchange Act. This states that each<br />
member of the audit committee must be a<br />
member of the Board and should be<br />
independent as defined in Rule 10A-3<br />
(b)(1)(ii) of the US Securities Exchange Act.<br />
A member of an audit committee of a listed<br />
issuer may not, other than in his capacity<br />
as a member of the audit committee, the<br />
Board, or any other Board committee:<br />
<strong>Telkom</strong> Annual Report 2009 45<br />
• Accept directly or indirectly any<br />
consulting, advisory or other<br />
compensation from the listed entity; and<br />
• Be an affiliated person of the listed<br />
entity.<br />
An affiliated person of an issuer is a person<br />
who directly, or indirectly, through one or<br />
more intermediaries, controls, or is<br />
controlled by or is under common control<br />
with the issuer.<br />
Rule 10A-3(b)(1)(iv)(E) of the US Securities<br />
Exchange Act provides an exemption from<br />
the prohibition on being an affiliated<br />
person of the issuer for an audit committee<br />
member of a foreign private issuer, who is<br />
a representative or designee of a foreign<br />
governmental entity that is an affiliate of the<br />
foreign private issuer if the member is not<br />
an executive officer of the foreign private<br />
issuer.<br />
Group<br />
overview<br />
Management<br />
review<br />
Sustainability<br />
review<br />
Performance<br />
review<br />
Financial<br />
statements<br />
Company<br />
Financial<br />
Information
46<br />
<strong>Telkom</strong> Annual Report 2009<br />
Corporate governance (continued)<br />
Key differences between NYSE corporate governance listing rules and <strong>Telkom</strong> practice are:<br />
NYSE rules <strong>Telkom</strong> practice<br />
Board of directors<br />
Composition The Board of directors should have a majority The majority of <strong>Telkom</strong>’s directors are non-executive<br />
of independent directors. Four of the 12 directors are considered independent, based<br />
on the King II definition of ‘independent’. Based on their<br />
ordinary shareholding at March 31, 2009 and their<br />
holding of the Class A and Class B shares respectively, the<br />
government is entitled to appoint five directors to the Board,<br />
while Black Ginger is entitled to appoint one director to the<br />
Board.<br />
King II defines an independent director as a non-executive<br />
director who:<br />
• Is not a representative of a share owner who has the<br />
ability to control or significantly influence management;<br />
• Has not been employed by the company or the Group,<br />
of which it currently forms part, in any executive capacity<br />
for the preceding three financial years;<br />
• Is not a member of the immediate family of an individual<br />
who is, or has been in any of the past three financial<br />
years, employed by the company or the Group in an<br />
executive capacity;<br />
• Is not a professional advisor to the company or the<br />
Group other than in a director capacity;<br />
• Is not a significant supplier to, or customer of the<br />
company or Group;<br />
• Has not been a significant supplier to, or customer of the<br />
company or Group;<br />
• Has no significant contractual relationship with the<br />
company or Group; and<br />
• Is free from any business or other relationship that could<br />
be seen to materially interfere with the individual’s<br />
capacity to act in an independent manner.<br />
Board committees<br />
Committees Companies are required to establish an audit <strong>Telkom</strong> has an <strong>AR</strong>C, investment, and strategy committee,<br />
required committee, a nominating or corporate nominations committee and HRRRC. For the description and<br />
governance committee and a compensation composition of these committees and the members refer to<br />
committee. Each of these committees must have pages 43 and 44. Board members who are not appointed<br />
a written charter that addresses certain matters by the Class A and B shareholders are appointed by<br />
specified in the NYSE listing standards, shareholders at the annual general meeting as stipulated in<br />
including the committee’s purpose and <strong>Telkom</strong>’s articles of association. <strong>Telkom</strong> does not perform an<br />
responsibilities and an annual performance<br />
evaluation of each committee.<br />
annual performance evaluation of each committee.
NYSE rules <strong>Telkom</strong> practice<br />
<strong>Telkom</strong> Annual Report 2009 47<br />
Board committees<br />
Composition All of the required committees should be All the committees have non-executive directors as members.<br />
composed entirely of independent non-executive<br />
directors.<br />
However, not all non-executives are independent.<br />
Audit committee<br />
Written charter The audit committee must have a written charter The <strong>AR</strong>C has a written charter. The responsibilities of the<br />
that addresses certain matters specified in the <strong>AR</strong>C are described in further details, on pages 43 and 44.<br />
NYSE listing standards, including the In addition, <strong>Telkom</strong>’s audit and risk committee charter, as a<br />
committee’s purpose, an annual performance listed issuer, complies with the Sarbanes-Oxley<br />
evaluation and the duties and responsibilities of<br />
the audit committee.<br />
requirements.<br />
Composition The audit committee must include a minimum The <strong>AR</strong>C consists of four non-executive members of <strong>Telkom</strong>’s<br />
of three members that satisfy the independence Board of directors, three of which are independent.<br />
requirements of both the NYSE listing standards Pursuant to the Sarbanes-Oxley Act, each member of<br />
and the Sarbanes-Oxley Act. <strong>Telkom</strong>’s <strong>AR</strong>C, as a non-US listed company, is a member of<br />
the Board of directors. In addition, although one of the<br />
members is appointed by the government, who may be<br />
deemed to be affiliated persons of <strong>Telkom</strong>, such<br />
appointments fall within the exception for the SEC<br />
independence requirements.<br />
Each of the members of the audit committee For members’ work experience refer to pages 28 to 29 under<br />
must be financially literate. In addition, at Board of directors. The Chairman of <strong>Telkom</strong>’s <strong>AR</strong>C,<br />
least one member of the audit committee Mr PCS Luthuli, who is a Chartered Accountant, is<br />
must have accounting or related financial considered an audit committee financial expert within the<br />
management skills. An audit committee financial meaning of item 16A of the requirements of Form 20-F in<br />
expert within the meaning of the SEC rules terms of the definition in the Sarbanes-Oxley Act. The SEC<br />
adopted pursuant to the Sarbanes Oxley Act has determined that the audit committee financial expert<br />
satisfies this requirement. designation does not impose on the person with that<br />
designation any duties, obligations or liabilities that are<br />
greater than the duties, obligations or liabilities imposed on<br />
such person as a member of the audit committee in the<br />
absence of such designation.<br />
Disclosure and<br />
Communication<br />
Corporate Listed companies are required to adopt, and The corporate governance statement is available on the<br />
governance post on their websites, a set of corporate company’s website, www.telkom.co.za/ir.<br />
guidelines governance guidelines and the charters of their<br />
most important committees, including at least the<br />
audit, and, if applicable, compensation and<br />
nominating committees. The guidelines must<br />
address, among other things: director qualification<br />
standards, director responsibilities, director access<br />
to management and independent advisers,<br />
director compensation, director orientation and<br />
continuing education, management succession,<br />
and an annual performance evaluation of the<br />
Board of directors.<br />
Group<br />
overview<br />
Management<br />
review<br />
Sustainability<br />
review<br />
Performance<br />
review<br />
Financial<br />
statements<br />
Company<br />
Financial<br />
Information
48<br />
<strong>Telkom</strong> Annual Report 2009<br />
Corporate governance (continued)<br />
<strong>Telkom</strong> Audit Services (TAS) is an independent and<br />
objective assurance and consulting function that<br />
focuses on a balance between<br />
value protection<br />
Internal controls<br />
Our internal control environment is<br />
monitored by the <strong>AR</strong>C, which:<br />
• Ensures that risks are identified and<br />
assessed.<br />
• Ascertains that all systems and<br />
processes to prevent and/or mitigate<br />
these risks are monitored; and<br />
• Reviews the quality of reporting and<br />
adherence to internal policies and other<br />
governance best practices.<br />
Our organisational structure facilitates and<br />
allows the flow of information upstream,<br />
downstream and across all business<br />
activities. This is supported by formal<br />
mechanisms in place to communicate the<br />
responsibilities and expectations of<br />
business activities at executive level.<br />
Section 404 of the Sarbanes-Oxley Act<br />
requires that companies listed on the NYSE<br />
annually evaluate and report on the<br />
effectiveness of their controls over financial<br />
reporting. We submit progress reports at<br />
least quarterly to the <strong>AR</strong>C which then<br />
reports to the Board.<br />
Our internal audit function plays a key role<br />
in providing an objective view and<br />
continuous assessment of the effectiveness<br />
of the internal control systems throughout<br />
the Group to both management and the<br />
<strong>AR</strong>C.<br />
Mechanisms are in place that capture and<br />
report on identified internal control<br />
and value enhancement<br />
weaknesses, including processes that<br />
ascertain the level at which deficiencies<br />
are reported. Significant deficiencies and<br />
material weaknesses in internal controls are<br />
reported to top management, the Board or<br />
the <strong>AR</strong>C, and the external auditors.<br />
<strong>Telkom</strong> Audit Services (TAS)<br />
TAS, in accordance with global best<br />
practices, is a value-adding, independent<br />
and objective assurance and consulting<br />
function, designed to add value to, and<br />
improve our operations. Its mandate is to<br />
provide an independent assessment on the<br />
reliability of financial reporting, validate<br />
control systems and provide an oversight of<br />
management and overall business<br />
activities, bringing a systematic, disciplined<br />
approach to the evaluation and<br />
improvement of the effectiveness of risk<br />
management, internal controls and<br />
corporate governance processes. In<br />
carrying out its mandate, TAS co-ordinates<br />
with other control and monitoring functions<br />
(enterprise risk management, compliance,<br />
security, legal, ethics, environment and<br />
external audit).<br />
TAS is required to provide reasonable<br />
assurance and to determine whether or not<br />
our control processes and systems are<br />
adequate and functioning to ensure that:<br />
• Resources and assets are effective and<br />
efficiently<br />
protected;<br />
used and adequately<br />
• Risks are appropriately identified and<br />
managed;<br />
• Significant financial, managerial and<br />
operating information is accurate,<br />
reliable and timely;<br />
• Employees’ actions are in compliance<br />
with policies, standards, procedures,<br />
applicable laws and regulations;<br />
• Significant legislative or regulatory<br />
issues impacting on us are recognised<br />
and addressed appropriately; and<br />
• An assessment is provided regularly of<br />
the adequacy and effectiveness of our<br />
corporate governance, risk and control<br />
processes for controlling our activities<br />
and managing our risks.<br />
To ensure the independence of TAS, the<br />
Group Executive: <strong>Telkom</strong> Audit Services<br />
reports functionally to the <strong>AR</strong>C Chairman<br />
and administratively to the Chief Financial<br />
Officer and has direct access to the Chief<br />
Executive Officer. In this context, the <strong>AR</strong>C<br />
oversees processes related to financial risks<br />
and internal controls, financial reporting<br />
and the monitoring of internal and external<br />
auditing processes. In carrying out its<br />
duties, the team has unrestricted access to<br />
all <strong>Telkom</strong> functions, records, property and<br />
personnel.<br />
The TAS team conducts audit work, or any<br />
other task, in accordance with the internal<br />
auditing standards set by the globally<br />
recognised Institute of Internal Auditing<br />
(IIA). This requires compliance with the<br />
Standards or Professional Practice of<br />
Internal Auditing (SPPIA) and, in particular,
the codes of conduct and ethics that are promulgated from time to<br />
time by relevant professional bodies and any other corporate<br />
governance initiatives. Internal audit practices and activities are<br />
also benchmarked independently by an authoritative external party<br />
as recommended by the SPPIA and required by the <strong>AR</strong>C.<br />
<strong>Telkom</strong> Annual Report 2009 49<br />
The Network Operations Centre (NOC)<br />
Our world-class campus in Centurion, outside Pretoria,<br />
enables us to offer our customers an integrated solution to<br />
their network requirements. At its heart is the Network<br />
Operations Centre (NOC). Developed from the best in<br />
world-class practices and centres, it employs the latest<br />
technologies and houses high level technical skills and<br />
support teams. It offers full network monitoring, fault<br />
management, configuration management, accounting<br />
management, performance management and security<br />
management 24 hours a day, seven days a week.<br />
Group<br />
overview<br />
Management<br />
review<br />
Sustainability<br />
review<br />
Performance<br />
review<br />
Financial<br />
statements<br />
Company<br />
Financial<br />
Information
50<br />
<strong>Telkom</strong> Annual Report 2009<br />
Enterprise risk management<br />
We manage a variety of risks including financial,<br />
political, regulatory and technology across the<br />
African continent<br />
SAT-3<br />
Senegal<br />
Sierra Leone<br />
SAT-3<br />
Gambia<br />
Mauritainia<br />
Guinea<br />
Liberia<br />
Ivory<br />
Coast<br />
Overlap of Primary Operators<br />
of Africa Online and MWEB<br />
Mali<br />
Burkina<br />
Ghana<br />
Overlap of Multi-Links and MWEB<br />
Only Africa Online Operators<br />
Overlap of Distributors of<br />
Africa Online and MWEB<br />
Only Africa Online Affiliates<br />
(Partneship with A-link)<br />
<strong>Telkom</strong> SA Limited<br />
Our Enterprise Risk Management (ERM)<br />
strategy was comprehensively reviewed<br />
during the year, in particular the capturing<br />
and reviewing of the high risks for<br />
the business for the <strong>Telkom</strong> enterprise<br />
risk management committee (TERMC),<br />
together with the compilation of an<br />
improved TERMC report.<br />
As a result of certain gaps identified by<br />
KPMG’s risk maturity assessment, the risk<br />
Togo<br />
Benin<br />
Niger<br />
Nigeria<br />
SAT-3<br />
Cameroon<br />
Equa.Guinea<br />
Gabon<br />
Congo<br />
Angola<br />
Namibia<br />
Central African<br />
Republic<br />
DRC<br />
Zambia<br />
Botswana<br />
South Africa<br />
Sudan<br />
Rawanda<br />
Burundi<br />
Zimbabwe<br />
Lesotho<br />
Uganda<br />
Swaziland<br />
management framework, risk policy and<br />
procedure deliverables were updated and<br />
approved by the Board.<br />
A proposed risk reporting format for the<br />
various risk committees was developed to<br />
help the audit and risk committee (<strong>AR</strong>C)<br />
monitor ERM’s effectiveness across the<br />
Group and the Risk Portfolio was monitored<br />
on an on-going basis.<br />
Tanzania<br />
Mozambique<br />
SAT-3<br />
Ethiopia<br />
Kenya<br />
EASSy<br />
Somalia<br />
EASSy<br />
EASSy<br />
Madagascar<br />
Our various subsidiaries and service<br />
organisations completed risk management<br />
compliance plans and all <strong>Telkom</strong> SA policies<br />
were endorsed. In addition, all <strong>Telkom</strong><br />
Group subsidiaries are now covered.<br />
Enterprise risk management governance<br />
We manage a variety of risks including<br />
financial; political; regulatory; technology;<br />
human capital; operational; safety, health<br />
and environment; security; strategic and
<strong>Telkom</strong> Annual Report 2009 51<br />
Enterprise risk management governance<br />
Enterprise risk management at <strong>Telkom</strong> is guided and monitored by various committees that have adopted certain principles to assist them<br />
in executing their respective enterprise risk management functions. The model below outlines the key enterprise risk management structures,<br />
the key role-players and their roles and responsibilities.<br />
Group<br />
overview<br />
Management<br />
review<br />
Sustainability<br />
review<br />
Performance<br />
review<br />
Financial<br />
statements<br />
Company<br />
Financial<br />
Information
52<br />
<strong>Telkom</strong> Annual Report 2009<br />
Enterprise risk management (continued)<br />
We practice a risk management approach<br />
that triggers an<br />
informed<br />
and dynamic approach<br />
legal, across the African continent. These<br />
are identified, measured and monitored<br />
through various control mechanisms.<br />
Our Board which sets the risk management<br />
standard and risk appetite* for the group is<br />
supported by various committees whose<br />
responsibilities include:<br />
• Reviewing and recommending to the<br />
Board risk management standards,<br />
including risk control principles and<br />
overall risk measure.<br />
• Reviewing the overall risk appetite and<br />
profile of the Group.<br />
• Reviewing significant changes in the risk<br />
framework, risk policy and the various<br />
procedures that support the risk strategy.<br />
• Reviewing the dashboard of strategic<br />
risks that impact on us; and<br />
• Reviewing reports on specific material<br />
aspects of our risk governance and risk<br />
management processes.<br />
In the year under review our copper<br />
cable losses amounted to R284.9 million<br />
excluding outbound revenue losses which<br />
is estimated at R907 million.<br />
On a daily basis, risks are managed by a<br />
number of committees (see chart), mainly<br />
through the <strong>AR</strong>C, which reports to the<br />
Board.<br />
*Risk appetite is a framework which we use to measure<br />
the ‘amount of risk’ – on a broad level – which we are<br />
prepared to accept in our pursuit of our strategic and<br />
financial objectives. As part of our business strategy, it<br />
helps management allocate resources across the various<br />
service organisations to ensure that objectives are met.<br />
Responsibility and accountability<br />
• The Board<br />
The Board, through the <strong>AR</strong>C, is responsible<br />
for the total risk management process and<br />
the formation of its own opinion on the<br />
effectiveness of the process. The Board<br />
approves the risk strategy in liaison with,<br />
and through recommendations of, the<br />
<strong>AR</strong>C.<br />
• Audit and risk committee (<strong>AR</strong>C)<br />
The <strong>AR</strong>C, which is empowered by the<br />
Board, operates within written guidelines<br />
established by it. The <strong>AR</strong>C is responsible<br />
for reviewing and monitoring our risk<br />
Loss statistics for 2008/2009<br />
10%<br />
2006/07<br />
8% 8%<br />
74%<br />
11%<br />
7%<br />
2007/08<br />
13%<br />
69%<br />
management performance and providing<br />
an on-going high level risk assessment<br />
to the Board. To ensure it fulfils its<br />
responsibilities, the <strong>AR</strong>C can access any<br />
information it needs.<br />
• <strong>Telkom</strong> enterprise risk management<br />
committee (TERMC)<br />
This is a dedicated risk management<br />
committee appointed by the <strong>AR</strong>C to<br />
implement an effective risk management<br />
process that will optimise our risk taking.<br />
• Group management<br />
The senior and line management teams of<br />
our service organisations are responsible<br />
for effective risk management.<br />
Enterprise risk management framework<br />
Risk is an unavoidable consequence of<br />
doing business but, managed correctly, it<br />
can be an opportunity for us to operate<br />
competitively.<br />
In our quest to be the leading customer and<br />
employee-centred ICT solutions service<br />
Copper cable Dect (CPE) Optic Damages (unknown third parties)<br />
14%<br />
3%<br />
2008/09<br />
15%<br />
68%
provider, we practice a risk management<br />
approach that triggers an informed and<br />
dynamic response through the evaluation<br />
and management of the many<br />
opportunities and threats that permeate our<br />
business environment.<br />
Protecting our assets<br />
To minimise, and preferably prevent, fraud,<br />
corruption and theft, we have a <strong>Telkom</strong><br />
Asset and Revenue Protection Services<br />
(T<strong>AR</strong>PS) section in place. Its scope includes<br />
forensic services, a fraud committee and<br />
an anti-fraud policy statement.<br />
Forensic services investigates all fraudrelated<br />
activities; the committee, which<br />
meets continuously, monitors all fraudrelated<br />
activities and the policy statement<br />
implements fraud risk management.<br />
Although no major fraud incidents were<br />
reported in the year under review, asset<br />
theft losses increased by 27%, mainly as a<br />
result of information technology equipment<br />
compliance which highlighted past<br />
lost/stolen equipment at ‘unknown times’.<br />
The <strong>Telkom</strong> Crime Hotline 0800 124 000<br />
The Hotline 0800 124 000, which takes<br />
calls from employees and the public<br />
regarding any <strong>Telkom</strong>-related alleged<br />
unethical or criminal activities, was<br />
contracted out to an independent<br />
administrator on January 1, 2009 in<br />
compliance with the Sarbanes-Oxley Act<br />
requirements. The administrator does,<br />
however, forward all information to T<strong>AR</strong>PS<br />
for investigation.<br />
As a result, employee trust in the line has<br />
been rejuvenated in terms of anonymity. In<br />
addition, our Whistleblower policy was<br />
updated to ensure more effective support<br />
for the whistleblowing process.<br />
Security services<br />
We continue to use physical and technical<br />
security services for physical access control<br />
to all our sites and the protection of our<br />
assets, and the provision of electronic<br />
solutions for all our security needs and<br />
requirements.<br />
Statistics<br />
Cable theft has<br />
<strong>Telkom</strong> Annual Report 2009 53<br />
2006/07 2007/08 2008/09<br />
Total incidents reported 9,279 7,954 7,216<br />
Total cases investigated 8,863 7,838 7,116<br />
Total cases resolved 8,443 6,427 5,960<br />
Asset theft<br />
Case types investigated<br />
T<strong>AR</strong>PS investigations<br />
1,794 2,026 2,573<br />
Burglary 117 141 196<br />
Business Code of Ethics 294 293 265<br />
Fraud 192 124 130<br />
Line management requests 72 27 15<br />
Payphones 224 157 112<br />
Reputational risk (Refund scam) 594 469 657<br />
Robbery 111 159 244<br />
Security breaches 57 16 16<br />
Vehicle 96 39 19<br />
Forensic projects 3 – –<br />
Total T<strong>AR</strong>PS investigations 3,554 3,451 4,227<br />
Network Protection Services (NPS) investigations<br />
Cable 3,399 3,198 2,018<br />
Network fraud 786 716 690<br />
Solar panel theft 1,124 473 181<br />
Total NPS investigations 5,309 4,387 2,889<br />
Successes<br />
Number of arrests 1,250 1,079 568<br />
Number of convictions 156 165 128<br />
to affect our operations<br />
Group<br />
overview<br />
Management<br />
review<br />
Sustainability<br />
review<br />
Performance<br />
review<br />
Financial<br />
statements<br />
Company<br />
Financial<br />
Information
54<br />
<strong>Telkom</strong> Annual Report 2009<br />
Enterprise risk management (continued)<br />
The Second Hand Goods Act<br />
provides<br />
penalties<br />
for stiff<br />
including imprisonment<br />
Cable statistics<br />
Total cable losses<br />
R millions 2006/07 2007/08 2008/09<br />
Copper cable 227.1 194.6 190.6<br />
Dect (CPE) 31.8 20.0 9.2<br />
Optic fibre 25.7 31.6 40.0<br />
Damages 26.1 37.7 40.8<br />
Payphone vandalism 15.0 5.8 4.3<br />
Total 325.7 289.7 284.9<br />
Cable theft repair costs<br />
R millions 2006/07 2007/08 2008/09<br />
Copper 179.5 151.2 141.2<br />
Fibre 5.5 7.9 10.2<br />
Total 185.0 159.1 151.4<br />
Estimated outbound revenue loss due to cable theft<br />
R millions 2006/07 2007/08 2008/09<br />
Outbound revenue 1 368.1 626.3 906.8<br />
1 Estimates based on certain assumptions<br />
Cable theft<br />
Cable theft has been a problem for the last<br />
10 years and increased at an alarming<br />
rate. In the year under review our copper<br />
cable losses amounted to R284.9 million<br />
excluding outbound revenue losses which<br />
is estimated at R907 million.<br />
Our main cable network and open wire<br />
routes have been targeted by highly<br />
organised syndicates and, on our smaller<br />
cable routes, we have seen an increase in<br />
petty crime. The key drivers, we believe,<br />
are the rising price of copper which, on<br />
average, increased by 600% over the last<br />
five years, and the strong demand for the<br />
metal from international markets, in<br />
particular China.<br />
While the problem is not unique to us or,<br />
indeed, South Africa, as evidenced by<br />
reports from, amongst other countries,<br />
Zambia, Tanzania, Kenya, Great Britain<br />
and the United States, it is impacting on<br />
our performance as the resources used to<br />
replace the stolen cable should actually<br />
be used to roll out new infrastructure and<br />
provide new services.<br />
We have instituted a number our own<br />
contingency measures – the investment of<br />
millions of rands in security personnel; cable<br />
alarms; placing cables underground;<br />
replacing manhole covers with lockable lids,<br />
closer working relationships with the South<br />
African Police Services, Non-Ferrous Theft<br />
Combating Committee and Business Against<br />
Crime, amongst others – to combat the<br />
problem.<br />
In addition, we believe the amended<br />
Second Hand Goods Act, whose aim is to
egulate the business of dealers in second hand goods in order to<br />
combat the trade in stolen goods, will be a valuable tool in the<br />
fight against this problem.<br />
The Act provides for stiff penalties, including imprisonment, for<br />
convicted metal thieves and scrap metal dealers.<br />
We are also lobbying to have copper declared in the same<br />
category as diamonds and for charging cable thieves with<br />
‘sabotage’ instead of ‘theft’.<br />
<strong>Telkom</strong> Business Continuity Management (BCM)<br />
In 2002 we established the <strong>Telkom</strong> Business Continuity/Disaster<br />
Recovery unit (<strong>Telkom</strong> BC/DR) which mainly focused on the<br />
readiness of our critical sites in case of a disaster or major incident.<br />
In February 2008, we reviewed BC/DRs network-driven focus<br />
and re-established the function as an enterprise-wide Business<br />
Continuity Management organisation. Its focus areas are to<br />
improve all disaster-related activities across the Group, ranging<br />
from management to operations and systems.<br />
A key deliverable in the year under review was the<br />
re-establishment of our BCM Institutional Capacity which resulted<br />
in an improved BCM Governance, Additionally, we reviewed our<br />
BCM company policy and charter, the implementation of a BCM<br />
training programme – which 32.1% of <strong>Telkom</strong> managers and<br />
senior managers completed – the review of the BCM website<br />
and generic BCM awareness on all managerial levels. The<br />
establishment and implementation of operational business<br />
continuity plans was also a key deliverable.<br />
Going forward<br />
Our key focus areas for the year ahead are:<br />
• Implement, through a phased approach, the revised ERM<br />
strategy and align it to an enterprise-wide view of all risks.<br />
• Upgrade our risk management training programme.<br />
• Align corporate governance and ERM to the draft King III code.<br />
• Conduct compliance risk assessments in terms of the agreed<br />
framework.<br />
• Present the first critical element in the determination of our risk<br />
appetite – the draft Risk Bearing Capacity (RBC) – to TERMC.<br />
• Create an independent division by separating ERM from the<br />
<strong>AR</strong>C, but ensuring that audit is still an integral part of our overall<br />
risk management; and<br />
• A significant enhancement of the quality of ERM reporting to the<br />
Board, business units and subsidiaries.<br />
We will also continue to improve our communication to internal<br />
and external stakeholders through a review and further<br />
development of our risk management processes. Our risk<br />
management database will also be re-examined to ensure we<br />
provide timeous, current, accurate and accessible information to<br />
our stakeholders.<br />
<strong>Telkom</strong> Annual Report 2009 55<br />
Menlyn Park – the flagship of the new generation<br />
<strong>Telkom</strong>Direct stores<br />
Since its opening in December 2008, the <strong>Telkom</strong>Direct store<br />
in Pretoria’s up-market Menlyn Park shopping centre has<br />
proved to be a huge hit with customers, justifying our faith in<br />
launching this ‘third generation’ store offering to South<br />
African consumers.<br />
Open seven days a week from 09:00 to 19:00, the store<br />
is one of the 136 we have in major shopping centres across<br />
the country.<br />
It provides not only a range of goods from fixed mobile<br />
conversions (the phones of the future) to laptops, ADSL units,<br />
mobile phones, play stations and satellite navigation units,<br />
but also free technical support.<br />
“Basically,” says store manager Thobeng Choeu, “we can<br />
fix or help with anything that is software-related. No other<br />
operator offers this service, making it a unique plus for<br />
<strong>Telkom</strong>.”<br />
With its ‘touch and feel’ ambience, the store is a superb<br />
marketing tool for us as it showcases our new technologies<br />
and technical expertise. A key customer ‘pull’ factor is the<br />
free doBroadband gaming facilities at the rear of the store.<br />
Here youngsters – and adults – can play a range of games<br />
to their heart’s content.<br />
Says Thobeng: “Because of the tactile experience, many<br />
customers end up buying the games and play stations”.<br />
Group<br />
overview<br />
Management<br />
review<br />
Sustainability<br />
review<br />
Performance<br />
review<br />
Financial<br />
statements<br />
Company<br />
Financial<br />
Information
56<br />
<strong>Telkom</strong> Annual Report 2009<br />
Enterprise risk management (continued)<br />
Risk factors<br />
You should carefully consider the risks<br />
described below in conjunction with the<br />
other information and the consolidated<br />
financial statements of the <strong>Telkom</strong> Group<br />
and the related notes included elsewhere in<br />
this annual report before making an<br />
investment decision with regard to <strong>Telkom</strong>’s<br />
ordinary shares or ADSs.<br />
Risks related to our business<br />
• We may be affected by global<br />
economic and financial conditions<br />
which could cause our growth rates,<br />
operating revenue, net profit and<br />
dividends to decline.<br />
• Any changes to our mobile strategy or<br />
our inability to successfully implement<br />
such strategy and organisational<br />
changes, could cause our growth rates,<br />
operating revenue, net profit and<br />
dividends to decline.<br />
• If we are not able to turn around<br />
the financial performance of our Multi-<br />
Links subsidiary, our Group’s financial<br />
condition could decline.<br />
• Increased competition in the South<br />
African communications market may<br />
result in a reduction in overall average<br />
tariffs and market share and an increase<br />
in costs in our fixed-line business, which<br />
could cause our growth rates, operating<br />
revenue and net profit to decline and<br />
our churn rates to increase.<br />
• Increased competition in the South<br />
African data communications market<br />
may adversely impact our growth rates,<br />
operating revenue and net profit.<br />
• We may not be successful in<br />
implementing our strategy of transforming<br />
from basic voice and data connectivity<br />
to fully converged solutions offering<br />
integrated voice, data, video and internet<br />
services and managing costs through our<br />
restructuring programme, which could<br />
adversely impact our ability to maintain<br />
profitability by growing and protecting<br />
revenue, while managing costs.<br />
• There are significant political,<br />
economic, regulatory, taxation and<br />
legal risks associated with our African<br />
investments outside of South Africa,<br />
which could adversely affect our<br />
businesses and cause our financial<br />
condition and net income to decline.<br />
• The number of commercially attractive<br />
acquisition and investment opportunities<br />
for our fixed-line and mobile businesses<br />
on the African continent is limited.<br />
Moreover, the consummation of<br />
acquisitions and investments may be<br />
unsuccessful, which could have a material<br />
adverse effect on our future growth.<br />
• The growth in the mobile market in<br />
South Africa has resulted in an increase<br />
in the number of <strong>Telkom</strong> calls terminating<br />
on mobile networks as opposed to<br />
our fixed-line network. <strong>Telkom</strong>’s net<br />
interconnect margins and net profit<br />
could decline if this trend continues.<br />
• If we are not able to continue to<br />
improve and maintain our management<br />
information and other systems, we could<br />
be subject to losses and inaccuracies in<br />
our financial reporting, our ability to<br />
provide accurate and comprehensive<br />
operating information and to compete<br />
may be harmed and our share price<br />
could decline.<br />
• If we lose key personnel or if we are<br />
unable to hire and retain highly<br />
qualified employees and partners, our<br />
business operations could be disrupted<br />
and could impact on our ability to<br />
compete successfully.<br />
• If <strong>Telkom</strong> is not able to successfully grow<br />
revenues, profits and cash flows from its<br />
existing and new businesses to replace<br />
revenues, profits and cash flows<br />
previously received from Vodacom,<br />
<strong>Telkom</strong> may not be able to pay<br />
dividends and service its debt and<br />
could be required to lower or defer<br />
capital expenditures, dividends and<br />
debt reduction, which could cause the<br />
trading prices of <strong>Telkom</strong>’s ordinary<br />
shares and ADSs to decline.<br />
• We have negative working capital,<br />
which may impair our operating and<br />
financial flexibility and require us to<br />
defer capital expenditures and we may<br />
not be able to pay dividends and our<br />
operations and financial condition<br />
could be adversely affected.<br />
• Continuing rapid changes in<br />
technologies could increase competition<br />
or require us to make substantial<br />
additional investments in technologies<br />
and equipment, which could reduce our<br />
return on investment and net profit.<br />
• If we continue to experience high rates<br />
of theft, vandalism, network fraud,<br />
payphone fraud and lost revenue due to<br />
non-licensed operators in our fixed-line<br />
business, our fixed-line fault rates could<br />
increase and our operating revenue<br />
and net profit could decline.<br />
• Delays in the development and supply of<br />
communications equipment may hinder<br />
the deployment of new technologies and<br />
services and cause our growth rates and<br />
net profit to decline.<br />
• Actual or perceived health risks relating<br />
to mobile handsets, base stations and<br />
associated equipment and any related<br />
publicity or litigation could make it<br />
difficult to find attractive sites for base<br />
stations and impact our ability to grow<br />
our 3G mobile network business, and<br />
reduce our customer base, average<br />
usage per customer and net profit.<br />
Risks related to <strong>Telkom</strong>’s ownership by<br />
the government of South Africa and<br />
major shareholders<br />
• <strong>Telkom</strong>’s major shareholders are entitled<br />
to appoint the majority of <strong>Telkom</strong>’s<br />
directors and exercise control over<br />
<strong>Telkom</strong>’s strategic direction and major<br />
corporate actions.<br />
• The government of the Republic of South<br />
Africa may use its position as<br />
shareholder of <strong>Telkom</strong> and policymaker<br />
for, and customer of, the telecommunications<br />
industry in a manner that may<br />
be favourable to our competitors and<br />
unfavourable to us.<br />
Risks related to regulatory and legal<br />
matters<br />
• The regulatory environment for the<br />
telecommunications industry in South<br />
Africa is evolving and regulations
addressing a number of significant<br />
matters have not yet been made. The<br />
interpretation of existing regulations, the<br />
adoption of new policies or regulations<br />
that are unfavourable to us, or the<br />
imposition of additional licence<br />
obligations and fees on us, could<br />
disrupt our business operations and<br />
could cause our net profit and the<br />
trading prices of <strong>Telkom</strong>’s ordinary<br />
shares and ADSs to decline.<br />
• Our tariffs are subject to approval by<br />
the regulatory authorities, which may<br />
limit our flexibility in pricing and could<br />
reduce our revenues and net profit.<br />
• Any payments to Telcordia Technologies<br />
Incorporated, or Telcordia, in the<br />
damages phase of its arbitration<br />
proceedings against <strong>Telkom</strong>, will be<br />
required to be funded by <strong>Telkom</strong> from<br />
cash flows or the incurrence of debt,<br />
which could have a material adverse<br />
effect on its financial condition and<br />
results of operations.<br />
• We are parties to a number of legal<br />
and arbitration proceedings, including<br />
complaints before the South African<br />
Competition Commission. If we lose<br />
these legal and arbitration proceedings,<br />
we could be prohibited from engaging<br />
in certain business activities and could<br />
be required to pay substantial penalties<br />
and damages, which could cause our<br />
revenue and net profit to decline and<br />
have a material adverse impact on our<br />
business and financial condition.<br />
• If we are required to unbundle the local<br />
loop, or are unable to negotiate<br />
favourable terms and conditions for the<br />
provision of interconnection services<br />
and facilities leasing services or ICASA<br />
finds that we have significant market<br />
power or otherwise imposes<br />
unfavourable terms and conditions on<br />
us, our business operations could be<br />
disrupted and our net profit could<br />
decline.<br />
• If we are unable to recover the<br />
substantial capital and operational costs<br />
associated with the implementation of<br />
carrier pre-selection and number<br />
portability or are unable to implement<br />
these requirements in a timely manner,<br />
our business operations could be<br />
disrupted and our net profit could<br />
decline. The implementation of carrier<br />
pre-selection and number portability will<br />
also likely further increase competition<br />
and cause our churn rates to increase.<br />
• The implementation of the Regulation of<br />
Interception of Communications and<br />
Provisions of Communication-Related<br />
Information Act, or RICA, could be<br />
costly and may negatively impact the<br />
ability of <strong>Telkom</strong> to register customers<br />
and may require us to disconnect<br />
existing customers, causing our<br />
penetration rates, growth rates, revenue<br />
and net profit to decline.<br />
• If <strong>Telkom</strong> is required to comply with the<br />
provisions of the South African Public<br />
Finance Management Act, 1 of 1999,<br />
or PFMA, and the provisions of the<br />
South African Public Audit Act of 2004,<br />
or PAA, <strong>Telkom</strong> could incur increased<br />
expenses and its net profit could decline<br />
and compliance with the PFMA and<br />
PAA could result in the delisting of<br />
<strong>Telkom</strong>’s ordinary shares from the JSE.<br />
• Our total property taxation expense<br />
could increase significantly and our net<br />
profit could decline as a result of the<br />
enactment of the South African Local<br />
Government: Municipal Property Rates<br />
Act, 6 of 2004.<br />
Risks related to the Republic of South<br />
Africa<br />
• Fluctuations in the value of the rand and<br />
inflation rates in South Africa could have<br />
a significant impact on the amount of<br />
<strong>Telkom</strong>’s dividends, the trading prices of<br />
<strong>Telkom</strong>’s ordinary shares and ADSs, our<br />
operating revenue, operating expenses,<br />
net profit, capital expenditures and on<br />
the comparability of our results between<br />
financial periods.<br />
• The levels of unemployment, poverty<br />
and crime in South Africa may cause the<br />
size of the South African communications<br />
market and our growth rates, operating<br />
revenue and net profit, as well as the<br />
<strong>Telkom</strong> Annual Report 2009 57<br />
trading prices of <strong>Telkom</strong>’s ordinary<br />
shares and ADSs, to decline.<br />
• Should the country continue to<br />
experience high occurrences of power<br />
outages, <strong>Telkom</strong>’s operational capacity,<br />
expenses and revenues will be affected<br />
and its operating revenue and net profit<br />
could decline.<br />
• The high rates of HIV infection in South<br />
Africa could cause the size of the South<br />
African communications market and our<br />
growth rates, operating revenue and net<br />
profit to decline.<br />
• Significant labour disputes, work<br />
stoppages, increased employee expenses<br />
as a result of collective bargaining and<br />
the cost of compliance with South<br />
African labour laws could limit our<br />
operating flexibility and disrupt our<br />
fixed-line business operations and<br />
reduce our net profit.<br />
• South African exchange control<br />
restrictions could hinder our ability to<br />
make foreign investments and procure<br />
foreign denominated financing.<br />
Risks related to ownership of <strong>Telkom</strong>’s<br />
ordinary shares and ADSs<br />
• The future sale of a substantial number<br />
of <strong>Telkom</strong>’s ordinary shares or ADSs<br />
could cause the trading prices of<br />
<strong>Telkom</strong>’s ordinary shares and ADSs to<br />
decline.<br />
• Your rights as a shareholder are<br />
governed by South African law, which<br />
differs in material respects from the<br />
rights of shareholders under the laws of<br />
other jurisdictions.<br />
• It may not be possible for you to effect<br />
service of legal process, enforce<br />
judgments of courts outside of South<br />
Africa or bring actions based on<br />
securities laws of jurisdictions other than<br />
South Africa against <strong>Telkom</strong> or against<br />
members of its Board.<br />
• Your ability to sell a substantial number<br />
of ordinary shares and ADSs may be<br />
restricted by the limited liquidity of<br />
ordinary shares.<br />
Group<br />
overview<br />
Management<br />
review<br />
Sustainability<br />
review<br />
Performance<br />
review<br />
Financial<br />
statements<br />
Company<br />
Financial<br />
Information
58<br />
<strong>Telkom</strong> Annual Report 2009<br />
Black economic empowerment<br />
We constantly strive to maintain our<br />
momentum<br />
in terms of implementing our<br />
BBBEE transformation pillars<br />
In the year under review, we continued to<br />
make a significant contribution towards the<br />
achievement of the objectives of our<br />
government’s Broad-Based Black Economic<br />
Empowerment (BBBEE) policies and the<br />
transformation of the Information and<br />
Communications Technology (ICT) sector.<br />
One of our strategic goals is to become<br />
one of South Africa’s leading empowered<br />
companies. Our BBBEE Strategy and<br />
Implementation Roadmap, which are the<br />
enablers to achieve the objectives of our<br />
2010 Strategic Plan, have both been<br />
approved by the Board.<br />
Our BBBEE self-assessment has revealed a<br />
number of highlights.<br />
• In ownership, a series of landmark<br />
transactions – the sale of 15% of our<br />
shares in Vodacom, the declaration of a<br />
special dividend and the listing and<br />
unbundling of Vodacom shares –<br />
unlocked value for our shareholders, the<br />
majority of whom are public entities and<br />
black shareholders.<br />
• In management control, we were<br />
ranked the second most empowered<br />
company on the JSE Securities<br />
Exchange by the Financial Mail Top<br />
Companies Survey. This ranking<br />
reflected the total transformation of our<br />
Board and top management structures<br />
to significantly exceed government’s<br />
targets for this element of BBBEE.<br />
• In preferential procurement, we were<br />
again ranked one of the best performers<br />
on the JSE Securities Exchange by the<br />
Financial Mail Top Empowerment<br />
Companies Survey. Our Preferential<br />
Procurement is recognised as a champion<br />
in driving economic transformation<br />
among JSE Listed companies, stateowned<br />
enterprises and within the ICT<br />
sector. During the past financial year,<br />
we procured goods and services<br />
worth R4.1 billion from black-owned<br />
companies, equivalent to 33.2% of total<br />
measured procurement spend. This<br />
figure exceeds the 15% target in the<br />
BEE Codes by a significant margin. BEE<br />
2007/ 2008/<br />
BBBEE element Target 08 09<br />
BBBEE procurement spend from all suppliers 50% 55% 70.4%<br />
BBBEE procurement spend from qualifying small<br />
enterprises or exempted micro-enterprises 10% 6.7% 5.1%<br />
BBBEE procurement from black-owned suppliers 9% 23.4% 33.2%<br />
BBBEE procurement from black women-owned<br />
suppliers 6% 6.3% 4.8%<br />
recognised procurement spend from all<br />
suppliers was R8.8 billion, equivalent to<br />
70.4% of total measured procurement<br />
spend. Again, this figure significantly<br />
exceeds the 50% target in the BEE<br />
Codes. BEE recognised procurement<br />
spend from Qualifying Small Enterprises<br />
(QSEs) and Exempted Micro-Enterprises<br />
(EMEs) declined slightly as many of our<br />
small suppliers graduated to become<br />
large enterprises measured under the<br />
Generic Scorecard of the BEE Codes of<br />
Good Practice.<br />
In this regard, we have a dual BEE<br />
evaluation policy that considers both the<br />
DTI scorecard (broad-based BEE<br />
evaluation criteria) and levels of black<br />
ownership (narrow-based BEE criteria)<br />
when making procurement decisions.<br />
This policy is in line with best practices in<br />
the South African economy. Our<br />
preferential procurement policy also<br />
seeks to move beyond BBBEE<br />
compliance and achieve other qualitative<br />
and industrial policy objectives such as<br />
reducing our dependence on<br />
international resources, the development<br />
of domestic technology production<br />
capabilities and the creation of<br />
sustainable black-owned ICT companies.<br />
Although our preferential procurement<br />
policy is perceived to be stringent, the<br />
majority of our large suppliers, many of<br />
them multi-national companies, have set<br />
up local operations, sold equity to black<br />
shareholders and developed BBBEE<br />
Commitment Plans that are in line with<br />
our policy.
There was a major<br />
Over the past decade, we have made a<br />
major contribution towards the economic<br />
transformation of our sector by awarding<br />
large contracts worth tens of billions of<br />
rands that facilitated the creation of<br />
sustainable black-owned ICT companies.<br />
Through Procurement’s intervention, we<br />
have managed to persuade multi-nationals<br />
to partner with local BEE companies. These<br />
partnerships will provide black-owned<br />
companies with the opportunity to upgrade<br />
their skills and other capabilities. During the<br />
next phase, they will be in a position to<br />
develop their own independent brands,<br />
products and services that can be marketed<br />
in South Africa and the rest of the world.<br />
Thank you <strong>Telkom</strong> for having faith in<br />
me, says Maletsati<br />
Tracking the health of its employees is<br />
critical for <strong>Telkom</strong> as, not only is it a legal<br />
requirement but it’s the right thing to do in a<br />
company whose employees are subjected<br />
to various levels of stress in their daily lives.<br />
In line with our commitment to sourcing<br />
BBBEE suppliers, we regularly put out<br />
tenders for the outsourcing of various<br />
activities and, in 2002, a tender for<br />
occupational health testing was awarded<br />
to a small company, Maletsati<br />
Occupational Health.<br />
Initially the company, owned and run by<br />
Maletsati Mosweu, worked in the Gauteng<br />
region, providing an in-house clinic service<br />
from the <strong>Telkom</strong> Centre For Learning in<br />
Johannesburg. We were so impressed with<br />
the service and attention to detail that in<br />
2004 we offered Maletsati a national<br />
<strong>Telkom</strong> Annual Report 2009 59<br />
improvement<br />
in our BBBEE suppliers spend<br />
We have various programmes in place<br />
to attract and retain black employees,<br />
particularly women. A total of 87% of<br />
new appointments in 2009 were black,<br />
bringing overall representation in the<br />
workforce to 62%.<br />
Group<br />
overview<br />
Management<br />
review<br />
Sustainability<br />
review<br />
Performance<br />
review<br />
Financial<br />
statements<br />
Company<br />
Financial<br />
Information
60<br />
<strong>Telkom</strong> Annual Report 2009<br />
Black economic empowerment continued<br />
We have<br />
progressive<br />
developed<br />
employment equity targets<br />
How BBBEE works<br />
On February 9, 2007, the Department of Trade and Industry (DTI) released its Broad Based Black Economic Empowerment<br />
(BBBEE) Codes of Good Practice (the Codes), a framework to guide government departments in the implementation of BBBEE.<br />
The Codes have a generic scorecard (the Scorecard) with seven elements:<br />
• Ownership (20 points)<br />
• Management control (10 points)<br />
• Employment equity (15 points)<br />
• Skills development (15 points)<br />
The elements in turn have indicators, each of which has its own weightings, measurement principles and compliance targets.<br />
Based on its scorecard performance, a business/enterprise is awarded a BEE Status and Recognition Level. The highest BEE<br />
Status is Level 1. This is awarded to an enterprise which scores more than 100 points and gives it a BEE recognition level of<br />
135%. Effectively an enterprise purchasing goods and services from a Level 1 supplier can recognise 135% of the procurement<br />
on its own scorecard.<br />
The lowest BEE Status is Level 8, which is awarded to an enterprise with a score of between 30 and 40 points. This equates<br />
to a BEE recognition level of 10%.<br />
An enterprise that scores less than 30 is a non-compliant BEE contributor with a BEE recognition level of 0%.<br />
contract for our five regions, creating<br />
additional jobs in the process as she had<br />
to set up satellite offices.<br />
Maletsati, who says she is eternally grateful<br />
to <strong>Telkom</strong> for the faith shown in her and her<br />
colleagues, tests up to 2,000 employees a<br />
year, screening them for ailments such as<br />
diabetes, blood pressure, impaired vision<br />
and hearing.<br />
“<strong>Telkom</strong> has been my springboard. It has<br />
allowed me to pace myself to the point<br />
where I am now ready to take on other<br />
jobs and, at the same time, intensify my<br />
commitment to the community through the<br />
company’s support for, amongst others, the<br />
Society For the Blind, mentoring newly<br />
qualified nurses and helping some children<br />
through school. <strong>Telkom</strong> has taught me that<br />
supporting the smaller people pays<br />
dividends all round,” says Maletsati.<br />
• We have developed aggressive<br />
employment equity targets to address<br />
the challenges we face in terms of<br />
increasing the diversity of our<br />
workforce, especially the representation<br />
of black women and black disabled<br />
people in the middle and senior<br />
management levels of the organisation.<br />
We have put a Human Capital and<br />
Diversity Strategy in place to ensure that<br />
our workforce reflects South African<br />
demographics in terms of race, gender<br />
and disability. We also have various<br />
programmes in place, including a<br />
dedicated talent management division,<br />
• Preferential procurement (20 points)<br />
• Enterprise development (15 points)<br />
• Socio-economic development (5 points).<br />
to attract and retain black employees,<br />
especially black women. A total of 87%<br />
of new appointments in 2009 were<br />
black, bringing overall black representation<br />
in the workforce to 62%. The<br />
proportion of disabled employees has<br />
risen from 0.93% in 2007 to 1.13% in<br />
2009. We continue to drive various<br />
initiatives across the organisation to<br />
ensure that our policies and guidelines<br />
attract and support the recruitment of<br />
people with disabilities and to<br />
encourage the disclosure of current<br />
employees with disabilities.<br />
• As part of our commitment towards<br />
Enterprise Development, more than<br />
100 black-owned companies are now<br />
beneficiaries of a new short-term
payment policy that facilitates the<br />
settlement of invoices in less than<br />
15 days. Other initiatives include<br />
training provided by senior staff<br />
members within procurement to enable<br />
suppliers to comply with quality<br />
standards and the training provided to<br />
suppliers at the <strong>Telkom</strong> Centre for<br />
Learning. Khayelihle Projects, which<br />
was assisted to develop and implement<br />
PCR, an abridged ISO 9000 of 2000<br />
quality system, is one of many<br />
beneficiaries of <strong>Telkom</strong>’s Enterprise<br />
Development. Management has been<br />
working hard at identifying various<br />
sustainable initiatives in this area to<br />
improve on current enterprise<br />
development contributions. Many of the<br />
identified initiatives have been<br />
approved by the Company’s top<br />
management and are in the process of<br />
being implemented.<br />
• We recognise that we have a critical<br />
role to play in transforming communities<br />
and in ensuring that they are<br />
sustainable.<br />
Our <strong>Telkom</strong> Foundation is a key driver in<br />
this regard and its activities are detailed on<br />
pages 78 to 80.<br />
<strong>Telkom</strong> Annual Report 2009 61<br />
Guma – smart by name and nature<br />
Success stories include Guma Smart Card. This black-owned company has grown<br />
from small beginnings to become a world-class manufacturer of smart cards that has<br />
replaced imports with local production and employment and developed lucrative<br />
export markets. Guma recently produced its 100 millionth smart card.<br />
“Today Guma is a role model black company with ownership of Gijima AST, Tourvest,<br />
etc. employing over 10,000 value-adding employees including those in our overseas<br />
offices like Australia, Canada, America, etc. Thanks to <strong>Telkom</strong> for having put faith in<br />
us as a small company with big dreams. This year we achieved 100 million <strong>Telkom</strong><br />
phonecards manufactured locally and delivered by Guma Smart Card. Through<br />
<strong>Telkom</strong>’s vigorous support and commitment to quality, Guma Smart Card attained<br />
ISO 9001 certification over six years ago. Without <strong>Telkom</strong>’s commitment to BEE, the<br />
success we have achieved thus far would not have been possible. Thanks to <strong>Telkom</strong><br />
management for staying true to the spirit of empowerment,” says Robert Matana<br />
Gumede, Chairman: Guma Group and Gijima AST.<br />
Group<br />
overview<br />
Management<br />
review<br />
Sustainability<br />
review<br />
Performance<br />
review<br />
Financial<br />
statements<br />
Company<br />
Financial<br />
Information
62<br />
<strong>Telkom</strong> Annual Report 2009<br />
Human capital management<br />
The past year’s performance has given us a<br />
platform to critically identify and<br />
prioritiseinterventions<br />
We have developed progressive<br />
employment equity targets to address<br />
the challenges we face in terms of the<br />
diversity of our work force.<br />
Introduction<br />
The labour dynamics in the global and local<br />
integrated communications technology (ICT)<br />
industry have been impacted by the rapid<br />
pace of change in the industry, and by the<br />
changes in the sector-specific and broader<br />
economies. These events have led to a<br />
marked change in the labour supply and<br />
skills retention patterns in recent years.<br />
This complex and evolving environment has<br />
tested our ability to provide a continuous<br />
supply of skills to ensure we achieve our<br />
strategy of growing our business and<br />
delivering shareholder value.<br />
The year under review’s performance has<br />
given us a platform to critically identify and<br />
prioritise interventions and test our progress<br />
in this regard.<br />
Our workforce<br />
We currently have 23,520 full-time<br />
employees, 5.5% less than the previous year,<br />
with the majority (68%) in operational and<br />
support roles; a further 21% in supervisory<br />
roles and 11% in managerial positions.<br />
The proportional distribution of our people<br />
largely corresponds with our existing and<br />
potential customer base.<br />
Staffing and staff exits<br />
In line with the changing labour dynamics of<br />
the industry, our natural attrition (employees<br />
who resigned and were not replaced) rate<br />
rose to 9% (7% in the previous year) and<br />
resignations rose to 8% (6% in 2007/08).<br />
This , however, is still in line with the South<br />
African industry norm.
Headcount movement<br />
Compensation and benefits<br />
• Remuneration<br />
While the fixed, or guaranteed, remuneration<br />
packages are reviewed each year,<br />
in certain critical skills areas, depending on<br />
the supply and demand of those skills in the<br />
market, there are ad hoc reviews to ensure<br />
we remain competitive.<br />
• Non-executive directors<br />
The directors, on recommendation of the<br />
human resources review and remuneration<br />
committee, determine the fees of nonexecutive<br />
directors who do not participate<br />
in the incentive scheme for top<br />
management. These fees are set out on<br />
Page • and in Note • in the consolidated<br />
annual financial statements.<br />
• Executive remuneration<br />
Fixed remuneration is currently set at<br />
the market median and independent<br />
remuneration consultants advise the Board’s<br />
remuneration committee on executive<br />
management packages.<br />
Guaranteed packages are influenced by the<br />
scope of each individual’s role, knowledge,<br />
skills and experience. These are reviewed<br />
2006 2007 2008 2009(**)<br />
Opening balance 28,972 25,575 25,864 24,879<br />
Employee gains 706 1,512 918 1,047<br />
Appointments 686 1,486 891 1,034<br />
Re-instatement 20 26 27 13<br />
Employee losses 4,103 1,223 1,903 2,406<br />
Employee retrenchments 2,990 20 4 10<br />
Voluntary early retirement 674 7 2 5<br />
Voluntary severance 2,295 13 2 5<br />
Involuntary reductions 21 0 0 0<br />
Natural attrition 1,113 1,203 1,899 2,396<br />
Closing balance 25,575 25,864 24,879 23,520<br />
Other employees* 4,227 5,807 3,801 4,307<br />
* Other employees refer to contract and temporary employees but exclude Board members,<br />
learnerships and bursary students.<br />
** Employee retrenchments for 2009 were employee initiated.<br />
each year as part of our overall<br />
remuneration review process and they are<br />
assessed against individual performance.<br />
The difference between the upper quartile<br />
and the market median for guaranteed<br />
packages is used when calculating<br />
incentives for top management.<br />
• Other employees<br />
Salary increases for all employees –<br />
management and bargaining unit – are<br />
approved by the Board. Non-management<br />
employees are paid in terms of the<br />
negotiated agreements with the relevant<br />
unions.<br />
• Short-term incentive plan<br />
There is an incentive scheme for our<br />
management based on a balanced set of<br />
measures determined by the Board. The<br />
measures consist of financial and key<br />
performance driven targets, based on the<br />
approved business plan. All other<br />
employees participate in an incentive<br />
scheme with different measures applied at<br />
the lower levels.<br />
<strong>Telkom</strong> Annual Report 2009 63<br />
In the top management scheme, the<br />
financial driver accounts for 45% of the<br />
total award, and this is measured by the<br />
basic earning per share, return on assets<br />
(ROA) and the defend and grow revenues<br />
strategy. Performance drivers (customer<br />
satisfaction and organisational renewal<br />
components) account for 35% and 20% is<br />
allocated for individual performance.<br />
• Long-term incentive plan<br />
All employees receive conditional shares,<br />
subject to their individual performance for<br />
each year preceding the allocation. The<br />
allocation is based on the average share<br />
price 10 days before the award date of<br />
June 1 each year, using a percentage of<br />
the employees’ total package. Our<br />
employees have no right or title to the<br />
shares and cannot receive dividends until<br />
the shares have vested. The shares will only<br />
vest if we meet our annual financial targets<br />
which are set out in the relevant team<br />
award plan, and employees must remain in<br />
continuous employment. The Company will<br />
introduce a new share scheme subject to<br />
shareholders’ approval.<br />
• The <strong>Telkom</strong> Pension Fund and<br />
Retirement Fund<br />
The old Pension Fund, only had 123<br />
members and the <strong>Telkom</strong> Retirement Fund<br />
had 23,389 members at March 31, 2009<br />
and both are financially sound.<br />
Performance management<br />
The performance management system has<br />
been enhanced to ensure that our<br />
leadership is measured on the right criteria<br />
to drive behaviours that will ensure we<br />
continuously improve on the value we<br />
obtain from our employees. A five point<br />
assessment scale has been introduced that<br />
ranges from ‘consistently exceeds job<br />
requirements’ to ‘consistently does not meet<br />
job requirements’ to distinguish those who<br />
do from those who do not.<br />
Group<br />
overview<br />
Management<br />
review<br />
Sustainability<br />
review<br />
Performance<br />
review<br />
Financial<br />
statements<br />
Company<br />
Financial<br />
Information
64<br />
<strong>Telkom</strong> Annual Report 2009<br />
Human capital management (continued)<br />
In the past year we focused on building the<br />
necessary current and future<br />
competencies<br />
Reward and recognition<br />
Our ‘Name In Lights’ programme that<br />
recognises outstanding achievement by<br />
employees or teams who go the extra mile<br />
is one of the yardsticks that distinguishes<br />
our business from others.<br />
Our Gold Award team award for<br />
2007/2008 went to Daniel Fourie, Alan<br />
Gould, Kevin Burns, Deon Minnie and<br />
Willie Engelbrecht, for developing a<br />
software application that created a service<br />
view for the DSLAM. This application has<br />
enabled us to determine within minutes<br />
whether a DSLAM has been affected by a<br />
major failure. It also provides us with<br />
valuable information for special investigation<br />
sections as it identifies problematic networks<br />
for future investigations.<br />
Daniel also won the CEO Award.<br />
EE training 2008–2009<br />
African female<br />
Coloured female<br />
Foreign female<br />
Indian female<br />
White female<br />
Training and development<br />
In the past year we focused on building the<br />
necessary current and future competencies<br />
through training programmes in:<br />
• Customer Service Academy (marketing,<br />
sales, call/contact centre and customer<br />
service competencies).<br />
• Leadership and management development<br />
(enterprise leadership, general<br />
management, <strong>front</strong>line leadership and<br />
business development competencies),<br />
and<br />
• Technical training (product knowledge,<br />
technical service, ICT infrastructure, IT<br />
solutions and technology and<br />
innovation management competencies).<br />
The bulk of the training (64%) was through<br />
the classroom-based Centre For Learning<br />
AA and EE as a % of total trained<br />
AA<br />
EE<br />
White male<br />
(CFL) with the balance conducted via the<br />
virtual (PC-based) campus interactive<br />
satellite-based facility, Skytrain.<br />
<strong>Telkom</strong> invested R300 million in employee<br />
training and development in the year under<br />
review (2008: R283 million). At CFL,<br />
12,271 employees (7,796 black<br />
candidates and 3,641 women) were<br />
trained.<br />
The CFL, which conducts most of its training<br />
in-house, spent R35.0 million with external<br />
vendors in the key areas of technical and<br />
IT, management, marketing and Safety,<br />
Health and Environment (SHE).<br />
EE/AA 2008–2009<br />
African female<br />
Female coloured<br />
Foreign female<br />
Female Indian<br />
Female white<br />
Male African<br />
Male coloured<br />
Male Indian<br />
Male white<br />
Male foreigner
• Accelerated development of women, blacks and young<br />
talent<br />
In the year under review, 257 employees (50% female and 70%<br />
black) were trained in value management and technology<br />
management.<br />
Some 18 graduates from the ICT GMP obtained their MSc<br />
degrees in technology and innovation management. Of these,<br />
seven were women and 11 were black.<br />
• Technical training<br />
Approximately 2,883 field technicians were trained in IP<br />
telephony and the installation and maintenance of ADSL and, to<br />
date, more than 3,300 students have been trained on IP-related<br />
offerings, including LAN technologies, router installation and<br />
maintenance programmes.<br />
• Network and IT training<br />
Some 350 ICT diploma and degree graduates and 400 diploma<br />
students were exposed to the industry via theoretical and field<br />
training. This resulted in the creation of various talent pools<br />
including specific functional skills needed by line management; IP<br />
skills and field operations.<br />
• Other training<br />
The CFL trained 200 candidates in 22 events relating to IO driven<br />
<strong>Telkom</strong> OSS/BSS projects and an additional 240 people were<br />
trained in infrastructure and product/service training on emerging<br />
technologies. Some 111 employees received IT certification with<br />
1,823 attending IT short courses and 154 attending IBM Tivoli<br />
Netcool training.<br />
Jobs Initiative on Priority Skills Acquisition (JIPSA)<br />
This is a government initiative aimed at addressing the skills<br />
shortage in certain areas in South Africa and, to date, 1,138<br />
unemployed ICT graduates have participated in internship<br />
programmes. Of these, we appointed 644 (75% of total industry<br />
appointments). In addition, 40 unemployed female ICT graduates<br />
were trained and completed advanced Internet Protocol<br />
Networking/Solutions development and we offered 22 (55%) of<br />
them full-time employment.<br />
Leadership and management development programmes<br />
During the year under review:<br />
• 22 employees completed the Implementing Strategy and<br />
Managing Performance programme.<br />
• 33 employees from the top leadership team enrolled for the<br />
<strong>Telkom</strong> Global Leadership Development programme.<br />
<strong>Telkom</strong> Annual Report 2009 65<br />
Tyron – a fine example of our development programme<br />
Tyron Truter, manager of the Cape Town Electronic Business<br />
Support Centre (ESBC), is a 20 year <strong>Telkom</strong> veteran who has<br />
worked his way up from being an ‘appie’ in the Mitchell’s<br />
Plan branch of the old Posts and Telecommunications<br />
department in 1989, to where he is today.<br />
He has worked all over the Western Cape, run call centres<br />
on the West Rand of Gauteng and Pretoria and returned to<br />
Cape Town in January 2009 to take over the ESBC.<br />
“This job is what you make of it and I’m having a lot of fun.<br />
I’m not a military style manager, I like to get down and dirty<br />
with my team to ensure we deliver on our key performance<br />
indicators (KPIs). Our customers make us responsible for<br />
everything so we have to keep them happy. South Africans,<br />
in the main, are not techno savvy so it’s up to us to help them<br />
set up their systems. Also, a lot of people don’t realise that we<br />
support all users from MNet to ourselves and we provide a<br />
value-added service to them all.”<br />
Group<br />
overview<br />
Management<br />
review<br />
Sustainability<br />
review<br />
Performance<br />
review<br />
Financial<br />
statements<br />
Company<br />
Financial<br />
Information
66<br />
<strong>Telkom</strong> Annual Report 2009<br />
Human capital management (continued)<br />
We remain committed to continuous<br />
engagement<br />
• 40 employees were nominated for the<br />
NGN Professional programme.<br />
• 100 employees have graduated to<br />
date from the Advanced Operations<br />
Management Development programme<br />
(AOMDP).<br />
• 81 employees attended the Gordon<br />
Institute of Business Science (GIBS)<br />
programme in managing the customer<br />
relationship (PMCR), and<br />
• 453 employees have been trained in<br />
the Next Generation Network (NGN)<br />
Essentials programme.<br />
Employee engagement<br />
Two developments stand out in the year<br />
under review:<br />
Union memberships – bargaining unit<br />
• There has been a marked improvement<br />
in our relationship with the unions, and<br />
• There is the emerging phenomenon of<br />
managerial employees joining trade<br />
unions.<br />
The former is, we believe, because of our<br />
deliberate action in 2007 to invest in<br />
rebuilding the relationship between<br />
ourselves and the unions following 2006’s<br />
industrial action. While the suspicions are<br />
still there, the propensity to engage in<br />
con<strong>front</strong>ational conduct has diminished.<br />
There is also some semblance of shared<br />
vision and a willingness to co-operate.<br />
Although the latter increase is not material<br />
it is, nevertheless, a worrying development,<br />
albeit one that is within our control if we<br />
are prepared to change the way we relate<br />
to these employees.<br />
Two factors are involved here – a feeling of<br />
abandonment of junior and middle<br />
management by top management, and the<br />
annual general salary increase approach<br />
which tends to treat management<br />
employees as immune to the economic<br />
hardships that we are all facing. As a result<br />
of the increases gained by union members,<br />
the unions are seen as viable vehicles for<br />
channelling frustrations with some of our<br />
practices.<br />
Industrial action<br />
Following an impasse in wage<br />
negotiations in 2008, some 2,500 out of<br />
Nonrecognised<br />
Non- Grand<br />
Union name CWU SACU Solidarity unions Total unionised total<br />
Number of members 8,205 4,682 2,836 52 15,775 5,259 21,034<br />
% membership: 2008/09 39.0 22.3 13.5 0.2 75.0 25.0 100<br />
% membership: 2007/08 37.6 23.8 13.2 0.2 74.8 25.2 100<br />
Union memberships – managerial staff<br />
with the unions<br />
Nonrecognised<br />
Non- Grand<br />
Union name CWU SACU Solidarity unions Total unionised total<br />
Number of members 149 319 125 225 818 1,668 2,486<br />
% membership: 2008/09 6.0 12.8 5.0 9.1 32.9 67.1 100<br />
% membership: 2007/08 5.7 12.0 4.3 8.7 30.7 69.3 100
14,500 union members participated in a short-lived strike<br />
in August 2008 and 1,680 bargaining unit employees<br />
participated in industrial action in August 2009. <strong>Telkom</strong><br />
continues to engage with unions in order to find equitable<br />
solutions.<br />
• Heartbeat<br />
The company measures the level of employee<br />
engagement, through the annual Heartbeat Survey.<br />
In the year under review our employees were more<br />
committed to <strong>Telkom</strong> and indicated that their intention was<br />
to stay with the Company and take up the challenges that<br />
come their way. For the first time in a long period<br />
employees are proud to say that they are part of the <strong>Telkom</strong><br />
family. They are willing to continue to focus on the positive<br />
in spite of negative economic conditions; internal<br />
performance pressures; and changing market forces.<br />
The great news is that even in the light of the above<br />
challenges the Company’s engagement increased by a<br />
pleasing 10%. Some 62% of the Company’s employees<br />
were engaged compared to 52% in 2008. It is expected<br />
that this will be reflected in increased individual, team and<br />
Company performance, as well as in the retention of the<br />
right people in the Company.<br />
Engaged employees focus on what’s good for the customer<br />
and what’s good for shareholders. There is positive growth<br />
in customer satisfaction in most of the customer segments,<br />
which is indirectly the result of the positive engagement of<br />
our employees.<br />
<strong>Telkom</strong> intends to continue its effort to improve employee<br />
engagement through a particular focus on improving the<br />
accessibility and availability of top management and<br />
improving <strong>Telkom</strong>’s ability to attract and retain a quality<br />
workforce.<br />
Talent management<br />
Managing our talent pool is a critical aspect of our<br />
business, from retaining key skills to unearthing the leaders<br />
of tomorrow. We have a number of initiatives in place to<br />
ensure we are well placed to face current and future<br />
challenges.<br />
<strong>Telkom</strong> Annual Report 2009 67<br />
Hartebeeshoek keeps track of South Africa<br />
The multi-billion rand Hartebeeshoek satellite station lies deep<br />
in a valley between Krugersdorp and Hartbeespoort Dam.<br />
Since its opening in 1975 it has relayed literally billions of<br />
signals from two satellites deep in space to South Africa’s data,<br />
television and voice units, 24 hours a day, seven days a week.<br />
Donovan Horn is one of the 28 people that man the station.<br />
As a technical specialist, Donovan heads a team of eight<br />
technicians who ensure that the station runs smoothly and<br />
efficiently. “We have to be fully operational at all times and our<br />
equipment is in what we call full redundancy mode so that if<br />
anything goes down it kicks in automatically,” he says.<br />
For some people, working at the station could be a lonely<br />
experience, but not for Donovan. “We are surrounded by<br />
prime bushveld with its myriad species of flora and fauna, so<br />
there’s always something to see, whether it’s a Piet-my-Vrou<br />
whose call echoes from the satellite dishes, or our lone<br />
Blesbok. The only thing I do miss about ‘civilisation’ is that<br />
there is no canteen on site so, if you forget your lunch, the<br />
nearest hamburger is 23km away!”<br />
Group<br />
overview<br />
Management<br />
review<br />
Sustainability<br />
review<br />
Performance<br />
review<br />
Financial<br />
statements<br />
Company<br />
Financial<br />
Information
68<br />
<strong>Telkom</strong> Annual Report 2009<br />
Human capital management (continued)<br />
Our Graduate Development Schemes division is<br />
dedicated<br />
to growing and developing young talent<br />
In the year under review our employees<br />
were more committed to <strong>Telkom</strong> and<br />
indicated their intention to stay.<br />
• Succession planning<br />
During the year under review our talent<br />
pool bench strength rose to 1,474.<br />
Effectively this means that there is at least<br />
one candidate in the talent pool for each<br />
group executive and executive position<br />
who can replace the current incumbent.<br />
• Retention programme<br />
The four focus areas of our retention<br />
strategy are:<br />
• Create knowledge (attract and seek<br />
talent)<br />
• Store and protect knowledge (retain<br />
talent)<br />
• Share and distribute knowledge<br />
(develop potential talent); and<br />
• Use knowledge (deploy talent).<br />
The success rate of our retention<br />
programme to date is 95%, with 253<br />
employees on retention.<br />
• Global talent<br />
To ensure we have a sustainable talent<br />
pool to staff our international businesses we<br />
established a Global Talent Pool and,<br />
currently, 48 employees are on short- or<br />
long-term assignments with Multi-Links/<br />
Africa Online.<br />
• Managed career development for<br />
high potential employees<br />
The six employees who obtained their<br />
Masters degrees in engineering and<br />
computer science at Cornell University in<br />
New York in 2007/08, rejoined us in<br />
September 2008 with two being<br />
promoted. An additional three employees
were admitted to the university in May<br />
2009.<br />
Six employees, identified by the CEO<br />
Rising Stars programme, are attending the<br />
IMD’s Building On Talent programme in<br />
Switzerland.<br />
51 female employees attended a Chat<br />
and Learn programme which focused on<br />
Women Leaders Under Construction –<br />
Blazing Your Own Path. In addition,<br />
10 female employees attended a two day<br />
workshop on Women In Management and<br />
Leadership.<br />
Graduate and skills pipelines (future<br />
talent)<br />
Our Graduate Development Schemes<br />
Division is dedicated to growing and<br />
developing young talent, not only for<br />
ourselves, but for South Africa as a whole.<br />
Some R29.7 million was invested in<br />
student bursaries in the fields of information<br />
technology, electrical engineering and<br />
marketing management during the year<br />
and an additional R3.7 million was spent<br />
on our Centres Of Excellence programme.<br />
We also funded 833 full-time bursaries;<br />
667 part-time bursaries and 1,121 study<br />
loans for employees or their dependants in<br />
the 2008 academic year.<br />
<strong>Telkom</strong> Annual Report 2009 69<br />
The voices of <strong>Telkom</strong><br />
<strong>Telkom</strong> has 34 call centres in South Africa, each geared to providing technical<br />
support and service to business and domestic customers. For the men and women<br />
who staff the centres, life can, at times, be challenging and stressful for these<br />
people are the ‘voice’ of <strong>Telkom</strong>, the ones who take the brunt of customer<br />
complaints.<br />
Hilary Peacock, an agent in the Cape Town Service Activation Unit, says a key<br />
attribute to surviving in the job is the ability to not take any of the abuse received<br />
as personal. The other key attributes are learning what tone of voice to adopt<br />
when handling calls, good or bad, and having a passion for customers<br />
“I try to put myself in the customer’s place and take the good with the bad when<br />
handling calls. Overall, the good definitely outweighs the bad and I would go as<br />
far as to say that about 90% of the calls I receive are good,” she says.<br />
Colleague Marlon Ernstzen agrees, particularly when it comes to adopting the<br />
right tone of voice.<br />
“There’s nothing better than talking to an irate customer who’s upset because<br />
something he was promised didn’t happen, and then, at the end of the call,<br />
hearing him, or her, calm down and apologising and then saying thank you for<br />
the help. That experience energises you for the next day.”<br />
Blanche Machelm is an agent in the Electronic Business Support Centre (EBSC) in<br />
Cape Town, a unit which handles between 6,000 and 8,000 calls a day, mainly<br />
in the areas of ADSL support (90% of the calls) and fault and connectivity issues –<br />
e-mail, for example.<br />
Blanche, who estimates that she handles approximately 50 calls a day, says all<br />
EBSC agents have to have an IT background as they have to have an intimate<br />
technical knowledge in areas such as routing, configurations, outages, modems<br />
and cable passwords.<br />
Group<br />
overview<br />
Management<br />
review<br />
Sustainability<br />
review<br />
Performance<br />
review<br />
Financial<br />
statements<br />
Company<br />
Financial<br />
Information
70<br />
<strong>Telkom</strong> Annual Report 2009<br />
Human capital management (continued)<br />
Overall, the year under review was our<br />
most successful to date in terms of bursar<br />
placements (80%) and a pass rate of more<br />
than 95%.<br />
Africa Online and Multi-Links<br />
Africa Online is our internet service<br />
provider (ISP) in Nairobi, Kenya and Multi-<br />
Links is Nigeria’s first private telecommunications<br />
operator. Two of our top<br />
management employees are on three year<br />
contracts in Nairobi and 39 are based in<br />
Lagos.<br />
<strong>Telkom</strong> Centres of Excellence<br />
<strong>Telkom</strong>'s Centres of Excellence (CoE) is a<br />
collaboration programme between <strong>Telkom</strong>,<br />
the telecommunications industry and<br />
government to promote research in<br />
communication technology and allied<br />
sciences and to provide facilities to<br />
encourage young scientists and engineers<br />
to pursue their research interests in South<br />
Africa<br />
The CoE programme was launched in<br />
February 1997 when the then Minister of<br />
Communications, Mr Jay Naidoo<br />
participated in the signing ceremony of the<br />
first research agreement between <strong>Telkom</strong>,<br />
Siemens and the University of Cape Town.<br />
During 1997 a total of seven CoEs were<br />
launched and subsequently, during the<br />
following year another five were<br />
established, including several at<br />
technikons. From the launch of the<br />
programme, the current Chief Executive<br />
Officer of <strong>Telkom</strong>, Mr Reuben September,<br />
became the patron of the programme and<br />
has guided and supported the initiative. At<br />
each of the launches during 1997/98,<br />
top ranking government officials, including<br />
Mr Andile Ngcaba, Mr Tokyo Sexwale<br />
and Minister Sibusiso Bhengu participated<br />
in the signing ceremonies of the<br />
collaborative research agreements.<br />
As part of <strong>Telkom</strong>’s contribution to the<br />
upliftment of advanced research skills in<br />
South Africa, several of the previously<br />
under-resourced universities were partnered<br />
with historically white universities. After a<br />
number of years these previously<br />
disadvantaged institutions have established<br />
themselves as research centres that can<br />
operate independently. Examples of these<br />
joint research centres are Rhodes University<br />
and the University of Fort Hare as well as<br />
the University of KwaZulu-Natal together<br />
with the University of Zululand. Currently,<br />
there are 16 CoEs across the country, each<br />
with a unique research focus.<br />
The CoEs are jointly funded by <strong>Telkom</strong>, ICT<br />
industry players and the Department of<br />
Trade and Industry - through its Technology<br />
and Human Resource for Industry<br />
Programme (THRIP).<br />
Sound governance ensures that allocated<br />
funds are well managed. Various levels of<br />
governance<br />
established.<br />
have been formally<br />
• Formal CoE Agreement between all<br />
stakeholders.<br />
• Each CoE is managed by a Steering<br />
Committee represented by the research<br />
staff, <strong>Telkom</strong>, the respective industry<br />
sponsor and a representative from the<br />
THRIP management team.<br />
• Research project selection mechanisms<br />
are aligned with; industry partner/s and<br />
THRIP funding criteria.<br />
• High level governance of the CoE<br />
programme is provided by an Executive<br />
Management Council with representivity<br />
from <strong>Telkom</strong>, industry, academia and<br />
THRIP.<br />
The various CoEs have been encouraged<br />
to build relationships with African<br />
universities to expand the ICT blueprint in<br />
Africa as a catalyst for job creation and<br />
economic development.<br />
Major progress has already been made in<br />
this regard and formal agreements exist,<br />
inter alia, with institutions in Egypt,<br />
Ethiopia, Uganda, Namibia, Kenya, Libya<br />
and Tunisia.<br />
The CoE programme enables the various<br />
institutions to establish research facilities<br />
that would not otherwise have been<br />
possible without the necessary <strong>Telkom</strong>,<br />
industry and government sponsorship.<br />
Skills retention in South Africa is a major<br />
challenge as many talented post-graduate<br />
students are attracted to opportunities<br />
overseas. An important feature of the CoE<br />
programme is that the extensive research<br />
opportunities offered to students effectively<br />
contribute to minimising the “brain drain”,<br />
thus keeping our talent here to provide a<br />
valuable human resource to the industry.<br />
Approximately 250 students are currently<br />
pursuing post graduate degrees through<br />
the programme and since its inception,<br />
more than 1,800 post graduate degrees<br />
have been awarded.<br />
The profile of the current CoE students is:<br />
• 84 Doctoral students<br />
• 166 Masters students<br />
• 20 women<br />
• 150 BEE candidates<br />
• 38% non-South African students<br />
Currently 27 industry partners are involved<br />
in the CoE programme. Industry<br />
stakeholders are more than financiers of the<br />
CoE programme as they also play a vital
ole in exposing students to the real world<br />
of communication.<br />
<strong>Telkom</strong>’s CoE programme has been<br />
recognised as a catalyst for ICT research in<br />
Africa.<br />
Intuitions, research areas and industry<br />
partners<br />
Tshwane University of Technology<br />
Radio planning: projects involve<br />
comparing the calculated or predicted<br />
value of radio signals with the measured<br />
signals.<br />
Industry Partners: <strong>Telkom</strong>, Alcatel-Lucent<br />
and Molapo Technology<br />
North West University (Potchefstroom<br />
Campus)<br />
Telecommunications Application Modelling<br />
includes projects on the Super Parallel<br />
Computing facility; data mining; decision<br />
support systems and mathematical<br />
programming applications.<br />
Industry Partners: <strong>Telkom</strong> and Saab Grintek<br />
University of Johannesburg<br />
Modelling Optical communication: involving<br />
Dense Wave Division Multiplexing (DWDM)<br />
projects; optical filters and transport<br />
networks<br />
Industry Partners: <strong>Telkom</strong>, CBi Electric and<br />
Ericsson<br />
Operational Support Systems (OSS)<br />
Industry Partners: <strong>Telkom</strong> and SAP<br />
Nelson Mandela Metropolitan University<br />
Multimedia software: includes usability<br />
laboratory projects, virtual classroom;<br />
programming tools and 3D system design<br />
Industry Partner: <strong>Telkom</strong> and Dimension<br />
Data<br />
Optical Fibre Measurements<br />
Industry Partners: <strong>Telkom</strong>, Hezeki and MCT<br />
Communications<br />
Solar Energy Research<br />
Industry Partners: <strong>Telkom</strong> and TFMC<br />
Rhodes University<br />
Distributed Multimedia: projects deal with<br />
virtual reality; Internet Protocol telephony,<br />
protocols and intelligent agents<br />
Industry Partners: <strong>Telkom</strong>, Comverse,<br />
Tellabs and StorTech<br />
University of Fort Hare<br />
Electronic Commerce<br />
Industry Partners: <strong>Telkom</strong>, Saab Grintek<br />
and Tellabs<br />
University of Stellenbosch<br />
Satellite communication, speech and<br />
image processing<br />
Industry Partners: <strong>Telkom</strong>, Motorola and<br />
Spescom<br />
University of Witwatersrand<br />
Telecommunications Access and Services<br />
based on the TINA Architecture<br />
Industry Partners: <strong>Telkom</strong>, Vodacom and<br />
Nokia Siemens Networks<br />
University of Limpopo<br />
Automatic Speech technology<br />
Industry Partners: <strong>Telkom</strong> and Maredi<br />
University of Pretoria<br />
Next Generation Networks<br />
Industry Partners: <strong>Telkom</strong>, Unisys, Alvarion,<br />
EMC and Tellumat<br />
<strong>Telkom</strong> Annual Report 2009 71<br />
University of KwaZulu-Natal<br />
Radio access involving CDMA receivers;<br />
traffic modelling; adaptive antenna arrays<br />
and resource management.<br />
Rural telecommunications with a variety of<br />
projects in the wireless networking arena.<br />
Industry Partners: <strong>Telkom</strong> and Alcatel-Lucent<br />
University of Zululand<br />
Mobile e-Services<br />
Industry Partners: <strong>Telkom</strong> and Huawei<br />
Universities of Cape Town and<br />
Stellenbosch<br />
ATM/Broadband Networks and their<br />
applications with research on MPLS and IP<br />
networks; congestion control and network<br />
performance.<br />
Industry Partners: <strong>Telkom</strong>, Nokia Siemens<br />
Networks and Telesciences<br />
University of Western Cape<br />
Internet Protocol Networks and their<br />
applications<br />
Industry Partners: <strong>Telkom</strong> and Cisco<br />
University of the Free State<br />
The identification of usability and human<br />
factors that will ensure higher accessibility<br />
to Information Technology<br />
Industry Partner: <strong>Telkom</strong><br />
Vaal University of Technology<br />
Power (fuel cells etc) and optic fibre<br />
research<br />
Industry partners: <strong>Telkom</strong>, M-Tec and<br />
TFMC<br />
Group<br />
overview<br />
Management<br />
review<br />
Sustainability<br />
review<br />
Performance<br />
review<br />
Financial<br />
statements<br />
Company<br />
Financial<br />
Information
72<br />
<strong>Telkom</strong> Annual Report 2009<br />
Safety, health and environment<br />
We successfully<br />
piloted a<br />
stress<br />
resilience and emotional<br />
intelligence workshop<br />
An industrial theatre show was a key driver in the roll-out of our Thuso Wellness days<br />
which highlighted a step-by-step approach to improve employee wellbeing through<br />
lifestyle changes.<br />
Safety, health and environment<br />
Our entrenched and integrated Employee<br />
Wellness and Safety, Health and<br />
Environment (SHE) portfolio continues to be<br />
one of the most admired in South African<br />
industry, as evidenced by the following<br />
achievements in the year under review.<br />
• We received the coveted international<br />
Global Business Coalition (GBC)<br />
Award for Excellence as the best<br />
HIV/AIDS workplace programme for<br />
our integrated Voluntary Counselling,<br />
Testing and Treatment programme for<br />
2008. The award was made by the<br />
United Nations Secretary General in<br />
New York.<br />
• Our annual national HIV/AIDS<br />
celebrations campaign, ‘Don’t hesitate,<br />
donate’, was successfully launched<br />
on World AIDS Day 2008 with our<br />
employees donating thousands of<br />
kilograms of food, clothes and toys<br />
to 26 adopted HIV/AIDS havens,<br />
orphanages and hospices.<br />
• Our Direct Retail shops initiated the<br />
Thuso Bus concept (Thuso is our<br />
employee wellness programme). Outlets<br />
in the Eastern Cape, including the<br />
former Transkei, were given a working<br />
day off to attend Thuso programmes.<br />
• We successfully piloted a stress<br />
resilience and emotional intelligence<br />
(EQ) workshop in areas with high<br />
degrees of trauma as a result of<br />
hijackings, robberies and other criminal<br />
activities. This will be rolled out<br />
nationally in the new financial year.
Sick leave indices<br />
• We saved R2 million on our Operational<br />
Hygiene surveys thanks to the application<br />
of specific criteria in key areas.<br />
• Our ISO 14001:2007 and OHSAS<br />
18001:2007 Safety, Occupational<br />
Health and Environmental Management<br />
systems were recertified by Dekra<br />
Norisko Industrial South Africa.<br />
• The Compensation Commissioner<br />
granted us a dedicated resource to deal<br />
specifically with <strong>Telkom</strong>-related cases.<br />
This resulted in a ‘quicker return to work’<br />
by employees who were injured on duty.<br />
• As a result of effective risk management<br />
controls, there were significant<br />
reductions in three reportable incident<br />
categories – working in elevated<br />
positions (17%); lifting and pushing<br />
(30%); and vehicle accidents (16%).<br />
• We established the <strong>Telkom</strong> Green<br />
Initiative (TGI) project team to enable us<br />
to better manage our environmental<br />
impact.<br />
Absenteeism through illness<br />
There were no significant variations in the<br />
absenteeism through illness and year-todate<br />
sick leave use figures, although there<br />
was a 5.5% improvement in overall sick<br />
leave days used.<br />
We remain concerned about the high level<br />
of sick leave taken (71.7% compared to<br />
70.1% in the previous year) and we will be<br />
making planned changes in sick leave<br />
policy stipulations and management<br />
effectiveness to decrease this business risk<br />
and impact. In terms of productivity and<br />
direct/indirect cost factors, the data<br />
indicates that 791 employees are off sick<br />
each working day. While this is an<br />
improvement of 2.6% on the previous year,<br />
it is still unacceptable and a significant<br />
improvement is necessary. Our new target<br />
is to reduce the sick leave per day to<br />
600 employees in 2010/2011.<br />
Physical wellness<br />
An industrial theatre show, ‘How Do I Eat<br />
This Elephant’ was a key driver in the roll-<br />
<strong>Telkom</strong> Annual Report 2009 73<br />
Sick leave measure 2006/2007 2007/2008 2008/2009 % variance<br />
S<strong>AR</strong> (%)<br />
Defined as a total number of sick days as % of total<br />
available man-days<br />
2.24 2.51 2.52 (0.4)<br />
ASR (days)<br />
Defined as the average number of days used per sick leave<br />
incident<br />
2.45 2.48 2.53 2.0<br />
AFT (incidents)<br />
The average number of sick leave incidents per sick leave user<br />
3.38 3.59 3.30 (8.1)<br />
SUR (%) Monthly average<br />
Number of sick leave users per month as % of total number of<br />
employee population<br />
15.7 17.3 17.3 0<br />
SUR (%) Year-to-date<br />
Number of sick leave users progressively utilising sick leave as<br />
% of total number of employee population (all sick leave users<br />
are only calculated once)<br />
67.2 70.1 71.7 2.3<br />
Total number of man-days/shifts lost due to sick leave<br />
implying the progressive and accumulative total of sick leave<br />
days over 12-month period<br />
176,795 194,364 183,679 (5.5)<br />
out of our Thuso Wellness days which<br />
highlighted a step-by-step approach to<br />
improve employee wellbeing through<br />
lifestyle changes. Our challenge remains to<br />
reconstruct the “Terrible Triangle” of high<br />
stress levels, poor chronic disease profile<br />
and bad lifestyle habits.<br />
• Eye screening<br />
2,113 employees were screened for vision<br />
impairment and 194 were identified for<br />
further treatment intervention.<br />
• Individual health risk assessments<br />
(chronic profile)<br />
2,903 employees at selected sites in the<br />
Free State, KwaZulu-Natal, Western Cape<br />
and Gauteng were screened for<br />
hypertension, cholesterol, diabetes and<br />
body mass.<br />
# Hypertension profile: While there was a<br />
decrease in the normal range from 63% to<br />
46%, this remains a major risk area as<br />
more than 50% of those tested had some<br />
abnormality in their blood pressure. The<br />
high systolic range (heart subtraction)<br />
Group<br />
overview<br />
Management<br />
review<br />
Sustainability<br />
review<br />
Performance<br />
review<br />
Financial<br />
statements<br />
Company<br />
Financial<br />
Information
74<br />
<strong>Telkom</strong> Annual Report 2009<br />
Safety, health and environment (continued)<br />
Of particular<br />
percentage was similar to the previous<br />
year but the diastolic (heart pumping) rate<br />
increased from 15% to 25% as a result<br />
of increased cardio-vascular illnesses;<br />
increased stress levels and poor lifestyles.<br />
# Cholesterol profile: There was a 7%<br />
increase in the at-risk category, again due<br />
to lifestyle factors such as lack of exercise<br />
and incorrect eating habits. This profile will<br />
be a priority going forward in our wellness<br />
campaigns.<br />
# Diabetes profile: There was an 11%<br />
improvement in the diabetes chronic<br />
profile, thanks to regular testing and the<br />
fact that diabetes remains a high focus<br />
area. However, we are concerned that low<br />
blood sugar levels rose from 28% to 37%<br />
and this will be another key focus area in<br />
our awareness campaigns.<br />
# Obesity profile: This is a high risk area<br />
for us as 65% of the employees tested were<br />
overweight or obese. As a result, the<br />
importance of lifestyle modification is a<br />
priority for us in the new financial year.<br />
# Opportunistic diseases: We are<br />
pleased to note that only six cases of TB<br />
were reported in the year under review<br />
and all cases were successfully treated.<br />
concern<br />
is the 17.6% increase in stress-related cases<br />
due to work related relations, poor performance,<br />
incapacity and job security.<br />
The following table shows the diagnostic causal factors for the EAP referrals<br />
Diagnosis 2006/2007 2007/2008 2008/2009 % variance<br />
Crisis and trauma 41.7% 41.3% 40.5% (1.9%)<br />
Family relationships and divorce 15.4% 17.6% 16.1% (8.5%)<br />
Stress related 7.6% 6.8% 8.0% 17.6%<br />
Psychological wellness<br />
In the year under review we transformed<br />
this section of the Wellness programme into<br />
a more proactive, competency-based<br />
approach, highlighted by the following:<br />
• Some 1,216 employees and their<br />
dependants were referred to our<br />
psychological counselling interventions,<br />
a 10% decrease on the previous year.<br />
This decrease is, we believe, largely<br />
due to the fact that employees did, from<br />
time to time, use their own private<br />
psychologists. From the referrals,<br />
4,132 sessions were conducted at an<br />
average of 3.4 sessions per referred<br />
patient at a cost to us of R1.8 million.<br />
• Of particular concern is the 3.8%<br />
increase in cases in the ‘other<br />
psychological illnesses’, such as<br />
psycho-sexual, personality disorders<br />
and related psychosis. This could be the<br />
tip of the iceberg as some of<br />
the problems experienced by our<br />
employees are of such a sensitive nature<br />
that they are discussed with their own<br />
psychologists.<br />
• The stress category (which includes<br />
work-related poor performance,<br />
incapacity, job security etc) constitutes<br />
almost 14% of all diagnoses and the<br />
293 cases recorded during the year is<br />
an increase of 17.6% on the previous<br />
year. This is a major challenge for us in<br />
the next financial year, particularly<br />
in view of the roll-out of Project<br />
Renaissance and the resultant<br />
uncertainty of job security and fears of<br />
job losses.<br />
Preventative interventions<br />
Five key workshops were held during the<br />
year:<br />
• Stress and resilience;<br />
• Team and value development;<br />
• Trauma and resilience;<br />
• Bereavement therapy; and<br />
• Conflict management.
These will be augmented by another six workshops in the next<br />
financial year:<br />
• Psychological and emotional resilience;<br />
• Financial wellness;<br />
• Prevention of emotional burnout;<br />
• Emotional intelligence;<br />
• Dealing with challenging circumstances; and<br />
• The psychology of customer care.<br />
Socio-economic wellness<br />
We provided guidance in the areas of lifestyle, finance and debt<br />
counselling during the year, three key areas that impact on the<br />
wellbeing of our employees with the specific focus to reduce stress<br />
and poor lifestyle habits.<br />
# Lifestyle: We contracted a lifestyle service provider to run our<br />
<strong>Telkom</strong> Touch Lifestyle Programme which connects employees to a<br />
range of lifestyle services such as recreational, vocational,<br />
household, educational and general lifestyle value offerings at<br />
great prices.<br />
# Financial resilience: There was an increase in counselling<br />
referrals (three to four a month) for employees with financial<br />
problems, which was underscored by the increase in garnishee<br />
orders against employees. As a result, a bid for the outsourcing of<br />
a financial resilience intervention and a financial advice service<br />
has been approved and is in process,<br />
# Debt counselling: We have set up a debt counselling service<br />
which registers employees who have huge debt under the<br />
National Credit Act of 2005. This protects them against parties<br />
demanding payment. A debt counselling company will act for such<br />
employees, negotiating new payback terms for bonds, vehicle<br />
leases and other creditors and preventing repossession of these<br />
assets.<br />
Safety management<br />
The Occupational Health and Safety (OHS) of <strong>Telkom</strong>’s employees<br />
is a fundamental right and therefore <strong>Telkom</strong> acknowledges that a<br />
healthy and safe working environment enhances performance in<br />
the workplace and also contributes to employee wellbeing.<br />
<strong>Telkom</strong> Annual Report 2009 75<br />
Our carbon footprint<br />
It now takes the earth 16 months to regenerate the resources it<br />
uses in a year and so businesses that look ahead and actively<br />
manage their ecological risks and opportunities can not only<br />
make a major contribution to saving the world’s resources but,<br />
at the same time, gain a strong competitive advantage over<br />
those that don’t.<br />
At <strong>Telkom</strong>, via our Green Initiative, we are consolidating all our<br />
environmental initiatives to ensure we meet our, and legislation’s,<br />
targets and, additionally, educate our people and encourage<br />
them to lead a greener lifestyle.<br />
We have 10 key focus management areas – energy, water,<br />
waste, greenhouse gas emissions, green procurement,<br />
biodiversity, renewable energy, company initiatives, our<br />
corporate image and our people. Some of our key objectives in<br />
these areas are to offset emissions, participate in carbon<br />
trading, provide the greater ICT sector and stakeholders with<br />
products and services that will help them to reduce their<br />
footprints and provide our shareholders with ‘green’ returns.<br />
Some of the areas where we can improve are:<br />
• Employee business travel (currently 26.7 million km a year).<br />
Our aim is to reduce this by 5.3 million km.<br />
• Our 2008/09 electricity consumption was 537,300MWh.<br />
Our aim is a reduction of 107,460MWh.<br />
• EPS generators use 2.3 million litres of diesel. Our aim is to<br />
reduce this by 456,000 litres.<br />
• Employee business air travel sits at 31.8 million km. Our aim<br />
is to reduce this by 6.4 million km.<br />
Overall, we believe we can reduce our carbon emissions by<br />
between 15% and 30% over the next three to five years.<br />
Group<br />
overview<br />
Management<br />
review<br />
Sustainability<br />
review<br />
Performance<br />
review<br />
Financial<br />
statements<br />
Company<br />
Financial<br />
Information
76<br />
<strong>Telkom</strong> Annual Report 2009<br />
Safety, health and environment (continued)<br />
To ensure <strong>Telkom</strong> complies with the<br />
minimum safety requirements as per<br />
national legislation and to support <strong>Telkom</strong>’s<br />
OHS policy, a:<br />
• Well structured SHE Governance policy<br />
is developed and revised annually.<br />
• Incident on Duty (IOD) system is<br />
developed to provide intelligent<br />
information to assist management in<br />
identifying trends and to implement<br />
corrective actions to mitigate future<br />
incidents.<br />
• Contractor management audit programme<br />
is implemented to ensure<br />
contractors are audited monthly to meet<br />
the requirements of the Construction<br />
Regulations; and<br />
• <strong>Telkom</strong> Subsidiary audit initiative is<br />
implemented to provide support to the<br />
subsidiaries to meet minimum statutory<br />
SHE requirements.<br />
HIV/AIDS workplace programme<br />
In addition to our international award, our<br />
Thuso programme is recognised for its best<br />
practices by researchers and academics<br />
who visit us for benchmarking purposes.<br />
Since the inception of our voluntary<br />
counselling and testing programme (VCT) in<br />
2004, 23,391 employees have been<br />
tested. In the year under review,<br />
2,353 employees, from a target population<br />
of 3,178 at 52 sites, were tested.<br />
We have 280 employees receiving antiretroviral<br />
therapy of which the majority<br />
have a normal sick absence profile, being<br />
healthy and productive at work.<br />
In analysing this data, 32% of HIV positive<br />
employees are either in the process of<br />
being registered or are unaccounted for.<br />
This remains a challenge for the<br />
programme to improve on this conversion<br />
rate to get identified HIV positive<br />
employees on to the programme. In the<br />
2008/2009 performance cycle, there<br />
were 74 new registrations on the<br />
programme (40 via onsite VCT; 32 selfidentified<br />
and two prophylaxis patients).<br />
The gender distribution on the chronic<br />
programme is 203 (52%) male and 186<br />
(48%) female. The median age is 36 years<br />
with ranges between four and 56 years.<br />
We have adopted a conservative<br />
approach in providing anti-retrovirals for<br />
employees registered on the programme<br />
with a CD4 count of 350 versus a<br />
governmental and NGO norm of 200.<br />
Using this as measurement category, only<br />
14 (4.9%) of the 284 employees on antiretrovirals<br />
are categorised in the AIDS or<br />
fully blown AIDS category.<br />
• Preventative strategy<br />
Since 1996, we have dispensed free<br />
condoms at all sites. In the year under<br />
review more than 703,000 condoms<br />
were dispensed and more than 120,000<br />
expired condoms of previous governmental<br />
issues were withdrawn.<br />
• Peer education<br />
Currently 594 employees have been<br />
trained and registered as fully fledged peer<br />
educators. It is gratifying to note that the<br />
involvement of peer educators has<br />
extended beyond the boundaries of the<br />
Company into the communities they serve<br />
via the adoption of various havens,<br />
orphanages, hospices and presentations to<br />
community youth groups. As a result, a<br />
Champions Programme will be launched<br />
later in 2009 to formalise community<br />
involvement.<br />
• Thuso Toll-free Call Centre<br />
Some 4,234 calls were routed via the<br />
Thuso Call Centre for the year under<br />
review. Outbound calls comprised 65.5%<br />
of these, mainly providing clinical support<br />
to patients. Inbound personal advice calls<br />
made up 29.7% of all calls.<br />
• KABP Study<br />
The regular KABP (Knowledge, Attitude,<br />
Behaviour and Perception) studies which<br />
test the general level of information,<br />
understanding and influencing behaviour<br />
of employees about education and<br />
awareness interventions have been<br />
extended to the HIV positive employees to<br />
test their understanding and also determine<br />
the level of stigmatisation experienced by<br />
them in the workplace.<br />
Environmental management<br />
While our environmental impact is not big,<br />
our contribution is not totally insignificant<br />
and, as a result, during the year under review<br />
we launched our <strong>Telkom</strong> Green Initiative, a<br />
concerted effort to place green issues firmly<br />
in the mainstream of our operations.<br />
• Treatment protocols<br />
In terms of treatment protocols, the following table reflects the current treatment status:<br />
Treatment aspect Number of employees<br />
HIV positive employees 708<br />
HIV positive status via VCT 512 (72%)<br />
HIV positive status via self-identification 196 (28%)<br />
HIV employees registered on the Chronic Disease<br />
Programme 389 (55%)<br />
HIV employees registered on Medical Aid, NGO or<br />
Government Programmes 92 (13%)<br />
HIV positive employees on treatment (Expert Treatment<br />
Programme (ETP)) 284 (40%)
Some of the key deliverables are:<br />
• Measuring our carbon footprint through<br />
the monitoring of electricity and fuel use;<br />
minimising travel and reducing waste<br />
and carbon emissions (there is no<br />
carbon trading legislation in South<br />
Africa as yet). Reducing our electricity<br />
bill through the installation of meters at<br />
key sites, a possible return to using more<br />
solar power and the installation of wind<br />
chargers.<br />
• Participation in national and<br />
international climate change awareness<br />
programmes.<br />
• Employee behavioural change awareness<br />
programmes.<br />
• Computerised destination control<br />
elevator system in our high rise<br />
buildings.<br />
Bats<br />
We are currently managing a bat encroachment concern in a<br />
remote exchange building in Mpumalanga. A colony of free tailed<br />
bats is roosting and raising its young in the ceiling, which creates<br />
an unhealthy environment for our technicians performing routine<br />
maintenance work. We are allowing the young to mature and will<br />
then install a one-way excluder exit. This will allow the mature<br />
adults and young to leave but not return. The final phase of the<br />
project will be the erection of a bat house on the site to provide<br />
an artificial roosting site for the colony.<br />
Blue cranes<br />
We are delighted to announce that since the installation of<br />
‘flappers’ on our lines in the central region, no blue crane<br />
mortalities have been recorded.<br />
Raptors<br />
As part of our commitment to active environmental stakeholder<br />
engagement with both governmental and non-governmental<br />
organisations we attended various meetings around the country.<br />
One of these is the annual meeting of the Northern Cape Raptor<br />
Forum (NCRF). At the last meeting issues relating to the nesting<br />
habits of sociable weavers on our towers were raised, specifically<br />
the environmental impact the removal of these nests would have on<br />
the survival of the Pygmy Falcons which prey on the weavers.<br />
<strong>Telkom</strong> Annual Report 2009 77<br />
• Improved functional efficiency of<br />
underfloor cooling requirements in<br />
equipment rooms.<br />
• The implementation of the Green<br />
building concept in partnership with our<br />
facility management company; and<br />
• Installation of motion sensor light<br />
switches and upgrade of existing<br />
lighting technology with more efficient<br />
technology.<br />
Group<br />
overview<br />
Management<br />
review<br />
Sustainability<br />
review<br />
Performance<br />
review<br />
Financial<br />
statements<br />
Company<br />
Financial<br />
Information
78<br />
<strong>Telkom</strong> Annual Report 2009<br />
Corporate social investment<br />
The Foundation was voted the<br />
Top<br />
Empowerment Company in CSI<br />
All our corporate social investment (CSI)<br />
programmes are run and managed by the<br />
<strong>Telkom</strong> Foundation which we established<br />
10 years ago.<br />
As a result of the Foundation’s work, we are<br />
recognised as one of the largest CSI<br />
investors in South Africa and in the year<br />
under review we invested more than<br />
R47 million, mainly in the areas of education<br />
and the roll-out of information and<br />
technology in disadvantaged communities.<br />
As a result of this commitment, the Foundation<br />
was voted the Top Empowerment Company<br />
in CSI at the 2009 Oliver Empowerment<br />
Awards, hosted by Topco.<br />
The Foundation’s focus on education and<br />
technology is governed by our belief that<br />
these areas are key contributors to an equal<br />
opportunity society in South Africa. One of<br />
the most powerful learning resources is the<br />
internet and by bringing this medium into<br />
classrooms around the country, educational<br />
standards will be enhanced.<br />
It is our hope that our continued investment<br />
in these fields will help redress skills<br />
shortages, particularly in the engineering,<br />
science and IT fields.<br />
We focused on four main projects in the<br />
year under review:<br />
• 2,010 for 2010 Schools Connectivity<br />
Initiative<br />
This is the Foundation’s biggest and most<br />
ambitious project ever. Our goal is to<br />
provide 2,010 schools across the country<br />
with internet access by 2010.
Fittingly, the initiative was launched in<br />
February 2009 by our CEO, Reuben<br />
September, at his former school, Grassy<br />
Park High School in Cape Town.<br />
Each participating school will receive an<br />
internet connection; discounted broadband<br />
subscription rates and interactive electronic<br />
whiteboards and laptops.<br />
Grassy Park also received an Internet Café<br />
for use by not only the learners, but the<br />
community. If this pilot programme is<br />
successful, it will be rolled out to the other<br />
schools as part of the overall initiative.<br />
<strong>Telkom</strong> Annual Report 2009 79<br />
We have been a proud supporter of the<br />
South African Paralympic team since<br />
1992. Our team achieved 6th place in<br />
the overall medal table in the 2008<br />
Beijing Olympics.<br />
Group<br />
overview<br />
Management<br />
review<br />
Sustainability<br />
review<br />
Performance<br />
review<br />
Financial<br />
statements<br />
Company<br />
Financial<br />
Information
80<br />
<strong>Telkom</strong> Annual Report 2009<br />
Corporate social investment (continued)<br />
• Beacon of Hope<br />
This programme, which was launched in<br />
2006, is designed to develop promising<br />
young learners into future leaders by<br />
placing top students from under-resourced<br />
schools in some of the country’s leading<br />
high schools.<br />
The Foundation pays for the tuition and<br />
boarding fees; uniforms; books and<br />
stationery for the 186 learners enrolled in<br />
the programme.<br />
• Giving from the Heart<br />
Initiated by our Human Resources<br />
department to encourage employees to<br />
give something back to the community, the<br />
project was taken over by the Foundation<br />
in 2006.<br />
Employees can either donate a portion of<br />
their salary to Giving from the Heart projects;<br />
donate their time and skills to projects, or<br />
identify their own charities to which they<br />
contribute either money or time. The <strong>Telkom</strong><br />
Foundation matches every rand an employee<br />
donates with the same amount.<br />
In the year under review, the Foundation<br />
launched an Employee Volunteer Week<br />
which resulted in our people working and<br />
assisting at the Tumelo Hospice in<br />
Mabopane; the Centre of Hope in<br />
Mahwelereng; the Nokuthula School for<br />
the Intellectually Disabled in Marlboro; the<br />
Uthando Orphanage House in Hazyview;<br />
St Patrick’s College in Kokstad and the<br />
Hospice Association of Transkei in<br />
Southernworld.<br />
• Sponsorships<br />
In the year under review various grants<br />
were made to organisations ranging from<br />
Childline to Nurturing Orphans of AIDS<br />
for Humanity (Noah) in line with our<br />
commitment to improving the lot of<br />
previously disadvantaged communities.<br />
Going forward<br />
In the next financial year, the <strong>Telkom</strong><br />
Foundation will launch the <strong>Telkom</strong> Teacher<br />
of the Year awards to honour South Africa’s<br />
top maths, science and technology<br />
educators at the Further Education and<br />
Training and the General Education and<br />
Training level. The awards will be made in<br />
August 2009.<br />
Our <strong>Telkom</strong> Business golf sponsorships enable us to position our brand in the business<br />
environment. They also help us to introduce new products and reinforce our relationship<br />
marketing programme.
Sponsorships<br />
Sponsorships continue to be an important<br />
part of our brand building and reputation<br />
management strategies. In the year under<br />
review we focused on soccer, swimming<br />
and golf.<br />
Soccer<br />
For the third consecutive year we<br />
sponsored the <strong>Telkom</strong> Knockout, a Premier<br />
Soccer League (‘PSL’) event played by all<br />
16 PSL teams between October and<br />
December. It is a knockout event that plays<br />
a major role in honing South Africa’s soccer<br />
skills.<br />
For the ninth consecutive year we also<br />
sponsored the <strong>Telkom</strong> Charity Cup, a one<br />
day PSL event where the fans choose the<br />
four competing teams. The teams who<br />
receive the most telephone and SMS votes<br />
play in a round robin series of games.<br />
A significant portion of the money<br />
generated by ticket sales and telephone<br />
voting is given to charities working with<br />
children, the elderly and people with<br />
disabilities. Some 695,000 fans voted in<br />
the 2008 event and R4.6 million was<br />
raised for the charitable organisations.<br />
2010 FIFA Soccer World Cup<br />
<strong>Telkom</strong> is a tier three National Supporter<br />
within the fixed-line environment. The<br />
biggest sporting event in the world is the<br />
perfect platform for <strong>Telkom</strong> to showcase its<br />
ICT capabilities. In June 2009, the<br />
Confederations Cup was utilised as a dress<br />
rehearsal for the World Cup finals in<br />
2010. <strong>Telkom</strong> exceeded all FIFA’s<br />
requirements in ensuring that broadcasting<br />
and media requirements were met. <strong>Telkom</strong><br />
has approximately 128,000 cable<br />
kilometres of optical fibre in the ground –<br />
enough to circle the world three times. This<br />
is more than enough fibre to support the<br />
massive amounts of bandwidth that FIFA<br />
will need in 2010.<br />
Swimming<br />
Since 2000, we have sponsored<br />
Swimming South Africa, a public benefit<br />
organisation which promotes all aquatic<br />
sports in the country. In addition to many<br />
South African swimming stars such as<br />
Ryk Neethling, Natalie du Toit and<br />
Roland Schoeman, Swimming South Africa<br />
has played a key role in boosting public<br />
awareness of swimming as a life and<br />
survival skill. Swimming contributes towards<br />
the Company’s objectives of being a<br />
caring organisation, as the sport offers<br />
opportunities for both able and disabled<br />
people.<br />
Drowning remains a major cause of death<br />
among children under the age of 14 and,<br />
as a result of our support for Swimming<br />
South Africa’s ‘Learn to Swim’ programme,<br />
many children and adults in the country<br />
have the opportunity to learn to swim.<br />
<strong>Telkom</strong> Annual Report 2009 81<br />
The programme is sub-divided into the<br />
‘Pool Splash’ project which focuses on safe<br />
swimming in pools; the ‘Ocean Splash’<br />
project which concentrates on sea<br />
swimming and the ‘Rural Splash’ project<br />
which concentrates on swimming in rivers<br />
and dams.<br />
Golf<br />
Our <strong>Telkom</strong> Business golf sponsorships –<br />
the <strong>Telkom</strong> PGA Championships, the<br />
<strong>Telkom</strong> PGA Pro-Am on the Sunshine Tour<br />
and two <strong>Telkom</strong> Business Pro-Ams – enable<br />
us to position our brand in the business<br />
environment. They also enable us to<br />
introduce new products and reinforce our<br />
relationship marketing programme.<br />
We also have a presence on Sunshine Tour<br />
tournaments such as the SA Open and the<br />
Nedbank Golf Challenge. In addition we<br />
are a broadcast sponsor of international<br />
events like the European Tour and World<br />
Gold championships.<br />
Paralympics<br />
<strong>Telkom</strong> has been a proud supporter of the<br />
South African Paralympics team since<br />
1992. Our team achieved 6th place on<br />
the overall medal table in the 2008 Beijing<br />
Olympics. The Paralympics are not only<br />
about sport; they are about hope, pride,<br />
inspiration and courage. <strong>Telkom</strong> is<br />
honoured to align our brand with this<br />
message of upliftment.<br />
Group<br />
overview<br />
Management<br />
review<br />
Sustainability<br />
review<br />
Performance<br />
review<br />
Financial<br />
statements<br />
Company<br />
Financial<br />
Information
82<br />
<strong>Telkom</strong> Annual Report 2009<br />
Global reporting initiative (GRI) content index<br />
<strong>Telkom</strong> has opted for an incremental adoption of the guidelines to the GRI index, the full adoption will include a quality assurance and<br />
compliance audit report. In many cases, <strong>Telkom</strong>’s internal reporting frameworks pre-date external frameworks, hence this is presented as<br />
a navigation aid as opposed to a “tick-box” compliance exercise.<br />
Item Comment and reference<br />
Vision and strategy<br />
1.1 Statement of the organisation’s vision and strategy regarding its<br />
contribution to sustainable development.<br />
See <strong>Telkom</strong>’s website: www.telkom.co.za/ir<br />
1.2 Statement from CEO (or equivalent senior manager) describing<br />
key elements of the report.<br />
Chief Executive Officer’s review<br />
Profile<br />
Organisational profile<br />
2.1 Name of reporting organisation. <strong>Telkom</strong> SA Limited<br />
2.2 Major products and/or services including brands if appropriate. Operational review<br />
Further details of products and service can be accessed<br />
on the website www.telkom.co.za<br />
2.3 Operational structure of the organisation. Group structure<br />
2.4 Description of major divisions, operating<br />
companies, subsidiaries.<br />
Group structure<br />
2.5 Countries in which the organisation’s operations are located. Enterprise risk management<br />
2.6 Nature of ownership; legal form. <strong>Telkom</strong> Group structure<br />
2.7 Nature of markets served. The telecommunications industry<br />
Report scope<br />
2.10 Contact person(s) for the report, including e-mail and<br />
web addresses.<br />
Administration page and www.telkom.co.za/ir<br />
2.11 Reporting period for information provided. Year ended March 31, 2009<br />
2.12 Date of most recent previous report. Year ended March 31, 2008<br />
Report profile<br />
2.17 Decisions not to apply GRI principles or protocols. Sustainability review<br />
2.18 Criteria/definitions used in any accounting for<br />
economic environment.<br />
Notes to the consolidated annual financial statements<br />
2.19 Significant changes from previous years in the<br />
measurement methods.<br />
Notes to the consolidated annual financial statements<br />
2.22 Means by which report users can obtain additional information<br />
and reports about economic, environmental and social aspects of<br />
the organisation’s activities, including facility-specific information.<br />
See <strong>Telkom</strong>’s website: www.telkom.co.za/ir
Item Comment and reference<br />
Governance structure and management systems<br />
Structure and governance<br />
3.1 Governance structure, including major Board committees. Corporate governance report<br />
3.2 Percentage of the Board of directors that are independent,<br />
non-executive directors.<br />
Corporate governance report<br />
3.3 Board-level processes for overseeing economic, environmental<br />
and social risks and opportunities.<br />
Corporate governance report<br />
3.4 Linkage between executive compensation and achievement<br />
of goals.<br />
Human capital management report<br />
3.5 Organisational structure and key responsibilities. Chief officers and management team<br />
<strong>Telkom</strong> Annual Report 2009 83<br />
3.6 Mission and values statements and codes of conduct. See <strong>Telkom</strong>’s website: www.telkom.co.za/ir<br />
3.7 Mechanisms for shareholders to provide recommendations to the Company Secretary (see contact details on ibc;) IR road-<br />
Board of directors. shows; AGM and the IR website www.telkom.co.za/ir<br />
Stakeholder engagement<br />
3.8 Major stakeholders. Sustainability review<br />
3.9 Approaches to stakeholder consultation. Sustainability review<br />
3.10 Type of information generated by stakeholder consultations. Sustainability review<br />
3.11 Use of information resulting from stakeholder engagements. Sustainability review<br />
Economic performance indicators<br />
EC1 Net sales. Consolidated income statement<br />
EC2 Geographic breakdown of markets. Notes to the consolidated annual financial statements<br />
EC3 Cost of all goods, material and services purchased. Consolidated income statement<br />
EC5 Total payroll benefits. Consolidated income statement<br />
EC6 Distributions to providers of capital. Consolidated statement of changes in equity<br />
EC7 Increase/decrease in retained earnings at end of period. Consolidated statement of changes in equity<br />
EC8 Total sum of taxes of all types paid broken down by country. Notes to the consolidated annual financial statements<br />
EC10 Donations to community, civil society and other groups. Corporate social investment report<br />
Group<br />
overview<br />
Management<br />
review<br />
Sustainability<br />
review<br />
Performance<br />
review<br />
Financial<br />
statements<br />
Company<br />
Financial<br />
Information
84<br />
<strong>Telkom</strong> Annual Report 2009<br />
Global reporting initiative (GRI) content index (continued)<br />
Item Comment and reference<br />
Environmental performance indicators<br />
Materials<br />
EN1 Total material use other than water, by type (report in tonnes,<br />
kilograms or volume). Provide definitions used for types<br />
of materials.<br />
Safety, health and environment report<br />
EN2 Percentage of materials used that are waste (processed<br />
or unprocessed) from sources external to the reporting<br />
organisation.<br />
Safety, health and environment report<br />
EN5 Total water use. Safety, health and environment report<br />
EN6 Land owned, leased, or managed in biodiversity-rich habitats. Safety, health and environment report<br />
EN7 Description of major impacts on biodiversity, associated with<br />
the organisation’s activities and/or products and services in<br />
terrestrial, freshwater and marine environments.<br />
Safety, health and environment report<br />
Social performance indicators<br />
Labour practices and decent work<br />
LA1 Breakdown of workforce. Human capital management report<br />
LA2 Percentage of employees represented by independent<br />
trade unions.<br />
Human capital management report<br />
LA3 Occupational accidents and diseases. Safety, health and environment report<br />
LA4 Standard injury, lost day and absentee rates and number of<br />
work-related fatalities.<br />
Safety, health and environment report<br />
LA5 Description of policies or programmes on HIV/AIDS. Safety, health and environment report<br />
LA6 Average hours of training per year per employee by category<br />
of employee.<br />
Human capital management report<br />
LA7 Equal opportunity policies or programmes. Human capital management report<br />
LA8 Composition of senior management and corporate Chief officers and management team<br />
governance bodies. Corporate governance report
espond<br />
to competitive<br />
challenges<br />
Performance review<br />
Five year operational review 86<br />
Operational review 87<br />
Three year financial review 104<br />
Financial review 105<br />
Group<br />
overview<br />
Management<br />
review<br />
Sustainability<br />
review<br />
Performance<br />
review<br />
Financial<br />
statements<br />
Company<br />
Financial<br />
Information
86<br />
<strong>Telkom</strong> Annual Report 2009<br />
Five year operational review<br />
for the years ended March 31<br />
2005 2006 2007 2008 2009 CAGR (%)<br />
Fixed-line operational data<br />
ADSL subscribers 1 58,278 143,509 255,633 412,190 548,015 75.1<br />
Calling plan subscribers – 62,803 272,071 464,038 590,590 111.1<br />
Closer subscribers – 62,803 266,300 451,122 575,812 109.3<br />
Supreme call subscribers – – 5,771 12,916 14,778 60.0<br />
W-CDMA subscribers – – – – 5,253 n/a<br />
Fixed access lines (’000) 1 4,726 4,708 4,642 4,533 4,451 (1.5)<br />
Post-paid – PSTN 3,006 2,996 2,971 2,893 2,769 (2.0)<br />
Post-paid – ISDN channels 664 693 718 754 781 4.1<br />
Prepaid 887 854 795 743 766 (3.6)<br />
Payphones 169 165 158 143 135 (5.5)<br />
Fixed-line penetration rate (%) 10.1 10.0 9.8 9.5 9.1 (2.6)<br />
Revenue per fixed access line (Z<strong>AR</strong>) 5,250 5,304 5,275 5,250 5,349 0.5<br />
Total fixed-line traffic (millions of minutes) 31,706 31,015 29,323 26,926 24,869 (5.9)<br />
Local 19,314 18,253 14,764 11,317 8,822 (17.8)<br />
Long distance 4,453 4,446 4,224 3,870 3,631 (5.0)<br />
Fixed-to-mobile 3,911 4,064 4,103 4,169 4,126 1.3<br />
International outgoing 415 515 558 635 622 10.6<br />
International VoIP 89 83 38 43 34 (21.4)<br />
Subscription based calling plans – – 1,896 2,997 3,546 36.8<br />
Interconnection 3,524 3,654 3,740 3,895 4,088 3.8<br />
Domestic mobile interconnection 2,206 2,299 2,419 2,502 2,484 3.0<br />
Domestic fixed interconnection – – – 113 415 n/a<br />
International interconnection 1,318 1,355 1,321 1,280 1,189 (2.5)<br />
Managed data network sites 11,961 16,887 21,879 25,112 29,979 25.8<br />
Internet all access subscribers 2 225,280 282,927 302,593 358,066 423,196 17.1<br />
Fixed-line employees 28,972 25,575 25,864 24,879 23,520 (5.1)<br />
Fixed access lines per fixed-line employee 3 163 184 180 182 189 3.8<br />
(1) Excludes <strong>Telkom</strong> internal lines.<br />
(2) Includes <strong>Telkom</strong> Internet ADSL, ISDN, WiMAX and dial-up subscribers.<br />
(3) Based on number of fixed-line employees, excluding subsidiaries.<br />
Mobile operational data 4<br />
Total mobile customers (’000) 15,483 23,520 30,150 33,994 39,614 26.5<br />
South Africa<br />
Mobile customers (’000) 12,838 19,162 23,004 24,821 27,625 21.1<br />
Contract 1,872 2,362 3,013 3,541 3,946 20.5<br />
Prepaid 10,941 16,770 19,896 21,177 23,561 21.1<br />
Community services telephones 25 30 95 103 118 47.4<br />
Mobile churn (%) 27.1 17.7 33.8 42.3 40.1 10.3<br />
Contract 9.1 10.0 9.7 8.3 9.9 2.1<br />
Prepaid 30.3 18.8 37.5 47.9 45.4 10.6<br />
Estimated mobile market share (%) 5 56 58 58 55 53 (1.4)<br />
Mobile penetration (%) 49.5 70.6 84.2 94.3 108.0 21.5<br />
Total mobile traffic (millions of minutes) 14,218 17,066 20,383 22,769 24,383 14.4<br />
Mobile <strong>AR</strong>PU (Z<strong>AR</strong>) 6 163 139 128 128 133 (5.0)<br />
Contract 624 572 517 486 474 (6.6)<br />
Prepaid 78 69 63 62 68 (3.4)<br />
Community services 2,321 1,796 902 689 534 (30.7)<br />
Mobile employees 7 3,919 4,305 4,727 4,849 5,451 8.6<br />
Mobile customers per mobile employee 7 3,276 4,451 4,867 5,119 5,068 11.5<br />
Other African countries<br />
Mobile customers (’000) 2,645 4,358 7,146 9,173 11,989 45.9<br />
Mobile employees 8 1,074 1,154 1,522 1,992 2,336 21.4<br />
Mobile customers per mobile employee 8 2,463 3,776 4,695 4,605 5,132 20.1<br />
Gateway employees – – – – 389 n/a<br />
(4) 100% of Vodacom data.<br />
(5) Based on Vodacom estimates.<br />
(6) With effect from April 1, 2008, <strong>AR</strong>PU calculations include revenues from national roamers and international visitors roaming on Vodacom’s network.<br />
Historical <strong>AR</strong>PU numbers have been restated in line with this new methodology.<br />
(7) Includes Holding company and Mauritian employees and temporary employees.<br />
(8) Includes temporary employees.<br />
Multi-Links<br />
Subscribers – – 185,619 813,392 2,516,109 268.2<br />
Employees – – – 782 1,124 n/a<br />
Permanent – – – 680 775 n/a<br />
Expatriate – – – 71 95 n/a<br />
Temporary<br />
Africa Online<br />
– – – 31 254 n/a<br />
Subscribers9,10 – – n/a 17,252 18,441 n/a<br />
Employees – – 317 379 313 (0.6)<br />
(9) 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<br />
been restated.<br />
(10) Excluding UUNet joint venture partner’s subscribers in Kenya. UU-Net had 300 and 320 subscribers as at March 31, 2008 and 2009, respectively.
Operational review<br />
History and development of the<br />
Company<br />
<strong>Telkom</strong> was incorporated on September<br />
30, 1991 as a public limited liability<br />
company registered under the South<br />
African Companies Act No. 61 of 1973,<br />
as amended.<br />
Registration number: 1991/005476/06<br />
The Company’s principal executive offices<br />
are located at:<br />
<strong>Telkom</strong> Towers North<br />
152 Proes Street<br />
Pretoria<br />
0002<br />
Gauteng Province<br />
South Africa<br />
Telephone number: +27 (0)12 311 3566<br />
Website address: http://www.telkom.co.za<br />
Historical background<br />
Prior to 1991, the former Department of<br />
Posts and Telecommunications of South<br />
Africa exclusively provided telecommunications<br />
and postal services in South Africa.<br />
In 1991, the government of South Africa<br />
transferred the entire telecommunications<br />
enterprise of the Department of Posts and<br />
Telecommunications of South Africa to a<br />
new entity, <strong>Telkom</strong>, as part of a<br />
commercialisation process intended to<br />
liberalise certain sectors of South Africa’s<br />
economy. <strong>Telkom</strong> remained a wholly stateowned<br />
enterprise until May 14, 1997,<br />
when the government of South Africa sold<br />
a 30% equity interest in <strong>Telkom</strong> to Thintana<br />
Communications LLC, a strategic equity<br />
investor beneficially owned by SBC<br />
Communications Inc. and Telekom Malaysia<br />
S.D.N. Berhard. On March 7, 2003, we<br />
completed our initial public offering and<br />
listing on the JSE and NYSE, pursuant to<br />
which the government of South Africa sold<br />
a total of 154,199,467 ordinary shares,<br />
including 14,941,513 ordinary shares<br />
through the exercise of an over-allotment<br />
option.<br />
Sale and unbundling of Vodacom<br />
shareholding<br />
Effective as of April 20, 2009, <strong>Telkom</strong><br />
concluded the sale and unbundling of its<br />
interest in Vodacom, pursuant to which the<br />
following inter-conditional transactions<br />
occurred:<br />
• <strong>Telkom</strong> sold a 15% stake in Vodacom<br />
for R22.5 billion of cash less the<br />
attributable net debt of Vodacom as at<br />
September 30, 2008 and 15% of any<br />
dividends, and any secondary taxation<br />
on companies (STC) levied thereon,<br />
which amounted to R20,583 million.<br />
• <strong>Telkom</strong> distributed to its shareholders a<br />
sum equal to 50% of the after-tax<br />
proceeds from the sale to Vodacom, net<br />
of any STC levied thereon (R19 per<br />
share) by way of a special dividend.<br />
• Vodacom converted to a public<br />
company and was listed on the main<br />
board of the JSE Limited on May 18,<br />
2009; and<br />
• <strong>Telkom</strong> distributed its remaining 35%<br />
stake in Vodacom to eligible <strong>Telkom</strong><br />
shareholders in proportion to their<br />
shareholdings in <strong>Telkom</strong>, by way of an<br />
unbundling in terms of Section 90 of the<br />
Companies Act 61 of 1973, as<br />
amended, and Section 46 of the<br />
Income Tax Act 58 of 1962, as<br />
amended.<br />
On June 2, 2009, <strong>Telkom</strong> completed a<br />
placement of 28,993,233 shares of<br />
Vodacom, on behalf of ineligible foreign<br />
shareholders, with institutional investors<br />
through an accelerated bookbuild offering,<br />
pursuant to Regulation S under the US<br />
Securities Act of 1933. The Vodacom<br />
shares were placed at a price of R53.00<br />
per share, raising gross proceeds of<br />
R1.54 billion for such ineligible foreign<br />
shareholders. The proceeds from the<br />
offering, net of applicable fees, expenses,<br />
taxes and charges, were distributed to the<br />
<strong>Telkom</strong> Annual Report 2009 87<br />
ineligible foreign shareholders in<br />
proportion to their entitlement to Vodacom<br />
shares. JP Morgan Securities Limited acted<br />
as the Sole Bookrunner for the placement.<br />
For further information on this transaction<br />
please refer to the detailed announcements<br />
posted on the Investor Relations website at<br />
www.telkom.co.za.<br />
Delisting on the New York Stock<br />
Exchange<br />
Given the current global economic climate<br />
and the business imperative for <strong>Telkom</strong> to<br />
reduce its cost base, the Board has<br />
decided to delist from the New York Stock<br />
Exchange. Maintaining a listing in the<br />
United States is expensive and takes<br />
considerable management time. The<br />
methodology employed and discipline<br />
gained from compliance with the<br />
Sarbanes-Oxley reporting requirements<br />
will be retained, where appropriate, to<br />
ensure strict corporate governance<br />
compliance and transparent financial<br />
reporting.<br />
<strong>Telkom</strong> is comfortable that the JSE provides<br />
sufficient access to capital from both South<br />
African and global investors. <strong>Telkom</strong><br />
intends to maintain a level 1 American<br />
Depositary Receipt programme to facilitate<br />
over-the-counter trading in the United States<br />
of America.<br />
Senior management<br />
On November 14, 2008, the Board<br />
announced that our business would be split<br />
into three operational units – <strong>Telkom</strong> SA,<br />
<strong>Telkom</strong> International and <strong>Telkom</strong> Data<br />
Centre Operations, effective from April 1,<br />
2009. On April 15, 2009 Thami<br />
Msimango was appointed Managing<br />
Director of the <strong>Telkom</strong> International business<br />
unit. On May 1, 2009 Nombulelo Moholi<br />
was appointed Managing Director of<br />
<strong>Telkom</strong> SA and on July 30, 2009<br />
Pierre Marais was appointed as acting<br />
Managing Director of <strong>Telkom</strong> Data Centre<br />
Operations.<br />
Group<br />
overview<br />
Management<br />
review<br />
Sustainability<br />
review<br />
Performance<br />
review<br />
Financial<br />
statements<br />
Company<br />
Financial<br />
Information
88<br />
<strong>Telkom</strong> Annual Report 2009<br />
Operational review (continued)<br />
Peter Nelson was appointed Chief<br />
Financial Officer on December 8, 2008.<br />
On July 7, 2009 <strong>Telkom</strong> announced the<br />
appointment of Jeffrey Hedberg as Chief<br />
Executive Officer of Multi-Links.<br />
Segmental reporting and discontinued<br />
operations<br />
At the beginning of 2009, Multi-Links was<br />
added as a separate financial reporting<br />
segment. Our four reporting segments are<br />
now fixed-line, Multi-Links, mobile and<br />
other. The other segment includes Trudon,<br />
formerly TDS Directory Operations; Africa<br />
Online; Swiftnet and <strong>Telkom</strong> Media.<br />
Discontinued operations include Vodacom,<br />
Swiftnet and <strong>Telkom</strong> Media.<br />
Acquisitions and investments<br />
During the year under review we purchased<br />
an additional 25% of Multi-Links in Nigeria,<br />
giving us 100% control of the company. In<br />
addition, after year end we acquired<br />
MWEB Africa and 75% of MWEB<br />
Namibia from Naspers and we sold our<br />
75% shareholding in <strong>Telkom</strong> Media to<br />
Shenzhen Media South Africa.<br />
Strategic agreement with AT&T<br />
On April 16, 2009 we entered into a<br />
strategic memorandum of understanding<br />
with global communications leader AT&T to<br />
enable the Company to extend its reach<br />
into sub-Saharan Africa to service corporate<br />
customers and boost our strategy to grow a<br />
strong local footprint in Africa.<br />
Business summary<br />
We are one of the largest companies<br />
registered in South Africa and one of the<br />
largest communications service providers in<br />
Africa based on operating revenue and<br />
assets. As of March 31, 2009, we had<br />
total assets of R85.8 billion; operating<br />
revenue from continuing operations of<br />
R35.9 billion; approximately 4.5 million<br />
telephone access lines with 99.9% of these<br />
connected to digital exchanges.<br />
We offer our customers fixed-line voice<br />
services, fixed-line and wireless data<br />
services and mobile communications<br />
services. Other services include the Trudon<br />
Group, our directory services, Multi-Links<br />
and MWEB Africa subsidiaries.<br />
Overview<br />
Our fixed-line segment is our largest<br />
business segment and includes our fixedline<br />
voice, data and internet businesses.<br />
<strong>Telkom</strong>’s fixed-line services comprise:<br />
• Fixed-line subscription and connection<br />
services to postpaid, prepaid and<br />
private payphone customers using PSTN<br />
lines including ISDN lines, and the sale<br />
of subscription based value-added voice<br />
services and customer premises<br />
equipment (CPE) rental and sales.<br />
• Fixed-line traffic services to postpaid,<br />
prepaid and payphone customers<br />
including local, long distance, fixed-tomobile,<br />
international outgoing and<br />
international Voice over Internet Protocol<br />
(VoIP) traffic services.<br />
• Interconnection services, including<br />
terminating and transiting traffic from<br />
South African mobile operators and<br />
international operators, as well as<br />
transiting traffic from mobile to<br />
international destinations, and<br />
• Data and internet services, including<br />
domestic and international data<br />
transmission services, such as point-topoint<br />
leased lines, ADSL services,<br />
W-CDMA packet based services,<br />
managed data networking services, as<br />
well as internet access and related<br />
information technology services.<br />
Products and services<br />
Subscriptions and connections<br />
<strong>Telkom</strong> provides post-paid, prepaid and<br />
private payphone customers with digital<br />
and analogue fixed-line access services<br />
including PSTN lines, ISDN lines, and<br />
wireless access between a customer’s<br />
premises and our fixed-line network. Each<br />
analogue PSTN line includes one access<br />
channel, each basic rate ISDN line<br />
includes two access channels and each<br />
primary rate ISDN line includes 30 access<br />
channels. Each ISDN line transmits signals<br />
at speeds of 64 Kbps per channel.<br />
Subscriptions to ADSL are included in our<br />
data services revenue.<br />
We were the first fixed-line operator<br />
globally to provide a prepaid service on a<br />
fixed-line network. Our prepaid service<br />
offers customers an alternative to the<br />
conventional post-paid fixed-line telephone<br />
Year ended March 31,<br />
2008/2007 2009/2008<br />
(in thousands, except percentages) 2007 2008 2009 % change % change<br />
Post-paid PSTN (1) 2,971 2,893 2,769 (2.6) (4.3)<br />
Business 1,426 1,429 1,396 0.2 (2.3)<br />
Residential 1,545 1,464 1,373 (5.2) (6.2)<br />
Prepaid PSTN 795 743 766 (6.5) 3.1<br />
ISDN channels 718 754 781 5.0 3.6<br />
Payphones (2) 158 142 135 (10.1) (4.9)<br />
Total fixed access lines (3) 4,642 4,532 4,451 (2.4) (1.8)<br />
(1) Excluding ISDN channels. PSTN lines are provided using copper cable, DECT and fibre.<br />
(2) Includes public and private payphones.<br />
(3) Total fixed access lines are comprised of PSTN lines, including ISDN channels, prepaid lines, ADSL lines and public and private payphones, but excluding<br />
internal lines in service. Each analogue PSTN line includes one access channel, each basic rate ISDN line includes two access channels and each primary<br />
rate ISDN line includes 30 access channels.
service. All costs including installation,<br />
telephone equipment, line rental and call<br />
charges are paid in advance, eliminating<br />
the need for monthly telephone bills. We<br />
target our prepaid service mainly at firsttime<br />
residential customers who do not have<br />
sufficient credit history, and are located in<br />
areas where we can provide access to our<br />
network without significant additional<br />
investment. Customers who have previously<br />
had their telephone service disconnected<br />
due to non-payment are also encouraged<br />
to migrate to our prepaid service option in<br />
order to reduce future non-payments while<br />
satisfying demand for our services.<br />
We also offer a broad range of valueadded<br />
voice services on a subscription or<br />
usage basis including call forwarding, call<br />
waiting, conference calling, voicemail, tollfree<br />
calling, ShareCall which permits<br />
callers and recipients to share call costs,<br />
speed dialling, enhanced fax services and<br />
calling card services for payphones. These<br />
services complement our basic voice<br />
services and provide us with additional<br />
revenue while satisfying customer demand,<br />
enhancing our brand and increasing<br />
customer loyalty. Value-added voice<br />
services such as our CallAnswer voicemail<br />
service are also bundled with value-added<br />
calling plans such as <strong>Telkom</strong> Closer, to<br />
further enhance the value of these services<br />
to our customers.<br />
We provide payphone services throughout<br />
South Africa. As at March 31, 2009,<br />
<strong>Telkom</strong> operated approximately 132,208<br />
public payphones and approximately<br />
3,146 private payphones, of which<br />
approximately 39% were coin-operated<br />
and combination payphones, and the<br />
remainder card-operated payphones.<br />
The table opposite presents information<br />
regarding our post-paid and prepaid lines<br />
as well as payphones as at the dates<br />
indicated, excluding our internal lines.<br />
The table above shows information related<br />
to the number of our fixed access lines in<br />
service, net line growth and churn for the<br />
periods. Churn is calculated by dividing<br />
the number of disconnections by the<br />
average number of fixed access lines in<br />
service during the year.<br />
Connections include new line orders resulting<br />
primarily from changes in service and, to a<br />
lesser extent, new line roll-out. Disconnections<br />
include both customer-initiated disconnections<br />
and <strong>Telkom</strong>-initiated disconnections. Included<br />
in disconnections and churn are those<br />
customers who have terminated their service<br />
with <strong>Telkom</strong> and subsequently subscribed to a<br />
new service with <strong>Telkom</strong> as a result of<br />
relocation or change of subscription to a<br />
different type of service.<br />
Value-enhancing bundles<br />
During the year under review, <strong>Telkom</strong><br />
continued to focus on customer retention<br />
and offering value for money by<br />
continuously enhancing packages such as<br />
PC bundles and <strong>Telkom</strong> Closer, including<br />
the following:<br />
From August 1, 2009, Closer customers<br />
will have the option to choose between<br />
CallAnswer and Identicall. Currently the<br />
package includes only CallAnswer.<br />
<strong>Telkom</strong> Closer 1<br />
Includes line rental, CallAnswer, a minimum<br />
flat-rate charge for calls during off-peak<br />
<strong>Telkom</strong> Annual Report 2009 89<br />
Year ended March 31,<br />
2008/2007 2009/2008<br />
(in thousands, except percentages) 2007 2008 2009 % change % change<br />
Opening balance 4,708 4,642 4,532 (1.4) (2.4)<br />
Net line growth (66) (110) (81) (66.7) (26.4)<br />
Connections 572 497 482 (13.1) (3.0)<br />
Disconnections (638) (607) (563) (4.9) (7.2)<br />
Closing balance 4,642 4,532 4,451 (2.4) (1.8)<br />
Chum (%) 13.6 13.3 12.5 (2.2) (6.0)<br />
time up to one hour, a discounted per<br />
record rate for local and long distance<br />
calls subject to a minimum charge, as well<br />
as 30 free local minutes during standard<br />
time introduced since August 2007. In<br />
addition, with effect from August 2008,<br />
this package includes 60 free local internet<br />
minutes during off-peak time.<br />
<strong>Telkom</strong> Closer 2<br />
Includes line rental, CallAnswer, unlimited<br />
free calls during off-peak time up to one<br />
hour, a discounted per record rate for local<br />
and long distance calls subject to a<br />
minimum charge, as well as 30 free local<br />
minutes during standard time introduced in<br />
August 2007. In addition, with effect from<br />
August 2008, this package includes<br />
60 free local internet minutes during offpeak<br />
time.<br />
<strong>Telkom</strong> Closer 3<br />
Includes line rental, CallAnswer, 1,300<br />
inclusive free peak-time minutes, unlimited<br />
free calls during off-peak time up to one<br />
hour, a discounted per second rate for<br />
local and long distance calls subject to a<br />
minimum charge, as well as reduced rates<br />
to selected international destinations and<br />
pure per second billing for fixed-to-mobile<br />
calls since August 2007.<br />
<strong>Telkom</strong> Closer 4<br />
All the benefits of <strong>Telkom</strong> Closer 3 bundled<br />
with Fast DSL up to 384 Kbps.<br />
<strong>Telkom</strong> Closer 5<br />
All the benefits of <strong>Telkom</strong> Closer 3 bundled<br />
with Fastest DSL up to 4096 Kbps.<br />
<strong>Telkom</strong> Closer plans 1 to 3 have an option<br />
to purchase 150 or 75 local internet hours<br />
during call more time.<br />
Group<br />
overview<br />
Management<br />
review<br />
Sustainability<br />
review<br />
Performance<br />
review<br />
Financial<br />
statements<br />
Company<br />
Financial<br />
Information
90<br />
<strong>Telkom</strong> Annual Report 2009<br />
Operational review (continued)<br />
The <strong>Telkom</strong> Closer packages have<br />
performed well, increasing by 27.6% to<br />
575,812 plans. Supreme call packages,<br />
targeted at the business segment, have<br />
increased by 14.4% to 14,778 packages<br />
and PC bundles have increased 48.3% to<br />
11,336. <strong>Telkom</strong> continues to be successful<br />
in tying in large corporate customers to<br />
term and volume discount plans. Annuity<br />
revenue streams, which exclude line<br />
installations, reconnection fees and<br />
CPE sales, have increased by 6.8% to<br />
R7.4 billion. <strong>Telkom</strong> will seek to continue<br />
converting revenue streams to annuity<br />
revenues. This will be done largely through<br />
bundling call minutes and ADSL services<br />
with access line rental in attractive<br />
subscription based value propositions. This<br />
is an important strategy for delivering<br />
greater value to our customers. Our current<br />
line penetration of bundled products is<br />
41.7% and we are targeting a penetration<br />
of 56% by 2013/14.<br />
Pricing is a key element of the value<br />
proposition and our pricing strategy is<br />
aimed at improving our competitiveness in<br />
areas where competition is expected to<br />
intensify and where arbitrage opportunities<br />
exist. <strong>Telkom</strong>’s strategy to counter pricing<br />
pressures is as follows:<br />
• Actively offer value based calling plans<br />
and bundles to extend value and<br />
savings to our customers.<br />
• Reduce international and long distance<br />
rates to reduce arbitrage opportunities;<br />
• Rebalance standard/off-peak local<br />
rates, to better align these with<br />
international norms and improve our<br />
competitive position; and<br />
• Reduce and rebalance national and<br />
international data prices to improve our<br />
competitive position.<br />
The decrease in the number of subscriber<br />
lines was largely in the residential postpaid<br />
PSTN line and, to a lesser extent,<br />
business post-paid PSTN lines, partially<br />
offset by an increase in ISDN channels.<br />
The decrease in the number of residential<br />
post-paid PSTN lines was mainly due to the<br />
introduction of competition in the fixed-line<br />
arena from Neotel, including due to<br />
customers relocating and changing<br />
providers, customer migration to mobile<br />
and higher bandwidth products and, to a<br />
lesser extent, cable theft incidents. The<br />
increase in prepaid services in the 2009<br />
financial year was due primarily to our<br />
lower priced “Waya-Waya” offering,<br />
which accounted for approximately 60.2%<br />
of prepaid services as of March 31,<br />
2009. The increase in ISDN channels and<br />
ADSL services was mainly driven by<br />
increased demand for higher bandwidth<br />
and functionality. This is evident in the 6%<br />
growth in ISDN Primary rates and the 33%<br />
growth in ADSL services. The upgrading of<br />
DSL 1024 to DSL 4096 increased the<br />
attractiveness of this DSL band, with<br />
customers migrating from DSL 512 to the<br />
high speed offering despite the added<br />
cost. <strong>Telkom</strong>’s aggressive marketing<br />
campaigns for Do Broadband products,<br />
also contributed to the ADSL growth. In the<br />
2009 fiscal year, <strong>Telkom</strong> introduced a<br />
wireless W-CDMA service to combat the<br />
effects of theft, as well as grow market<br />
share in anticipation of <strong>Telkom</strong> moving into<br />
the mobile market. Connections to our<br />
wireless W-CDMA service are included in<br />
our numbers of subscribers, but not lines.<br />
We also offer telecommunications equipment<br />
rentals and sales such as telephones<br />
and private branch exchange (PABX)<br />
systems, as well as related post-sales<br />
maintenance and service for residential<br />
and business customers in South Africa.<br />
The market in South Africa for such<br />
equipment and systems, commonly known<br />
as customer premises equipment (CPE), is<br />
characterised by high competition and low<br />
profit margins. We believe, however, that<br />
the supply and servicing of CPE is an<br />
essential part of providing a full service<br />
to our customers and in the process<br />
stimulating usage on our network.<br />
Traffic minutes<br />
We offer local, long distance, fixed-tomobile,<br />
international outgoing and<br />
international voice over internet protocol<br />
services to business, residential and<br />
payphone customers throughout South<br />
Africa at tariffs that vary depending on the<br />
destination, length, day and time of call.<br />
The following table presents information<br />
regarding our fixed-line traffic minutes,<br />
excluding interconnection traffic, for the<br />
periods indicated. We calculate fixed-line<br />
traffic by dividing fixed-line traffic revenues<br />
for the particular category by the weighted<br />
average tariff for that category during the<br />
relevant period.<br />
Year ended March 31,<br />
2008/2007 2009/2008<br />
(in millions of minutes, except percentages) 2007 2008 2009 % change % change<br />
Local (1) 14,764 11,317 8,822 (23.3) (22.0)<br />
Long distance (1) 4,224 3,870 3,631 (8.4) (6.2)<br />
Fixed-to-mobile 4,103 4,169 4,126 1.6 (1.0)<br />
International outgoing 558 635 622 13.8 (2.0)<br />
International voice over internet protocol 38 43 34 13.2 (20.9)<br />
Subscription based calling plans 1,896 2,997 3,546 58.1 18.3<br />
Total 25,583 23,031 20,781 (10.0) (9.8)<br />
(1) Local and long distance traffic includes dial-up Internet traffic.
Traffic was adversely affected in both the<br />
2009 and 2008 financial years by the<br />
increasing substitution of calls placed using<br />
mobile services rather than our fixed-line<br />
service and dial-up internet traffic being<br />
substituted by our ADSL service, as well as<br />
the decrease in the number of residential<br />
post-paid PSTN lines and increased<br />
competition in our payphone business. In<br />
addition, the 2009 financial year traffic<br />
was adversely affected by customer<br />
migration to broadband services offered<br />
by mobile operators.<br />
The table above sets forth information<br />
regarding interconnection traffic terminating<br />
on or transiting through our network for<br />
the periods indicated. We calculate<br />
interconnection traffic, other than<br />
international outgoing mobile traffic and<br />
international interconnection traffic, by<br />
dividing interconnection revenue for the<br />
particular category by the weighted<br />
average tariff for such category during the<br />
relevant period. Fixed-line international<br />
outgoing mobile traffic and international<br />
interconnection traffic are based on the<br />
traffic registered through the respective<br />
exchanges and reflected in international<br />
interconnection invoices.<br />
The increase in domestic mobile<br />
interconnection traffic in the years ended<br />
March 31, 2009 and 2008 was primarily<br />
due to an overall increase in mobile calls<br />
as a result of growth in the mobile market,<br />
partially offset by increased mobile-tomobile<br />
calls bypassing our network. The<br />
decrease in domestic mobile interconnection<br />
traffic in the 2009 financial<br />
year was primarily due to increased<br />
mobile-to-mobile calls bypassing our<br />
network.<br />
Domestic fixed interconnection traffic<br />
includes traffic from Neotel, USALs and<br />
VANS. The increase in domestic fixed<br />
interconnection traffic in the year under<br />
review was mainly due to increased<br />
competition.<br />
International interconnection traffic<br />
decreased in the 2009 and 2008<br />
financial years due to a decrease in<br />
volumes as a result of loss of volumes to<br />
Neotel, Sentech, the USALs and illegal<br />
operators terminating traffic in the country.<br />
The decrease was partially offset by<br />
increased international hubbing traffic in<br />
the year under review.<br />
Tariff rebalancing<br />
We made significant progress in<br />
rebalancing our fixed-line tariffs. Our tariff<br />
rebalancing programme was historically<br />
aimed at better aligning our fixed-line traffic<br />
charges with underlying costs and<br />
international norms. We expect that our<br />
tariff rebalancing in future will focus more<br />
on the relationship between the actual<br />
costs and tariffs of subscriptions,<br />
connections and traffic in order to more<br />
accurately reflect underlying costs, and in<br />
response to increased competition.<br />
Regulations under the Telecommunications<br />
Act, which remain in effect, impose a price<br />
cap on a basket of <strong>Telkom</strong>’s specified<br />
services including installations, prepaid<br />
and post-paid line rental, local, long<br />
distance and international calls, fixed-tomobile<br />
calls, public payphone calls, ISDN<br />
services, our Diginet product and our<br />
Megaline product. A similar cap applies to<br />
a sub-basket of those services provided to<br />
residential customers, including leased<br />
<strong>Telkom</strong> Annual Report 2009 91<br />
Year ended March 31,<br />
2008/2007 2009/2008<br />
(in millions of minutes, except percentages) 2007 2008 2009 % change % change<br />
Domestic mobile interconnection traffic 2,419 2,502 2,484 3.4 (0.7)<br />
Domestic fixed interconnection traffic – 113 415 n/a 267.3<br />
International interconnection traffic 1,321 1,280 1,189 (3.1) (7.1)<br />
Total 3,740 3,895 4,088 4.1 5.0<br />
lines up to and including lines of 2 Mbps<br />
of capacity and the rental and installation<br />
of business exchange lines. Approximately<br />
57% of our operating revenue for the year<br />
ended March 31,2008 was included in<br />
this basket, compared to approximately<br />
54% in the year ended March 31, 2009.<br />
Our tariffs for these services are filed with<br />
ICASA for approval. The price cap<br />
operates by restricting the annual<br />
percentage increase in revenues from all<br />
services included in the basket that are<br />
attributable solely to changes in annual<br />
inflation, measured by changes in the<br />
consumer price index, less a specified<br />
percentage.<br />
Historically, the annual permitted<br />
percentage increase in revenues from both<br />
the whole basket and the residential subbasket<br />
was 1.5% below inflation. Effective<br />
from August 1, 2005 through July 31,<br />
2008, the annual permitted increase in<br />
revenues from both the whole basket and<br />
the residential sub-basket was lowered to<br />
3.5% below inflation, and ADSL products<br />
and services have been added to the<br />
basket. In addition, the price of no<br />
individual service within the residential subbasket<br />
can be increased by more than 5%<br />
above inflation except where specific<br />
approval has been received from ICASA,<br />
and pursuant to the Electronic Communications<br />
Act, revenue generated from<br />
services where we have significant market<br />
power may not be used to subsidise<br />
competitive services. Early in 2008,<br />
ICASA commissioned a review of the<br />
existing price control regulations<br />
applicable to <strong>Telkom</strong>; however, ICASA has<br />
not initiated the statutory public process of<br />
reviewing the existing regulations. <strong>Telkom</strong> is<br />
Group<br />
overview<br />
Management<br />
review<br />
Sustainability<br />
review<br />
Performance<br />
review<br />
Financial<br />
statements<br />
Company<br />
Financial<br />
Information
92<br />
<strong>Telkom</strong> Annual Report 2009<br />
Operational review (continued)<br />
awaiting communications from ICASA in<br />
respect of proposed timelines for the<br />
review.<br />
ICASA approved a 2.1% reduction in the<br />
overall tariffs for services in the basket<br />
effective August 1, 2006, a 1.2%<br />
reduction in the overall tariffs for services in<br />
the basket effective August 1, 2007 and a<br />
2.4% increase on its regulated basket of<br />
products and services effective August 1,<br />
2008. On June 22, 2009, <strong>Telkom</strong> filed<br />
with ICASA proposed average price<br />
increases on its regulated basket of<br />
products and services of 1.7% as a result<br />
of inflation increases, effective August 1,<br />
2009. The price control formula would<br />
have permitted <strong>Telkom</strong> to apply for a<br />
19.7% price increase due to the high<br />
consumer price index in South Africa and<br />
excess carryover of lower price increases<br />
for prior periods. Our tariffs are subject to<br />
approval by the regulatory authorities. All<br />
tariffs include value-added tax (VAT) at a<br />
rate of 14%.<br />
Data<br />
Leased lines<br />
A large number of leased lines are<br />
provided to the mobile operators at<br />
negotiated wholesale rates for the build-out<br />
of their networks. With the growth in traffic<br />
carried on the mobile networks, a need<br />
was identified for the deployment within<br />
these networks of transmission links with<br />
speeds higher than the 2 Mbps provided<br />
by existing agreements. We have<br />
broadband fixed-link leasing agreements<br />
with Vodacom, MTN and Cell C. These<br />
agreements have been enhanced over<br />
time, and we currently provide broadband<br />
links at speeds of 45 Mbps, 155 Mbps<br />
and 622 Mbps, and anticipate that we<br />
will soon be providing links at speeds of<br />
2.5 Gbps. Formalised service level<br />
agreements as well as term and volume<br />
based discount structures, as a counter to<br />
the competitive challenges that are<br />
occurring in this area of the business, have<br />
been implemented.<br />
Recognising the increasing threat of<br />
competition in the provision of leased lines<br />
to the mobile operators, <strong>Telkom</strong> introduced<br />
further discounting structures in the 2007<br />
and 2008 financial years to enhance the<br />
attractiveness of <strong>Telkom</strong>’s product offerings<br />
to this rapidly growing market. Fixed-link<br />
leasing agreements were also entered into<br />
with some of the smaller operators,<br />
including VANS and USALs, as well as with<br />
Neotel. Vodacom and MTN have both<br />
indicated that they intend to self-provide<br />
some of the leased lines, which they require<br />
for the build-out of their networks, as an<br />
alternative to leasing from <strong>Telkom</strong>. We are<br />
currently negotiating improved leased line<br />
prices with the mobile operators in order to<br />
retain revenue from leased lines.<br />
The table below indicates the bandwidth<br />
capacity of our Diginet, Diginet Plus, ATM<br />
Express and broadcasting data<br />
transmission services:<br />
Leased line Bandwidth<br />
Diginet 64 Kbps<br />
Diginet Plus 128 Kbps to 2 Mbps<br />
ATM Express 2 Mbps to 155 Mbps<br />
Broadcasting<br />
Analogue audio 7.5 or 15 KHz<br />
Analogue video 70 MHz<br />
Digital 2 Mbps to 155 Mbps<br />
Managed data networking services<br />
Our managed data networking services<br />
combine our data transmission services<br />
discussed above with active network<br />
management provided through our state-ofthe-art<br />
national network operations centre.<br />
We offer a wide range of integrated and<br />
customised networking management<br />
services, including design, planning,<br />
installation, management and maintenance<br />
of corporate-wide data, voice and video<br />
communications networks, as well as other<br />
value-added services such as capacity,<br />
configuration and software version<br />
management on customers’ networks. To<br />
support our service commitment, we offer<br />
guaranteed service level agreements on a<br />
wide range of our products, which include<br />
guaranteed availability, or uptime, of the<br />
network through the use of our national<br />
network operations centre.<br />
Our managed data networking services<br />
include our customer network care service<br />
which facilitates the network management<br />
of all our data transmission services using<br />
the leased lines or packet based services<br />
discussed above, and our Spacestream<br />
and IVSat products, which are satellite<br />
based products. Spacestream is a high<br />
quality, flexible satellite networking service<br />
that supports data, voice, fax, video and<br />
multimedia applications, both domestically<br />
and in the rest of Africa.<br />
Managed data networking services are<br />
billed on a monthly basis and vary by<br />
customer depending on the particular<br />
services provided and the number of<br />
network sites under management.<br />
As of March 31,<br />
2008/2007 2009/2008<br />
2007 2008 2009 % change % change<br />
Terrestrial based 12,905 17,237 19,042 33.6 10.5<br />
Satellite based 8,974 7,875 (1) 10,937 (2) (12.2) 38.9<br />
Total managed network sites 21,879 25,112 29,979 14.8 19.4<br />
(1) Satellite based managed network sites declined during the 2008 financial year as a result of Uthingo, the South African lottery operator, losing its licence<br />
to operate.<br />
(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.
<strong>Telkom</strong>’s focus on bringing new innovative<br />
products to the market that cater for<br />
increased data usage and converged<br />
services has resulted in our new VPN<br />
products gaining increased traction in the<br />
market. We have increased VPN sites by<br />
20.7% to 14,659. Our VPN Lite products,<br />
which are delivered over the ADSL<br />
network, include advanced self-help and<br />
online charging solutions. This product was<br />
launched during November 2007. <strong>Telkom</strong><br />
is in the process of building on a culture of<br />
research and innovation and fast time-tomarket,<br />
in order to cater for customers who<br />
are increasingly looking for innovative,<br />
easy to use products.<br />
Broadband and converged services continue<br />
to perform well with ADSL subscribers up<br />
33% to 548,015. Do Broadband<br />
subscribers increased 58.1% to 188,540.<br />
Internet all access subscribers increased<br />
18.2% to 423,196. Our current broadband<br />
line penetration rate is 15% and our targeted<br />
penetration rate is 25 by 2013/14.<br />
We have increased DSLAMs throughout<br />
the country by 50.4% to 4,000 sites. We<br />
have installed 91% of ADSL lines within<br />
21 working days where no network build<br />
is required, compared to 79% in the year<br />
ended March 31, 2008 and 74% within<br />
21 working days where network build is<br />
required compared to 66% in the year<br />
ended March 31, 2008. The ADSL Self<br />
Install option is expected to continue to<br />
improve the installation times. As of March<br />
31, 2009, 57% of all ADSL installations<br />
were being done through the Self Install<br />
option.<br />
ADSL allows provisioning of high speed<br />
connections over existing copper wires<br />
using digital compression. We have<br />
different ADSL services available, aimed at<br />
the distinct needs of our customers.<br />
Internet access services and other related<br />
information technology services<br />
<strong>Telkom</strong> is one of the leading internet access<br />
providers in South Africa in the retail and<br />
wholesale internet access provision markets.<br />
We also package our <strong>Telkom</strong>Internet<br />
product with personal computers, ADSL and<br />
ISDN services, as well as our satellite access<br />
products, SpaceStream Express and<br />
SpaceStream Office.<br />
Our South African Internet exchange (SAIX)<br />
is South Africa’s largest internet access<br />
provider, offering dedicated and dial-up,<br />
aDSL and satellite internet connectivity to<br />
internet service providers and value-added<br />
network providers. SAIX has offered fixedline<br />
network internet access through dial-up<br />
service since 1995. SAIX derives revenue<br />
for its access services primarily from<br />
subscription fees paid by internet service<br />
providers and value-added network<br />
providers for access services. In order to<br />
grow the portfolio, an opportunity has been<br />
identified to develop a service targeted<br />
mainly at night-time users of the SAIX ADSL<br />
service. These customers can be regarded<br />
as heavy users as they use the service mainly<br />
for games, music and movie downloading.<br />
The SAIX customer base has expanded<br />
beyond service providers and value-added<br />
network providers, and now includes<br />
Vodacom and other operators in Africa.<br />
These include incumbents in Mozambique,<br />
Namibia, Angola, Zimbabwe and Lesotho.<br />
Broadband and converged services<br />
We have identified an opportunity to<br />
develop a SAIX northern hemisphere<br />
<strong>Telkom</strong> Annual Report 2009 93<br />
The following table indicates our product offerings as at March 31, 2009:<br />
DSL DSL DSL<br />
384 512 4096<br />
Downstream speed Up to 384 Kbps 512 Kbps 4096 Kbps<br />
Upstream speed Up to 128 Kbps 256 Kbps 512 Kbps<br />
internet service targeted at African operators<br />
and ISPs to enhance additional growth of<br />
internet access services north of the equator.<br />
Currently, the customers in this region buy<br />
their internet services from Europe. By<br />
establishing a central SAIX hub in London<br />
we believe we can capture this market and<br />
increase our revenue.<br />
The table below presents information<br />
regarding our wholesale and retail internet<br />
services and customers as at the dates<br />
indicated.<br />
Voice over Internet Protocol network<br />
Softswitch capability has been deployed<br />
as an overlay network to enable the<br />
communication of VoIP services. Our<br />
current VoIP network terminates calls for<br />
numerous international voice carriers into<br />
our fixed-line network as well as local<br />
VANS providers. Call centres from around<br />
the world that have relocated to South<br />
Africa due to favourable economic<br />
conditions and lower resource costs are<br />
also hosted on our VoIP network. <strong>Telkom</strong><br />
has points of presence for connectivity to<br />
the VoIP network in Amsterdam, London,<br />
New York, Ashburn (Washington DC),<br />
Hong Kong, Zambia, Zanzibar, Tanzania,<br />
Senegal and Madagascar. The network<br />
has 69 media gateways and can terminate<br />
some 32,700 voice circuits. The media<br />
gateways compress the traditional voice<br />
channels of 64 Kbps to 8 Kbps channels,<br />
thus enabling us to reduce the cost of<br />
international calls, while maintaining the<br />
perceived voice quality of a 64 Kbps call.<br />
Year ended March 31,<br />
2008/2007 2009/2008<br />
2007 2008 2009 % change % change<br />
Wholesale<br />
Internet leased lines-equivalent 64 kbps 19,247 22,541 24,204 17.1 7.4<br />
Dial-up ports<br />
Retail<br />
11,462 7,010 4,541 (38.8) (35.2)<br />
Internet all access subscribers 302,593 358,066 423,196 18.3 18.2<br />
Group<br />
overview<br />
Management<br />
review<br />
Sustainability<br />
review<br />
Performance<br />
review<br />
Financial<br />
statements<br />
Company<br />
Financial<br />
Information
94<br />
<strong>Telkom</strong> Annual Report 2009<br />
Operational review (continued)<br />
WiFi<br />
In February 2005 <strong>Telkom</strong> launched a hot<br />
spot service that provides wireless data<br />
access through 802.11b/g WiFi<br />
technology. Any user with a wireless-enabled<br />
notebook computer or personal digital<br />
assistant can connect to the service while in<br />
the coverage area. WiFi is mainly targeted<br />
at restaurants, hotel groups, major shopping<br />
malls and some sites on national routes. At<br />
March 31, 2009 <strong>Telkom</strong> had 335 hotspots,<br />
up from 237 at March 31, 2008.<br />
WiMAX<br />
<strong>Telkom</strong> has launched services based on fixed<br />
(IEEE 802. 16-2004) WiMAX technology.<br />
This technology is a standards based<br />
broadband wireless access technology that<br />
provides throughput connectivity in a point-tomultipoint<br />
configuration. The technology is<br />
designed to enable <strong>Telkom</strong> to complement its<br />
ADSL service offering and voice services to<br />
customers in areas affected by fixed-line<br />
copper cable problems. Currently there are<br />
57 WiMAX base stations across all major<br />
cities and towns with 2,615 customers,<br />
including voice and internet customers as of<br />
March 31, 2009.<br />
W-CDMA<br />
We have started rolling out a W-CDMA<br />
Wireless Local Loop (WLL) network in the<br />
2100MHz band. Initially planned to deliver<br />
service in areas plagued by theft, breakages<br />
and incidents, the network is now expected<br />
to evolve into a full mobile network to<br />
compete with other mobile operators. As of<br />
March 31, 2009, we had 141 base<br />
station sites in major metropolitan areas.<br />
Geographic expansion and other<br />
operations<br />
<strong>Telkom</strong> aims to establish itself as a regional<br />
voice and data player through providing a<br />
range of hosting services, managed<br />
solutions, mobile voice and wireless<br />
broadband services. We are also entering<br />
the field of management consulting to<br />
operators. In addition, we are positioning<br />
<strong>Telkom</strong> as a wholesale facilities and<br />
infrastructure enabler for regional incumbents.<br />
Our expansion to date has been through<br />
Multi-Links, a private telecommunications<br />
operator operating in Nigeria and Africa<br />
Online, an internet services provider with<br />
its head office in Kenya and operating in<br />
eight other African countries.<br />
The <strong>Telkom</strong> Group added Multi-Links as a<br />
new segment to its financial reporting for the<br />
2009 financial year. As a result, the <strong>Telkom</strong><br />
Group’s four reporting segments for the<br />
2009 financial year are fixed-line, Multi-<br />
Links, mobile and other. The other segment<br />
includes <strong>Telkom</strong>’s Trudon, formerly known as<br />
TDS Directory Operations, and Africa<br />
Online subsidiaries. The information in this<br />
annual report has been updated to reflect<br />
the above changes to <strong>Telkom</strong>’s reporting<br />
segments.<br />
Trudon<br />
<strong>Telkom</strong> owns 64.9% of Trudon, formerly<br />
known as TDS Directory Operations, the<br />
largest directory publisher in South Africa<br />
providing white and yellow pages<br />
directory services and electronic white<br />
pages. In the year ended March 31,<br />
2009, Trudon published approximately<br />
5.437 million white, 1.995 million yellow<br />
and 7.433 million combined directories.<br />
Trudon also provides electronic yellow<br />
pages and value-added content through full<br />
colour advertisements. Trudon has<br />
improved the accessibility and distribution<br />
of directories through door-to-door delivery<br />
and electronic media. Trudon also provides<br />
national telephone inquiries and directory<br />
services. The remaining 35.1% of Trudon is<br />
owned by Truvo Services South Africa (Pty)<br />
Ltd, formerly known as Maister Directories.<br />
On January 23, 2007, Trudon acquired a<br />
100% shareholding in a shell company<br />
and subsequently renamed it TDS Directory<br />
Operations (Namibia) (Pty) Ltd, which<br />
provides directory services in Namibia.<br />
On October 31, 2008, Trudon sold a<br />
25% interest in TDS Directory Operations<br />
(Namibia) (Pty) Ltd to Ripanga Investment<br />
Holdings (Pty) Ltd, a black economic<br />
empowerment partner in Namibia, for two<br />
million Namibian dollars.<br />
Trudon’s capital expenditure was<br />
R12 million in the 2009 financial year as<br />
the company sought to continue to expand<br />
access and distribution into new markets.<br />
Trudon has invested in a new online<br />
platform in order to combat declining<br />
revenue from printed products.<br />
Trudon’s primary competitors for print<br />
materials include Caxton, Easy Info and<br />
Brabys. Trudon’s primary internet<br />
competitors include Yahoo, Google,<br />
Ananzi, as well as vertical search<br />
capabilities such as Auto Trader and<br />
Supersport. Trudon’s estimated market<br />
share as of March 31, 2009 was<br />
approximately 11% in respect of print<br />
media and approximately 22% in respect<br />
of internet directory services.<br />
Trudon had 531 employees as of March<br />
31, 2009.<br />
Multi-Links<br />
With effect from May 1, 2007, <strong>Telkom</strong><br />
acquired 75% of Multi-Links Telecommunications<br />
Limited, or Multi-Links, through<br />
<strong>Telkom</strong> International, a wholly owned South<br />
African subsidiary, in Nigeria, for<br />
US$280 million, or R1,985 million. The<br />
remaining 25% of Multi-Links was owned<br />
by Kenston Investment Limited, an<br />
investment company based in the Isle of<br />
Man in the United Kingdom. With effect<br />
from January 21, 2009, <strong>Telkom</strong> acquired<br />
the remaining 25% interest in Multi-Links for<br />
US$130 million, thereby increasing its<br />
ownership of Multi-Links to 100%. The<br />
purchase price was subject to a contractual<br />
put option in favour of the minority<br />
shareholder.<br />
Multi-Links is a private telecommunications<br />
operator with a Unified Access Licence<br />
allowing fixed, mobile, data, long distance<br />
and international telecommunications<br />
services to corporate clients, wholesale<br />
and mass markets in Nigeria.<br />
Multi-Links’ Unified Access Licence was<br />
granted on November 1, 2006 and has a<br />
term of 10 years, with seven years<br />
remaining. There are currently<br />
13 operators licensed with Unified Access<br />
Services Licences in Nigeria, making the<br />
Nigerian telecommunications market<br />
extremely competitive as operators may use<br />
any technology to deliver voice, data and<br />
video services to their customers.<br />
We were disappointed with the<br />
performance of Multi-Links. The poor<br />
performance is solely attributable to our<br />
under-estimation of the competitiveness of<br />
the Nigerian market and the aggressive
esponse of the CDMA operators to our<br />
subsidisation of handsets. We also failed<br />
to adequately manage our distribution<br />
channels and opened ourselves up to<br />
exploitation by the dealers. We have learnt<br />
our lessons the hard way. Turning around<br />
Multi-Links is our number one priority.<br />
Multi-Links reported a 124.9% increase in<br />
revenue to R1.9 billion with subscribers<br />
growing 209.3% to 2,516,109 in the<br />
year ended March 31, 2009. Voice and<br />
data revenue contributed 75.0% to total<br />
revenue, handset sales 11.9%, interconnect<br />
revenue 12.6% and SMS 0.5%.<br />
Multi-Links’s slow start in developing an<br />
efficient and well controlled distribution<br />
channel, together with a departure from its<br />
initial strategy of focusing on high <strong>AR</strong>PU<br />
subscribers, the delayed launch of EVDO<br />
and destructive competition in the CDMA<br />
market caused <strong>AR</strong>PU to decline from<br />
US$32 at March 31, 2008 to US$9 at<br />
March 31, 2009. <strong>Telkom</strong> is currently<br />
addressing these challenges as indicated<br />
below.<br />
Operating expenses increased 157.1% to<br />
R2.4 billion primarily as a result of up<strong>front</strong><br />
handset subsidies. The average cost per unit<br />
equalled approximately R400 and subsidies<br />
totalled R281 million. Payment to other<br />
operators contributed 26.9%, selling general<br />
and administrative expenses 46.0%,<br />
employee expenses 5.2%, operating leases<br />
8.0%, service fees 1.6% and depreciation<br />
12.3%.<br />
Multi-Links reported a negative EBITDA<br />
margin of 11.9%, an EBITDA loss of<br />
R226 million for the year ended March 31,<br />
2009 and a net loss of R1.76 billion after<br />
accounting for an impairment of the<br />
deferred tax asset of R301 million. Bad<br />
debts increased 208.2% to R7.9 million.<br />
Multi-Links has begun focusing its attention on<br />
the SMME, corporate and wholesale<br />
markets and mainly on high <strong>AR</strong>PU users. Its<br />
revenue retention and growth strategy will<br />
concentrate on increasing revenue of fixed<br />
wireless and mobile customers through brand<br />
awareness and promotion; expanding<br />
broadband internet to offer high value<br />
bundles and services. Through its extensive<br />
fibre network it will provide high quality<br />
internet protocol/next generation network<br />
services to the government, corporate and<br />
SMME customers whilst extending its metroethernet<br />
services. The reach of its fibre<br />
network also allows Multi-Links to concentrate<br />
on carrier class corporate and wholesale<br />
product and services offerings.<br />
Multi-Links has contracted the service of<br />
Blue Label Telecoms Limited to assist with<br />
the development and management of<br />
our distribution channels, dealerships,<br />
promotional campaigns and inventory<br />
management.<br />
Operating expenses have been driven by<br />
network growth, rehabilitation of<br />
distribution channels, marketing costs and<br />
customer acquisition and maintenance.<br />
Multi-Links is focusing on containing costs<br />
through reducing handset subsidies<br />
drastically, continuing to migrate to an all IP<br />
network in order to reap the benefits of its<br />
cost effective network management<br />
capabilities and securing cost effective<br />
international connectivity through the SAT-3<br />
and other submarine cables.<br />
Capital expenditure increased 112.7% to<br />
R2.8 billion in the year ended March 31,<br />
2009. In the 2009 financial year, Multi-<br />
Links’s build and expansion programme<br />
achieved the following:<br />
• Deployed additional packet based<br />
mobile switching centres increasing the<br />
available capacity from 1,000,000 to<br />
2,800,000 subscribers.<br />
• Extended home location register<br />
capacities from 800,000 to<br />
5,100,000 subscribers.<br />
• Rolled out additional base transmission<br />
stations increasing its total capacity from<br />
800,000 to 1,800,000 subscribers.<br />
• Successfully launched its broadband<br />
service offering by rolling out an EVDO<br />
3G network to a capacity of 100,000<br />
subscribers.<br />
• Added 1,300 kms of optic fibre resulting<br />
in a total to 3,711 kms.<br />
• Increased international capacity by the<br />
addition of 2 x 155Mb services on the<br />
SAT-3 submarine cable system; and<br />
<strong>Telkom</strong> Annual Report 2009 95<br />
• Extended coverage to 22 states and<br />
Abuja.<br />
Turning around Multi-Links’s performance is<br />
vital to <strong>Telkom</strong> given the extent of the<br />
Group’s investment and the enormous<br />
opportunity the Nigerian market provides.<br />
US$100 million has been budgeted for the<br />
2009/10 financial year for the completion<br />
of an additional 1,645 km build and<br />
584 km swop of optic fibre cable for the<br />
DWDM/SDH network. It is anticipated that<br />
the network will connect 80 DWDM/SDH<br />
sites, covering all major cities in Nigeria,<br />
providing us with additional bandwidth<br />
connectivity for voice and data customers.<br />
In addition, 227 cell towers are to be<br />
erected and another 300 commissioned on<br />
third party leased tower infrastructure during<br />
the year. Seven new customer service<br />
centres are planned to facilitate and support<br />
the network growth.<br />
We expect Multi-links to be EBITDA<br />
positive in 2010/11 and to be cash flow<br />
positive by 2011/12.<br />
Africa Online<br />
On February 23, 2007, <strong>Telkom</strong> acquired<br />
100% of the issued share capital of Africa<br />
Online from African Lakes Corporation for<br />
a total cost of R150 million. Africa Online<br />
is an internet service provider active in<br />
Cote d’Ivoire, Ghana, Kenya, Namibia,<br />
Swaziland, Tanzania, Uganda, Zambia<br />
and Zimbabwe. Africa Online’s strategy<br />
focuses on brand development, creation<br />
and development of customer channels,<br />
improvement of network systems, human<br />
resources development and an expansion<br />
drive targeting other African countries.<br />
Africa Online offers wireless and fixed<br />
technologies, hosting and domain<br />
registration to both consumer and<br />
corporate customers.<br />
In the 2009 financial year, Africa Online<br />
had R194 million of revenue and<br />
R216 million of total assets. The major<br />
contributors to revenue were corporate and<br />
consumer wireless and broadband VSAT<br />
services. Consumer wireless revenue<br />
growth was predominantly in East Africa,<br />
while corporate revenue growth was<br />
Group<br />
overview<br />
Management<br />
review<br />
Sustainability<br />
review<br />
Performance<br />
review<br />
Financial<br />
statements<br />
Company<br />
Financial<br />
Information
96<br />
<strong>Telkom</strong> Annual Report 2009<br />
Operational review (continued)<br />
mainly in Ghana and Uganda. The growth<br />
in Pan African business, Ghana and<br />
Tanzania accounted for the increase in<br />
Broadband VSAT. In the 2008 financial<br />
year, Africa Online had R110 million of<br />
revenue, and R122 million of total assets.<br />
In the 2008 financial year, dedicated<br />
corporate links and consumer wireless<br />
were the highest revenue streams followed<br />
closely by dial-up business. Dial-up<br />
packages are the most popular and<br />
accounted for approximately 62% of Africa<br />
Online’s total customers as of March 31,<br />
2009. Wireless customers are expected to<br />
continue to grow with Africa Online’s<br />
continued investment in infrastructure.<br />
The reason for the decrease in the number<br />
of dial-up and ADSL customers is that Africa<br />
Online has shifted its marketing approach<br />
Year ended March 31,<br />
Restated (1) 2008/2007 2009/2008<br />
2007 2008 2009 % change % change<br />
Dial-up ports n/a 12,051 11,437 3.9 (5.1)<br />
Consumer wireless n/a 4,075 5,754 110.2 41.2<br />
Unbundled local loop n/a 99 99 (1.0) –<br />
ADSL n/a 325 308 8.3 (5.2)<br />
VSAT n/a 96 210 269.2 118.8<br />
Dedicated corporate n/a 606 633 4.8 4.5<br />
Total (1) n/a 17,252 18,441 18.6 6.9<br />
UUNet subscribers (2) n/a 300 320 – 6.7<br />
(1) In the 2009 financial year, Africa Online changed the method of counting subscribers to include all the individual corporate sites as individual customers.<br />
The comparative information for the 2008 financial year has been restated.<br />
(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<br />
in UUNet and MTN owns the remaining 60% of UUNet.<br />
to increase customers on its own wireless<br />
network infrastructure as opposed to dialup<br />
and ADSL networks.<br />
Africa Online’s distribution is conducted<br />
through various channels, including direct<br />
sales and different types of resellers<br />
depending on the customer segment.<br />
Customers are serviced through customer<br />
relationship managers and a 24 hour call<br />
centre. Africa Online’s primary competitors<br />
include former telecommunication<br />
companies that have entered the internet<br />
service provider market, mobile providers<br />
and other private data companies.<br />
Africa Online’s network had 29 points of<br />
presence, 46 mobile broadband transceiver<br />
stations, 31 fixed broadband wireless<br />
access transceiver stations, eight network<br />
operation and 17 support centres and eight<br />
data centres across nine countries as of<br />
March 31, 2009. Africa Online’s capital<br />
expenditure was US$7 million in the 2009<br />
financial year, US$5.7 million in the 2008<br />
financial year and US$0.8 million in the<br />
2007 financial year. The increase in Africa<br />
Online’s capital expenditure was primarily for<br />
the improvement of service quality and to<br />
increase the range of information,<br />
communications and technology services<br />
offered in the market.<br />
Africa Online had 313 employees as of<br />
March 31, 2009. UUNet, Africa Online’s<br />
40% joint venture partner had<br />
70 employees as of March 31, 2009.<br />
Shiletsi Makhofane was appointed as<br />
acting chief executive officer in October<br />
2008.<br />
Africa Online’s footprint covers East Africa,<br />
southern Africa and West Africa. The<br />
regulatory environments are fairly different<br />
in each of Africa Online’s different regions.<br />
East Africa is liberalised and Africa Online<br />
provides services across the information,<br />
communications and technology spectrum,<br />
including voice over internet protocol<br />
services, in East Africa. Markets in southern<br />
Africa are still regulated, limiting the<br />
services Africa Online is able to provide to<br />
its customers. West Africa is a fairly<br />
liberalised market and Africa Online is<br />
presently seeking to take advantage of this<br />
opportunity.
MWEB Africa<br />
On April 21, 2009, we acquired a 100%<br />
interest in MWEB Africa Limited, which<br />
owns approximately 88% of ASFAT<br />
Communications Limited, and a 75%<br />
interest in MWEB Namibia (Pty) Ltd, for<br />
R498 million. MWEB Africa is a group of<br />
companies offering internet services and its<br />
own VSAT access services in sub-Saharan<br />
Africa (excluding South Africa). MWEB<br />
Africa is obliged to acquire the additional<br />
12% of AFSAT Communications Limited<br />
and we are currently in negotiations to<br />
purchase such shares.<br />
MWEB Africa’s VSAT service is mostly<br />
focused on the corporate and enterprise<br />
markets and is branded iWay. Its VSAT<br />
services are using satellite teleport facilities<br />
in SA, the USA and Europe. The company<br />
had almost 20,175 customers at<br />
March 31, 2009.<br />
The group is headquartered in Mauritius<br />
with operations in Nigeria, Kenya,<br />
Tanzania, Uganda, Namibia and<br />
Zimbabwe and an agency arrangement in<br />
Botswana. There are distributors in 26 sub-<br />
Saharan African countries.<br />
Other developments<br />
Mobile strategy<br />
Mobile Strategy – South Africa<br />
The recent liberalisation in the licensing<br />
regime, advancements in convergence<br />
technology and termination of the<br />
Vodafone shareholders’ agreement provide<br />
<strong>Telkom</strong> with the opportunity to enter the<br />
mobile market. We believe that an<br />
integrated fixed-mobile operator is well<br />
positioned to react to, and take advantage<br />
of the future requirements of our customers.<br />
By developing an integrated fixed-mobile<br />
offering <strong>Telkom</strong> will seek to leverage its<br />
customer base, marketing, logistics and<br />
distribution channels to increase its share of<br />
voice revenue. In addition, internet access<br />
demands are increasingly requiring<br />
mobility. An integrated bundled offering<br />
would offer superior speeds and quality<br />
through the fixed-line, including the<br />
advantages of mobility when required by<br />
the customer. Mobility provides cost<br />
efficiencies and the opportunity to<br />
consolidate traffic onto <strong>Telkom</strong>’s network.<br />
Currently mobile customers are<br />
experiencing the effects of highly<br />
congested networks. <strong>Telkom</strong> intends to use<br />
the strengths of its fixed-line network to<br />
differentiate its mobile service on quality<br />
with a fully converged array of products<br />
and services. Our Next Generation<br />
Network and access to the latest<br />
technologies will provide further value to<br />
our customers.<br />
<strong>Telkom</strong> has rolled out 141 W-CDMA sites<br />
in major metropolitan areas throughout<br />
South Africa. Our initial focus has been on<br />
theft, breakages and incident-prone areas,<br />
customers waiting for service and<br />
greenfield areas where <strong>Telkom</strong> has no<br />
copper infrastructure. In essence, the<br />
W-CDMA technology allows <strong>Telkom</strong> to<br />
deploy fixed-line lookalike services with<br />
regional fixed numbering plans instead of<br />
deploying copper, especially in high<br />
copper theft areas or areas where copper<br />
deployment is not feasible or too slow to<br />
roll out. This roll-out will be extended to<br />
rural areas and to replace expensive to<br />
maintain legacy equipment.<br />
Our move into offering a fully fledged<br />
mobile service is dependent on the<br />
finalisation of market research and the<br />
outcome of pilot and customer trials<br />
planned for the end of 2009.<br />
We are however aware of the power of<br />
the entrenched mobile companies. With<br />
this in mind, <strong>Telkom</strong> will not commit to<br />
further capital expenditure other than that<br />
focused on reducing costs before the<br />
Company has completed its market<br />
research. Future build will be based on<br />
maximising our current infrastructure and<br />
subscriber numbers in order to reduce<br />
operational and build costs and improve<br />
value add as far as possible.<br />
Key Next Generation Network, capacity<br />
and product developments<br />
<strong>Telkom</strong> is in the fourth year of its Next<br />
Generation Network (NGN) build out<br />
programme. Customer demand and global<br />
<strong>Telkom</strong> Annual Report 2009 97<br />
standards necessitate the provision of<br />
services and particularly bandwidth that is<br />
only possible utilising the intelligence of an<br />
NGN system.<br />
Our NGN build-out achievements are as<br />
follows:<br />
• In the national layer of the transport<br />
network, bandwidth capability has<br />
increased by more than 500% in<br />
bandwidth and automatic self-healing<br />
re-routing of bandwidth has been<br />
introduced based on customer service<br />
levels.<br />
• Optical fibre deployment has been<br />
accelerated and <strong>Telkom</strong> now has<br />
around 128,000 cable kilometres of<br />
optical fibre in the ground, enough to<br />
circle the world three times.<br />
• Dense Wave Division Multiplexing<br />
(DWDM) systems have been introduced<br />
between major metropolitan centres<br />
such as Gauteng and Durban. These<br />
systems can carry 40 10GB signals<br />
over a single fibre pair.<br />
• Metro Ethernet has been deployed in<br />
the major metros, including Cape Town,<br />
Durban, Johannesburg, Pretoria and<br />
Port Elizabeth.<br />
• Integrated Multi-Service Access<br />
Multiplexer (IMAX) has been deployed<br />
to carry narrowband and broadband<br />
services for Wireline legacy and<br />
converged systems.<br />
• A Network Interactive Voice Response<br />
system has been introduced, giving<br />
<strong>Telkom</strong> and its corporate customers the<br />
ability to use advanced speech services<br />
such as automated speech recognition<br />
and text-to-speech applications.<br />
• The SAT-3/WASC/SAFE undersea<br />
cable system, which connects South<br />
Africa to Europe and the Far East, has<br />
been upgraded to treble the amount of<br />
international bandwidth available.<br />
Group<br />
overview<br />
Management<br />
review<br />
Sustainability<br />
review<br />
Performance<br />
review<br />
Financial<br />
statements<br />
Company<br />
Financial<br />
Information
98<br />
<strong>Telkom</strong> Annual Report 2009<br />
Operational review (continued)<br />
Next Generation Network (NGN)<br />
<strong>Telkom</strong> has strategic objectives that are<br />
followed as part of network planning to<br />
ensure that we drive the implementation of<br />
the NGN. <strong>Telkom</strong>’s NGN is based on an<br />
evolutionary approach where the NGN is<br />
deployed in parallel with the legacy<br />
network and migration to the NGN is<br />
phased in over time.<br />
Key to <strong>Telkom</strong>’s NGN deployment are<br />
Softswitches that function in association<br />
with Application Servers, next generation<br />
transport networks, and IP and Metro<br />
Ethernet networks. In order to leverage on<br />
<strong>Telkom</strong>’s ubiquitous network deployment,<br />
the transport network will be transformed to<br />
support the expected exponential growth in<br />
bandwidth. The IP Network has been<br />
positioned to differentiate <strong>Telkom</strong> from<br />
its competitors and to leverage on<br />
the bandwidth capacity increase of the<br />
transport network.<br />
To achieve success with the NGN, two<br />
objectives are actively pursued; the<br />
consolidation of service offerings and the<br />
development and marketing of new and<br />
innovative services which are enabled by<br />
the NGN technology.<br />
NGN is cheaper to maintain and<br />
operate<br />
NGN will provide network convergence<br />
and simplification over the longer term as<br />
separate networks for voice and data<br />
converge to one IP based network with<br />
associated intelligent devices such as<br />
softswitches and application servers. NGN<br />
requires less diverse technology elements<br />
to maintain that will increase network<br />
reliability and manageability and result in<br />
operational savings.<br />
NGN is a revenue generator<br />
There is a critical mass of NGN equipment<br />
that is required before proper converged<br />
services with a viable footprint are<br />
possible. Some NGN services are already<br />
functioning, but in small numbers. Preprovisioning<br />
in the core of the network is<br />
currently taking place that will be beneficial<br />
in the longer term, in view of the<br />
expectation that bandwidth will grow<br />
exponentially.<br />
The NGN network elements<br />
The Metro Ethernet Network<br />
An extensive Metro Ethernet Network is<br />
being deployed for the provisioning of<br />
high-speed broadband services for<br />
corporate customers and to serve as an<br />
access network backhaul to provide cost<br />
effective transport of high bandwidth<br />
services, typically as a backhaul for access<br />
nodes. Metro Ethernet also serves as an<br />
access network to services provisioned on<br />
the IP Network.<br />
The Transport Network<br />
To achieve the growth and manageability<br />
in the transport network, <strong>Telkom</strong> is<br />
deploying Next Generation Synchronous<br />
Digital Hierarchy (NG-SDH) and Dense<br />
Wavelength Division Multiplexing<br />
(DWDM). In order to provide automated<br />
provisioning, routing and restoration<br />
capability, Automatic Switching Transport<br />
Network (ASTN) technology is being<br />
deployed on <strong>Telkom</strong>’s long haul network.<br />
The ASTN network will also improve<br />
resilience, reliability and reduce cost of the<br />
transport network.<br />
Softswitches and application servers<br />
Softswitches have been deployed to<br />
control media gateways, access gateways<br />
and provide basic voice services while it<br />
functions in association with application<br />
servers to provide advanced next<br />
generation voice services. <strong>Telkom</strong>’s IP<br />
network provides the transport capability<br />
between the network elements while media<br />
gateways mediate between the circuit<br />
switched network and the Voice Over<br />
Internet Protocol (VoIP) network. The need<br />
for such media gateways will diminish as<br />
more traffic moves to VoIP.<br />
The NGN network will continue to be<br />
developed towards an IP Multimedia<br />
Subsystem (IMS) controlled network where<br />
call control will be combined into a single<br />
control layer with IMS architecture. In the<br />
longer term customer services will migrate<br />
to an NGN infrastructure where only a few<br />
Softswitch nodes with multiple Softswitches<br />
are required to fulfil the functionalities of the<br />
Class 4 core and Class 5 edge Time<br />
Division Multiplex switches.<br />
IP Network<br />
<strong>Telkom</strong>’s IP Network is an extensive<br />
network, providing points of presence<br />
country wide. 34 Edge nodes, each with<br />
multiple routers, have been deployed. At<br />
these nodes, edge routers act as<br />
distribution and aggregation points to<br />
IPNet via the Network Access Servers (dialup<br />
customers), Access Routers (leased<br />
line Internet customers), customer edges<br />
(Customer Edges for VPN termination) and<br />
also terminate ADSL sessions – 145 Edge<br />
routers are deployed at the 34 edge<br />
nodes.<br />
The IPNet routing platforms support<br />
business customer requirements (VPN) as<br />
well as providing Internet capacity for<br />
leased line and broadband internet<br />
services.<br />
Separate and dedicated edge routers for<br />
business traffic and internet traffic provide<br />
physical separation of corporate customer<br />
Virtual Private Network (VPN) traffic from<br />
that of Internet traffic to ensure secure<br />
implementation of services to the business<br />
segment. Separate routing platforms,<br />
dedicated for ADSL termination, are also<br />
deployed at the IPNet edge nodes.<br />
An extensive access network that could<br />
potentially provide connectivity to almost<br />
any customer provides access to IP<br />
services. These access networks include<br />
legacy networks such as Constant Bit Rate<br />
(CBR), and new point to cloud infrastructure<br />
e.g. Synchronous High-bit rate Digital<br />
Subscriber Line and Metro Ethernet.<br />
To further improve the secure provisioning<br />
of services and create new business<br />
opportunities, IPNet is evolving to a<br />
Carrier-supporting-Carrier (CsC) Multi-<br />
Protocol Label Switching (MPLS)<br />
architecture. In short, CsC is a hierarchical
VPN model that allows other service<br />
providers or corporate customers to<br />
interconnect their own IP/MPLS networks<br />
over <strong>Telkom</strong>’s MPLS backbone. This<br />
eliminates the need for customer carriers<br />
and service carriers to build and maintain<br />
their own MPLS backbone. In the<br />
backbone, the CsC concept provides<br />
complete separation of the different service<br />
carriers’ traffic.<br />
A Service Carrier is a collection of<br />
Service (or customer-specific) Provider<br />
Edge routers (S-PEs), essentially forming a<br />
layer around the Backbone Carrier<br />
network. Service Carriers also include their<br />
respective Customer Edge (CE) routers.<br />
S-PE and CE routers can only belong to a<br />
single Service Carrier at any one time.<br />
In essence, IPNet will consist of a<br />
Backbone Carrier, supporting various<br />
Service or Customer Carriers each<br />
retaining a level of autonomy (e.g. security,<br />
management, Quality of Service<br />
implementation) from the core. At a basic<br />
technical level, it means that any number of<br />
customer VPNs are embedded and treated<br />
as a single VPN within the backbone<br />
carrier infrastructure by means of multiple<br />
stacked MPLS labels, while preserving the<br />
customer’s unique parameters, such as<br />
Quality of Service models.<br />
Network resilience<br />
<strong>Telkom</strong>’s networks are generally viewed as<br />
three layers, ie access, edge and core.<br />
The different network elements are<br />
interconnected utilising Synchronous Digital<br />
Hierarchy (SDH), with the primary physical<br />
interconnecting medium being fibre.<br />
The transport network equipment is<br />
connected in a mesh or ring topology,<br />
providing for redundancy. To further<br />
improve resilience, intelligent ASTN<br />
switches are deployed in the long haul<br />
network to provide automatic provisioning,<br />
routing, and restoration capability.<br />
Generally, at the access, no resilience is<br />
present in the network architecture towards<br />
the edge other than physical protection<br />
at the SDH layer where end-to-end path<br />
protection, utilising 1+1 protection<br />
architecture, i.e. a working path and a hot<br />
standby<br />
deployed.<br />
protection path, has been<br />
The traffic leaving or entering edges to or<br />
from the network is protected in the core.<br />
Core redundancy provides protection in<br />
edge to edge and edge to international<br />
destination set-ups. The degree of<br />
redundancy varies across the different<br />
technologies and networks.<br />
Voice network<br />
Dual connectivity exists between edge to<br />
core nodes and core to international<br />
gateway nodes. The transmission links<br />
between the edge and the core pair nodes<br />
are geographically separated. These links<br />
are protected to eliminate any single point<br />
of failure in the transport network. All links<br />
are designed to cater for the busy hour<br />
loads and have been implemented in a<br />
50:50 load sharing fashion with each<br />
route limited to 80% utilisation.<br />
In the event of a failure of an international<br />
gateway during the peak hour, about 38%<br />
of the international traffic will be lost. In the<br />
event of a failure of a core switch during<br />
the peak hour, about 38% of national and<br />
international traffic will be lost from the<br />
secondary layer of a particular region.<br />
Activation of disaster recovery procedures<br />
and plans to re-route traffic will further limit<br />
the loss of traffic. The Intelligent Network<br />
platforms, providing advance services,<br />
cater for protection of traffic under failure<br />
conditions.<br />
Signalling<br />
No risk exists from a national perspective<br />
as full redundancy has been implemented.<br />
Due to the fact that the international<br />
Signalling Transit Points are not connected<br />
as a mated pair to all international<br />
destinations, failure of an international<br />
gateway Signalling Transit Point may<br />
result in the loss of some international<br />
connections.<br />
<strong>Telkom</strong> Annual Report 2009 99<br />
Data networks<br />
At the core layer and between the core<br />
and the edge nodes, full resilience exists.<br />
Edge devices are connected to two core<br />
devices, located in physically diverse<br />
buildings. The connectivity between the<br />
edge and each core router as well as the<br />
core infrastructure is dimensioned to carry<br />
the full traffic load in the event of a link<br />
failure or core node failure. Edge to core,<br />
inter-core and edge to International<br />
destinations are therefore fully redundant.<br />
Connectivity to international destinations is<br />
provided from two physically diverse<br />
nodes, through different cable landing<br />
stations and different submarine cable<br />
networks to multiple international nodes on<br />
different continents that are all<br />
interconnected using protected or<br />
restorable transmission systems. In the event<br />
of the loss of one of the local nodes,<br />
potentially 38% of the IP throughput traffic<br />
could be lost. Mechanisms will schedule<br />
traffic and prioritisation of traffic will<br />
take place.<br />
Service level agreements are offered to<br />
clients to provide improved resilience from<br />
the customer site to the edge.<br />
Power<br />
Only 12V and 48V direct current (DC)<br />
equipment is utilised. Some alternating<br />
current (AC) equipment is used, mainly in<br />
the server environments, eg data centres<br />
and at sites where DC is not available, eg<br />
at customer service branches.<br />
Operations centres, Core nodes, Edge<br />
nodes, International gateway nodes and<br />
any station carrying core or edge traffic<br />
have been defined as critical sites where a<br />
disruption of service cannot be tolerated.<br />
Power availability is ensured, using a<br />
combination of battery back up and AC<br />
standby plants.<br />
Group<br />
overview<br />
Management<br />
review<br />
Sustainability<br />
review<br />
Performance<br />
review<br />
Financial<br />
statements<br />
Company<br />
Financial<br />
Information
100<br />
<strong>Telkom</strong> Annual Report 2009<br />
Operational review (continued)<br />
Cost, efficiency and productivity<br />
management<br />
Faced with competition eroding our<br />
revenue base, cost management continues<br />
to be a key element in creating shareholder<br />
value. Combined with the inflationary<br />
environment affecting our operating<br />
expenses, a number of once-off items<br />
impacted fixed-line expenditure including:<br />
• R177 million expenses relating to the<br />
Vodacom transaction;<br />
• R85 million impairment of Africa<br />
Online;<br />
• R254 million impairment of <strong>Telkom</strong><br />
Media; and<br />
• R1.8 billion impairment of Multi-Links.<br />
Fixed-line operating expenses increased<br />
19.6% to R29.8 billion. Employee<br />
expenses increased by 8.1% to<br />
R8.0 billion, payments to other operators<br />
increased 9.2% to R7.5 billion, selling<br />
general and administrative expenses<br />
increased by 68.8% to R6.6 billion,<br />
service fees increased by 14.4% to<br />
R2.8 billion and operating leases<br />
decreased by 1.0% to R613 million.<br />
Depreciation, amortisation, impairment<br />
and write-offs increased by 16.8% to<br />
R4.4 billion resulting in an EBITDA margin<br />
of 25.8%. Excluding the Multi-Links, <strong>Telkom</strong><br />
Media and Africa Online impairment the<br />
fixed-line adjusted EBITDA margin was<br />
32.3%.<br />
The <strong>Telkom</strong> reorganisation programme –<br />
<strong>Telkom</strong> Renaissance – improves profit and<br />
loss accountability throughout the<br />
organisation and will allow us to focus on<br />
efficient resource management and cost<br />
containment. In addition, the roll-out of our<br />
mobile network is expected to enable us to<br />
provide connectivity in a more cost<br />
effective manner in rural and high cable<br />
theft areas. Next Generation Network and<br />
mobile technology also allows us to<br />
replace expensive to maintain legacy<br />
equipment. We intend to expedite the<br />
retirement of costly legacy systems as a<br />
result of our growing Next Generation<br />
Network in order to reduce maintenance<br />
spend. We continue with the renegotiation<br />
of all supplier contracts and constructive<br />
engagement with labour unions. We are<br />
reviewing our IT investment strategy in<br />
order to ensure optimum levels of spend in<br />
line with our strategy and network<br />
investment. Inventories and capital work-inprogress<br />
are receiving considerable<br />
attention as we seek to lower just-in-time<br />
levels of investment and to monetise any<br />
excessive levels of assets.<br />
<strong>Telkom</strong> is targeting an operating cost<br />
reduction of 10% over the following three<br />
financial years.<br />
The <strong>Telkom</strong> Board is focusing on improving<br />
the cost efficiency and free cash flow<br />
profile of the company. It has reduced the<br />
initial five year capital expenditure budget<br />
by 40% to R34 billion and intends to<br />
reduce it further where possible.<br />
Maintaining the quality of services to our<br />
customers<br />
Improved customer service is vital to the<br />
success of <strong>Telkom</strong> into the future.<br />
Sustainable and profitable growth in the<br />
customer base requires creating and<br />
strengthening capabilities focused on<br />
managing customer relationships and<br />
learning from acquired customer<br />
information. This will allow <strong>Telkom</strong> to better<br />
manage the customer experience and<br />
anticipate customer needs.<br />
Customer segmentation based on value is<br />
enabling <strong>Telkom</strong> to understand customers<br />
better in order to give additional value and<br />
services to customers. Surveys with our key<br />
customer segments have shown that service<br />
quality perception has improved in the<br />
small business, medium and large business<br />
and corporate and government sectors.<br />
The residential market perception survey<br />
indicates a stable rating.<br />
Network service quality<br />
We have made significant investments in<br />
our national network operations centre and<br />
our data centre, designed to increase our<br />
ability to identify and anticipate future<br />
customer needs more rapidly, and to<br />
provide appropriate solutions and services.<br />
In order to take advantage of economies of<br />
scale, we have consolidated our six voice<br />
installation and fault management centres<br />
into two centres to address faults,<br />
installation and service appointment sites,<br />
and have consolidated our six data<br />
installation and fault management centres<br />
into two centres.<br />
Faults reported on residential, business and<br />
ADSL business services increased in the<br />
2009 financial year mainly due to the 33%<br />
increase in the ADSL installed base during<br />
the 2009 financial year resulting in an<br />
increase in the number of reported faults,<br />
adverse weather conditions causing many<br />
areas to be flooded, mainly in the coastal<br />
areas of KwaZulu-Natal, Western Cape<br />
and Eastern Cape, and third party<br />
damage to <strong>Telkom</strong> cable infrastructure, rollout<br />
of other providers’ services, road<br />
extensions and other 2010 Soccer World<br />
Cup projects. In addition, many customers<br />
were affected by access equipment that<br />
failed following prolonged power outages.<br />
Data and ADSL Business services fulfilment<br />
performances improved following the<br />
introduction of more efficient workflow<br />
processes.<br />
Faults cleared in 24 hours declined in the<br />
2009 financial year due to the increased<br />
number of ADSL services. The ADSL<br />
installed base grew by 61% during the<br />
2008 financial year. This growth resulted<br />
in an increase in the number of reported<br />
faults and impacted on the time taken to<br />
clear faults. This growth also impacted on<br />
data subrate services as they share ADSL<br />
resources. Network failures consist of cable<br />
breaks, cable theft and failures on other<br />
core network elements. We implemented a<br />
self install option for ADSL, which had a<br />
positive impact on ADSL installation.<br />
We expect to continue to change the<br />
method in which we measure performance<br />
to align with changes in the information<br />
communication technology industry that<br />
focus more on broadband and data
services and also to support <strong>Telkom</strong>’s<br />
customer centricity drive.<br />
Competition<br />
Competition in the South African fixed-line<br />
communications market is intense and is<br />
increasing as a result of the Electronic<br />
Communications Act and determinations<br />
issued by the Minister of Communications.<br />
The new licensing framework included in the<br />
Electronic Communications Act is resulting in<br />
the market becoming more horizontally<br />
layered, with a large number of separate<br />
licences being issued for electronic<br />
communications network services, electronic<br />
communications services, broadcasting<br />
services and the radio frequency spectrum.<br />
This will substantially increase competition in<br />
our fixed-line business.<br />
We compete primarily on the basis<br />
of customer service, quality, reliability<br />
and price in those areas where we<br />
currently face competition and where we<br />
expect to compete for public-switched<br />
telecommunications services in the future.<br />
We intend to introduce new products and<br />
services as well as tariff structures with the<br />
aim of maintaining and gaining revenue.<br />
Mobile competition<br />
<strong>Telkom</strong> competes for voice customers with<br />
the three existing mobile operators,<br />
Vodacom, MTN and Cell C. Vodacom,<br />
our previously 50% owned joint venture,<br />
was listed on the JSE on May 18, 2009.<br />
The sale and unbundling of our stake in<br />
Vodacom will further increase competition.<br />
MTN is a public company listed on the JSE<br />
Limited, and Cell C entered into a joint<br />
venture with Virgin Mobile which has<br />
further increased competition. <strong>Telkom</strong> also<br />
competes with service providers who use<br />
least cost routing technology that enables<br />
fixed-to-mobile calls from corporate private<br />
branch exchanges to bypass our fixed-line<br />
network by being transferred directly to<br />
mobile networks. In recent periods, our<br />
fixed-line business has experienced<br />
significant customer migration to mobile<br />
services, as well as substitution of calls<br />
placed using mobile services rather than<br />
<strong>Telkom</strong> Annual Report 2009 101<br />
The following table presents information regarding <strong>Telkom</strong>’s service delivery measurements during the periods indicated.<br />
Year ended March 31,<br />
2007 2008 2009<br />
Residential voice<br />
% cleared in 24 hours 50 38 32<br />
Faults per 1,000 lines 485 476 650<br />
% installed within 28 working days initial timeframe – No build 84 91 91<br />
% installed within 80 working days initial timeframe – Build<br />
Business voice<br />
73 82 80<br />
% cleared in 24 hours 66 50 45<br />
Faults per 1,000 lines 328 264 369<br />
% installed within 21 working days initial timeframe – No build 77 85 87<br />
% installed within 70 working days initial timeframe – Build<br />
Data subrate<br />
81 84 82<br />
% cleared in 24 hours 84 93 94<br />
Faults per 1,000 lines 870 875 816<br />
% installed within 30 working days initial timeframe – No build 49 48 64<br />
% installed within 90 working days initial timeframe – Build<br />
ADSL business<br />
54 79 80<br />
% cleared in 24 hours 33 42 37<br />
Faults per 1,000 lines 575 575 649<br />
% installed within 28 working days initial timeframe – No build 56 79 91<br />
% installed within 60 working days initial timeframe – Build 68 66 74<br />
our fixed-line service. ICASA has initiated a<br />
review process of mobile termination rates<br />
aimed at reducing high mobile<br />
interconnect charges which, once<br />
completed, is also likely to impact <strong>Telkom</strong>’s<br />
own termination rates and interconnection<br />
revenues.<br />
Data competition<br />
Neotel, the former VANS providers such as<br />
Internet Solutions and the three existing<br />
mobile operators are our main competitors<br />
in the data market. Each of Vodacom,<br />
MTN and Cell C currently offer 3G, HSPA<br />
and EDGE mobile broadband data<br />
services that directly compete with our<br />
services. Neotel is entering the market<br />
through competitive pricing and niche<br />
products such as fibre connections and<br />
rings. The mobile operators have also<br />
stated their intention to start competing in<br />
the fixed-line market through building their<br />
own infrastructure. The former VANS<br />
provide competitive internet protocol virtual<br />
private networks and internet service<br />
provider services to the business segment.<br />
Group<br />
overview<br />
Management<br />
review<br />
Sustainability<br />
review<br />
Performance<br />
review<br />
Financial<br />
statements<br />
Company<br />
Financial<br />
Information
102<br />
<strong>Telkom</strong> Annual Report 2009<br />
Operational review (continued)<br />
Consumer orientated internet service<br />
providers such as MWEB are our main<br />
competitors in the consumer internet<br />
market.<br />
In addition, our data services have faced<br />
increased competition from iBurst, a<br />
wireless competitor that offers competing<br />
broadband services and, to a lesser extent,<br />
Sentech, which owns and operates satellite<br />
transmission systems, a packaged, alwayson<br />
bidirectional broadband service via<br />
satellite and a wireless high-speed internet<br />
service offering. The mobile data providers<br />
have reduced prices significantly, leading to<br />
price competition in our data markets. We<br />
believe the former VANS operators and<br />
internet service providers will increasingly<br />
move into the corporate and voice services<br />
market, while telecommunications service<br />
providers aim to expand into the managed<br />
data network and international traffic<br />
markets. We anticipate that alliances will<br />
be forged between the former VANS<br />
operators, telecommunications service<br />
providers and content providers to<br />
concentrate on the delivery of converged<br />
services within the next few years.<br />
Domestically, expansion into new markets<br />
by the former VANS and mobile<br />
companies will occur, while the<br />
development of new products and services<br />
will intensify competition. We expect<br />
competition to further increase as a result of<br />
consolidation in the market, with<br />
competitors growing through mergers,<br />
acquisitions and alliance-forming activity.<br />
The entry of multi-national corporations into<br />
South Africa is expected to be a further<br />
incentive for global communications<br />
operators, which already service these<br />
corporations abroad, to establish or<br />
enhance their presence in South Africa.<br />
Competition in the data market is expected<br />
to increase as a result of the VANS<br />
providers’ ability to deliver complex<br />
managed data solutions and integrated<br />
information communications technology<br />
solutions, as well as expected future<br />
alliances between the VANS and fixed and<br />
mobile operators. Technological advances<br />
will also enable more and more<br />
convergence and integration which in turn<br />
will enable more effective competition and<br />
usage of bandwidth.<br />
As competition increases in the South<br />
African market, South African telecommunication<br />
service providers, including<br />
<strong>Telkom</strong>, are expected to increasingly look<br />
to other developing markets for new<br />
revenue streams, particularly in sub-<br />
Saharan Africa. Internationally, <strong>Telkom</strong>’s<br />
new Africa Online business already<br />
competes with Internet Solutions and MTN<br />
Network Solutions. In addition, Verizon is<br />
already present in a number of other<br />
African markets.<br />
Fixed-line voice competition<br />
In September 2004, the Minister of<br />
Communications granted an additional<br />
licence to provide public-switched<br />
telecommunications services to Neotel.<br />
Neotel was 30% owned by Transtel and<br />
Esitel, which are beneficially owned by the<br />
South African government and other<br />
strategic equity investors including 26%<br />
beneficially owned by TATA Africa<br />
Holdings (Pty) Ltd, a member of the large<br />
Indian conglomerate with information and<br />
communications operations. On March<br />
19, 2008 Neotel announced that the<br />
Competition Tribunal of South Africa had<br />
approved its acquisition of Transtel without<br />
any conditions. TATA Africa Holdings (Pty)<br />
Ltd has subsequently acquired the 30%<br />
equity stake beneficially owned by the<br />
South African government, increasing its<br />
shareholding in Neotel to 56%. Neotel<br />
was licensed on December 9, 2005 and<br />
commercially launched on August 31,<br />
2006. Neotel commenced providing<br />
services to large corporations and other<br />
licensees at the beginning of the 2007<br />
calendar year.<br />
On April 25, 2008, Neotel announced<br />
that the first of its consumer products were<br />
available in limited parts of Johannesburg<br />
and Pretoria. Government has created an<br />
infrastructure company, Broadband Infraco,<br />
which stated that it will provide inter-city<br />
bandwidth at cost based prices to Neotel,<br />
and later to the rest of the industry. This will<br />
further compete with our existing<br />
communications network. As an alternative<br />
provider of communications infrastructure,<br />
Broadband Infraco will also be involved in<br />
some of the undersea cable projects.<br />
Broadband Infraco was established by an<br />
Act of Parliament: the Broadband Infraco<br />
Act, No 33 of 2007. The Electronic<br />
Communications Act, No 36 of 2005, has<br />
been amended by the Electronic<br />
Communications Amendment Act, No 37<br />
of 2007, to permit electronic<br />
communications licences to be issued to<br />
Broadband Infraco.<br />
A process to issue additional licences to<br />
small business operators to provide<br />
telecommunications services in<br />
underserviced areas with a teledensity of<br />
less than 5% commenced in 2005 and is<br />
continuing. The Minister of Communications<br />
has identified 27 of these<br />
underserviced areas. ICASA has issued<br />
licences to successful bidders in seven of<br />
these areas and the Minister has issued<br />
invitations to apply for licences in<br />
14 additional areas. In August 2006<br />
ICASA recommended to the Minister that<br />
licences be granted to successful<br />
applicants in 13 of these areas. While it<br />
was expected that further licences would<br />
be issued in the 2007 calendar year, none<br />
were issued. The Minister of<br />
Communications has issued a policy<br />
directive to ICASA directing it to, where<br />
there is more than one licence in a<br />
province, merge the licences and issue one<br />
Provincial Under-Serviced Area Network<br />
Operator (PUSANO) licence. None of<br />
these consolidated licences have yet been<br />
issued by ICASA. In his budget speech of<br />
June 26, 2009, the Minister of<br />
Communications indicated the intention to<br />
review the policy in relation to USALs.
<strong>Telkom</strong>’s fixed-line voice business is<br />
expected to be further impacted by<br />
continuing developments of Voice over<br />
Internet Protocol (VoIP) and by the roll-out of<br />
limited mobility services. Wireless operator<br />
iBurst has started to offer portable voice<br />
services over its wireless network.<br />
Additionally, VoIP and other operators with<br />
international gateway licences are<br />
expected to create increased competition<br />
for <strong>Telkom</strong>’s fixed-line voice business in<br />
carrying international traffic in and out of<br />
South Africa.<br />
We expect that the introduction of number<br />
portability and carrier pre-selection could<br />
further enhance competition in our fixed-line<br />
voice business and increase our churn<br />
rates. As competition intensifies, the main<br />
challenges our fixed-line voice business<br />
faces are continuing to improve customer<br />
loyalty through improved services and<br />
products, and maintaining our leadership<br />
in the South African communications<br />
market. As a result of increasing<br />
competition, we anticipate pressure on our<br />
overall average tariffs and a reduction in<br />
our market share.<br />
<strong>Telkom</strong> Annual Report 2009 103<br />
Group<br />
overview<br />
Management<br />
review<br />
Sustainability<br />
review<br />
Performance<br />
review<br />
Financial<br />
statements<br />
Company<br />
Financial<br />
Information
104<br />
<strong>Telkom</strong> Annual Report 2009<br />
Three year financial review<br />
for the years ended March 31<br />
Amounts in accordance with IFRS<br />
(in Z<strong>AR</strong> millions, except percentages) 2007 2008 2009 CAGR (%)<br />
Fixed-line segment financial data<br />
Revenue 32,345 32,572 33,659 2.0<br />
Operating profit 8,596 8,107 4,334 (29.0)<br />
Operating profit margin (%) 26.6 24.9 12.9 (30.4)<br />
EBITDA 12,178 11,839 8,692 (15.5)<br />
EBITDA margin (%) 37.7 36.3 25.8 (17.3)<br />
Capital expenditure to revenue (%)<br />
Multi-Links segment financial data<br />
20.4 20.9 19.9 (1.2)<br />
Revenue – 845 1,900 124.9<br />
Operating profit – (97) (522) 438.1<br />
Operating profit margin (%) – (11.5) (27.5) 139.3<br />
EBITDA – (11) (226) 1,954.5<br />
EBITDA margin (%) – (1.3) (11.9) 813.7<br />
Capital expenditure to revenue (%)<br />
Other segment financial data<br />
– 155.3 146.9 (5.4)<br />
Revenue 873 1,040 1,214 17.9<br />
Operating profit 411 453 477 7.7<br />
Operating profit margin (%) 47.1 43.6 39.3 (8.6)<br />
EBITDA 430 486 527 10.7<br />
EBITDA margin (%) 49.3 46.7 43.4 (6.1)<br />
Capital expenditure to revenue (%)<br />
Financial review (Group)<br />
Income statement data<br />
Continuing operations<br />
5.0 32.1 13.8 66.1<br />
Operating revenue 32,441 33,611 35,940 5.3<br />
Operating expenses (including depreciation) 23,028 25,014 29,895 13.9<br />
EBITDA 13,352 13,203 11,668 (6.5)<br />
Operating profit 9,751 9,069 6,388 (19.1)<br />
Profit before tax 9,093 7,681 3,726 (36.0)<br />
Profit from continuing operations 6,290 5,034 2,066 (42.7)<br />
Basic earnings per share (cents) 1,204.7 963.7 407.4 (41.8)<br />
Headline earnings per share (cents) 1,235.5 1,028.9 557.0 (32.9)<br />
Dividend per share (cents)<br />
Total operations<br />
900.0 1,100.0 660.0 (14.4)<br />
Basic earnings per share (cents) 1,681.0 1,565.0 832.8 (29.6)<br />
Headline earnings per share (cents)<br />
Balance sheet data<br />
1,710.7 1,634.8 994.6 (23.8)<br />
Total assets 59,146 70,372 85,779 20.4<br />
Current assets 10,376 12,609 11,287 4.3<br />
Non-current assets 48,770 57,763 51,009 2.3<br />
Assets of disposal groups held for sale n/a n/a 23,482<br />
Total liabilities 27,138 37,035 48,673 33.9<br />
Current liabilities 18,584 21,931 17,452 (3.1)<br />
Non-current liabilities 8,554 15,104 15,348 33.9<br />
Liabilities of disposal groups held for sale n/a n/a 15,873<br />
Shareholders’ equity<br />
Continuing operations<br />
32,008 33,337 37,106 7.7<br />
Capital expenditure 6,623 8,428 9,631 20.6<br />
Total debt 11,034 18,365 18,630 29.9<br />
Net debt<br />
Total operations<br />
10,026 16,617 15,497 24.3<br />
Capital expenditure 10,246 11,900 13,234 13.6<br />
Net debt<br />
Cash flow data<br />
10,026 16,617 23,047 51.6<br />
Cash flow from operating activities 9,356 10,603 11,432 10.5<br />
Cash flow from investing activities (10,412) (14,106) (17,005) 27.8<br />
Cash flow from financing activities (2,920) 2,943 7,093 –<br />
Capital expenditure excluding intangibles 8,648 10,108 8,725 0.4<br />
Operating free cash flow<br />
Financial ratios<br />
Continuing operations<br />
3,728 2,229 (2,237) –<br />
Operating profit margin (%) 30.1 27.0 17.8 (23.1)<br />
EBITDA margin (%) 41.2 39.3 32.5 (11.2)<br />
Net profit margin (%) 19.4 15.0 5.7 (45.5)<br />
Net debt to EBITDA n/a n/a 1.3 –<br />
After tax operating return on assets (%) n/a n/a 5.0 –<br />
Capital expenditure to revenue (%)<br />
Total operations<br />
20.4 25.1 26.8 14.6<br />
Net debt to EBITDA 0.5 0.8 1.2 54.9<br />
After tax operating return on assets (%) 22.7 18.3 9.7 (34.6)
Results of operations<br />
The <strong>Telkom</strong> Group added Multi-Links as a new segment to its<br />
financial reporting for the 2009 financial year. As a result, the<br />
<strong>Telkom</strong> Group’s four reporting segments for the 2009 financial<br />
year are fixed-line, Multi-Links, mobile and other. The other<br />
segment includes <strong>Telkom</strong>’s Trudon, formerly known as TDS<br />
Directory Operations, and Africa Online subsidiaries. The<br />
information in this annual report has been updated to reflect the<br />
above changes to <strong>Telkom</strong>’s reporting segments.<br />
<strong>Telkom</strong> concluded the disposal and sale of Vodacom, its mobile<br />
segment that provided mobile services through its 50% joint<br />
venture interest in Vodacom, effective as of April 20, 2009. In<br />
addition, <strong>Telkom</strong>’s Board of directors determined to dispose of<br />
Swiftnet, a wholly owned subsidiary that provides wireless data<br />
services, and determined to wind up its <strong>Telkom</strong> Media subsidiary.<br />
The <strong>Telkom</strong> Group’s consolidated financial statements and<br />
information included herein reflects the restatement to <strong>Telkom</strong>’s<br />
consolidated financial statements in prior years as a result of these<br />
events to disclose the effect of discontinued operations and the<br />
disposal of the subsidiaries held for sale as follows:<br />
• Income statement data for all the periods have been restated to<br />
reflect our 50% share of Vodacom’s results, our 100% share of<br />
Swiftnet’s results and our 75% share of <strong>Telkom</strong> Media’s results<br />
as discontinued operations in accordance with IFRS5; and<br />
• Balance sheet data for only the year ended March 31, 2009<br />
reflect our 50% share of Vodacom’s results and our 100% share<br />
of Swiftnet’s results as discontinued operations in accordance<br />
with IFRS5.<br />
The discussion of the business below has been revised from<br />
previous years to reflect the changes to <strong>Telkom</strong>’s segments and its<br />
discontinued operations.<br />
Year ended March 31, 2009 compared to year ended March<br />
31, 2008 and year ended March 31, 2007<br />
Consolidated results<br />
The following table shows information related to our operating<br />
revenue, other income, operating expenses, operating profit,<br />
operating profit margin, profit for the year, profit margin, EBITDA<br />
and EBITDA margin for the periods indicated.<br />
Financial review<br />
<strong>Telkom</strong> Annual Report 2009 105<br />
The Board has decided to delist from the New York Stock<br />
Exchange. Maintaining a listing in the United States is<br />
expensive and takes considerable management time. The<br />
methodology employed and discipline gained from<br />
compliance with the Sarbanes-Oxley reporting<br />
requirements will be retained, where appropriate, to<br />
ensure strict corporate governance compliance and<br />
transparent financial reporting.<br />
<strong>Telkom</strong> is comfortable that the JSE provides sufficient access<br />
to capital from both South African and global investors.<br />
Group<br />
overview<br />
Management<br />
review<br />
Sustainability<br />
review<br />
Performance<br />
review<br />
Financial<br />
statements<br />
Company<br />
Financial<br />
Information
106<br />
<strong>Telkom</strong> Annual Report 2009<br />
Financial review (continued)<br />
<strong>Telkom</strong> Group’s segmental results<br />
Year ended March 31,<br />
2008/ 2009/<br />
2007 2008 2009 2007 2008<br />
(in millions, except percentages) Z<strong>AR</strong> % Z<strong>AR</strong> % Z<strong>AR</strong> % % change % change<br />
Operating revenue 32,441 100.0 33,611 100.0 35,940 100.0 3.6 6.9<br />
Fixed-line 32,345 99.7 32,572 96.9 33,659 93.7 0.7 3.3<br />
Multi-Links – – 845 2.5 1,900 5.3 – 124.9<br />
Other 873 2.7 1,040 3.1 1,214 3.4 19.1 16.7<br />
Intercompany eliminations (777) (2.4) (846) (2.5) (833) (2.4) 8.9 (1.5)<br />
Other income (1) 338 100.0 472 100.0 343 100.0 39.6 (27.3)<br />
Fixed-line 334 98.8 497 105.3 524 152.8 48.8 5.4<br />
Multi-Links – – – – – – – –<br />
Other 50 14.8 61 12.9 64 18.6 22.0 4.9<br />
Intercompany eliminations (46) (13.6) (86) (18.2) (245) (71.4) 87.0 184.9<br />
Operating expenses 23,028 100.0 25,014 100.0 29,895 100.0 8.6 19.5<br />
Fixed-line 24,083 104.6 24,962 99.7 29,849 99.8 3.6 19.6<br />
Multi-Links – – 942 3.8 2,422 8.1 – 157.1<br />
Other 512 2.2 648 2.6 801 2.7 26.6 23.6<br />
Intercompany eliminations (1,567) (6.8) (1,538) (6.1) (3,177) (10.6) (1.9) 106.6<br />
Operating profit 9,751 100.0 9,069 100.0 6,388 100.0 (7.0) (29.6)<br />
Fixed-line 8,596 88.2 8,107 89.4 4,334 67.8 (5.7) (46.5)<br />
Multi-Links – – (97) (1.1) (522) (8.2) – (438.1)<br />
Other 411 4.2 453 5.0 477 7.5 10.2 5.3<br />
Intercompany eliminations 744 7.6 606 6.7 2,099 32.9 (18.5) 246.4<br />
Operating profit margin (%) 30.1 27.0 17.8 (10.3) (34.1)<br />
Fixed-line 26.6 24.9 12.9 (6.4) (48.2)<br />
Multi-Links – (11.5) (27.5) – 139.1<br />
Other 47.1 43.6 39.3 (7.4) (9.9)<br />
Profit for the year attributable<br />
to equity holders of <strong>Telkom</strong><br />
Profit margin (%)<br />
EBITDA (2) 13,352 100.0 13,203 100.0 11,668 100.0 (1.1) (11.6)<br />
Fixed-line 12,178 91.2 11,839 89.7 8,692 74.5 (2.8) (26.6)<br />
Multi-Links – – (11) (0.1) (226) (1.9) – (1,954.5)<br />
Other 430 3.2 486 3.7 527 4.5 13.0 8.4<br />
Intercompany eliminations 744 5.6 889 6.7 2,675 22.9 19.5 200.9<br />
EBITDA margin (%) 41.2 39.3 32.5<br />
Notes:<br />
(1) Other income includes profit and losses on disposal of investments, property, plant and equipment and intangible assets.<br />
(2) EBITDA represents profit for the year, which includes profit on sale of investments, before taxation, finance charges, investment income and depreciation,<br />
amortisation, impairments and write-offs. We believe that EBITDA provides meaningful additional information to investors since it is widely accepted by<br />
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<br />
capital expenditures or business acquisitions, a company’s capital structure or the relevant taxation regime. This is particularly the case in a capital intensive<br />
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<br />
and to fund its continued growth. You should not construe EBITDA as an alternative to operating profit or cash flows from operating activities determined<br />
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<br />
similarly titled measures of other companies unless the definition is the same. In addition, the calculation of EBITDA for the maintenance of our covenants<br />
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<br />
for purposes of those covenants is not calculated in the same manner as it is calculated in the above table.
EBITDA can be reconciled to operating profit as follows:<br />
<strong>Telkom</strong> Annual Report 2009 107<br />
Year ended March 31,<br />
2007 2008 2009<br />
(in millions) Z<strong>AR</strong> Z<strong>AR</strong> Z<strong>AR</strong><br />
Fixed-line<br />
EBITDA 12,178 11,839 8,692<br />
Depreciation, amortisation, impairments and write-offs (3,582) (3,732) (4,358)<br />
Operating profit 8,596 8,107 4,334<br />
Multi-Links<br />
EBITDA – (11) (226)<br />
Depreciation, amortisation, impairments and write-offs – (86) (296)<br />
Operating profit – (97) (522)<br />
Other<br />
EBITDA 430 486 527<br />
Depreciation, amortisation, impairments and write-offs (19) (33) (50)<br />
Operating profit 411 453 477<br />
Operating revenue<br />
Operating revenue increased in the years<br />
ended March 31, 2009 and 2008 due to<br />
increased operating revenue in our fixedline,<br />
Multi-Links and other segment. The<br />
increase in fixed-line operating revenue of<br />
3.3% and 0.7% in the 2009 and 2008<br />
financial years, respectively, was primarily<br />
due to continued growth in data services,<br />
higher revenue from interconnection and<br />
subscription based calling plans, partially<br />
offset by lower traffic revenue. The increase<br />
in revenue in our Multi-Links segment in the<br />
2009 financial year was primarily due to<br />
subscriber growth, an increase in<br />
domestic traffic volumes as well as<br />
increased data revenue. The increase in<br />
revenue in our Multi-Links and other<br />
segment in the 2008 financial year was<br />
primarily due to the inclusion in the 2008<br />
fiscal year of revenue generated by our<br />
newly acquired subsidiaries, Multi-Links<br />
and Africa Online.<br />
Other income<br />
Other income includes profit on the<br />
disposal of investments, property, plant and<br />
equipment and intangible assets. The<br />
decrease in fixed-line other income in the<br />
2009 financial year was primarily due to<br />
the gain on disposal of properties in the<br />
2008 financial year. The increase in fixedline<br />
other income in the 2008 financial<br />
year was primarily due to the disposal of<br />
more properties at a higher value during<br />
the 2008 fiscal year.<br />
Operating expenses<br />
Operating expenses increased in the years<br />
ended March 31, 2009 and 2008 as a<br />
result of increased operating expenses in<br />
Multi-Links and fixed-line segments.<br />
The increase in the Multi-Links segment’s<br />
operating expenses in the 2009 financial<br />
year was primarily due to increased cost of<br />
sales and associated subsidies as a result<br />
of increased sales volumes, increased<br />
advertising and promotional expenditure<br />
and an increase in expatriate fees as a<br />
result of an increase in staff seconded from<br />
<strong>Telkom</strong> during the year. The increase in the<br />
Multi-Links segment’s operating expenses in<br />
the 2008 financial year was primarily due<br />
to the inclusion of operating expenses<br />
relating to our newly acquired subsidiary,<br />
Multi-Links, which impacted all expense<br />
categories.<br />
The increase in the other segment’s<br />
operating expenses in the 2009 financial<br />
year was mainly contributed by the<br />
operating expenditure of UUNET, Africa<br />
Online’s 40% joint venture. Increases in the<br />
other segment’s operating expenses in the<br />
2008 financial year were primarily driven<br />
by significant increases in payments to<br />
other operators, employee expenses,<br />
selling, general and administrative<br />
expenses, depreciation, amortisation<br />
impairments and write-offs, operating<br />
leases and service fees.<br />
The increase in fixed-line operating<br />
expenses in the 2009 financial year was<br />
primarily due to increased selling, general<br />
and administrative expenses, payment to<br />
other network operators, depreciation,<br />
amortisation impairments and write-offs,<br />
employee expenses and service fees.<br />
Selling, general and administrative<br />
expenses increased primarily due to the<br />
impairment of the Multi-Links investment in<br />
the 2009 financial year, increased<br />
materials and maintenance expenses and<br />
higher bad debts. Depreciation,<br />
amortisation, impairments and write-offs<br />
increased in the year ended March 31,<br />
2009 primarily as a result of higher<br />
amortisation of intangible assets and<br />
increased depreciation due to the on-going<br />
investment in telecommunications network<br />
equipment and data processing<br />
equipment. Payments to other operators<br />
increased primarily due to increased<br />
payments to international operators due to<br />
increased switch hubbing volumes and<br />
higher exchange rates and settlement rates.<br />
Employee expenses increased in the year<br />
ended March 31, 2009 primarily due to a<br />
higher provision for medical aid for<br />
pensioners as a result of increased interest<br />
costs, higher salaries and wages as a result<br />
Group<br />
overview<br />
Management<br />
review<br />
Sustainability<br />
review<br />
Performance<br />
review<br />
Financial<br />
statements<br />
Company<br />
Financial<br />
Information
108<br />
<strong>Telkom</strong> Annual Report 2009<br />
Financial review (continued)<br />
of average annual salary increases of<br />
10.86% as well as higher leave benefits.<br />
Service fees increased in the year ended<br />
March 31, 2009 primarily due to<br />
consultancy fees relating to the Vodacom<br />
sale and unbundling transaction and higher<br />
security costs to secure the copper network.<br />
The increase in fixed-line operating<br />
expenses in the 2008 financial year was<br />
primarily due to increased payments to<br />
other operators, higher employee expenses<br />
and service fees, partially offset by lower<br />
leases and selling, general and<br />
administrative expenses. Payments to other<br />
operators increased primarily due to<br />
increased calls from our fixed-line network<br />
to mobile and international operators as<br />
result of higher call volumes from our fixedline<br />
network to the mobile and international<br />
networks. Employee expenses increased<br />
due to higher salaries and wages as a<br />
result of average annual salary increases<br />
and higher share compensation expenses,<br />
partially offset by a reduced provision for<br />
team award and a reduction in the number<br />
of employees. Service fees increased<br />
primarily due to increased property<br />
management costs mainly related to<br />
increased electricity usage, electricity rates<br />
and taxes, payments to consultants to<br />
explore local and international investment<br />
opportunities, higher security costs due to<br />
increases in contract prices and<br />
maintenance and monitoring of the cable<br />
alarm system and legal fees related to<br />
Telcordia. Operating leases decreased in<br />
the year ended March 31, 2008 primarily<br />
due to a discount received on the extension<br />
of our vehicle lease and a reduction in the<br />
number of vehicles from 9,694 at<br />
March 31, 2007 to 8,792 at March 31,<br />
2008. Selling, general and administrative<br />
expenses decreased primarily due to the<br />
provision for probable liabilities in the<br />
Telcordia dispute in the 2007 financial<br />
year, which were not increased significantly<br />
in the 2008 financial year, and lower<br />
marketing expense, partially offset by the<br />
R217 million impairment of the <strong>Telkom</strong><br />
Media loan in the 2008 financial year –<br />
increased materials and maintenance<br />
expenses and higher bad debts.<br />
Depreciation, amortisation, impairments<br />
and write-offs increased in the year ended<br />
March 31, 2008 primarily as a result of<br />
higher amortisation of intangible assets and<br />
increased depreciation due to the on-going<br />
investment in telecommunications network<br />
equipment and data processing equipment,<br />
partially offset by lower asset write-offs.<br />
Operating profit<br />
Operating profit decreased in the 2009<br />
and 2008 financial years due to<br />
decreased operating profit in the fixed-line<br />
and Multi-Links segments as a result of<br />
increased operating expenditure. As a<br />
result, the fixed-line operating profit margin<br />
decreased from 26.6% in the 2007<br />
financial year to 24.9% in the 2008<br />
financial year and decreased to 12.9% in<br />
the 2009 financial year. The operating<br />
margin for our Multi-Links segment<br />
decreased significantly from a negative<br />
margin of 11.5% in the 2008 financial<br />
year to a negative operating margin of<br />
25.7% in the 2009 financial year. The<br />
operating profit margin for our other<br />
segment decreased from 47.1% in the<br />
2007 financial year to 43.6% in the 2008<br />
financial year and decreased to 39.3% in<br />
the 2009 financial year.<br />
Investment income<br />
Investment income consists of interest<br />
received on short-term investments and<br />
bank accounts and income received from<br />
our investments. Group investment income<br />
increased 7.7% to R181 million in the<br />
2009 financial year and decreased<br />
15.6% to R168 million in the 2008<br />
financial year from R199 million in the<br />
2007 financial year. The increase in the<br />
2009 financial year was primarily due to<br />
increased short-term investments and<br />
interest rates. The decrease in the 2008<br />
financial year was primarily due to lower<br />
interest received from fixed deposits and<br />
repurchase agreements mainly due to<br />
lower cash balances.<br />
Finance charges and fair value<br />
movements<br />
Finance charges and fair value movements<br />
include interest paid on local and foreign<br />
borrowings, amortised discounts on bonds<br />
and commercial paper bills, fair value<br />
gains and losses on financial instruments<br />
and foreign exchange gains and losses.<br />
The following table sets forth information<br />
related to our finance charges and fair<br />
value movements for the periods indicated.
<strong>Telkom</strong> Annual Report 2009 109<br />
Finance charges and fair value movements<br />
Year ended March 31,<br />
2007 2008 2009 2008/2007 2009/2008<br />
(in millions, except percentages) Z<strong>AR</strong> Z<strong>AR</strong> Z<strong>AR</strong> % change % change<br />
Interest expense 1,142 1,543 1,732 35.1 12.2<br />
Local loans 1,303 1,700 1,895 30.5 11.5<br />
Foreign loans – 18 – – –<br />
Finance charges capitalised (161) (175) (163) 8.7 (6.9)<br />
Foreign exchange losses and fair value movements (285) 13 1,111 (104.6) –<br />
Fair value (adjustments) on derivative instruments (344) (80) 268 (76.7) (435.0)<br />
Foreign exchange losses 59 93 843 57.6 806.5<br />
Total finance charges 857 1,556 2,843 81.6 82.7<br />
During the year ended March 31, 2009,<br />
finance charges increased primarily due to<br />
higher foreign exchange losses and fair<br />
value movements incurred by Multi-Links on<br />
foreign denominated loans and creditor’s<br />
balances as a result of the devaluation of<br />
the naira and the mark to market valuation<br />
of the Multi-Links put option as well as<br />
increased interest paid as a result of higher<br />
debt levels and interest rates. During the<br />
year ended March 31, 2008, finance<br />
charges increased primarily due to a<br />
higher interest expense resulting from<br />
higher debt levels in the fixed-line, Multi-<br />
Links and other segments, and foreign<br />
exchange losses and fair value movements<br />
decreased primarily due to currency<br />
movements and fair value losses on the put<br />
option we have in place relating to Multi-<br />
Links. This was partially offset by fair value<br />
adjustments as a result of the significant<br />
weakness of the rand against international<br />
currencies.<br />
Taxation<br />
Our consolidated taxation expense from<br />
continuing operations decreased 37.3% to<br />
R1,660 million in the year ended March<br />
31, 2009 and decreased 5.6% to<br />
R2,647 million in the year ended March<br />
31, 2008 from R2,803 million in the year<br />
ended March 31, 2007. The decrease in<br />
the 2009 financial year was primarily due<br />
to the decrease in the STC charge as a<br />
result of lower dividends declared as<br />
compared to the previous year and the<br />
R454 million deferred taxation asset that<br />
was raised on the capital gains tax base<br />
cost of the 15% investment in Vodacom,<br />
that are held for sale and will be utilised for<br />
the future capital gains tax liability of the<br />
sale transaction. This was partially offset by<br />
higher non-deductible expenditure relating<br />
to the impairment of Multi-Links and Africa<br />
Online. The decrease in the 2008<br />
financial year was primarily due to higher<br />
non-deductible expenses relating mostly to<br />
the impairment of <strong>Telkom</strong> Media and Africa<br />
Online assets, the increase in STC taxation<br />
credits utilised in respect of the repurchase<br />
of <strong>Telkom</strong> shares, the utilisation of the Multi-<br />
Links assessed losses and the impact of the<br />
taxation rate change on deferred taxation<br />
from 29% to 28% with effect from April 1,<br />
2008.<br />
The following table sets forth information related to our effective taxation rate for the <strong>Telkom</strong> Group, <strong>Telkom</strong> Company and Vodacom for<br />
the periods indicated:<br />
2007<br />
Year ended March 31,<br />
2008 2009 2008/2007 2009/2008<br />
(in percentages) % % % % change % change<br />
Effective tax rate<br />
<strong>Telkom</strong> Group – continuing operations 30.8 34.5 44.5 12.0 29.3<br />
<strong>Telkom</strong> Company 24.2 24.6 8.9 1.7 (63.8)<br />
Vodacom 36.9 34.1 39.5 (7.6) 15.8<br />
Group<br />
overview<br />
Management<br />
review<br />
Sustainability<br />
review<br />
Performance<br />
review<br />
Financial<br />
statements<br />
Company<br />
Financial<br />
Information
110<br />
<strong>Telkom</strong> Annual Report 2009<br />
Financial review (continued)<br />
The increase in the <strong>Telkom</strong> Group effective<br />
taxation rate in the 2009 financial year<br />
was mainly due to higher non-deductible<br />
expenditure relating to the impairment of<br />
Multi-Links and Africa Online and Vodacom<br />
transaction costs. The increase in the<br />
<strong>Telkom</strong> Group effective taxation rate in the<br />
2008 financial year was mainly due to<br />
higher non-deductible expenses relating<br />
mostly to the impairment of <strong>Telkom</strong> Media<br />
and Africa Online assets, the increase in<br />
STC taxation credits utilised in respect of<br />
the repurchases of <strong>Telkom</strong> shares and the<br />
impact of the taxation rate change on<br />
deferred taxation from 29% to 28% with<br />
effect from April 1, 2008.<br />
The decrease in the <strong>Telkom</strong> Company<br />
effective taxation rate in the 2009 financial<br />
year was mainly due to the R1,280 million<br />
deferred taxation asset that was raised on<br />
the capital gains tax base cost of the 15%<br />
investment in Vodacom, that are held for<br />
sale and will be utilised for the future<br />
capital gains tax liability of the sale<br />
transaction, partially offset by the<br />
R1,843 million impairment of the Multi-<br />
Links investment, R254 million impairment<br />
of the <strong>Telkom</strong> Media loan and R85 million<br />
impairment of the Africa Online investment<br />
as well as Vodacom transaction costs. The<br />
higher effective taxation rate for <strong>Telkom</strong><br />
Company in the year ended March 31,<br />
2008 was primarily due to higher nondeductible<br />
expenses relating to the<br />
R217 million impairment of the <strong>Telkom</strong><br />
Media loan and an increase of<br />
R198 million in secondary taxation on<br />
companies, partially offset by higher<br />
exempt income resulting from dividends<br />
received from Vodacom and other<br />
subsidiaries. Vodacom’s effective taxation<br />
rate increased in the 2008 financial year<br />
primarily due to the disallowable expenses<br />
relating to the BEE deal and non-deductible<br />
interest expenses. Vodacom’s effective<br />
taxation rate decreased in the 2008<br />
financial year primarily due to the decrease<br />
in the rate of secondary taxation on<br />
companies from 12.5% to 10%.<br />
Minority interests<br />
Minority interests in the income of subsidiaries<br />
decreased significantly to R77 million in the<br />
year ended March 31, 2009 primarily due<br />
to an increase in the Multi-Links minorities’<br />
share in net losses. Minority interests in the<br />
income of subsidiaries decreased 3.0% to<br />
R197 million in the year ended March 31,<br />
2008 primarily due to the purchase of the<br />
remaining equity interest of 30% in<br />
Smartphone on August 31, 2007, partially<br />
offset by an increase in profits generated by<br />
our <strong>Telkom</strong> Directory Services subsidiary and<br />
Vodacom Tanzania.<br />
Profit for the year attributable to equity<br />
holders of <strong>Telkom</strong><br />
Profit for the year attributable to equity<br />
holders of <strong>Telkom</strong> decreased to<br />
R4,170 million in the 2009 financial year<br />
primarily due to decreased operating profit<br />
in our Multi-Links, fixed-line and mobile<br />
segments, partially offset by increased<br />
operating profit in our other segment.<br />
Higher finance charges were partially<br />
offset by lower taxation and higher<br />
investment income. Profit for the year<br />
attributable to equity holders of <strong>Telkom</strong><br />
decreased to R7,975 million in the 2008<br />
financial year primarily due to decreased<br />
operating profit in our fixed-line and other<br />
segments, partially offset by increased<br />
operating profit in our mobile segment.<br />
Higher finance charges and lower<br />
investment income were partially offset by<br />
lower taxation.<br />
Fixed-line segment<br />
The following is a discussion of the results<br />
of operations from our fixed-line segment<br />
before eliminations of intercompany<br />
transactions with the mobile and other<br />
segments. Our fixed-line segment is our<br />
largest segment based on revenue and<br />
profit contribution.<br />
Fixed-line operating revenue<br />
Our fixed-line operating revenue is derived<br />
principally from fixed-line subscriptions and<br />
connections; traffic, which comprises local<br />
and long distance traffic, fixed-to-mobile<br />
traffic, international outgoing traffic and<br />
international voice over internet protocol<br />
services; and interconnection, which<br />
comprise terminating and hubbing traffic.<br />
We also derive fixed-line operating<br />
revenue from our data business, which<br />
includes data transmission services,<br />
managed data networking services and<br />
internet access and related information<br />
technology services.<br />
<strong>Telkom</strong> has in recent years introduced<br />
calling plans as a customer retention<br />
strategy in order to defend revenues. These<br />
calling plan arrangements comprise<br />
monthly subscriptions for access line rental,<br />
value-added services and free or<br />
discounted rates on calls. The access line<br />
rentals and value-added services revenue<br />
components of calling plan arrangements<br />
are included in subscriptions and<br />
connections revenue. In response to the<br />
significant growth in calling plan<br />
arrangements, the need arose to separate<br />
traffic revenue resulting from subscription<br />
based calling plans into annuity revenue<br />
and the respective traffic revenue streams.<br />
Subscription based on calling plans<br />
revenue includes traffic annuity revenue<br />
related to calling plans. Discounted and<br />
out of plan traffic relating to these calling<br />
plans is disclosed under the applicable<br />
traffic revenue streams.<br />
The following table shows operating<br />
revenue for our fixed-line segment broken<br />
down by major revenue streams and as a<br />
percentage of total revenue for our fixedline<br />
segment and the percentage change<br />
by major revenue stream for the periods<br />
indicated.
Fixed-line operating revenue increased in<br />
the 2009 financial year primarily due to<br />
continued growth in data services, higher<br />
revenue from interconnection services and<br />
subscriptions and connections partially<br />
offset by a decrease in traffic revenue,<br />
particularly local and long distance traffic<br />
revenue partially offset by an increase in<br />
traffic revenue from subscription based<br />
calling plans. Fixed-line operating revenue<br />
increased in the 2008 financial year<br />
primarily due to continued growth in data<br />
services and higher revenue from<br />
subscription based calling plans,<br />
interconnection and subscriptions and<br />
connections, partially offset by a decrease<br />
in traffic revenue, particularly local and<br />
long distance traffic revenue.<br />
Fixed-line operating revenue was adversely<br />
impacted in both the 2009 and 2008<br />
financial years due to a decrease in the<br />
number of residential post-paid PSTN lines<br />
primarily as a result of customer migration<br />
to mobile and higher bandwidth products<br />
such as ADSL and lower connections, and<br />
a decrease in the number of prepaid PSTN<br />
lines as a result of customer migration to<br />
mobile services and our residential postpaid<br />
PSTN services to enable access to<br />
subscription based calling plans and was<br />
positively impacted by our increase in<br />
ISDN channels, ADSL services and, to a<br />
lesser extent, business post-paid PSTN<br />
lines. In addition, traffic was adversely<br />
affected in both years by the increasing<br />
substitution of calls placed using mobile<br />
services rather than our fixed-line service<br />
and dial-up traffic being substituted by our<br />
ADSL service, as well as the decrease in<br />
the number of prepaid and residential postpaid<br />
PSTN lines and increased competition<br />
in our payphones business. As a result,<br />
traffic declined 7.6% in the 2009 financial<br />
year and 8.2% in the 2008 financial year.<br />
Revenue per fixed access line increased<br />
2.1% to R5,349 in the 2009 financial<br />
year from R5,250 in the 2008 financial<br />
year primarily due to a 1.4% decrease in<br />
the average number of access lines<br />
and increased interconnection and<br />
subscriptions and connection revenue<br />
partially offset by lower traffic revenue.<br />
Revenue per fixed access line decreased<br />
<strong>Telkom</strong> Annual Report 2009 111<br />
Fixed-line operating revenue<br />
Year ended March 31,<br />
2008/ 2009/<br />
2007 2008 2009 2007 2008<br />
(in millions, except percentages) Z<strong>AR</strong> % Z<strong>AR</strong> % Z<strong>AR</strong> % % change % change<br />
Subscriptions and connections 6,286 19.4 6,330 19.4 6,614 19.7 0.7 4.5<br />
Traffic 16,740 51.8 15,950 49.0 15,323 45.5 (4.7) (3.9)<br />
Local 4,832 14.9 4,076 12.6 3,634 10.8 (15.6) (10.8)<br />
Long distance 2,731 8.5 2,252 6.9 2,036 6.0 (17.5) (9.6)<br />
Fixed-to-mobile 7,646 23.6 7,557 23.2 7,420 22.0 (1.2) (1.8)<br />
International outgoing 988 3.1 986 3.0 933 2.8 (0.2) (5.4)<br />
Subscription based calling plans 543 1.7 1,079 3.3 1,300 3.9 98.7 20.5<br />
Interconnection 1,639 5.1 1,757 5.4 2,084 6.2 7.2 18.6<br />
Data 7,489 23.1 8,308 25.5 9,310 27.6 10.9 12.1<br />
Sundry revenue 191 0.6 227 0.7 328 1.0 18.8 44.5<br />
Fixed-line operating revenue 32,345 100.0 32,572 100.0 33,659 100.0 0.7 3.3<br />
0.5% to R5,250 in the 2008 financial<br />
year from R5,275 in the 2007 financial<br />
year primarily due to the decline in traffic<br />
tariffs and local traffic volumes, partially<br />
offset by increased subscription based<br />
calling plans, interconnection and<br />
subscriptions and connections tariffs.<br />
Subscriptions and connections. Revenue<br />
from subscriptions and connections consists<br />
of revenue from connection fees, monthly<br />
rental charges, value-added voice services<br />
and the sale and rental of customer<br />
premises equipment for post-paid and<br />
prepaid PSTN lines, including ISDN<br />
channels and private payphones.<br />
Subscriptions and connections revenue is<br />
principally a function of the number and<br />
mix of residential and business lines in<br />
service, the number of private payphones<br />
in service and the corresponding charges.<br />
The following table sets forth information<br />
related to our fixed-line subscription and<br />
connection revenue during the periods<br />
indicated.<br />
Group<br />
overview<br />
Management<br />
review<br />
Sustainability<br />
review<br />
Performance<br />
review<br />
Financial<br />
statements<br />
Company<br />
Financial<br />
Information
112<br />
<strong>Telkom</strong> Annual Report 2009<br />
Financial review (continued)<br />
Revenue from subscriptions and<br />
connections increased in the year ended<br />
March 31, 2009 mainly due to increased<br />
tariffs as well as an increase in the number<br />
of ISDN lines and, to a lesser extent,<br />
residential prepaid PSTN lines, partially<br />
offset by lower business and residential<br />
post-paid PSTN lines. The average monthly<br />
prices for subscriptions increased by<br />
11.0% on August 1, 2008. Revenue from<br />
subscriptions and connections increased in<br />
the year ended March 31, 2008 mainly<br />
due to increased tariffs as well as an<br />
increase in the number of ISDN lines and,<br />
to a lesser extent, business post-paid PSTN<br />
lines, partially offset by lower residential<br />
post-paid PSTN lines and prepaid PSTN<br />
lines. The average monthly prices for<br />
subscriptions increased by 8.3% on August<br />
1, 2006 and 12.0% on August 1, 2007.<br />
The decrease in the number of residential<br />
post-paid PSTN lines in service in both the<br />
2009 and 2008 financial years was<br />
primarily as a result of customer migration<br />
to mobile and higher bandwidth products<br />
such as ADSL and lower connections. The<br />
Fixed-line subscription and connection revenue<br />
Year ended March 31,<br />
2007 2008 2009 2008/2007 2009/2008<br />
% change % change<br />
Total subscriptions and connections revenue<br />
(Z<strong>AR</strong> millions, except percentages)<br />
Total subscription access lines (thousands,<br />
6,286 6,330 6,614 0.7 4.5<br />
except percentages) (1) Postpaid<br />
4,490 4,395 4,319 (2.1) (1.7)<br />
PSTN (2) 2,971 2,893 2,769 (2.6) (4.3)<br />
ISDN channels 718 754 781 5.0 3.6<br />
Prepaid PSTN 795 743 766 (6.5) 3.1<br />
Private payphones 6 5 3 (16.7) (40.0)<br />
Notes:<br />
(1) Total subscription access lines comprise PSTN lines, including ISDN lines and private payphones, but excluding internal lines in service and public<br />
payphones. Each analogue PSTN line includes one access channel, each basic rate ISDN line includes two access channels and each primary rate<br />
ISDN line includes 30 access channels.<br />
(2) Excluding ISDN channels. PSTN lines are provided using copper cable, DECT and fibre.<br />
increase in the number of post-paid ISDN<br />
channels was driven by increased demand<br />
for higher bandwidth and functionality. The<br />
increase in prepaid PSTN lines in the<br />
2009 financial year was primarily due to<br />
our affordable Waya Waya offering. The<br />
decrease in prepaid PSTN lines in the<br />
2008 financial year was primarily due to<br />
continued migration to mobile services and<br />
our residential post-paid PSTN services to<br />
enable access to subscription based<br />
calling plans. In addition, we relaxed our<br />
credit policies which led to fewer<br />
migrations of our postpaid customers to<br />
prepaid service in the 2008 financial year.<br />
Traffic. Traffic revenue consists of revenue<br />
from local, long distance, fixed-to-mobile<br />
and international outgoing calls,<br />
international voice over internet protocol<br />
services and subscription based calling<br />
plans. Traffic revenue is principally a<br />
function of tariffs and the volume, duration<br />
and mix between relatively more expensive<br />
domestic long distance, international and<br />
fixed-to-mobile calls and relatively less<br />
expensive local calls.<br />
<strong>Telkom</strong> has in recent years introduced<br />
calling plans as a customer retention<br />
strategy in order to defend revenues. These<br />
calling plan arrangements comprise<br />
monthly subscriptions for access line rental,<br />
value-added services and free or<br />
discounted rates on calls. The access line<br />
rentals and value-added services revenue<br />
components of calling plan arrangements<br />
are included in subscriptions and<br />
connections revenue. In response to the<br />
significant growth in calling plan<br />
arrangements, the need arose to separate<br />
traffic revenue resulting from subscription<br />
based calling plans into annuity revenue<br />
and the respective traffic revenue streams.<br />
Subscription based on calling plans<br />
revenue includes traffic annuity revenue<br />
related to calling plans. Discounted and<br />
out of plan traffic relating to these calling<br />
plans is disclosed under the applicable<br />
traffic revenue streams.<br />
Traffic includes dial-up internet traffic.
The following table sets forth information related to our fixed-line traffic revenue for the periods indicated.<br />
Fixed-line traffic revenue<br />
Year ended March 31,<br />
<strong>Telkom</strong> Annual Report 2009 113<br />
2007 2008 2009 2008/2007 2009/2008<br />
% change % change<br />
Local traffic revenue (Z<strong>AR</strong> millions, except percentages) 4,832 4,076 3,634 (15.6) (10.8)<br />
Local traffic (millions of minutes, except percentages) (1) 14,764 11,317 8,822 (23.3) (22.0)<br />
Long distance traffic revenue (Z<strong>AR</strong> millions,<br />
except percentages)<br />
Long distance traffic (millions of minutes, except<br />
2,731 2,252 2,036 (17.5) (9.6)<br />
percentages) (1) Fixed-to-mobile traffic revenue (Z<strong>AR</strong> millions,<br />
4,224 3,870 3,631 (8.4) (6.2)<br />
except percentages)<br />
Fixed-to-mobile traffic (millions of minutes, except<br />
7,646 7,557 7,420 (1.2) (1.8)<br />
percentages) (1) International outgoing traffic revenue<br />
4,103 4,169 4,126 1.6 (1.0)<br />
(Z<strong>AR</strong> millions, except percentages)<br />
International outgoing traffic (millions of minutes,<br />
988 986 933 (0.2) (5.4)<br />
except percentages) (1) International voice over internet protocol (millions<br />
558 635 622 13.8 (2.0)<br />
of minutes, except percentages) (2) Subscription based calling plans revenue<br />
38 43 34 13.2 (20.9)<br />
(Z<strong>AR</strong> millions, except percentages)<br />
Subscription based calling plans (millions of<br />
543 1,079 1,300 98.7 20.5<br />
minutes, except percentages)<br />
Total traffic revenue (Z<strong>AR</strong> millions, except<br />
1,896 2,997 3,546 58.1 18.3<br />
percentages) 16,740 15,950 15,323 (4.7) (3.9)<br />
Total traffic (millions of minutes, except percentages) (1) Average total monthly traffic minutes per average<br />
29,323 26,926 24,869 (8.2) (7.6)<br />
monthly access line (minutes) (3) 456 417 385 (8.6) (7.7)<br />
Notes:<br />
(1) Traffic, other than international voice over internet protocol traffic, is calculated by dividing total traffic revenue by the weighted average tariff during the<br />
relevant period. Traffic includes dial-up internet traffic.<br />
(2) International voice over internet protocol traffic is based on the traffic reflected in invoices.<br />
(3) Average monthly traffic minutes per average monthly access line are calculated by dividing the total traffic by the cumulative number of monthly access<br />
lines in the period.<br />
Group<br />
overview<br />
Management<br />
review<br />
Sustainability<br />
review<br />
Performance<br />
review<br />
Financial<br />
statements<br />
Company<br />
Financial<br />
Information
114<br />
<strong>Telkom</strong> Annual Report 2009<br />
Financial review (continued)<br />
Traffic revenue declined in the 2009<br />
financial year primarily due to lower traffic<br />
volumes partially offset by increased<br />
subscription based calling plans and<br />
revenue and higher average traffic tariffs.<br />
Traffic revenue declined in the 2008<br />
financial year primarily due to lower<br />
average traffic tariffs and lower local traffic<br />
volumes partially offset by increased<br />
subscription based calling plans and<br />
revenue, international outgoing and fixedto-mobile<br />
traffic.<br />
ICASA approved a 2.1% reduction in the<br />
overall tariffs for services in the basket<br />
effective August 1, 2006, 1.2% reduction<br />
in the overall tariffs for services in the<br />
basket effective August 1, 2007 and a<br />
2.4% increase in the overall tariffs for<br />
services in the basket effective August 1,<br />
2008. Traffic was adversely affected in<br />
both the 2009 and 2008 financial years<br />
by the increasing substitution of calls<br />
placed using mobile services rather than<br />
our fixed-line service and dial-up traffic<br />
being substituted by our ADSL service, as<br />
well as the decrease in the number of<br />
prepaid and residential post-paid PSTN<br />
lines and increased competition in our<br />
payphone business.<br />
Local traffic revenue decreased in the<br />
2009 and 2008 financial years primarily<br />
due to significantly lower traffic resulting<br />
primarily from internet call usage being<br />
substituted by our ADSL service, the<br />
substitution of calls placed using mobile<br />
services and discounts to business<br />
customers, partially offset by increased<br />
local off-peak tariffs and traffic volumes<br />
related to <strong>Telkom</strong> Closer packages. We<br />
increased penetration of subscription<br />
based calling plans to stimulate usage in<br />
the 2009 and 2008 financial years and to<br />
counteract mobile substitution, which<br />
effectively lowers the cost to the customer.<br />
On September 1, 2005, we decreased<br />
the price of local peak calls after the first<br />
unit by 5.0% to 38 SA cents per minute<br />
(VAT inclusive). This price was unchanged<br />
on August 1, 2006 and August 1, 2007.<br />
On August 1, 2008, we increased the<br />
price of local peak calls after the first unit<br />
by 3.2% to 39.2 SA cents per minute (VAT<br />
inclusive). On August 1, 2007, the price of<br />
local off-peak calls increased 4.1% on<br />
average. On August 1, 2008, the price of<br />
local off-peak calls increased 9.2% on<br />
average.<br />
Long distance traffic revenue decreased in<br />
the 2009 and 2008 financial years mainly<br />
due to a decrease in average long<br />
distance tariffs and, to a lesser extent,<br />
decreased long distance traffic, partially<br />
offset by increased traffic related to <strong>Telkom</strong><br />
Closer packages and Worldcall. We<br />
decreased our fixed-line long distance<br />
traffic tariffs by 10% on September 1,<br />
2005, a further 10% on August 1, 2006<br />
and a further 10% on August 1, 2007. The<br />
tariff remained unchanged on August 1,<br />
2008.<br />
Revenue from fixed-to-mobile traffic consists<br />
of revenue from calls made by our fixed-line<br />
customers to the three mobile networks in<br />
South Africa and is primarily a function of<br />
fixed-to-mobile tariffs and the number, the<br />
duration and the time of calls. Fixed-tomobile<br />
traffic revenue decreased in the<br />
2009 and 2008 financial years due to<br />
higher discount offered to customers in<br />
order to retain traffic, partially offset by<br />
higher traffic related to the <strong>Telkom</strong> Closer<br />
packages. The decrease in fixed-to-mobile<br />
traffic in the 2009 financial year was<br />
primarily due to an increase in the number<br />
of <strong>Telkom</strong> Closer customers, thereby<br />
decreasing the out of bundle volumes. The<br />
increase in fixed-to-mobile traffic in the<br />
2008 financial year was primarily due to<br />
discounts offered to larger customers on<br />
fixed-to-mobile calls.<br />
Revenue from international outgoing traffic<br />
consists of revenue from calls made by our<br />
fixed-line customers to international<br />
destinations and from international voice<br />
over internet protocol services and is a<br />
function of tariffs and the number, duration<br />
and mix of calls to destinations outside<br />
South Africa. In the 2009 financial year,<br />
international outgoing traffic revenue<br />
declined primarily as a result of a decrease<br />
in volumes mainly as a result of the<br />
increase in the number of <strong>Telkom</strong> Closer<br />
subscribers, thereby decreasing the out of<br />
bundle volumes. In the 2008 financial<br />
year, international outgoing traffic revenue<br />
declined primarily as a result of a decrease<br />
in the average international outgoing<br />
tariffs, partially offset by an increase in<br />
international outgoing traffic primarily as a<br />
result of the reduced tariffs. The average<br />
tariffs to all international destinations<br />
decreased by 11.1% on August 1, 2006<br />
and by 9.0% on August 1, 2007. On<br />
August 1, 2008 the overall international<br />
tariffs remained unchanged, but tariffs to<br />
certain destinations were increased whilst<br />
others were decreased.<br />
Revenue from subscription based calling<br />
plans includes revenue from <strong>Telkom</strong>’s<br />
subscription based plans, <strong>Telkom</strong> Closer<br />
and Supreme Call, which are bundled<br />
products on post-paid PSTN lines that<br />
include discounted rates and free minutes<br />
for a fixed monthly subscription fee. In the<br />
2009 financial year, revenue from<br />
subscription based calling plans increased<br />
by 20.5% primarily due to a 27.6%<br />
increase in customers subscribing to these<br />
packages. In the 2008 financial year,<br />
revenue from subscription based calling<br />
plans increased by 98.7% primarily due to<br />
a 69.4% increase in customers subscribing<br />
to these packages.<br />
Interconnection. We generate revenue from<br />
interconnection services for traffic from calls<br />
made by other operators’ customers that<br />
terminate on or transit through our network.<br />
Revenue from interconnection services<br />
includes payments from domestic mobile,<br />
domestic fixed and international operators<br />
regardless of where the traffic originates or<br />
terminates. The following table sets forth<br />
information related to interconnection<br />
revenue for the years indicated.
Interconnection revenue<br />
Year ended March 31,<br />
<strong>Telkom</strong> Annual Report 2009 115<br />
2007 2008 2009 2008/2007 2009/2008<br />
% change % change<br />
Interconnection revenue (Z<strong>AR</strong> millions, except<br />
percentages)<br />
Interconnection revenue from domestic mobile<br />
1,639 1,757 2,084 7.2 18.6<br />
operators (Z<strong>AR</strong> millions, except percentages)<br />
Domestic mobile interconnection traffic<br />
816 838 916 2.7 9.3<br />
(millions of minutes, except percentages) (1) Interconnection revenue from domestic fixed-line<br />
2,419 2,502 2,484 3.4 (0.7)<br />
operators (Z<strong>AR</strong> millions, except percentages)<br />
Domestic fixed-line interconnection traffic<br />
– 28 111 – 296.4<br />
(millions of minutes, except percentages) (2) Interconnection revenue from international<br />
– 113 415 – 267.3<br />
operators (Z<strong>AR</strong> millions, except percentages)<br />
International interconnection traffic<br />
823 891 1,057 8.3 18.6<br />
(millions of minutes, except percentages) (2) 1,321 1,280 1,189 (3.1) (7.1)<br />
Notes:<br />
(1) Domestic mobile interconnection traffic, other than international outgoing mobile traffic, is calculated by dividing total domestic mobile and domestic fixedline<br />
interconnection traffic revenue, respectively, by the weighted average domestic mobile and domestic fixed-line interconnection traffic tariffs during the<br />
relevant period. International outgoing mobile traffic is based on the traffic registered through the respective exchanges and reflected in interconnection<br />
invoices.<br />
(2) International interconnection and domestic fixed-line interconnection traffic is based on the traffic registered through the respective exchanges and reflected<br />
on interconnection invoices.<br />
Interconnection revenue from domestic<br />
mobile operators includes revenue for call<br />
termination and international outgoing calls<br />
from domestic mobile networks, as well as<br />
access to other services, such as<br />
emergency services and directory enquiry<br />
services. Interconnection revenue from<br />
domestic mobile operators increased in the<br />
2009 and financial year mainly due to<br />
higher average tariffs, partially offset by<br />
lower volumes. Interconnection revenue<br />
from domestic mobile operators increased<br />
in the 2008 financial year mainly due to<br />
increased traffic from domestic mobile<br />
operators, partially offset by lower average<br />
tariffs on mobile international outgoing<br />
calls. Domestic mobile interconnection<br />
traffic decreased in the year ended March<br />
31, 2009 primarily due to increased<br />
mobile-to-mobile calls bypassing our<br />
network and volumes lost to other<br />
international carriers. Domestic mobile<br />
interconnection traffic increased in the year<br />
ended March 31, 2008 primarily due to<br />
an overall increase in mobile calls as a<br />
result of a growing mobile market, partially<br />
offset by increased mobile-to-mobile calls<br />
bypassing our network. Interconnection<br />
revenue from domestic mobile operators<br />
includes fees paid to our fixed-line business<br />
by Vodacom of R462 million in the year<br />
ended March 31, 2009, R468 million in<br />
the year ended March 31, 2008 and<br />
R468 million in the year ended March 31,<br />
2007. Fifty percent of these amounts were<br />
attributable to our interest in Vodacom and<br />
were eliminated from the <strong>Telkom</strong> Group’s<br />
revenue on consolidation.<br />
Interconnection revenue from domestic<br />
fixed-line operators includes fees paid by<br />
Neotel, underserviced area licence holders<br />
and value-added network service providers<br />
for call termination and international<br />
outgoing calls, as well as access to other<br />
services, such as emergency services and<br />
directory inquiry services. With effect from<br />
May 23, 2007, ICASA approved<br />
interconnection rates with Neotel,<br />
underserviced area licence holders and<br />
value-added network service providers for<br />
interconnection on our fixed-line network. In<br />
October 2007, Neotel commenced<br />
interconnection with <strong>Telkom</strong>. In July 2007,<br />
<strong>Telkom</strong> began interconnection with the<br />
underserviced area licence holders and in<br />
November 2007, value added network<br />
service providers. We expect interconnection<br />
revenue to increase as a result<br />
of the entrance of Neotel and the further<br />
liberalisation of the South African<br />
telecommunications industry, which may<br />
partially mitigate declines in revenue in<br />
other areas.<br />
Interconnection revenue from international<br />
operators includes amounts paid by foreign<br />
operators for the use of our network to<br />
terminate calls made by customers of such<br />
Group<br />
overview<br />
Management<br />
review<br />
Sustainability<br />
review<br />
Performance<br />
review<br />
Financial<br />
statements<br />
Company<br />
Financial<br />
Information
116<br />
<strong>Telkom</strong> Annual Report 2009<br />
Financial review (continued)<br />
operators and payments from foreign<br />
operators for interconnection hubbing<br />
traffic through our network to other foreign<br />
networks. Interconnection revenue from<br />
international operators increased in the<br />
year ended March 31, 2009 primarily<br />
due to the weakening of the Rand against<br />
the SDR, the notional currency in which<br />
international rates are determined, and<br />
increased switched hubbing traffic volumes<br />
due to a reduction in tariffs to stimulate<br />
competitiveness. Interconnection revenue<br />
from international operators increased in<br />
the year ended March 31, 2008 primarily<br />
due to the weakening of the rand against<br />
the SDR, the notional currency in which<br />
international rates are determined, and<br />
increased switched hubbing traffic volumes<br />
due to a reduction in tariffs to stimulate<br />
competitiveness, partially offset by lower<br />
volumes and settlement rates.<br />
Data. Data services comprise data<br />
transmission services, including leased<br />
lines and packet based services, managed<br />
data networking services and internet<br />
access and related information technology<br />
services. In addition, data services include<br />
revenue from ADSL. Revenue from data<br />
services is mainly a function of the number<br />
of subscriptions, tariffs, bandwidth and<br />
2007<br />
Data services revenue<br />
Year ended March 31,<br />
2008 2009 2008/2007 2009/2008<br />
% change % change<br />
Data services revenue (Z<strong>AR</strong> millions, except<br />
percentages) 7,489 8,308 9,310 10.9 12.1<br />
Leased lines and other data revenue (1) Leased line facilities revenues from mobile<br />
5,828 6,460 7,452 10.8 15.4<br />
operators 1,661 1,848 1,858 11.3 0.5<br />
Number of managed network sites (at period end) 21,879 25,112 29,979 14.8 19.4<br />
Internet all access subscribers (at period end) 302,593 358,066 423,196 18.3 18.2<br />
Total ADSL subscribers (at period end) (2) 255,633 412,190 548,015 61.2 33.0<br />
Notes:<br />
(1) Leased lines and other data revenue includes all data services revenue other than leased line facilities revenue from mobile operators.<br />
(2) Excludes <strong>Telkom</strong> internal ADSL services of 1,029, 751 and 523 as of March 31, 2009, 2008 and 2007, respectively.<br />
distance. The table above sets forth<br />
information related to revenue from data<br />
services for the periods indicated.<br />
Our data services revenue increased in<br />
both the 2009 and 2008 financial years<br />
primarily due to increased revenue from<br />
data connectivity service, including ADSL<br />
connectivity and SAIX, internet access, and<br />
managed data networks, including VPN<br />
Supreme and increased revenue from<br />
leased line facilities from mobile operators.<br />
These increases were partially offset by<br />
decreased tariffs for leased line facilities to<br />
mobile operators and data connectivity<br />
services. Revenue from leased line facilities<br />
from mobile operators was relatively flat in<br />
the year ended March 31, 2009. Revenue<br />
from leased line facilities from mobile<br />
operators increased in the year ended<br />
March 31, 2008 primarily due to the rollout<br />
of third generation and universal mobile<br />
telecommunications system products by the<br />
mobile operators.<br />
Operating revenue from our data services<br />
included R1,059 million, R1,028 million<br />
and R907 million in revenue received by<br />
our fixed-line business from Vodacom in the<br />
years ended March 31, 2009, 2008 and<br />
2007, respectively. Fifty percent of these<br />
amounts were attributable to our interest in<br />
Vodacom and were eliminated from the<br />
<strong>Telkom</strong> Group’s revenue on consolidation.<br />
Sundry revenue. Sundry revenue includes<br />
revenue relating to collocation of other<br />
licensed operators on <strong>Telkom</strong> owned<br />
properties, the sale of materials and<br />
revenue related to the recovery of costs for<br />
work performed on behalf of other licensed<br />
operators. Sundry revenue increased by<br />
44.5% to R328 million in the 2009<br />
financial year and 18.8% to R227 million<br />
in the 2008 financial year from<br />
R191 million in the 2007 financial year.<br />
The increase in the 2009 financial year<br />
was primarily due to revenue from the FIFA<br />
World Cup project. The increase in the<br />
2008 financial year was primarily due to<br />
an increase in prices for collocation and<br />
recoveries.<br />
Fixed-line operating expenses<br />
The following table shows the operating<br />
expenses of our fixed-line segment broken<br />
down by expense category as a<br />
percentage of total revenue and the<br />
percentage change by operating expense<br />
category for the years indicated.
<strong>Telkom</strong> Annual Report 2009 117<br />
Fixed-line operating expenses<br />
Year ended March 31,<br />
2007 2008 2009 2008/ 2009/<br />
% of % of % of 2007 2008<br />
(in millions, except percentages) Z<strong>AR</strong> revenue Z<strong>AR</strong> revenue Z<strong>AR</strong> revenue % change % change<br />
Employee expenses (1) 7,096 21.9 7,397 22.7 7,999 23.8 4.2 8.1<br />
Payments to other<br />
network operators<br />
Selling, general and administrative<br />
6,461 20.0 6,902 21.2 7,536 22.3 6.8 9.2<br />
expenses (2)(3) 3,976 12.3 3,899 11.9 6,582 19.5 (1.9) 68.8<br />
Service fees 2,206 6.8 2,413 7.4 2,761 8.2 9.4 14.4<br />
Operating leases<br />
Depreciation, amortisation,<br />
762 2.4 619 1.9 613 1.8 (18.8) (1.0)<br />
impairments and write-offs 3,582 11.1 3,732 11.5 4,358 13.0 4.2 16.8<br />
Fixed-line operating expenses 24,083 74.5 24,962 76.6 29,849 88.7 3.6 19.6<br />
Notes:<br />
(1) Employee expenses include workforce reduction expenses of R8 million, R3 million and R24 million in the years ended March 31, 2009, 2008 and<br />
2007, respectively.<br />
(2) In the year ended March 31, 2007 we recorded a provision of R527 million for probable liabilities related to <strong>Telkom</strong>’s arbitration with Telcordia,<br />
excluding legal fees, of which R510 million is included in selling, general and administrative expenses and R11 million for interest and R6 million for<br />
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<br />
liabilities related to <strong>Telkom</strong>’s arbitration with Telcordia, including legal fees. The movement in the provision is due to increased interest of R53 million and<br />
foreign exchange rate effect of R52 million, which are included in finance charges, partially offset by a provisional payment made in respect of specific<br />
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<br />
<strong>Telkom</strong>’s arbitration with Telcordia, including legal fees. The movement in the provision is due to increased interest of R11 million and foreign exchange<br />
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,<br />
general and administrative expenses.<br />
(3) Includes a R254 million and R217 million impairment relating to <strong>Telkom</strong> Media in the 2009 and 2008 financial years, respectively and R1,843 million<br />
relating to the impairment of Multi-Links, R85 million impairment relating to Africa Online in the 2009 financial year.<br />
Fixed-line operating expenses increased in<br />
the 2009 financial year primarily due to<br />
increased selling, general and administrative<br />
expenses, payments to other network<br />
operators, depreciation, amortisation,<br />
impairment and write-offs, employee<br />
expenses and service fees. Fixed-line<br />
operating expenses increased in the 2008<br />
financial year primarily due to increased<br />
payments to other network operators,<br />
employee expenses, service fees and<br />
depreciation, amortisation, impairment and<br />
write-offs, partially offset by lower leases and<br />
selling, general and administrative expenses.<br />
Employee expenses. Employee expenses<br />
consist mainly of salaries and wages for<br />
employees, including bonuses and other<br />
incentives, benefits and workforce<br />
reduction expenses.<br />
The following table sets forth information<br />
related to our employee expenses for the<br />
years indicated.<br />
Group<br />
overview<br />
Management<br />
review<br />
Sustainability<br />
review<br />
Performance<br />
review<br />
Financial<br />
statements<br />
Company<br />
Financial<br />
Information
118<br />
<strong>Telkom</strong> Annual Report 2009<br />
Financial review (continued)<br />
Fixed-line employee expenses<br />
Year ended March 31,<br />
(in millions, except percentages and 2007 2008 2009 2008/2007 2009/2008<br />
number of employees) Z<strong>AR</strong> Z<strong>AR</strong> Z<strong>AR</strong> % change % change<br />
Salaries and wages 5,095 5,509 5,746 8.1 4.3<br />
Benefits 2,673 2,671 2,981 (0.1) 11.6<br />
Workforce reduction expenses 24 3 8 (87.5) 166.7<br />
Employee related expenses capitalised (696) (786) (736) 12.9 (6.4)<br />
Employee expenses 7,096 7,397 7,999 4.2 8.1<br />
Number of full-time, fixed-line employees<br />
(at period end) 25,864 24,879 23,520 (3.8) (5.5)<br />
Employee expenses increased in the year<br />
ended March 31, 2009 primarily due to a<br />
higher provision for medical aid for<br />
pensioners as a result of increased interest<br />
costs, higher salaries and wages as a result<br />
of average annual salary increases of<br />
10.85% as well as a higher leave<br />
provision, partially offset by a lower<br />
number of employees. Employee expenses<br />
increased in the year ended March 31,<br />
2008 primarily due to higher salaries and<br />
wages as a result of average annual salary<br />
increases of 7.0%, and increased share<br />
option grant expenses as a result of the<br />
higher number of shares granted in the<br />
year, partially offset by lower team<br />
awards.<br />
Salaries and wages increased in the year<br />
ended March 31, 2009 primarily due to<br />
average annual salary increases of<br />
10.85%, partially offset by lower<br />
headcount. Salaries and wages increased<br />
in the year ended March 31, 2008<br />
primarily due to average annual salary<br />
increases of 7.0% and were further<br />
impacted by increased payments to<br />
contractors from original equipment<br />
manufacturers.<br />
Benefits include allowances, such as<br />
bonuses, company contributions to medical<br />
aid, pension and retirement funds, leave<br />
provisions, workmen’s compensation and<br />
levies payable for skills development.<br />
Benefits increased in the 2009 financial<br />
year primarily due to a higher provision for<br />
medical aid for pensioners as a result of<br />
increased interest costs and a higher<br />
provision for leave as a result of annual<br />
salary increases and a decrease in leave<br />
days taken. Benefits decreased in the<br />
2008 financial year primarily due to lower<br />
team awards, a lower provision for<br />
medical aid for pensioners as a result of the<br />
annuity policy qualifying as a plan asset in<br />
June 2006, a lower provision for leave as<br />
a result of the decrease in the number of<br />
employees and lower training expenses,<br />
partially offset by increased share option<br />
grant expenses as a result of the higher<br />
number of shares allocated during the year.<br />
Workforce reduction expenses include the<br />
cost of voluntary early retirement,<br />
termination severance packages offered to<br />
employees and the cost of social plan<br />
expense to prepare affected employees for<br />
new careers outside <strong>Telkom</strong>. Workforce<br />
reduction expenses decreased substantially<br />
in the years ended March 31, 2009 and<br />
2008 due to the moratorium on voluntary<br />
severance packages taken in the 2007<br />
financial year. An additional seven<br />
employees in the 2009 financial year, four<br />
employees in the 2008 financial year and<br />
13 employees in the 2007 financial year<br />
left <strong>Telkom</strong> as part of the conclusion of<br />
<strong>Telkom</strong>’s workforce reduction initiatives for<br />
the 2005 financial year.<br />
Employee related expenses capitalised<br />
include employee related expenses<br />
associated with construction and<br />
infrastructure development projects.<br />
Employee related expenses capitalised<br />
decreased in the year ended March 31,<br />
2009 primarily due to an increase in the<br />
use of subcontractors. Employee related<br />
expenses capitalised increased in the year<br />
ended March 31, 2008 primarily due to<br />
annual salary increases and increased<br />
capital expenditures on projects during the<br />
year.<br />
Payments to other network operators.<br />
Payments to other network operators<br />
include settlement payments paid to the<br />
three South African mobile communications<br />
network operators and commencing in the<br />
2008 financial year, Neotel, for<br />
terminating calls on their networks and to<br />
international network operators for<br />
terminating outgoing international calls and<br />
traffic transiting through their networks.<br />
The following table sets forth information<br />
related to our payments to other network<br />
operators for the periods indicated.
Fixed-line payments to other network operators<br />
Year ended March 31,<br />
<strong>Telkom</strong> Annual Report 2009 119<br />
2007 2008 2009 2008/2007 2009/2008<br />
(in millions, except percentages) Z<strong>AR</strong> Z<strong>AR</strong> Z<strong>AR</strong> % change % change<br />
Payments to mobile communications network operators 5,425 5,460 5,432 0.6 (0.5)<br />
Payments to international and other network operators 1,036 1,208 1,853 16.6 53.4<br />
Payments to fixed-line operators – 234 251 n/a 7.3<br />
Payments to other network operators 6,461 6,902 7,536 6.8 9.2<br />
Payments to fixed-line operators increased in the 2009 financial year due to higher call volumes from interconnection with Neotel and<br />
VANS. Payments to fixed-line operators in the 2008 financial year were derived from interconnection commencing with Neotel, USALS<br />
and VANS during the 2008 financial year. Payments to mobile network operators decreased in the 2009 financial year primarily due to<br />
lower call volumes from our fixed-line network to the mobile networks due to an increase in mobile-to-mobile calls. Payments to international<br />
operators increased during the 2009 financial year due to increased switch hubbing volumes and higher exchange rates. Payments to<br />
mobile and international network operators increased in the 2008 financial year primarily due to higher call volumes from our fixed-line<br />
network to the mobile networks, resulting from discounts offered on our CellSaver and <strong>Telkom</strong> Closer products, increased fixed-to-mobile<br />
calls by business customers due to growth in the mobile market, increased international outgoing traffic arising from our reduced average<br />
international tariffs, a weaker exchange rate in the 2008 financial year and payments to fixed-line operators commencing in the 2008<br />
financial year. Payments to other network operators include payments made by our fixed-line business to Vodacom, which were<br />
R3,020 million, R3,017 million and R2,954 million in the years ended March 31, 2009, 2008 and 2007, respectively. Fifty percent<br />
of these amounts were attributable to our interest in Vodacom and were eliminated from the <strong>Telkom</strong> Group’s expenses on consolidation.<br />
Selling, general and administrative expenses. Selling, general and administrative expenses include materials and maintenance costs,<br />
marketing expenditures, bad debts, theft, losses and other expenses, including obsolete stock and cost of sales.<br />
The following table sets forth information related to our fixed-line selling, general and administrative expenses for the periods indicated.<br />
Fixed-line selling, general and administrative expenses<br />
Year ended March 31,<br />
2007 2008 2009 2008/2007 2009/2008<br />
(in millions, except percentages) Z<strong>AR</strong> Z<strong>AR</strong> Z<strong>AR</strong> % change % change<br />
Materials and maintenance 1,900 1,996 2,295 5.1 15.0<br />
Marketing 604 583 574 (3.5) (1.5)<br />
Bad debts 137 217 285 58.4 31.3<br />
Other (1)(2) 1,335 1,103 3,428 (17.4) 210.8<br />
Selling, general and administrative expenses (1)(2) 3,976 3,899 6,582 (1.9) 68.8<br />
Notes:<br />
(1) In the year ended March 31, 2007 we recorded a provision of R527 million for probable liabilities related to <strong>Telkom</strong>’s arbitration with Telcordia,<br />
excluding legal fees, of which R510 million is included in selling, general and administrative expenses and R11 million for interest and R6 million for<br />
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<br />
liabilities related to <strong>Telkom</strong>’s arbitration with Telcordia, including legal fees. The movement in the provision is due to increased interest of R53 million and<br />
foreign exchange rate effect of R52 million, which are included in finance charges, partially offset by a provisional payment made in respect of specific<br />
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<br />
<strong>Telkom</strong>’s arbitration with Telcordia, including legal fees. The movement in the provision is due to increased interest of R11 million and foreign exchange<br />
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,<br />
general and administrative expenses.<br />
(2) Includes a R254 million and R217 million impairment relating to <strong>Telkom</strong> Media in the 2009 and 2008 financial years, respectively and a R1,843 million<br />
impairment of the Multi-Links investment and an R85 million impairment of the Africa Online investment in the 2009 financial year.<br />
Group<br />
overview<br />
Management<br />
review<br />
Sustainability<br />
review<br />
Performance<br />
review<br />
Financial<br />
statements<br />
Company<br />
Financial<br />
Information
120<br />
<strong>Telkom</strong> Annual Report 2009<br />
Financial review (continued)<br />
Selling, general and administrative<br />
expenses increased primarily due to the<br />
impairment of the Multi-Links investment in<br />
the 2009 financial year, increased<br />
materials and maintenance expenses and<br />
higher bad debts. Selling, general and<br />
administrative expenses decreased<br />
primarily due to the provision for probable<br />
liabilities in the Telcordia dispute in the<br />
2007 financial year, which were not<br />
increased significantly in the 2008<br />
financial year, and lower marketing<br />
expense, partially offset by the R217 million<br />
impairment of the <strong>Telkom</strong> Media loan in the<br />
2008 financial year – increased materials<br />
and maintenance expenses and higher<br />
bad debts.<br />
Materials and maintenance expenses<br />
include stock write-offs, subcontractor<br />
payments and consumables required to<br />
maintain our network. Materials and<br />
maintenance expenses increased in the<br />
years ended March 31, 2009 and 2008<br />
primarily due to increased operating<br />
maintenance projects as result of an<br />
increase in the number of technologies<br />
employed in the network and higher fuel<br />
costs as a result of the increased price of<br />
fuel. In the 2009 financial year increased<br />
maintenance on the submarine cables as a<br />
result of higher exchange rates also<br />
contributed.<br />
Marketing expenses were relatively flat in<br />
the 2009 financial year. Marketing<br />
expenses decreased in the year ended<br />
March 31, 2008 primarily due to lower<br />
sponsorships and decreased calling plan<br />
advertising during the year.<br />
Bad debt increased in the year ended<br />
March 31, 2009 as more debtors<br />
defaulted on payments as a result of poor<br />
economic conditions in South Africa driven<br />
by higher inflation. Bad debt increased in<br />
the year ended March 31, 2008 due to<br />
provisions for higher international bad<br />
debts in certain countries, including<br />
Nigeria, Gabon and the United Kingdom.<br />
Bad debt as a percentage of revenue was<br />
1.0%, 0.7% and 0.4% in the 2009, 2008<br />
and 2007 financial years, respectively.<br />
Other expenses include obsolete stock,<br />
cost of sales, subsistence and travel and an<br />
offset for bad debts recovered. Other<br />
expenses increased in the year ended<br />
March 31, 2009 primarily due to the<br />
R1,843 million impairment of the Multi-<br />
Links investment, R254 million impairment<br />
of the <strong>Telkom</strong> Media loan and R85 million<br />
impairment of the Africa Online investment<br />
in the 2009 financial year. Other expenses<br />
decreased in the year ended March 31,<br />
2008 primarily due to the provision for<br />
probable liabilities in the Telcordia dispute<br />
in the 2007 financial year, which were not<br />
increased significantly in the 2008 financial<br />
year, partially offset by the R217 million<br />
impairment of the <strong>Telkom</strong> Media loan in the<br />
2008 financial year.<br />
Service fees. Service fees include payments<br />
in respect of the management of our<br />
properties, to TFMC, a facilities and<br />
property management company, consultants<br />
and security. Consultants comprise fees<br />
paid to collection agents and to providers<br />
of other professional services and external<br />
auditors. Security refers to services to<br />
safeguard the network and contracts to<br />
ensure a safe work environment, such as<br />
guard services.<br />
The following table sets forth information<br />
relating to service fee expenses for the<br />
periods indicated.<br />
2007<br />
Fixed-line service fees<br />
Year ended March 31,<br />
2008 2009 2008/2007 2009/2008<br />
(in millions, except percentages) Z<strong>AR</strong> Z<strong>AR</strong> Z<strong>AR</strong> % change % change<br />
Property management 1,141 1,222 1,262 7.1 3.2<br />
Consultants, security and other 1,065 1,191 1,499 11.8 25.9<br />
Service fees 2,206 2,413 2,761 9.4 14.4
Service fees increased in the year ended<br />
March 31, 2009 primarily due to<br />
consultancy fees relating to the Vodacom<br />
sale and unbundling transaction and higher<br />
security costs to secure the copper network.<br />
Service fees increased in the year ended<br />
March 31, 2008 primarily as a result of<br />
increased property payment costs, mainly<br />
related to increased electricity usage,<br />
electricity rates and taxes, payments to<br />
consultants to explore local and<br />
international investment opportunities,<br />
higher security costs due to increases in<br />
contract prices and maintenance and<br />
monitoring of the cable alarm system and<br />
legal fees related to Telcordia.<br />
Operating leases. Operating leases<br />
include payments in respect of equipment,<br />
buildings and vehicles. Operating leases<br />
decreased by 1.0% primarily due to a<br />
6.0% reduction in the vehicle fleet from<br />
8,792 vehicles at March 31, 2008 to<br />
8,266 vehicles at March 31, 2009.<br />
Operating leases decreased in the year<br />
ended March 31, 2008 primarily due to a<br />
discount received on the extension of our<br />
vehicle lease and a reduction in the number<br />
of vehicles from 9,694 at March 31, 2007<br />
to 8,792 at March 31, 2008.<br />
Depreciation, amortisation, impairments<br />
and write-offs. Depreciation, amortisation,<br />
impairments and write-offs increased in the<br />
year ended March 31, 2009 primarily as<br />
a result of higher amortisation of intangible<br />
assets and increased depreciation due to<br />
the ongoing investment in<br />
telecommunications network equipment<br />
and data processing equipment.<br />
Depreciation, amortisation, impairments<br />
and write-offs increased in the year ended<br />
March 31, 2008 primarily as a result of<br />
higher amortisation of intangible assets<br />
and increased depreciation due to the<br />
ongoing investment in telecommunications<br />
network equipment and data processing<br />
equipment, partially offset by lower asset<br />
write-offs.<br />
Mobile segment<br />
Mobile encompasses all the operating<br />
activities of our 50% joint venture<br />
investment in Vodacom, the largest mobile<br />
operator in South Africa with an<br />
approximate 53% market share as of<br />
March 31, 2009 based on total estimated<br />
<strong>Telkom</strong> Annual Report 2009 121<br />
The following table sets forth information relating to depreciation, amortisation, impairments and write-offs for the periods indicate.<br />
Fixed-line depreciation, amortisation, impairments and write-offs<br />
Year ended March 31,<br />
2007 2008 2009 2008/2007 2009/2008<br />
(in millions, except percentages) Z<strong>AR</strong> Z<strong>AR</strong> Z<strong>AR</strong> % change % change<br />
Depreciation of property, plant and equipment 2,993 3,061 3,399 2.3 11.0<br />
Amortisation of intangibles<br />
Write-offs of property, plant and equipment and<br />
305 409 638 34.1 56.0<br />
intangible assets 284 262 321 (7.7) 22.5<br />
Depreciation, amortisation, impairments and<br />
write-offs 3,582 3,732 4,358 4.2 16.8<br />
customers in South Africa. In addition to its<br />
South African operations, Vodacom has<br />
investments in mobile communications<br />
network operators in Lesotho, Tanzania, the<br />
Democratic Republic of the Congo and<br />
Mozambique. On December 30, 2008<br />
Vodacom acquired 100% shareholding in<br />
Gateway Telecommunications Plc,<br />
Gateway Communications (Proprietary)<br />
Limited, Gateway Communications<br />
Mozambique LDA, Gateway<br />
Communications (Tanzania) Limited, GS<br />
Telecom (Proprietary) Limited and their<br />
respective subsidiaries, or Gateway which<br />
has customers in 40 countries in Africa.<br />
The following table shows information<br />
related to our 50% share of Vodacom’s<br />
operating revenue and operating profit<br />
broken down by Vodacom’s South African<br />
operations and operations in other African<br />
countries and Gateway for the periods<br />
indicated. All amounts in this table and the<br />
discussion of our mobile segment that<br />
follows represent 50% of Vodacom’s results<br />
of operations unless otherwise stated and<br />
are before the elimination of intercompany<br />
transactions with us.<br />
Group<br />
overview<br />
Management<br />
review<br />
Sustainability<br />
review<br />
Performance<br />
review<br />
Financial<br />
statements<br />
Company<br />
Financial<br />
Information
122<br />
<strong>Telkom</strong> Annual Report 2009<br />
Financial review (continued)<br />
Mobile operating revenue and profits<br />
Year ended March 31,<br />
2008/ 2009/<br />
2007 2008 2009 2007 2008<br />
(in millions, except percentages) Z<strong>AR</strong> % Z<strong>AR</strong> % Z<strong>AR</strong> % % change % change<br />
Operating revenue 20,573 100.0 24,089 100.0 27,594 100.0 17.1 14.6<br />
South Africa 18,504 89.9 21,392 88.8 23,688 85.8 15.6 10.7<br />
Other African countries 2,069 10.1 2,697 11.2 3,502 12.7 30.4 29.8<br />
Gateway – – – – 404 1.5 – n/a<br />
Operating profit (1) 5,430 100.0 6,247 100.0 6,009 100.0 15.0 (3.8)<br />
South Africa 5,170 95.2 5,852 93.7 5,690 94.7 13.2 (2.8)<br />
Other African countries 260 4.8 395 6.3 303 5.0 51.9 (23.3)<br />
Gateway – – – – 16 0.3 n/a<br />
EBITDA (1)(2) 7,123 100.0 8,217 100.0 8,407 100.0 15.4 2.3<br />
Notes:<br />
(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,<br />
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<br />
the impairment loss related to available-for-sale investments.<br />
(2) Mobile EBITDA comprises our 50% share of Vodacom’s EBITDA, which represents mobile net profit, before taxation, finance charges, investment income<br />
and depreciation, amortisation and impairments, but includes the profit on sale of investments and broad-based black economic empowerment expenses.<br />
We believe that EBITDA provides meaningful additional information to investors since it is widely accepted by analysts and investors as a basis for<br />
comparing a company’s underlying operating profitability with that of other companies as it is not influenced by past capital expenditures or business<br />
acquisitions, a company’s capital structure or the relevant taxation regime. This is particularly the case in a capital intensive industry such as<br />
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<br />
continued growth. EBITDA is not an IFRS measure. You should not construe EBITDA as an alternative to operating profit or cash flows from operating<br />
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<br />
comparable to other similarly titled measures of other companies unless the definition is the same.<br />
Mobile operating revenue<br />
Vodacom derives revenue from mobile<br />
services as well as other related or valueadded<br />
goods and services. Vodacom’s<br />
revenue is mainly in the form of airtime<br />
charges, primarily airtime payments from<br />
customers registered on Vodacom’s<br />
network; data products and services;<br />
interconnection revenue from other<br />
operators for the termination of calls on<br />
Vodacom’s network and national roaming<br />
revenue, revenue from equipment sales,<br />
including sales of handsets and accessories;<br />
and revenue from international services,<br />
including airtime charges for the use of<br />
Vodacom’s network through roaming of<br />
customers from other international networks<br />
and Vodacom customers who roam abroad.<br />
The following table shows our 50% share<br />
of Vodacom’s revenue broken down by<br />
major revenue type and as a percentage of<br />
total operating revenue for our mobile<br />
segment and the percentage change by<br />
revenue type for the periods indicated.<br />
Mobile operating revenue<br />
Year ended March 31,<br />
2008/ 2009/<br />
2007 2008 2009 2007 2008<br />
(in millions, except percentages) Z<strong>AR</strong> % Z<strong>AR</strong> % Z<strong>AR</strong> % % change % change<br />
Airtime and access 11,854 57.6 13,548 56.3 15,166 55.0 14.3 11.9<br />
Data 1,671 8.1 2,501 10.4 3,221 11.7 49.7 28.8<br />
Interconnection 3,918 19.0 4,443 18.4 4,899 17.7 13.4 10.3<br />
Equipment sales 2,350 11.4 2,526 10.5 2,650 9.6 7.5 4.9<br />
International airtime 653 3.2 918 3.8 1,043 3.8 40.6 13.6<br />
Other sales and services 127 0.7 153 0.6 615 2.2 20.5 302.0<br />
Mobile operating revenue 20,573 100.0 24,089 100.0 27,594 100.0 17.1 14.6
Vodacom’s operating revenue from South<br />
African operations increased in the 2009<br />
financial year mainly due to an increase in<br />
customers driven by retention campaigns<br />
and loyalty programmes, the introduction<br />
of more affordable products and lower<br />
denomination vouchers. Revenue growth in<br />
the other African operations was mainly<br />
due to strong customer growth driven by<br />
the launch of new products and services,<br />
aggressive sales and marketing campaigns<br />
as well as enhanced network coverage.<br />
Vodacom’s operating revenue increased in<br />
the 2008 financial year primarily due to<br />
increased airtime, data, interconnection<br />
and equipment sales revenue as a result of<br />
continued customer growth. Vodacom’s<br />
equipment sales further increased in the<br />
2008 financial year due to the added<br />
functionality of new phones based on new<br />
technologies.<br />
Our 50% share of Vodacom’s revenue from<br />
operations outside of South Africa increased<br />
to R3,502 million for the year ended<br />
March 31, 2009 from R2,697 million<br />
for the year ended March 31, 2008 and<br />
R2,069 million in the year ended<br />
March 31, 2007. The increase in<br />
Vodacom’s operating revenue from other<br />
African countries in the 2009 and 2008<br />
financial years was primarily due to<br />
substantial increases in the number of<br />
customers in Vodacom’s operations,<br />
particularly in Tanzania, the Democratic<br />
Republic of the Congo and Mozambique,<br />
and the weakening of the rand in the 2009<br />
and 2008 financial years, which resulted in<br />
higher rand converted revenue, partially<br />
offset by lower <strong>AR</strong>PU resulting from the<br />
higher volume of lower spending prepaid<br />
customers. Revenue from Vodacom’s other<br />
African countries as a percentage of<br />
Vodacom’s total mobile operating revenue<br />
increased to 12.7% in the year ended<br />
March 31, 2009 from 11.2% in the year<br />
ended March 31, 2008 and 10.1% in the<br />
year ended March 31, 2007.<br />
South African contract <strong>AR</strong>PU decreased to<br />
R474 per month in the 2009 financial year<br />
from R486 per month in the 2008 financial<br />
year and R517 per month in the 2007<br />
financial year. South African prepaid <strong>AR</strong>PU<br />
increased to R68 per month in the 2009<br />
financial year from R62 per month in the<br />
2008 financial year, a decrease from<br />
R63 per month in the 2007 financial year.<br />
In the 2008 and 2007 financial years,<br />
contract and prepaid customer <strong>AR</strong>PU were<br />
also negatively impacted by the high<br />
growth in Vodacom’s hybrid contract<br />
product, Family Top Up, which contributed<br />
to the migration of higher spending<br />
prepaid customers, who tend to spend less<br />
than existing contract customers, to<br />
contracts. In the 2007 financial year,<br />
Vodacom changed its definition of active<br />
customers to exclude calls forwarded to<br />
voicemail from the definition of revenue<br />
generating activity for a six-month period,<br />
resulting in the deletion of approximately<br />
three million customers. Prepaid <strong>AR</strong>PU was<br />
positively impacted by this temporary rule<br />
change in the 2007 financial year.<br />
Vodacom subsequently changed its<br />
definition of revenue generating activity<br />
back to include calls forwarded to<br />
voicemail effective September 1, 2006.<br />
Such SIM cards were disconnected from<br />
the network after being inactive for a<br />
215 consecutive day period. Since<br />
implementing this change, prepaid SIM<br />
cards remaining in an active state on the<br />
network, with only call forwarding to<br />
voicemail and no other revenue generating<br />
activities, increased significantly. Vodacom<br />
therefore implemented a supplementary<br />
disconnection rule in September 2007 to<br />
disconnect inactive prepaid SIM cards<br />
after 13 months of being kept in an active<br />
state, by call forwarding to voicemail only,<br />
and not having had any other revenue<br />
generating activity on Vodacom’s network.<br />
The implementation of the supplementary<br />
disconnection rule led to the disconnection<br />
of an additional 2.9 million prepaid SIM<br />
cards in September 2007, which resulted<br />
in higher prepaid <strong>AR</strong>PU than would have<br />
otherwise occurred. Approximately 85.3%<br />
of Vodacom’s South African mobile<br />
customers were prepaid customers at<br />
March 31, 2009 and approximately<br />
<strong>Telkom</strong> Annual Report 2009 123<br />
94.4% of all gross connections were<br />
prepaid customers in the 2009 financial<br />
year. Vodacom expects the number of<br />
prepaid mobile users to continue to grow<br />
to a greater extent than contract mobile<br />
users. The increasing number of prepaid<br />
users, who tend to have lower average<br />
usage, and the lower overall usage as the<br />
lower end of the market is penetrated have<br />
historically resulted in decreasing overall<br />
average revenue per customer. Total South<br />
African <strong>AR</strong>PU increased to R133 per month<br />
in the 2009 financial year and remained<br />
stable at R128 per month in the 2008 and<br />
2007 financial years. Total South African<br />
<strong>AR</strong>PU remained stable in the 2008<br />
financial year, despite declining South<br />
African contract and prepaid <strong>AR</strong>PU, due to<br />
a shift in the customer mix to higher<br />
spending contract customers, which<br />
represented 14.3% of total South African<br />
customers as of March 31, 2009 and<br />
2008, respectively.<br />
Service providers in South Africa generally<br />
subsidise handsets when a contract<br />
customer enters into a new contract or<br />
renews an existing contract depending on<br />
the airtime and tariff plan and type of<br />
handset purchased. Subsidised handset<br />
sales give customers an incentive to switch<br />
operators to obtain new handsets and<br />
have contributed to churn. Handsets for<br />
prepaid customers are not subsidised by<br />
Vodacom as these users have the freedom<br />
of switching operators and contribute to<br />
churn. Vodacom is more vulnerable to<br />
churn than other mobile communications<br />
providers in South Africa since it has the<br />
largest number of customers in South<br />
Africa. To date, mobile number portability<br />
has had no significant impact on churn.<br />
The cost to acquire contract customers in a<br />
highly developed market is high. Vodacom<br />
has therefore implemented upgrade and<br />
retention policies over the last few years<br />
and has striven to maintain a high level of<br />
incentives to service providers in order to<br />
reduce churn. Vodacom’s churn rate for<br />
contract customers in South Africa<br />
increased to 9.9% in the 2009 financial<br />
Group<br />
overview<br />
Management<br />
review<br />
Sustainability<br />
review<br />
Performance<br />
review<br />
Financial<br />
statements<br />
Company<br />
Financial<br />
Information
124<br />
<strong>Telkom</strong> Annual Report 2009<br />
Financial review (continued)<br />
year from 8.3% in the 2008 financial year<br />
mainly due to an increase in involuntary<br />
churn driven by the economic conditions.<br />
Vodacom’s churn rate for contract<br />
customers decreased in the 2008 financial<br />
year to 8.3% from 9.7% in the 2007<br />
financial year mainly due to an<br />
improvement in service and products to<br />
customers and the continued high level of<br />
handset support to retain customers.<br />
Prepaid churn is adversely impeded by an<br />
increasingly competitive market, lower<br />
barriers to entry for prepaid customers in<br />
South Africa and the volatile nature of the<br />
prepaid customer base. Vodacom’s churn<br />
rate for prepaid customers in South Africa<br />
decreased to 45.4% in the 2009 financial<br />
year from 47.9% in the 2008 financial<br />
year mainly due to focused campaigns to<br />
offer greater value to customers to reduce<br />
churn coupled with the marketing of SIM<br />
swaps and various loyalty programmes.<br />
Vodacom’s churn rate for prepaid<br />
customers in South Africa increased to<br />
47.9% in the 2008 financial year from<br />
37.5% in the 2007 financial year. The<br />
increase in prepaid churn in the 2008<br />
financial year was mainly due to the<br />
supplementary disconnection rule<br />
implemented, which led to the<br />
disconnection of an additional 2.9 million<br />
prepaid SIM cards in September 2007.<br />
Airtime. Vodacom derives airtime revenue<br />
from connection and monthly rental fees<br />
and airtime usage fees paid by Vodacom’s<br />
contract customers for use of its mobile<br />
networks. Airtime revenue also includes<br />
fees paid by Vodacom’s prepaid phone<br />
customers for prepaid starter phone<br />
packages and airtime recharge vouchers<br />
utilised, which entitle customers to receive<br />
unlimited incoming calls up to 365 days.<br />
Airtime revenue depends on the total<br />
number of customers, traffic volume, mix of<br />
prepaid and contract customers and tariffs.<br />
Vodacom’s airtime revenue increased in the<br />
years ended March 31, 2009 and March<br />
31, 2008 primarily due to continued<br />
customer growth and an increase in<br />
outgoing voice traffic minutes. As<br />
Vodacom’s primary market in South Africa<br />
continues to mature and Vodacom<br />
continues to connect more marginal<br />
customers in its South African operations,<br />
Vodacom expects that growth in airtime in<br />
South Africa will continue to slow. Total<br />
customers increased 16.5% and 12.7% in<br />
the years ended March 31, 2009 and<br />
2008, respectively, primarily due to strong<br />
prepaid customer growth in South Africa<br />
and significant customer growth in<br />
Vodacom’s operations outside of South<br />
Africa, particularly in Tanzania, the<br />
Democratic Republic of Congo and<br />
Mozambique in the 2009 and 2008<br />
financial years.<br />
Data revenue. Vodacom derives data<br />
revenue from mobile data, including short<br />
messaging services, or SMSs, and<br />
multimedia messaging services, or MMSs,<br />
general packet radio services, or GPRS,<br />
and third generation services, or 3G. Data<br />
revenue contributed 11.7% of Vodacom’s<br />
total revenue in the year ended March 31,<br />
2009, up from 10.4% in the year ended<br />
March 31, 2008 and 8.1% in the year<br />
ended March 31, 2007. Vodacom’s<br />
mobile data revenue increased in the year<br />
ended March 31, 2009 primarily due to<br />
growth in the number of messages sent as<br />
well as an increase in the number of<br />
broadband customers. Vodacom’s mobile<br />
data revenue increased in the year ended<br />
March 31, 2008 primarily due to higher<br />
penetration levels influenced by more<br />
affordable product offerings.<br />
In South Africa, Vodacom transmitted<br />
5.4 billion SMSs and MMSs over its<br />
network in the 2009 financial year,<br />
compared to 5.0 billion in the 2008<br />
financial year. The number of broadband<br />
connectivity customers increased by 79.8%<br />
to approximately 720,000 customers from<br />
approximately 400,000 customers as of<br />
March 31, 2008. The number of<br />
3G/HSDPA handsets on the network as of<br />
March 31, 2009 was 2.8 million, as<br />
compared to 1.3 million as of March 31,<br />
2008. During the 2009 financial year<br />
there was an increase in the usage of<br />
GPRS, 3G and HSDPA, the volume of data<br />
transferred increased to 3,175 Terabytes,<br />
a 97.8% increase from the 2008 financial<br />
year.<br />
Interconnection. Vodacom generates<br />
interconnection revenue when a call<br />
originating from our fixed-line network and<br />
more recently, Neotel, or one of the other<br />
mobile operators’ networks terminates on<br />
Vodacom’s network. Interconnection<br />
revenue also includes revenue from Cell C<br />
for national roaming services. Vodacom<br />
does not have a roaming agreement with<br />
MTN. Vodacom generates national<br />
roaming revenue when its mobile network<br />
carries a call made from a Cell C customer.<br />
Interconnection revenue depends on the<br />
volume of traffic terminating on Vodacom’s<br />
network, the interconnection termination<br />
rates payable by ourselves and the other<br />
mobile operators to Vodacom and national<br />
roaming rates.<br />
Vodacom’s interconnection revenue<br />
increased in the years ended March 31,<br />
2009 and March 31, 2008 primarily due<br />
to an increase in the number of calls<br />
terminating on Vodacom’s network as a<br />
result of the increased number of<br />
Vodacom’s customers and South African<br />
mobile users generally. The increase in the<br />
2009 financial year was mainly driven by<br />
an increase in incoming traffic as well as<br />
an increase in national roaming revenue<br />
from Cell C as a result of their increased<br />
market share and increased calls<br />
terminating on Vodacom’s network. The<br />
growth in the 2008 financial year was<br />
also attributable to the growth in the<br />
substitution of fixed-line calls by mobile<br />
calls and incoming traffic resulting from an<br />
overall increase in the customer base of<br />
other mobile operators. The increases were<br />
partially offset by a reduced number of<br />
fixed-line calls from <strong>Telkom</strong>’s network<br />
terminating on Vodacom’s network.<br />
Interconnection revenue in our mobile<br />
segment included R1,483 million,<br />
R1,482 million and R1,454 million in the<br />
years ended March 31, 2009, 2008 and<br />
2007, respectively, for calls received from
our fixed-line business, which were<br />
eliminated from the <strong>Telkom</strong> Group’s<br />
revenue on consolidation.<br />
Equipment sales. Vodacom generates<br />
revenue from equipment sales primarily<br />
from the sale of mobile phones and<br />
accessories. Vodacom purchases handsets<br />
for itself and for external service providers<br />
in bulk at purchase discounts in order to<br />
lower the cost of handset subsidisation for<br />
contract customers. Equipment sales<br />
revenue fluctuates based on whether<br />
external providers and Vodacom’s other<br />
African operators source equipment from<br />
Vodacom in South Africa or purchase<br />
equipment from third party suppliers.<br />
Vodacom’s equipment sales increased in<br />
the 2009 and 2008 financial years<br />
primarily due to the growth of Vodacom’s<br />
customer base and the continued uptake of<br />
new handsets in South Africa as a result of<br />
cheaper rand prices of new handsets and<br />
the added functionality of new phones<br />
based on new technologies such as 3G<br />
enabled phones, camera phones and<br />
colour screens.<br />
International airtime. International airtime<br />
revenues are predominantly from<br />
international calls by Vodacom customers,<br />
roaming revenue from Vodacom’s<br />
customers making and receiving calls while<br />
abroad and revenue from international<br />
customers roaming on Vodacom’s<br />
networks. International airtime increased<br />
13.6% to R1,043 million in the year ended<br />
March 31, 2009 and 40.6% to<br />
R918 million in the year ended March 31,<br />
2008 primarily as a result of growth in the<br />
customer base.<br />
Other. Revenue from other sales and<br />
services includes revenue from Vodacom’s<br />
cell captive insurance vehicle, wireless<br />
application services provider, or WASP,<br />
revenue, site sharing rental income as well<br />
as other revenue from non-core operations.<br />
Vodacom’s other sales and services<br />
revenue increased 302.0% to R615 million<br />
in the 2009 financial year primarily due to<br />
<strong>Telkom</strong> Annual Report 2009 125<br />
the acquisition of Gateway. Vodacom’s<br />
other sales and services revenue increased<br />
20.5% to R153 million in the 2008<br />
financial year primarily due to an increase<br />
in inactivated starter packs which do not<br />
contain an expiration date, but which are<br />
recognised as income after a period of<br />
36 months.<br />
Mobile operating expenses<br />
The following is a discussion of our mobile<br />
segment’s operating expenses which<br />
comprise our 50% share in Vodacom’s<br />
operating expenses. Vodacom’s operating<br />
expense line items are presented in<br />
accordance with the line items reflected in<br />
the <strong>Telkom</strong> Group’s consolidated operating<br />
expenses which are different from the<br />
operating expense line items contained in<br />
Vodacom’s consolidated financial statements.<br />
The following table shows our 50% share<br />
of Vodacom’s operating expenses and the<br />
percentage change for the periods<br />
indicated.<br />
Mobile operating expenses<br />
Year ended March 31,<br />
2007 2008 2009 2008/2007 2009/2008<br />
(in millions, except percentages) Z<strong>AR</strong> Z<strong>AR</strong> Z<strong>AR</strong> % change % change<br />
Employee expenses 1,186 1,488 1,804 25.5 21.2<br />
Payments to other network operators 2,818 3,279 3,822 16.4 16.6<br />
Selling, general and administrative expenses 8,777 10,271 12,553 17.0 22.2<br />
Service fees 82 115 169 40.2 47.0<br />
Operating leases 629 775 958 23.2 23.6<br />
Depreciation, amortisation and impairments 1,693 1,970 2,398 16.4 21.7<br />
Mobile operating expenses 15,185 17,898 21,704 17.9 21.3<br />
Group<br />
overview<br />
Management<br />
review<br />
Sustainability<br />
review<br />
Performance<br />
review<br />
Financial<br />
statements<br />
Company<br />
Financial<br />
Information
126<br />
<strong>Telkom</strong> Annual Report 2009<br />
Financial review (continued)<br />
The increase in mobile operating expenses<br />
in the 2009 financial year was mainly due<br />
to the increased cost of connecting prepaid<br />
customers and retaining contract customers,<br />
as well as increased network operational<br />
expenditure due to the roll-out of additional<br />
sites, coupled with increased interconnection<br />
rates in the DRC. The increase in<br />
mobile operating expenses in the 2008<br />
financial year was primarily due to<br />
inflationary factors and growth in the<br />
business, which led to increased selling,<br />
general and administrative expenses to<br />
support the expansion of 3G, growth in<br />
Vodacom’s South African and African<br />
operations and increased competition,<br />
increased payments to other network<br />
operators due to higher outgoing traffic and<br />
the increased percentage of outgoing traffic<br />
terminating on other mobile networks,<br />
higher employee costs as a result of<br />
increased headcount as well as increased<br />
depreciation, amortisation and impairment.<br />
Employee expenses. Employee expenses<br />
consist mainly of salaries and wages of<br />
employees as well as contributions to<br />
employee pension, medical aid funds and<br />
benefits and the deferred bonus incentive<br />
scheme.<br />
Vodacom’s employee expenses increased<br />
in the year ended March 31, 2009<br />
primarily as a result of the increase in the<br />
average number of employees and annual<br />
salary increases, partially offset by lower<br />
performance based remuneration.<br />
Vodacom’s employee expenses increased<br />
in the year ended March 31, 2008<br />
primarily as a result of a 9.5% increase in<br />
headcount to support the expansion of<br />
customer care operations, the strengthening<br />
of senior management structures to support<br />
the growth in ongoing operations and the<br />
launch of Vodacom Business. Annual salary<br />
increases and increased provisions for<br />
other employee incentive schemes also<br />
contributed to the increase in staff<br />
expenses.<br />
Total headcount in Vodacom’s South<br />
African operations increased 12.4% to<br />
5,451 employees as of March 31, 2009<br />
and 2.6% to 4,849 employees as of<br />
March 31, 2008 from 4,727 employees<br />
as of March 31, 2007. Total headcount in<br />
Vodacom’s other African countries<br />
increased 17.3% to 2,336 employees as<br />
of March 31, 2009 and 30.9% to 1,992<br />
employees as of March 31, 2008 from<br />
1,522 employees as of March 31, 2007.<br />
Total headcount includes temporary<br />
agency employees. Employees seconded<br />
to other African countries are included in<br />
the number of employees of other African<br />
countries and excluded from Vodacom<br />
South Africa’s number of employees.<br />
Payments to other network operators.<br />
Payments to other network operators consist<br />
mainly of interconnection payments made<br />
by Vodacom’s South African and other<br />
African operations for terminating calls on<br />
other operators’ networks. Vodacom’s<br />
payments to other network operators<br />
increased significantly in the years ended<br />
March 31, 2009 and 2008 as a result of<br />
increased outgoing traffic in line with<br />
increased customer growth and the<br />
increasing percentage of outgoing traffic<br />
terminating on the other mobile networks<br />
rather than <strong>Telkom</strong>’s fixed-line network as<br />
the cost of terminating calls on other mobile<br />
networks is higher than calls terminating on<br />
<strong>Telkom</strong>’s fixed-line network. As the mobile<br />
communications market continues to grow<br />
in South Africa, Vodacom expects that<br />
interconnection charges will continue to<br />
increase and adversely impact Vodacom’s<br />
profit margins.<br />
Payments to other network operators in our<br />
mobile segment included R231 million,<br />
R234 million and R234 million in the years<br />
ended March 31, 2009, 2008 and<br />
2007, respectively, for interconnection fees<br />
paid to our fixed-line segment, which were<br />
eliminated from the <strong>Telkom</strong> Group’s<br />
operating expenses on consolidation.<br />
Selling, general and administrative<br />
expenses. Selling, general and<br />
administrative expenses include customer<br />
acquisition and retention costs, packaging,<br />
distribution, marketing, regulatory licence<br />
fees, bad debts and various other general<br />
administrative expenses, including<br />
accommodation, information technology<br />
costs, office administration, consultant<br />
expenses, social economic investment and<br />
insurance.<br />
The following table sets forth information related to our 50% share of Vodacom’s selling, general and administrative expenses for the<br />
periods indicated.<br />
Mobile selling, general and administrative expenses<br />
Year ended March 31,<br />
2007 2008 2009 2008/2007 2009/2008<br />
(in millions, except percentages) Z<strong>AR</strong> Z<strong>AR</strong> Z<strong>AR</strong> % change % change<br />
Selling, distribution and other 7,703 9,063 11,105 17.7 22.5<br />
Marketing 573 632 762 10.3 20.6<br />
Regulatory and licence fees 490 527 607 7.6 15.2<br />
Bad debts 11 49 79 345.5 61.2<br />
Selling, general and administrative expenses 8,777 10,271 12,553 17.0 22.2
Vodacom’s selling, general and<br />
administrative expenses increased in the<br />
year ended March 31, 2009 primarily<br />
due to an increase in selling, distribution<br />
and other expenses and marketing<br />
expenses to support the launch and<br />
expansion of 3G, growth in Vodacom’s<br />
South African and African operations and<br />
competition. Vodacom’s selling, general<br />
and administrative expenses increased in<br />
the year ended March 31, 2008 primarily<br />
due to an increase in selling, distribution<br />
and other expenses, incentive costs,<br />
regulatory and licence fees and marketing<br />
expenses to support the launch and<br />
expansion of 3G, growth in Vodacom’s<br />
South African and African operations and<br />
increased competition.<br />
Selling, distribution and other expenses<br />
include cost of goods sold, commissions,<br />
customer acquisition and retention<br />
expenses, distribution expenses and<br />
insurance. The increase in selling,<br />
distribution and other expenses in the<br />
2009 financial year was primarily due to<br />
increased fuel and electricity costs,<br />
competition and network operational<br />
expenditure as a result of the roll-out of<br />
additional sites. The increase in selling,<br />
distribution and other expenses in the<br />
2008 financial year was primarily due to<br />
increased customer connections,<br />
competition, revenue, cost of equipment as<br />
a result of increased handset sales and<br />
maintenance of the GSM infrastructure and<br />
billing systems as well as due to the<br />
Vodafone global alliance fee.<br />
The increase in marketing expenses in the<br />
2009 financial year was mainly as a result<br />
of promotion campaigns to counter<br />
competition. The increase in marketing<br />
expenses in the 2008 financial year was<br />
mainly due to promoting new technologies,<br />
including 3G and Vodafone live! and<br />
further promoting the Vodacom brand in all<br />
operations. The increases in regulatory and<br />
licence fees during the reporting periods<br />
were directly related to the increase in<br />
operating revenues and corresponding<br />
payments under Vodacom’s existing<br />
licences. The increase in bad debts in the<br />
2008 financial year resulted from a cleanup<br />
of Smartphone debtors following the<br />
increase in shareholding to 100%.<br />
Service fees. Service fees include<br />
consultancy services for technical,<br />
administrative and managerial services,<br />
audit fees, legal fees and communication<br />
and information technology costs.<br />
Operating leases. Operating leases<br />
include payments in respect of rentals of<br />
GSM transmission lines as well as office<br />
<strong>Telkom</strong> Annual Report 2009 127<br />
accommodation, office equipment and<br />
motor vehicles. Operating leases in our<br />
mobile segment included R529 million,<br />
R514 million and R453 million in the years<br />
ended March 31, 2009, 2008 and<br />
2007, respectively, for operating lease<br />
payments to our fixed-line segment, which<br />
were eliminated from the <strong>Telkom</strong> Group’s<br />
operating expenses on consolidation.<br />
Depreciation, amortisation and<br />
impairments. Depreciation, amortisation<br />
and impairments increased in the years<br />
ended March 31, 2009 and 2008<br />
primarily due to higher capital expenditure<br />
as a result of the implementation and<br />
expansion of 3G/HSDPA networks, the<br />
weakening of the rand against the other<br />
functional currencies of Vodacom and the<br />
impairment of assets in Vodacom<br />
Mozambique.<br />
Multi-Links segment<br />
Multi-Links operating revenue<br />
Multi-Links operating revenue is derived<br />
principally from fixed, mobile, data, long<br />
distance and international communications<br />
services throughout Nigeria, through our<br />
wholly owned subsidiary, Multi-Links.<br />
The following table shows the operating<br />
revenue for our Multi-Links segment for the<br />
periods indicated.<br />
Multi-Links operating revenue<br />
Year ended March 31,<br />
2007 2008 2009 2008/2007 2009/2008<br />
(in millions, except percentages) Z<strong>AR</strong> Z<strong>AR</strong> Z<strong>AR</strong> % change % change<br />
Multi-Links operating revenue – 845 1,900 – 124.9<br />
The increase in Multi-Links revenue is<br />
mainly as a result of subscriber growth and<br />
an increase in domestic traffic volumes as<br />
well as increased data revenue. Multi-Links,<br />
which was acquired with effect from May<br />
1, 2007, contributed R845 million in the<br />
2008 financial year from its customers in<br />
the Nigerian market since its acquisition.<br />
Multi-Links operating expenses<br />
The following table shows operating<br />
expenses for our Multi-Links segment broken<br />
down by major expense categories and the<br />
percentage change for the periods indicated.<br />
Group<br />
overview<br />
Management<br />
review<br />
Sustainability<br />
review<br />
Performance<br />
review<br />
Financial<br />
statements<br />
Company<br />
Financial<br />
Information
128<br />
<strong>Telkom</strong> Annual Report 2009<br />
Financial review (continued)<br />
Multi-Links operating expenses<br />
Year ended March 31,<br />
2007 2008 2009 2008/2007 2009/2008<br />
(in millions, except percentages) Z<strong>AR</strong> Z<strong>AR</strong> Z<strong>AR</strong> % change % change<br />
Employee expenses – 39 126 – 223.1<br />
Payments to other operators – 624 652 – 4.5<br />
Selling, general and administrative expenses – 142 1,117 – 686.6<br />
Service fees – 14 38 – 171.4<br />
Operating leases – 37 193 – 421.6<br />
Depreciation, amortisation and impairments – 86 296 – 244.2<br />
Other operating expenses – 942 2,422 – 157.1<br />
Employee expenses increased by 223.1% in<br />
the 2009 financial year primarily due to an<br />
increase in the number of employees as well<br />
as salary increases and bonus payments.<br />
The 686.6% increase in selling, general<br />
and administrative expenditure in the<br />
2009 financial year primarily related to<br />
increased cost of sales and associated<br />
handset subsidies of R281 million as a<br />
result of increased sales volumes,<br />
increased advertising and promotional<br />
expenditure and an increase in expatriates<br />
fees as a result of an increase in staff<br />
seconded from <strong>Telkom</strong> during the year.<br />
The increases in service fees were mainly<br />
as a result of increased security cost and<br />
payments to consultants as a result of an<br />
increase in operations during the year.<br />
Operating leases increased 421.6% as a<br />
result of an increase in the number of<br />
leased base stations, warehouses and<br />
office buildings as a result of the<br />
expanding operations.<br />
Depreciation, amortisation and impairments<br />
increased 244.2% as a result of higher<br />
capital expenditure incurred during the<br />
year.<br />
Other segment<br />
Other operating revenue<br />
Our other operating revenue is derived<br />
principally from directory services, through<br />
our Trudon Group, internet services outside<br />
South Africa, through our Africa Online<br />
subsidiary.<br />
The following table shows the operating<br />
revenue for our other segment broken<br />
down by major revenue streams and the<br />
percentage change by major revenue<br />
stream for the periods indicated.<br />
2007<br />
Other operating revenue<br />
Year ended March 31,<br />
2008 2009 2008/2007 2009/2008<br />
(in millions, except percentages) Z<strong>AR</strong> Z<strong>AR</strong> Z<strong>AR</strong> % change % change<br />
Trudon 865 930 1,020 7.5 9.7<br />
Africa Online 8 110 194 n/a 76.4<br />
Other operating revenue 873 1,040 1,214 19.1 16.7
The increase in other operating revenue<br />
was mainly attributable to UUNET, Africa<br />
Online’s 40% joint venture. Our other<br />
operating revenue increased in the 2008<br />
financial year primarily due the inclusion in<br />
the current year of revenue generated by<br />
our newly acquired subsidiary, Africa<br />
Online. Africa Online, which was acquired<br />
with effect from February 23, 2007,<br />
increased the revenue contribution to the<br />
group from R8 million during the 2007<br />
financial year to R110 million during the<br />
2008 financial year.<br />
These additional revenue streams were<br />
further supported by the continued growth<br />
in advertising revenue from our subsidiary,<br />
Trudon. Revenue from directory services<br />
increased in the years ended March 31,<br />
2009 and 2008 primarily due to annual<br />
tariff increases and increased marketing<br />
and online efforts, resulting in increased<br />
spending on advertising by existing<br />
customers and additional advertising<br />
revenue from new customers.<br />
<strong>Telkom</strong> Annual Report 2009 129<br />
Other operating expenses<br />
The following table shows operating<br />
expenses for our other segment broken<br />
down by major expense categories and<br />
the percentage change for the periods<br />
indicated.<br />
2007<br />
Other operating expenses<br />
Year ended March 31,<br />
2008 2009 2008/2007 2009/2008<br />
(in millions, except percentages) Z<strong>AR</strong> Z<strong>AR</strong> Z<strong>AR</strong> % change % change<br />
Employee expense 158 193 220 22.2 14.0<br />
Payments to other operators – 53 89 – 67.9<br />
Selling, general and administrative expenses 310 335 404 8.1 20.6<br />
Service fees 5 12 12 140.0 –<br />
Operating leases 20 23 26 15.0 13.0<br />
Depreciation, amortisation and impairments 19 32 50 68.4 56.3<br />
Other operating expenses 512 648 801 26.6 23.6<br />
Increases in other operating expenses in<br />
the 2009 financial year were primarily<br />
driven by increases in selling, general and<br />
administrative expenses, payments to other<br />
operators, employee expenses and<br />
depreciation, amortisation and impairments.<br />
Increases in other operating expenses in<br />
the 2008 financial year were primarily<br />
driven by increases in payments to other<br />
operators, employee expenses, depreciation,<br />
amortisation and impairments,<br />
operating leases and service fees. The<br />
increase in these operating expenses in the<br />
2008 financial year was primarily due to<br />
the inclusion of operating expenses relating<br />
to our newly acquired subsidiary, Africa<br />
Online, which impacted all expense<br />
categories.<br />
The following table shows the contributions<br />
to other operating expenses by each of the<br />
two subsidiaries contained in our other<br />
segment and the percentage change for<br />
the periods indicated.<br />
2007<br />
Other operating expenses<br />
Year ended March 31,<br />
2008 2009 2008/2007 2009/2008<br />
(in millions, except percentages) Z<strong>AR</strong> Z<strong>AR</strong> Z<strong>AR</strong> % change % change<br />
Trudon 504 530 593 5.2 11.9<br />
Africa Online 8 118 208 1,375.0 76.3<br />
Other operating expenses 512 648 801 210.7 23.6<br />
Group<br />
overview<br />
Management<br />
review<br />
Sustainability<br />
review<br />
Performance<br />
review<br />
Financial<br />
statements<br />
Company<br />
Financial<br />
Information
130<br />
<strong>Telkom</strong> Annual Report 2009<br />
Financial review (continued)<br />
Liquidity and capital resources<br />
Group liquidity and capital resources<br />
Cash flows<br />
The following table shows information regarding our consolidated cash flows for the periods indicated.<br />
2007<br />
Year ended March 31,<br />
2008 2009 2008/2007 2009/2008<br />
(in millions, except percentages) Z<strong>AR</strong> Z<strong>AR</strong> Z<strong>AR</strong> % change % change<br />
Cash flows from operating activities 9,356 10,603 11,432 13.3 7.8<br />
Cash flows from investing activities (10,412) (14,106) (17,005) 35.5 20.6<br />
Cash flows from financing activities (2,920) 2,943 7,093 200.8 141.0<br />
Net (decrease)/increase in cash and cash<br />
equivalents (3,976) (560) 1,520 85.9 371.4<br />
Effect of foreign exchange rate differences<br />
Net cash and cash equivalents at the beginning<br />
29 44 (30) 51.7 (168.2)<br />
of the year 4,255 308 (208) (92.8) (167.5)<br />
Net cash and cash equivalents at the end of<br />
the year 308 (208) 1,282 (167.5) 716.3<br />
Cash flows from operating activities<br />
Our primary sources of liquidity are cash<br />
flows from operating activities and<br />
borrowings. We intend to fund our<br />
expenses, indebtedness and working<br />
capital requirements from cash generated<br />
from our operations and from capital raised<br />
in the markets. The increase in cash flows<br />
from operating activities in the 2009<br />
financial year is mainly due to a lower<br />
dividend payment in respect of the 2008<br />
financial year and lower taxation paid,<br />
partially offset by higher finance charges<br />
and a decrease in cash generated from<br />
operations. The increase in cash flows from<br />
operating activities in the 2008 financial<br />
year is mainly due to lower taxation<br />
payments as well as an increase in cash<br />
generated from operations, partially offset<br />
by higher dividends paid.<br />
Cash flows from investing activities<br />
Cash flows from investing activities relate<br />
primarily to investments in our fixed-line<br />
network, our other segment’s networks and<br />
our 50% share of Vodacom’s investments in<br />
its mobile networks in South Africa and<br />
other African countries. The increase in<br />
cash flows used in investing activities in the<br />
2009 financial year was as a result of the<br />
increased capital expenditure of Multi-Links<br />
as well as the acquisition of Gateway by<br />
Vodacom and the acquisition of the<br />
remaining 25% share in Multi-Links. The<br />
increase in cash flows used in investing<br />
activities in the 2008 financial year was<br />
mainly the result of R1,985 million cash<br />
utilised for the purchase of Multi-Links and<br />
increased equity investments in Smartphone,<br />
increased capital expenditures in our fixedline,<br />
mobile and other segments and lower<br />
proceeds on the disposal of investments,<br />
partially offset by higher proceeds on the<br />
disposal of property, plant and equipment<br />
and intangibles.<br />
Cash flows from financing activities<br />
Cash flows from financing activities are<br />
primarily a function of borrowing and share<br />
buy-back activities.<br />
In the 2009 financial year, loans raised<br />
exceeded loans repaid and the increase in<br />
net financial assets. In the 2009 financial<br />
year, cash flows from financing activities<br />
were primarily due to the issuance of<br />
R11,025 million nominal value of<br />
commercial paper bills, the issue of the<br />
new local bonds, the TL12 and TL15 with<br />
a nominal value of R1,060 million and<br />
R1,160 million, respectively, as well as<br />
entering into a syndicated loan agreement<br />
with a nominal value of R4,100 million.<br />
This was partially offset by the repayment of<br />
a term loan of R1,000 million, a bank<br />
facility of R1,000 million, bridging finance<br />
of R1,600 million and maturing commercial<br />
paper bills of R9,849 million nominal value.<br />
In the 2008 financial year, loans raised<br />
and the decrease in net financial assets<br />
exceeded loans repaid, shares bought<br />
back and cancelled and finance lease<br />
obligation repaid. In the 2008 financial<br />
year, cash flows from financing activities<br />
were primarily due to the issuance of<br />
R18,806 million nominal value of
commercial paper bills, as well as entering<br />
into call and term loans of R5,600 million<br />
to fund the redemption of the TK01 bond<br />
and other cash flows from investing<br />
activities, including R1.6 billion of<br />
additional bank borrowings and interest<br />
bearing debt by Vodacom. This was<br />
partially offset by the maturing commercial<br />
paper debt of R15,773 million nominal<br />
value, the repayment of the TK01 bond<br />
with a nominal value of R4,680 million<br />
and R1,647 million paid for the<br />
repurchase of shares during the year.<br />
In the 2007 financial year, loans and finance<br />
leases repaid and shares repurchased and<br />
cancelled exceeded loans raised and the<br />
decrease in net financial assets, by<br />
R2,920 million. In the 2007 financial year<br />
cash flows used in financing activities<br />
increased primarily due to the lower sale of<br />
repurchase agreements and derivative<br />
instruments that were sold in the 2006<br />
financial year to fund dividends and tax<br />
payments. On October 31, 2006, we<br />
repaid the TL06 local bond having a nominal<br />
value of R2,100 million and during the<br />
2007 financial year, we repaid<br />
R3,731 million in nominal value of<br />
commercial paper bill debt. Commercial<br />
paper bills having a nominal value of<br />
R4,651 million were issued in the 2007<br />
financial year.<br />
Working capital<br />
We had negative consolidated working<br />
capital from continuing operations of<br />
approximately R6.2 billion as of March 31,<br />
2009, we had negative consolidated<br />
working capital from total operations of<br />
approximately R9.3 billion as of March 31,<br />
2008 and approximately R8.2 billion as of<br />
March 31, 2007. Negative working<br />
capital arises when current liabilities are<br />
greater than current assets. The increase in<br />
the Company’s negative working capital in<br />
the 2009 financial year was mainly as a<br />
result of an increase in interest bearing debt<br />
payable, partially offset by higher financial<br />
assets in the form of repurchase agreements.<br />
The increase in negative working capital in<br />
the 2008 financial year was primarily due<br />
to an increase in the current portion of<br />
interest bearing debt due to the repayment<br />
of the TK01 local bond with short-term debt<br />
that was subsequently partially refinanced<br />
<strong>Telkom</strong> Annual Report 2009 131<br />
by the TL12 and TL15 bonds after the year<br />
end, a reduction in cash available due to<br />
acquisition activities, increased capital<br />
expenditure, increased dividends paid,<br />
shares repurchased and an increase in trade<br />
and other payables. <strong>Telkom</strong> is of the opinion<br />
that the <strong>Telkom</strong> Group’s cash flows from<br />
operations, together with proceeds from the<br />
Vodacom transaction and the proceeds from<br />
liquidity available under credit facilities and<br />
in the capital markets, will be sufficient to<br />
meet the <strong>Telkom</strong> Group’s present working<br />
capital requirements for the 12 months<br />
following the date of this annual report. We<br />
intend to fund current liabilities through a<br />
combination of operating cash flows and<br />
with new borrowings and borrowings<br />
available under existing credit facilities. We<br />
had R6.2 billion available under existing<br />
credit facilities as of March 31, 2009.<br />
Capital expenditures and investments<br />
The following table shows the <strong>Telkom</strong><br />
Group’s investments in property, plant and<br />
equipment including intangible assets,<br />
including our 50% share of Vodacom’s<br />
investments, for the periods indicated.<br />
2007<br />
Year ended March 31,<br />
2008 2009 2008/2007 2009/2008<br />
(in millions, except percentages) Z<strong>AR</strong> Z<strong>AR</strong> Z<strong>AR</strong> % change % change<br />
Group capital expenditure<br />
Fixed-line 6,594 6,794 6,690 3.0 (1.5)<br />
Baseline 3,409 4,039 3,343 18.5 (17.2)<br />
Revenue generating 159 57 30 (64.2) (47.4)<br />
Network evolution 784 1,092 1,373 39.3 25.7<br />
Sustainment 416 277 115 (33.4) (58.5)<br />
Effectiveness and efficiencies 1,141 841 603 (26.3) (28.3)<br />
Company support 497 451 790 (9.3) 75.2<br />
Regulatory 188 37 436 (80.3) 1,078.4<br />
Mobile 3,608 3,460 3,569 (4.1) 3.2<br />
Multi-Links – 1,312 2,791 – 112.7<br />
Other 44 334 184 659.1 (44.9)<br />
Total investment in property, plant and<br />
equipment and intangible assets 10,246 11,900 13,234 16.1 11.2<br />
Group<br />
overview<br />
Management<br />
review<br />
Sustainability<br />
review<br />
Performance<br />
review<br />
Financial<br />
statements<br />
Company<br />
Financial<br />
Information
132<br />
<strong>Telkom</strong> Annual Report 2009<br />
Financial review (continued)<br />
Fixed-line capital expenditure, which<br />
includes spending on intangible assets,<br />
decreased by 1.5% to R6,690 million and<br />
represents 19.9% of fixed-line revenue.<br />
Baseline capital expenditure of<br />
R3,343 million in the 2009 financial year<br />
was largely for the deployment of<br />
technologies to support the growing data<br />
services business (including ADSL footprint),<br />
links to the mobile cellular operators and<br />
expenditure for access line deployment in<br />
selected high growth commercial and<br />
residential areas. The continued focus on<br />
rehabilitating the access network and<br />
increasing the efficiencies and<br />
redundancies in the transport network as<br />
well as the initiation of the fixed-wireless<br />
roll-out contributed to the network evolution<br />
and sustainment capital expenditure of<br />
R1,488 million.<br />
<strong>Telkom</strong> continues to focus on its operations<br />
support system investment with current<br />
emphasis on workforce management,<br />
provisioning and fulfilment, assurance and<br />
customer care, hardware technology<br />
upgrades on the billing platform and<br />
performance and service management and<br />
property optimisation. During the year<br />
ended March 31, 2009, R603 million<br />
was spent on the implementation of several<br />
systems.<br />
Fixed-line capital expenditure, which<br />
includes spending on intangible assets,<br />
increased 3.0% to R6,794 million in the<br />
2008 financial year from R6,594 million<br />
in the 2007 financial year and represented<br />
20.9% of fixed-line revenue compared to<br />
20.4% in the 2007 financial year. The<br />
increase in baseline and revenue<br />
generating capital expenditure to<br />
R4,095 million in the 2008 financial year<br />
from R3,568 million in the 2007 financial<br />
year was largely for the deployment of<br />
technologies to support the growing data<br />
services business (including ADSL footprint),<br />
links to the mobile cellular operators and<br />
expenditure for access line deployment in<br />
selected high growth residential areas.<br />
During the year ended March 31, 2008,<br />
R841 million was spent on the<br />
implementation of systems compared to<br />
R1,141 million in the 2007 financial year.<br />
Mobile capital expenditure (50% of<br />
Vodacom’s capital expenditure) increased<br />
by 3.2% to R3,569 million in the 2009<br />
financial year from R3,460 million in the<br />
2008 financial year and represents 12.9%<br />
of mobile revenue compared to 14.4% in<br />
the 2008 financial year which was mainly<br />
spent on the continued investment to<br />
improve geographic coverage and<br />
increase capacity for both the voice and<br />
data networks in South Africa and to<br />
expand coverage in Tanzania and<br />
Mozambique.<br />
Mobile capital expenditure, which includes<br />
spending on intangible assets, increased<br />
by 3.2% to R3,569 million and represents<br />
12.9% of mobile revenue and was due to<br />
the continued investment to improve<br />
geographic coverage and increase<br />
capacity for both the voice and data<br />
networks. Mobile capital expenditure (50%<br />
of Vodacom’s capital expenditure)<br />
decreased by 4.1% to R3,460 million<br />
in the 2008 financial year from<br />
R3,608 million in the 2007 financial year<br />
and represents 14.4% of mobile revenue<br />
compared to 17.5% in the 2007 financial<br />
year which was mainly spent on the<br />
cellular network infrastructure consisting of<br />
radio, switching and transmission network<br />
infrastructure and computer software. The<br />
decrease in capital expenditure in other<br />
African countries was largely as a result of<br />
decreased investment in Tanzania,<br />
Democratic Republic of the Congo and<br />
Mozambique offset by an increase in<br />
investment in Lesotho.<br />
Our consolidated capital expenditure in<br />
property, plant and equipment for the<br />
2010 financial year budgeted to be<br />
approximately R7.9 billion, of which<br />
approximately R7.0 billion is budgeted to<br />
be spent in our fixed-line segment,<br />
approximately R847 million is budgeted to<br />
be spent in our Multi-Links segment, and<br />
approximately R90 million is budgeted to<br />
be spent in our other segment. Our capital<br />
expenditures are continuously examined<br />
and evaluated against the perceived<br />
economic benefit and may be revised in<br />
light of changing business conditions,<br />
regulatory requirements, investment<br />
opportunities and other business factors.
The following table sets forth our consolidated indebtedness including finance leases as of March 31, 2009<br />
<strong>Telkom</strong> Annual Report 2009 133<br />
Nominal<br />
amount<br />
Out- out<br />
standing standing Maturing<br />
Interest Interest as of as of Year ended March 31,<br />
payment rate/ March 31, March 31, After<br />
dates coupon 2009 2009 2010 2011 2012 2013 2014 2014<br />
(in millions) (%) Z<strong>AR</strong> Z<strong>AR</strong> Z<strong>AR</strong> Z<strong>AR</strong> Z<strong>AR</strong> Z<strong>AR</strong> Z<strong>AR</strong> Z<strong>AR</strong><br />
<strong>Telkom</strong><br />
Bonds<br />
12.45% unsecured local bond due 29 Apr &<br />
April 29, 2012 (TL12) (1, 2) 29 Oct 12.45 1,059 1,060 – – – 1,060 – –<br />
11.90% unsecured local bond due 29 Apr &<br />
April 29, 2015 (TL15) (1, 3) 29 Oct 11.9 1,159 1,160 – – – – – 1,160<br />
6% unsecured local bond due<br />
February 24, 2020 (TL20) (1, 4) 22 Feb 6 1,325 2,500 – – – – – 2,500<br />
Zero coupon unsecured loan stock<br />
due September 30, 2010 (PP02) (5) – – 349 430 – 430 – – – –<br />
Zero coupon unsecured loan stock<br />
due June 15, 2010 (PP03) (6) – – 1,131 1,350 – 1,350 - – – –<br />
Commercial paper – 11.44 5,476 5,559 5,559 – – – – –<br />
Syndicated loans due December 17,<br />
2011 and 2013 (7) 11.46 4,083 4,100 – – 820 – 3,280 –<br />
Term loans Various 9.67 2,000 2,000 2,000 – – – – –<br />
Bank facilities<br />
R394 million uncommitted overdraft<br />
facility with ABSA Bank Limited,<br />
repayable on demand, and a<br />
R1 billion unsecured committed<br />
facility, repayable on 364 days Mutually Not Not<br />
notice – agreed utilised utilised – – – – – –<br />
R1 billion unsecured committed facility<br />
with The Standard Bank of South Africa<br />
Limited, repayable within 365 days of Mutually Not Not<br />
drawdown – agreed utilised utilised – – – – – –<br />
R1 billion unsecured committed facility<br />
with FirstRand Bank Limited, repayable Mutually Not Not<br />
on 364 days notice – agreed utilised utilised – – – – – –<br />
$35 million unsecured short-term loan<br />
facility with Calyon Corporate and Mutually Not Not<br />
Investment Bank, repayable on demand – agreed utilised utilised – – – – – –<br />
R1 billion uncommitted short term facility with<br />
Sumitomo Mitsui Banking Corporation, Mutually Not Not<br />
repayable on demand – agreed utilised utilised – – – – – –<br />
R500 million call loan facility with<br />
iNkotha Investments Limited, repayable Mutually Not Not<br />
on demand – agreed utilised utilised – – – – – –<br />
R1 billion loan agreement with<br />
Old Mutual Specialised Finance Mutually Not Not<br />
(Proprietary) Limited, repayable on demand agreed utilised utilised – – – – – –<br />
Various bank loans 8 – Various 138 138 – 20 13 9 0 96<br />
Bank overdraft and other short-term debt – 106 106 106 – – – –<br />
13.43% –<br />
Finance leases (9) n/a 37.78% 984 984 35 231 – – – 718<br />
Total <strong>Telkom</strong> 17,810 19,387 7,700 2,031 833 1,069 3,280 4,474<br />
Group<br />
overview<br />
Management<br />
review<br />
Sustainability<br />
review<br />
Performance<br />
review<br />
Financial<br />
statements<br />
Company<br />
Financial<br />
Information
134<br />
<strong>Telkom</strong> Annual Report 2009<br />
Financial review (continued)<br />
Nominal<br />
amount<br />
Out- out<br />
standing standing Maturing<br />
Interest Interest as of as of Year ended March 31,<br />
payment rate/ March 31, March 31, After<br />
dates coupon 2009 2009 2010 2011 2012 2013 2014 2014<br />
(in millions) (%) Z<strong>AR</strong> Z<strong>AR</strong> Z<strong>AR</strong> Z<strong>AR</strong> Z<strong>AR</strong> Z<strong>AR</strong> Z<strong>AR</strong> Z<strong>AR</strong><br />
Other<br />
Trudon (Pty) Ltd<br />
Various finance leases – Various 2 2 1 1 – – – –<br />
<strong>Telkom</strong> Media (Pty) Ltd<br />
Various loans – 13% 9 9 – 5 2 2 – –<br />
Multi-Links Telecommunications Limited<br />
Naira 1,100 million Commercial paper – 18.5% 70 70 70 – – –<br />
$18 million Export Development Bank LIBOR<br />
of Canada funding – + 1.25% 157 157 35 – – 122 – –<br />
$41.6 million Huawei Vendor Financing LIBOR<br />
Facility funding – + 2% 323 323 – – 323 – – –<br />
Africa Online Limited<br />
Various loans – Various 11 11 4 7 – – – –<br />
Bank overdrafts and other short-term debt – 20 20 20 – – – – –<br />
Total other 592 592 130 13 325 124 – –<br />
Grand total 18,402 19,979 7,830 2,044 1,158 1,193 3,280 4,474<br />
1. Listed on the Bond Exchange of South Africa.<br />
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.<br />
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.<br />
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,<br />
2005.<br />
5. Issued on February 25, 2000. Original amount issued was R430 million. The yield to maturity of this instrument issued by <strong>Telkom</strong> is 14.37%.<br />
6. Issued on June 15, 2000. Original amount issued was R1,350 million. The yield to maturity of this instrument is 15.175%.<br />
7. Agreement effective from December 17, 2008 for three and five years.<br />
8. R138 million of <strong>Telkom</strong>'s indebtedness outstanding as of March 31, 2009 was guaranteed by the government of South Africa. Euro loans converted at the spot rate.<br />
9. Secured by land and buildings.
challeng<br />
Consolidated financial statements<br />
Directors’ responsibility statement 137<br />
Certificate from Group Company Secretary 137<br />
Report of independent auditors 138<br />
Directors’ report 140<br />
Consolidated income statement 142<br />
Consolidated balance sheet 143<br />
Consolidated statement of changes in equity 144<br />
Consolidated cash flow statement 145<br />
Notes to the consolidated annual financial statements 146<br />
economic conditions<br />
contributed to a<br />
difficult year<br />
Group<br />
overview<br />
Management<br />
review<br />
Sustainability<br />
review<br />
Performance<br />
review<br />
Financial<br />
statements<br />
Company<br />
Financial<br />
Information<br />
1<br />
2<br />
3<br />
4<br />
5<br />
6
Directors’ responsibility statement<br />
The directors are responsible for the preparation of the annual financial<br />
statements of the Company and the Group. The directors are also<br />
responsible for maintaining a sound system of internal controls to<br />
safeguard shareholders’ investments and the Group’s assets.<br />
In presenting the accompanying financial statements, International<br />
Financial Reporting Standards as issued by the International<br />
Accounting Standards Board have been followed and applicable<br />
accounting policies have been used incorporating prudent judgements<br />
and estimates.<br />
The external auditors are responsible for independently auditing and<br />
reporting on the annual financial statements.<br />
In order for the directors to discharge their responsibilities,<br />
management continues to develop and maintain a system of internal<br />
controls aimed at reducing the risk of error or loss in a cost-effective<br />
manner. The internal controls include a risk-based system of internal<br />
auditing and administrative controls designed to provide reasonable<br />
but not absolute assurance that assets are safeguarded and that<br />
transactions are executed and recorded in accordance with generally<br />
accepted business practices and the Group’s policies and procedures.<br />
The directors, primarily through the audit and risk committee, which<br />
consists of non-executive directors, meet periodically with the external<br />
and internal auditors, as well as executive management to evaluate<br />
matters concerning accounting policies, internal controls, auditing and<br />
financial reporting.<br />
The directors are of the opinion, based on the information and<br />
explanations given by management and internal audit, that the internal<br />
accounting controls are adequate, so that the financial records may be<br />
relied on for preparing the financial statements and maintaining<br />
<strong>Telkom</strong> Annual Report 2009 137<br />
accountability for assets and liabilities. The directors are satisfied that<br />
the Company and the Group have adequate resources to continue in<br />
operational existence for the foreseeable future. Accordingly, <strong>Telkom</strong><br />
SA Limited continues to adopt the going concern basis in preparing the<br />
annual financial statements.<br />
Against this background, the directors of the Company accept<br />
responsibility for the annual financial statements, which were approved<br />
by the Board of directors on 10 July 2009 and are signed on their<br />
behalf by:<br />
Shirley Lue Arnold<br />
Chairman<br />
Reuben September<br />
Chief Executive Officer<br />
Peter Nelson<br />
Chief Financial Officer<br />
Pretoria<br />
Certificate from Group Company Secretary<br />
I hereby certify that in accordance with section 268G(d) of the Companies Act, 1973, as amended, the Company has lodged with the Registrar<br />
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<br />
and belief, true, correct and up to date.<br />
Mmathoto Lephadi<br />
Group Company Secretary<br />
Pretoria<br />
10 July 2009
138<br />
<strong>Telkom</strong> Annual Report 2009
<strong>Telkom</strong> Annual Report 2009 139
140<br />
<strong>Telkom</strong> Annual Report 2009<br />
Directors’ report<br />
To the members of <strong>Telkom</strong> SA Limited<br />
The directors have pleasure in submitting the annual financial<br />
statements of the Company and the Group for the year ended<br />
March 31, 2009.<br />
NATURE OF BUSINESS<br />
<strong>Telkom</strong> is a leading integrated communications service provider in<br />
South Africa and on the African continent.<br />
FINANCIAL RESULTS<br />
Earnings attributable to equity holders of <strong>Telkom</strong> for the year ended<br />
March 31, 2009 were R4,170 million (2008: R7,975 million)<br />
representing basic earnings per share from continuing operations of<br />
407.4 cents (2008: 963.7 cents). Full details of the financial position<br />
and results of the Group are set out in the accompanying Company<br />
and Group financial statements.<br />
DIVIDENDS<br />
The following dividend was declared in respect of the year ended<br />
March 31, 2009:<br />
• Ordinary dividend number 14 of 115 cents per share (2008:<br />
660 cents);<br />
• Special dividend of 260 cents per share (2008: nil cents).<br />
The level of dividend payments will be based upon a number of<br />
factors, including the consideration of financial results, capital and<br />
operating expenditure requirements, the Group’s debt level, interest<br />
coverage, internal cash flows, prospects and available growth<br />
opportunities.<br />
SUBSIDI<strong>AR</strong>IES<br />
Particulars of the significant subsidiaries of the Group are set out in<br />
notes 42 and 43 of the accompanying Group financial statements.<br />
The attributable interest of the Group in the after taxation earnings from<br />
continuing operations of its subsidiaries for the year ended March 31,<br />
2009 were:<br />
2008 2009<br />
Rm Rm<br />
Aggregate amount of loss after taxation (102) (2,142)<br />
SH<strong>AR</strong>E CAPITAL<br />
Details of the authorised, issued and unissued share capital of the<br />
Company as at March 31, 2009 are contained in note 22 and<br />
note 20 of the accompanying Group and Company financial<br />
statements respectively.<br />
SH<strong>AR</strong>E REPURCHASE<br />
Shareholders approved a special resolution granting a general<br />
authority for the repurchase of shares by the Company at its annual<br />
general meeting of September 15, 2008. The Company repurchased<br />
286 ordinary shares at a value of R30,425 (including costs) during the<br />
year under review. These shares have been cancelled as issued share<br />
capital and restored as authorised but unissued share capital.<br />
BORROWING POWERS<br />
In terms of the Company’s articles of association, <strong>Telkom</strong> has unlimited<br />
borrowing powers subject to the restrictive financial covenants of the<br />
TL20 bond and Syndicated loans.<br />
CAPITAL EXPENDITURE AND COMMITMENTS<br />
Details of the Company’s capital expenditure on property, plant and<br />
equipment as well as intangibles are set out in notes 9 and 10 of the<br />
accompanying financial statements, while details of the Company’s<br />
capital commitments are set out in note 34.<br />
Details of the Group’s capital expenditure on property, plant and<br />
equipment as well as intangibles are set out in notes 11 and 12 of the<br />
accompanying financial statements, while details of the Group’s<br />
capital commitments are set out in note 38.<br />
EVENTS SUBSEQUENT TO BALANCE SHEET DATE<br />
Events subsequent to the balance sheet date are set out in note 45 of<br />
the accompanying Group financial statements and note 39 of the<br />
Company financial statements.<br />
DIRECTORATE<br />
The following changes occurred in the composition of the Board from<br />
April 1, 2008 to date of this report.<br />
Appointments<br />
B Molefe July 3, 2008<br />
PG Joubert August 12, 2008<br />
DD Barber September 1, 2008<br />
PG Nelson December 8, 2008<br />
Resignations<br />
MJ Lamberti June 3, 2008<br />
AG Rhoda July 3, 2008
Directors’ report (continued)<br />
The Board of Directors at date of this report are as follows:<br />
ST Arnold (Chairman)<br />
RJ September (Chief Executive Officer)<br />
PG Nelson (Chief Financial Officer)<br />
DD Barber<br />
B du Plessis<br />
RJ Huntley<br />
PG Joubert<br />
VB Lawrence<br />
PCS Luthuli<br />
KST Matthews<br />
B Molefe<br />
E Spio-Garbrah<br />
Details of each director may be found on pages 28 and 29 in the<br />
Management review section.<br />
DIRECTORS’ INTERESTS<br />
At the date of this report, none of <strong>Telkom</strong>’s directors other than<br />
Mr RJ September, Mr PG Nelson, Mr PG Joubert and Mr DD Barber,<br />
held any direct and indirect, beneficial and non-beneficial interests in<br />
the share capital of the Company. Mr RJ September directly held<br />
90,815 and indirectly held 1,820 ordinary shares, Mr. PG Nelson<br />
directly held 19,182 ordinary shares, Mr PG Joubert indirectly held<br />
15,000 ordinary shares and Mr DD Barber indirectly held<br />
1,200 ordinary shares in the capital of <strong>Telkom</strong>.<br />
Details of the Company Secretary’s business address and the<br />
Company’s registered office are set out on the inside back cover.<br />
<strong>Telkom</strong> Annual Report 2009 141
142<br />
<strong>Telkom</strong> Annual Report 2009<br />
Consolidated income statement<br />
for the three years ended March 31, 2009<br />
Restated* Restated* Audited<br />
2007 2008 2009<br />
Notes Rm Rm Rm<br />
Total revenue 3.1 32,919 34,084 36,433<br />
Operating revenue 3.2 32,441 33,611 35,940<br />
Other income 4 338 472 343<br />
Operating expenses 23,028 25,014 29,895<br />
Employee expenses 5.1 7,254 7,629 8,345<br />
Payments to other operators 5.2 5,005 6,098 6,919<br />
Selling, general and administrative expenses 5.3 4,184 4,045 5,772<br />
Service fees 5.4 2,209 2,437 2,756<br />
Operating leases 5.5 775 671 823<br />
Depreciation, amortisation, impairment and write-offs 5.6 3,601 4,134 5,280<br />
Operating profit 9,751 9,069 6,388<br />
Investment income 6 199 168 181<br />
Finance charges and fair value movements 7 857 1,556 2,843<br />
Interest 1,142 1,543 1,732<br />
Foreign exchange and fair value movement (gain)/loss (285) 13 1,111<br />
Profit before taxation 9,093 7,681 3,726<br />
Taxation 8 2,803 2,647 1,660<br />
Profit from continuing operations 6,290 5,034 2,066<br />
Profit for the year from discontinued operations 9 2,559 3,138 2,181<br />
Profit for the year 8,849 8,172 4,247<br />
Attributable to:<br />
Equity holders of <strong>Telkom</strong> 8,646 7,975 4,170<br />
Minority interest 203 197 77<br />
8,849 8,172 4,247<br />
Total operations<br />
Basic earnings per share (cents) 10 1,681.0 1,565.0 832.8<br />
Diluted earnings per share (cents) 10 1,676.3 1,546.9 819.6<br />
Dividend per share (cents) 10 900.0 1,100.0 660.0<br />
Continuing operations<br />
Basic earnings per share (cents) 10 1,204.7 963.7 407.4<br />
Diluted earnings per share (cents) 10 1,201.3 952.6 401.0<br />
* The amounts have been restated for the effect of the discontinued operation and disposal groups held for sale as disclosed in note 9.
Consolidated balance sheet<br />
at March 31, 2009<br />
<strong>Telkom</strong> Annual Report 2009 143<br />
2007 2008 2009<br />
Notes Rm Rm Rm<br />
ASSETS<br />
Non-current assets 48,770 57,763 51,010<br />
Property, plant and equipment 11 41,254 46,815 41,418<br />
Intangible assets 12 5,111 8,468 7,232<br />
Investments 14 1,384 1,448 1,383<br />
Deferred expenses 15 270 221 55<br />
Finance lease receivables 16 158 206 166<br />
Deferred taxation 17 593 605 756<br />
Current assets 10,376 12,609 11,287<br />
Short-term investments 14 77 51 –<br />
Inventories 18 1,093 1,287 1,974<br />
Income taxation receivable 34 520 9 91<br />
Current portion of deferred expenses 15 287 362 –<br />
Current portion of finance lease receivables 16 88 166 109<br />
Trade and other receivables 19 7,303 8,986 5,980<br />
Other financial assets 20 259 614 1,202<br />
Cash and cash equivalents 21 749 1,134 1,931<br />
Assets of disposal groups classified as held for sale 9 – – 23,482<br />
Total assets 59,146 70,372 85,779<br />
EQUITY AND LIABILITIES<br />
Equity attributable to equity holders of <strong>Telkom</strong> 31,724 32,815 36,253<br />
Share capital 22 5,329 5,208 5,208<br />
Treasury share reserve 23 (1,774) (1,638) (1,517)<br />
Share-based compensation reserve 24 257 643 1,076<br />
Non-distributable reserves 25 1,413 1,292 1,758<br />
Retained earnings 26 26,499 27,310 28,852<br />
Reserves of disposal groups classified as held for sale 9 – – 876<br />
Minority interest 27 284 522 853<br />
Total equity 32,008 33,337 37,106<br />
Non-current liabilities 8,554 15,104 15,348<br />
Interest-bearing debt 28 4,338 9,403 10,653<br />
Other financial liabilities 20 36 919 –<br />
Provisions 29 1,443 1,675 1,875<br />
Deferred revenue 15 1,021 1,128 997<br />
Deferred taxation 17 1,716 1,979 1,823<br />
Current liabilities 18,584 21,931 17,452<br />
Trade and other payables 31 7,237 8,771 5,538<br />
Shareholders for dividend 35 15 20 23<br />
Current portion of interest-bearing debt 28 6,026 6,330 7,622<br />
Current portion of provisions 29 2,095 2,181 2,150<br />
Current portion of deferred revenue 15 1,983 2,593 1,714<br />
Income taxation payable 34 594 323 50<br />
Other financial liabilities 20 193 371 228<br />
Credit facilities utilised 21 441 1,342 127<br />
Liabilities of disposal groups classified as held for sale 9 – – 15,873<br />
Total liabilities 27,138 37,035 48,673<br />
Total equity and liabilities 59,146 70,372 85,779
144<br />
<strong>Telkom</strong> Annual Report 2009<br />
Consolidated statement of changes in equity<br />
for the three years ended March 31, 2009<br />
Attributable to equity holders of <strong>Telkom</strong><br />
Sharebased<br />
Discon-<br />
Treasury compen- Non-distri- tinued<br />
Share Share share sation butable Retained opera- Minority Total<br />
capital premium reserve reserve reserves earnings tions Total interest equity<br />
Rm Rm Rm Rm Rm Rm Rm Rm Rm Rm<br />
Balance at April 1, 2006 5,449 1,342 (1,809) 151 1,128 22,904 – 29,165 301 29,466<br />
Total income and expense for the year 46 8,646 – 8,692 217 8,909<br />
Profit for the year<br />
Foreign currency translation reserve<br />
– 8,646 – 8,646 203 8,849<br />
(net of taxation of R4 million) (refer to note 25) 46 – – 46 14 60<br />
Dividend declared (refer to note 35)<br />
Transfer to non-distributable reserves<br />
– (4,678) – (4,678) (166) (4,844)<br />
(refer to note 25)<br />
Shares vested and re-issued<br />
239 (239) – – – –<br />
(refer to note 24)<br />
Increase in share-based compensation<br />
35 (35) – – – – – –<br />
reserve (refer to note 24)<br />
Acquisition of subsidiaries and minorities<br />
– 141 – – – 141 – 141<br />
(refer to note 36)<br />
Shares bought back and cancelled<br />
– – – – – – (68) (68)<br />
(refer to note 22) (120) (1,342) – – – (134) – (1,596) (1,596)<br />
Balance at March 31, 2007 5,329 – (1,774) 257 1,413 26,499 – 31,724 284 32,008<br />
Total income and expense for the year 529 7,975 – 8,504 226 8,730<br />
Profit for the year<br />
Revaluation of available-for-sale<br />
– 7,975 – 7,975 197 8,172<br />
investment (net of taxation of R1 million)<br />
Foreign currency translation reserve<br />
8 – – 8 – 8<br />
(net of taxation of R6 million) (refer to note 25) 521 – – 521 29 550<br />
Dividend declared (refer to note 35)<br />
Transfer to non-distributable reserves<br />
– (5,627) – (5,627) (65) (5,692)<br />
(refer to note 25)<br />
Increase in share-based compensation<br />
11 (11) – – – –<br />
reserve (refer to note 24)<br />
Shares vested and re-issued<br />
522 – – – 522 – 522<br />
(refer to note 24)<br />
Acquisition of subsidiaries and<br />
136 (136) – – – – – –<br />
minorities (refer to note 36)<br />
Shares bought back and cancelled<br />
– – – – – – 77 77<br />
(refer to note 22) (121) – – – (1,526) – (1,647) – (1,647)<br />
Minority put option – – – – (661) – – (661) – (661)<br />
Balance at March 31, 2008 5,208 – (1,638) 643 1,292 27,310 – 32,815 522 33,337<br />
Discontinued operations (4) – 4 – – –<br />
Total income and expense for the year (181) 4,171 181 4,171 93 4,264<br />
Profit for the year<br />
Revaluation of available-for-sale<br />
– 4,171 – 4,171 77 4,248<br />
investment (net of taxation of R1 million)<br />
Foreign currency translation reserve<br />
– – (8) (8) – (8)<br />
(net of taxation of R6 million) (refer to note 25) (181) – 189 8 16 24<br />
Dividend declared (refer to note 35)<br />
Transfer to non-distributable reserves<br />
– (3,306) – (3,306) (33) (3,339)<br />
(refer to note 25)<br />
Increase in share-based compensation<br />
(10) 10 – – – –<br />
reserve (refer to note 24) 554 – – – 554 – 554<br />
Shares vested and re-issued (refer to note 24) 121 (121) – – – – – –<br />
Acquisition of subsidiaries and minorities<br />
Shares bought back and cancelled<br />
– – – 667 – 667 – 667<br />
(refer to note 22) – – – – – – – –<br />
Minority put option<br />
Broad-based black economic<br />
– – 661 – – 661 – 661<br />
empowerment transaction in Vodacom – – – – 691 691 271 962<br />
Balance at March 31, 2009 5,208 – (1,517) 1,076 1,758 28,852 876 36,253 853 37,106
Consolidated cash flow statement<br />
for the three years ended March 31, 2009<br />
<strong>Telkom</strong> Annual Report 2009 145<br />
2007 2008 2009<br />
Notes Rm Rm Rm<br />
Cash flows from operating activities 9,356 10,603 11,432<br />
Cash receipts from customers 50,979 55,627 61,302<br />
Cash paid to suppliers and employees (30,459) (34,371) (40,908)<br />
Cash generated from operations 32 20,520 21,256 20,394<br />
Interest received 422 433 485<br />
Dividends received 6 3 – –<br />
Finance charges paid 33 (1,115) (1,077) (2,164)<br />
Taxation paid 34 (5,690) (4,277) (3,947)<br />
Cash generated from operations before dividend paid 14,140 16,335 14,768<br />
Dividend paid 35 (4,784) (5,732) (3,336)<br />
Cash flows from investing activities (10,412) (14,106) (17,005)<br />
Proceeds on disposal of property, plant and equipment and<br />
intangible assets 54 169 43<br />
Proceeds on disposal of investments 77 8 –<br />
Additions to property, plant and equipment and intangible assets (10,037) (11,657) (13,191)<br />
Acquisition of subsidiaries and minority interest (445) (2,462) (3,778)<br />
Additions to other investments (61) (164) (79)<br />
Cash flows from financing activities (2,920) 2,943 7,093<br />
Loans raised 5,624 23,877 18,168<br />
Loans repaid (6,922) (19,315) (10,212)<br />
Shares bought back and cancelled (1,596) (1,647) –<br />
Finance lease obligation repaid (37) (61) (136)<br />
Decrease/(increase) in net financial assets 11 89 (727)<br />
Net (decrease)/increase in cash and cash equivalents (3,976) (560) 1,520<br />
Net cash and cash equivalents at beginning of the year 4,255 308 (208)<br />
Effect of foreign exchange rate differences 29 44 (30)<br />
Net cash and cash equivalents at end of the year 21 308 (208) 1,282
146<br />
<strong>Telkom</strong> Annual Report 2009<br />
Notes to the consolidated annual financial statements<br />
for the three years ended March 31, 2009<br />
1. CORPORATE INFORMATION<br />
<strong>Telkom</strong> SA Limited (<strong>Telkom</strong>) is a company incorporated and<br />
domiciled in the Republic of South Africa (South Africa)<br />
whose shares are publicly traded. The main objective of <strong>Telkom</strong>,<br />
its subsidiaries and joint ventures (the Group) is to supply<br />
telecommunication, broadcasting, multimedia, technology,<br />
information and other related information technology services to<br />
the general public, as well as mobile communication services<br />
through the Vodacom Group (Proprietary) Limited (Vodacom) in<br />
South Africa and certain other African countries. The principal<br />
activities of the Group include:<br />
• fixed-line subscription and connection services to post-paid,<br />
prepaid and private payphone customers using PSTN<br />
(‘Public Switched Telephone Network’) lines, including ISDN<br />
(‘Integrated Services Digital Network’) lines, and the sale of<br />
subscription based value-added voice services and customer<br />
premises equipment rental and sales;<br />
• fixed-line traffic services to post-paid, prepaid and payphone<br />
customers, including local, long distance, fixed-to-mobile,<br />
international outgoing and international voice-over-internet<br />
protocol traffic services;<br />
• interconnection services, including terminating and transiting<br />
traffic from South African mobile operators, as well as from<br />
international operators and transiting traffic from mobile to<br />
international destinations;<br />
• fixed-line data and internet services, including domestic and<br />
international data transmission services, such as point-to-point<br />
leased lines, ADSL (Asymmetrical Digital Subscriber Line)<br />
services, packet-based services, managed data networking<br />
services and internet access and related information<br />
technology services;<br />
• e-commerce, including internet access service provider,<br />
application provider, hosting, data storage, e-mail and<br />
security services;<br />
• W-CDMA (Wideband Code Division Multiple Access), a<br />
3G next generation network, including fixed voice services,<br />
data services and nomadic voice services; and<br />
• other services including directory services, through Trudon<br />
(Proprietary) Limited (formerly trading as TDS Directory<br />
Operations (Proprietary) Limited), wireless data services,<br />
through Swiftnet (Proprietary) Limited, television media<br />
services, through <strong>Telkom</strong> Media Group, internet services<br />
outside South Africa, through Africa Online Limited and<br />
information, communication and telecommunication<br />
operating services in Nigeria, through Multi-Links<br />
Telecommunications Limited.<br />
Mobile communications services, wireless data services and<br />
television media services through Vodacom, Swiftnet and <strong>Telkom</strong><br />
Media Group respectively have been classified as disposal<br />
groups held for sale and discontinued operations.<br />
2. SIGNIFICANT ACCOUNTING POLICIES<br />
Basis of preparation<br />
The consolidated annual financial statements comply with<br />
the International Financial Reporting Standards (IFRS) of the<br />
International Accounting Standards Board (IASB) and the<br />
Companies Act of South Africa, 1973.<br />
The financial statements are prepared on the historical cost<br />
basis, with the exception of certain financial instruments which<br />
are measured at fair value and share-based payments which are<br />
measured at grant date fair value.<br />
Details of the Group’s significant accounting policies are set out<br />
below, and are consistent with those applied in the previous<br />
financial year except for the following:<br />
The Group has adopted certain amendments to IAS39 and<br />
IFRS7, and adopted IFRIC12 and IFRIC14 which are<br />
applicable for annual periods on or after January 1, 2008.<br />
The principal effects of these changes are discussed below.<br />
Adoption of amendments to standards and new<br />
interpretation<br />
IAS39 Financial Instruments: Recognition and Measurement<br />
and IFRS7 Financial Instruments: Disclosures –<br />
Reclassification of Financial Assets (amended)<br />
The amendments, which are effective on or after July 1, 2008,<br />
permit an entity to reclassify non-derivative financial assets (other<br />
than those designated at fair value through profit or loss by the<br />
entity upon initial recognition) out of the fair value through profit<br />
or loss category in particular circumstances. The amendments<br />
also permit an entity to transfer from the available-for-sale<br />
category to the loans and receivables category a financial asset<br />
that would have met the definition of loans and receivables<br />
(if the financial asset had not been designated as available-forsale),<br />
if the entity has the intention and ability to hold that<br />
financial asset for the foreseeable future. The amendments do<br />
not have an impact on the consolidated annual financial<br />
statements.<br />
IFRIC12 Service Concession Arrangements<br />
The interpretation, which is effective for annual periods<br />
beginning on or after January 1, 2008, sets out general<br />
principles on recognising and measuring the obligations and<br />
related rights in service concession arrangements from an<br />
operator’s perspective. The interpretation does not have an<br />
impact on the consolidated annual financial statements.
2. SIGNIFICANT ACCOUNTING POLICIES (continued)<br />
Adoption of amendments to standards and new<br />
interpretation (continued)<br />
IFRIC14 The Limit on a Defined Benefit Asset, Minimum<br />
Funding Requirements and their Interaction<br />
The interpretation, which is effective for annual periods<br />
beginning on or after January 1, 2008, provides guidance on<br />
assessing the limit in IAS19 on the amount of the surplus that can<br />
be recognised as an asset. It also explains how the pension<br />
asset or liability may be affected by a statutory or contractual<br />
minimum funding requirement. The interpretation does not have<br />
any impact on the consolidated annual financial statements, as<br />
the Group is not subject to minimum funding requirements.<br />
Significant accounting judgements, estimates and<br />
assumptions<br />
The preparation of financial statements requires the use of<br />
estimates and assumptions that affect the reported amounts<br />
of assets and liabilities and disclosure of contingent assets and<br />
liabilities at the date of the financial statements and the reported<br />
amounts of revenue and expenses during the reporting periods.<br />
Although these estimates and assumptions are based on<br />
management’s best knowledge of current events and actions that<br />
the Group may undertake in the future, actual results may<br />
ultimately differ from those estimates and assumptions.<br />
The presentation of the results of operations, financial position<br />
and cash flows in the financial statements of the Group is<br />
dependent upon and sensitive to the accounting policies,<br />
assumptions and estimates that are used as a basis for the<br />
preparation of these financial statements. Management has<br />
made certain judgements in the process of applying the Group’s<br />
accounting policies. These, together with the key estimates and<br />
assumptions concerning the future, and other key sources of<br />
estimation uncertainty at the balance sheet date, are as follows:<br />
Revenue recognition<br />
To reflect the substance of each transaction, revenue recognition<br />
criteria are applied to each separately identifiable component<br />
of a transaction as disclosed in note 3. In order to account for<br />
multiple-element revenue arrangements in developing its<br />
accounting policies, the Group considered the guidance<br />
contained in the United States Financial Accounting Standards<br />
Board (’FASB’) Emerging Issues Task Force No 00-21 Revenue<br />
Arrangements with Multiple Deliverables. Judgement is required<br />
to separate those revenue arrangements that contain the delivery<br />
of bundled products or services into individual units of<br />
accounting, each with its own earnings process, when the<br />
delivered item has stand-alone value and the undelivered item<br />
has fair value. Further judgement is required to determine the<br />
relative fair values of each separate unit of accounting to be<br />
allocated to the total arrangement consideration. Changes in<br />
<strong>Telkom</strong> Annual Report 2009 147<br />
Notes to the consolidated annual financial statements (continued)<br />
for the three years ended March 31, 2009<br />
the relative fair values could affect the allocation of arrangement<br />
consideration between the various revenue streams.<br />
Judgement is also required to determine the expected customer<br />
relationship period. Any changes in these assessments may<br />
have a significant impact on revenue and deferred revenue.<br />
Property, plant and equipment and intangible assets<br />
The useful lives of assets are based on management’s<br />
estimation. Management considers the impact of changes in<br />
technology, customer service requirements, availability of<br />
capital funding and required return on assets and equity to<br />
determine the optimum useful life expectation for each of the<br />
individual categories of property, plant and equipment and<br />
intangible assets. Due to the rapid technological advancement<br />
in the telecommunications industry as well as <strong>Telkom</strong>’s plan to<br />
migrate to a next generation network over the next few years,<br />
the estimation of useful lives could differ significantly on an<br />
annual basis due to unexpected changes in the roll-out strategy.<br />
The impact of the change in the expected useful life of property,<br />
plant and equipment is described more fully in note 5.6.<br />
The estimation of residual values of assets is also based on<br />
management’s judgement whether the assets will be sold<br />
or used to the end of their useful lives and what their condition<br />
will be like at that time.<br />
For intangible assets that incorporate both a tangible and an<br />
intangible portion, management uses judgement to assess which<br />
element is more significant to determine whether it should be<br />
treated as property, plant and equipment or intangible assets.<br />
Asset retirement obligations<br />
Management judgement is exercised when determining whether<br />
an asset retirement obligation exists, and in determining the<br />
present value of expected future cash flows and discount rate<br />
when the obligation to dismantle or restore the site arises, as<br />
well as the estimated useful life of the related asset.<br />
Impairments of property, plant and equipment and<br />
intangible assets<br />
Management is required to make judgements concerning<br />
the cause, timing and amount of impairment as indicated on<br />
notes 11 and 12. In the identification of impairment indicators,<br />
management considers the impact of changes in current<br />
competitive conditions, cost of capital, availability of funding,<br />
technological obsolescence, discontinuance of services and<br />
other circumstances that could indicate that an impairment<br />
exists. The Group applies the impairment assessment to its<br />
separate cash-generating units. This requires management to<br />
make significant judgements concerning the existence of<br />
impairment indicators, identification of separate cash-generating<br />
units, remaining useful lives of assets and estimates of projected
148<br />
<strong>Telkom</strong> Annual Report 2009<br />
Notes to the consolidated annual financial statements (continued)<br />
for the three years ended March 31, 2009<br />
2. SIGNIFICANT ACCOUNTING POLICIES (continued)<br />
Significant accounting judgements, estimates and<br />
assumptions (continued)<br />
Impairments of property, plant and equipment and<br />
intangible assets (continued)<br />
cash flows and fair value less costs to sell. Management<br />
judgement is also required when assessing whether a previously<br />
recognised impairment loss should be reversed.<br />
Where impairment indicators exist, the determination of<br />
the recoverable amount of a cash-generating unit requires<br />
management to make assumptions to determine the fair value<br />
less costs to sell and value in use. Key assumptions on which<br />
management has based its determination of fair value less costs<br />
to sell include the existence of binding sale agreements, and for<br />
the determination of value in use include the weighted average<br />
cost of capital, projected revenues, gross margins, average<br />
revenue per customer, capital expenditure, expected customer<br />
bases and market share. The judgements, assumptions and<br />
methodologies used can have a material impact on the fair<br />
value and ultimately the amount of any impairment.<br />
Impairment of other financial assets<br />
At each balance sheet date management assesses whether<br />
there are indicators of impairment of financial assets, including<br />
equity investments. If such evidence exists, the estimated present<br />
value of the future cash flows of that asset is determined.<br />
Management judgement is required when determining the<br />
expected future cash flows. To determine whether any decline in<br />
fair value in available-for-sale investments is significant or<br />
prolonged, reliance is placed on an assessment by<br />
management. In measuring impairments, quoted market prices<br />
are used, if available, or projected business plan information<br />
from the investee is used for those financial assets not carried at<br />
fair value.<br />
Impairment of receivables<br />
An impairment is recognised on trade receivables that are<br />
assessed to be impaired (refer to notes 13 and 19). The<br />
impairment is based on an assessment of the extent to which<br />
customers have defaulted on payments already due and an<br />
assessment on their ability to make payments based on their<br />
credit worthiness and historical write-offs experience. Should the<br />
assumptions regarding the financial condition of the customer<br />
change, actual write-offs could differ significantly from the<br />
impaired amount.<br />
Leases<br />
The determination of whether an arrangement is, or contains a<br />
lease is based on whether, at the date of inception, the fulfilment<br />
of the arrangement is dependent on the use of a specific asset<br />
or assets or the arrangement conveys a right to use the asset as<br />
set out in notes 16 and 38.<br />
Leases in which a significant portion of the risks and rewards of<br />
ownership are retained by the lessor are classified as operating<br />
leases. Payments made under operating leases (net of any<br />
incentives received from the lessor) are charged to the income<br />
statement on a straight-line basis over the period of the lease.<br />
A lease is classified as a finance lease if it transfers substantially<br />
all the risks and rewards incidental to ownership.<br />
Deferred taxation asset<br />
Management judgement is exercised when determining the<br />
probability of future taxable profits which will determine whether<br />
deferred taxation assets should be recognised or derecognised.<br />
The realisation of deferred taxation assets will depend on<br />
whether it is possible to generate sufficient taxable income,<br />
taking into account any legal restrictions on the length and<br />
nature of the taxation asset. When deciding whether to<br />
recognise unutilised taxation credits, management needs to<br />
determine the extent that the future obligation is likely to be<br />
available for set-off. In the event that the assessment of the future<br />
obligation and future utilisation changes, the change in the<br />
recognised deferred taxation asset must be recognised in profit<br />
or loss.<br />
Taxation<br />
The taxation rules and regulations in South Africa as well as the<br />
other African countries within which the Group operates are<br />
highly complex and subject to interpretation. Additionally, for<br />
the foreseeable future, management expects South African<br />
taxation laws to further develop through changes in South<br />
Africa’s existing taxation structure as well as clarification of the<br />
existing taxation laws through published interpretations and the<br />
resolution of actual taxation cases. Refer to notes 8 and 17.<br />
Management has made a judgement that all outstanding<br />
taxation credits relating to secondary taxation on companies<br />
(STC) will be available for utilisation before the taxation regime<br />
from STC to withholding taxation change is effective.<br />
The growth of the Group, following its geographical expansion<br />
into other African countries over the past few years, has made<br />
the estimation and judgement required in recognising and<br />
measuring deferred taxation balances more challenging. The<br />
resolution of taxation issues is not always within the control of<br />
the Group and it is often dependent on the efficiency of the<br />
legal processes in the relevant taxation jurisdictions in which<br />
the Group operates. Issues can, and often do, take many years<br />
to resolve. Payments in respect of taxation liabilities for an<br />
accounting period result from payments on account and on the<br />
final resolution of open items. As a result there can be substantial<br />
differences between the taxation charge in the consolidated<br />
income statement and the current taxation payments.
2. SIGNIFICANT ACCOUNTING POLICIES (continued)<br />
Significant accounting judgements, estimates and<br />
assumptions (continued)<br />
Taxation (continued)<br />
Group entities are regularly subject to evaluation, by the relevant<br />
taxation authorities, of their historical taxation filings and in<br />
connection with such reviews, disputes can arise with the taxation<br />
authorities over the interpretation or application of certain taxation<br />
rules to the business of the relevant Group entities. These disputes<br />
may not necessarily be resolved in a manner that is favourable for<br />
the Group. Additionally the resolution of the disputes could result in<br />
an obligation for the Group that exceeds management’s estimate.<br />
The Group has historically filed, and continues to file, all required<br />
income taxation returns. Management believes that the principles<br />
applied in determining the Group’s taxation obligations are<br />
consistent with the principles and interpretations of the relevant<br />
countries’ taxation laws.<br />
Deferred taxation rate<br />
Management makes judgements on the taxation rate applicable<br />
based on the Group’s expectations at balance sheet date on<br />
how the asset is expected to be recovered or the liability is<br />
expected to be settled.<br />
Employee benefits<br />
The Group provides defined benefit plans for certain postemployment<br />
benefits. The Group’s net obligation in respect of<br />
defined benefits is calculated separately for each plan by<br />
estimating the amount of future benefits earned in return for<br />
services rendered. The obligation and assets related to each of<br />
the post-retirement benefits are determined through an actuarial<br />
valuation. The actuarial valuation relies heavily on assumptions<br />
as disclosed in note 30. The assumptions determined by<br />
management make use of information obtained from the<br />
Group’s employment agreements with staff and pensioners,<br />
market related returns on similar investments, market related<br />
discount rates and other available information. The assumptions<br />
concerning the expected return on assets and expected change<br />
in liabilities are determined on a uniform basis, considering<br />
long-term historical returns and future estimates of returns and<br />
medical inflation expectations. In the event that further changes<br />
in assumptions are required, the future amounts of postemployment<br />
benefits may be affected materially.<br />
The discount rate reflects the average timing of the estimated<br />
defined benefit payments. The discount rate is based on longterm<br />
South African government bonds with the longest maturity<br />
period as reported by the Bond Exchange of South Africa.<br />
The discount rate is expected to follow the trend of inflation.<br />
The overall expected rate of return on assets is determined<br />
based on the market prices prevailing at that date, applicable<br />
to the period over which the obligation is to be settled.<br />
<strong>Telkom</strong> Annual Report 2009 149<br />
Notes to the consolidated annual financial statements (continued)<br />
for the three years ended March 31, 2009<br />
<strong>Telkom</strong> provides equity compensation in the form of the <strong>Telkom</strong><br />
Conditional Share Plan to its employees. The related expense<br />
and reserve are determined through an actuarial valuation<br />
which relies heavily on assumptions. The assumptions include<br />
employee turnover percentages and whether specified<br />
performance criteria will be met. Changes to these assumptions<br />
could affect the amount of expense ultimately recognised in the<br />
financial statements. An actuarial valuation relies heavily on the<br />
actual plan experience assumptions as disclosed in note 30.<br />
Provisions and contingent liabilities<br />
Management judgement is required when recognising and<br />
measuring provisions and when measuring contingent liabilities as<br />
set out in notes 29 and 39 respectively. The probability that an<br />
outflow of economic resources will be required to settle the<br />
obligation must be assessed and a reliable estimate must be made<br />
of the amount of the obligation. Provisions are discounted where<br />
the effect of discounting is material based on management’s<br />
judgement. The discount rate used is the rate that reflects current<br />
market assessments of the time value of money and, where<br />
appropriate, the risks specific to the liability, all of which requires<br />
management judgement. The Group is required to recognise<br />
provisions for claims arising from litigation when the occurrence of<br />
the claim is probable and the amount of the loss can be reasonably<br />
estimated. Liabilities provided for legal matters require judgements<br />
regarding projected outcomes and ranges of losses based on<br />
historical experience and recommendations of legal counsel.<br />
Litigation is however unpredictable and actual costs incurred could<br />
differ materially from those estimated at the balance sheet date.<br />
Held-to-maturity financial assets<br />
Management has reviewed the Group’s held-to-maturity<br />
financial assets in the light of its capital management and<br />
liquidity requirements and has confirmed the Group’s positive<br />
intention and ability to hold those assets to maturity.<br />
Summary of significant accounting policies<br />
Basis of consolidation<br />
The consolidated financial statements incorporate the financial<br />
statements of <strong>Telkom</strong> and entities (including special purpose<br />
entities) controlled by <strong>Telkom</strong>, its subsidiaries, as well as its joint<br />
ventures and associates. Control is achieved where <strong>Telkom</strong> has<br />
the power to govern the financial and operating policies of an<br />
investee entity so as to obtain benefits from its activities. Joint<br />
ventures are those enterprises over which the Group exercises<br />
joint control in terms of a contractual agreement. Joint ventures<br />
are proportionately consolidated. Associates are those entities<br />
over which the Group has significant influence and that are<br />
neither subsidiaries nor joint ventures. Associates are equity<br />
accounted. Significant influence exists when the Group has the<br />
power to participate in the financial and operating policy<br />
decisions of these entities, but does not have control or joint<br />
control over those policies.
150<br />
<strong>Telkom</strong> Annual Report 2009<br />
Notes to the consolidated annual financial statements (continued)<br />
for the three years ended March 31, 2009<br />
2. SIGNIFICANT ACCOUNTING POLICIES (continued)<br />
Summary of significant accounting policies (continued)<br />
Basis of consolidation (continued)<br />
The results of subsidiaries acquired or disposed of during the<br />
year are included in the income statement from the effective date<br />
of acquisition and up to the effective date of disposal, as<br />
appropriate.<br />
Where necessary, adjustments are made to the financial<br />
statements of subsidiaries, joint ventures and associates to bring<br />
the accounting policies used in line with those used by the<br />
Group.<br />
Inter-company transactions, balances and unrealised gains on<br />
transactions between Group companies are eliminated.<br />
Unrealised profit or losses are also eliminated.<br />
The Group applies a policy of treating transactions with minority<br />
interests as transactions with parties external to the Group.<br />
Disposals to minority interests result in gains and losses for the<br />
Group and are recorded in the income statement. Acquisition of<br />
minority interests results in goodwill, being the difference<br />
between any consideration paid and the relevant share<br />
acquired of the carrying value of net assets of the subsidiary.<br />
Business combinations<br />
The purchase method of accounting is used to account for the<br />
acquisition of subsidiaries by the Group. The cost of an<br />
acquisition is measured as the fair value of the assets given,<br />
equity instruments issued and liabilities incurred or assumed at<br />
the date of exchange, plus costs directly attributable to the<br />
acquisition. Identifiable assets acquired and liabilities and<br />
contingent liabilities assumed in a business combination are<br />
measured initially at their fair values at the acquisition date,<br />
irrespective of the extent of any minority interest. The excess<br />
of the cost of acquisition over the fair value of the Group’s share<br />
of the identifiable net assets acquired is recorded as goodwill.<br />
If the cost of acquisition is less than the fair value of the net<br />
assets of the subsidiary acquired, the difference is recognised<br />
directly in the income statement.<br />
Operating revenue<br />
The Group provides fixed-line communication services, mobile<br />
communication services and other services. Other includes<br />
data services, directory services and communication related<br />
products. The Group provides such services to business,<br />
residential, payphone and mobile customers. Revenue<br />
represents the fair value of fixed or determinable consideration<br />
that has been received or is receivable.<br />
Revenue for services is measured at amounts invoiced to<br />
customers and excludes Value Added Taxation.<br />
Revenue is recognised when there is evidence of an<br />
arrangement, collectability is reasonably assured, and the<br />
delivery of the product or service has occurred. In certain<br />
circumstances revenue is split into separately identifiable<br />
components and recognised when the related components are<br />
delivered in order to reflect the substance of the transaction.<br />
The value of components is determined using verifiable<br />
objective evidence. The Group does not provide customers with<br />
the right to a refund.<br />
Fixed-line and other<br />
Subscriptions, connections and other usage<br />
The Group provides telephone and data communication<br />
services under post-paid and prepaid payment arrangements.<br />
Revenue includes fees for installation and activation, which are<br />
deferred over the expected customer relationship period. Costs<br />
incurred on first time installations that form an integral part of<br />
the network are capitalised and depreciated over the expected<br />
average customer relationship period. All other installation and<br />
activation costs are expensed as incurred.<br />
Post-paid and prepaid service arrangements include<br />
subscription fees, typically monthly fees, which are recognised<br />
over the subscription period.<br />
Revenue related to sale of communication equipment, products<br />
and value-added services is recognised upon delivery and<br />
acceptance of the product or service by the customer.<br />
Traffic (domestic, fixed-to-mobile and international)<br />
Prepaid<br />
Prepaid traffic service revenue collected in advance is deferred<br />
and recognised based on actual usage or upon expiration of<br />
the usage period, whichever comes first. The terms and<br />
conditions of certain prepaid products allow the carry over of<br />
unused minutes. Revenue related to the carry over of unused<br />
minutes is deferred until usage or expiration.<br />
Payphones<br />
Payphone service coin revenue is recognised when the service<br />
is provided.<br />
Payphone service card revenue collected in advance is deferred<br />
and recognised based on actual usage or upon expiration of<br />
the usage period, whichever comes first.<br />
Post-paid<br />
Revenue related to local, long distance, network-to-network,<br />
roaming and international call connection services is recognised<br />
when the call is placed or the connection provided.<br />
Interconnection<br />
Interconnection revenue for call termination, call transit, and<br />
network usage is recognised as the traffic flow occurs.
2. SIGNIFICANT ACCOUNTING POLICIES (continued)<br />
Summary of significant accounting policies (continued)<br />
Fixed-line and other (continued)<br />
Data<br />
The Group provides data communication services under postpaid<br />
and prepaid payment arrangements. Revenue includes fees<br />
for installation and activation, which are deferred over the<br />
expected average customer relationship period. Costs incurred<br />
on first time installations that form an integral part of the network<br />
are capitalised and depreciated over the life of the expected<br />
average customer relationship period. All other installation and<br />
activation costs are expensed as incurred. Post-paid and prepaid<br />
service arrangements include subscription fees, typically monthly<br />
fees, which are recognised over the subscription period.<br />
Directory services<br />
Included in other are directory services. Revenue is recognised<br />
when printed directories are released for distribution, as the<br />
significant risks and rewards of ownership have been transferred<br />
to the buyer. Electronic directories’ revenue is recognised on a<br />
monthly basis, as earned.<br />
Sundry revenue<br />
Sundry revenue is recognised when the economic benefit flows<br />
to the Group and the earnings process is complete.<br />
Dealer incentives<br />
<strong>Telkom</strong> provides incentives to its retail payphone card distributors<br />
as trade discounts. Incentives are based on sales volume and<br />
value. Revenue for retail payphone cards is recorded as traffic<br />
revenue, net of these discounts as the cards are used.<br />
Mobile<br />
The Vodacom Group invoices its independent service providers<br />
for the revenue billed by them on behalf of the Group. The<br />
Group, within its contractual arrangements with its agents, pays<br />
them administrative fees. The Group receives in cash, the net<br />
amount equal to the gross revenue earned less the administrative<br />
fees payable to the agents.<br />
Contract products<br />
Contract products that may include deliverables such as a<br />
handset and 24-month service are defined as arrangements<br />
with multiple deliverables. The arrangement consideration is<br />
allocated to each deliverable, based on the fair value of each<br />
deliverable on a stand-alone basis as a percentage of the<br />
aggregated fair value of the individual deliverables. Revenue<br />
allocated to the identified deliverables in each revenue<br />
arrangement and the cost applicable to these identified<br />
deliverables are recognised based on the same recognition<br />
criteria of the individual deliverable at the time the product or<br />
service is delivered.<br />
<strong>Telkom</strong> Annual Report 2009 151<br />
Notes to the consolidated annual financial statements (continued)<br />
for the three years ended March 31, 2009<br />
Vodacom revenue from the handset is recognised when the<br />
product is delivered limited to the amount of cash received.<br />
Monthly service revenue received from the customer is recognised<br />
in the period in which the service is delivered. Airtime revenue is<br />
recognised on the usage basis. The terms and conditions of the<br />
bundled airtime products, where applicable, allow the carry over<br />
of unused airtime. The unused airtime is deferred in full. Deferred<br />
revenue related to unused airtime is recognised when utilised by<br />
the customer. Upon termination of the customer contract, all<br />
deferred revenue for unused airtime is recognised in revenue.<br />
Prepaid products<br />
Prepaid products that may include deliverables such as a SIMcard<br />
and airtime are defined as arrangements with multiple<br />
deliverables. The arrangement consideration is allocated to<br />
each deliverable, based on the fair value of each deliverable<br />
on a stand-alone basis as a percentage of the aggregated fair<br />
value of the individual deliverables. Revenue allocated to the<br />
identified deliverables in each revenue arrangement and the<br />
cost applicable to these identified deliverables are recognised<br />
based on the same recognition criteria of the individual<br />
deliverable at the time the product or service is delivered.<br />
• Revenue from the SIM-card representing activation fees is<br />
recognised over the average useful life of a prepaid customer.<br />
• Airtime revenue is recognised on the usage basis. Unused<br />
airtime is deferred in full.<br />
• Deferred revenue related to unused airtime is recognised<br />
when utilised by the customer. Upon termination of the<br />
customer relationship, all deferred revenue for unused airtime<br />
is recognised in revenue.<br />
Upon purchase of an airtime voucher the customer receives the<br />
right to make outgoing voice and data calls to the value of the<br />
airtime voucher. Revenue is recognised as the customer utilises<br />
the voucher.<br />
Deferred revenue and costs related to unactivated starter packs<br />
which do not contain any expiry date, are recognised in the<br />
period when the probability of these starter packs being<br />
activated by a customer becomes remote. In this regard the<br />
Group applies a period of 36 months before these revenue and<br />
costs are released to the consolidated income statement.<br />
Data<br />
Revenue, net of discounts, from data services is recognised<br />
when the Group has performed the related service and<br />
depending on the nature of the service, is recognised either at<br />
the gross amounts billed to the customer or the amount<br />
receivable by the Group as commission for facilitating the<br />
service.
152<br />
<strong>Telkom</strong> Annual Report 2009<br />
Notes to the consolidated annual financial statements (continued)<br />
for the three years ended March 31, 2009<br />
2. SIGNIFICANT ACCOUNTING POLICIES (continued)<br />
Summary of significant accounting policies (continued)<br />
Mobile (continued)<br />
Equipment sales<br />
All equipment sales are recognised only when delivery and<br />
acceptance has taken place. Equipment sales to third party<br />
service providers are recognised when delivery is accepted.<br />
No rights of return exist on sales to third party service providers.<br />
Mobile number portability<br />
Revenue transactions from mobile number portability are<br />
accounted for in terms of current business rules and revenue<br />
recognition policies above.<br />
Interest on debtors’ accounts<br />
Interest is raised on overdue accounts on an effective interest<br />
rate method and recognised in the income statement.<br />
Marketing<br />
Marketing costs are recognised as an expense when incurred.<br />
Incentives<br />
Incentives paid to service providers and dealers for products<br />
delivered to the customer are expensed as incurred. Incentives<br />
paid to service providers and dealers for services delivered are<br />
expensed in the period that the related revenue is recognised.<br />
Distribution incentives paid to service providers and dealers for<br />
exclusivity are deferred and expensed over the contractual<br />
relationship period.<br />
Investment income<br />
Dividends from investments are recognised on the date that the<br />
Group is entitled to the dividend. Interest is recognised on a time<br />
proportionate basis taking into account the principal amount<br />
outstanding and the effective interest rate.<br />
Taxation<br />
Current taxation<br />
The charge for current taxation is based on the results for the year<br />
and is adjusted for non-taxable income and non-deductible<br />
expenditure. Current taxation is measured at the amount expected<br />
to be paid to the taxation authorities, using taxation rates and<br />
laws that have been enacted or substantively enacted by the<br />
balance sheet date.<br />
Deferred taxation<br />
Deferred taxation is accounted for using the balance sheet<br />
liability method on all temporary differences at the balance<br />
sheet date between the taxation bases of assets and liabilities<br />
and their carrying amounts for financial reporting purposes.<br />
Deferred taxation is not provided on the initial recognition of<br />
assets or liabilities which is not a business combination and at the<br />
time of the transaction affects neither accounting nor taxable profit<br />
or loss.<br />
A deferred taxation asset is recognised to the extent that it is<br />
probable that future taxable profits will be available against<br />
which the associated unused taxation losses, unused taxation<br />
credits and deductible temporary differences can be utilised.<br />
The carrying amount of deferred taxation assets is reviewed at<br />
each balance sheet date and is reduced to the extent that it is<br />
no longer probable that the related taxation benefit will be<br />
realised. In respect of deductible temporary differences<br />
associated with investments in subsidiaries, associates and<br />
interest in joint ventures, deferred income taxation assets are<br />
recognised only to the extent that it is probable that temporary<br />
differences will reverse in the foreseeable future and taxable<br />
profit will be available against which temporary differences can<br />
be utilised.<br />
Deferred taxation relating to items recognised directly in equity<br />
is recognised in equity and not in the income statement.<br />
Deferred taxation assets and liabilities are measured at the<br />
taxation rates that are expected to apply to the period when the<br />
asset is realised or the liability is settled, based on taxation rates<br />
(and taxation laws) that have been enacted or substantively<br />
enacted by the balance sheet date. Deferred taxation assets and<br />
liabilities are not discounted.<br />
Deferred taxation assets and deferred taxation liabilities are<br />
offset, if a legally enforceable right exists to set off current<br />
taxation assets against current taxation liabilities and the<br />
deferred taxes relate to the same taxable entity and the same<br />
taxation authority.<br />
Exchange differences arising from the translation of foreign<br />
deferred taxation assets and liabilities of foreign entities where<br />
the functional currency is different to the local currency, are<br />
classified as a deferred taxation expense or income.<br />
Secondary taxation on companies<br />
Secondary taxation on companies (STC) is provided for at a<br />
rate of 10% (12.5% before October 1, 2007) on the amount<br />
by which dividends declared by the Group exceeds dividends<br />
received. Deferred taxation on unutilised STC credits is<br />
recognised to the extent that STC payable on future dividend<br />
payments is likely to be available for set-off.
2. SIGNIFICANT ACCOUNTING POLICIES (continued)<br />
Summary of significant accounting policies (continued)<br />
Property, plant and equipment<br />
At initial recognition acquired property, plant and equipment<br />
are recognised at their purchase price, including import duties<br />
and non-refundable purchase taxes, after deducting trade<br />
discounts and rebates. The recognised cost includes any directly<br />
attributable costs for preparing the asset for its intended use.<br />
The cost of an item of property, plant and equipment is<br />
recognised as an asset if it is probable that the future economic<br />
benefits associated with the item will flow to the Group and the<br />
cost of the item can be measured reliably.<br />
Property, plant and equipment is stated at historical cost less<br />
accumulated depreciation and any accumulated impairment<br />
losses. Each component of an item of property, plant and<br />
equipment with a cost that is significant in relation to the total<br />
cost of the item is depreciated separately. Depreciation is<br />
charged from the date the asset is available for use on a<br />
straight-line basis over the estimated useful life and ceases at the<br />
earlier of the date that the asset is classified as held for sale and<br />
the date the asset is derecognised. Idle assets continue to attract<br />
depreciation.<br />
The estimated useful life of individual assets and the<br />
depreciation method thereof are reviewed on an annual basis<br />
at balance sheet date. The depreciable amount is determined<br />
after taking into account the residual value of the asset. The<br />
residual value is the estimated amount that the Group would<br />
currently obtain from the disposal of the asset, after deducting<br />
the estimated cost of disposal, if the asset were already of the<br />
age and in the condition expected at the end of its useful life.<br />
The residual values of assets are reviewed on an annual basis<br />
at balance sheet date.<br />
Assets under construction represents freehold buildings, integral<br />
operating software, network and support equipment and<br />
includes all direct expenditure as well as related borrowing<br />
costs capitalised, but excludes the costs of abnormal amounts of<br />
waste material, labour or other resources incurred in the<br />
production of self-constructed assets.<br />
Freehold land is stated at cost and is not depreciated. Amounts<br />
paid by the Group on improvements to assets which are held in<br />
terms of operating lease agreements are depreciated on a<br />
straight-line basis over the shorter of the remaining useful life of<br />
the applicable asset or the remainder of the lease period.<br />
Where it is reasonably certain that the lease agreement will be<br />
renewed, the lease period equals the period of the initial<br />
agreement plus the renewal periods.<br />
<strong>Telkom</strong> Annual Report 2009 153<br />
Notes to the consolidated annual financial statements (continued)<br />
for the three years ended March 31, 2009<br />
The estimated useful lives assigned to groups of property, plant<br />
and equipment are:<br />
Years<br />
Freehold buildings 15 to 50<br />
Leasehold buildings<br />
Network equipment<br />
7 to 50<br />
Cables 20 to 40<br />
Switching equipment 2 to 25<br />
Transmission equipment 3 to 18<br />
Other 1 to 20<br />
Support equipment 3 to 13<br />
Furniture and office equipment 2 to 25<br />
Data processing equipment and software 3 to 10<br />
Other 2 to 20<br />
An item of property, plant and equipment is derecognised upon<br />
disposal or when no future economic benefits are expected from<br />
its use or disposal. Any gain or loss arising on derecognition of<br />
the asset (calculated as the difference between the net disposal<br />
proceeds and the carrying amount of the asset) is included in<br />
the income statement in the year the asset is derecognised.<br />
Assets held under finance leases are depreciated over their<br />
expected useful lives on the same basis as owned assets or,<br />
where shorter, the term of the relevant lease if there is no<br />
reasonable certainty that the Group will obtain ownership by the<br />
end of the lease term.<br />
Intangible assets<br />
Goodwill<br />
Goodwill arising on the acquisition of a subsidiary is<br />
recognised as an asset at the date that control is acquired (the<br />
acquisition date). Goodwill is measured as the excess of the<br />
sum of the consideration transferred, the amount of any minority<br />
interest in the acquiree and the fair value of the acquirer’s<br />
previously-held equity interest (if any) in the entity over the net fair<br />
value of the identifiable net assets recognised.<br />
If, after reassessment, the Group’s interest in the net fair value of<br />
the acquiree’s identifiable net assets exceeds the sum of the<br />
consideration transferred, the amount of any minority interest in<br />
the acquiree and the fair value of the acquirer’s previously-held<br />
equity interest (if any), the excess is recognised immediately in<br />
profit or loss as a bargain purchase gain.<br />
Goodwill is not amortised, but is reviewed for impairment at<br />
least annually. Any impairment loss is recognised immediately in<br />
profit or loss and is not subsequently reversed.<br />
On disposal of a subsidiary, the attributable amount of goodwill<br />
is included in the determination of the profit or loss on disposal.
154<br />
<strong>Telkom</strong> Annual Report 2009<br />
Notes to the consolidated annual financial statements (continued)<br />
for the three years ended March 31, 2009<br />
2. SIGNIFICANT ACCOUNTING POLICIES (continued)<br />
Intangible assets (continued)<br />
Licences, software, trademarks, copyrights and other<br />
At initial recognition acquired intangible assets are recognised<br />
at their purchase price, including import duties and nonrefundable<br />
purchase taxes, after deducting trade discounts and<br />
rebates. The recognised cost includes any directly attributable<br />
costs for preparing the asset for its intended use. Internally<br />
generated intangible assets are recognised at cost comprising<br />
all directly attributable costs necessary to create and prepare<br />
the asset to be capable of operating in the manner intended by<br />
management. Licences, software, trademarks, copyrights and<br />
other intangible assets are carried at cost less accumulated<br />
amortisation and any accumulated impairment losses.<br />
Amortisation commences when the intangible assets are<br />
available for their intended use and is recognised on a straightline<br />
basis over the assets’ expected useful lives. Amortisation<br />
ceases at the earlier of the date that the asset is classified as<br />
held for sale and the date that the asset is derecognised.<br />
The residual value of intangible assets is the estimated amount that<br />
the Group would currently obtain from the disposal of the asset,<br />
after deducting the estimated cost of disposal, if the asset were<br />
already of the age and in the condition expected at the end of its<br />
useful life. Due to the nature of the asset the residual value is<br />
assumed to be zero unless there is a commitment by a third party<br />
to purchase the asset at the end of its useful life or when there is an<br />
active market that is likely to exist at the end of the asset’s useful life,<br />
which can be used to estimate the residual values. The residual<br />
values of intangible assets, amortisation methods and their useful<br />
lives are reviewed on an annual basis at balance sheet date.<br />
Intangible assets with indefinite useful lives and intangible assets<br />
not yet available for use are tested for impairment annually<br />
either individually or at the cash-generating unit level. Such<br />
intangible assets are not amortised. The useful life of an<br />
intangible asset with an indefinite life is reviewed annually to<br />
determine whether indefinite life assessment continues to be<br />
supportable. If not, the change in the useful life assessment from<br />
indefinite to finite is made on a prospective basis.<br />
Assets under construction represents application and other nonintegral<br />
software and includes all direct expenditure as well as<br />
related borrowing costs capitalised, but excludes the costs of<br />
abnormal amounts of waste material, labour or other resources<br />
incurred in the production of self-constructed assets.<br />
Intangible assets are derecognised when they have been<br />
disposed of or when the asset is permanently withdrawn from<br />
use and no future economic benefit is expected from its<br />
disposal. Any gains or losses on the retirement or disposal of<br />
assets are recognised in the income statement in the year in<br />
which they arise.<br />
The expected useful lives assigned to intangible assets are:<br />
Years<br />
Licences 5 to 30<br />
Software 2 to 10<br />
Trademarks, copyrights and other 1 to 15<br />
Asset retirement obligations<br />
Asset retirement obligations related to property, plant and<br />
equipment and intangible assets are recognised at the present<br />
value of expected future cash flows when the obligation to<br />
dismantle or restore the site arises. The increase in the related<br />
asset’s carrying value is depreciated over its estimated useful<br />
life. The unwinding of the discount is included in finance<br />
charges and fair value movements. Changes in the<br />
measurement of an existing liability that result from changes in<br />
the estimated timing or amount of the outflow of resources<br />
required to settle the liability, or a change in the discount rate<br />
are accounted for as increases or decreases to the original cost<br />
of the recognised assets. If the amount deducted exceeds the<br />
carrying amount of the asset, the excess is recognised<br />
immediately in profit or loss.<br />
Non-current assets held for sale<br />
Non-current assets and disposal groups are classified as held<br />
for sale if their carrying amount will be recovered through a sale<br />
transaction rather than through continuing use. This condition is<br />
regarded as met only when the sale is highly probable and the<br />
asset (or disposal group) is available for immediate sale in its<br />
present condition. Management must be committed to the sale,<br />
which should be expected to qualify for recognition as a<br />
complete sale within one year from the date of classification and<br />
marketed at a reasonable value. Assets are no longer<br />
depreciated when they are classified into the category.<br />
If a non-current asset or disposal group is classified as held for<br />
sale, but the criteria for classification as held for sale are no<br />
longer met, the disclosure of such non-current asset or disposal<br />
group as held for sale is ceased. Where the disposal group<br />
was also classified as a discontinued operation, the subsequent<br />
classification as held for use also requires that the discontinued<br />
operation be included in continuing operations.<br />
Non-current assets (and disposal groups) classified as held for<br />
sale are measured at the lower of the assets’ previous carrying<br />
amount and fair value less cost to sell.
2. SIGNIFICANT ACCOUNTING POLICIES (continued)<br />
Summary of significant accounting policies (continued)<br />
Impairment of property, plant and equipment and<br />
intangible assets<br />
The Group regularly reviews its non-financial assets and cashgenerating<br />
units for any indication of impairment. When<br />
indicators, including changes in technology, market, economic,<br />
legal and operating environments occur and could result in<br />
changes of the asset’s or cash-generating unit’s estimated<br />
recoverable amount, an impairment test is performed.<br />
The recoverable amount of assets or cash-generating units is<br />
measured using the higher of the fair value less costs to sell and<br />
its value in use, which is the present value of projected cash<br />
flows covering the remaining useful lives of the assets.<br />
Impairment losses are recognised when the asset’s carrying<br />
value exceeds its estimated recoverable amount. Where<br />
applicable, the recoverable amount is determined for the cashgenerating<br />
unit to which the asset belongs.<br />
Previously recognised impairment losses, other than goodwill, are<br />
reviewed annually for any indication that it may no longer exist or<br />
may have decreased. If any such indication exists, the recoverable<br />
amount of the asset is estimated. Such impairment losses are<br />
reversed through the income statement if the recoverable amount<br />
has increased as a result of a change in the estimates used to<br />
determine the recoverable amount, but not to an amount higher<br />
than the carrying amount that would have been determined (net of<br />
depreciation or amortisation) had no impairment loss been<br />
recognised in prior years. Impairment on goodwill is not reversed.<br />
Repairs and maintenance<br />
The Group expenses all costs associated with repairs and<br />
maintenance, unless it is probable that such costs would result in<br />
increased future economic benefits flowing to the Group, and<br />
the costs can be reliably measured.<br />
Borrowing costs<br />
Financing costs directly associated with the acquisition or<br />
construction of assets that require more than three months to<br />
complete and place in service are capitalised at interest rates<br />
relating to loans specifically raised for that purpose, or at the<br />
weighted average borrowing rate where the general pool of<br />
Group borrowings was utilised. Other borrowing costs are<br />
expensed as incurred.<br />
Deferred revenue and expenses<br />
Activation revenue and costs are recognised in accordance with<br />
the principles contained in Emerging Issues Task Force Issue<br />
No 00-21, Revenue Arrangements with Multiple Deliverables<br />
(EITF 00-21), issued in the United States. This results in activation<br />
revenue and costs up to the amount of the deferred revenue<br />
<strong>Telkom</strong> Annual Report 2009 155<br />
Notes to the consolidated annual financial statements (continued)<br />
for the three years ended March 31, 2009<br />
being deferred and recognised systematically over the expected<br />
duration of the customer relationship because it is considered to<br />
be part of the customers’ ongoing rights to telecommunication<br />
services and the operator’s continuing involvement. Any excess<br />
of the costs over revenues is expensed immediately.<br />
Inventories<br />
Installation material, maintenance and network equipment<br />
inventories are stated at the lower of cost, determined on a<br />
weighted average basis, or estimated net realisable value.<br />
Merchandise inventories are stated at the lower of cost,<br />
determined on a first-in first-out (FIFO) basis, or estimated net<br />
realisable value. Write-down of inventories arises when, for<br />
example, goods are damaged or when net realisable value is<br />
lower than carrying value.<br />
Financial instruments<br />
Recognition and initial measurement<br />
All financial instruments are initially recognised at fair value, plus,<br />
in the case of financial assets and liabilities not at fair value through<br />
profit or loss, transaction costs that are directly attributable to the<br />
acquisition or issue. Financial instruments are recognised when the<br />
Group becomes a party to their contractual arrangements. All<br />
regular way transactions are accounted for on settlement date.<br />
Regular way purchases or sales are purchases or sales of financial<br />
assets that require delivery of assets within the period generally<br />
established by regulation or convention in the marketplace.<br />
Subsequent measurement<br />
Subsequent to initial recognition, the Group classifies financial<br />
assets as ’at fair value through profit or loss’, ’held-to-maturity<br />
investments’, ’loans and receivables’, or ’available-for-sale’.<br />
Financial liabilities are classified ’at fair value through profit or<br />
loss’ or ’other financial liabilities’. The measurement of each is<br />
set out below and presented in a table in note 13.<br />
The fair value of financial assets and liabilities that are actively<br />
traded in financial markets is determined by reference to quoted<br />
market prices at the close of business on the balance sheet date.<br />
Where there is no active market, fair value is determined using<br />
valuation techniques such as discounted cash flow analysis.<br />
Financial assets at fair value through profit or loss<br />
The Group classifies financial assets that are held for trading in the<br />
category ’financial assets at fair value through profit or loss’.<br />
Financial assets are classified as held for trading if they are<br />
acquired for the purpose of selling in the future. Derivatives not<br />
designated as hedges are also classified as held for trading. On<br />
remeasurement to fair value the gains or losses on held for trading<br />
financial assets are recognised in net finance charges and fair<br />
value movements for the year.
156<br />
<strong>Telkom</strong> Annual Report 2009<br />
Notes to the consolidated annual financial statements (continued)<br />
for the three years ended March 31, 2009<br />
2. SIGNIFICANT ACCOUNTING POLICIES (continued)<br />
Financial instruments (continued)<br />
Financial assets at fair value through profit or loss<br />
(continued)<br />
Gains and losses arising from changes in the fair value of the<br />
’financial assets at fair value through profit or loss’ category are<br />
presented in the income statement within ’finance charges and<br />
fair value movements’ in the period which they arise.<br />
Held-to-maturity financial assets<br />
The Group classifies non-derivative financial assets with fixed or<br />
determinable payments and fixed maturity dates as held-tomaturity<br />
when the Group has the positive intention and ability to<br />
hold to maturity. These assets are subsequently measured at<br />
amortised cost. Amortised cost is computed as the amount<br />
initially recognised minus principal repayments, plus or minus<br />
the cumulative amortisation using the effective interest rate<br />
method. This calculation includes all fees paid or received<br />
between parties to the contract. For investments carried at<br />
amortised cost, gains and losses are recognised in net profit or<br />
loss when the investments are sold or impaired.<br />
Loans and receivables<br />
Loans and receivables are non-derivative financial assets with<br />
fixed or determinable payments that are not quoted in an active<br />
market. Such assets are carried at amortised cost using the<br />
effective interest rate method. Trade receivables are<br />
subsequently measured at the original invoice amount where the<br />
effect of discounting is not material.<br />
Available-for-sale financial assets<br />
Available-for-sale financial assets are those non-derivative assets<br />
that are designated as available-for-sale, or are not classified in<br />
any of the three preceding categories. Equity instruments are all<br />
treated as available-for-sale financial instruments. After initial<br />
recognition, available-for-sale financial assets are measured at<br />
fair value, with gains and losses being recognised as a<br />
separate component of equity, net of taxation. Dividend income<br />
is recognised in the income statement as part of other income<br />
when the Group’s right to receive payment is established.<br />
Changes in the fair value of monetary items denominated in a<br />
foreign currency and classified as available-for-sale are<br />
analysed between translation differences resulting from changes<br />
in amortised cost of the security and other changes in carrying<br />
amount of the item. The translation differences on monetary<br />
items are recognised in profit or loss, while translation<br />
differences on non-monetary securities are recognised in equity.<br />
Changes in the fair value of monetary and non-monetary items<br />
classified as available-for-sale are recognised directly in equity.<br />
When an investment is derecognised or determined to be<br />
impaired, the cumulative gain or loss previously recorded in<br />
equity is recognised in profit or loss.<br />
Financial liabilities at fair value through profit or loss<br />
Financial liabilities are classified as ‘at fair value through profit<br />
or loss’ (FVTPL) where the financial liability is held for trading.<br />
A financial liability is classified as held for trading:<br />
• if it is acquired for the purpose of settling in the near term; or<br />
• if it is a derivative that is not designated and effective as a<br />
hedging instrument.<br />
Financial liabilities at a FVTPL are stated at fair value, with any<br />
resultant gains or losses recognised in profit or loss. The net<br />
gain or loss recognised in profit or loss incorporates any interest<br />
paid on the financial liability.<br />
Other financial liabilities<br />
Other financial liabilities are subsequently measured at<br />
amortised cost using the effective interest rate method, with<br />
interest expense recognised in finance charges and fair value<br />
movements, on an effective interest rate basis.<br />
The effective interest rate is the rate that accurately discounts<br />
estimated future cash payments through the expected life of the<br />
financial liability or, where appropriate, a shorter period.<br />
Financial guarantee contracts<br />
Financial guarantee contracts are subsequently measured at the<br />
higher of the amount determined in accordance with IAS37<br />
Provisions, Contingent Liabilities and Contingent Assets or the<br />
amount initially recognised less, when appropriate, cumulative<br />
amortisation, recognised in accordance with IAS18 Revenue.<br />
Cash and cash equivalents<br />
Cash and cash equivalents are measured at amortised cost. This<br />
comprises cash on hand, deposits held on call and term<br />
deposits with an initial maturity of less than three months when<br />
entered into.<br />
For the purpose of the cash flow statement, cash and cash<br />
equivalents consist of cash and cash equivalents defined above,<br />
net of credit facilities utilised.<br />
Capital and money market transactions<br />
New bonds and commercial paper bills issued are subsequently<br />
measured at amortised cost using the effective interest rate<br />
method.<br />
Bonds issued where <strong>Telkom</strong> is a buyer and seller of last resort<br />
are carried at fair value. The Group does not actively trade in<br />
bonds.
2. SIGNIFICANT ACCOUNTING POLICIES (continued)<br />
Financial instruments (continued)<br />
Derecognition<br />
A financial instrument or a portion of a financial instrument will<br />
be derecognised and a gain or loss recognised when the<br />
Group’s contractual rights expire, financial assets are transferred<br />
or financial liabilities are extinguished. On derecognition of a<br />
financial asset or liability, the difference between the<br />
consideration and the carrying amount on the settlement date is<br />
included in finance charges and fair value movements for the<br />
year. For available-for-sale assets, the fair value adjustment<br />
relating to prior revaluations of assets is transferred from equity<br />
and recognised in finance charges and fair value movements for<br />
the year.<br />
Bonds and commercial paper bills are derecognised when the<br />
obligation specified in the contract is discharged. The difference<br />
between the carrying value of the bond and the amount paid to<br />
extinguish the obligation is included in finance charges and fair<br />
value movements for the year.<br />
Impairment of financial assets<br />
At each balance sheet date an assessment is made of whether<br />
there are any indicators of impairment of a financial asset or<br />
a group of financial assets based on observable data about<br />
one or more loss events that occurred after the initial recognition<br />
of the asset or the group of assets. For loans and receivables<br />
carried at amortised costs, if there is objective evidence that an<br />
impairment loss has been incurred, the amount of the loss is<br />
measured at the difference between the asset’s carrying amount<br />
and the present value of estimated future cashflows. The<br />
carrying amount of the assets is reduced through the use of an<br />
allowance account and the amount of the loss is recognised in<br />
the income statement. In the case of equity securities classified<br />
as available-for-sale, a significant or prolonged decline in the<br />
fair value of the security below its cost is considered as an<br />
indicator that the securities are impaired.<br />
If any such evidence exists for available-for-sale assets, the<br />
cumulative loss – measured as the difference between the<br />
acquisition cost and the current fair value, less any impairment<br />
loss on that financial asset previously recognised in profit or loss<br />
– is removed from equity and recognised in the income<br />
statement. Impairment losses recognised in the income statement<br />
on equity instruments are not reversed through the income<br />
statement. The recoverable amount of financial assets carried at<br />
amortised cost is calculated as the present value of expected<br />
future cash flows discounted at the original effective interest rate<br />
of the asset.<br />
<strong>Telkom</strong> Annual Report 2009 157<br />
Notes to the consolidated annual financial statements (continued)<br />
for the three years ended March 31, 2009<br />
If, in a subsequent period, the amount of the impairment loss for<br />
financial assets decreases and the decrease can be related<br />
objectively to an event occurring after the impairment was<br />
recognised, the previously recognised impairment loss is<br />
reversed except for those financial assets classified as availablefor-sale<br />
and carried at cost that are not reversed. Any<br />
subsequent reversal of an impairment loss is recognised in the<br />
income statement, to the extent that the carrying value of the<br />
asset does not exceed its amortised cost at the reversal date.<br />
Reversals in respect of equity instruments classified as availablefor-sale<br />
are not recognised in profit or loss. Reversals of<br />
impairment losses on debt instruments classified as available-forsale<br />
are reversed through the income statement, if the increase<br />
in fair value of the instrument is objectively related to an event<br />
occurring after the impairment loss was recognised through the<br />
income statement.<br />
Remeasurement of embedded derivatives<br />
The Group assesses whether an embedded derivative is<br />
required to be separated from the host contract and accounted<br />
for as a derivative when it first becomes party to the contract.<br />
The Group reassesses the contract when there is a change in the<br />
terms of the contract which significantly modifies the cash flows<br />
that would otherwise be required under the contract.<br />
Financial instruments: Disclosures<br />
The Group groups its financial instruments into classes of similar<br />
instruments and where disclosure is required, it discloses them<br />
by class. It also discloses information about the nature and<br />
extent of risks arising from its financial instruments as indicated<br />
in note 13.<br />
Foreign currencies<br />
Each entity within the Group determines its functional currency.<br />
The Group’s presentation currency is the South African rand<br />
(Z<strong>AR</strong>).<br />
Transactions denominated in foreign currencies are measured at<br />
the rate of exchange at transaction date. Monetary items<br />
denominated in foreign currencies are remeasured at the rate of<br />
exchange at settlement date or balance sheet date, whichever<br />
occurs first. Exchange differences on the settlement or translation<br />
of monetary assets and liabilities are included in finance<br />
charges and fair value movements in the period in which they<br />
arise. Non-monetary items that are measured in terms of<br />
historical cost in a foreign country are translated using the<br />
exchange rates as at the dates of the initial transactions. Nonmonetary<br />
items measured at fair value in a foreign currency are<br />
translated using the exchange rates at the date when the fair<br />
value is determined.
158<br />
<strong>Telkom</strong> Annual Report 2009<br />
Notes to the consolidated annual financial statements (continued)<br />
for the three years ended March 31, 2009<br />
2. SIGNIFICANT ACCOUNTING POLICIES (continued)<br />
Foreign currencies (continued)<br />
The annual financial statements of foreign operations are<br />
translated into South African rand, the Group’s presentation<br />
currency, for incorporation into the consolidated annual<br />
financial statements. Assets and liabilities are translated at the<br />
foreign exchange rates ruling at the balance sheet date.<br />
Income, expenditure and cash flow items are measured at the<br />
actual foreign exchange rate or average foreign exchange rates<br />
for the period. All resulting unrealised exchange differences are<br />
classified as equity. On disposal, the cumulative amounts of<br />
unrealised exchange differences that have been deferred are<br />
recognised in the consolidated income statement as part of the<br />
gain or loss on disposal.<br />
All gains and losses on the translation of equity loans to foreign<br />
operations that are intended to be permanent, whether they are<br />
denominated in one of the entities’ functional currencies or in a<br />
third currency, are recognised in equity.<br />
Goodwill and intangible assets arising on the acquisition of a<br />
foreign operation are treated as assets of the foreign operation<br />
and translated at the foreign exchange rates ruling at balance<br />
sheet date.<br />
Treasury shares<br />
Where the Group acquires, or in substance acquires, <strong>Telkom</strong><br />
shares, such shares are measured at cost and disclosed as a<br />
reduction of equity. No gain or loss is recognised in profit or loss<br />
on the purchase, sale, issue or cancellation of the Group’s own<br />
equity instruments. Such shares are not remeasured for changes<br />
in fair value.<br />
Where the Group chooses or is required to buy equity instruments<br />
from another party to satisfy its obligations to its employees under<br />
the share-based payment arrangement by delivery of its own<br />
shares, the transaction is accounted for as equity-settled. This<br />
applies regardless of whether the employees’ rights to the equity<br />
instruments were granted by the Group itself or by its shareholders<br />
or was settled by the Group itself or its shareholders.<br />
Leases<br />
A lease is classified as a finance lease if it transfers substantially<br />
all the risks and rewards incidental to ownership. All other<br />
leases are classified as operating leases.<br />
Where the Group enters into a service agreement as a supplier or<br />
a customer that depends on the use of a specific asset, and conveys<br />
the right to control the use of the specific asset, the arrangement is<br />
assessed to determine whether it contains a lease. Once it has been<br />
concluded that an arrangement contains a lease, it is assessed<br />
against the criteria in IAS17 to determine if the arrangement should<br />
be recognised as a finance lease or operating lease.<br />
The land and buildings elements of a lease of land and<br />
buildings are considered separately for the purposes of lease<br />
classification unless it is impracticable to do so.<br />
Lessee<br />
Operating lease payments are recognised in the income<br />
statement on a straight-line basis over the lease term.<br />
Assets acquired in terms of finance leases are capitalised at the<br />
lower of fair value or the present value of the minimum lease<br />
payments at inception of the lease and depreciated over the<br />
lesser of the useful life of the asset or the lease term. The capital<br />
element of future obligations under the leases is included as a<br />
liability in the balance sheet. Lease finance costs are amortised<br />
in the income statement over the lease term using the interest rate<br />
implicit in the lease. Where a sale and leaseback transaction<br />
results in a finance lease, any excess of sale proceeds over the<br />
carrying amount is deferred and recognised in the income<br />
statement over the term of the lease.<br />
Lessor<br />
Operating lease revenue is recognised in the income statement<br />
on a straight-line basis over the lease term.<br />
Assets held under a finance lease are recognised in the balance<br />
sheet and presented as a receivable at an amount equal to the<br />
net investment in the lease. The recognition of finance income is<br />
based on a pattern reflecting a constant periodic rate of return<br />
on the net investment in the finance lease.<br />
Employee benefits<br />
Post-employment benefits<br />
The Group provides defined benefit and defined contribution<br />
plans for the benefit of employees. These plans are funded by<br />
the employees and the Group, taking into account<br />
recommendations of the independent actuaries. The postretirement<br />
telephone rebate liability is unfunded.<br />
Defined contribution plans<br />
The Group’s funding of the defined contribution plans is charged<br />
to employee expenses in the same year as the related service is<br />
provided.<br />
Defined benefit plans<br />
The Group provides defined benefit plans for pension,<br />
retirement, post-retirement medical aid benefits and telephone<br />
rebates to qualifying employees. The Group’s net obligation in<br />
respect of defined benefits is calculated separately for each<br />
plan by estimating the amount of future benefits earned in return<br />
for services rendered.
2. SIGNIFICANT ACCOUNTING POLICIES (continued)<br />
Employee benefits (continued)<br />
Defined benefit plans (continued)<br />
The amount recognised in the balance sheet represents the present<br />
value of the defined benefit obligations, calculated by using the<br />
projected unit credit method, as adjusted for unrecognised<br />
actuarial gains and losses, unrecognised past service costs and<br />
reduced by the fair value of the related plan assets. The amount<br />
of any surplus recognised and reflected as deferred expenses is<br />
limited to unrecognised actuarial losses and past service costs plus<br />
the present value of available refunds and reductions in future<br />
contributions to the plan. To the extent that there is uncertainty as<br />
to the entitlement to the surplus, no asset is recognised. No gain<br />
is recognised solely as a result of an actuarial loss or past service<br />
cost in the current period and no loss is recognised solely as a<br />
result of an actuarial gain or past service cost in the current period.<br />
Actuarial gains and losses are recognised as employee<br />
expenses when the cumulative unrecognised gains and losses<br />
for each individual plan exceed 10% of the greater of the<br />
present value of the Group’s obligation and the fair value of<br />
plan assets at the beginning of the year. These gains or losses<br />
are amortised on a straight-line basis over 10 years for all the<br />
defined benefit plans, except gains or losses related to the<br />
pensioners in the <strong>Telkom</strong> Retirement Fund or unless the standard<br />
requires faster recognition. For the <strong>Telkom</strong> Retirement Fund<br />
pensioners, the cumulative unrecognised actuarial gains and<br />
losses in excess of the 10% corridor at the beginning of the year<br />
are recognised immediately.<br />
Past service costs are recognised immediately to the extent that<br />
the benefits are vested, otherwise they are recognised on a<br />
straight-line basis over the average period the benefits become<br />
vested.<br />
Leave benefits<br />
Annual leave entitlement is provided for over the period that the<br />
leave accrues and is subject to a cap of 22 days.<br />
Workforce reduction<br />
Workforce reduction expenses are payable when employment<br />
is terminated before the normal retirement age or when an<br />
employee accepts voluntary redundancy in exchange for<br />
benefits. Workforce reduction benefits are recognised when the<br />
entity is demonstrably committed and it is probable that the<br />
expenses will be incurred. In the case of an offer made to<br />
encourage voluntary redundancy, the measurement of<br />
termination benefits is based on the number of employees<br />
expected to accept the offer.<br />
<strong>Telkom</strong> Annual Report 2009 159<br />
Notes to the consolidated annual financial statements (continued)<br />
for the three years ended March 31, 2009<br />
Deferred bonus incentives<br />
Employees of the wholly owned subsidiaries of Vodacom,<br />
including executive directors, are eligible for compensation<br />
benefits in the form of a Deferred Bonus Incentive Scheme. The<br />
benefit is recorded at the present value of the expected future<br />
cash outflows.<br />
Share-based compensation<br />
The grants of equity instruments, made to employees in terms of<br />
the <strong>Telkom</strong> Conditional Share Plan, are classified as equitysettled<br />
share-based payment transactions. The expense relating<br />
to the services rendered by the employees, and the<br />
corresponding increase in equity, is measured at the fair value<br />
of the equity instruments at their date of grant based on the<br />
market price at grant date, adjusted for the lack of entitlement to<br />
dividends during the vesting period. This compensation cost is<br />
recognised over the vesting period, based on the best available<br />
estimate at each balance sheet date of the number of equity<br />
instruments that are expected to vest.<br />
Short-term employee benefits<br />
The cost of all short-term employee benefits is recognised during<br />
the year the employees render services, unless the Group uses<br />
the services of employees in the construction of an asset and the<br />
benefits received meet the recognition criteria of an asset, at<br />
which stage it is included as part of the related property, plant<br />
and equipment or intangible asset item.<br />
Long-term incentive provision<br />
The Vodacom Group provides long-term incentives to eligible<br />
employees payable on termination or retirement. The Group’s<br />
liability is based on an actuarial valuation. Actuarial gains and<br />
losses are recognised as employee expenses.<br />
Provisions<br />
Provisions are recognised when the Group has a present<br />
obligation (legal or constructive) as a result of a past event, it is<br />
probable that an outflow of resources will be required to settle<br />
the obligation, and a reliable estimate can be made of the<br />
amount of the obligation. Provisions are reviewed at each<br />
balance sheet date and adjusted to reflect the current best<br />
estimate. Where the effect of the time value of money is<br />
material, the amount of the provision is the present value of the<br />
expenditures expected to be required to settle the obligation.
160<br />
<strong>Telkom</strong> Annual Report 2009<br />
Notes to the consolidated annual financial statements (continued)<br />
for the three years ended March 31, 2009<br />
3. REVENUE<br />
2007 2008 2009<br />
Rm Rm Rm<br />
3.1 Total revenue 32,919 34,084 36,433<br />
Operating revenue 32,441 33,611 35,940<br />
Other income (excluding profit on disposal of property, plant and<br />
equipment, intangible assets and investments, refer to note 4) 279 305 312<br />
Investment income (refer to note 6) 199 168 181<br />
3.2 Operating revenue 32,441 33,611 35,940<br />
Fixed-line 32,345 32,572 33,659<br />
Multi-Links – 845 1,900<br />
Other 873 1,040 1,214<br />
Eliminations (777) (846) (833)<br />
Fixed-line 32,345 32,572 33,659<br />
Subscriptions, connections and other usage 6,286 6,330 6,614<br />
Traffic 16,740 15,950 15,323<br />
Domestic (local and long distance) 7,563 6,328 5,670<br />
Fixed-to-mobile 7,646 7,557 7,420<br />
International (outgoing) 988 986 933<br />
Subscription based calling plans 543 1,079 1,300<br />
Interconnection 1,639 1,757 2,084<br />
Data 7,489 8,308 9,310<br />
Sundry revenue 191 227 328<br />
4. OTHER INCOME 338 472 343<br />
Other income (included in Total revenue, refer to note 3) 279 305 312<br />
Interest received from trade receivables 188 254 270<br />
Sundry income 91 51 42<br />
Profit on disposal of property, plant and equipment and intangible assets 16 167 31<br />
Profit on disposal of investment 43 – –
<strong>Telkom</strong> Annual Report 2009 161<br />
Notes to the consolidated annual financial statements (continued)<br />
for the three years ended March 31, 2009<br />
5. OPERATING EXPENSES<br />
Operating expenses comprise:<br />
2007 2008 2009<br />
Rm Rm Rm<br />
5.1 Employee expenses 7,254 7,629 8,345<br />
Salaries and wages 5,215 5,710 6,050<br />
Medical aid contributions 384 415 410<br />
Retirement contributions 446 470 472<br />
Post-retirement pension and retirement fund (refer to note 30) 33 5 29<br />
Current service cost 5 5 4<br />
Interest cost 329 509 633<br />
Expected return on plan assets (508) (713) (825)<br />
Actuarial gain (136) (16) –<br />
Settlement loss/(gain) 21 (2) (3)<br />
Asset limitation 322 222 220<br />
Post-retirement medical aid (refer to notes 29 and 30) 330 278 457<br />
Current service cost 83 84 95<br />
Interest cost 286 322 428<br />
Expected return on plan asset (188) (257) (223)<br />
Actuarial loss 149 129 157<br />
Telephone rebates (refer to notes 29 and 30) 104 27 61<br />
Current service cost 4 3 6<br />
Interest cost 19 22 39<br />
Past service cost 76 2 2<br />
Actuarial loss 5 – 14<br />
Share-based compensation expense (refer to note 24) 141 522 554<br />
Other benefits* 1,297 988 1,048<br />
Employee expenses capitalised (696) (786) (736)<br />
* Other benefits include annual leave, performance incentive,<br />
service bonuses, skills development and workforce reduction expenses.<br />
5.2 Payments to other operators 5,005 6,098 6,919<br />
Payments to other network operators consist of expenses in respect of interconnection with other network operators.
162<br />
<strong>Telkom</strong> Annual Report 2009<br />
Notes to the consolidated annual financial statements (continued)<br />
for the three years ended March 31, 2009<br />
5. OPERATING EXPENSES (continued)<br />
2007 2008 2009<br />
Rm Rm Rm<br />
5.3 Selling, general and administrative expenses 4,184 4,045 5,772<br />
Selling and administrative expenses 1,533 1,220 2,374<br />
Maintenance 1,870 1,966 2,319<br />
Marketing 640 614 711<br />
Bad debts 141 245 368<br />
The increase in the current year’s selling and administrative expenses is<br />
attributable to the focus on expanding the customer base in Nigeria.<br />
5.4 Service fees 2,209 2,437 2,756<br />
Facilities and property management 1,142 1,228 1,275<br />
Consultancy services 192 169 295<br />
Security and other 821 982 1,121<br />
Auditors’ remuneration 54 58 65<br />
Audit services 53 57 58<br />
Company auditors 48 46 47<br />
Current year 47 43 47<br />
Prior year underprovision 1 3 –<br />
Other auditors – current year 5 11 11<br />
Audit related services – 1 –<br />
Other auditors – 1 –<br />
Other services 1 – 7<br />
Included in the current year’s consultancy services is an amount of<br />
R177 million relating to services rendered in respect of the transaction<br />
to dispose of <strong>Telkom</strong>’s shareholding in Vodacom Group (Proprietary) Limited.<br />
The increase in the current year’s security and other costs is mainly<br />
attributable to the new contract negotiated to secure the copper network<br />
in <strong>Telkom</strong>’s drive to cut down on cable thefts.<br />
5.5 Operating leases 775 671 823<br />
Land and buildings 135 160 244<br />
Transmission and data lines 8 35 118<br />
Equipment 80 48 72<br />
Vehicles 552 428 389<br />
5.6 Depreciation, amortisation, impairment and write-offs 3,601 4,134 5,280<br />
Depreciation of property, plant and equipment 3,011 3,151 3,733<br />
Amortisation of intangible assets 306 469 724<br />
Impairment of property, plant and equipment and intangible assets – 229 501<br />
Write-offs of property, plant and equipment and intangible assets 284 285 322<br />
Included in the current year’s amortisation of intangible assets is an amount of R134 million relating to the FIFA brand intangible asset.<br />
The impairment charge for the 2009 financial year consists of R462 million and R39 million relating to Multi-Links and Africa Online<br />
respectively.
<strong>Telkom</strong> Annual Report 2009 163<br />
Notes to the consolidated annual financial statements (continued)<br />
for the three years ended March 31, 2009<br />
2007 2008 2009<br />
Rm Rm Rm<br />
6. INVESTMENT INCOME 199 168 181<br />
Interest income 196 168 181<br />
Dividend income from investments 3 – –<br />
Included in investment income is an amount of R160 million (2008:<br />
R142 million; 2007: R196 million) which relates to interest earned from<br />
financial assets not measured at fair value through profit or loss.<br />
7. FINANCE CH<strong>AR</strong>GES AND FAIR VALUE MOVEMENTS 857 1,556 2,843<br />
Finance charges on interest-bearing debt 1,142 1,543 1,732<br />
Local debt 1,303 1,700 1,895<br />
Foreign debt – 18 –<br />
Finance charges capitalised (161) (175) (163)<br />
Foreign exchange gains and losses and fair value movement (285) 13 1,111<br />
Foreign exchange losses 59 93 843<br />
Fair value adjustments on derivative instruments (344) (80) 268<br />
Capitalisation rate 14.77% 12.60% 12.40%<br />
Included in finance charges is an amount of R1,655 million (2008: R1,499 million; 2007: R1,142 million) which relates to interest paid<br />
on financial liabilities not measured at fair value through profit or loss.<br />
Included in foreign exchange losses and fair value adjustments are forex losses of R961 million in respect of the loan that Multi-Links<br />
received from <strong>Telkom</strong> and R409 million loss in respect of the Multi-Links put option, offset by the R318 million gain in <strong>Telkom</strong>.
164<br />
<strong>Telkom</strong> Annual Report 2009<br />
Notes to the consolidated annual financial statements (continued)<br />
for the three years ended March 31, 2009<br />
2007 2008 2009<br />
Rm Rm Rm<br />
8. TAXATION 2,803 2,647 1,660<br />
South African normal company taxation 1,989 2,018 1,658<br />
Current taxation 2,023 2,018 1,686<br />
Overprovision for prior year (34) – (28)<br />
Deferred taxation 490 254 (164)<br />
Temporary differences – normal company taxation 534 121 241<br />
Temporary difference – secondary taxation on companies<br />
(STC) taxation credits (raised)/utilised (45) 190 (89)<br />
Change in taxation rate – (54) –<br />
Capital gains taxation (CGT) asset – – (454)<br />
Underprovision/(overprovision) for prior year 1 (3) 138<br />
Secondary taxation on companies 324 381 164<br />
Foreign taxation – (6) 2<br />
Included in the current year’s deferred taxation expense is a credit of<br />
R454 million relating to the deferred taxation on temporary differences<br />
associated with the disposal groups which are classified as held for sale.<br />
The decrease in the deferred taxation expense is mainly due to the<br />
temporary difference associated with the disposal groups which are<br />
classified as held for sale.<br />
The STC expense was provided for at a rate of 10% (12.5% before<br />
October 1, 2007) on the amount by which dividends declared exceeded<br />
dividends received. Deferred taxation expense relating to STC credits is<br />
provided for at a rate of 10% (2008: 10%; 2007: 12.5%).<br />
Reconciliation of taxation rate % % %<br />
Effective rate 30.8 34.5 44.5<br />
South African normal rate of taxation 29.0 29.0 28.0<br />
Adjusted for: 1.8 5.5 16.5<br />
Change in taxation rate – (0.5) –<br />
Exempt income (2.2) (2.5) (26.8)<br />
Disallowable expenditure 0.7 2.9 47.7<br />
Taxation losses not utilised – (0.7) 1.6<br />
STC credits (raised)/utilised (0.3) 1.5 (2.4)<br />
STC charge 3.1 5.3 4.4<br />
CGT asset 1.1 – (11.0)<br />
Net (overprovision)/underprovision for prior year (0.5) (0.5) 3.0<br />
Utilisation of assessed loss (0.1) – –
9. DISCONTINUED OPERATIONS AND DISPOSAL GROUPS HELD FOR SALE<br />
9.1 Discontinued operations<br />
<strong>Telkom</strong> Media (Proprietary) Limited<br />
<strong>Telkom</strong> Media was classified as held for sale in the September 2008 interim<br />
financials. At year end March 31, 2009, the subsidiary did not meet<br />
the held for sale criteria as management were unable to sell the disposal<br />
group for its expected price and therefore decided to abandon it.<br />
The results and cash flows of the subsidiary are disclosed as a<br />
discontinued operation in accordance with IFRS.<br />
<strong>Telkom</strong> Annual Report 2009 165<br />
Notes to the consolidated annual financial statements (continued)<br />
for the three years ended March 31, 2009<br />
2007 2008 2009<br />
Rm Rm Rm<br />
Analysis of the results of discontinued operations:<br />
Revenue* 14 26<br />
Expenses* 157 305<br />
Loss before taxation of discontinued operations 143 279<br />
Taxation (1) 2<br />
Loss after taxation of discontinued operations 142 281<br />
The net cash flows attributable to the operating, investing and<br />
financing activities of discontinued operations:<br />
Operating cash flows (95) (140)<br />
Investing cash flows (218) (39)<br />
Financing cash flows 319 149<br />
Total cash inflow/(outflow) 6 (30)<br />
9.2 Disposal groups held for sale<br />
9.2.1 Vodacom Group (Proprietary) Limited<br />
In the current year, the Group announced a decision to dispose of its entire<br />
interest in Vodacom through selling 15% of its shareholding to Vodafone, a<br />
wholly owned subsidiary of Vodafone Group Plc (Vodafones) and unbundling<br />
its remaining 35% shareholding to its shareholders pursuant to a listing of<br />
Vodacom on the main board of the JSE Limited. This decision was taken in<br />
line with the Group’s strategy to unlock shareholder value; consequently, all<br />
assets and liabilities of Vodacom and its subsidiaries were classified as a<br />
discontinued operation.<br />
Analysis of the results of discontinued operations:<br />
Revenue* 19,157 22,653 26,215<br />
Expenses* 14,709 17,334 21,749<br />
Profit before taxation of discontinued operations 4,448 5,319 4,466<br />
Taxation 1,918 2,055 2,023<br />
Profit after taxation of discontinued operations 2,530 3,264 2,443<br />
* Revenue comprises operating revenue, other income and investment income. Expenses comprises operating expenses and finance charges.
166<br />
<strong>Telkom</strong> Annual Report 2009<br />
Notes to the consolidated annual financial statements (continued)<br />
for the three years ended March 31, 2009<br />
2007 2008 2009<br />
Rm Rm Rm<br />
9. DISCONTINUED OPERATIONS AND DISPOSAL GROUPS HELD<br />
FOR SALE (continued)<br />
9.2 Disposal groups held for sale (continued)<br />
9.2.1 Vodacom Group (Proprietary) Limited (continued)<br />
The major classes of assets and liabilities of the business classified<br />
as a disposal group:<br />
Assets 23,410<br />
Property, plant and equipment 10,922<br />
Intangible assets 5,897<br />
Trade and other receivables 4,283<br />
Other non-current and current assets 2,308<br />
Liabilities 15,858<br />
Interest-bearing debt 4,170<br />
Trade and other payables 4,679<br />
Current portion of interest-bearing debt 2,882<br />
Current portion of deferred revenue 1,260<br />
Credit facilities utilised 1,102<br />
Other non-current and current liabilities 1,765<br />
Reserve of disposal group held for sale 876<br />
Reconciliation of carrying value transferred to disposal groups at year end: Property,<br />
plant and<br />
equipment<br />
Carrying value at beginning of year 9,585<br />
Additions 2,979<br />
Disposals (28)<br />
Foreign currency translation reserve 340<br />
Business combinations 143<br />
Impairments and write-offs (53)<br />
Depreciation (1,974)<br />
Transfers (33)<br />
Other transfers (37)<br />
Carrying value at end of year 10,922<br />
Intangible<br />
assets<br />
Carrying value at beginning of year 2,111<br />
Additions 590<br />
Foreign currency translation reserve 26<br />
Business combinations 3,503<br />
Amortisation (366)<br />
Transfers (33)<br />
Carrying value at end of year 5,897<br />
The net cash flows attributable to the operating, investing and<br />
financing activities of the disposal group:<br />
Operating cash flows 2,429 2,563 2,092<br />
Investing cash flows (3,292) (3,751) (6,375)<br />
Financing cash flows (100) 1,617 4,436<br />
Total cash (outflow)/inflow (963) 429 153
9. DISCONTINUED OPERATIONS AND DISPOSAL GROUPS HELD<br />
FOR SALE (continued)<br />
9.2 Disposal groups held for sale (continued)<br />
9.2.2 Swiftnet (Proprietary) Limited<br />
In February 2009, <strong>Telkom</strong>’s Board of directors took a decision to<br />
dispose of its 100% investment in Swiftnet (Proprietary) Limited.<br />
The investment is classified as held for sale.<br />
<strong>Telkom</strong> Annual Report 2009 167<br />
Notes to the consolidated annual financial statements (continued)<br />
for the three years ended March 31, 2009<br />
2007 2008 2009<br />
Rm Rm Rm<br />
Analysis of the results of discontinued operations:<br />
Revenue* 103 98 97<br />
Expenses* 64 79 82<br />
Profit before taxation of discontinued operations 39 19 15<br />
Taxation 10 3 (4)<br />
Profit after taxation of discontinued operations 29 16 19<br />
The major classes of assets and liabilities of the business<br />
classified as a disposal group:<br />
Assets 72<br />
Property, plant and equipment and intangible assets 24<br />
Income taxation receivable 2<br />
Trade and other receivables 18<br />
Cash and cash equivalents 28<br />
Liabilities 15<br />
Provisions 1<br />
Trade and other payables 10<br />
Current portion of provisions 4<br />
The net cash flows attributable to the operating, investing and financing<br />
activities of the disposal group:<br />
Operating cash flows 43 22 31<br />
Investing cash flows (15) (11) (33)<br />
Financing cash flows (23) – 10<br />
Total cash inflow 5 11 8<br />
* Revenue comprises operating revenue, other income and investment income. Expenses comprises operating expenses and finance charges.
168<br />
<strong>Telkom</strong> Annual Report 2009<br />
Notes to the consolidated annual financial statements (continued)<br />
for the three years ended March 31, 2009<br />
10. E<strong>AR</strong>NINGS PER SH<strong>AR</strong>E<br />
2007 2008 2009<br />
Total operations<br />
Basic earnings per share (cents)<br />
The calculation of earnings per share is based on profit attributable to equity<br />
holders of <strong>Telkom</strong> for the year of R4,170 million (2008: R7,975 million;<br />
2007: R8,646 million) and 500,700,538 (2008: 509,595,092;<br />
2007: 514,341,284) weighted average number of ordinary shares in issue.<br />
1,681.0 1,565.0 832.8<br />
Diluted earnings per share (cents)<br />
The calculation of diluted earnings per share is based on earnings for the<br />
year of R4,170 million (2008: R7,975 million; 2007: R8,646 million) and<br />
508,782,641 (2008: 515,541,968; 2007: 515,763,581) diluted<br />
weighted average number of ordinary shares. The adjustment in the<br />
weighted average number of shares is as a result of the expected future<br />
vesting of shares already allocated to employees under the <strong>Telkom</strong><br />
Conditional Share Plan.<br />
1,676.3 1,546.9 819.6<br />
Headline earnings per share (cents)*<br />
The calculation of headline earnings per share is based on headline<br />
earnings of R4,980 million (2008: R8,331 million; 2007:<br />
R8,799 million) and 500,700,538 (2008: 509,595,092;<br />
2007: 514,341,284) weighted average number of ordinary shares in issue.<br />
1,710.7 1,634.8 994.6<br />
Diluted headline earnings per share (cents)*<br />
The calculation of diluted headline earnings per share is based on headline<br />
earnings of R4,980 million (2008: R8,331 million; 2007: R8,799 million)<br />
and 508,782,641 (2008: 515,541,968; 2007: 515,763,581)<br />
diluted weighted average number of ordinary shares in issue. The<br />
adjustment in the weighted average number of shares is as a result<br />
of the expected future vesting of shares already allocated to<br />
employees under the <strong>Telkom</strong> Conditional Share Plan.<br />
1,706.0 1,616.0 978.8<br />
Continuing operations<br />
Basic earnings per share (cents)<br />
The calculation of earnings per share is based on profit attributable to<br />
equity holders of <strong>Telkom</strong> for the year of R2,040 million (2008: R4,911 million;<br />
2007: R6,196 million) and 500,700,538 (2008: 509,595,092;<br />
2007: 514,341,284) weighted average number of ordinary shares<br />
in issue.<br />
1,204.7 963.7 407.4<br />
Diluted earnings per share (cents)<br />
The calculation of diluted earnings per share is based on earnings for<br />
the year of R2,040 million (2008: R4,911 million; 2007: R6,196 million)<br />
and 508,782,641 (2008: 515,541,968; 2007: 515,763,581) diluted<br />
weighted average number of ordinary shares. The adjustment in the<br />
weighted average number of shares is as a result of the expected future<br />
vesting of shares already allocated to employees under the <strong>Telkom</strong><br />
Conditional Share Plan.<br />
1,201.3 952.6 401.0
10. E<strong>AR</strong>NINGS PER SH<strong>AR</strong>E (continued)<br />
Continuing operations (continued)<br />
<strong>Telkom</strong> Annual Report 2009 169<br />
Notes to the consolidated annual financial statements (continued)<br />
for the three years ended March 31, 2009<br />
2007 2008 2009<br />
Headline earnings per share (cents)* 1,235.5 1,028.9 557.0<br />
The calculation of headline earnings per share is based on headline<br />
earnings of R2,789 million (2008: R5,243 million; 2007: R6,355 million)<br />
and 500,700,538 (2008: 509,595,092; 2007: 514,341,284)<br />
weighted average number of ordinary shares in issue.<br />
Diluted headline earnings per share (cents)*<br />
The calculation of diluted headline earnings per share is based on headline<br />
earnings of R2,789 million (2008: R5,243 million; 2007: R6,355 million)<br />
and 508,782,641 (2008: 515,541,968; 2007: 515,763,581) diluted<br />
weighted average number of ordinary shares in issue. The adjustment in the<br />
weighted average number of shares is as a result of the expected future<br />
vesting of shares already allocated to employees under the <strong>Telkom</strong><br />
Conditional Share Plan.<br />
1,232.2 1,017.0 548.2<br />
Discontinuing operations<br />
Basic earnings per share (cents)<br />
The calculation of earnings per share is based on profit attributable to<br />
equity holders of <strong>Telkom</strong> for the year of R2,130 million (2008:<br />
R3,064 million; 2007: R2,450 million) and 500,700,538<br />
(2008: 509,595,092; 2007: 514,341,284) weighted average<br />
number of ordinary shares in issue.<br />
476.3 601.3 425.4<br />
Diluted earnings per share (cents)<br />
The calculation of diluted earnings per share is based on earnings for the<br />
year of R2,130 million (2008: R3,064 million; 2007: R2,450 million)<br />
and 508,782,641 diluted weighted average number of ordinary shares<br />
(2008: 515,541,968; 2007: 515,763,581). The adjustment in the<br />
weighted average number of shares is as a result of the expected future<br />
vesting of shares already allocated to employees under the <strong>Telkom</strong><br />
Conditional Share Plan.<br />
475.0 594.3 418.6<br />
Headline earnings per share (cents)*<br />
The calculation of headline earnings per share is based on headline<br />
earnings of R2,191 million (2008: R3,088 million; 2007: R2,444 million)<br />
and 500,700,538 (2008: 509,595,092; 2007: 514,341,284)<br />
weighted average number of ordinary shares in issue.<br />
475.2 606.0 437.6<br />
Diluted headline earnings per share (cents)*<br />
The calculation of diluted headline earnings per share is based on<br />
headline earnings of R2,191 million (2008: R3,088 million; 2007:<br />
R2,444 million) and 508,782,641 (2008: 515,541,968;<br />
2007: 515,763,581) diluted weighted average number of ordinary<br />
shares in issue. The adjustment in the weighted average number of<br />
shares is as a result of the expected future vesting of shares already<br />
allocated to employees under the <strong>Telkom</strong> Conditional Share Plan.<br />
473.9 599.0 430.6
170<br />
<strong>Telkom</strong> Annual Report 2009<br />
Notes to the consolidated annual financial statements (continued)<br />
for the three years ended March 31, 2009<br />
10. E<strong>AR</strong>NINGS PER SH<strong>AR</strong>E (continued)<br />
2007 2008 2009<br />
Reconciliation of weighted average number of ordinary shares:<br />
Ordinary shares in issue (refer to note 22) 544,944,901 532,855,530 520,784,186<br />
Weighted average number of shares bought back (7,442,253) (1,594,241) (27)<br />
Weighted average number of treasury shares (23,161,364) (21,666,197) (20,083,621)<br />
Weighted average number of shares outstanding 514,341,284 509,595,092 500,700,538<br />
Reconciliation of diluted weighted average number of ordinary shares<br />
Weighted average number of shares outstanding 514,341,284 509,595,092 500,700,538<br />
Expected future vesting of shares 1,422,297 5,946,876 8,082,103<br />
Diluted weighted average number of shares outstanding 515,763,581 515,541,968 508,782,641<br />
Gross** Net<br />
Total operations Rm Rm<br />
2009<br />
Reconciliation between earnings and headline earnings:<br />
Earnings as reported 4,170<br />
Profit on disposal of property, plant and equipment and intangible assets (25) (21)<br />
Impairment loss on property, plant and equipment and intangible assets 557 557<br />
Write-offs of property, plant and equipment and intangible assets 322 274<br />
Headline earnings 4,980<br />
2008<br />
Reconciliation between earnings and headline earnings:<br />
Earnings as reported 7,975<br />
Profit on disposal of investments (available-for-sale) (4) (3)<br />
Profit on disposal of property, plant and equipment and intangible assets (147) (104)<br />
Impairment loss on property, plant and equipment and intangible assets 248 244<br />
Write-offs of property, plant and equipment and intangible assets 285 219<br />
Headline earnings 8,331<br />
2007<br />
Reconciliation between earnings and headline earnings:<br />
Earnings as reported 8,646<br />
Profit on disposal of investments (available-for-sale) (52) (37)<br />
Profit on disposal of property, plant and equipment and intangible assets (29) (21)<br />
Reversal of impairment loss on property, plant and equipment and intangible assets 12 9<br />
Write-offs of property, plant and equipment and intangible assets 284 202<br />
Headline earnings 8,799<br />
* 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<br />
with the South African Institute of Chartered Accountants’ circular issued in this regard.<br />
** These are the gross amounts, before deducting taxation and minority interests.
10. E<strong>AR</strong>NINGS PER SH<strong>AR</strong>E (continued)<br />
<strong>Telkom</strong> Annual Report 2009 171<br />
Notes to the consolidated annual financial statements (continued)<br />
for the three years ended March 31, 2009<br />
Gross* Net<br />
Continuing operations Rm Rm<br />
2009<br />
Reconciliation between earnings and headline earnings:<br />
Profit from continuing operations 2,066<br />
Minority interest 26<br />
Earnings from continuing operations attributable to equity holders of <strong>Telkom</strong> 2,040<br />
Profit on disposal of property, plant and equipment and intangible assets (32) (26)<br />
Impairment loss on property, plant and equipment and intangible assets 501 499<br />
Write-offs of property, plant and equipment and intangible assets 322 276<br />
Headline earnings 2,789<br />
2008<br />
Reconciliation between earnings and headline earnings:<br />
Profit from continuing operations 5,034<br />
Minority interest 123<br />
Earnings from continuing operations attributable to equity holders of <strong>Telkom</strong> 4,911<br />
Profit on disposal of property, plant and equipment and intangible assets (166) (118)<br />
Impairment loss on property, plant and equipment and intangible assets 233 233<br />
Write-offs of property, plant and equipment and intangible assets 285 217<br />
Headline earnings 5,244<br />
2007<br />
Reconciliation between earnings and headline earnings:<br />
Profit from continuing operations 6,290<br />
Minority interest 94<br />
Earnings from continuing operations attributable to equity holders of <strong>Telkom</strong> 6,196<br />
Profit on disposal of investments (available-for-sale) (43) (31)<br />
Profit on disposal of property, plant and equipment and intangible assets (16) (11)<br />
Write-offs of property, plant and equipment and intangible assets 284 201<br />
Headline earnings 6,355<br />
* These are the gross amounts, before deducting taxation and minority interests.
172<br />
<strong>Telkom</strong> Annual Report 2009<br />
Notes to the consolidated annual financial statements (continued)<br />
for the three years ended March 31, 2009<br />
10. E<strong>AR</strong>NINGS PER SH<strong>AR</strong>E (continued)<br />
Gross* Net<br />
Discontinuing operations Rm Rm<br />
2009<br />
Reconciliation between earnings and headline earnings:<br />
Profit from discontinued operations 2,181<br />
Minority interest 51<br />
Earnings from discontinued operations attributable to equity holders of <strong>Telkom</strong> 2,130<br />
Profit on disposal of property, plant and equipment and intangible assets 7 5<br />
Impairment loss on property, plant and equipment and intangible assets 56 56<br />
Headline earnings 2,191<br />
2008<br />
Reconciliation between earnings and headline earnings:<br />
Profit from discontinued operations 3,138<br />
Minority interest 74<br />
Earnings as reported 3,064<br />
Profit on disposal of investments (available-for-sale) (4) (4)<br />
Profit on disposal of property, plant and equipment and intangible assets 19 13<br />
Impairment loss on property, plant and equipment and intangible assets 15 15<br />
Headline earnings 3,088<br />
2007<br />
Reconciliation between earnings and headline earnings:<br />
Profit from discontinued operations 2,559<br />
Minority interest 109<br />
Earnings as reported 2,450<br />
Profit on disposal of investments (available-for-sale) (9) (6)<br />
Profit on disposal of property, plant and equipment and intangible assets (13) (9)<br />
Reversal of impairment loss on property, plant and equipment and intangible assets 12 9<br />
Headline earnings 2,444<br />
2007 2008 2009<br />
Dividend per share (cents) 900.0 1,100.0 660.0<br />
The calculation of dividend per share is based on dividends of R3,306 million (2008: R5,627 million; 2007: R4,678 million) declared<br />
on June 6, 2008 and 500,941,027 (2008: 511,513,237; 2007: 519,711,236) number of ordinary shares outstanding on the date<br />
of dividend declaration. The reduction in the number of shares represents the number of treasury shares held on date of payment.<br />
* These are the gross amounts, before deducting taxation and minority interests.
11. PROPERTY, PLANT<br />
AND EQUIPMENT<br />
2007 2008 2009*<br />
<strong>Telkom</strong> Annual Report 2009 173<br />
Notes to the consolidated annual financial statements (continued)<br />
for the three years ended March 31, 2009<br />
Accumu- Accumu- Accumu-<br />
lated lated lated<br />
depre- depre- depre-<br />
ciation and ciation and ciation and<br />
impair- Carrying impair- Carrying impair- Carrying<br />
Cost ment value Cost ment value Cost ment value<br />
Rm Rm Rm Rm Rm Rm Rm Rm Rm<br />
Freehold land and<br />
buildings 4,594 (1,837) 2,757 4,931 (2,010) 2,921 4,950 (2,136) 2,814<br />
Leasehold buildings 926 (362) 564 1,052 (418) 634 805 (477) 328<br />
Network equipment 63,003 (31,820) 31,183 69,572 (35,214) 34,358 59,765 (29,982) 29,783<br />
Support equipment<br />
Furniture and office<br />
4,045 (2,436) 1,609 4,355 (2,635) 1,720 3,921 (2,482) 1,439<br />
equipment<br />
Data processing<br />
equipment and<br />
536 (366) 170 568 (377) 191 453 (328) 125<br />
software<br />
Under<br />
5,836 (3,707) 2,129 6,279 (3,904) 2,375 5,543 (3,518) 2,025<br />
construction 2,536 – 2,536 4,200 – 4,200 4,612 – 4,612<br />
Other 860 (554) 306 1,046 (630) 416 721 (429) 292<br />
82,336 (41,082) 41,254 92,003 (45,188) 46,815 80,770 (39,352) 41,418<br />
Fully depreciated assets with a cost of R155 million (2008: R498 million; 2007: R1,225 million) were derecognised in the 2009 financial<br />
year. This has reduced both the cost price and accumulated depreciation of property, plant and equipment.<br />
Property, plant and equipment with a carrying value of R158 million (2008: R681 million; 2007: R574 million) are pledged as security.<br />
Details of the loans are disclosed in note 28.<br />
* Net of assets of disposal groups classified as held for sale.
174<br />
<strong>Telkom</strong> Annual Report 2009<br />
Notes to the consolidated annual financial statements (continued)<br />
for the three years ended March 31, 2009<br />
11. PROPERTY, PLANT AND EQUIPMENT (continued)<br />
The carrying amounts of property, plant and equipment can be reconciled as follows:**<br />
Carrying Transfers Impairment, Carrying<br />
value at to Business Foreign write-offs value at<br />
beginning disposal combi- currency and Depre- end of<br />
of year groups Additions nations Transfers* translation reversals Disposals ciation year<br />
Rm Rm Rm Rm Rm Rm Rm Rm Rm Rm<br />
2009<br />
Freehold land and buildings 2,921 (293) 283 – 82 (4) (5) (2) (168) 2,814<br />
Leasehold buildings 634 (360) 119 – 24 (64) – – (25) 328<br />
Network equipment 34,358 (7,951) 2,913 – 3,378 30 (141) (71) (2,733) 29,783<br />
Support equipment 1,720 (235) 137 – 112 1 (12) – (284) 1,439<br />
Furniture and office equipment 191 (72) 19 – 13 1 – – (27) 125<br />
Data processing equipment<br />
and software 2,375 (370) 154 – 310 (1) (5) (1) (437) 2,025<br />
Under construction 4,200 – 4,872 – (4,120) (238) (102) – – 4,612<br />
Other 416 (304) 228 – 13 (1) (1) – (59) 292<br />
46,815 (9,585) 8,725 – (188) (276) (266) (74) (3,733) 41,418<br />
2008<br />
Freehold land and buildings 2,757 – 300 22 27 2 (3) (8) (176) 2,921<br />
Leasehold buildings 564 – 136 26 32 1 (67) (1) (57) 634<br />
Network equipment 31,183 – 5,167 404 1,301 272 (136) (107) (3,726) 34,358<br />
Support equipment 1,609 – 316 1 116 3 (8) – (317) 1,720<br />
Furniture and office equipment 170 – 78 3 1 1 (8) (1) (53) 191<br />
Data processing equipment<br />
and software 2,129 – 525 31 150 6 (19) (2) (445) 2,375<br />
Under construction 2,536 – 3,416 135 (1,737) 2 (152) – – 4,200<br />
Other 306 – 170 8 11 7 (2) (3) (81) 416<br />
41,254 – 10,108 630 (99) 294 (395) (122) (4,855) 46,815<br />
2007<br />
Freehold land and buildings 2,699 – 209 – – 2 17 (1) (169) 2,757<br />
Leasehold buildings 618 – – – 1 – – (14) (41) 564<br />
Network equipment 28,941 – 5,154 1 849 240 (199) (270) (3,533) 31,183<br />
Support equipment 1,321 – 442 – 109 2 (15) – (250) 1,609<br />
Furniture and office equipment 134 – 51 3 8 1 – – (27) 170<br />
Data processing equipment<br />
and software 2,082 – 466 12 (36) 8 (10) (2) (391) 2,129<br />
Under construction 1,320 – 2,165 – (912) – (37) – – 2,536<br />
Other 159 – 161 – 58 4 (1) (3) (72) 306<br />
37,274 – 8,648 16 77 257 (245) (290) (4,483) 41,254<br />
Full details of land and buildings are available for inspection at the registered offices of the Group.<br />
The Group does not have temporarily idle property, plant and equipment.<br />
A major portion of this capital expenditure relates to the expansion of existing networks and services. An extensive build programme that provides capacity<br />
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<br />
equipment, has resulted in an increase in property, plant and equipment additions.<br />
During the 2008 financial year, the Group recognised an impairment loss relating to <strong>Telkom</strong> Media assets. The recoverable amount for certain items of<br />
property, plant and equipment was estimated, and an impairment loss of R217 million was recognised in order to reduce the carrying amount of those<br />
assets to their recoverable amount. The impairment has been included in impairment, write-offs and reversals.<br />
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.<br />
An amount of R71 million (2008: R88 million; 2007: R240 million) under property, plant and equipment disposals relates to the reclassification of<br />
Customer Premises Equipment at the start of the lease. These disposals are as a result of the Group entering into a leasing arrangement.<br />
* An amount of R21 million was transferred from network equipment to cash and cash equivalents for <strong>Telkom</strong> Media.<br />
** The 2009 reconciliation excludes assets held in the disposal groups held for sale, refer to note 9.
2007 2008 2009*<br />
<strong>Telkom</strong> Annual Report 2009 175<br />
Notes to the consolidated annual financial statements (continued)<br />
for the three years ended March 31, 2009<br />
Accumulated Accumulated Accumulated<br />
amortisation amortisation amortisation<br />
and impair- Carrying and impair- Carrying and impair- Carrying<br />
Cost ment value Cost ment value Cost ment value<br />
Rm Rm Rm Rm Rm Rm Rm Rm Rm<br />
12. INTANGIBLE ASSETS<br />
Goodwill 673 – 673 3,267 (12) 3,255 3,461 (501) 2,960<br />
Trademarks, copyrights<br />
and other 761 (521) 240 1,127 (633) 494 677 (332) 345<br />
Licences 222 (116) 106 311 (140) 171 228 (35) 193<br />
Software 6,720 (3,737) 2,983 8,106 (4,298) 3,808 7,045 (3,799) 3,246<br />
Under construction 1,109 – 1,109 740 – 740 488 – 488<br />
* Net of assets of disposal groups classified as held for sale.<br />
9,485 (4,374) 5,111 13,551 (5,083) 8,468 11,899 (4,667) 7,232<br />
The carrying amounts of intangible assets can be reconciled as follows:**<br />
Carrying Transfers Impair- Carrying<br />
value at to Business Foreign ment value at<br />
beginning disposal combi- currency and Amor- end of<br />
of year groups Additions nations Transfers translation write-offs tisation year<br />
Rm Rm Rm Rm Rm Rm Rm Rm Rm<br />
2009<br />
Goodwill<br />
Trademarks, copyrights<br />
3,255 (947) – 1,309 – (156) (501) – 2,960<br />
and other 494 (178) 300 – (28) (22) – (221) 345<br />
Licences 171 (104) 41 – 137 (42) – (10) 193<br />
Software 3,808 (882) 209 – 613 (8) (1) (493) 3,246<br />
Under construction 740 – 356 – (555) 2 (55) – 488<br />
8,468 (2,111) 906 1,309 167 (226) (557) (724) 7,232<br />
2008<br />
Goodwill<br />
Trademarks, copyrights<br />
673 – 492 1,727 – 375 (12) – 3,255<br />
and other 240 – 174 165 – 20 – (105) 494<br />
Licences 106 – 32 36 – 15 (3) (15) 171<br />
Software 2,983 – 739 – 713 9 (10) (626) 3,808<br />
Under construction 1,109 – 354 – (614) – (109) – 740<br />
5,111 – 1,791 1,928 99 419 (134) (746) 8,468<br />
2007<br />
Goodwill<br />
Trademarks, copyrights<br />
305 – 186 173 – 9 – – 673<br />
and other 213 – 8 69 – – – (50) 240<br />
Licences 60 – 47 1 – 8 – (10) 106<br />
Software 2,269 – 628 – 559 7 (4) (476) 2,983<br />
Under construction 1,063 – 729 – (636) – (47) – 1,109<br />
3,910 – 1,598 243 (77) 24 (51) (536) 5,111<br />
Intangible assets that are material to the Group consist of Software and Goodwill. The average remaining amortisation period for Software<br />
is between 2 and 10 years.<br />
** The 2009 reconciliation excludes assets held in the disposal groups held for sale, refer to note 9.
176<br />
<strong>Telkom</strong> Annual Report 2009<br />
Notes to the consolidated annual financial statements (continued)<br />
for the three years ended March 31, 2009<br />
12. INTANGIBLE ASSETS (continued)<br />
Impairment testing of goodwill<br />
For the purposes of impairment testing, goodwill is allocated to the smallest cash-generating unit. A cash-generating unit is the smallest<br />
identifiable group of assets that generates cash inflows that are largely independent of the cash inflows from other assets or groups of<br />
assets. The Group reviews goodwill for impairment annually by comparing the recoverable amounts of cash-generating units to the carrying<br />
amounts.<br />
Goodwill acquired through business combinations has been allocated to two cash-generating units for impairment testing as follows:<br />
Africa Online Limited (Kenya)<br />
Multi-Links Telecommunications Limited (Nigeria)<br />
Kenya<br />
The carrying amount of goodwill is R144 million.<br />
For the period ending March 31, 2009, Africa Online was treated as one cash-generating unit for impairment testing purposes. This<br />
represents the lowest level within the Group at which the goodwill is monitored for internal management purposes.<br />
Goodwill relating to Africa Online was tested for impairment on March 31, 2009. The recoverable amount of goodwill relating to Africa<br />
Online was determined on the basis of value in use calculations.<br />
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<br />
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%<br />
(2008: 11.59%) and a terminal growth rate of 3%.<br />
An impairment loss of R39 million (2008: R12 million) was recognised.<br />
Nigeria<br />
The carrying amount of goodwill is R2,749 million.<br />
Multi-Links has been identified as a single cash-generating unit within the Group. The recoverable amount of goodwill relating to Multi-Links<br />
was determined using the discounted cash flow method.<br />
The key assumptions in determining cash flows are a five year forecast of future cash flows, extrapolated in perpetuity to reflect the longterm<br />
plans for the entity, using a weighted average cost of capital of 18.8%. The calculated perpetuity value for Multi-Links assumes that<br />
the company will continue to grow at 3% p.a. (nominal).<br />
Key assumptions used in the testing of goodwill for impairment:<br />
Applicable to all cash-generating units<br />
Expected customer base: The basis for determining value(s) assigned to key assumptions is based on the closing customer base in the period<br />
immediately preceding the budget period and increased for expected growth. The value assigned to key assumptions reflects past<br />
experience, and has an element of potential growth. The growth is based on market assumptions.<br />
Gross margin: The basis for determining value(s) assigned to key assumptions is based on the average gross margin achieved in the period<br />
immediately before the budget period and increased for expected efficiences. The value assigned reflects past experience and efficiency<br />
improvements.<br />
Capital expenditure: The basis for determining value(s) assigned to key assumptions is based on the total capital expenditure achieved in<br />
the period immediately before the budget period and adjusted for expected network coverage roll-out. The value assigned is based on<br />
management’s expected network coverage roll-out.<br />
Applicable to all cash-generating units except for the Africa Online cash-generating units<br />
<strong>AR</strong>PU: The basis for determining value(s) assigned to key assumptions is based on past experience and expected growth which is based<br />
on market forces and external sources of information.<br />
Applicable to all non-South African cash-generating units<br />
Exchange rates: The basis for determining value(s) assigned to key assumptions is based on the average market forward exchange rate<br />
over the budget period in respect of the Z<strong>AR</strong>/US$. The value assigned to the key assumption is consistent with external sources of<br />
information.
13. FINANCIAL INSTRUMENTS AND RISK MANAGEMENT<br />
Risk management<br />
<strong>Telkom</strong> Annual Report 2009 177<br />
Notes to the consolidated annual financial statements (continued)<br />
for the three years ended March 31, 2009<br />
Exposure to continuously changing market conditions has made management of financial risk critical for the Group. As a result of the<br />
financial instruments held, the Group is exposed to market risk (comprising interest rate risk and currency risk), credit risk and liquidity risk.<br />
Treasury policies, risk limits and control procedures are continuously monitored by the Board of directors through its audit and risk<br />
management committee.<br />
The Group holds or issues financial instruments to finance its operations, for the temporary investment of short-term funds and to manage<br />
currency and interest rate risks. In addition, financial instruments, for example trade receivables and payables, arise directly from the<br />
Group’s operations.<br />
The Group finances its operations primarily by a mixture of issued share capital, retained earnings, long-term and short-term loans. The<br />
Group uses derivative financial instruments to manage its exposure to market risks from changes in interest and foreign exchange rates. The<br />
derivatives used for this purpose are principally interest rate swaps and forward exchange contracts. The Group does not speculate in<br />
derivative instruments.<br />
The table below sets out the Group’s classification of financial assets and liabilities:<br />
At fair<br />
value<br />
through<br />
profit or Financial<br />
loss liabilities at Total<br />
held for amortised Held-to- Available- Loans and carrying<br />
trading cost maturity for-sale receivables value Fair value<br />
Note Rm Rm Rm Rm Rm Rm Rm<br />
2009<br />
Classes of financial<br />
instruments per balance sheet<br />
Assets 1,442 – 1,046 – 7,976 10,464 10,464<br />
Investments 14 1,286 – – – 97 1,383 1,383<br />
Trade and other receivables* 19 – – – – 5,673 5,673 5,673<br />
Other financial assets 20 156 – 1,046 – – 1,202 1,202<br />
Interest rate swaps 4 – – – – 4 4<br />
Forward exchange contracts 152 – – – – 152 152<br />
Repurchase agreements – – 1,046 – – 1,046 1,046<br />
Finance lease receivables 16 – – – – 275 275 275<br />
Cash and cash equivalents 21 – – – – 1,931 1,931 1,931<br />
Liabilities (228) (23,963) – – – (24,191) (25,265)<br />
Interest-bearing debt 28 – (18,275) – – – (18,275) (19,349)<br />
Trade and other payables 31 – (5,538) – – – (5,538) (5,538)<br />
Other financial liabilities 20 (228) – – – – (228) (228)<br />
Interest rate swaps (72) – – – – (72) (72)<br />
Forward exchange contracts (156) – – – – (156) (156)<br />
Credit facilities utilised 21 – (127) – – – (127) (127)<br />
Shareholders for dividends 35 – (23) – – – (23) (23)<br />
* Trade and other receivables are disclosed net of prepayments of R307 million (2008: R404 million; 2007: R256 million).
178<br />
<strong>Telkom</strong> Annual Report 2009<br />
Notes to the consolidated annual financial statements (continued)<br />
for the three years ended March 31, 2009<br />
13. FINANCIAL INSTRUMENTS AND RISK MANAGEMENT (continued)<br />
Risk management (continued)<br />
2008<br />
At fair<br />
value<br />
through<br />
profit or Financial<br />
loss liabilities at Total<br />
held for amortised Held-to- Available- Loans and carrying<br />
trading cost maturity for-sale receivables value Fair value<br />
Note Rm Rm Rm Rm Rm Rm Rm<br />
Classes of financial<br />
instruments per balance sheet<br />
Assets 1,991 – – 55 10,155 12,201 12,201<br />
Investments 14 1,377 – – 55 67 1,499 1,499<br />
Trade and other receivables* 19 – – – – 8,582 8,582 8,582<br />
Other financial assets 20 614 – – – – 614 614<br />
Interest rate swaps<br />
Forward exchange<br />
9 – – – – 9 9<br />
contracts 589 – – – – 589 589<br />
Other financial assets 16 – – – – 16 16<br />
Finance lease receivables 16 – – – – 372 372 372<br />
Cash and cash equivalents 21 – – – – 1,134 1,134 1,134<br />
Liabilities (1,290) (25,866) – – – (27,156) (27,692)<br />
Interest-bearing debt 28 – (15,733) – – – (15,733) (16,269)<br />
Trade and other payables 31 – (8,771) – – – (8,771) (8,771)<br />
Other financial liabilities 20 (1,290) – – – – (1,290) (1,290)<br />
Put option (Multi-Links) (919) – – – – (919) (919)<br />
Put option (Vodacom DRC) (198) – – – – (198) (198)<br />
Forward exchange contracts (173) – – – – (173) (173)<br />
Credit facilities utilised 21 – (1,342) – – – (1,342) (1,342)<br />
Shareholders for dividend 35 – (20) – – – (20) (20)<br />
* Trade and other receivables are disclosed net of prepayments of R307 million (2008: R404 million; 2007: R256 million).
13. FINANCIAL INSTRUMENTS AND RISK MANAGEMENT (continued)<br />
Risk management (continued)<br />
2007<br />
At fair<br />
value<br />
through<br />
profit or Financial<br />
loss liabilities at Total<br />
held for amortised Held-to- Available- Loans and carrying<br />
<strong>Telkom</strong> Annual Report 2009 179<br />
Notes to the consolidated annual financial statements (continued)<br />
for the three years ended March 31, 2009<br />
trading cost maturity for-sale receivables value Fair value<br />
Note Rm Rm Rm Rm Rm Rm Rm<br />
Classes of financial<br />
instruments per balance sheet<br />
Assets 1,608 – 246 47 7,861 9,762 9,762<br />
Investments 14 1,349 – – 47 65 1,461 1,461<br />
Trade and other receivables* 19 – – – – 7,047 7,047 7,047<br />
Other financial assets 20 259 – – – – 259 259<br />
Bills of exchange 98 – – – – 98 98<br />
Interest rate swaps 16 – – – – 16 16<br />
Forward exchange contracts 145 – – – – 145 145<br />
Finance lease receivables 16 – – 246 – – 246 246<br />
Cash and cash equivalents 21 – – – – 749 749 749<br />
Liabilities (327) (17,959) – – – (18,286) (19,676)<br />
Interest-bearing debt 28 (98) (10,266) – – – (10,364) (11,754)<br />
Trade and other payables 31 – (7,237) – – – (7,237) (7,237)<br />
Other financial liabilities 20 (229) – – – – (229) (229)<br />
Put option (Vodacom DRC) (125) – – – – (125) (125)<br />
Interest rate swaps (26) – – – – (26) (26)<br />
Forward exchange contracts (42) – – – – (42) (42)<br />
Other financial liabilities (36) – – – – (36) (36)<br />
Credit facilities utilised 21 – (441) – – – (441) (441)<br />
Shareholders for dividend 35 – (15) – – – (15) (15)<br />
* Trade and other receivables are disclosed net of prepayments of R307 million (2008: R404 million; 2007: R256 million).
180<br />
<strong>Telkom</strong> Annual Report 2009<br />
Notes to the consolidated annual financial statements (continued)<br />
for the three years ended March 31, 2009<br />
13. FINANCIAL INSTRUMENTS AND RISK MANAGEMENT (continued)<br />
13.1 Fair value of financial instruments<br />
Carrying value of all financial instruments noted in the balance sheet approximates fair value except as disclosed below.<br />
The estimated net fair values as at March 31, 2009, have been determined using available market information and appropriate valuation<br />
methodologies as outlined below.<br />
Derivatives are recognised at fair value.<br />
The fair values of derivatives are determined using quoted prices or, where such prices are not available, discounted cash flow analysis is<br />
used. These amounts reflect the approximate values of the net derivative position at the balance sheet date.<br />
The fair value of receivables, bank balances, repurchase agreements and other liquid funds, payables and accruals, approximate their fair<br />
amount due to the short-term maturities of these instruments.<br />
The fair values of the borrowings disclosed above are based on quoted prices or, where such prices are not available, the expected future<br />
payments discounted at market interest rates, as a result they differ from carrying values.<br />
The fair values of listed investments are based on quoted market prices.<br />
13.2 Interest rate risk management<br />
Interest rate risk arises from the repricing of the Group’s forward cover and floating rate debt as well as incremental funding or new<br />
borrowings and the refinancing of existing borrowings.<br />
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<br />
a cost efficient manner and to hedge specific exposure in the interest rate repricing profile of the existing borrowings and anticipated peak<br />
additional borrowings, the Group makes use of interest rate derivatives as approved in terms of the Group policy limits. Fixed rate debt<br />
represents approximately 64.86% (2008: 51.88%; 2007: 90.37%) of the total debt, after taking the instruments listed below into<br />
consideration. There were no changes in the policies and processes for managing and measuring the risk from the previous period.<br />
The table below summarises the interest rate swaps outstanding as at March 31:<br />
Notional Weighted<br />
Average amount average<br />
maturity Currency Rm coupon rate<br />
2009<br />
Interest rate swaps outstanding<br />
Pay fixed 2-5 years Z<strong>AR</strong> 2,000 10.84%<br />
2008<br />
Interest rate swaps outstanding<br />
Pay fixed < 1 year Z<strong>AR</strong> 27 13.62%<br />
Receive fixed 1-5 years Z<strong>AR</strong> 58 13.30%<br />
2007<br />
Interest rate swaps outstanding<br />
Pay fixed < 1 year Z<strong>AR</strong> 1,000 14.67%<br />
Receive fixed 1-5 years Z<strong>AR</strong> 38 11.45%<br />
Pay fixed<br />
>5 years Z<strong>AR</strong> 61 11.44%<br />
The floating rate is based on the three month JIB<strong>AR</strong>, and is settled quarterly in arrears. The interest rate swaps are used to manage interest<br />
rate risk on debt instruments.
13. FINANCIAL INSTRUMENTS AND RISK MANAGEMENT (continued)<br />
13.3 Credit risk management<br />
Credit risk is the risk due to uncertainty in a counterparty’s ability to meet its obligations as they fall due.<br />
<strong>Telkom</strong> Annual Report 2009 181<br />
Notes to the consolidated annual financial statements (continued)<br />
for the three years ended March 31, 2009<br />
Credit risk arises from derivative contracts entered into with financial institutions with a rating of A1 or better. The Group is not exposed to<br />
significant concentrations of credit risk. Credit limits are set on an individual basis. The maximum exposure to the Group from counterparties<br />
is a net favourable position of R29 million (2008: R438 million; 2007: R144 million). No collateral is required when entering into<br />
derivative contracts. Credit limits are reviewed on an annual basis or when information becomes available in the market. The Group limits<br />
the exposure to any counterparty and exposures are monitored daily. The Group expects that all counterparties will meet their obligations.<br />
With regard to credit risk arising from other financial assets of the Group, which comprises held-to-maturity investments, financial assets held<br />
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<br />
potential default by a counterparty, with a maximum exposure equal to the carrying amount of these instruments.<br />
The Group’s exposure to credit risk is influenced mainly by the individual characteristics of each type of customer. Management reduces<br />
the risk of irrecoverable debt by improving credit management through credit checks and limits. To reduce the risk of counterparty failure,<br />
limits are set based on the individual ratings of counterparties by well-known ratings agencies. Trade receivables comprise a large<br />
widespread customer base, covering residential, business, government, wholesale, global and corporate customer profiles.<br />
Credit checks are performed on all customers, other than prepaid customers, on application for new services on an ongoing basis where<br />
appropriate.<br />
The Group establishes an allowance for impairment that represents its estimate of incurred losses in respect of trade and other receivables.<br />
The collective loss allowance is determined based on historical data of payment statistics for similar financial assets as well as expected<br />
future cash flows. Refer to note 19.<br />
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<br />
(2008: R23 million; 2007: RNil).<br />
<strong>Telkom</strong> guarantees a certain portion of employees’ housing loans. The amount guaranteed differs depending on facts such as employment<br />
period and salary rates. When an employee leaves the employment of <strong>Telkom</strong>, any housing debt guaranteed by <strong>Telkom</strong> is settled before<br />
any pension payout can be made to the employee. There is no provision outstanding in respect of these contingencies. The maximum<br />
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:<br />
RNil; 2007: RNil).<br />
Given the deterioration of credit markets, stricter objectives, policies and processes were applied for managing and measuring the risk than<br />
in the previous period.
182<br />
<strong>Telkom</strong> Annual Report 2009<br />
Notes to the consolidated annual financial statements (continued)<br />
for the three years ended March 31, 2009<br />
13. FINANCIAL INSTRUMENTS AND RISK MANAGEMENT (continued)<br />
13.3 Credit risk management (continued)<br />
The maximum exposure to credit risk for financial assets at the reporting date by type of customer was:<br />
Trade receivables<br />
Carrying amount<br />
2007 2008 2009<br />
Rm Rm Rm<br />
Fixed-line 3,926 4,401 4,231<br />
Business and residential 1,924 1,824 1,870<br />
Global, corporate and wholesale 1,643 1,875 1,708<br />
Government 318 368 444<br />
Other customers 41 334 209<br />
Mobile 2,299 2,880 –<br />
Multi-Links – 38 72<br />
Other 567 666 720<br />
Impairment of trade receivables (235) (290) (324)<br />
Subtotal for trade receivables 6,557 7,695 4,699<br />
Other receivables* 490 887 974<br />
Other financial assets 259 614 1,202<br />
* Excluding prepayments.<br />
7,306 9,196 6,875<br />
The ageing of trade receivables at the reporting date was:<br />
Not past due/current 5,829 6,840 3,582<br />
Ageing of past due but not impaired<br />
21 to 60 days 331 384 441<br />
61 to 90 days 80 110 135<br />
91 to 120 days 59 71 84<br />
120+ days 258 290 457<br />
6,557 7,695 4,699<br />
The ageing in the allowance for the impairment of trade receivables<br />
at reporting date was:<br />
Fixed-line and other<br />
Current defaulted trade 24 53 70<br />
21 to 60 days 21 25 30<br />
61 to 90 days 19 31 19<br />
91 to 120 days 15 19 74<br />
120+ days 118 121 131<br />
197 249 324<br />
Mobile 38 41 –<br />
235 290 324
13. FINANCIAL INSTRUMENTS AND RISK MANAGEMENT (continued)<br />
13.3 Credit risk management (continued)<br />
The movement in the allowance for impairment in respect of trade receivables during the year is disclosed in note 19.<br />
<strong>Telkom</strong> Annual Report 2009 183<br />
Notes to the consolidated annual financial statements (continued)<br />
for the three years ended March 31, 2009<br />
Included in the allowance for doubtful debts are individually impaired receivables with a balance of R49 million (2008: R32 million; 2007:<br />
R49 million) which have been identified as being unable to service their debt obligation. The impairment recognised represents the<br />
difference between the carrying amount of these trade receivables and the present value of the expected liquidation proceeds. The Group<br />
does not hold any collateral over these balances.<br />
During the 2009 year end the Group renegotiated the terms of trade receivables amounting to R1,9 million from a long outstanding<br />
customer. No impairment losses were recognised.<br />
13.4 Liquidity risk management<br />
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<br />
risk as a result of uncertain cash flows as well as capital commitments. Liquidity risk is managed by the Group’s various Corporate Finance<br />
divisions in accordance with policies and guidelines formulated by the Group’s executive committees. In terms of its borrowing requirements<br />
the Group ensures that sufficient facilities exist to meet its immediate obligations. In terms of its long-term liquidity risk, the Group maintains<br />
a reasonable balance between the period over which assets generate funds and the period over which the respective assets are funded.<br />
Short-term liquidity gaps may be funded through repurchase agreements and commercial paper bills.<br />
There were no material changes in the exposure to liquidity risk and its objectives, policies and processes for managing and measuring<br />
the risk from the previous period.<br />
The table below summarises the maturity profile of the Group’s financial liabilities based on undiscounted contractual cash flow at the<br />
balance sheet date:<br />
Carrying Contractual 0 – 12 1 – 2 2 – 5 > 5<br />
amount cash flows months years years years<br />
Note Rm Rm Rm Rm Rm Rm<br />
2009<br />
Non-derivative financial liabilities<br />
Finance lease liabilities<br />
Interest-bearing debt (excluding<br />
38 986 1,848 165 172 516 995<br />
finance leases) 28 17,291 18,866 7,670 1,817 5,621 3,758<br />
Trade and other payables 31 5,538 5,778 5,778 – – –<br />
Credit facilities utilised<br />
Derivative financial liabilities<br />
21 127 127 127 – – –<br />
Other financial liabilities 20 228 228 156 72 – –<br />
Interest rate swaps 72 72 – 72 – –<br />
Forward exchange contracts 156 156 156 – – –<br />
24,170 26,847 13,896 2,061 6,137 4,753
184<br />
<strong>Telkom</strong> Annual Report 2009<br />
Notes to the consolidated annual financial statements (continued)<br />
for the three years ended March 31, 2009<br />
13. FINANCIAL INSTRUMENTS AND RISK MANAGEMENT (continued)<br />
13.4 Liquidity risk management (continued)<br />
Carrying Contractual 0 – 12 1 – 2 2 – 5 > 5<br />
amount cash flows months years years years<br />
Note Rm Rm Rm Rm Rm Rm<br />
2008<br />
Non-derivative financial liabilities<br />
Finance lease liabilities<br />
Interest-bearing debt (excluding finance<br />
38 1,167 2,198 257 202 589 1,150<br />
leases) 28 14,566 16,672 6,350 4,835 2,733 2,754<br />
Trade and other payables 31 8,771 8,771 8,771 – – –<br />
Credit facilities utilised<br />
Derivative financial liabilities<br />
21 1,342 1,342 1,342 – – –<br />
Other financial liabilities 20 1,290 1,290 371 919 – –<br />
Put option (Multi-Links) 919 919 – 919 – –<br />
Put option (Vodacom DRC) 198 198 198 – – –<br />
Forward exchange contracts 173 173 173 – – –<br />
27,136 30,273 17,091 5,956 3,322 3,904<br />
2007<br />
Non-derivative financial liabilities<br />
Finance lease liabilities<br />
Interest-bearing debt (excluding<br />
38 1,220 2,424 231 276 585 1,332<br />
finance leases) 28 9,144 11,329 6,133 1 2,551 2,644<br />
Trade and other payables 31 7,237 7,237 7,237 – – –<br />
Credit facilities utilised<br />
Derivative financial liabilities<br />
21 441 441 441 – – –<br />
Other financial liabilities 20 229 229 229 – – –<br />
Put option (Vodacom DRC) 125 125 125 – – –<br />
Interest rate swaps 26 26 26 – – –<br />
Forward exchange contracts 42 42 42 – – –<br />
Other financial liability 36 36 36 – – –<br />
18,271 21,660 14,271 277 3,136 3,976
13. FINANCIAL INSTRUMENTS AND RISK MANAGEMENT (continued)<br />
13.5 Foreign currency exchange rate risk management<br />
<strong>Telkom</strong> Annual Report 2009 185<br />
Notes to the consolidated annual financial statements (continued)<br />
for the three years ended March 31, 2009<br />
The Group manages its foreign currency exchange rate risk by economically hedging all identifiable exposures via various financial<br />
instruments suitable to the Group’s risk exposure.<br />
Forward exchange contracts have been entered into to reduce the foreign currency exposure on the Group’s operations and liabilities. The<br />
Group also enters into foreign forward exchange contracts to economically hedge interest expense and purchase and sale commitments<br />
denominated in foreign currencies (primarily United States dollars and euros). The purpose of the Group’s foreign currency hedging activities<br />
is to protect the Group from the risk that the eventual net cash flows will be adversely affected by changes in exchange rates.<br />
There were no changes in the exposure to foreign currency exchange rate risk and its objectives, policies and processes for managing and<br />
measuring the risk from the previous period.<br />
The following table details the foreign forward exchange contracts outstanding at year end:<br />
Foreign<br />
contract Forward<br />
amount amount Fair value<br />
To buy m Rm Rm<br />
2009<br />
Currency<br />
US$ 155 1,477 14<br />
Euro 92 1,205 (24)<br />
Other 36 69 (3)<br />
2008<br />
Currency<br />
US$ 139 1,042 109<br />
Euro 252 2,826 444<br />
Pound Sterling 19 281 30<br />
Other 31 32 6<br />
2007<br />
Currency<br />
US$ 181 1,329 (1)<br />
Euro 196 1,899 23<br />
Pound Sterling 19 261 6<br />
Other 66 49 (1)<br />
2,751<br />
4,181<br />
3,538
186<br />
<strong>Telkom</strong> Annual Report 2009<br />
Notes to the consolidated annual financial statements (continued)<br />
for the three years ended March 31, 2009<br />
13. FINANCIAL INSTRUMENTS AND RISK MANAGEMENT (continued)<br />
13.5 Foreign currency exchange rate risk management (continued)<br />
Foreign<br />
contract Forward<br />
amount amount Fair value<br />
To sell m Rm Rm<br />
2009<br />
Currency<br />
US$ 99 947 (22)<br />
Euro 35 485 28<br />
Other 21 43 4<br />
2008<br />
Currency<br />
US$ 78 596 (68)<br />
Euro 73 848 (103)<br />
Pound Sterling 5 89 (1)<br />
Other 17 22 (1)<br />
2007<br />
Currency<br />
US$ 122 994 88<br />
Euro 52 505 (5)<br />
Pound Sterling 4 51 1<br />
Other 29 17 –<br />
The Group has various monetary assets and liabilities in currencies other than the Group’s functional currency. The following table represents<br />
the net currency exposure (net carrying amount of foreign denominated monetary assets and liabilities) of the Group according to the<br />
different foreign currencies.<br />
1,475<br />
1,555<br />
1,567<br />
South United<br />
African Pound States<br />
Rand Euro Sterling Dollar Other<br />
Rm Rm Rm Rm Rm<br />
2009<br />
Net foreign currency monetary assets/(liabilities)<br />
Functional currency of company operation<br />
South African rand – 204 – 650 19<br />
Naira – – – (1,611) –<br />
2008<br />
Net foreign currency monetary assets/(liabilities)<br />
Functional currency of company operation<br />
South African Rand – 481 (133) 224 (13)<br />
United States Dollar – 8 – – (17)<br />
Naira – – – (446) –
13. FINANCIAL INSTRUMENTS AND RISK MANAGEMENT (continued)<br />
13.5 Foreign currency exchange rate risk management (continued)<br />
South United<br />
African Pound States<br />
<strong>Telkom</strong> Annual Report 2009 187<br />
Notes to the consolidated annual financial statements (continued)<br />
for the three years ended March 31, 2009<br />
Rand Euro Sterling Dollar Other<br />
Rm Rm Rm Rm Rm<br />
2007<br />
Net foreign currency monetary assets/(liabilities)<br />
Functional currency of company operation<br />
South African rand – 475 (166) 159 32<br />
United States dollar 26 (25) – – (17)<br />
Currency swaps<br />
There were no currency swaps in place at March 31, 2009, 2008 and 2007.<br />
13.6 Sensitivity analysis<br />
Interest rate risk<br />
The following table illustrates the sensitivity to a reasonably possible change in the interest rates, with all other variables held constant:<br />
+1% movement –1% movement<br />
Other Other<br />
movements movements<br />
Profit in equity Profit in equity<br />
Rm Rm Rm Rm<br />
2009<br />
Classes of financial instruments per balance sheet<br />
Assets<br />
Trade and other receivables 5 – (5) –<br />
Other financial assets 28 – (28) –<br />
Interest rate swaps 18 – (18) –<br />
Repurchase agreements 10 – (10) –<br />
Liabilities<br />
Interest-bearing debt (67) – 67 –<br />
Other financial liabilities 15 – (15) –<br />
Interest rate swaps 15 – (15) –<br />
(19) – 19 –
188<br />
<strong>Telkom</strong> Annual Report 2009<br />
Notes to the consolidated annual financial statements (continued)<br />
for the three years ended March 31, 2009<br />
13. FINANCIAL INSTRUMENTS AND RISK MANAGEMENT (continued)<br />
13.6 Sensitivity analysis (continued)<br />
Interest rate risk (continued)<br />
+1% movement –1% movement<br />
Other Other<br />
movements movements<br />
Profit in equity Profit in equity<br />
Rm Rm Rm Rm<br />
2008<br />
Classes of financial instruments per balance sheet<br />
Assets<br />
Trade and other receivables<br />
Liabilities<br />
5 – (5) –<br />
Interest-bearing debt (62) – 62 –<br />
(57) – 57 –<br />
2007<br />
Classes of financial instruments per balance sheet<br />
Assets<br />
Trade and other receivables<br />
Liabilities<br />
4 – (4) –<br />
Interest-bearing debt (1) – 1 –<br />
Other financial liabilities 2 – (2) –<br />
Forward exchange contract 2 – (2)<br />
5 – (5) –<br />
Foreign exchange currency risk<br />
The following table illustrates the sensitivity to a reasonably possible change in the exchange rates, with all other variables held constant.<br />
+10% movement –10% movement<br />
(depreciation) (appreciation)<br />
Other Other<br />
movements movements<br />
Profit in equity Profit in equity<br />
Rm Rm Rm Rm<br />
2009<br />
Classes of financial instruments per balance sheet<br />
Assets<br />
Trade and other receivables 40 – (40)<br />
Other financial assets 1 – (1) –<br />
Forward exchange contract 1 – (1) –<br />
Liabilities<br />
Interest-bearing debt (70) – 70 –<br />
Trade and other payables (173) – 173 –<br />
Other financial liabilities 128 – (128) –<br />
Forward exchange contract 128 – (128) –<br />
(74) – 74 –
13. FINANCIAL INSTRUMENTS AND RISK MANAGEMENT (continued)<br />
13.6 Sensitivity analysis (continued)<br />
Foreign exchange currency sensitivity (continued)<br />
<strong>Telkom</strong> Annual Report 2009 189<br />
Notes to the consolidated annual financial statements (continued)<br />
for the three years ended March 31, 2009<br />
+10% movement –10% movement<br />
(depreciation) (appreciation)<br />
Other Other<br />
movements movements<br />
Profit in equity Profit in equity<br />
Rm Rm Rm Rm<br />
2008<br />
Classes of financial instruments per balance sheet<br />
Assets<br />
Trade and other receivables 10 – (10) –<br />
Other financial assets 331 – (331) –<br />
Forward exchange contract 331 – (331) –<br />
Liabilities<br />
Interest-bearing debt 68 – (68) –<br />
Trade and other payables (95) – 95 –<br />
Other financial liabilities (153) – 153 –<br />
Forward exchange contract (153) – 153 –<br />
161 – (161) –<br />
2007<br />
Classes of financial instruments per balance sheet<br />
Assets<br />
Trade and other receivables 10 – (10) –<br />
Other financial assets 74 – (74) –<br />
Forward exchange contract 74 – (74) –<br />
Liabilities<br />
Interest-bearing debt 10 – (10) –<br />
Trade and other payables (40) – 40 –<br />
Other financial liabilities 11 – (11) –<br />
Forward exchange contract 11 – (11) –<br />
45 – (45) –
190<br />
<strong>Telkom</strong> Annual Report 2009<br />
Notes to the consolidated annual financial statements (continued)<br />
for the three years ended March 31, 2009<br />
13. FINANCIAL INSTRUMENTS AND RISK MANAGEMENT (continued)<br />
13.7 Exchange rate table (closing rate)<br />
2007 2008 2009<br />
R R R<br />
United States Dollar 7.248 8.132 9.484<br />
Euro 9.649 12.854 12.617<br />
Pound Sterling 14.189 16.166 13.555<br />
Swedish Krona 1.033 1.370 1.153<br />
Japanese Yen 0.061 0.082 0.097<br />
13.8 Capital management<br />
The Group’s policy is to maintain a strong capital base so as to sustain investor, creditor and market confidence and to sustain future<br />
development of the business. Capital comprises equity attributable to equity holders of <strong>Telkom</strong>. The Group monitors capital using net debt<br />
to EBITDA ratio. <strong>Telkom</strong>’s policy is to keep the net debt to EBITDA ratio between 1 and 2 times. Included in net debt are interest-bearing<br />
loans and borrowings, credit facilities and other financial liabilities, less cash and cash equivalents and other financial assets.<br />
<strong>Telkom</strong> plans on continuing its share buy-back strategy based on certain criteria, including market conditions, availability of cash and other<br />
investment opportunities and needs.<br />
All of <strong>Telkom</strong>’s issued and outstanding ordinary shares, including the class A ordinary share and the class B ordinary share, rank equal for<br />
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<br />
declared to holders of all ordinary shares. <strong>Telkom</strong>’s current dividend policy aims to provide shareholders with a competitive return on their<br />
investment, while assuring sufficient reinvestment of profits to enable the Group to achieve its strategy. <strong>Telkom</strong> may revise its dividend policy<br />
from time to time. The determination to pay dividends and the amount of the dividends, will depend upon, among other things, the earnings,<br />
financial position, capital requirements, general business conditions, cash flows, net debt levels and share buy-back plans.<br />
The Group has access to financing facilities; the total unused amount is R6,237 million (2008: R7,565 million; 2007: R8,658 million) at<br />
the balance sheet date.<br />
There were no changes in the Group’s approach to capital management during the year.<br />
Neither the Group nor any of its subsidiaries are subject to externally imposed capital requirements.<br />
The net debt to EBITDA ratio is as follows:<br />
2007 2008 2009<br />
Rm Rm Rm<br />
Non-current portion of interest-bearing debt 4,338 9,403 10,653<br />
Current portion of interest -bearing debt 6,026 6,330 7,622<br />
Credit facilities utilised 441 1,342 127<br />
Non-current portion of other financial liabilities 36 919 –<br />
Current portion of other financial liabilities 193 371 228<br />
Less: Cash and cash equivalents (749) (1,134) (1,931)<br />
Less: Other financial assets (259) (614) (1,202)<br />
Net debt 10,026 16,617 15,497<br />
EBITDA 13,352 13,203 11,668<br />
Net debt to EBITDA ratio 0.75 1.26 1.33
<strong>Telkom</strong> Annual Report 2009 191<br />
Notes to the consolidated annual financial statements (continued)<br />
for the three years ended March 31, 2009<br />
2007 2008 2009<br />
Rm Rm Rm<br />
14. INVESTMENTS 1,384 1,444 1,383<br />
Available-for-sale 47 55 –<br />
Unlisted investments<br />
Rascom – – –<br />
WBS Holdings (Proprietary) Limited<br />
2 500 ordinary shares at R0.01 each<br />
40 23 –<br />
Other investments 7 32 –<br />
Loans and receivables 65 63 97<br />
Mirambo Limited – 60 –<br />
Planetel Communications Limited 25 – –<br />
Caspian Limited 29 – –<br />
Number Portability Company (Proprietary) Limited 3 3 –<br />
Sekha-Metsi Investment Consortium Limited 8 – –<br />
Empresa Mocambicana de Telecommunicacoes S.A.R.L. (’Emotel’) – 4 –<br />
Other unlisted investments – – 97<br />
At fair value through profit or loss 1,349 1,377 1,286<br />
Linked insurance policies – Coronation 1,280 1,291 1,286<br />
Other money market investments 69 51 –<br />
Other unlisted investments – 35 –<br />
Less: Short-term investments (77) (51) –<br />
Sekha-Metsi Investment Consortium Limited (8) – –<br />
WBS Holdings (Proprietary) Limited (included in other unlisted investments) – (13) –<br />
Other money market investments (69) (38) –<br />
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<br />
medical aid liability. These investments are made through a cell captive, in which <strong>Telkom</strong> holds 100% of the preference shares of the<br />
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<br />
(2008: R535 million; 2007: R535 million). <strong>Telkom</strong> bears all the risks and rewards of the investment, as the returns/losses on the preference<br />
shares are dependent on the performance of the underlying investments made by the cell captive. On this basis <strong>Telkom</strong> as the preference<br />
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<br />
risks and rewards. The cell captive has been consolidated in full.
192<br />
<strong>Telkom</strong> Annual Report 2009<br />
Notes to the consolidated annual financial statements (continued)<br />
for the three years ended March 31, 2009<br />
15. DEFERRED REVENUE AND DEFERRED EXPENSES<br />
2007 2008 2009<br />
Rm Rm Rm<br />
Deferred revenue 3,004 3,721 2,711<br />
Non-current deferred revenue 1,021 1,128 997<br />
Current portion of deferred revenue 1,983 2,593 1,714<br />
Deferred expenses 557 583 55<br />
Non-current deferred expenses 270 221 55<br />
Current portion of deferred expenses 287 362 –<br />
Included in non-current deferred expenses and revenue for the financial<br />
year end March 31, 2008 and 2007 is Vodacom unactivated starter packs.<br />
16. FINANCE LEASE RECEIVABLES<br />
The Group provides voice and non-voice services to its customers, which make use of router and PABX equipment that is dedicated to<br />
specific customers. The disclosed information relates to those arrangements which were assessed to be finance leases in terms of IAS17.<br />
Total < 1 year 1 – 5 years > 5 years<br />
Rm Rm Rm Rm<br />
2009<br />
Minimum lease payments<br />
Lease payments receivable 360 142 219 –<br />
Unearned finance income (85) (33) (53) –<br />
Present value of minimum lease payments 275 109 166 –<br />
Lease receivables 275 109 166 –<br />
2008<br />
Minimum lease payments<br />
Lease payments receivable 452 196 256 –<br />
Unearned finance income (80) (30) (50) –<br />
Present value of minimum lease payments 372 166 206 –<br />
Lease receivables 372 166 206 –<br />
2007<br />
Minimum lease payments<br />
Lease payments receivable 312 110 202 –<br />
Unearned finance income (66) (22) (44) –<br />
Present value of minimum lease payments 246 88 158 –<br />
Lease receivables 246 88 158 –
<strong>Telkom</strong> Annual Report 2009 193<br />
Notes to the consolidated annual financial statements (continued)<br />
for the three years ended March 31, 2009<br />
2007 2008 2009<br />
Rm Rm Rm<br />
17. DEFERRED TAXATION (1,123) (1,374) (1,068)<br />
Opening balance (587) (1,123) (1,374)<br />
Transferred to disposal group – – 281<br />
Income statement movements (516) (219) 164<br />
Temporary differences (515) (331) (152)<br />
(Underprovision)/overprovision prior year (1) 53 (138)<br />
Capital gains taxation asset – – 454<br />
Change in taxation rate – 59 –<br />
Business combinations (16) (65) (137)<br />
Foreign currency translation reserve and foreign equity revaluation (4) 33 (2)<br />
The balance comprises: (1,123) (1,374) (1,067)<br />
Capital allowances (3,325) (3,841) 3,210)<br />
Provisions and other allowances 1,719 2,008 1,416<br />
Taxation losses 113 276 –<br />
Capital gains taxation asset – – 454<br />
STC taxation credits 370 183 273<br />
Deferred taxation balance is made up as follows: (1,123) (1,374) (1,067)<br />
Deferred taxation assets 593 605 756<br />
Deferred taxation liabilities (1,716) (1,979) (1,823)<br />
Unutilised STC credits 2,958 1,830 2,730<br />
Secondary taxation on companies (STC) is provided for a rate of<br />
10% on the amount by which dividends declared by <strong>Telkom</strong><br />
exceeds dividends received. The deferred taxation asset is raised as it is<br />
probable that it will be utilised in future. The asset will be released as a<br />
taxation expense when dividends are declared.<br />
The deferred taxation asset represents STC credits on past dividends<br />
received that are available to be utilised against dividends declared.<br />
The deferred taxation asset also includes deferred taxation on temporary<br />
differences arising on investments that were classified as held for sale in<br />
the period as well as STC credits on past dividends received.<br />
18. INVENTORIES 1,093 1,287 1,974<br />
Gross inventories 1,275 1,535 2,165<br />
Write-down of inventories to net realisable value (182) (248) (191)<br />
Inventories consist of the following categories: 1,093 1,287 1,974<br />
Installation material, maintenance material and network equipment 811 895 1,051<br />
Merchandise 282 392 923<br />
Write-down of inventories to net realisable value 182 248 191<br />
Opening balance 102 182 248<br />
Transferred to disposal group – – (50)<br />
Charged to selling, general and administrative expenses 154 164 167<br />
Inventories written-off (74) (98) (174)<br />
Inventory levels as at March 31, 2009, 2008 and 2007 have increased due to the accelerated roll-out of the Next Generation Network<br />
required to improve customer service, and the acquisition of merchandise for the W-CDMA roll-out.
194<br />
<strong>Telkom</strong> Annual Report 2009<br />
Notes to the consolidated annual financial statements (continued)<br />
for the three years ended March 31, 2009<br />
2007 2008 2009<br />
Rm Rm Rm<br />
19. TRADE AND OTHER RECEIVABLES 7,303 8,986 5,980<br />
Trade receivables 6,557 7,695 4,698<br />
Gross trade receivables 6,792 7,985 5,022<br />
Impairment of receivables (235) (290) (324)<br />
Prepayments and other receivables 746 1,291 1,282<br />
Impairment allowance account for receivables 235 290 324<br />
Opening balance 290 235 290<br />
Charged to selling, general and administrative expenses 153 300 368<br />
Receivables written-off (208) (245) (334)<br />
Refer to note 13 for detailed credit risk analysis.<br />
20. OTHER FINANCIAL ASSETS AND LIABILITIES<br />
Other financial assets consist of: 259 614 1,202<br />
Held-to-maturity<br />
Repurchase agreements – – 1,046<br />
At fair value through profit or loss 259 614 156<br />
Bills of exchange 98 – –<br />
Interest rate swaps 16 9 4<br />
Forward exchange contracts 145 589 152<br />
Other financial assets – 16 –<br />
Repurchase agreements<br />
<strong>Telkom</strong> manages a portfolio of repurchase agreements in the South<br />
African capital and money markets, with a view to generating additional<br />
investment income on the favourable interest rates provided on these<br />
transactions. Interest received from the borrower is based on the current<br />
market related yield. There were no repurchase agreements held at<br />
March 31, 2008 and 2007.<br />
Bills of exchange<br />
The fair value of bills of exchange has been calculated at with reference<br />
to the Bond Exchange of South Africa quoted prices.<br />
Other financial liabilities consist of: (229) (1,290) (228)<br />
Non-current portion of other financial liabilities<br />
Other (36) – –<br />
Put option at fair value through profit or loss<br />
Current portion of other financial liabilities<br />
– (919) –<br />
At fair value through profit or loss (193) (371) (228)<br />
Put option at fair value through profit or loss (125) (198) –<br />
Interest rate swaps (26) – (72)<br />
Forward exchange contracts (42) (173) (156)
<strong>Telkom</strong> Annual Report 2009 195<br />
Notes to the consolidated annual financial statements (continued)<br />
for the three years ended March 31, 2009<br />
2007 2008 2009<br />
Rm Rm Rm<br />
21. NET CASH AND CASH EQUIVALENTS 308 (208) 1,282<br />
Net cash and cash equivalents attributable to continuing operations 308 (208) 1,804<br />
Cash shown as current assets 749 1,134 1,931<br />
Cash and bank balances 649 664 1,361<br />
Short-term deposits 100 470 570<br />
Credit facilities utilised (441) (1,342) (127)<br />
Net cash and cash equivalents attributable to disposal groups – – (522)<br />
Cash at banks and short-term deposits attributable to disposal groups – – 580<br />
Credit facilities utilised – – (1,102)<br />
Undrawn borrowing facilities 8,658 7,565 6,237<br />
The undrawn borrowing facilities are unsecured, when drawn bear interest at a rate that will be mutually agreed between the borrower<br />
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<br />
liquidity. At March 31, 2009, R3,000 million of these undrawn facilities were committed by <strong>Telkom</strong>.<br />
Borrowing powers<br />
To borrow money, <strong>Telkom</strong>’s directors may mortgage or encumber <strong>Telkom</strong>’s property or any part thereof and issue debentures, whether<br />
secured or unsecured, whether outright or as security for debt, liability or obligation of <strong>Telkom</strong> or any third party. For this purpose the<br />
borrowing powers of <strong>Telkom</strong> are unlimited, but are subject to the restrictive financial covenants of the loan facilities indicated on note 28.
196<br />
<strong>Telkom</strong> Annual Report 2009<br />
Notes to the consolidated annual financial statements (continued)<br />
for the three years ended March 31, 2009<br />
22. SH<strong>AR</strong>E CAPITAL<br />
Authorised and issued share capital is made up as follows:<br />
2007 2008 2009<br />
Rm Rm Rm<br />
Authorised 10,000 10,000 10,000<br />
999,999,998 ordinary shares of R10 each 10,000 10,000 10,000<br />
1 class A ordinary share of R10 – – –<br />
1 class B ordinary share of R10 – – –<br />
Issued and fully paid 5,329 5,208 5,208<br />
520,783,898 (2008: 520,784,184; 2007: 532,855,528)<br />
ordinary shares of R10 each 5,329 5,208 5,208<br />
1 (2008: 1; 2007: 1) class A ordinary share of R10 – – –<br />
1 (2008: 1; 2007: 1) class B ordinary share of R10 – – –<br />
The following table illustrates the movement within the number of shares issued:<br />
Number of Number of Number of<br />
shares shares shares<br />
Shares in issue at beginning of year 544,944,901 532,855,530 520,784,186<br />
Shares bought back and cancelled (12,089,371) (12,071,344) (286)<br />
Shares in issue at end of year 532,855,530 520,784,186 520,783,900<br />
Full details of the voting rights of ordinary, class A and class B shares are documented in the articles of association of <strong>Telkom</strong>.<br />
Share buy-back<br />
During the financial year <strong>Telkom</strong> bought back 286 ordinary shares at a total consideration of R30,425. The shares were bought back and<br />
cancelled in order to allow <strong>Telkom</strong> shareholders to participate in the proposed unbundling of Vodacom Group on a one to one basis. This<br />
reduced share capital by R2,860 and retained earnings by R27,565.<br />
During the financial year ended March 31, 2008, <strong>Telkom</strong> bought back 12,071,344 ordinary shares at a total consideration of<br />
R1,647 million. This reduced share capital by R121 million and retained earnings by R1,526 million.<br />
During the financial year ended March 31, 2007, <strong>Telkom</strong> bought back 12,089,371 ordinary shares at a total consideration of<br />
R1,596 million. This reduced share capital by R120 million, share premium by R1,342 million and retained earnings by R134 million.<br />
Capital management<br />
Refer to note 13 for detailed capital management disclosure.
<strong>Telkom</strong> Annual Report 2009 197<br />
Notes to the consolidated annual financial statements (continued)<br />
for the three years ended March 31, 2009<br />
2007 2008 2009<br />
Rm Rm Rm<br />
23. TREASURY SH<strong>AR</strong>E RESERVE (1,774) (1,638) (1,517)<br />
This reserve represents amounts paid by <strong>Telkom</strong> to Rossal No 65<br />
(Proprietary) Limited and Acajou Investments (Proprietary) Limited,<br />
subsidiaries, for the acquisition of <strong>Telkom</strong>’s shares to be utilised in terms<br />
of the <strong>Telkom</strong> Conditional Share Plan (’TCSP’).<br />
At March 31, 2009, 11,646,680 (2008: 10,493,141;<br />
2007: 12,237,016) and 8,143,556 (2008: 10,849,058;<br />
2007: 10,849,058) ordinary shares in <strong>Telkom</strong>, with a fair value of<br />
R1,229 million (2008: R1,377 million; 2007: R2,031 million) and<br />
R859 million (2008: R1,423 million; 2007: R1,801 million) are held<br />
as treasury shares by its subsidiaries Rossal No 65 (Proprietary) Limited<br />
and Acajou Investments (Proprietary) Limited, respectively.<br />
The shares held by Rossal No 65 (Proprietary) Limited and Acajou<br />
Investments (Proprietary) Limited are reserved for issue in terms of the<br />
<strong>Telkom</strong> Conditional Share Plan (’TCSP’).<br />
The reduction in the number of treasury shares is due to 1,552,029<br />
(2008: 1,743,785; 2007: 450,505) shares that vested in terms<br />
of the TCSP during the year.<br />
The fair value of these shares at the date of vesting was R228 million<br />
(2008: R301 million; 2007: R63 million).<br />
24. SH<strong>AR</strong>E-BASED COMPENSATION RESERVE<br />
This reserve represents the cumulative grant date fair value of the equitysettled<br />
share-based payment transactions recognised in employee<br />
expenses during the vesting period of the equity instruments granted to<br />
employees in terms of the <strong>Telkom</strong> Conditional Share Plan (refer to note 30).<br />
No consideration is payable on the shares issued to employees, but<br />
performance criteria will have to be met in order for the granted shares<br />
to vest. The ultimate number of shares that will vest may differ based on<br />
certain individual and <strong>Telkom</strong> performance conditions being met. The<br />
related compensation expense is recognised over the vesting period of<br />
shares granted, commencing on the grant date.<br />
The following table illustrates the movement within the share-based<br />
compensation reserve:<br />
Balance at beginning of year 151 257 643<br />
Net increase in equity 106 386 433<br />
Employee cost 141 522 554<br />
Vesting and transfer of shares (35) (136) (121)<br />
Balance at end of year 257 643 1,076<br />
At March 31, 2009 the estimated total compensation expense to be recognised over the vesting period was R1,824 million (2008:<br />
R2,151 million; 2007: R580 million), of which R554 million (2008: R522 million; 2007: R141 million) was recognised in employee<br />
expenses for the year.
198<br />
<strong>Telkom</strong> Annual Report 2009<br />
Notes to the consolidated annual financial statements (continued)<br />
for the three years ended March 31, 2009<br />
2007 2008 2009<br />
Rm Rm Rm<br />
25. NON-DISTRIBUTABLE RESERVES 1,413 1,292 1,758<br />
Opening balance 1,128 1,413 1,292<br />
Transferred to disposal groups (4)<br />
Movement during the year 285 (121) 470<br />
Foreign currency translation reserve (net of taxation of R6 million<br />
(2008: R6 million; 2007: R4 million) 46 521 (181)<br />
Minority put option – (661) 661<br />
Revaluation of an available-for-sale investment (net of taxation of R1 million)<br />
Available-for-sale financial asset<br />
– 8 –<br />
Life fund reserve (cell captive) 239 11 (10)<br />
The balance comprises: 1,413 1,292 1,758<br />
Foreign currency translation reserve (58) 463 286<br />
Cell captive reserve 1,471 1,482 1,472<br />
Available-for-sale investment – 8 –<br />
Minority put option – (661) –<br />
The Group has a consolidated cell captive, used as an investment to fund<br />
<strong>Telkom</strong>’s post-retirement medical aid liability.<br />
The earnings from the cell captive are recognised in the income statement<br />
and then transferred to non-distributable reserves.<br />
Gains and losses from changes in the fair value of available-for-sale<br />
investments are recognised directly in equity until the financial asset<br />
is disposed of.<br />
26. RETAINED E<strong>AR</strong>NINGS 26,499 27,310 28,852<br />
Opening balance 22,904 26,499 27,310<br />
Movement during year 3,729 2,337 1,542<br />
Net profit for the year 8,646 7,975 4,171<br />
Transfer to non-distributable reserves (refer to note 25) (239) (11) 10<br />
Premium on acquisition of minority interest in Multi-Links – – 667<br />
Dividend declared (refer to note 35) (4,678) (5,627) (3,306)<br />
Shares bought back (refer to note 22) (134) (1,526) –<br />
The balance comprises: 26,499 27,310 28,852<br />
Company 21,906 22,484 24,323<br />
Joint venture 4,762 5,697 6,132<br />
Subsidiaries 786 428 223<br />
Eliminations (955) (1,299) (1,826)
<strong>Telkom</strong> Annual Report 2009 199<br />
Notes to the consolidated annual financial statements (continued)<br />
for the three years ended March 31, 2009<br />
2007 2008 2009<br />
Rm Rm Rm<br />
27. MINORITY INTEREST 284 522 853<br />
Opening balance 301 284 522<br />
Movement during the year (17) 238 331<br />
Reconciliation: 284 522 853<br />
Balance at beginning of year 301 284 522<br />
Share of earnings 203 197 77<br />
Acquisition of subsidiaries and minority interests (68) 77 –<br />
Foreign currency translation reserves 14 29 16<br />
Dividend declared (166) (65) (33)<br />
Broad-based black economic empowerment transaction in Vodacom – – 271<br />
28. INTEREST-BE<strong>AR</strong>ING DEBT<br />
Non-current interest-bearing debt 4,338 9,403 10,653<br />
Total interest-bearing debt (refer to note 13) 10,364 15,733 18,275<br />
Gross interest-bearing debt 12,549 17,839 19,851<br />
Discount on debt instruments issued (2,185) (2,106) (1,576)<br />
Less: Current portion of interest-bearing debt (6,026) (6,330) (7,622)<br />
Local debt (5,772) (6,001) (7,546)<br />
Locally registered <strong>Telkom</strong> debt instruments (4,432) – (2,000)<br />
Commercial paper bills (1,339) (3,401) (5,546)<br />
Short-term interest-free loans (1) – –<br />
Call borrowings – (2,600) –<br />
Foreign debt (193) (202) (40)<br />
Finance leases (61) (124) (36)<br />
Licence obligation – (3) –
200<br />
<strong>Telkom</strong> Annual Report 2009<br />
Notes to the consolidated annual financial statements (continued)<br />
for the three years ended March 31, 2009<br />
28. INTEREST-BE<strong>AR</strong>ING DEBT (continued)<br />
2007 2008 2009<br />
Rm Rm Rm<br />
Total interest-bearing debt is made up as follows: 10,364 15,733 18,275<br />
(a) Local debt 8,131 12,923 16,660<br />
Locally registered <strong>Telkom</strong> debt instruments 6,786 8,164 11,106<br />
Name, maturity, rate p.a., nominal value<br />
TK01, 2009, 10%, RNil (2008: RNil;<br />
2007: R4,680 million) 4,432 – –<br />
TL12, 2012, 12.45%, R1,060 million (2008: RNil;<br />
2007: RNil) – – 1,059<br />
TL15, 2015, 11.9%, R1,160 million (2008: RNil;<br />
2007: RNil) – – 1,159<br />
TL20, 2020, 6%, R2,500 million (2008: R2,500 million;<br />
2007: R2,500 million) 1,246 1,283 1,325<br />
PP02, 2010, 0%, R430 million (2008: R430 million;<br />
2007: R430 million) 264 304 349<br />
PP03, 2010, 0%, R1,350 million (2008: R1,350 million;<br />
2007: R1,350 million) 844 977 1,131<br />
Call borrowings, 2009, 11.58%, RNil (2008: R2,600 million;<br />
2007: RNil) – 2,600 –<br />
Term loans, 2010, 9.67%, R2,000 million (2008: R3,000 million;<br />
2007: RNil) – 3,000 2,000<br />
Syndicated loans, 2014, 11.46%, R4,100 million (2008: RNil;<br />
2007: RNil) – – 4,083<br />
Total interest-bearing debt is made up of R18,275 million debt at<br />
amortised cost (2008: R15,733 million debt at amortised cost;<br />
2007: R10,266 million debt at amortised cost and R98 million debt<br />
at fair value through profit and loss).<br />
Local bonds<br />
The local <strong>Telkom</strong> bonds are unsecured, but a Side letter to the<br />
Subscription Agreement (as amended) of the TL20 bond contains a<br />
number of restrictive covenants, which, if not met, could result in the<br />
early redemption of the loan. The local bonds limit <strong>Telkom</strong>’s ability to<br />
create encumbrances on revenue or assets, and secure any indebtedness<br />
without securing the outstanding bonds equally and rateably with such<br />
indebtedness. The Term loan agreements limit <strong>Telkom</strong>’s ability to encumber,<br />
cede, assign, sell or otherwise dispose of a material portion of its assets<br />
without prior written consent of the Lenders, which will not be<br />
unreasonably withheld. The syndicated loan agreement contains<br />
restrictive covenants as well as restrictions on encumbrances,<br />
disposals, Group guarantees and Group loans.<br />
Commercial paper bills<br />
Rate p.a., nominal value<br />
2009, 11.44% (2008: 11.71%; 2007: 9.04%), R5,559 million<br />
(2008: R4,383 million; 2007: R1,350 million)<br />
1,339 4,202 5,546<br />
Asset Backed Arbitraged Securities (Proprietary) Limited – 500 –<br />
Licence obligation – 47 –<br />
Other debt 6 10 8
28. INTEREST-BE<strong>AR</strong>ING DEBT (continued)<br />
<strong>Telkom</strong> Annual Report 2009 201<br />
Notes to the consolidated annual financial statements (continued)<br />
for the three years ended March 31, 2009<br />
2007 2008 2009<br />
Rm Rm Rm<br />
(b) Foreign debt 1,013 1,643 629<br />
Maturity, rate p.a., nominal value 106 141 138<br />
Euro: 2010 – 2025, 0.10% – 0.14% (2008: 0.10% – 0.14%;<br />
2007: 0.10% – 0.14%), e11 million (2008: e11 million;<br />
2007: e11 million)<br />
Interest-bearing debt held in Vodacom disposal group<br />
The local and foreign debt, for both the non-current and current portion,<br />
is disclosed in note 9.2 in the disposal group.<br />
907 957 –<br />
Zenith Bank<br />
Multi-Links Telecommunications Limited took out a loan with Zenith Bank.<br />
The original loan amounted to US$14 million against which full repayments<br />
were made in 2009. The loan bore interest at LIBOR plus 3.5%.<br />
– 45 –<br />
FCMB loan<br />
Multi-Links Telecommunications Limited took out a FCMB loan.The original<br />
loan amounted to naira 1,500 million against which full repayments were<br />
made in 2009. The loan bore interest at 13%.<br />
– 87 –<br />
Export Development Bank of Canada<br />
Multi-Links Telecommunications Limited has a long-term funding facility in<br />
place with Export Development Bank of Canada (EDC), through First Bank<br />
of Nigeria plc. The original funding amounted to US$18 million against<br />
which US$1,6 million repayments were made.The loan bears interest<br />
at LIBOR plus 1.25%, and will be fully repaid during 2013.<br />
– 82 157<br />
Huawei Vendor Financing Facility (‘VFF’)<br />
Multi-Links Telecommunications Limited entered into a Bridge Financing<br />
Agreement with Huawei Tech Investment Co. Limited for the supply of<br />
telecommunications equipment and services. The original funding amounted<br />
to US$41.6 million against which repayments of US$5 million have<br />
already been made. The loan bears interest at LIBOR plus 2% and will<br />
be repaid by 2012. The above arrangement is temporary until financing<br />
facilities are obtained from China Development Bank.<br />
– 319 323<br />
PTA Bank and Barclays Bank<br />
Africa Online Group has taken out a loan with PTA Bank and Barclays<br />
Bank to the value of US$1.5 million in total. Of this amount US$0.8 million<br />
bears interest at LIBOR plus 6% and the remaining US$0.4 million bears<br />
interest at 11.5%.<br />
– 12 11<br />
(c) Finance leases<br />
The finance leases are secured by buildings with a carrying value of<br />
R152 million (2008: R174 million; 2007: R197 million) and office<br />
equipment with a book value of R6 million (2008: R14 million;<br />
2007: R6 million) (refer to note 11). These amounts are repayable within<br />
periods ranging from 1 to 12 years. Interest rates vary between 13.43%<br />
and 37.78%.<br />
1,220 1,167 986
202<br />
<strong>Telkom</strong> Annual Report 2009<br />
Notes to the consolidated annual financial statements (continued)<br />
for the three years ended March 31, 2009<br />
2007 2008 2009<br />
Rm Rm Rm<br />
28. INTEREST-BE<strong>AR</strong>ING DEBT (continued)<br />
Included in non-current and current debt is:<br />
Debt guaranteed by the South African Government 4,537 141 138<br />
<strong>Telkom</strong> may issue or re-issue locally registered debt instruments in terms of<br />
the Post Office Amendment Act 85 of 1991. The borrowing powers of<br />
<strong>Telkom</strong> are set out as per note 21.<br />
Repayments/refinancing of current portion of interest-bearing debt<br />
<strong>Telkom</strong> issued new local bonds, the TL12 and TL15 with a nominal value<br />
of R1,060 million and R1,160 million respectively and entered into<br />
Syndicated loan agreements with a nominal value of R4,100 million<br />
during the current year. Commercial Paper Bills with a nominal value of<br />
R11,025 million were issued and Commercial Paper debt with a nominal<br />
value of R9,849 million was repaid during the current year.<br />
The repayment/refinancing of R7,622 million of the current portion of<br />
interest-bearing debt will depend on the market circumstances at the time<br />
of repayment.<br />
Management believes that sufficient funding facilities will be available<br />
at the date of repayment/refinancing.<br />
29. PROVISIONS 1,443 1,675 1,875<br />
Employee related 3,005 3,186 3,169<br />
Annual leave 413 438 428<br />
Balance at beginning of year 356 413 438<br />
Transferred to disposal groups – – (67)<br />
Charged to employee expenses 66 44 72<br />
Leave paid (9) (19) (15)<br />
Post-retirement medical aid (refer to note 30) 1,139 1,356 1,745<br />
Balance at beginning of year 2,607 1,139 1,356<br />
Interest cost 286 322 428<br />
Current service cost 83 84 95<br />
Expected return on plan asset (188) (257) (223)<br />
Actuarial loss 149 129 157<br />
Termination settlement – – (5)<br />
Plan asset – initial recognition (1,720) – –<br />
Contributions paid (78) (61) (63)<br />
Telephone rebates (refer to note 30) 282 287 325<br />
Balance at beginning of year 198 282 287<br />
Interest cost 19 22 39<br />
Current service cost 4 3 6<br />
Past service cost 76 2 2<br />
Actuarial loss 5 – 14<br />
Benefits paid (20) (22) (23)<br />
Bonus 1,090 992 671<br />
Balance at beginning of year 1,071 1,090 992<br />
Transferred to disposal groups – – (397)<br />
Charged to employee expenses 965 797 577<br />
Payment (946) (895) (501)
<strong>Telkom</strong> Annual Report 2009 203<br />
Notes to the consolidated annual financial statements (continued)<br />
for the three years ended March 31, 2009<br />
2007 2008 2009<br />
Rm Rm Rm<br />
29. PROVISIONS (continued)<br />
Long-term incentive provision 81 113 –<br />
Balance at beginning of year 61 81 113<br />
Transferred to disposal groups – – (113)<br />
Charged to employee expenses 21 41 –<br />
Payment (1) (9) –<br />
Non-employee related 533 670 856<br />
Supplier dispute (refer to note 39) 527 569 664<br />
Balance at beginning of year – 527 569<br />
Charged to expenses 527 42 95<br />
Warranty provision – – –<br />
Balance at beginning of year 16 – –<br />
Provision utilised (16) – –<br />
Other 6 101 192<br />
Less: Current portion of provisions (2,095) (2,181) (2,150)<br />
Annual leave (402) (417) (425)<br />
Post-retirement medical aid (186) (186) (227)<br />
Telephone rebates (26) (26) (29)<br />
Bonus (911) (921) (654)<br />
Supplier dispute (527) (569) (664)<br />
Other (43) (62) (151)<br />
Annual leave<br />
In terms of <strong>Telkom</strong>’s policy, employees are entitled to accumulate vested leave benefits not taken within a leave cycle, to a cap of 22 days<br />
which must be taken within an 18 month leave cycle. The leave cycle is reviewed annually and is in accordance with legislation.<br />
Bonus<br />
The <strong>Telkom</strong> bonus scheme consists of performance bonuses which are dependent on achievement of certain financial and non-financial<br />
targets. The bonus is to all qualifying employees payable bi-annually after <strong>Telkom</strong>’s results have been made public.<br />
Supplier dispute<br />
<strong>Telkom</strong> provided R664 million (2008: R569 million; 2007: R527 million) for its estimate of the probable liability as discussed in note 39.<br />
The net movement in the provision of R95 million consists of finance charges and fair value movements.<br />
Other<br />
Included in other provisions is an amount provided for asset retirement obligations and the onerous lease obligation recognised in <strong>Telkom</strong><br />
Media.
204<br />
<strong>Telkom</strong> Annual Report 2009<br />
Notes to the consolidated annual financial statements (continued)<br />
for the three years ended March 31, 2009<br />
30. EMPLOYEE BENEFITS<br />
The Group provides benefits for all its permanent employees through the <strong>Telkom</strong> Pension Fund and the <strong>Telkom</strong> Retirement Fund. Membership<br />
of one of the funds is compulsory. In addition, certain retired employees receive medical aid benefits and a telephone rebate. The liabilities<br />
for all of the benefits are actuarially determined in accordance with accounting requirements each year. In addition, statutory funding<br />
valuations for the retirement and pension funds are performed at intervals not exceeding three years.<br />
At March 31, 2009, the Group employed 25,445 employees (2008: 33,616; 2007: 33,047).<br />
Actuarial valuations were performed by qualified actuaries to determine the benefit obligation, plan asset and service costs for the pension<br />
and retirement funds for each of the financial periods presented.<br />
The <strong>Telkom</strong> Pension Fund<br />
The <strong>Telkom</strong> Pension Fund is a defined benefit fund that was created in terms of the Post Office Amendment Act 85 of 1991.<br />
The latest actuarial valuation performed at March 31, 2009 indicates that the pension fund is in a surplus position of R94 million after<br />
unrecognised losses. The recognition of the surplus is limited due to the application of the asset limitation criteria in IAS19 (revised).<br />
With effect from July 1, 1995, the <strong>Telkom</strong> Pension Fund was closed to new members. During the year ended March 31, 2007, a settlement<br />
event occurred in the <strong>Telkom</strong> Pension Fund whereby 106 members were transferred to the <strong>Telkom</strong> Retirement Fund.<br />
The funded status of the <strong>Telkom</strong> Pension Fund is disclosed below:<br />
2007 2008 2009<br />
Rm Rm Rm<br />
The <strong>Telkom</strong> Pension Fund<br />
The net periodic pension costs includes the following components:<br />
Interest and service cost on projected benefit obligations 22 21 21<br />
Expected return on plan assets (19) (27) (28)<br />
Recognised actuarial loss/(gain) 9 (16) –<br />
Settlement loss/(gain) 21 (2) (3)<br />
Asset limitation – 29 39<br />
Net periodic pension expense recognised 33 5 29<br />
Pension fund contributions (refer to note 5.1) 8 5 (1)<br />
The status of the pension plan obligation is as follows:<br />
At beginning of year 281 205 204<br />
Interest and service cost 22 21 21<br />
Employee contributions 2 2 2<br />
Benefits paid (2) (3) (5)<br />
Settlements (70) (15) (22)<br />
Actuarial gain (28) (6) (1)<br />
Benefit obligation at end of year 205 204 199<br />
Plan assets at fair value:<br />
At beginning of year 243 284 311<br />
Expected return on plan assets 19 27 28<br />
Benefits paid (2) (3) (5)<br />
Contributions 10 8 2<br />
Settlements (61) (15) (22)<br />
Actuarial gain/(loss) 75 10 (67)<br />
Plan assets at end of year 284 311 247
30. EMPLOYEE BENEFITS (continued)<br />
<strong>Telkom</strong> Annual Report 2009 205<br />
Notes to the consolidated annual financial statements (continued)<br />
for the three years ended March 31, 2009<br />
2007 2008 2009<br />
Rm Rm Rm<br />
The <strong>Telkom</strong> Pension Fund (continued)<br />
Present value of funded obligation 205 204 199<br />
Fair value of plan assets (284) (311) (247)<br />
Fund surplus (79) (107) (48)<br />
Unrecognised net actuarial gain/(loss) 25 23 (46)<br />
Fund surplus (54) (84) (94)<br />
Asset limitation – 29 39<br />
Recognised net asset (54) (55) (55)<br />
Expected return on plan assets 19 27 28<br />
Actuarial return/(loss) on plan assets 75 10 (67)<br />
Actual return/(loss) on plan assets 94 37 (39)<br />
Principal actuarial assumptions were as follows:<br />
Discount rate (%) 7.5 9.0 8.7<br />
Yield on government bonds (%) 7.5 9.0 8.7<br />
Long-term return on equities (%) 10.5 11.0 12.0<br />
Long-term return on cash (%) 5.5 7.0 7.5<br />
Expected return on plan assets (%) 9.7 9.8 10.5<br />
Salary inflation rate (%) 6.0 7.5 7.2<br />
Pension increase allowance (%) 2.9 4.3 4.0<br />
The overall long-term expected rate of return on assets is 10.5%. This is<br />
based on the portfolio as a whole and not the sum of the returns of<br />
individual asset categories. The expected return takes into account the<br />
asset allocation of the <strong>Telkom</strong> Pension Fund and expected long-term<br />
return of these assets, of which South African equities and bonds<br />
are the largest contributors.<br />
The assumed rates of mortality are determined by reference to the<br />
SA85-90 (Light) Ultimate table, as published by the Actuarial Society<br />
of South Africa, for pre-retirement purposes and the PA(90) Ultimate<br />
table, minus one year age rating as published by the Institute and<br />
Faculty of Actuaries in London and Scotland, for retirement purposes.<br />
Funding level per statutory actuarial valuation (%) 100.0 100.0 100.0<br />
The number of employees registered under the <strong>Telkom</strong> Pension Fund<br />
The fund portfolio consists of the following:<br />
153 146 123<br />
Equities (%) 74 54 57<br />
Bonds (%) 5 5 25<br />
Cash (%) 3 23 3<br />
Foreign investments (%) 16 18 15<br />
Insurance policies (%) 2 – –<br />
The total expected contributions payable to the pension fund for the next financial year are R1 million.
206<br />
<strong>Telkom</strong> Annual Report 2009<br />
Notes to the consolidated annual financial statements (continued)<br />
for the three years ended March 31, 2009<br />
30. EMPLOYEE BENEFITS (continued)<br />
The <strong>Telkom</strong> Retirement Fund<br />
The <strong>Telkom</strong> Retirement Fund was established on July 1, 1995 as a hybrid defined benefit and defined contribution plan. Existing employees<br />
were given the option to either remain in the <strong>Telkom</strong> Pension Fund or to be transferred to the <strong>Telkom</strong> Retirement Fund. All pensioners of the<br />
<strong>Telkom</strong> Pension Fund and employees who retired after July 1, 1995 were transferred to the <strong>Telkom</strong> Retirement Fund. Upon transfer the<br />
government ceased to guarantee the deficit in the <strong>Telkom</strong> Retirement Fund. Subsequent to July 1, 1995 further transfers of existing employees<br />
occurred.<br />
The <strong>Telkom</strong> Retirement Fund is a defined contribution fund with regard to in-service members. On retirement, an employee is transferred<br />
from the defined contribution plan to a defined benefit plan. <strong>Telkom</strong>, as a guarantor, is contingently liable for any deficit in the <strong>Telkom</strong><br />
Retirement Fund. Moreover, all of the assets in the fund, including any potential excess, belong to the participants of the scheme. <strong>Telkom</strong><br />
is unable to benefit from the excess in the form of future reduced contributions or refunds.<br />
<strong>Telkom</strong> guarantees any actuarial shortfall of the pensioner pool in the retirement fund. This liability is initially funded through assets of the<br />
retirement fund. The latest actuarial valuation performed at March 31, 2009 indicates that the retirement fund is in a surplus funding position<br />
of R1,549 million after unrecognised losses.<br />
The <strong>Telkom</strong> Retirement Fund is governed by the Pension Funds Act 24 of 1956. In terms of section 37A of this Act, the pension benefits<br />
payable to the pensioners cannot be reduced. If therefore the present value of the funded obligation were to exceed the fair value of plan<br />
assets. <strong>Telkom</strong> would be required to fund the statutory deficit.<br />
The information presented below is intended only to comply with the disclosure requirements of IAS19 (revised) and not to suggest that<br />
<strong>Telkom</strong> has a potential asset with regard to this fund.<br />
The funded status of the <strong>Telkom</strong> Retirement Fund is disclosed below:<br />
2007 2008 2009<br />
Rm Rm Rm<br />
The <strong>Telkom</strong> Retirement Fund<br />
The net periodic retirement costs include the following components:<br />
Interest and service cost on projected benefit obligations 312 493 616<br />
Expected return on plan assets (489) (686) (796)<br />
Recognised actuarial gain (145) – –<br />
Net periodic pension expense not recognised (asset limitation) (322) (193) (180)<br />
Retirement fund contributions (refer to note 5.1)<br />
Benefit obligation:<br />
439 460 460<br />
At beginning of year 4,377 6,581 7,101<br />
Interest 312 493 616<br />
Benefits paid (486) (488) (520)<br />
Liability for new pensioners 44 14 143<br />
Actuarial loss/(gain) 2,334 501 (636)<br />
Benefit obligation at end of year 6,581 7,101 6,704<br />
Plan assets at fair value:<br />
At beginning of year 5,973 7,661 7,991<br />
Expected return on plan assets 489 686 796<br />
Benefits paid (486) (488) (520)<br />
Asset backing new pensioners’ liabilities 44 14 143<br />
Actuarial gain/(loss) 1,641 118 (1,735)<br />
Plan assets at end of year 7,661 7,991 6,675
30. EMPLOYEE BENEFITS (continued)<br />
The <strong>Telkom</strong> Retirement Fund (continued)<br />
<strong>Telkom</strong> Annual Report 2009 207<br />
Notes to the consolidated annual financial statements (continued)<br />
for the three years ended March 31, 2009<br />
2007 2008 2009<br />
Rm Rm Rm<br />
Present value of funded obligation 6,581 7,101 6,704<br />
Fair value of plan assets (7,661) (7,991) (6,675)<br />
Fund (surplus)/deficit (1,080) (890) 29<br />
Unrecognised net actuarial loss (96) (478) (1,578)<br />
Unrecognised net asset (1,176) (1,368) (1,549)<br />
Expected return on plan assets 489 686 796<br />
Actuarial gain/(loss) on plan assets 1,641 118 (1,735)<br />
Actual gain/(loss) on plan assets 2,130 804 (939)<br />
Included in the fair value of plan assets is:<br />
Office buildings occupied by <strong>Telkom</strong> 371 596 619<br />
<strong>Telkom</strong> bonds 21 10 –<br />
<strong>Telkom</strong> shares 284 141 132<br />
The <strong>Telkom</strong> Retirement Fund invests its funds in South Africa and internationally.<br />
Twelve fund managers invest in South Africa and five of these managers<br />
specialise in trades with bonds on behalf of the Retirement Fund. The<br />
international investment portfolio consists of global equity and hedged funds.<br />
2007 2008 2009<br />
Principal actuarial assumptions were as follows:<br />
Discount rate (%) 7.5 9.0 8.7<br />
Yield on government bonds (%) 7.5 9.0 8.7<br />
Long-term return on equities (%) 10.5 11.0 12.0<br />
Long-term return on cash (%) 5.5 7.0 7.5<br />
Expected return on plan assets (%) 9.3 10.3 10.7<br />
Pension increase allowance (%) 4.5 6.0 4.0<br />
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<br />
of individual asset categories. The expected return takes into account the asset allocation of the Retirement Fund and expected long-term<br />
return on these assets, of which South African equities, foreign investments and South African index-linked bonds are the largest contributors.
208<br />
<strong>Telkom</strong> Annual Report 2009<br />
Notes to the consolidated annual financial statements (continued)<br />
for the three years ended March 31, 2009<br />
30. EMPLOYEE BENEFITS (continued)<br />
The <strong>Telkom</strong> Retirement Fund (continued)<br />
The assumed rates of mortality are determined by reference to the<br />
SA85-90 (Light) Ultimate table, as published by the Actuarial Society<br />
of South Africa, for pre-retirement purposes and the PA(90) Ultimate<br />
table, minus one year age rating as published by the Institute and<br />
Faculty of Actuaries in London and Scotland, for retirement purposes.<br />
2007 2008 2009<br />
Funding level per statutory actuarial valuation (%) 100 100 100<br />
The number of pensioners registered under the <strong>Telkom</strong> Retirement Fund<br />
The number of in-service employees registered under the <strong>Telkom</strong><br />
14,451 14,255 13,617<br />
Retirement Fund 25,766 24,939 23,389<br />
The fund portfolio consists of the following:<br />
Equities (%) 59 70 55<br />
Property (%) 2 2 –<br />
Bonds (%) 19 11 5<br />
Cash (%) 7 1 5<br />
Foreign investments (%) 13 16 20<br />
Index linked (%) – – 15<br />
The total expected pension benefit payments for the year ending March 31, 2010 are R541,000.<br />
Medical benefits<br />
<strong>Telkom</strong> makes certain contributions to medical funds in respect of current and retired employees. The scheme is a defined benefit plan. The<br />
expense in respect of current employees’ medical aid is disclosed in note 5.1. The amounts due in respect of post-retirement medical<br />
benefits to current and retired employees have been actuarially determined and provided for as set out in note 29. <strong>Telkom</strong> has terminated<br />
future post-retirement medical benefits in respect of employees joining after July 1, 2000.<br />
There are three major categories of members entitled to the post-retirement medical aid: pensioners who retired before 1994 (Pre-94); those<br />
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,<br />
which increases annually with the average salary increase.<br />
Eligible employees must be employed by <strong>Telkom</strong> until retirement age to qualify for the post-retirement medical aid benefit. The most recent<br />
actuarial valuation of the benefit was performed as at March 31, 2009.<br />
<strong>Telkom</strong> has allocated certain investments to fund this liability as set out in note 14.
30. EMPLOYEE BENEFITS (continued)<br />
Medical benefits (continued)<br />
<strong>Telkom</strong> Annual Report 2009 209<br />
Notes to the consolidated annual financial statements (continued)<br />
for the three years ended March 31, 2009<br />
2007 2008 2009<br />
Rm Rm Rm<br />
Medical aid<br />
Benefit obligation:<br />
At beginning of year 3,904 4,384 4,850<br />
Interest cost 286 322 428<br />
Current service cost 83 84 95<br />
Actuarial loss 283 246 246<br />
Termination settlement – – (5)<br />
Benefits paid from plan assets (94) (125) (141)<br />
Contributions paid by <strong>Telkom</strong> (78) (61) (63)<br />
Benefit obligation at end of year 4,384 4,850 5,410<br />
Plan assets at fair value:<br />
At beginning of year – 1,961 1,929<br />
Plan asset – initial recognition 1,720 – –<br />
Expected return on plan assets 188 257 223<br />
Benefits paid from plan assets (94) (125) (141)<br />
Actuarial gain/(loss) 147 (164) (393)<br />
Plan assets at end of year 1,961 1,929 1,618<br />
Present value of funded obligation 4,384 4,850 5,410<br />
Fair value of plan assets (1,961) (1,929) (1,618)<br />
Funded status 2,423 2,921 3,792<br />
Unrecognised net actuarial loss (1,284) (1,565) (2,047)<br />
Liability as disclosed in the balance sheet (refer to note 29) 1,139 1,356 1,745<br />
Expected return on plan assets 188 257 223<br />
Actuarial return on plan assets 147 (164) (393)<br />
Actual return on plan assets 335 93 (170)<br />
2007 2008 2009<br />
Principal actuarial assumptions were as follows:<br />
Discount rate (%) 7.5 9.0 8.7<br />
Expected return on plan assets (%) 13.5 12.0 11.0<br />
Salary inflation rate (%) 6.0 7.5 7.2<br />
Medical inflation rate (%) 6.5 8.0 7.7<br />
The assumed rates of mortality are determined by reference to the SA85-90<br />
(Light) Ultimate table, as published by the Actuarial Society of South Africa,<br />
for pre-retirement purposes and the PA(90) Ultimate table, minus one year<br />
age rating as published by the Institute and Faculty of Actuaries in London<br />
and Scotland, for retirement purposes.<br />
Contractual retirement age 65 65 65<br />
Average retirement age 60 60 60<br />
Number of members 17,119 15,526 13,883<br />
Number of pensioners 8,494 8,430 8,397
210<br />
<strong>Telkom</strong> Annual Report 2009<br />
Notes to the consolidated annual financial statements (continued)<br />
for the three years ended March 31, 2009<br />
30. EMPLOYEE BENEFITS (continued)<br />
Medical benefits (continued)<br />
The valuation results are extremely sensitive to changes in the underlying assumptions. The following table provides an indication of the<br />
impact of changing some of the valuation assumptions above:<br />
The Trudon benefit obligation of R21 million has been excluded from the sensitivity analysis below.<br />
Current assumption Decrease Increase<br />
Rm Rm Rm<br />
Medical cost inflation rate 7.7% -1.0% +1.0%<br />
Benefit obligation 5,389 (736) 921<br />
Percentage change (13.7)% 17.1%<br />
Service cost and interest cost 2009/2010 555 (84) 108<br />
Percentage change (15.1)% 19.5 %<br />
Discount rate 8.7% -1.0% +1.0%<br />
Benefit obligation 5,389 933 (734)<br />
Percentage change 17.3% (13.6)%<br />
Service cost and interest cost 2009/2010 555 46 (37)<br />
Percentage change 8.3% (6.7)%<br />
Post-retirement mortality rate PA(90) Ultimate-1 -10.0% +10.0%<br />
Benefit obligation 5,389 221 (197)<br />
Percentage change 4.1% (3.7)%<br />
Service cost and interest cost 2009/2010 555 23 (20)<br />
Percentage change 4.1% (3.6)%<br />
2007 2008 2009<br />
The fund portfolio consists of the following:<br />
Equities (%) 59 56 30<br />
Bonds (%) 3 2 2<br />
Cash and money market investments (%) 21 33 10<br />
Foreign investments (%) 9 9 9<br />
Insurance policies (%) 8 – 49<br />
Telephone rebates<br />
<strong>Telkom</strong> provides telephone rebates to its pensioners. The most recent<br />
actuarial valuation was performed as at March 31, 2009. Eligible<br />
employees must be employed by <strong>Telkom</strong> until retirement age to qualify<br />
for the telephone rebates. The scheme is a defined benefit plan.<br />
2007 2008 2009<br />
Rm Rm Rm<br />
The status of the telephone rebate liability is disclosed below:<br />
Benefit obligation opening balance 251 307 443<br />
Service cost 4 3 6<br />
Interest cost 19 22 39<br />
Actuarial (gain)/loss (39) 133 19<br />
Amendments 93 – –<br />
Benefits paid (21) (22) (23)<br />
Present value of unfunded obligation 307 443 484<br />
Unrecognised net actuarial loss and service cost* (25) (156) (159)<br />
Liability as disclosed in the balance sheet (refer to note 29) 282 287 325<br />
* The major increase in 2008 is attributable to the change in the rebate inflation rate.
30. EMPLOYEE BENEFITS (continued)<br />
Telephone rebates (continued)<br />
Principal actuarial assumptions were as follows:<br />
<strong>Telkom</strong> Annual Report 2009 211<br />
Notes to the consolidated annual financial statements (continued)<br />
for the three years ended March 31, 2009<br />
2007 2008 2009<br />
Discount rate (%) 7.5 9.0 8.7<br />
Rebate inflation rate (%) 0.0 4.0 4.0<br />
Contractual retirement age 65 65 65<br />
Average retirement age 60 60 60<br />
The assumed rates of mortality are determined by reference<br />
to the PA(90) Ultimate table, minus one year age rating as<br />
published by the Institute and Faculty of Actuaries<br />
in London and Scotland.<br />
Number of members 19,515 18,766 17,034<br />
Number of pensioners 10,918 10,680 10,499<br />
<strong>Telkom</strong> Conditional Share Plan<br />
<strong>Telkom</strong>’s shareholders approved the <strong>Telkom</strong> Conditional Share Plan at the January 2004 Annual General Meeting. The scheme covers both<br />
operational and management employees and is aimed at giving shares to <strong>Telkom</strong> employees, at a RNil exercise price, at the end of the<br />
vesting period. The vesting period for the operational employees shares awarded in 2004 and 2005 is 0% in year one, 33% in each of<br />
the three years thereafter, while the shares allocated in 2006 and 2007 together with management shares vest fully after three years.<br />
Although the number of shares awarded to employees will be communicated at the grant date, the ultimate number of shares that vest may<br />
differ based on certain performance conditions being met (refer to note 24).<br />
The <strong>Telkom</strong> Board approved the fourth enhanced allocation of shares to employees as at September 24, 2007, with a grant date of<br />
September 27, 2007, the day that the employees and <strong>Telkom</strong> shared a common understanding of the terms and conditions of the grant.<br />
A total number of 6,089,810 shares were granted.<br />
The Board has also approved an enhanced allocation for the November 2006 grant on September 4, 2007 with a grant date of<br />
September 27, 2007. The number of additional shares granted with regard to the 2006 allocation is 4,966,860 shares.<br />
The weighted average remaining vesting period for the shares outstanding as at March 31, 2009 is 0.71 years (2008: 1.25 years;<br />
2007: 1.75 years).<br />
2007 2008 2009<br />
The following table illustrates the movement of the maximum number of<br />
shares that will vest to employees for the August 2004 grant:<br />
Outstanding at beginning of the year 2,414,207 1,883,991 420,590<br />
Granted during the year 1,212 252 –<br />
Forfeited during the year (80,923) (43,790) (3,985)<br />
Vested during the year (450,505) (1,419,863) (416,605)<br />
Outstanding at end of the year 1,883,991 420,590 –<br />
The following table illustrates the movement of the maximum number of<br />
shares that will vest to employees for the June 2005 grant:<br />
Outstanding at beginning of the year 1,930,687 1,864,041 1,435,387<br />
Granted during the year 1,005 3,469 52,954<br />
Forfeited during the year (67,651) (108,177) (45,188)<br />
Vested during the year – (323,946) (1,135,424)<br />
Outstanding at end of the year 1,864,041 1,435,387 307,729
212<br />
<strong>Telkom</strong> Annual Report 2009<br />
Notes to the consolidated annual financial statements (continued)<br />
for the three years ended March 31, 2009<br />
30. EMPLOYEE BENEFITS (continued)<br />
<strong>Telkom</strong> Conditional Share Plan (continued)<br />
2007 2008 2009<br />
The following table illustrates the movement of the maximum<br />
number of shares that will vest to employees for the<br />
November 2006 grant:<br />
Outstanding at beginning of the year – 1,773,361 1,640,980<br />
Granted during the year 1,825,488 833 –<br />
Forfeited during the year (52,127) (133,214) (132,614)<br />
Outstanding at end of the year 1,773,361 1,640,980 1,508,366<br />
The following table illustrates the movement of the maximum<br />
number of shares that will vest to employees relating to<br />
the additional November 2006 grant:<br />
Outstanding at beginning of the year – – 4,812,305<br />
Granted during the year – 4,984,693 25,775<br />
Forfeited during the year – (172,388) (389,357)<br />
Outstanding at end of the year – 4,812,305 4,448,723<br />
The following table illustrates the movement of the maximum<br />
number of shares that will vest to employees for the<br />
September 2007 grant:<br />
Outstanding at beginning of the year – – 5,846,636<br />
Granted during the year – 6,117,163 23,650<br />
Forfeited during the year – (270,527) (509,185)<br />
Outstanding at end of the year – 5,846,636 5,361,101<br />
The fair value of the shares granted have been calculated by an actuary using Black-Scholes-Merton model and the following values at<br />
grant date:<br />
August 8, June 23, November 2, September 4,<br />
2004 2005 2006 2007<br />
Grant Grant Grant Grant<br />
Market share price (R) 77.50 111.00 141.25 173.00<br />
Dividend yield (%) 2.60 3.60 3.50 3.50<br />
2007 2008 2009<br />
The principal assumptions used in calculating the<br />
expected number of shares that will vest<br />
are as follows:<br />
Employee turnover (%) 5 5 9<br />
Meeting specified performance criteria (%) 100 100 75
30. EMPLOYEE BENEFITS (continued)<br />
The amounts for the current and previous four years are as follows:<br />
<strong>Telkom</strong> Annual Report 2009 213<br />
Notes to the consolidated annual financial statements (continued)<br />
for the three years ended March 31, 2009<br />
2005 2006 2007 2008 2009<br />
Rm Rm Rm Rm Rm<br />
<strong>Telkom</strong> Pension Fund<br />
Defined benefit obligation (186) (281) (205) (204) (199)<br />
Plan assets 231 243 284 311 247<br />
Surplus/(deficit) 45 (38) 79 107 48<br />
Asset limitation – – – (29) (39)<br />
Unrecognised actuarial loss/(gain) 89 118 (25) (23) 46<br />
Unrecognised/recognised net asset 134 80 54 55 55<br />
Experience adjustment on assets – – 75 10 (67)<br />
Experience adjustment on liabilities – – 25 (6) 1<br />
<strong>Telkom</strong> Retirement Fund<br />
Defined benefit obligation (4,020) (4,377) (6,581) (7,101) (6,704)<br />
Plan assets 4,477 5,973 7,661 7,991 6,675<br />
Surplus/(deficit) 457 1,596 1,080 890 (29)<br />
Unrecognised actuarial gain/(loss) 312 (742) 96 478 1,578<br />
Unrecognised net asset 769 854 1,176 1,368 1,549<br />
Experience adjustment on assets* – – 1,641 118 (1,735)<br />
Experience adjustment on liabilities* – – 1,234 485 (645)<br />
Medical benefits<br />
Defined benefit obligation (3,079) (3,904) (4,384) (4,850) (5,410)<br />
Plan assets – – 1,961 1,929 1,618<br />
Deficit (3,079) (3,904) (2,423) (2,921) (3,792)<br />
Unrecognised actuarial loss 649 1,297 1,284 1,565 2,047<br />
Liability recognised (2,430) (2,607) (1,139) (1,356) (1,745)<br />
Experience adjustment on assets – – 147 (164) (393)<br />
Experience adjustment on liabilities – – 28 193 246<br />
Telephone rebates<br />
Defined benefit obligation (177) (251) (307) (443) (484)<br />
Unrecognised actuarial (gain)/loss (2) 53 25 156 159<br />
Liability recognised (179) (198) (282) (287) (325)<br />
Experience adjustment on liabilities – – (25) 2 2<br />
The experience adjustments on asset and liabilities for each of the financial periods ended March 31, 2005 and 2006 have not been<br />
disclosed due to the fact that it was impractical to determine the information.<br />
* During the March 31, 2007 year end <strong>Telkom</strong> actuaries performed a full valuation while for the March 31, 2006 year end a roll forward method was<br />
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<br />
statutory valuation as a base applying the relevant assumptions determined by management to arrive at the present value of the benefit obligation, and<br />
the fair value of the plan assets.<br />
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<br />
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<br />
year end.
214<br />
<strong>Telkom</strong> Annual Report 2009<br />
Notes to the consolidated annual financial statements (continued)<br />
for the three years ended March 31, 2009<br />
2007 2008 2009<br />
Rm Rm Rm<br />
31. TRADE AND OTHER PAYABLES 7,237 8,771 5,538<br />
Trade payables 5,511 6,768 2,955<br />
Finance cost accrued 22 39 156<br />
Accruals and other payables 1,704 1,964 2,427<br />
Accruals and other payables mainly represent amounts payable for<br />
goods received, net of Value Added Taxation obligations.<br />
32. RECONCILIATION OF PROFIT FOR THE YE<strong>AR</strong> TO CASH<br />
GENERATED FROM OPERATIONS *<br />
Cash generated from operations 20,520 21,256 20,394<br />
Profit for the year 8,849 8,172 4,247<br />
Finance charges and fair value movements 1,125 1,803 3,765<br />
Taxation 4,731 4,704 3,681<br />
Investment income (235) (197) (216)<br />
Interest received from debtors (190) (257) (273)<br />
Non-cash items 6,582 6,930 10,292<br />
Depreciation, amortisation, impairment and write-offs 5,315 6,130 8,155<br />
Cost of equipment disposed when recognising finance leases 240 88 71<br />
Increase in provisions 1,107 857 1,387<br />
Profit on disposal of property, plant and equipment and intangible assets (29) (147) (29)<br />
Vodacom broad-based black economic empowerment charge – – 691<br />
Profit on disposal of investment and subsidiaries (52) – –<br />
Loss on disposal of property, plant and equipment and intangible assets 1 2 17<br />
(Increase)/decrease in working capital (342) 101 (1,102)<br />
Inventories (393) (354) (1,130)<br />
Accounts receivable (758) (784) (812)<br />
Accounts payable 809 1,239 840<br />
33. FINANCE CH<strong>AR</strong>GES PAID *<br />
(1,115) (1,077) (2,164)<br />
Finance charges per income statement (1,125) (1,803) (3,765)<br />
Non-cash items 10 726 1,601<br />
Movements in interest accruals (119) 101 105<br />
Net discount amortised 409 568 698<br />
Capitalised finance leases – – 178<br />
Capitalised foreign exchange – – 38<br />
Fair value adjustment (338) (243) 183<br />
Unrealised gain 58 300 399<br />
* Cash flows includes the cash flows related to assets held for sale and disposal groups.
<strong>Telkom</strong> Annual Report 2009 215<br />
Notes to the consolidated annual financial statements (continued)<br />
for the three years ended March 31, 2009<br />
34. TAXATION PAID *<br />
2007 2008 2009<br />
Rm Rm Rm<br />
(5,690) (4,277) (3,947)<br />
Taxation payable at beginning of year (1,549) (74) (314)<br />
Current taxation (excluding deferred taxation) (3,545) (3,807) (3,412)<br />
Foreign currency translation reserve – (32) 2<br />
Business combinations – – 2<br />
Secondary taxation on companies (670) (678) (425)<br />
Taxation payable at end of year 74 314 200<br />
Reconciliation of net taxation liability at end of year** (74) (314) (200)<br />
Income taxation receivable 520 9 125<br />
Continuing operations 520 9 91<br />
Disposal groups – – 34<br />
Income taxation payable (594) (323) (325)<br />
Continuing operations (594) (323) (50)<br />
Disposal groups – – (275)<br />
* Cash flows includes the cash flows related to assets held for sale<br />
and disposal groups.<br />
** The split income taxation receivable and income taxation payable was split in 2009<br />
to disclose the effect of the discontinued operations.<br />
35. DIVIDEND PAID (4,784) (5,732) (3,336)<br />
Dividend payable at beginning of year (4) (15) (20)<br />
Declared during the year – Dividend on ordinary shares: (4,678) (5,627) (3,306)<br />
Final dividend for 2006: 500 cents (2,599) – –<br />
Special dividend for 2006: 400 cents (2,079) – –<br />
Final dividend for 2007: 600 cents – (3,069) –<br />
Special dividend for 2007: 500 cents – (2,558) –<br />
Final dividend for 2008: 660 cents – – (3,306)<br />
Dividends paid to minority interest (117) (110) (33)<br />
Dividend payable at end of year 15 20 23
216<br />
<strong>Telkom</strong> Annual Report 2009<br />
Notes to the consolidated annual financial statements (continued)<br />
for the three years ended March 31, 2009<br />
36. ACQUISITION AND DISPOSALS OF SUBSIDI<strong>AR</strong>IES, JOINT VENTURES AND MINORITY INTERESTS<br />
36.1 Acquisitions<br />
By <strong>Telkom</strong><br />
Multi-Links Telecommunications Limited (Multi-Links Telecommunications) (25%)<br />
<strong>Telkom</strong> International (Proprietary) Limited acquired 75% of the issued<br />
share capital of Multi-Links Telecommunications Limited from Kenston<br />
Investment Limited on May 1, 2007. <strong>Telkom</strong> also granted Kenston the<br />
irrevocable right and option (put option) to require <strong>Telkom</strong> to acquire all<br />
of the shares held by Kenston (25% shareholding) in Multi-Links, at any<br />
time during the 90 day period following the second anniversary of the<br />
effective date. On initial recognition, a liability of R661 million,<br />
representing the higher of the transaction share price and the fair value,<br />
was recognised under non-current other financial liabilities.<br />
A corresponding debit was recognised in non-distributable reserves.<br />
The put option was exercised on January 21, 2009 for R1,328 million<br />
(US$130 million at US$1 = R10.2188). The liability was derecognised<br />
and a corresponding credit consisting of R661 million reversal of equity<br />
and R667 million relating to changes in the fair value of the put option<br />
subsequent to initial recognition, was recognised directly in equity.<br />
2007 2008 2009<br />
Rm Rm Rm<br />
Put option – – 1,328<br />
Africa Online Limited (Africa Online)<br />
On February 23, 2007 <strong>Telkom</strong> acquired a 100% shareholding of Africa<br />
Online from African Lakes Corporation for a total cost of R150 million,<br />
with a resulting goodwill of R145 million.<br />
Africa Online is an internet service provider active in Cote d’Ivoire, Ghana,<br />
Kenya, Namibia, Swaziland, Tanzania, Uganda, Zambia and Zimbabwe.<br />
Africa Online is incorporated in the Republic of Mauritius.<br />
At acquisition date the company was not IFRS compliant and thus no fair<br />
value information based on IFRS was available.<br />
The process of calculating a fair value of the identified assets, liabilities<br />
and contingent liabilities has been finalised.<br />
The fair value of the assets and liabilities acquired were determined as follows:<br />
Fair value of intangible assets (licences R1 million, brand R42 million) 43 – –<br />
Less: Deferred taxation raised on intangible assets (12) – –<br />
Less: Net liabilities acquired (excluding fair value of intangible assets) (26) – –<br />
Fair value of net assets acquired 5 – –<br />
Goodwill 145 – –<br />
Purchase price 150 – –<br />
The goodwill has been allocated to the various cash-generating units (’CGU’) representative of the countries in which Africa Online Limited<br />
operates.
36. ACQUISITION AND DISPOSALS OF SUBSIDI<strong>AR</strong>IES, JOINT<br />
VENTURES AND MINORITY INTERESTS (continued)<br />
36.1 Acquisitions (continued)<br />
By the Group’s subsidiaries<br />
Multi-Links Telecommunications Limited (’Multi-Links Telecommunications’) (75%)<br />
On May 1, 2007 <strong>Telkom</strong> acquired a 75% shareholding in Multi-Links<br />
Telecommunications through <strong>Telkom</strong> International, a wholly owned<br />
South African subsidiary, for a total cost of R1,985 million.<br />
Multi-Links Telecommunications is a Nigerian Private Telecommunications<br />
Operator with a Unified Access Licence providing fixed, mobile, data, long<br />
distance and international telecommunications services throughout Nigeria.<br />
Multi-Links is domiciled and incorporated in Nigeria.<br />
The purchase price allocation was completed during the 2008 financial year,<br />
and has resulted in goodwill being adjusted.<br />
The following intangible assets were identified and valued<br />
at the end of the year:<br />
<strong>Telkom</strong> Annual Report 2009 217<br />
Notes to the consolidated annual financial statements (continued)<br />
for the three years ended March 31, 2009<br />
2007 2008 2009<br />
Rm Rm Rm<br />
Customer relationship – 61 –<br />
Licence – 36 –<br />
Brand – 105 –<br />
Fair value of intangible assets – 202 –<br />
The fair value of the assets and liabilities acquired were determined as follows:<br />
Net assets acquired (excluding fair value of intangible assets) – 236 –<br />
Fair value of intangible assets – 202 –<br />
Less: Contingencies recognised – (35) –<br />
Less: Deferred taxation raised on intangible assets – (65) –<br />
Fair value of net assets acquired – 338 –<br />
Less: Minority interest – (80) –<br />
Goodwill – 1,727 –<br />
Purchase price* – 1,985 –<br />
* The purchase price was settled in cash.<br />
Disposal group<br />
By the Group’s 50% joint venture, Vodacom<br />
Storage Technology Services (Proprietary) Limited – – 69<br />
Gateway – – 2,846<br />
Smartphone SP (Proprietary) Limited and subsidiaries 168 468 –<br />
Smartcom (Proprietary) Limited 4 9 –<br />
Africell Cellular Services (Proprietary) Limited 40 – –<br />
InterConnect s.p.r.l 10 – –<br />
Cointel VAS (Proprietary) Limited 73 – –<br />
Disposals<br />
By the Group’s 50% joint venture, Vodacom<br />
Ithuba Smartcall (Proprietary) Limited – – –<br />
Stand 13 Eastwood Road Dunkeld (Proprietary) Limited – 8 –
218<br />
<strong>Telkom</strong> Annual Report 2009<br />
Notes to the consolidated annual financial statements (continued)<br />
for the three years ended March 31, 2009<br />
37. UNDRAWN BORROWING FACILITIES AND GU<strong>AR</strong>ANTEES<br />
37.1 Rand denominated facilities and guarantees<br />
<strong>Telkom</strong> has general banking facilities of R6,226 million. The facilities are unsecured, when drawn bear interest at a rate linked to prime,<br />
have no specific maturity date and are subject to annual review. R3,000 million of these undrawn facilities were committed.<br />
37.2 Foreign denominated facilities and guarantees<br />
2007 2008 2009<br />
Guarantor Details Beneficiary Rm Rm Rm<br />
<strong>Telkom</strong> SA Limited Punctual payment and performance by Various US$3 million – 23 26<br />
Africa Online under the Trade Finance (2008:<br />
Facility Agreement to various banks US$3 million)<br />
First Bank of Nigeria plc Guarantee on lending facility from Export Nortel Networks US$18 million – 147 171<br />
(on behalf of Multi-links Bank of Canada to Nortel Networks for Canada (2008:<br />
Telecommunications the purchase of Telecommunications US$18 million)<br />
Limited) equipment phases – 9a, 9b, 9c and 9d<br />
Zenith Bank plc (on Guarantee payment to Gilat Satcom Gilat Satcom US$0.1 million – 1 1<br />
behalf of Multi-links Limited in respect of interconnect Limited (2008:<br />
Telecommunications<br />
Limited)<br />
service (standby letter of credit) US$0.1 million)<br />
Zenith Bank plc (on Support the bid award of the contract NCC US$0.1 million – 1 1<br />
behalf of Multi-links for the submission of the proposal to (2008:<br />
Telecommunications provide wire to Nigerian Telecommuni- US$0.1 million)<br />
Limited) cations Services<br />
Zenith Bank plc (on Issued in favour of Huawei Technology Huawei US$31 million – 250 294<br />
behalf of Multi-links Investment Company Limited for the Technology (2008:<br />
Telecommunications supply of core telecommunications Investment US$31 million)<br />
Limited) services Company<br />
Limited<br />
Zenith Bank plc (on Issued in favour of Huawei Technology Huawei US$11 million – 88 104<br />
behalf of Multi-links Investment Company Limited for the Technology (2008:<br />
Telecommunications supply of core telecommunications Investment US$11 million)<br />
Limited) services Company<br />
Limited<br />
– 510 597<br />
Disposal group<br />
Rand denominated facilities and guarantees<br />
The Group exposure is 50% of the following items:<br />
Vodacom has Rand denominated credit facilities totalling R15,675 million with R12,335 million utilised as at March 31, 2009. The<br />
facilities that are uncommitted can also be utilised for loans to foreign entities and are subject to review at various dates (usually on an<br />
annual basis). Certain of the facilities are still subject to the Group’s final acceptance.
37. UNDRAWN BORROWING FACILITIES AND GU<strong>AR</strong>ANTEES (continued)<br />
37.2 Foreign denominated facilities and guarantees<br />
Rand denominated facilities and guarantees (continued)<br />
<strong>Telkom</strong> Annual Report 2009 219<br />
Notes to the consolidated annual financial statements (continued)<br />
for the three years ended March 31, 2009<br />
2007 2008 2009<br />
Guarantor Details Beneficiary Rm Rm Rm<br />
Vodacom (Proprietary) All guarantees individually less than Various 3 2 2<br />
Limited R2 million<br />
Vodacom Service All guarantees individually less than Various 3 3 2<br />
Provider Company R2 million<br />
(Proprietary) Limited<br />
Vodacom Service Guarantee in respect of receipt of SA Insurance 27 32 35<br />
Provider Company independent intermediaries of premiums Association<br />
(Proprietary) Limited on behalf of short-term insurers and for benefit<br />
Lloyd’s underwriters, and relating to<br />
short-term insurance business carried on<br />
in RSA. Renewable annually<br />
of insurers<br />
Smartcom (Proprietary) Guarantees for salary bank account Various 3 – –<br />
Limited and debit orders<br />
Cointel VAS (Proprietary) Guarantees for operating lease Various 1 – –<br />
Limited and debit orders<br />
Vodacom (Proprietary)<br />
Limited<br />
Letter of undertaking in respect of land Attorneys 7 17 33<br />
Vodacom Properties<br />
No.2 (Proprietary)<br />
Limited<br />
Lease guarantees Various – – 3<br />
44 54 75<br />
The Group exposure is 50% of the following items:<br />
Vodacom Congo (RDC) s.p.r.l. has various facilities of US$31 million which was fully utilised as at March 31, 2009. Vodacom<br />
International Limited has a revolving term loan of US$180 million which was fully utilised at March 31, 2009. Vodacom Lesotho<br />
(Proprietary) Limited has overdraft facilities with various banks of M25 million of which M13 million was utilised at March 31, 2009.<br />
Vodacom Tanzania Limited has medium-term loans for US$47 million and TZS54,000 million of which US$40 million and TZSNil was<br />
utilised at March 31, 2009. Foreign currency term facilities are predominantly US Dollar based, at various maturities and are utilised for<br />
bridging and short-term working capital needs.<br />
2007 2008 2009<br />
Guarantor Details Beneficiary Rm Rm Rm<br />
Vodacom Group Guarantees issued for the obligation of Standard Bank US$180 million 1,312 1,463 1,735<br />
(Proprietary) Limited Vodacom International Limited’s term plc and RMB (2008:<br />
loan facility*# International US$180 million;<br />
(Dublin) Limited 2007:<br />
US$180 million)<br />
1,312 1,463 1,735<br />
* Foreign denominated guarantees amounting to R1,735 million (2008: R1,463 million; 2007: R1,312 million) issued in support of Vodacom Congo (RDC)<br />
s.p.r.l. are included as liabilities in the disposal group held for sale.<br />
# The Group is in compliance with the covenants attached to the term loan facility.<br />
Companies within the Group have provided the following guarantees:<br />
Vodacom (Proprietary) Limited provides an unlimited guarantee for borrowings entered into by Vodacom Group (Proprietary) Limited.
220<br />
<strong>Telkom</strong> Annual Report 2009<br />
Notes to the consolidated annual financial statements (continued)<br />
for the three years ended March 31, 2009<br />
38. COMMITMENTS<br />
Capital commitments<br />
2007 2008 2009<br />
Rm Rm Rm<br />
Capital commitments authorised 11,167 15,198 7,928<br />
Fixed-line 7,000 7,000 6,991<br />
Mobile 4,159 5,211 –<br />
Multi-Links – 355 847<br />
Other 8 2,632 90<br />
Commitments against authorised capital expenditure 1,099 3,504 1,393<br />
Fixed-line 506 652 539<br />
Mobile 591 800 –<br />
Multi-Links – 355 847<br />
Other 2 1,697 7<br />
Authorised capital expenditure not yet contracted 10,068 11,694 6,535<br />
Fixed-line 6,494 6,348 6,452<br />
Mobile 3,568 4,411 –<br />
Multi-Links – – –<br />
Other 6 935 83<br />
Capital commitments comprise commitments for property, plant and<br />
equipment and software included in Intangible assets.<br />
Management expects these commitments to be financed from<br />
proceeds of the Vodacom sale.<br />
2010 FIFA World Cup commitments<br />
The FIFA World Cup commitment is an executory contract which requires <strong>Telkom</strong> to develop the fixed-line components of the necessary<br />
telecommunications infrastructure needed to broadcast this event to the world. This encompasses the provisioning of the fixed-line<br />
telecommunications related products and services and, where applicable, the services of qualified personnel necessary for the planning,<br />
management, delivery, installation and de-installation, operation, maintenance and satisfactory functioning of these products and services.<br />
Furthermore as a National Supporter. <strong>Telkom</strong> owns a tier 3 sponsorship that grants <strong>Telkom</strong> a package of advertising, promotional and<br />
marketing rights that are exercisable within the borders of South Africa. <strong>Telkom</strong> entered into a barter transaction in return for which it has<br />
an outstanding commitment to FIFA of R243 million (2008: R260 million) as at March 31, 2009. This has been recognised in intangible<br />
assets (note 12) and has been included in the disclosure note.<br />
Total 5 years<br />
Rm Rm Rm Rm<br />
Operating lease commitments and receivables<br />
2009<br />
Land and buildings 583 290 281 12<br />
Rental receivable on buildings (271) (99) (170) (2)<br />
Vehicles 1,137 261 876 –<br />
Equipment 15 6 9 –<br />
Customer premises equipment receivables (87) (48) (39) –<br />
Total 1,377 410 957 10
38. COMMITMENTS (continued)<br />
Operating lease commitments and receivables (continued)<br />
<strong>Telkom</strong> Annual Report 2009 221<br />
Notes to the consolidated annual financial statements (continued)<br />
for the three years ended March 31, 2009<br />
Total 5 years<br />
Rm Rm Rm Rm<br />
2008<br />
Land and buildings 2,061 341 913 807<br />
Rental receivable on buildings (266) (94) (169) (3)<br />
Transmission and data lines 709 134 490 85<br />
Vehicles 1,444 233 1,211 –<br />
Equipment 13 10 3 –<br />
Sport and marketing contracts 680 282 395 3<br />
Customer premises equipment receivables (84) (45) (39) –<br />
Total 4,557 861 2,804 892<br />
2007<br />
Land and buildings 1,465 289 771 405<br />
Rental receivable on buildings (269) (91) (174) (4)<br />
Transmission and data lines 262 68 159 35<br />
Vehicles 573 568 5 –<br />
Equipment 23 6 17 –<br />
Sport and marketing contracts 441 164 275 2<br />
Customer premises equipment receivables (57) (30) (27) –<br />
Total 2,438 974 1,026 438<br />
Customer premises equipment receivable<br />
The disclosed information relates to those arrangements which were assessed to be operating leases in terms of IAS17.<br />
Operating leases<br />
The Group leases certain buildings, vehicles and equipment. The majority of the lease terms negotiated for equipment-related premises are<br />
10 years with other leases signed for five and three years. The majority of the leases contain an option clause entitling <strong>Telkom</strong> to renew<br />
the lease agreements for a period usually equal to the main lease term.<br />
The minimum lease payments under these agreements are subject to annual escalations, which range from 6% to 15%.<br />
Penalties in terms of the lease agreements are only payable should <strong>Telkom</strong> vacate a premises and negotiate to terminate the lease<br />
agreement prior to the expiry date, in which case the settlement payment will be negotiated in accordance with the market conditions of<br />
the premises. Future minimum lease payments under operating leases are included in the above note. Onerous leases for buildings, of<br />
which <strong>Telkom</strong> has no further use, no possibility of sub-lease and no option to cancel, are provided for in full and included in other provisions<br />
(refer to note 29).<br />
The master lease agreement for vehicles was for a period of five years and then extended for an additional three years which resulted in<br />
the lease expiring on March 31, 2008. During August 2007 new terms were negotiated and approved and as a result the operating<br />
lease commitments for vehicles are based on the new agreement which expires on March 31, 2013.<br />
In accordance with this agreement <strong>Telkom</strong> is not allowed to lease any similar vehicle as specified in the contract from any other service<br />
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<br />
which are not part of the agreement.<br />
The agreement is structured to have no lease increases on vehicles that are continually leased from the lessor. If a vehicle is, however,<br />
replaced by a new similar vehicle, the lease costs of the newest vehicle will increase by the Consumer Price Index. All leased vehicles are,<br />
however, subject to any variance in the interest rate fluctuations and are adjusted as and when the adjustments are announced by the South<br />
African Reserve Bank. The leases of individual vehicles are renewed annually.<br />
The master lease agreements for office equipment are with two suppliers with initial periods of 36 months effective from November 25,<br />
2005. Upon expiry of the initial lease agreement on November 25, 2008, an extension of the lease was negotiated until November 24,<br />
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.
222<br />
<strong>Telkom</strong> Annual Report 2009<br />
Notes to the consolidated annual financial statements (continued)<br />
for the three years ended March 31, 2009<br />
38. COMMITMENTS (continued)<br />
Total 5 years<br />
Rm Rm Rm Rm<br />
Finance lease commitments<br />
2009<br />
Building<br />
Minimum lease payments 1,654 113 546 995<br />
Finance charges (822) (112) (426) (284)<br />
Finance lease obligation 832 1 120 711<br />
Equipment<br />
Minimum lease payments 7 5 2 –<br />
Finance charges (2) (1) (1) –<br />
Finance lease obligation 5 4 1 –<br />
Vehicles<br />
Minimum lease payments 187 47 140 –<br />
Finance charges (38) (15) (23) –<br />
Finance lease obligation 149 32 117 –<br />
2008<br />
Building<br />
Minimum lease payments 2,198 257 791 1,150<br />
Finance charges (1,031) (152) (496) (383)<br />
Finance lease obligation 1,167 105 295 767<br />
Equipment<br />
Minimum lease payments 16 4 12 –<br />
Finance charges (2) – (2) –<br />
Finance lease obligation 14 4 10 –<br />
Vehicles<br />
Minimum lease payments 242 48 194 –<br />
Finance charges (59) (20) (39) –<br />
Finance lease obligation 183 28 155 –<br />
2007<br />
Building<br />
Minimum lease payments 2,412 227 853 1,332<br />
Finance charges (1,198) (166) (540) (492)<br />
Finance lease obligation 1,214 61 313 840<br />
Equipment<br />
Minimum lease payments 6 – 6 –<br />
Finance charges – – – –<br />
Finance lease obligation 6 – 6 –<br />
Finance leases<br />
Finance leases on vehicles relates to the lease of Swap bodies. The lease term for the Swap bodies is April 2008 to April 2013.<br />
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<br />
buildings is for a period of 25 years ending 2019. The minimum lease payments are subject to an annual escalation of 10% p.a. <strong>Telkom</strong><br />
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<br />
damages.<br />
Finance leases on equipment mainly relates to office equipment. The lease term negotiated for the finance leases is for a period of three<br />
years ending in 2011.
39. CONTINGENCIES<br />
<strong>Telkom</strong> Annual Report 2009 223<br />
Notes to the consolidated annual financial statements (continued)<br />
for the three years ended March 31, 2009<br />
2007 2008 2009<br />
Rm Rm Rm<br />
Third parties 28 27 18<br />
Fixed-line 19 18 18<br />
Mobile 4 4 –<br />
Multi-Links – – –<br />
Other 5 5 –<br />
Third parties<br />
These amounts represent sundry disputes with suppliers that are not individually significant and that the Group does not intend to settle.<br />
Supplier dispute<br />
Telcordia instituted arbitration proceedings against <strong>Telkom</strong> in March 2001 before a single arbitrator of the International Court of Arbitration,<br />
operating under the auspices of the International Chamber of Commerce. Telcordia is seeking to recover approximately US$130 million<br />
for monies outstanding and damages, plus costs and interest at a rate of 15.5% per year which was increased by Telcordia to<br />
US$172 million in the 2007 financial year and subsequently decreased to US$128 million in the 2008 financial year. The arbitration<br />
proceeding relates to the cancellation of an agreement entered into between <strong>Telkom</strong> and Telcordia during June 1999 for the development<br />
and supply of an integrated end-to-end customer assurance and activation system by Telcordia.<br />
In September 2002, the arbitrator found that <strong>Telkom</strong> had wrongfully repudiated the contract and a partial award was issued by the<br />
arbitrator in favour of Telcordia. <strong>Telkom</strong> subsequently filed an application in the South African High Court to review and set aside the partial<br />
award. On November 27, 2003, the South African High Court set aside the partial award and issued a cost order in favour of <strong>Telkom</strong>.<br />
On May 3, 2004, the South African High Court dismissed an application by Telcordia for leave to appeal and ordered Telcordia to pay<br />
the legal costs of <strong>Telkom</strong>.<br />
On November 29, 2004 the Supreme Court of Appeals granted Telcordia leave to appeal. Telcordia filed a notice of appeal and also<br />
petitioned the United States District Court for the District of Columbia to confirm the partial award, which petition was dismissed, along<br />
with a subsequent appeal. Following the dismissal of the appeal, Telcordia filed a similar petition in the United States District Court of New<br />
Jersey. The United States District Court of New Jersey also dismissed Telcordia’s petition, reaffirming the decision of the United States District<br />
Court of Columbia. Telcordia appealed this dismissal, which was later dismissed by the Appeals Court of New Jersey.<br />
The appeal by Telcordia in the Supreme Court of Appeals was set down for and heard on October 30 and October 31, 2006. Following<br />
the successful upholding of the appeal, <strong>Telkom</strong> filed an application for leave to appeal to the Constitutional Court on only the issue revolving<br />
around the Supreme Court of Appeals’ failure to recognise <strong>Telkom</strong>’s rights of access to the courts under the South African Arbitration Act.<br />
The Constitutional Court has since dismissed <strong>Telkom</strong>’s appeal with costs. The Constitutional Court judgment brought finality to the dispute<br />
over the merits of Telcordia’s claim against <strong>Telkom</strong> and the parties reconvened the arbitration in May 2007 to deal with the amount of<br />
damages to which Telcordia is entitled.<br />
Two hearings were held at the International Dispute Resolutions Centre (IDRC). The first hearing was held in London on May 21, 2007<br />
and was a ’directions hearing’, in terms of which the parties consented to a ruling by the arbitrator setting out a consolidated list of<br />
proposals and issues to form part of the damages hearing.<br />
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<br />
out of part of <strong>Telkom</strong>’s defence on the basis that <strong>Telkom</strong> had raised issues in its defence that had already been heard by the arbitrator prior<br />
to his partial award. This application was dismissed by the arbitrator. The arbitrator also made a ruling compelling Telcordia to provide<br />
certain particulars requested by <strong>Telkom</strong> with regard to the claims by Telcordia. In his ruling, the arbitrator also set out a list of issues for<br />
determination of the damages.
224<br />
<strong>Telkom</strong> Annual Report 2009<br />
Notes to the consolidated annual financial statements (continued)<br />
for the three years ended March 31, 2009<br />
39. CONTINGENCIES (continued)<br />
Supplier dispute (continued)<br />
The mediation took place in London in February and April of 2008 without success. In the interim the parties agreed to the appointment<br />
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<br />
Telcordia, who will make a recommendation to the arbitrator in dealing with the amount of the claims. A further hearing was held before<br />
the arbitrator in October 2008 during which the arbitrator permitted <strong>Telkom</strong> to amend its statement of defence. Further hearings were held<br />
before the software expert in November 2008 and he has made his report available.<br />
The parties have now agreed that the whole question of “integration” of the software will be done at an experts only hearing (no lawyers)<br />
before Mr P Burns, a software expert in Johannesburg during October 2009. The hearings before the software expert will have an impact<br />
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<br />
Johannesburg.<br />
Although <strong>Telkom</strong> is currently unable to predict the exact amount that it may eventually be required to pay Telcordia, it has made provisions<br />
for estimated liabilities in respect of the Telcordia claim in the sum of US$70 million (R664 million), including interest and legal fees. <strong>Telkom</strong><br />
will be required to fund any payments to Telcordia from cash flows or the incurrence of debt and the amount of any damages above<br />
<strong>Telkom</strong>’s provision would increase <strong>Telkom</strong>’s liabilities and decrease its net profit, which could have a material adverse effect on its financial<br />
condition, cash flows and results of operations.<br />
A provision has been raised based on management’s best estimate of the probable payments in this regard.<br />
2007 2008 2009<br />
Rm Rm Rm<br />
Supplier dispute liability included in current portion of provisions 527 569 664*<br />
The provision has not increased from March 31, 2007, except for foreign exchange movements.<br />
* US$70 million (2008: US$70 million; 2007: US$70 million).<br />
Competition Commission<br />
<strong>Telkom</strong> is party to a number of legal and arbitration proceedings filed by parties with the South African Competition Commission alleging<br />
anti-competitive practices described below. If <strong>Telkom</strong> were found to have committed prohibited practices as contained in the Competition<br />
Act, 1998, as amended. <strong>Telkom</strong> could be required to cease these practices, divest these businesses and be fined a penalty of up to 10%<br />
of <strong>Telkom</strong>’s annual turnover, excluding the turnover of subsidiaries and joint ventures, for each complaint for the financial years prior to the<br />
dates of the complaints. The Competition Commission has to date not imposed the maximum penalty on any offender.<br />
On July 31, 2008, <strong>Telkom</strong> received a summons issued by the Competition Commission requesting information in connection with<br />
investigations being conducted by the Competition Commission into five complaints against <strong>Telkom</strong> described in greater detail below by the<br />
Internet Service Association, MWEB, Internet Solutions and Verizon SA Limited. The summons was subsequently withdrawn by the Competition<br />
Commission following an agreement with <strong>Telkom</strong> in a co-operative process with the Competition Commission as part of the Competition<br />
Commission’s ongoing investigations into these complaints. The investigation is expected to be finalised in the 2009 calendar year.<br />
As competition continues to increase, <strong>Telkom</strong> expects that we will become involved in an increasing number of disputes regarding the<br />
legality of services and products provided by <strong>Telkom</strong> and third parties. These disputes may range from court lawsuits to complaints lodged<br />
by or against <strong>Telkom</strong> with various regulatory bodies. <strong>Telkom</strong> is currently unable to predict the amount that it may eventually be required to<br />
pay in these proceedings. However, <strong>Telkom</strong> has not included provisions for any of these claims in our financial statements. In addition,<br />
<strong>Telkom</strong> might need to spend substantial amounts defending or prosecuting these claims even if it is ultimately successful. If <strong>Telkom</strong> is required<br />
to cease these practices, divest from the relevant businesses or pay significant fines, <strong>Telkom</strong>’s business and financial condition could be<br />
materially and adversely affected and its revenue and net profit could decline. <strong>Telkom</strong> may be required to fund any penalties or damages<br />
from cash flows or drawings on our credit facilities, which could cause its indebtedness to increase.<br />
Independent Cellular Services Provider Association of South Africa (ICSPA)<br />
In 2002, the ICSPA filed a complaint against <strong>Telkom</strong> at the Competition Commission in terms of the Competition Act, alleging that <strong>Telkom</strong><br />
had entered into contracts with large corporations, providing large discounts with the effect of discouraging the corporates from using the<br />
’premicell’ device installed by their members. ICSPA also alleged various contraventions of the Competition Act by <strong>Telkom</strong>. <strong>Telkom</strong> provided<br />
the Competition Commission with certain information requested. <strong>Telkom</strong> also referred the Competition Commission to its High Court<br />
application in respect of utilisation of the ’premicell’ device. The Competition Commission declined to refer the matter to the Competition<br />
Tribunal. ICSPA then referred the matter to the Competition Tribunal on September 18, 2003. <strong>Telkom</strong> filed its answering affidavit on<br />
November 28, 2003. ICSPA has taken no further action since then.
39. CONTINGENCIES (continued)<br />
Competition Commission (continued)<br />
The South African Value Added Network Services (SAVA)<br />
<strong>Telkom</strong> Annual Report 2009 225<br />
Notes to the consolidated annual financial statements (continued)<br />
for the three years ended March 31, 2009<br />
On May 7, 2002, the South African Value Added Network Services Providers’ Association, an association of VANS providers, filed<br />
complaints against <strong>Telkom</strong> at the Competition Commission of the Republic of South Africa under the South African Competition Act, 89 of<br />
1998, alleging, among other things, that <strong>Telkom</strong> was abusing its dominant position in contravention of the Competition Act, 89 of 1998,<br />
and that it was engaged in price discrimination. The Competition Commission determined, among other things, that several aspects of<br />
<strong>Telkom</strong>’s conduct contravened the Competition Act, 89 of 1998, and referred certain of the relevant complaints to the Competition Tribunal<br />
for adjudication. The referred complaints deal with <strong>Telkom</strong>’s alleged refusal to provide telecommunications facilities to certain VANS<br />
providers to construct their networks, refusal to lease access facilities to VANS providers, provision of bundled and cross subsidised<br />
competitive services with monopoly services, discriminatory pricing with regard to leased line services and alleged refusal to peer with<br />
certain VANS providers.<br />
<strong>Telkom</strong> brought an application for review against the Competition Commission and the Competition Tribunal in the South African High<br />
Court, in respect of the decision by the Competition Commission to refer the matters to the Competition Tribunal. <strong>Telkom</strong> is of the view that<br />
the Competition Tribunal does not have jurisdiction to adjudicate these matters and argued that ICASA has the requisite jurisdiction. In the<br />
review application, <strong>Telkom</strong> also sought to set aside the decision by the Competition Commission to refer the complaints to the Competition<br />
Tribunal on the basis that the Competition Commission was biased, that the referral was out of time and that the Competition Commission<br />
had not adhered to the memorandum of understanding between it and ICASA. Only the Competition Commission opposed the application<br />
and filed an answering affidavit.<br />
The main complaint at the Competition Commission was held over pending the outcome of the review application.<br />
The application for review was heard on April 24 and 25, 2008. The South African High Court judge set aside the decision of the<br />
Competition Commission to refer the SAVA complaints and the Omnilink complaint against <strong>Telkom</strong> discussed below to the Competition<br />
Tribunal. The decision was made based on three grounds, namely that:<br />
• the Competition Commission failed to comply with the peremptory provisions of the memorandum of understanding between the<br />
Competition Commission and ICASA;<br />
• the referral was out of time, on the basis that the agreements with the complainants to extend the time which the Competition Commission<br />
was allowed to investigate the complaints were invalid; and<br />
• the Competition Commission’s reliance on a report by the Link Centre created reasonable apprehension of bias, since some of the<br />
complainants contribute financially to the Link Centre and the Link Centre’s advisory board includes employees of the complainants in<br />
the SAVA complaints.<br />
The judge did not make a decision on the question of jurisdiction (ie, whether ICASA or the Competition Tribunal has the jurisdiction to<br />
deal with competition matters in the electronic communications industry).<br />
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<br />
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<br />
ground for review. <strong>Telkom</strong> then filed an application for leave to cross-appeal on July 11, 2008. The main basis of <strong>Telkom</strong>’s cross-appeal<br />
is that <strong>Telkom</strong> believes that the judge erred in failing to make a decision as to whether ICASA or the Competition Commission and<br />
Competition Tribunal should deal with this type of complaint. The application for leave to appeal as well as the application for leave to<br />
cross-appeal were granted by the Pretoria High Court on October 9, 2008. The parties are attending to the filing of the record of<br />
proceedings before the High Court as well as the parties’ heads of argument, after which the Registrar of the Supreme Court of Appeal<br />
will inform the parties of the date for the hearing. The main complaint before the Competition Tribunal will continue to be held over pending<br />
the outcome of the appeal and cross-appeal.<br />
This matter is not expected to be finalised within the 2010 financial year.
226<br />
<strong>Telkom</strong> Annual Report 2009<br />
Notes to the consolidated annual financial statements (continued)<br />
for the three years ended March 31, 2009<br />
39. CONTINGENCIES (continued)<br />
Competition Commission (continued)<br />
Omnilink<br />
On August 22, 2002 Omnilink filed a complaint against <strong>Telkom</strong> at the Competition Commission alleging that <strong>Telkom</strong> was abusing its<br />
dominance by discriminating in its price for Diginet services as against those charged to VANS and the price charged to customers who<br />
apply for a <strong>Telkom</strong> VPN solution. The Competition Commission conducted an enquiry and subsequently referred the complaint, together<br />
with the SAVA complaint, to the Competition Tribunal for adjudication. This matter is currently being dealt with together with the SAVA matter<br />
discussed previously.<br />
Orion/<strong>Telkom</strong> (Standard Bank and Edcon): Competition Tribunal<br />
In April 2003, Orion filed a complaint against <strong>Telkom</strong>, Standard Bank and Edcon at the Competition Commission concerning <strong>Telkom</strong>’s<br />
discounts offered on public switched telecommunication services to corporate customers. In terms of the rules of the Competition<br />
Commission, the Competition Commission, who acts as an investigator, had one year to investigate the complaint. Orion, simultaneously<br />
with the filing of the complaint, also filed an application against <strong>Telkom</strong>, Standard Bank and Edcon at the Competition Tribunal, for an<br />
interim order interdicting and restraining <strong>Telkom</strong> from offering Orion’s corporate customers reduced rates associated with <strong>Telkom</strong>’s Cellsaver<br />
discount plan.<br />
The Competition Commission completed its investigation and decided that there was no prima facie evidence of any contravention of the<br />
Competition Act. Orion however referred the matter to the Competition Tribunal in terms of section 51 of the Competition Act, which allows<br />
for parties to refer matters to the Competition Tribunal themselves. <strong>Telkom</strong> has not yet filed its answering affidavit in the main complaint<br />
before the Competition Tribunal. To date there have been no further developments on this matter.<br />
The Internet Service Providers Association (ISPA)<br />
In December 2005, the ISPA, an association of ISPs, filed complaints against <strong>Telkom</strong> at the Competition Commission regarding alleged<br />
anti-competitive practices on the part of <strong>Telkom</strong>. The complaints deal with the cost of access to SAIX, the prices offered by <strong>Telkom</strong>Internet,<br />
the alleged delay in provision of facilities to ISPs and the alleged favourable installation timelines offered to <strong>Telkom</strong>Internet customers. The<br />
Competition Commission has formally requested <strong>Telkom</strong> to provide it with certain records of orders placed for certain services, in an attempt<br />
to first investigate the latter aspects of the complaint. <strong>Telkom</strong> provided the Competition Commission with the information.<br />
MWEB and Internet Solutions (IS)<br />
On June 29, 2005, MWEB and Internet Solutions, or IS, jointly lodged a complaint with the Competition Commission against <strong>Telkom</strong> and<br />
also requested interim relief at the Competition Tribunal. The complaint at the Competition Commission mainly deals with <strong>Telkom</strong>’s pricing<br />
for ADSL retail products and its IP Connect products, the termination of the peering link between <strong>Telkom</strong> and IS, the wholesale pricing of<br />
SAIX bandwidth for ADSL users of other internet service providers, the architecture of <strong>Telkom</strong>’s ADSL access route and the manner in which<br />
internet service providers can only connect to <strong>Telkom</strong>’s edge service router via IP Connect as well as alleged excessive pricing for bandwidth<br />
on <strong>Telkom</strong>’s international undersea cable. The application for interim relief at the Competition Tribunal dealt with allegations that <strong>Telkom</strong><br />
should maintain the peering link between IS and <strong>Telkom</strong> in terms of its current peering agreement, and demanded that <strong>Telkom</strong> treat the<br />
traffic generated by ADSL customers of MWEB as traffic destined for the peering link and that <strong>Telkom</strong> upgrade its peering link to<br />
accommodate the increased ADSL traffic emanating from MWEB and maintain a maximum of 65% utilisation. <strong>Telkom</strong> filed its answering<br />
affidavit, and is awaiting IS and MWEB’s replying affidavit.<br />
Since then, <strong>Telkom</strong> has entered into a new peering agreement with IS and has responded to numerous documentation and information<br />
requests from the Competition Commission. To date neither MWEB nor IS has filed a replying affidavit in the interim relief application.
39. CONTINGENCIES (continued)<br />
Competition Commission (continued)<br />
MWEB<br />
<strong>Telkom</strong> Annual Report 2009 227<br />
Notes to the consolidated annual financial statements (continued)<br />
for the three years ended March 31, 2009<br />
On June 5, 2007, MWEB brought an application against <strong>Telkom</strong> for interim relief at the Competition Tribunal with regard to the manner<br />
in which <strong>Telkom</strong> provides wholesale ADSL internet connections. MWEB requested the Competition Tribunal to grant an order of interim<br />
relief against <strong>Telkom</strong> to charge MWEB a wholesale price for the provision of ADSL internet connections which is not higher than the lowest<br />
retail price. MWEB further applied for an order that <strong>Telkom</strong> implement the migration of end customers from <strong>Telkom</strong> PSTS ADSL access to<br />
MWEB without interruption of the service. <strong>Telkom</strong> raised the objection that the Competition Tribunal does not have jurisdiction to hear the<br />
matter in its answering affidavit filed at the Competition Tribunal. <strong>Telkom</strong> still had to “plead over” as to the merits of the matter. <strong>Telkom</strong> also<br />
filed an application in the Transvaal Provincial Division of the South African High Court on July 3, 2007 for an order declaring that the<br />
Competition Tribunal does not have jurisdiction to hear the application for interim relief made to it by MWEB.<br />
The application before the High Court was set down for hearing during the first quarter of the 2009 financial year. The parties however<br />
entered into settlement negotiations, which resulted in the withdrawal of the interim relief application at the Competition Tribunal by MWEB<br />
as well as a withdrawal of the jurisdictional challenge filed at the South African High Court by <strong>Telkom</strong>. The parties are in further<br />
negotiations.<br />
Verizon SA Limited (Verizon)<br />
Verizon filed a complaint against <strong>Telkom</strong> on March 22, 2007 alleging that <strong>Telkom</strong> charges an excessive price on services rendered to<br />
Verizon thereby inducing Verizon’s customers not to deal with Verizon, engages in exclusionary conduct through “margin squeeze” in<br />
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<br />
Verizon, and that <strong>Telkom</strong> engages in price discrimination against Verizon.<br />
Internet Solutions (IS)<br />
IS filed a complaint against <strong>Telkom</strong> at the Competition Commission during December 2007. The complaint alleges abusive conduct by<br />
<strong>Telkom</strong>. IS specifically alleges that <strong>Telkom</strong> is charging excessive prices that bear no reasonable relation to the economic value of the goods<br />
or services, that <strong>Telkom</strong> has raised the wholesale cost to downstream competitors, while also reducing the downstream retail price to clients;<br />
engaging in margin squeeze, that <strong>Telkom</strong> has introduced a series of bundled products (namely <strong>Telkom</strong> Closer Products) that limit the ability<br />
of rivals in particular markets to compete effectively, and <strong>Telkom</strong> is offering discriminatory prices in relation to a number of infrastructural<br />
and service items that IS is compelled to purchase from <strong>Telkom</strong>.<br />
While that complaint was being investigated by the Competition Commission IS brought an application to the Competition Commission<br />
for interim relief requesting: that <strong>Telkom</strong> be ordered to charge IS a wholesale price for telecommunication facilities to provide virtual private<br />
network services to its customers no higher than the lowest retail price for such connection charged to <strong>Telkom</strong>’s VPN Supreme customers<br />
and ordering that the costs of the application be paid by <strong>Telkom</strong>.<br />
<strong>Telkom</strong> opposed the application of by IS at the Competition Tribunal although it is unable to finalise its opposing papers due to difficulties<br />
associated with the manner in which IS claimed confidentiality over the application. No further activity has taken place with regard to the<br />
interim relief application to date.
228<br />
<strong>Telkom</strong> Annual Report 2009<br />
Notes to the consolidated annual financial statements (continued)<br />
for the three years ended March 31, 2009<br />
39. CONTINGENCIES (continued)<br />
Competition Commission (continued)<br />
Telecom and Broadcasting (Proprietary) Limited (Maredi)<br />
Maredi<br />
Maredi served a notice of motion on <strong>Telkom</strong>, Ericsson SA and Telsaf Data (Pty) Ltd on January 8, 2009. The matter relates to a tender<br />
published by <strong>Telkom</strong> for the supply of point-to-point split mount microwave equipment. Maredi, Telsaf, Ericsson and a fourth company,<br />
Mobax, were shortlisted. The tender was awarded by <strong>Telkom</strong> to Telsaf and Ericsson.<br />
Maredi applied for a court order, with a court hearing date set for February 3, 2009, requesting that the court prevent <strong>Telkom</strong> from entering<br />
into a contract with Ericsson and Telsaf or either party, and from ordering goods or services from Ericsson and Telsaf pursuant to the tender.<br />
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<br />
aforementioned parties, and refer the tender back to <strong>Telkom</strong> in order for <strong>Telkom</strong> to reconsider its award. Maredi alleged that there were<br />
certain irregularities in the tender process in that <strong>Telkom</strong> did not follow fair procedures by failing to comply with its own mandatory<br />
procedural requirements, that <strong>Telkom</strong> acted arbitrarily and in bad faith, that <strong>Telkom</strong> was biased in favour of Ericsson and that Ericsson should<br />
have been disqualified as it failed to meet <strong>Telkom</strong>’s critical criteria as set out in the tender.<br />
Numerous allegations in the application, including accusations against certain members of the Procurement Review Council and allegations<br />
by Maredi of compliance by them to the technical critical criteria, were refuted by <strong>Telkom</strong>. <strong>Telkom</strong> and Ericsson opposed the application<br />
and filed their respective opposing affidavits. Telsaf did not oppose the application. The matter was ultimately set down for hearing on<br />
February 20, 2009 and Maredi’s application was dismissed with costs. However, Maredi is proceeding with a review application in the<br />
ordinary course and <strong>Telkom</strong> is opposing the application.<br />
<strong>Telkom</strong> is not currently able to predict when these disputes may be resolved or the amount that <strong>Telkom</strong> may eventually be required to pay,<br />
however, <strong>Telkom</strong> has not included provisions for all of these claims in our consolidated financial statements. In addition, <strong>Telkom</strong> may need<br />
to spend substantial amounts defending or prosecuting these claims even if <strong>Telkom</strong> is ultimately successful. If <strong>Telkom</strong> were to lose these or<br />
future legal and arbitration proceedings, <strong>Telkom</strong> could be prohibited from engaging in certain business activities and could be required to<br />
pay substantial penalties and damages, which could cause <strong>Telkom</strong>’s revenue and net profit to decline and have a material adverse impact<br />
on the business and financial condition. <strong>Telkom</strong> may be required to fund any penalties or damages from cash flows or drawings on our<br />
credit facilities, which could cause <strong>Telkom</strong>’s indebtedness to increase.<br />
<strong>Telkom</strong> is party to various additional proceedings and lawsuits in the ordinary course of our business, which management does not believe<br />
will have a material adverse impact.<br />
Negative working capital ratio<br />
At each of the financial years ended March 31, 2009, 2008 and 2007 the Group had a negative working capital ratio. A negative<br />
working capital ratio arises when current liabilities are greater than current assets. Current liabilities are intended to be financed from<br />
operating cash flows, new borrowings and borrowings available under existing credit facilities.
40. DIRECTORS’ INTERESTS<br />
<strong>Telkom</strong> Annual Report 2009 229<br />
Notes to the consolidated annual financial statements (continued)<br />
for the three years ended March 31, 2009<br />
ST Arnold, RJ Huntley, E Spio-Garbrah, KST Matthews and VB Lawrence, five of <strong>Telkom</strong>’s Board members, are the South African<br />
Government’s representatives on <strong>Telkom</strong>’s Board of directors. At March 31, 2009, the Government held 39.76% (2008: 39.42%; 2007:<br />
38.83%) of <strong>Telkom</strong>’s shares.<br />
B Molefe is a Public Investment Corporation (PIC) representative on <strong>Telkom</strong>’s Board of directors. As at March 31, 2009 the PIC held<br />
15.63% (2008: 15.23%, 2007: 15.27%) of <strong>Telkom</strong>’s shares.<br />
Beneficial Non-beneficial<br />
Direct Indirect Direct Indirect<br />
Directors’ shareholding (Number of shares)<br />
2009<br />
Executive<br />
RJ September 90,815 1,820 – –<br />
PG Nelson 19,182 –<br />
Total 109,997 1,820 – –<br />
Non-executive<br />
PG Joubert – 15,000 – –<br />
D Barber – 1,200 – –<br />
– 16,200 – –<br />
2008<br />
Executive<br />
RJ September 7,155 – – –<br />
Total 7,155 – – –<br />
Non-executive<br />
At March 31, 2008 there were no non-executive directors’ shareholdings.<br />
2007<br />
Non-executive<br />
TF Mosololi 455 – – –<br />
Total 455 – – –<br />
The directors’ shareholding changed between the balance sheet date and the date of issue of the financial statements and this has been<br />
reflected in the above information.<br />
2007 2008 2009<br />
Rm Rm Rm<br />
Directors’ emoluments 7 36 20<br />
Executive<br />
For services as directors<br />
Non-executive<br />
4 31 15<br />
For services as directors 3 5 5
230<br />
<strong>Telkom</strong> Annual Report 2009<br />
Notes to the consolidated annual financial statements (continued)<br />
for the three years ended March 31, 2009<br />
40. DIRECTORS’ INTEREST (continued)<br />
Directors’ emoluments (continued)<br />
Performance Fringe and<br />
Fees Remuneration bonus other benefits Total<br />
R R R R R<br />
2009<br />
Emoluments per director:<br />
Non-executive 5,028,084 – – – 5,028,084<br />
ST Arnold 1,030,000 – – – 1,030,000<br />
B du Plessis 498,000 – – – 498,000<br />
PSC Luthuli 642,000 – – – 642,000<br />
KST Matthews 441,000 – – – 441,000<br />
B Molefe 159,551 – – – 159,551<br />
AG Rhoda 124,001 – – – 124,001<br />
RJ Huntley 533,000 – – – 533,000<br />
Dr E Spio-Garbrah** 622,750 – – – 622,750<br />
Dr VB Lawrence** 359,000 – – – 359,000<br />
DD Barber 293,667 – – – 293,667<br />
PG Joubert 302,778 – – – 302,778<br />
Executive – 4,530,912 2,289,947 7,848,357 14,669,216<br />
RJ September CEO* – 3,555,800 1,841,396 7,430,452 12,827,648<br />
PG Nelson CFO* – 975,112 448,551 417,905 1,841,568<br />
Total emoluments – paid by <strong>Telkom</strong> 5,005,747 4,530,912 2,289,947 7,848,357 19,674,963<br />
2008<br />
Emoluments per director:<br />
Non-executive 4,633,933 – – – 4,633,933<br />
ST Arnold 1,124,373 – – – 1,124,373<br />
B du Plessis 393,967 – – – 393,967<br />
MJ Lamberti – – – – –<br />
PSC Luthuli 502,117 – – – 502,117<br />
TD Mahloele 357,684 – – – 357,684<br />
KST Matthews 501,217 – – – 501,217<br />
TF Mosololi 174,960 – – – 174,960<br />
M Mostert*** 229,433 – – – 229,433<br />
DD Tabata 250,583 – – – 250,583<br />
YR Tenza 305,633 – – – 305,633<br />
PL Zim 5,333 – – – 5,333<br />
B Molefe 20,497 – – – 20,497<br />
A Rhoda 14,286 – – – 14,286<br />
RJ Huntley 193,833 – – – 193,833<br />
Dr E Spio-Garbrah** 273,841 – – – 273,841<br />
Dr VB Lawrence** 286,176 – – – 286,176<br />
Executive – 14,489,833 3,436,308 13,244,896 31,171,037<br />
R September* – 2,453,757 3,436,308 13,218,772 19,108,837<br />
CEO – 1,016,524 3,436,308 10,438,538 14,891,370<br />
Acting CEO – 1,437,233 – 2,780,234 4,217,467<br />
LRR Molotsane* – 12,036,076 – 26,124 12,062,200<br />
Total emoluments – paid by <strong>Telkom</strong> 4,633,933 14,489,833 3,436,308 13,244,896 35,804,970
40. DIRECTORS’ INTEREST (continued)<br />
Directors’ emoluments (continued)<br />
Performance Fringe and<br />
<strong>Telkom</strong> Annual Report 2009 231<br />
Notes to the consolidated annual financial statements (continued)<br />
for the three years ended March 31, 2009<br />
Fees Remuneration bonus other benefits Total<br />
R R R R R<br />
2007<br />
Emoluments per director:<br />
Non-executive 2,641,168 – – – 2,641,168<br />
NE Mtshotshisa 463,050 – – – 463,050<br />
ST Arnold 353,719 – – – 353,719<br />
TCP Chikane 32,670 – – – 32,670<br />
B du Plessis 213,367 – – – 213,367<br />
PSC Luthuli 205,417 – – – 205,417<br />
TD Mahloele 166,667 – – – 166,667<br />
KST Matthews 109,643 – – – 109,643<br />
TF Mosololi 214,417 – – – 214,417<br />
M Mostert 232,417 – – – 232,417<br />
DD Tabata 175,367 – – – 175,367<br />
YR Tenza 321,767 – – – 321,767<br />
PL Zim 152,667 – – – 152,667<br />
Executive – 2,272,785 – 1,653,202 3,925,987<br />
LRR Molotsane* – 2,272,785 – 1,653,202 3,925,987<br />
Total emoluments – paid by <strong>Telkom</strong> 2,641,168 2,272,785 – 1,653,202 6,567,155<br />
*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<br />
(2008: R280,261; 2007: RNil) and PG Nelson of R125,765 (2008: RNil; 2007: RNil) at March 31, 2009 paid to the <strong>Telkom</strong> Retirement Fund.<br />
** Foreign directors.<br />
*** In the absence of an internal corporate finance division, and pending the structuring and staffing thereof, the <strong>Telkom</strong> Board resolved that it was in the<br />
best interest of the Company and shareholders to deploy the highest quality skills currently resident in <strong>Telkom</strong>, to evaluate, structure and make<br />
recommendations to the Board on major transactions. During 2008, Dr Mostert led all efforts in this regard and was remunerated accordingly. Moreover,<br />
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<br />
this involvement in the transaction evaluated.
232<br />
<strong>Telkom</strong> Annual Report 2009<br />
Notes to the consolidated annual financial statements (continued)<br />
for the three years ended March 31, 2009<br />
41. SEGMENT INFORMATION<br />
Eliminations represent the inter-segmental transactions that have been<br />
eliminated against segment results. The mobile segment represents the<br />
Group’s joint venture Vodacom.<br />
2007 2008 2009<br />
Rm Rm Rm<br />
Business segment<br />
Consolidated operating revenue 32,441 33,611 35,940<br />
Fixed-line 32,345 32,572 33,659<br />
Elimination (772) (830) (817)<br />
Multi-Links – 845 1,900<br />
Other 873 1,040 1,214<br />
Elimination (5) (16) (16)<br />
Discontinued operations 19,178 22,674 26,174<br />
Mobile 20,573 24,089 27,594<br />
Elimination (1,494) (1,519) (1,531)<br />
Other 106 108 123<br />
Elimination (7) (4) (12)<br />
Consolidated other income 338 472 343<br />
Fixed-line 334 497 524<br />
Elimination (46) (86) (245)<br />
Other 50 61 64<br />
Discontinued operations 46 62 129<br />
Mobile 42 56 119<br />
Other 4 6 10<br />
Consolidated operating expenses 23,028 25,014 29,895<br />
Fixed-line 24,083 24,962 29,849<br />
Elimination (1,505) (1,709) (3,624)<br />
Multi-Links – 942 2,422<br />
Elimination – 56 469<br />
Other 512 928 801<br />
Elimination (62) (165) (22)<br />
Discontinued operations 14,505 17,323 21,214<br />
Mobile 15,185 17,898 21,704<br />
Elimination (745) (805) (876)<br />
Other 77 245 607<br />
Elimination (12) (15) (221)
<strong>Telkom</strong> Annual Report 2009 233<br />
Notes to the consolidated annual financial statements (continued)<br />
for the three years ended March 31, 2009<br />
41. SEGMENT INFORMATION (continued)<br />
2007 2008 2009<br />
Rm Rm Rm<br />
Consolidated operating profit 9,751 9,069 6,388<br />
Fixed-line 8,596 8,107 4,334<br />
Elimination 687 793 2,562<br />
Multi-Links – (97) (522)<br />
Elimination – (56) (469)<br />
Other 411 173 477<br />
Elimination 57 149 6<br />
Discontinued operations 4,719 5,413 5,089<br />
Mobile 5,430 6,247 6,009<br />
Elimination (749) (714) (655)<br />
Other 33 (131) (474)<br />
Elimination 5 11 209<br />
Consolidated investment income 199 168 181<br />
Fixed-line 3,041 3,975 2,807<br />
Elimination (2,850) (3,832) (2,646)<br />
Multi-Links – 7 5<br />
Other 8 18 15<br />
Discontinued operations 37 29 35<br />
Mobile 37 27 33<br />
Other – 2 2<br />
Consolidated finance charges 857 1,556 2,843<br />
Fixed-line 857 1,277 1,464<br />
Multi-Links – (4) 1,201<br />
Elimination – (33) (164)<br />
Other – 318 353<br />
Elimination – (2) (11)<br />
Discontinued operations 269 247 922<br />
Mobile 269 240 921<br />
Other – 7 1<br />
Consolidated taxation 2,803 2,647 1,660<br />
Fixed-line 2,652 2,630 560<br />
Elimination – – 825<br />
Multi-Links – (131) 141<br />
Elimination – – (24)<br />
Other 151 148 158
234<br />
<strong>Telkom</strong> Annual Report 2009<br />
Notes to the consolidated annual financial statements (continued)<br />
for the three years ended March 31, 2009<br />
41. SEGMENT INFORMATION (continued)<br />
2007 2008 2009<br />
Rm Rm Rm<br />
Discontinued operations 1,928 2,057 2,021<br />
Mobile 1,918 2,055 2,023<br />
Other 10 2 (2)<br />
Minority interests 94 123 26<br />
Multi-Links – 12 (96)<br />
Other 94 111 122<br />
Discontinued operations 109 74 51<br />
Mobile 109 73 51<br />
Other – 1 –<br />
Profit attributable to equity holders of <strong>Telkom</strong> 6,196 4,911 2,040<br />
Fixed-line 8,128 8,175 5,117<br />
Elimination (2,163) (3,039) (909)<br />
Multi-Links – 33 (1,763)<br />
Elimination – (23) (281)<br />
Other 174 (386) (141)<br />
Elimination 57 151 17<br />
Discontinued operations 2,450 3,064 2,130<br />
Mobile 3,171 3,906 3,047<br />
Elimination (749) (714) (655)<br />
Other 23 (139) (471)<br />
Elimination 5 11 209<br />
Consolidated assets 57,426 68,259 59,712<br />
Fixed-line 44,224 47,829 54,593<br />
Elimination (1,547) (1,604) (1,167)<br />
Mobile 14,026 16,743 –<br />
Elimination (353) (278) –<br />
Multi-Links – 2,451 5,834<br />
Elimination – – (860)<br />
Other 1,188 3,283 1,285<br />
Elimination (112) (165) 27<br />
Disposal group – – 23,215<br />
Mobile 23,412<br />
Elimination (269)<br />
Other 94<br />
Elimination (22)
<strong>Telkom</strong> Annual Report 2009 235<br />
Notes to the consolidated annual financial statements (continued)<br />
for the three years ended March 31, 2009<br />
41. SEGMENT INFORMATION (continued)<br />
2007 2008 2009<br />
Rm Rm Rm<br />
Investments 1,461 1,499 1,383<br />
Fixed-line 1,621 4,917 10,910<br />
Elimination (341) (3,607) (9,540)<br />
Mobile 181 176 –<br />
Other – 13 13<br />
Disposal group – –<br />
Mobile 194<br />
Other financial assets 259 614 1,202<br />
Fixed-line 230 445 1,200<br />
Mobile 28 169 –<br />
Other 1 – 2<br />
Disposal group<br />
Mobile – – 73<br />
Total assets 59,146 70,372 85,779<br />
Consolidated liabilities 15,951 19,689 14,247<br />
Fixed-line 10,154 11,892 13,002<br />
Elimination (458) (495) (514)<br />
Multi-Links – 639 1,564<br />
Elimination – – (265)<br />
Mobile 7,416 8,871 –<br />
Elimination (1,468) (1,542) –<br />
Other 374 332 165<br />
Elimination (67) (8) 295<br />
Disposal group – – 8,498<br />
Mobile 9,611<br />
Elimination (1,128)<br />
Other 15<br />
Interest-bearing debt 10,364 15,733 18,275<br />
Fixed-line 9,082 13,362 17,704<br />
Mobile 1,278 1,815 –<br />
Multi-Links – 532 550<br />
Other 4 24 21<br />
Disposal group – – 7,052<br />
Mobile 7,052<br />
Other –
236<br />
<strong>Telkom</strong> Annual Report 2009<br />
Notes to the consolidated annual financial statements (continued)<br />
for the three years ended March 31, 2009<br />
41. SEGMENT INFORMATION (continued)<br />
2007 2008 2009<br />
Rm Rm Rm<br />
Other financial liabilities 229 1,290 228<br />
Fixed-line 58 167 226<br />
Mobile 158 204 –<br />
Other 13 919 2<br />
Disposal group<br />
Mobile – – 48<br />
Taxation liabilities 594 323 50<br />
Fixed-line – 7 12<br />
Mobile 556 290 –<br />
Other 38 26 38<br />
Disposal group – – 275<br />
Mobile 275<br />
Other –<br />
Total liabilities 27,138 37,035 48,673<br />
Other segment information<br />
Capital expenditure for property, plant and equipment 8,648 10,108 8,725<br />
Fixed-line 5,545 6,044 5,866<br />
Mobile 3,069 2,475 –<br />
Multi-Links – 1,312 2,754<br />
Other 34 277 105<br />
Disposal group – – 3,013<br />
Mobile 2,979<br />
Other 34<br />
Capital expenditure for intangible assets 1,598 1,791 906<br />
Fixed-line 1,049 749 824<br />
Mobile 539 985 –<br />
Multi-Links – – 37<br />
Other 10 57 45<br />
Disposal group – – 590<br />
Mobile 590<br />
Other –<br />
Depreciation and amortisation 3,316 3,621 4,458<br />
Fixed-line 3,298 3,470 4,037<br />
Multi-Links – 119 296<br />
Elimination – – 69<br />
Other 18 32 50<br />
Elimination – – 6
41. SEGMENT INFORMATION (continued)<br />
<strong>Telkom</strong> Annual Report 2009 237<br />
Notes to the consolidated annual financial statements (continued)<br />
for the three years ended March 31, 2009<br />
2007 2008 2009<br />
Rm Rm Rm<br />
Discontinued operations 1,703 1,980 2,373<br />
Mobile 1,681 1,955 2,341<br />
Other 22 25 32<br />
Impairment and asset write-offs 284 514 822<br />
Fixed-line 284 262 321<br />
Multi-Links – 23 462<br />
Other – 229 39<br />
Discontinued operations 12 15 57<br />
Mobile 12 15 57<br />
Other – – –<br />
Workforce reduction expense – Fixed-line 24 3 8<br />
Geographical segment<br />
Consolidated operating revenue 32,441 33,611 35,940<br />
South Africa 32,428 32,671 33,847<br />
Other African countries 29 956 2,093<br />
Elimination (16) (16) –<br />
Disposal group 19,178 22,674 26,174<br />
South Africa 17,130 19,997 22,298<br />
Other African countries 2,070 2,697 3,932<br />
Elimination (22) (20) (56)<br />
Consolidated operating profit 9,751 9,069 6,388<br />
South Africa 9,744 9,254 7,435<br />
Other African countries 18 (169) (533)<br />
Elimination (11) (16) (514)<br />
Disposal group 4,719 5,413 5,089<br />
South Africa 4,622 5,089 4,726<br />
Other African countries 276 414 400<br />
Elimination (179) (90) (37)<br />
Consolidated assets 59,146 70,372 62,297<br />
South Africa 56,797 63,772 57,056<br />
Other African countries 3,489 8,785 6,101<br />
Eliminations (1,140) (2,185) (860)
238<br />
<strong>Telkom</strong> Annual Report 2009<br />
Notes to the consolidated annual financial statements (continued)<br />
for the three years ended March 31, 2009<br />
41. SEGMENT INFORMATION (continued)<br />
2007 2008 2009<br />
Rm Rm Rm<br />
Disposal group – – 23,482<br />
South Africa 20,693<br />
Other African countries 9,597<br />
Elimination (6,808)<br />
Capital expenditure for property, plant and equipment and intangible assets 10,246 11,899 9,631<br />
South Africa 9,459 9,780 6,735<br />
Other African countries 787 2,119 2,896<br />
Disposal group – – 3,603<br />
South Africa 2,443<br />
Other African countries 1,213<br />
Elimination (53)<br />
’South Africa’, which is also the country of domicile for <strong>Telkom</strong>, comprises the segment information relating to <strong>Telkom</strong> and its South African<br />
subsidiaries as well as Vodacom’s South African-based mobile communications network, the segment information of its service providers is<br />
included in the disposal group.<br />
‘Other African countries’ comprises <strong>Telkom</strong>’s subsidiaries Africa Online Limited and Multi-Links Telecommunications Limited as well as<br />
Vodacom’s mobile communications network in Tanzania, Lesotho, the Democratic Republic of the Congo and Mozambique.
<strong>Telkom</strong> Annual Report 2009 239<br />
Notes to the consolidated annual financial statements (continued)<br />
for the three years ended March 31, 2009<br />
42. RELATED P<strong>AR</strong>TIES<br />
Details of material transactions and balances with related parties not disclosed separately in the consolidated annual financial statements<br />
were as follows:<br />
2007 2008 2009<br />
Rm Rm Rm<br />
With joint venture:<br />
Vodacom Group (Proprietary) Limited<br />
Related party balances<br />
Trade receivables 61 51 61<br />
Trade payables (353) (346) (325)<br />
Related party transactions<br />
Revenue (755) (816) (891)<br />
Expenses 1,494 1,525 1,533<br />
Audit fees 3 3 2<br />
Revenue includes interconnect fees and lease and installation of transmission lines.<br />
Expenses mostly represent interconnect expenses.<br />
With shareholders:<br />
Public Investment Corporation<br />
There were no material transactions between <strong>Telkom</strong> and the<br />
Public Investment Corporation.<br />
Government<br />
Related party balances<br />
Trade receivables 271 326 386<br />
Related party transactions<br />
Revenue (2,458) (2,623) (2,767)<br />
With entities under common control:<br />
Major public entities<br />
Related party balances<br />
Trade receivables 59 28 52<br />
Trade payables (6) (25) (3)<br />
The outstanding balances are unsecured and will be settled in cash in<br />
the ordinary course of business.<br />
Related party transactions<br />
Revenue (435) (486) (446)<br />
Expenses 238 243 212<br />
Rent received (29) (21) (20)<br />
Rent paid 27 22 19<br />
Key management personnel compensation:<br />
(Including directors’ emoluments)<br />
Related party transactions<br />
Short-term employee benefits 116 155 62<br />
Post-employment benefits 4 4 6<br />
Termination benefits – 27 –<br />
Equity compensation benefits 8 29 39<br />
Other long-term benefits 17 – –<br />
The fair value of the shares that vested in the current year is R11 million (2008: R12 million; 2007: RNil).<br />
Terms and conditions of transactions with related parties<br />
The sales to and purchases from related parties of telecommunication services are made at arm’s length prices. Except as indicated above,<br />
outstanding balances at the year end are unsecured, interest-free and settlement occurs in cash. Apart from the bank guarantee to the<br />
amount not exceeding R23 million provided to Africa Online Limited, there have been no guarantees provided or received for related party<br />
receivables or payables.
240<br />
<strong>Telkom</strong> Annual Report 2009<br />
Notes to the consolidated annual financial statements (continued)<br />
for the three years ended March 31, 2009<br />
43. INTEREST IN MATERIAL SUBSIDI<strong>AR</strong>IES<br />
Country of incorporation: RSA – Republic of South Africa; TZN – Tanzania; LES – Lesotho; MZ – Mozambique; DRC – Democratic Republic<br />
of Congo; MAU – Mauritius; NIG – Nigeria; GUE – Guernsey.<br />
Nature of business: C – Cellular; S – Satellite; MSC – Management services company; PROP – Property company; OTH – Other.<br />
* Dormant at March 31, 2008.<br />
Issued share capital<br />
Interest in issued<br />
ordinary share capital<br />
Country of 2007 2008 2009 2007 2008 2009<br />
incorporation % % %<br />
Directory advertising<br />
Trudon (Proprietary) Limited (formerly trading as TDS Directory<br />
Operations (Proprietary) Limited)<br />
Other group entities<br />
RSA R100,000 R100,000 R100,000 64.9 64.9 64.9<br />
Rossal No 65 (Proprietary) Limited RSA R100 R100 R100 100 100 100<br />
Acajou Investments (Proprietary) Limited RSA R100 R100 R100 100 100 100<br />
Africa Online Limited MAU US$1,000 US$1,000 US$1,000 100 100 100<br />
Multi-Links Telecommunications Limited NIG – NGN300,000,000 NGN300,000,000 – 75 100<br />
<strong>Telkom</strong> Management Services (Proprietary) Limited RSA – – R100 – – 100<br />
Intekom (Proprietary) Limited RSA R10,001,000 R10,001,000 R10,001,000 100 100 100<br />
Q-Trunk (Proprietary) Limited RSA R10,001,000 R10,001,000 R10,001,000 100 100 100<br />
<strong>Telkom</strong> International (Proprietary) Limited RSA R100 R100 R100 100 100 100<br />
The aggregate net loss of the nine subsidiaries is<br />
R2,168 million (2008: R186 million) and profit of<br />
(2007: R564 million)<br />
Disposal group<br />
<strong>Telkom</strong> Media (Proprietary) Limited RSA R100 R100 R100 100 100 100<br />
Swiftnet (Proprietary) Limited RSA R25,000,000 R5,000,000 R5,000,000 100 100 100<br />
Vodacom has an interest in the following companies<br />
(Group share: 50% of the interest in ordinary share<br />
capital as indicated):<br />
Cellular network operators<br />
Vodacom (Proprietary) Limited (C) RSA R100 R100 R100 100 100 100<br />
Vodacom Lesotho (Proprietary) Limited (C) LES M4,180 M4,180 M4,180 88.3 88.3 88.3<br />
Vodacom Tanzania Limited (C) TZN TZS10,000 TZS10,000 TZS10,000 65 65 65<br />
VM, S.A.R.L. (C) MZ US$60,000,000 US$60,000,000 US$60,000,000 98 90 90<br />
Vodacom Congo (RDC) s.p.r.l. (C) DRC US$1,000,000 US$1,000,000 US$1,000,000 51 51 51<br />
Service providers<br />
Vodacom Service Provider Company (Proprietary) Limited (C) RSA R20 R20 R20 100 100 100<br />
Smartphone SP (Proprietary) Limited (C)* RSA R20,000 R20,000 R20,000 70 100 100<br />
Smartcom (Proprietary) Limited (C)* RSA R1,000 R1,000 R1,000 61.7 100 100<br />
Cointel VAS (Proprietary) Limited (C)* RSA R10,204 R10,204 R10,204 70 100 100<br />
Other significant subsidiaries of the Group’s Joint Venture<br />
Vodacom Service Provider Holdings Company (Proprietary)<br />
Limited (MSC)* RSA R1,020 R1,023 R1,023 100 100 100<br />
Vodacom Satellite Services (Proprietary) Limited (OTH)* RSA R100 R100 R100 100 100 100<br />
GSM Cellular (Proprietary) Limited (OTH)* RSA R1,200 R1,200 R1,200 100 100 100<br />
Vodacom Venture No.1 (Proprietary) Limited (OTH)* RSA R810 R810 R810 100 100 100<br />
Vodacom Equipment Company (Proprietary) Limited (OTH)* RSA R100 R100 R100 100 100 100<br />
Vodacare (Proprietary) Limited* (OTH) RSA R100 R100 R100 100 100 100
43. INTEREST IN MATERIAL SUBSIDI<strong>AR</strong>IES (continued)<br />
<strong>Telkom</strong> Annual Report 2009 241<br />
Notes to the consolidated annual financial statements (continued)<br />
for the three years ended March 31, 2009<br />
Interest in issued<br />
Issued share capital ordinary share capital<br />
Country of 2007 2008 2009 2007 2008 2009<br />
incorporation % % %<br />
Vodacom International Holdings (Proprietary) Limited (MSC) RSA R100 R100 R100 100 100 100<br />
Vodacom International Limited (MSC) MAU US$100 US$100 US$100 100 100 100<br />
Vodacom Properties No.1 (Proprietary) Limited (PROP) RSA R100 R100 R100 100 100 100<br />
Vodacom Properties No.2 (Proprietary) Limited (PROP) RSA R1,000 R1,000 R1,000 100 100 100<br />
Stand 13 Eastwood Road Dunkeld West (Proprietary)<br />
Limited (PROP) RSA R100 – – 70 – –<br />
Ithuba Smartcall (Proprietary) Limited (OTH) RSA R100 – – 36.4 – –<br />
Smartcall Smartlife (Proprietary) Limited (OTH) RSA R100 – – 63 – –<br />
Vodacom Tanzania Limited (Zanzibar) (OTH)* TZN TZS10,000 TZS10,000 TZS10,000 99 99 99<br />
Joycell Shops (Proprietary) Limited (OTH)* RSA R100 R100 R100 100 100 100<br />
Marble Gold Investments (Proprietary) Limited (OTH) * RSA R100 R100 R100 100 100 100<br />
Vodacom Ventures (Proprietary) Limited (OTH) RSA R120 R120 R120 100 100 100<br />
Skyprops 134 (Proprietary) Limited (PROP) RSA R100 R100 R100 100 100 100<br />
Storage Technology Services (Proprietary) Limited RSA – – R136 – – 51<br />
Gateway Telecommunications Plc UK – – £49,567,569 – – 100<br />
Gateway Communications Africa (UK) Limited UK – – £1 – – 100<br />
Gateway Communications SA BLG – – e62,000 – – 100<br />
Gateway Telecoms Integrated Services Limited NIG – – NGN1,250,000 – – 100<br />
GS Telecom Limited GUE – – US$193 – – 100<br />
Indebtedness of <strong>Telkom</strong> subsidiary companies Rm Rm Rm<br />
Intekom (Proprietary) Limited RSA – – – – – (23)<br />
Q-Trunk (Proprietary) Limited RSA – – – 30 26 22<br />
Rossal No 65 (Proprietary) Limited RSA – – – – 30 (342)<br />
Acajou Investments (Proprietary) Limited RSA – – – – – 285<br />
Africa Online Limited MAU – – – – 74 236<br />
Multi-Links Telecommunications Limited NIG – – – – 841 5,225<br />
<strong>Telkom</strong> International (Proprietary) Limited<br />
Disposal group<br />
RSA – – – – 1,985 1,985<br />
Swiftnet (Proprietary) Limited RSA – – – – – 10<br />
<strong>Telkom</strong> Media (Proprietary) Limited RSA – – – – 326 470
242<br />
<strong>Telkom</strong> Annual Report 2009<br />
Notes to the consolidated annual financial statements (continued)<br />
for the three years ended March 31, 2009<br />
44. SIGNIFICANT EVENTS<br />
<strong>Telkom</strong> Renaissance<br />
On November 14, 2008, <strong>Telkom</strong>’s Board of directors approved the new organisation structure which is designed to fit <strong>Telkom</strong>’s defend<br />
and growth strategy. The new structure is effective April 1, 2009 and is being managed through a project called <strong>Telkom</strong> Renaissance.<br />
The Group has been restructured into three operating Business Units namely <strong>Telkom</strong> South Africa, <strong>Telkom</strong> International and <strong>Telkom</strong> Data<br />
Centre Operations. The <strong>Telkom</strong> Renaissance initiative will occur over the next 24 months to ensure that all the necessary remodelling,<br />
reorganising, revitalising and re-engineering happens in order to make the new structure function optimally.<br />
This initiative is a complete transformation of the way <strong>Telkom</strong> focuses on servicing its customers and creating value for its stakeholders. It is<br />
a positive, purposeful change towards a more accountable and competitive company. This change is a necessary part of <strong>Telkom</strong>’s strategy<br />
to maintain and grow market share in South Africa whilst building a strong footprint on the African continent.<br />
Capability Management<br />
<strong>Telkom</strong> will seek to manage costs and address service delivery constraints by realigning its structure and resources to better match its<br />
transforming information, communications and technology business.<br />
The transformation of the communications industry and increasing market and competitive pressure has put communication companies such<br />
as <strong>Telkom</strong> under increasing revenue and expense constraints while being required to improve customer service. As a result Capability<br />
Management is designed to ensure that the capabilities needed to succeed in a converged communications market are established through<br />
the optimal utilisation of external as well as internal capabilities, extracting efficiencies, where possible, through scale of a rapidly maturing<br />
retail and wholesale market and better organised functional areas in a more deregulated and liberalised communications market.<br />
Capability Management includes the internal consolidation of certain functional areas and the optimisation of strategic supplier and service<br />
provider relationships improving performance in other functional areas.<br />
Capability Management will be concerned with assisting in addressing the margin and service delivery pressures by reassessing the<br />
operational service delivery methodology currently deployed with a view of increasing flexibility, reducing expense while improving service<br />
delivery across the <strong>Telkom</strong> Group.<br />
Given the challenges <strong>Telkom</strong> faces in rolling out broadband, converged and data services, maintaining our legacy network and expanding<br />
our operations across the African continent, employees’ skills and performance must be aligned with our strategy to ensure financial,<br />
operational and transformational targets, customer expectations and shareholder expectations are met.<br />
The immediate objective therefore is to remodel service delivery. This is one of the strategic initiatives under Project Renaissance and will<br />
focus on the following:<br />
• Identify and assess existing capabilities;<br />
• Establish a <strong>Telkom</strong> Group Capability Inventory;<br />
• Determine future capability requirements;<br />
• Identify and develop a set of optimal service delivery options for achieving current and future strategic objectives; and<br />
• Enable <strong>Telkom</strong> South Africa, <strong>Telkom</strong> International and <strong>Telkom</strong> Data Centre Operations to:<br />
– Improve resource efficiency;<br />
– Improve capital productivity; and<br />
– Improve service delivery.<br />
A memorandum of understanding was entered into between <strong>Telkom</strong> and organised labour which included issues such as the deferment of<br />
the Managed Services Partner outsourcing project implementation post April 2009 and the establishment of a Restructuring Forum where<br />
all restructuring initiatives will be debated between the parties concerned.<br />
<strong>Telkom</strong> Management Services (Proprietary) Limited (TMS)<br />
TMS was registered as a company during August 2008. <strong>Telkom</strong>’s Board approved the establishment of TMS as a part of <strong>Telkom</strong>’s strategic<br />
plan to grow revenue and expand geographic reach.<br />
Appointment of director<br />
On November 10, 2008 <strong>Telkom</strong> announced the appointment of Mr Peter Nelson as Chief Financial Officer and director in <strong>Telkom</strong> with<br />
effect from December 8, 2008.
<strong>Telkom</strong> Annual Report 2009 243<br />
Notes to the consolidated annual financial statements (continued)<br />
for the three years ended March 31, 2009<br />
45. SUBSEQUENT EVENTS<br />
Dividends<br />
The <strong>Telkom</strong> Board declared an ordinary dividend of 115 cents (2008: 660 cents, 2007: 600 cents) per share and a special dividend<br />
of 260 cents (2008: Nil cents, 2007: 500 cents) per share on June 19, 2009, payable on July 20, 2009 to shareholders registered on<br />
July 17, 2009.<br />
Acquisition of MWEB Africa Limited and majority equity stake in MWEB Namibia (Proprietary) Limited<br />
On November 10, 2008, <strong>Telkom</strong> International (Proprietary) Limited, a wholly owned subsidiary of <strong>Telkom</strong>, announced it has entered into<br />
agreements to acquire 100% of MWEB Africa Limited ("MWEB Africa") and 75% of MWEB Namibia (Proprietary) Limited<br />
(“MWEB Namibia”). The purchase price for the MWEB Africa Group including AFSAT and MWEB Namibia is US$55 million<br />
(approximately R498 million) with a deferred payment of US$14.18 million due when the profits of MWEB Group for the year ended<br />
March 31, 2009 are finalised. These shareholdings will be acquired from Multichoice Africa Limited and MIH Holdings Limited<br />
respectively, which are members of the Naspers Limited Group.<br />
MWEB Africa is an internet services provider in sub-Saharan Africa (excluding South Africa) which also provides network access services<br />
in some countries and is headquartered in Mauritius with operations in Namibia, Nigeria, Kenya, Tanzania, Uganda and Zimbabwe, an<br />
agency arrangement in Botswana and distributors in 26 sub-Saharan African countries.<br />
The acquisition of MWEB is part of the Group’s strategy of growing its broadband and solidifying its market position through acquisitions.<br />
Based on an independent valuation, the MWEB Africa Group does not have any significant contingent liabilities at acquisition date.<br />
The only possible contingent liability, the AFSAT bonus scheme, is reasonably quantified and included in the balance sheet of MWEB Africa<br />
Group at March 31, 2009.<br />
The purchase price of US$69.168 million was determined as follows:<br />
• Namibian cash-generating unit for US$1.5 million;<br />
• Mauritian cash-generating unit for US$53.5 million; and<br />
• US$14.18 million deferred until the profits of the MWEB Group for the year ended March 31, 2009 are finalised.<br />
The successful conclusion of the agreements being entered into is subject to conditions precedent, including regulatory approvals being<br />
obtained in certain African jurisdictions.<br />
Subsequent to year end, on April 21, 2009, the conditions precedent to the sale were fulfilled.<br />
The acquisition will have the following effect on the Group’s assets and liabilities on acquisition:<br />
Carrying amounts Fair values<br />
Rm Rm<br />
Fixed assets 43 43<br />
Intangible assets 138 209<br />
Deferred taxation asset 2 2<br />
Cash and cash equivalents 75 75<br />
Trade and other receivables 26 26<br />
Inventory 16 16<br />
Deferred taxation liability (18) (19)<br />
Taxation (4) (4)<br />
Trade and other payables (69) (69)<br />
Fair value of net assets acquired 209 279<br />
Minority interests (2) (2)<br />
Net asset value 207 277<br />
Goodwill on acquisition – 352<br />
Purchase price* – 629<br />
Capitalised transaction costs – 3<br />
Total cash consideration – 632<br />
* Of the R629 million purchase price, R498 million has been settled. The outstanding amount of US$14.18 million (approximately R105 million) is deferred<br />
payment.
244<br />
<strong>Telkom</strong> Annual Report 2009<br />
Notes to the consolidated annual financial statements (continued)<br />
for the three years ended March 31, 2009<br />
45. SUBSEQUENT EVENTS (continued)<br />
The goodwill from the acquisition is partially attributable to the following:<br />
• Certain licences that could not be valued separately from the MWEB Group as no secondary licensing market exists, but contribute<br />
significantly to goodwill as the MWEB business’s would cease to exist without the licence rights.<br />
• The skills and technical talent of the acquired business’s workforce, and the synergies expected to be achieved from integrating the<br />
acquiree into the Group’s existing internet service provision.<br />
• The goodwill is also attributable to the MWEB Group’s position as Africa’s largest satellite-based internet service provider in Sub-Saharan<br />
Africa.<br />
There was RNil revenue in the consolidated annual financial statements.<br />
AT&T strategic agreement<br />
On April 16, 2009, <strong>Telkom</strong> and AT&T, the global communications leader, entered into a strategic agreement which aims to extend AT&T’s<br />
global networking reach to sub-Saharan Africa and boost <strong>Telkom</strong>’s strategy to grow a strong ICT footprint on the African continent. The<br />
agreement will allow both companies to explore ways to provide global seamless communication and technology solutions and services<br />
to multinational customers, either based in or seeking to extend their operations in sub-Saharan Africa.<br />
Under the terms of the memorandum of understanding, the two companies will begin work towards definitive agreements that would:<br />
• directly connect the <strong>Telkom</strong> regional network and the AT&T global network;<br />
• deliver a wider geographic footprint of telecommunication services, in both sub-Saharan Africa and other global points;<br />
• enhance mobile service capabilities for corporate customers in sub-Saharan Africa;<br />
• extend global VPN (Virtual Private Network) services to support the state of art network requirements of customers either headquartered<br />
in or seeking to expand sites in sub-Saharan Africa;<br />
• explore other potential opportunities in areas such as Telepresence, hosting and professional services; and<br />
• expand the existing global wholesale voice services relationship between <strong>Telkom</strong> Group and AT&T.<br />
<strong>Telkom</strong> Media (Proprietary) Limited (<strong>Telkom</strong> Media)<br />
On August 31, 2006 <strong>Telkom</strong> created a new subsidiary, <strong>Telkom</strong> Media (Proprietary) Limited, with a black economic empowerment (’BEE’)<br />
shareholding. ICASA awarded <strong>Telkom</strong> Media a commercial satellite and cable subscription broadcast licence on September 12, 2007.<br />
On March 31, 2008, the <strong>Telkom</strong> Board took a decision to substantially reduce its investment in <strong>Telkom</strong> Media and as such <strong>Telkom</strong> Media<br />
reduced its operational expenses and commitments to a minimum. <strong>Telkom</strong> Media did not meet the held for sale criteria at year end as<br />
management were unable to sell the disposal group for its expected price and therefore decided to abandon it.<br />
Subsequent to year end <strong>Telkom</strong> was approached by potential buyers of <strong>Telkom</strong>’s interest in <strong>Telkom</strong> Media and negotiations with the potential<br />
buyer were concluded. On May 4, 2009, <strong>Telkom</strong> sold its 75% interest in <strong>Telkom</strong> Media to Shenzhen Media South Africa (Proprietary)<br />
Limited for a nominal amount.<br />
Disposal and unbundling of stake in Vodacom<br />
In 2008 <strong>Telkom</strong> announced a decision to dispose of its entire shareholding in Vodacom through selling 15% of its shareholding to<br />
Vodafone, a wholly owned subsidiary of Vodafone Group plc, and unbundling its remaining 35% shareholding to its shareholders pursuant<br />
to a listing of Vodacom on the main board of JSE Limited.<br />
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<br />
<strong>Telkom</strong> shareholders. <strong>Telkom</strong> successfully completed the unbundling of Vodacom shares to its shareholders on May 25, 2009.
45. SUBSEQUENT EVENTS (continued)<br />
Bookbuilding of Vodacom Group (Proprietary) Limited shares<br />
<strong>Telkom</strong> Annual Report 2009 245<br />
Notes to the consolidated annual financial statements (continued)<br />
for the three years ended March 31, 2009<br />
On June 2, 2009 <strong>Telkom</strong> announced the successful completion of the accelerated bookbuilding of Vodacom shares, raising R1,540 million<br />
for "ineligible shareholders". The directors of <strong>Telkom</strong>, in consultation with Vodafone, determined that <strong>Telkom</strong> shareholders in the United States<br />
of America would be regarded as "ineligible shareholders" for the unbundling of Vodacom shares to shareholders of <strong>Telkom</strong>, which was<br />
completed on May 25, 2009, and would therefore not receive Vodacom shares in such distributions.<br />
The proceeds from the offering, net of applicable fees, expenses, taxes and charges, will be distributed to the "ineligible shareholders" in<br />
proportion to their entitlement to Vodacom shares.<br />
New York Stock Exchange listing<br />
Given the current global economic climate and the absolute necessity for <strong>Telkom</strong> to reduce its cost profile, the Board has decided to delist<br />
from the New York Stock Exchange. Maintaining a listing in the United States of America is expensive and takes considerable management<br />
time. The methodology employed and discipline gained from Sarbanes-Oxley reporting requirements will be retained to ensure strict<br />
governance compliance and transparent financial reporting.<br />
<strong>Telkom</strong> is comfortable that the Johannesburg Stock Exchange provides sufficient access to capital for both South African and global<br />
investors. <strong>Telkom</strong> intends to maintain a level 1 American Depository Receipt programme to facilitate over-the-counter- trading in the United<br />
States of America.<br />
<strong>Telkom</strong> Communications International (Proprietary) Limited<br />
The Abacus Financial Services (Mauritius) Limited issued a notice under section 265 (5) of the Companies Act 1984 that <strong>Telkom</strong><br />
Communications International (Proprietary) Limited has been dissolved with effect from May 12, 2009.<br />
Other matters<br />
The directors are not aware of any other matter or circumstance since the financial year ended March 31, 2009 and the date of this<br />
report, or otherwise dealt with in the financial statements, which significantly affects the financial position of the Group and the results of<br />
its operations.<br />
46. ACCOUNTING PRONOUNCEMENTS NOT YET ADOPTED<br />
The Group has not early adopted the following standards, interpretations and amendments that have been issued and are not yet effective:<br />
IFRS1 First-time Adoption of International Financial Reporting Standards: Cost of an Investment in a Subsidiary, Jointly Controlled Entity<br />
or Associate (amended)<br />
This amendment is effective for annual periods beginning on or after January 1, 2009. This standard is amended to allow an entity, in its<br />
separate financial statements, to determine the cost of investments in subsidiaries, jointly controlled entities or associates (in its opening IFRS<br />
financial statements) as one of the following amounts:<br />
• Cost determined in accordance with IAS27<br />
• At the fair value of the investment at the date of the transition to IFRS, determined in accordance with IAS39 Financial Instruments:<br />
Recognition and Measurement<br />
• The previous GAAP carrying amount of the investment at the date of transition to IFRS<br />
This determination is made for each investment, rather than being a policy decision.<br />
The amendment does not have an impact on the annual financial statements.
246<br />
<strong>Telkom</strong> Annual Report 2009<br />
Notes to the consolidated annual financial statements (continued)<br />
for the three years ended March 31, 2009<br />
46. ACCOUNTING PRONOUNCEMENTS NOT YET ADOPTED (continued)<br />
IFRS2 Share-Based Payment: Vesting Conditions and Cancellations (amended)<br />
This amendment is effective for annual periods beginning on or after January 1, 2009. The amendments to IFRS2 Share-Based Payment<br />
clarifies the definition of vesting conditions and the accounting treatment of cancellations by the counterparty to a share-based arrangement.<br />
The amendment will not have a material impact on the consolidated financial statements.<br />
IFRS2 Share-Based Payment: Group Cash-Settled Share-Based Payment Arrangements (amended)<br />
This amendment is effective for annual periods beginning on or after January 1, 2010. The amendment clarifies how an individual<br />
subsidiary in a group should account for some share-based payment arrangements in its own financial statements. The amendment will not<br />
have a material impact on the Company’s/Group’s financial statements.<br />
IFRS3 Business Combinations (revised)<br />
The revisions are effective for annual periods beginning on or after 1 July 2009 .The revised standard still applies the acquisition method<br />
of accounting for business combinations, with some significant changes. For example, all payments to purchase a business are to be<br />
recorded at fair value at the acquisition date, with contingent payments classified as debt subsequently re-measured through the income<br />
statement. There is a choice on an acquisition-by-acquisition basis to measure the non-controlling interest in the acquiree either at fair<br />
value or at the non-controlling interest’s proportionate share of the acquiree’s net assets. All acquisition-related costs should be expensed.<br />
The impact of the revised standard is being evaluated.<br />
IFRS7 Financial Instruments: Disclosures (amended)<br />
The interpretation is applicable for annual periods beginning on or after January 1, 2009. The amendment requires enhanced disclosures<br />
about fair value measurements and liquidity risk. The impact of the amendment is being evaluated.<br />
IFRS8 Operating Segments<br />
This standard is effective for annual periods beginning on or after January 1, 2009. The standard requires operating segments to be<br />
identified on the basis of internal reports about components of the entity that are regularly reviewed by the chief operating decision maker<br />
in order to allocate resources to the segment and to assess its performance. The impact of this standard is currently being evaluated.<br />
IFRIC9 Reassessment of Embedded Derivatives (amended)<br />
The amendment is effective for annual periods ending on or after June 30, 2009. The amendment clarifies that on reclassification of a<br />
financial asset out of the ’fair value through profit or loss’ category, all embedded derivatives have to be assessed and, if necessary,<br />
separately accounted for in financial statements. The amendment will not have an impact on the consolidated financial statements as the<br />
Group does not have material embedded derivatives.<br />
IFRIC13 Customer Loyalty Programmes<br />
The interpretation is effective for annual periods beginning on or after July 1, 2008. The interpretation requires loyalty award credits granted<br />
to customers in connection with a sales transaction to be accounted for as a separate component of the sales transaction. The consideration<br />
received in the sales transaction would, therefore, be allocated between the loyalty award credits and the other components of the sale.<br />
The interpretation is not relevant to the Group’s operations because none of the Group entities operate any loyalty programmes.<br />
Where the cost of fulfilling the awards is expected to exceed the consideration received, the Group will have to recognise an onerous<br />
contract liability. The impact of this interpretation is being evaluated.<br />
IFRIC15 Agreements for the Construction of Real Estate<br />
The interpretation is effective for annual periods beginning on or after January 1, 2009. The aim of this interpretation is to determine<br />
whether an agreement for the construction of real estate is within the scope of IAS11 Construction Contracts or IAS18 Revenue.<br />
This interpretation is not relevant to the Group’s operations as the Group does not construct real estates.
46. ACCOUNTING PRONOUNCEMENTS NOT YET ADOPTED (continued)<br />
IFRIC16 Hedges of a Net Investment in a Foreign Operation<br />
<strong>Telkom</strong> Annual Report 2009 247<br />
Notes to the consolidated annual financial statements (continued)<br />
for the three years ended March 31, 2009<br />
The interpretation is effective for annual periods beginning on or after October 1, 2008. The interpretation provides guidance in respect<br />
of hedges of foreign currency gains and losses on a net investment in a foreign operation. This includes the fact that net investment hedging<br />
relates to differences in functional currency and not presentation currency, and hedging instruments may be held anywhere in the Group.<br />
The interpretation will not have an impact on the consolidated annual financial statements.<br />
IFRIC17 Distributions of Non-Cash Assets to Owners<br />
The interpretation is effective for annual periods beginning on or after July 1, 2009. The interpretation provides guidance on how an entity<br />
should account for non-cash distributions to its owners and/or distributions that give owners a choice of receiving either non-cash assets or<br />
a cash alternative. The impact of this interpretation is being evaluated.<br />
IFRIC18 Transfer of Assets from Customers<br />
The interpretation is effective for annual periods beginning on or after July 1, 2009. The interpretation clarifies the requirements of IFRSs<br />
for agreements in which an entity receives from a customer an item of property, plant and equipment (’PPE’) that the entity must then use<br />
either to connect the customer to a network or to provide the customer with ongoing access to a supply of goods or services. The<br />
interpretation also provides guidance where an entity receives cash from a customer that must be used only to acquire or construct an item<br />
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<br />
impact of this interpretation is currently being evaluated.<br />
IAS1 Presentation of Financial Statements (revised)<br />
The revised standard is effective for annual periods beginning on or after January 1, 2009.<br />
IAS1R introduces a statement of comprehensive income with two optional formats and refers to the balance sheet and cash flow statement<br />
by different names: the ’statement of financial position’ and ’statement of cash flows’, respectively. The revision to the standard will result in<br />
changes in the way the consolidated annual financial statements are presented.<br />
IAS7 Cash Flow Statement: Consequential Amendments Arising from Amendments to IAS16<br />
The amendment is effective for annual periods beginning on or after January 1, 2009. IAS7 as amended requires cash receipts and<br />
payments relating to purchase, rental and sale of property, plant and equipment held for rental to be treated as cash flows from operating<br />
activities. The impact of this amendment is being evaluated.<br />
IAS23 Borrowing Costs (revised)<br />
The revised standard applies to borrowing costs relating to qualifying assets for which the commencement date for capitalisation is on or<br />
after January 1, 2009. The revised standard requires all borrowing costs that are directly attributable to the acquisition, construction or<br />
production of qualifying assets to be capitalised. The Group does not expect the adoption of the standard to have a material impact.<br />
IAS27 Consolidated and Separate Financial Statements (revised)<br />
The revisions are effective for annual periods beginning on or after July 1, 2009. The revised standard requires the effects of all transactions<br />
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<br />
or gains and losses. The standard also specifies the accounting when control is lost. Any remaining interest in the entity is re-measured to<br />
fair value, and a gain or loss is recognised in profit or loss. The impact of the revised standard is being evaluated.<br />
IAS27 Consolidated and Separate Financial Statements – Cost of an Investment in a Subsidiary, Jointly Controlled Entity or Associate<br />
(amended)<br />
The amended standard is effective for annual periods beginning on or after January 1, 2009. The amended standard is for the following<br />
changes in respect of the holding company’s separate financial statements:<br />
• The deletion of the ’cost method’. Making the distinction between pre- and post- acquisition profits is no longer required. All dividends<br />
will be recognised in profit or loss. However, the payment of such dividends requires the entity to consider whether there is an indicator<br />
of impairment; and<br />
• In cases of reorganisations where a new parent is inserted above an existing parent of the group (subject to meeting specific<br />
requirements), the cost of the subsidiary is the previous carrying amount of its share of equity items in the subsidiary rather than its fair<br />
value. The impact of this amended standard is currently being evaluated.
248<br />
<strong>Telkom</strong> Annual Report 2009<br />
Notes to the consolidated annual financial statements (continued)<br />
for the three years ended March 31, 2009<br />
46. ACCOUNTING PRONOUNCEMENTS NOT YET ADOPTED (continued)<br />
Amendment to IAS32 Financial Instruments Presentation and IAS1 Presentation of Financial Statements, Puttable Financial Instruments<br />
The amendment is effective for periods beginning January 1, 2009. The amendments classify puttable financial instruments, or components<br />
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<br />
liquidation, as equity, provided they have particular features and meet specific conditions. The impact of this amendment is being<br />
evaluated.<br />
IAS39 Financial Instruments: Recognition and Measurement (amended)<br />
The amendment is effective for annual periods ending on or after June 30, 2009. The amendment clarifies that on reclassification of a<br />
financial asset out of the ’fair value through profit or loss’ category, all embedded derivatives have to be assessed and, if necessary,<br />
separately accounted for in financial statements. The amendment will not have an impact on the financial statements as <strong>Telkom</strong> does not<br />
have material embedded derivatives.<br />
IAS39 Financial Instruments: Recognition and Measurement – Eligible Hedged Items (amended)<br />
The amendment to the standard is effective for annual periods beginning on or after July 1, 2009. The amendment clarifies that an entity<br />
is permitted to designate a portion of the fair value changes or cash flow variability of a financial instrument as a hedged item. The<br />
amendment will not have an impact on the financial statements as <strong>Telkom</strong> does not apply hedge accounting.<br />
Changes as a result of the annual improvements project<br />
A number of standards were amended as a result of the annual improvements project of the IASB in May 2008 effective for annual periods<br />
beginning on or after January 1, 2009, with the exception of IFRS5 which is effective for annual periods beginning on or after July 1,<br />
2009. These standards were as follows:<br />
IFRS5 Non-Current Assets Held for Sale and Discontinued Operations<br />
IAS1 Presentation of Financial Statements – Non-Current/Current Classification of Derivatives<br />
IAS16 Property, Plant and Equipment<br />
IAS19 Employee Benefits<br />
IAS20 Government Grants<br />
IAS23 Borrowing Costs – Components of Borrowing Costs<br />
IAS27 Consolidated and Separate Financial Statements<br />
IAS28 Investments in Associates<br />
IAS29 Financial Reporting in Hyperinflationary Economies<br />
IAS31 Interests in Joint Ventures<br />
IAS36 Impairment of Assets<br />
IAS38 Intangible Assets<br />
IAS39 Financial Instruments: Recognition and Measurement<br />
IAS40 Investment Property<br />
IAS41 Agriculture<br />
The Group will adopt the changes to these standards during the 2010 financial year with the exception of IFRS5, which will be adopted<br />
during the 2011 financial year. The Group is currently evaluating the effects of the improvements.
fixed<br />
Company financial statements<br />
Company income statement 250<br />
Company balance sheet 251<br />
Company statement of changes in equity 252<br />
Company cash flow statement 253<br />
Notes to the Company annual financial statements 254<br />
business shows<br />
resilience<br />
Company<br />
Financial<br />
Information<br />
6
250<br />
<strong>Telkom</strong> Annual Report 2009<br />
Company income statement<br />
for the three years ended March 31, 2009<br />
2007 2008 2009<br />
Notes Rm Rm Rm<br />
Total revenue 3.1 35,818 36,641 37,058<br />
Operating revenue 3.2 32,340 32,571 33,659<br />
Other income 4 655 498 524<br />
Operating expenses 24,089 24,953 29,837<br />
Employee expenses 5.1 7,077 7,386 7,990<br />
Payments to other operators 5.2 6,461 6,902 7,536<br />
Selling, general and administrative expenses 5.3 3,970 3,904 6,580<br />
Service fees 5.4 2,236 2,410 2,760<br />
Operating leases 5.5 762 619 613<br />
Depreciation, amortisation, impairment and write-offs 5.6 3,583 3,732 4,358<br />
Operating profit 8,906 8,116 4,346<br />
Investment income 6 3,202 3,739 2,907<br />
Finance charges and fair value movements 7 1,027 1,289 1,460<br />
Interest 1,142 1,499 1,655<br />
Foreign exchange and fair value movement gain (115) (210) (195)<br />
Profit before taxation 11,081 10,566 5,793<br />
Taxation 8 2,690 2,599 516<br />
Profit for the year 8,391 7,967 5,277
Company balance sheet<br />
at March 31, 2009<br />
ASSETS<br />
<strong>Telkom</strong> Annual Report 2009 251<br />
2007 2008 2009<br />
Notes Rm Rm Rm<br />
Non-current assets 37,533 43,360 50,796<br />
Property, plant and equipment 9 32,614 35,273 37,345<br />
Intangible assets 10 3,502 3,806 3,988<br />
Investments 11 887 3,883 7,693<br />
Finance lease receivables 13 136 160 166<br />
Deferred taxation 14 340 183 1,549<br />
Deferred expenses 25 54 55 55<br />
Current assets 7,754 8,763 10,090<br />
Inventories 15 839 873 1,331<br />
Income tax receivable 31 519 – 91<br />
Current portion of finance lease receivables 13 71 105 109<br />
Trade and other receivables 17 5,920 6,859 6,420<br />
Other financial assets 18 229 443 1,198<br />
Cash and cash equivalents 19 176 483 941<br />
Assets held for sale and discontinued operations 16 – – 34<br />
Total assets 45,287 52,123 60,920<br />
EQUITY AND LIABILITIES<br />
Capital and reserves 25,714 26,693 29,086<br />
Share capital 20 5,329 5,208 5,208<br />
Treasury share reserve 21 (1,778) (1,642) (1,521)<br />
Share-based compensation reserve 22 257 643 1,076<br />
Retained earnings 21,906 22,484 24,323<br />
Non-current liabilities 6,580 11,181 14,766<br />
Interest-bearing debt 23 3,308 7,336 10,193<br />
Provisions 24 1,203 1,445 1,830<br />
Deferred revenue 26 739 870 996<br />
Deferred taxation 14 1,330 1,530 1,747<br />
Current liabilities 12,993 14,249 17,068<br />
Trade and other payables 27 4,333 4,923 5,424<br />
Shareholders for dividend 32 15 20 23<br />
Current portion of interest-bearing debt 23 5,775 6,026 7,511<br />
Current portion of provisions 24 1,706 1,640 1,953<br />
Current portion of deferred revenue 26 1,107 1,424 1,826<br />
Income tax payable 31 – 7 –<br />
Other financial liabilities 18 57 168 225<br />
Credit facilities utilised 19 – 41 106<br />
Total liabilities 19,573 25,430 31,834<br />
Total equity and liabilities 45,287 52,123 60,920
252<br />
<strong>Telkom</strong> Annual Report 2009<br />
Company statement of changes in equity<br />
for the three years ended March 31, 2009<br />
Treasury Share-based<br />
Share Share share compensation Retained<br />
capital premium reserve reserve earnings Total<br />
Rm Rm Rm Rm Rm Rm<br />
Balance at April 1, 2006 5,449 1,342 (1,786) 151 18,534 23,690<br />
Total income and expense for the year – – – – 8,391 8,391<br />
Dividend declared (refer to note 32) – – – – (4,885) (4,885)<br />
Payment made for treasury shares – – (27) – – (27)<br />
Increase in share-based compensation<br />
reserve (refer to note 22)<br />
Shares vested and re-issued (refer to<br />
– – – 141 – 141<br />
note 22)<br />
Shares bought back and cancelled<br />
– – 35 (35) – –<br />
(refer to note 20) (120) (1,342) – – (134) (1,596)<br />
Balance at March 31, 2007 5,329 – (1,778) 257 21,906 25,714<br />
Total income and expense for the year – – – – 7,967 7,967<br />
Dividend declared (refer to note 32)<br />
Increase in share-based compensation<br />
– – – – (5,863) (5,863)<br />
reserve (refer to note 22)<br />
Shares vested and re-issued (refer to<br />
– – – 522 – 522<br />
note 22)<br />
Shares bought back and cancelled<br />
– – 136 (136) – –<br />
(refer to note 20) (121) – – – (1,526) (1,647)<br />
Balance at March 31, 2008 5,208 – (1,642) 643 22,484 26,693<br />
Total income and expense for the year – – – – 5,277 5,277<br />
Dividend declared (refer to note 32)<br />
Increase in share-based compensation<br />
– – – – (3,438) (3,438)<br />
reserve (refer to note 22)<br />
Shares vested and re-issued (refer to<br />
– – – 554 – 554<br />
note 22) – – 121 (121) – –<br />
Balance at March 31, 2009 5,208 – (1,521) 1,076 24,323 29,086
Company cash flow statement<br />
for the three years ended March 31, 2009<br />
Restated Restated<br />
<strong>Telkom</strong> Annual Report 2009 253<br />
2007 2008 2009<br />
Notes Rm Rm Rm<br />
Cash flows from operating activities 6,383 8,172 9,948<br />
Cash receipts from customers 32,109 32,375 34,239<br />
Cash paid to suppliers and employees (19,449) (19,713) (22,212)<br />
Cash generated from operations 28 12,660 12,662 12,027<br />
Interest received 385 390 343<br />
Dividends received 29 2,950 3,536 3,242<br />
Finance charges paid 30 (886) (842) (466)<br />
Taxation paid 31 (3,852) (1,716) (1,764)<br />
Cash generated from operations before dividend paid 11,257 14,030 13,382<br />
Dividend paid 32 (4,874) (5,858) (3,434)<br />
Cash flows from investing activities (6,662) (9,994) (12,129)<br />
Proceeds on disposal of property, plant and equipment and<br />
intangible assets<br />
Additions to property, plant and equipment and intangible<br />
4 164 21<br />
assets (6,598) (6,763) (6,428)<br />
Expansions to property, plant and equipment and intangible<br />
assets<br />
Maintenance to property, plant and equipment and<br />
(2,409) (4,142) (3,344)<br />
intangible assets (3,189) (2,621) (3,084)<br />
Acquisition of subsidiary and minority interest in subsidiary 11 (150) – (1,339)<br />
Loans to subsidiaries – (3,395) (4,383)<br />
Loans repaid by subsidiaries 82 – –<br />
Cash flows from financing activities (2,777) 2,088 2,574<br />
Loans raised 5,624 23,878 18,168<br />
Loans repaid (6,843) (20,204) (14,649)<br />
Shares bought back and cancelled (1,596) (1,647) –<br />
Decrease/(increase) in net financial assets 38 61 (945)<br />
Net (decrease)/increase in cash and cash equivalents (3,056) 266 393<br />
Net cash and cash equivalents at beginning of the year 3,232 176 442<br />
Net cash and cash equivalents at end of the year 19 176 442 835
254<br />
<strong>Telkom</strong> Annual Report 2009<br />
Notes to the annual financial statements<br />
for the three years ended March 31, 2009<br />
1. CORPORATE INFORMATION<br />
<strong>Telkom</strong> SA Limited (the Company) is a company incorporated<br />
and domiciled in the Republic of South Africa (’South Africa’)<br />
whose shares are publicly traded. The Company’s main<br />
objective and main business is to supply telecommunication,<br />
broadcasting, multimedia, technology, information and other<br />
related information technology services to the general public.<br />
The principal activities of the Company’s services and products<br />
include:<br />
• fixed-line subscription and connection services to post-paid,<br />
prepaid and private payphone customers using PSTN (Public<br />
Switched Telephone Network) lines, including ISDN<br />
(Integrated Service Digital Network) lines, and the sale of<br />
subscription based value-added voice services and customer<br />
premises equipment rental and sales;<br />
• fixed-line traffic services to post-paid, prepaid and payphone<br />
customers, including local, long distance, fixed-to-mobile,<br />
international outgoing and international voice-over-internet<br />
protocol traffic services;<br />
• interconnection services, including terminating and transiting<br />
traffic from South African mobile operators, as well as from<br />
international operators and transiting traffic from mobile to<br />
international destinations;<br />
• fixed-line data and internet services, including domestic and<br />
international data transmission services, such as point-to-point<br />
leased lines, ADSL (Asymmetrical Digital Subscriber Line)<br />
services, packet-based services, managed data networking<br />
services and internet access and related information<br />
technology services; and<br />
• W-CDMA (Wideband Code Division Multiple Access), a<br />
3G next generation network, including fixed voice services,<br />
data services and nomadic voice services.<br />
These separate annual financial statements are prepared in<br />
compliance with the South African Companies Act, 1973. In<br />
addition, the Group presents consolidated financial statements<br />
which include all subsidiaries, special purpose entities and joint<br />
ventures, which are included in these financial statements as<br />
investments.<br />
2. SIGNIFICANT ACCOUNTING POLICIES<br />
Basis of preparation<br />
The financial statements comply with the International Financial<br />
Reporting Standards (IFRS) of the International Accounting<br />
Standards Board (IASB) and the Companies Act of South Africa,<br />
1973.<br />
The financial statements are prepared on the historical cost<br />
basis, with the exception of certain financial instruments which<br />
are measured at fair value and share-based payments which are<br />
measured at grant date fair value. Details of the Company’s<br />
significant accounting policies are set out below, and are<br />
consistent with those applied in the previous financial year<br />
except for the following:<br />
• The Company has adopted certain amendments to IAS39<br />
and IFRS7, and adopted IFRIC12 and IFRIC14, which<br />
are applicable for annual periods beginning on or after<br />
January 1, 2008.<br />
The principal effects of these changes are discussed below.<br />
Adoption of amendments to standards and new<br />
interpretations<br />
IAS39 Financial Instruments: Recognition and Measurement<br />
and IFRS7 Financial Instruments: Disclosures –<br />
Reclassification of Financial Assets (amended)<br />
The amendments which are effective on or after July 1, 2008,<br />
permit an entity to reclassify non-derivative financial assets (other<br />
than those designated at fair value through profit or loss by the<br />
entity upon initial recognition) out of the fair value through profit<br />
or loss category in particular circumstances. The amendments<br />
also permit an entity to transfer from the available-for-sale<br />
category to the loans and receivables category a financial asset<br />
that would have met the definition of loans and receivables (if<br />
the financial asset had not been designated as available-forsale),<br />
if the entity has the intention and ability to hold that<br />
financial asset for the foreseeable future. The amendments do<br />
not have an impact on the annual financial statements.<br />
IFRIC12 Service Concession Arrangements<br />
The interpretation which is effective for annual periods<br />
beginning on or after January 1, 2008, sets out general<br />
principles on recognising and measuring the obligations and<br />
related rights in service concession arrangements from an<br />
operator’s perspective. This interpretation does not have an<br />
impact on the annual financial statements.<br />
IFRIC14 The Limit on a Defined Benefit Asset, Minimum<br />
Funding Requirements and their Interaction<br />
The interpretation which is effective for annual periods<br />
beginning on or after January 1, 2008, provides guidance on<br />
assessing the limit in IAS19 on the amount of the surplus that can<br />
be recognised as an asset. It also explains how the pension<br />
asset or liability may be affected by a statutory or contractual<br />
minimum funding requirement. This interpretation does not have<br />
any impact on the annual financial statements, as the Company<br />
is not subject to minimum funding requirements.
Notes to the annual financial statements (continued)<br />
for the three years ended March 31, 2009<br />
2. SIGNIFICANT ACCOUNTING POLICIES (continued)<br />
Significant accounting judgements, estimates and<br />
assumptions<br />
The preparation of financial statements requires the use of<br />
estimates and assumptions that affect the reported amounts of<br />
assets and liabilities and disclosure of contingent assets and<br />
liabilities at the date of the financial statements and the reported<br />
amounts of revenue and expenses during the reporting periods.<br />
Although these estimates and assumptions are based on<br />
management’s best knowledge of current events and actions that<br />
the Company may undertake in the future, actual results may<br />
ultimately differ from those estimates and assumptions.<br />
The presentation of the results of operations, financial position<br />
and cash flows in the financial statements of the Company is<br />
dependent upon and sensitive to the accounting policies,<br />
assumptions and estimates that are used as a basis for the<br />
preparation of these financial statements. Management has<br />
made certain judgements in the process of applying the<br />
Company’s accounting policies. These, together with the key<br />
estimates and assumptions concerning the future, and other key<br />
sources of estimation uncertainty at the balance sheet date, are<br />
as follows:<br />
Revenue recognition<br />
To reflect the substance of each transaction, revenue recognition<br />
criteria are applied to each separately identifiable component<br />
of a transaction. In order to account for multiple-element revenue<br />
arrangements in developing its accounting policies, the<br />
Company considered the guidance contained in the United<br />
States Financial Accounting Standards Board (FASB) Emerging<br />
Issues Task Force No 00-21 Revenue Arrangements with<br />
Multiple Deliverables. Judgement is required to separate those<br />
revenue arrangements that contain the delivery of bundled<br />
products or services into individual units of accounting, each<br />
with its own earnings process, when the delivered item has<br />
stand-alone value and the undelivered item has fair value.<br />
Further judgement is required to determine the relative fair values<br />
of each separate unit of accounting to be allocated to the total<br />
arrangement consideration. Changes in the relative fair values<br />
could affect the allocation of arrangement consideration<br />
between the various revenue streams.<br />
Judgement is also required to determine the expected customer<br />
relationship period. Any changes in these assessments may<br />
have a significant impact on revenue and deferred revenue.<br />
Property, plant and equipment and intangible assets<br />
The useful lives of assets are based on management’s<br />
estimation. Management considers the impact of changes in<br />
technology, customer service requirements, availability of<br />
<strong>Telkom</strong> Annual Report 2009 255<br />
capital funding and required return on assets and equity to<br />
determine the optimum useful life expectation for each of the<br />
individual categories of property, plant, equipment and<br />
intangible assets. Due to the rapid technological advancement<br />
in the telecommunications industry as well as the Company’s<br />
plan to migrate to a next generation network over the next few<br />
years, the estimation of useful lives could differ significantly on<br />
an annual basis due to unexpected changes in the roll-out<br />
strategy. The impact of the change in the expected useful life of<br />
property, plant and equipment is described more fully in note<br />
5.6. The estimation of residual values of assets is also based on<br />
management’s judgement whether the assets will be sold or<br />
used to the end of their useful lives and what their condition will<br />
be like at that time.<br />
For intangible assets that incorporate both a tangible and<br />
intangible portion, management uses judgement to assess which<br />
element is more significant to determine whether it should be<br />
treated as property, plant and equipment or intangible assets.<br />
Asset retirement obligations<br />
Management judgement is exercised when determining whether<br />
an asset retirement obligation exists, and in determining the<br />
present value of expected future cash flows and discount rate<br />
when the obligation to dismantle or restore the site arises, as<br />
well as the estimated useful life of the related asset.<br />
Impairments of property, plant and equipment and<br />
intangible assets<br />
Management is required to make judgements concerning the<br />
cause, timing and amount of impairment as indicated on notes<br />
9 and 10. In the identification of impairment indicators,<br />
management considers the impact of changes in current<br />
competitive conditions, cost of capital, availability of funding,<br />
technological obsolescence, discontinuance of services and<br />
other circumstances that could indicate that an impairment<br />
exists. The Company applies the impairment assessment to its<br />
separate cash-generating units. This requires management to<br />
make significant judgements concerning the existence of<br />
impairment indicators, identification of separate cash-generating<br />
units, remaining useful lives of assets and estimates of projected<br />
cash flows and fair value less costs to sell. Management<br />
judgement is also required when assessing whether a previously<br />
recognised impairment loss should be reversed.
256<br />
<strong>Telkom</strong> Annual Report 2009<br />
Notes to the annual financial statements (continued)<br />
for the three years ended March 31, 2009<br />
2. SIGNIFICANT ACCOUNTING POLICIES (continued)<br />
Significant accounting judgements, estimates and<br />
assumptions (continued)<br />
Impairments of property, plant and equipment and<br />
intangible assets (continued)<br />
Where impairment indicators exist, the determination of the<br />
recoverable amount of a cash-generating unit requires<br />
management to make assumptions to determine the fair value<br />
less costs to sell and value in use. Key assumptions on which<br />
management has based its determination of fair value less costs<br />
to sell include the existence of binding sale agreements, and for<br />
the determination of value in use include the weighted average<br />
cost of capital, projected revenues, gross margins, average<br />
revenue per customer, capital expenditure, expected customer<br />
bases and market share. The judgements, assumptions and<br />
methodologies used can have a material impact on the fair<br />
value and ultimately the amount of any impairment.<br />
Impairment of other financial assets<br />
At each balance sheet date management assesses whether<br />
there are indicators of impairment of financial assets, including<br />
equity investments. If such evidence exists, the estimated present<br />
value of the future cash flows of that asset is determined.<br />
Management judgement is required when determining the<br />
expected future cash flows. To determine whether any decline in<br />
fair value of available-for-sale investments is prolonged, reliance<br />
is placed on an assessment by management regarding the<br />
future prospects of the investee. In measuring impairments,<br />
quoted market prices are used, if available, or projected<br />
business plan information from the investee is used for those<br />
financial assets not carried at fair value.<br />
Impairment of receivables<br />
An impairment is recognised on trade receivables that are<br />
assessed to be impaired (refer to notes 12 and 17). The<br />
impairment is based on an assessment of the extent to which<br />
customers have defaulted on payments already due and an<br />
assessment on their ability to make payments based on their<br />
credit worthiness and historical write-offs experience. Should the<br />
assumptions regarding the financial condition of the customer<br />
change, actual write-offs could differ significantly from the<br />
impaired amount.<br />
Leases<br />
The determination of whether an arrangement is, or contains a<br />
lease is based on whether, at the date of inception, the fulfilment<br />
of the arrangement is dependent on the use of a specific asset<br />
or assets or the arrangement conveys a right to use the asset.<br />
Leases in which a significant portion of the risks and rewards of<br />
ownership are retained by the lessor are classified as operating<br />
leases. Payments made under operating leases (net of any<br />
incentives received from the lessor) are charged to the income<br />
statement on a straight-line basis over the period of the lease.<br />
A lease is classified as a finance lease if it transfers substantially<br />
all the risks and rewards incidental to ownership.<br />
Deferred taxation asset<br />
Management judgement is exercised when determining the<br />
probability of future taxable profits which will determine whether<br />
deferred tax assets should be recognised or derecognised. The<br />
realisation of deferred tax assets will depend on whether it is<br />
possible to generate sufficient taxable income, taking into<br />
account any legal restrictions on the length and nature of the<br />
taxation asset. When deciding whether to recognise unutilised<br />
taxation credits, management needs to determine the extent that<br />
the future obligation is likely to be available for set-off. In the<br />
event that the assessment of future payments and future utilisation<br />
changes, the change in the recognised deferred tax asset must<br />
be recognised in profit or loss.<br />
Taxation<br />
The taxation rules and regulations in South Africa within which<br />
the Company operates are highly complex and subject to<br />
interpretation. Additionally, for the foreseeable future,<br />
management expects South African taxation laws to further<br />
develop through changes in South Africa’s existing taxation<br />
structure as well as clarification of the existing taxation laws<br />
through published interpretations and the resolution of actual tax<br />
cases (refer to notes 8 and 14).<br />
Management has made a judgement that all outstanding<br />
taxation credits relating to secondary taxation on companies<br />
(STC) will be available for utilisation before the taxation regime<br />
change, from STC to withholding taxation, is effective.<br />
The Company is regularly subject to evaluation by the South<br />
African taxation authorities of its historical income taxation filings<br />
and in connection with such reviews disputes can arise with the<br />
taxing authorities over the interpretation or application of certain<br />
taxation rules to the business of the Company. These disputes<br />
may not necessarily be resolved in a manner that is favourable<br />
for the Company. Additionally the resolution of the disputes<br />
could result in an obligation for the Company that exceeds<br />
management’s estimate. The Company has historically filed,<br />
and continues to file, all required income taxation returns.<br />
Management believes that the principles applied in determining<br />
the Company’s taxation obligations are consistent with the<br />
principles and interpretations of the South African taxation laws.<br />
Deferred taxation rate<br />
Management makes judgements on the taxation rate applicable<br />
based on the Company’s expectations at balance sheet date on<br />
how the asset is expected to be recovered or the liability is<br />
expected to be settled.
Notes to the annual financial statements (continued)<br />
for the three years ended March 31, 2009<br />
2. SIGNIFICANT ACCOUNTING POLICIES (continued)<br />
Significant accounting judgements, estimates and<br />
assumptions (continued)<br />
Employee benefits<br />
The Company provides defined benefit plans for certain postemployment<br />
benefits. The Company’s net obligation in respect<br />
of defined benefits is calculated separately for each plan by<br />
estimating the amount of future benefits earned in return for<br />
services rendered. The obligation and assets related to each of<br />
the post-retirement benefits are determined through an actuarial<br />
valuation. The actuarial valuation relies heavily on assumptions<br />
as disclosed in note 25. The assumptions determined by<br />
management make use of information obtained from the<br />
Company’s employment agreements with staff and pensioners,<br />
market related returns on similar investments, market related<br />
discount rates and other available information. The assumptions<br />
concerning the expected return on assets and expected change<br />
in liabilities are determined on a uniform basis, considering<br />
long-term historical returns and future estimates of returns and<br />
medical inflation expectations. In the event that further changes<br />
in assumptions are required, the future amounts of postemployment<br />
benefits may be affected materially.<br />
The discount rate reflects the average timing of the estimated<br />
defined benefit payments. The discount rate is based on longterm<br />
South African government bonds with the longest maturity<br />
period as reported by the Bond Exchange of South Africa. The<br />
discount rate is expected to follow the trend of inflation.<br />
The overall expected rate of return on assets is determined<br />
based on the market prices prevailing at that date, applicable<br />
to the period over which the obligation is to be settled.<br />
<strong>Telkom</strong> provides equity compensation to its employees in the<br />
form of the <strong>Telkom</strong> Conditional Share Plan. The related expense<br />
and reserve are determined through an actuarial valuation<br />
which relies heavily on assumptions. The assumptions include<br />
employee turnover percentages and whether specified<br />
performance criteria will be met. Changes to these assumptions<br />
could affect the amount of expense ultimately recognised in the<br />
financial statements. An actuarial valuation relies heavily on the<br />
actual plan experience assumptions as disclosed in note 25.<br />
Provisions and contingent liabilities<br />
Management judgement is required when recognising and<br />
measuring provisions and when measuring contingent liabilities<br />
as set out in notes 24 and 35 respectively. The probability that<br />
an outflow of economic resources will be required to settle the<br />
obligation must be assessed and a reliable estimate must be<br />
made of the amount of the obligation. Provisions are discounted<br />
where the effect of discounting is material based on<br />
management’s judgement. The discount rate used is the rate that<br />
reflects current market assessments of the time value of money<br />
<strong>Telkom</strong> Annual Report 2009 257<br />
and, where appropriate, the risks specific to the liability, all of<br />
which requires management judgement. The Company is<br />
required to recognise provisions for claims arising from litigation<br />
when the occurrence of the claim is probable and the amount<br />
of the loss can be reasonably estimated. Liabilities provided for<br />
legal matters require judgements regarding projected outcomes<br />
and ranges of losses based on historical experience and<br />
recommendations of legal counsel. Litigation is however<br />
unpredictable and actual costs incurred could differ materially<br />
from those estimated at the balance sheet date.<br />
Held-to-maturity financial assets<br />
Management has reviewed the Company’s held-to-maturity<br />
financial assets in the light of its capital management and<br />
liquidity requirements and has confirmed the Company’s positive<br />
intention and ability to hold those assets to maturity.<br />
Summary of significant accounting policies<br />
Operating revenue<br />
The Company provides fixed-line and data communication<br />
services and communication-related products. The Company<br />
provides such services to business, residential and payphone<br />
customers. Revenue represents the fair value of fixed or<br />
determinable consideration that has been received or is receivable.<br />
Revenue for services is measured at amounts invoiced to<br />
customers and excludes Value Added Tax.<br />
Revenue is recognised when there is evidence of an arrangement,<br />
collectability is probable, and the delivery of the product or<br />
service has occurred. In certain circumstances, revenue is split into<br />
separately identifiable components and recognised when the<br />
related components are delivered in order to reflect the substance<br />
of the transaction. The value of components is determined using<br />
verifiable objective evidence. The Company does not provide<br />
customers with the right to a refund.<br />
Dealer incentives<br />
The Company provides incentives to its retail payphone card<br />
distributors as trade discounts. Incentives are based on sales<br />
volume and value. Revenue for retail payphone cards is recorded<br />
as traffic revenue, net of these discounts as the cards are used.<br />
Subscriptions, connections and other usage<br />
The Company provides telephone and data communication<br />
services under post-paid and prepaid payment arrangements.<br />
Revenue includes fees for installation and activation, which are<br />
deferred and recognised over the expected customer<br />
relationship period. Costs incurred on first time installations that<br />
form an integral part of the network are capitalised and<br />
depreciated over the expected average customer relationship<br />
period. All other installation and activation costs are expensed<br />
as incurred.
258<br />
<strong>Telkom</strong> Annual Report 2009<br />
Notes to the annual financial statements (continued)<br />
for the three years ended March 31, 2009<br />
2. SIGNIFICANT ACCOUNTING POLICIES (continued)<br />
Summary of significant accounting policies (continued)<br />
Operating revenue (continued)<br />
Subscriptions, connections and other usage (continued)<br />
Post-paid and prepaid service arrangements include<br />
subscription fees, typically monthly fees, which are recognised<br />
over the subscription period.<br />
Revenue related to sale of communication equipment, products<br />
and value-added services is recognised upon delivery and<br />
acceptance of the product or service by the customer.<br />
Traffic (domestic, fixed-to-mobile and international)<br />
Prepaid<br />
Prepaid traffic service revenue collected in advance is deferred<br />
and recognised based on actual usage or upon expiration of<br />
the usage period, whichever comes first. The terms and<br />
conditions of certain prepaid products allow the carry over of<br />
unused minutes. Revenue related to the carry over of unused<br />
minutes is deferred until usage or expiration.<br />
Payphones<br />
Payphone service coin revenue is recognised when the service<br />
is provided.<br />
Payphone service card revenue collected in advance is deferred<br />
and recognised based on actual usage or upon expiration of<br />
the usage period, whichever comes first.<br />
Post-paid<br />
Revenue related to local, long distance, network-to-network,<br />
roaming and international call connection services is recognised<br />
when the call is placed or the connection provided.<br />
Interconnection<br />
Interconnection revenue for call termination, call transit and<br />
network usage is recognised as the traffic flow occurs.<br />
Data<br />
The Company provides data communication services under<br />
post-paid and prepaid payment arrangements. Revenue<br />
includes fees for installation and activation, which are deferred<br />
over the expected average customer relationship period. Costs<br />
incurred on first time installations that form an integral part of the<br />
network are capitalised and depreciated over the life of the<br />
expected average customer relationship period. All other<br />
installation and activation costs are expensed as incurred. Postpaid<br />
and prepaid service arrangements include subscription<br />
fees, typically monthly fees, which are recognised over the<br />
subscription period.<br />
Directory services<br />
Included in other revenue are directory services. Revenue is<br />
recognised when printed directories are released for<br />
distribution, as the significant risks and rewards of ownership<br />
have been transferred to the buyer. Electronic directories’<br />
revenue is recognised on a monthly basis, as earned.<br />
Sundry revenue<br />
Sundry revenue is recognised when the economic benefit flows<br />
to the Company and the earnings process is complete.<br />
Interest on debtors’ accounts<br />
Interest is raised on overdue accounts by using the effective<br />
interest rate method and recognised in the income statement.<br />
Marketing<br />
Marketing costs are recognised as an expense as incurred.<br />
Incentives<br />
Incentives paid to service providers and dealers for products<br />
delivered to the customer are expensed as incurred. Incentives<br />
paid to service providers and dealers for services delivered are<br />
expensed in the period that the related revenue is recognised.<br />
Distribution incentives paid to service providers and dealers for<br />
exclusivity are deferred and expensed over the contractual<br />
relationship period.<br />
Investment income<br />
Dividends from investments are recognised on the date that the<br />
Company is entitled to the dividend. Interest is recognised on a<br />
time proportionate basis taking into account the principal<br />
amount outstanding and the effective interest rate.<br />
Taxation<br />
Current taxation<br />
The charge for current taxation is based on the results for the<br />
year and is adjusted for non-taxable income and non-deductible<br />
expenditure. Current taxation is measured at the amount<br />
expected to be paid to the taxation authorities, using taxation<br />
rates and laws that have been enacted or substantively enacted<br />
by the balance sheet date.<br />
Deferred taxation<br />
Deferred taxation is accounted for using the balance sheet<br />
liability method on all temporary differences at the balance<br />
sheet date between taxation bases of assets and liabilities and<br />
their carrying amounts for financial reporting purposes.
Notes to the annual financial statements (continued)<br />
for the three years ended March 31, 2009<br />
2. SIGNIFICANT ACCOUNTING POLICIES (continued)<br />
Summary of significant accounting policies (continued)<br />
Taxation (continued)<br />
Deferred taxation (continued)<br />
Deferred taxation is not provided on the initial recognition of<br />
goodwill or initial recognition of assets or liabilities which is not<br />
a business combination and at the time of the transaction affects<br />
neither accounting nor taxable profit or loss.<br />
A deferred taxation asset is recognised to the extent that it is<br />
probable that future taxable profits will be available against<br />
which the associated unused taxation losses, unused taxation<br />
credits and deductible temporary differences can be utilised.<br />
The carrying amount of deferred taxation assets is reviewed at<br />
each balance sheet date and is reduced to the extent that it is<br />
no longer probable that the related taxation benefit will be<br />
realised. In respect of deductible temporary differences<br />
associated with investments in subsidiaries, associates and<br />
interest in joint ventures, deferred income tax assets are<br />
recognised only to the extent that it is probable that temporary<br />
differences will reverse in the foreseeable future and taxable<br />
profit will be available against which temporary differences can<br />
be utilised.<br />
Deferred taxation relating to items recognised directly in equity<br />
is recognised in equity and not in the income statement.<br />
Deferred taxation assets and liabilities are measured at the<br />
taxation rates that are expected to apply to the period when the<br />
asset is realised or the liability is settled, based on taxation rates<br />
(and taxation laws) that have been enacted or substantively<br />
enacted by the balance sheet date.<br />
Deferred taxation assets and deferred taxation liabilities are<br />
offset, if a legally enforceable right exists to set off current<br />
taxation assets against current taxation liabilities and the<br />
deferred taxes relate to the same taxable entity and the same<br />
taxation authority.<br />
Secondary taxation on companies<br />
Secondary taxation on companies (’STC’) is provided for at a<br />
rate of 10% (12.5% before October 1, 2007) on the amount<br />
by which dividends declared by the Company exceed<br />
dividends received. Deferred taxation on unutilised STC credits<br />
is recognised to the extent that STC payable on future dividend<br />
payments is likely to be available for set-off.<br />
Property, plant and equipment<br />
At initial recognition acquired property, plant and equipment<br />
are recognised at their purchase price, including import duties<br />
<strong>Telkom</strong> Annual Report 2009 259<br />
and non-refundable purchase taxes, after deducting trade<br />
discounts and rebates. The recognised cost includes any directly<br />
attributable costs for preparing the asset for its intended use.<br />
The cost of an item of property, plant and equipment is<br />
recognised as an asset if it is probable that the future economic<br />
benefits associated with the item will flow to the Company and<br />
the cost of the item can be measured reliably.<br />
Property, plant and equipment is stated at historical cost less<br />
accumulated depreciation and any accumulated impairment<br />
losses. Each component of an item of property, plant and<br />
equipment with a cost that is significant in relation to the total<br />
cost of the item is depreciated separately. Depreciation is<br />
charged from the date the asset is available for use on a<br />
straight-line basis over the estimated useful life and ceases at the<br />
earlier of the date that the asset is classified as held for sale or<br />
the date the asset is derecognised. Idle assets continue to attract<br />
depreciation.<br />
The estimated useful life of individual assets and the<br />
depreciation method thereof are reviewed on an annual basis<br />
at balance sheet date. The depreciable amount is determined<br />
after taking into account the residual value of the asset. The<br />
residual value is the estimated amount that the Company would<br />
currently obtain from the disposal of the asset, after deducting<br />
the estimated cost of disposal, if the asset were already of the<br />
age and in the condition expected at the end of its useful life.<br />
The residual values of assets are reviewed on an annual basis<br />
at balance sheet date.<br />
Assets under construction represents freehold buildings,<br />
operating software, network and support equipment and<br />
includes all direct expenditure as well as related borrowing<br />
costs capitalised, but excludes the costs of abnormal amounts of<br />
waste material, labour or other resources incurred in the<br />
production of self-constructed assets.<br />
Freehold land is stated at cost and is not depreciated. Amounts<br />
paid by the Company on improvements to assets which are held<br />
in terms of operating lease agreements are depreciated on a<br />
straight-line basis over the shorter of the remaining useful life of<br />
the applicable asset or the remainder of the lease period.<br />
Where it is reasonably certain that the lease agreement will be<br />
renewed, the lease period equals the period of the initial<br />
agreement plus the renewal periods.
260<br />
<strong>Telkom</strong> Annual Report 2009<br />
Notes to the annual financial statements (continued)<br />
for the three years ended March 31, 2009<br />
2. SIGNIFICANT ACCOUNTING POLICIES (continued)<br />
Summary of significant accounting policies (continued)<br />
Property, plant and equipment (continued)<br />
The estimated useful lives assigned to groups of property, plant<br />
and equipment are:<br />
Years<br />
Freehold buildings 15 to 40<br />
Leasehold buildings<br />
Network equipment:<br />
7 to 25<br />
Cables 20 to 40<br />
Switching equipment 2 to 18<br />
Transmission equipment 5 to 18<br />
Other 1 to 20<br />
Support equipment 5 to 13<br />
Furniture and office equipment 2 to 15<br />
Data processing equipment and software 3 to 10<br />
Other 2 to 20<br />
An item of property, plant and equipment is derecognised upon<br />
disposal or when no future economic benefits are expected from<br />
its use or disposal. Any gain or loss arising on derecognition of<br />
the asset (calculated as the difference between the net disposal<br />
proceeds and the carrying amount of the asset) is included in<br />
the income statement in the year the asset is derecognised.<br />
Assets held under finance leases are depreciated over their<br />
expected useful lives on the same basis as owned assets or,<br />
where shorter, the term of the relevant lease if there is no<br />
reasonable certainty that the Company will obtain ownership by<br />
the end of the lease term.<br />
Intangible assets<br />
At initial recognition acquired intangible assets are recognised at<br />
their purchase price, including import duties and non-refundable<br />
purchase taxes, after deducting trade discounts and rebates. The<br />
recognised cost includes any directly attributable costs for preparing<br />
the asset for its intended use. Internally generated intangible assets<br />
are recognised at cost comprising all directly attributable costs<br />
necessary to create and prepare the asset to be capable of<br />
operating in the manner intended by management. Licences,<br />
software, trademarks, copyrights and other intangible assets are<br />
carried at cost less accumulated amortisation and any accumulated<br />
impairment losses. Amortisation commences when the intangible<br />
assets are available for their intended use and is recognised on a<br />
straight-line basis over the assets’ expected useful lives. Amortisation<br />
ceases at the earlier of the date that the asset is classified as held<br />
for sale and the date that the asset is derecognised.<br />
The residual value of intangible assets is the estimated amount<br />
that the Company would currently obtain from the disposal of<br />
the asset, after deducting the estimated cost of disposal, if the<br />
asset were already of the age and in the condition expected at<br />
the end of its useful life. Due to the nature of the asset the<br />
residual value is assumed to be zero unless there is a<br />
commitment by a third party to purchase the asset at the end of<br />
its useful life or when there is an active market that is likely to<br />
exist at the end of the asset’s useful life, which can be used to<br />
estimate the residual values. The residual values of intangible<br />
assets and their useful lives are reviewed on an annual basis at<br />
balance sheet date.<br />
Intangible assets with indefinite useful lives and intangible assets<br />
not yet available for use are tested for impairment annually<br />
either individually or at the cash-generating unit level. Such<br />
intangibles are not amortised. The useful life of an intangible<br />
asset with an indefinite life is reviewed annually to determine<br />
whether indefinite life assessment continues to be supportable. If<br />
not, the change in the useful life assessment from indefinite to<br />
finite is made on a prospective basis.<br />
Assets under construction represent application and other nonintegral<br />
software and includes all direct expenditure as well as<br />
related borrowing costs capitalised, but excludes the costs of<br />
abnormal amounts of waste material, labour or other resources<br />
incurred in the production of self-constructed assets.<br />
Intangible assets are derecognised when they have been<br />
disposed of or when the asset is permanently withdrawn from use<br />
and no future economic benefit is expected from its disposal. Any<br />
gains or losses on the retirement or disposal of assets are<br />
recognised in the income statement in the year in which they arise.<br />
The expected useful lives assigned to intangible assets are:<br />
Years<br />
Licences 5 to 30<br />
Software<br />
Trademarks, copyrights and other including<br />
2 to 10<br />
FIFA brand 1 to 15<br />
Asset retirement obligations<br />
Asset retirement obligations related to property, plant and<br />
equipment and intangible assets are recognised at the present<br />
value of expected future cash flows when the obligation to<br />
dismantle or restore the site arises. The increase in the related<br />
asset’s carrying value is depreciated over its estimated useful<br />
life. The unwinding of the discount is included in finance<br />
charges and fair value movements. Changes in the<br />
measurement of an existing liability that result from changes in<br />
the estimated timing or amount of the outflow of resources<br />
required to settle the liability, or a change in the discount rate,<br />
are accounted for as increases or decreases to the original cost<br />
of the recognised assets. If the amount deducted exceeds the<br />
carrying amount of the asset, the excess is recognised<br />
immediately in profit and loss.
Notes to the annual financial statements (continued)<br />
for the three years ended March 31, 2009<br />
2. SIGNIFICANT ACCOUNTING POLICIES (continued)<br />
Summary of significant accounting policies (continued)<br />
Non-current assets held for sale<br />
Non-current assets and disposal groups are classified as held<br />
for sale if their carrying amount will be recovered through a sale<br />
transaction rather than through continuing use. This condition is<br />
regarded as met only when the sale is highly probable and the<br />
asset (or disposal group) is available for immediate sale in its<br />
present condition. Management must be committed to the sale,<br />
which should be expected to qualify for recognition as a<br />
complete sale within one year from the date of classification.<br />
Assets are no longer depreciated when they are classified into<br />
this category.<br />
Non-current assets (and disposal groups) classified as held for<br />
sale are measured at the lower of the assets’ previous carrying<br />
amount and fair value less costs to sell.<br />
Impairment of property, plant and equipment and<br />
intangible assets<br />
The Company regularly reviews its non-financial assets and<br />
cash-generating units for any indication of impairment. When<br />
indicators, including changes in technology, market, economic,<br />
legal and operating environments occur and could result in<br />
changes of the asset’s or cash-generating unit’s estimated<br />
recoverable amount, an impairment test is performed.<br />
The recoverable amount of assets or cash-generating units is<br />
measured using the higher of the fair value less costs to sell and<br />
its value in use, which is the present value of projected cash<br />
flows covering the remaining useful lives of the assets.<br />
Impairment losses are recognised when the asset’s carrying<br />
value exceeds its estimated recoverable amount. Where<br />
applicable, the recoverable amount is determined for the cashgenerating<br />
unit to which the asset belongs.<br />
Previously recognised impairment losses are reviewed annually<br />
for any indication that it may no longer exist or may have<br />
decreased. If any such indication exists, the recoverable amount<br />
of the asset is estimated. Such impairment losses are reversed<br />
through the income statement if the recoverable amount has<br />
increased as a result of a change in the estimates used to<br />
determine the recoverable amount, but not to an amount higher<br />
than the carrying amount that would have been determined (net<br />
of depreciation or amortisation) had no impairment loss been<br />
recognised in prior years.<br />
Repairs and maintenance<br />
The Company expenses all costs associated with repairs and<br />
maintenance, unless it is probable that such costs would result in<br />
increased future economic benefits flowing to the Company,<br />
and the costs can be reliably measured.<br />
<strong>Telkom</strong> Annual Report 2009 261<br />
Borrowing costs<br />
Financing costs directly associated with the acquisition or<br />
construction of assets that require more than three months to<br />
complete and place in service are capitalised at interest rates<br />
relating to loans specifically raised for that purpose, or at the<br />
weighted average borrowing rate where the general pool of<br />
Company borrowings was utilised. Other borrowing costs are<br />
expensed as incurred.<br />
Deferred revenue and expenses<br />
Activation revenue and costs are recognised in accordance with<br />
the principles contained in Emerging Issues Task Force Issue<br />
No 00-21, Revenue Arrangements with Multiple Deliverables<br />
(’EITF 00-21’), issued in the United States. This results in<br />
activation revenue and costs up to the amount of the deferred<br />
revenue being deferred and recognised systematically over the<br />
expected duration of the customer relationship because it is<br />
considered to be part of the customers’ ongoing rights to<br />
telecommunication services and the operator’s continuing<br />
involvement. Any excess of the costs over revenues is expensed<br />
immediately.<br />
Subsidiaries and joint venture<br />
Investments in subsidiaries, special purpose entities and joint<br />
ventures are carried at cost and adjusted for any impairment<br />
losses.<br />
Inventories<br />
Installation material, maintenance and network equipment<br />
inventories are stated at the lower of cost, determined on a<br />
weighted average basis and estimated net realisable value.<br />
Merchandise inventories are stated at the lower of cost,<br />
determined on a first-in first-out (’FIFO’) basis and estimated net<br />
realisable value. Write-down of inventories arises when, for<br />
example, goods are damaged or when net realisable value is<br />
lower than carrying value.<br />
Financial instruments<br />
Recognition and initial measurement<br />
All financial instruments are initially recognised at fair value,<br />
plus, in the case of financial assets and liabilities not at fair<br />
value through profit or loss, transaction costs that are directly<br />
attributable to the acquisition or issue. Financial instruments are<br />
recognised when the Company becomes a party to their<br />
contractual arrangements. All regular way transactions are<br />
accounted for on settlement date. Regular way purchases or<br />
sales are purchases or sales of financial assets that require<br />
delivery of assets within the period generally established by<br />
regulation or convention in the marketplace.
262<br />
<strong>Telkom</strong> Annual Report 2009<br />
Notes to the annual financial statements (continued)<br />
for the three years ended March 31, 2009<br />
2. SIGNIFICANT ACCOUNTING POLICIES (continued)<br />
Summary of significant accounting policies (continued)<br />
Financial instruments (continued)<br />
Subsequent measurement<br />
Subsequent to initial recognition, the Company classifies<br />
financial assets as ’at fair value through profit or loss’, ’held-tomaturity<br />
investments’, ’loans and receivables’, or ’available-forsale'.<br />
Financial liabilities are classified ’at fair value through<br />
profit or loss’ or ’other financial liabilities’. The measurement of<br />
each is set out below and presented in a table in note 12.<br />
The fair value of financial assets and liabilities that are actively<br />
traded in financial markets is determined by reference to quoted<br />
market prices at the close of business on the balance sheet date.<br />
Where there is no active market, fair value is determined using<br />
valuation techniques such as discounted cash flow analysis.<br />
Financial assets at fair value through profit or loss<br />
The Company classifies financial assets that are held for trading<br />
in the category ’financial assets at fair value through profit or<br />
loss’. Financial assets are classified as held for trading if they<br />
are acquired for the purpose of selling in the future. Derivatives<br />
not designated as hedges are also classified as held for trading.<br />
On remeasurement to fair value the gains or losses on held for<br />
trading financial assets are recognised in net finance charges<br />
and fair value movements for the year.<br />
Gains and losses arising from changes in the fair value of the<br />
’financial assets at fair value through profit or loss’ category are<br />
presented in the income statement within ’finance charges and<br />
fair value movements’ in the period which they arise.<br />
Held-to-maturity financial assets<br />
The Company classifies non-derivative financial assets with fixed<br />
or determinable payments and fixed maturity dates as held-tomaturity<br />
when the Company has the positive intention and<br />
ability to hold to maturity. These assets are subsequently<br />
measured at amortised cost. Amortised cost is computed as the<br />
amount initially recognised minus principal repayments, plus or<br />
minus the cumulative amortisation using the effective interest<br />
method. This calculation includes all fees paid or received<br />
between parties to the contract. For investments carried at<br />
amortised cost, gains and losses are recognised in net profit or<br />
loss when the investments are sold or impaired.<br />
Loans and receivables<br />
Loans and receivables are non-derivative financial assets with<br />
fixed or determinable payments that are not quoted in an active<br />
market. Such assets are carried at amortised cost using the<br />
effective interest method. Trade receivables are subsequently<br />
measured at the original invoice amount where the effect of<br />
discounting is not material.<br />
Available-for-sale financial assets<br />
Available-for-sale financial assets are those non-derivative assets<br />
that are designated as available-for-sale, or are not classified in<br />
any of the three preceding categories. Equity instruments are all<br />
treated as available-for-sale financial instruments. After initial<br />
recognition, available-for-sale financial assets are measured at<br />
fair value, with gains and losses being recognised as a<br />
separate component of equity, net of taxation. Dividend income<br />
is recognised in the income statement as part of other income<br />
when the Company’s right to receive payment is established.<br />
Changes in the fair value of monetary items denominated in a<br />
foreign currency and classified as available-for-sale are<br />
analysed between translation differences resulting from changes<br />
in amortised cost of the security and other changes in carrying<br />
amount of the item. The translation differences on monetary<br />
items are recognised in profit or loss, while translation<br />
differences on non-monetary securities are recognised in equity.<br />
Changes in the fair value of monetary and non-monetary items<br />
classified as available-for-sale are recognised directly in equity.<br />
When an investment is derecognised or determined to be<br />
impaired, the cumulative gain or loss previously recorded in<br />
equity is recognised in profit or loss.<br />
Financial liabilities at fair value through profit or loss<br />
Financial liabilities are classified as ‘at fair value through profit<br />
or loss’ (’FVTPL’) where the financial liability is held for trading.<br />
A financial liability is classified as held for trading:<br />
• if it is acquired for the purpose of settling in the near term; or<br />
• if it is a derivative that is not designated and effective as a<br />
hedging instrument.<br />
Financial liabilities at a FVTPL are stated at fair value, with any<br />
resultant gains or losses recognised in profit or loss. The net gain<br />
or loss recognised in profit or loss incorporates any interest paid<br />
on the financial liability.<br />
Other financial liabilities<br />
Other financial liabilities are subsequently measured at<br />
amortised cost using the effective interest rate method, with<br />
interest expense recognised in finance charges and fair value<br />
movements, on an effective interest rate basis.<br />
The effective interest rate is the rate that accurately discounts<br />
estimated future cash payments through the expected life of the<br />
financial liability or, where appropriate, a shorter period.
Notes to the annual financial statements (continued)<br />
for the three years ended March 31, 2009<br />
2. SIGNIFICANT ACCOUNTING POLICIES (continued)<br />
Summary of significant accounting policies (continued)<br />
Financial instruments (continued)<br />
Financial guarantee contracts<br />
Financial guarantee contracts are subsequently measured at the<br />
higher of the amount determined in accordance with IAS37<br />
Provisions, Contingent Liabilities and Contingent Assets or the<br />
amount initially recognised less, when appropriate, cumulative<br />
amortisation, recognised in accordance with IAS18 Revenue.<br />
Cash and cash equivalents<br />
Cash and cash equivalents are measured at amortised cost. This<br />
comprises cash on hand, deposits held on call and term<br />
deposits with an initial maturity of less than three months when<br />
entered into.<br />
For the purpose of the cash flow statement, cash and cash<br />
equivalents consist of cash and cash equivalents defined above,<br />
net of credit facilities utilised.<br />
Capital and money market transactions<br />
New bonds and commercial paper bills issued are subsequently<br />
measured at amortised cost using the effective interest rate<br />
method.<br />
Bonds issued where the Company is a buyer and seller of last<br />
resort are carried at fair value. The Company does not actively<br />
trade in bonds.<br />
Derecognition<br />
A financial instrument or a portion of a financial instrument will<br />
be derecognised and a gain or loss recognised when the<br />
Company’s contractual rights expire, financial assets are<br />
transferred or financial liabilities are extinguished. On<br />
derecognition of a financial asset or liability, the difference<br />
between the consideration and the carrying amount on the<br />
settlement date is included in finance charges and fair value<br />
movements for the year. For available-for-sale assets, the fair<br />
value adjustment relating to prior revaluations of assets is<br />
transferred from equity and recognised in finance charges and<br />
fair value movements for the year.<br />
Bonds and commercial paper bills are derecognised when the<br />
obligation specified in the contract is discharged. The difference<br />
between the carrying value of the bond and the amount paid to<br />
extinguish the obligation is included in finance charges and fair<br />
value movements for the year.<br />
Impairment of financial assets<br />
At each balance sheet date an assessment is made of whether<br />
there are any indicators of impairment of a financial asset or a<br />
group of financial assets based on observable data about one<br />
or more loss events that occurred after the initial recognition of<br />
<strong>Telkom</strong> Annual Report 2009 263<br />
the asset or the group of assets. In the case of equity securities<br />
classified as available-for-sale, a significant or prolonged<br />
decline in the fair value of the security below its cost is<br />
considered as an indicator that the securities are impaired. For<br />
loans and receivables carried at amortised cost, if there is<br />
objective evidence that an impairment loss has been incurred,<br />
the amount of the loss is measured at the difference between the<br />
asset’s carrying amount and the present value of estimated future<br />
cashflows. The carrying amount of the asset is reduced through<br />
the use of an allowance account and the amount of the loss is<br />
recognised in the income statement.<br />
If any such evidence exists for available-for-sale assets, the<br />
cumulative loss – measured as the difference between the<br />
acquisition cost and the current fair value, less any impairment<br />
loss on that financial asset previously recognised in profit or loss<br />
– is removed from equity and recognised in the income<br />
statement. Impairment losses recognised in the income statement<br />
on equity instruments are not reversed through the income<br />
statement. The recoverable amount of financial assets carried at<br />
amortised cost is calculated as the present value of expected<br />
future cash flows discounted at the original effective interest rate<br />
of the asset.<br />
If, in a subsequent period, the amount of the impairment loss for<br />
financial assets decreases and the decrease can be related<br />
objectively to an event occurring after the impairment was<br />
recognised, the previously recognised impairment loss is<br />
reversed except for those financial assets classified as availablefor-sale<br />
and carried at cost that are not reversed. Any<br />
subsequent reversal of an impairment loss is recognised in the<br />
income statement, to the extent that the carrying value of the<br />
asset does not exceed its amortised cost at the reversal date.<br />
Reversals in respect of equity instruments classified as availablefor-sale<br />
are not recognised in profit and loss. Reversals of<br />
impairment losses on debt instruments classified as available-forsale<br />
are reversed through the income statement, if the increase<br />
in fair value of the instrument can be objectively related to an<br />
event occurring after the impairment loss was recognised<br />
through the income statement.<br />
Embedded derivatives<br />
The Company assesses whether an embedded derivative is<br />
required to be separated from the host contract and accounted<br />
for as a derivative when it first becomes party to the contract.<br />
The Company reassesses the contract when there is a change<br />
in the terms of the contract which significantly modifies the cash<br />
flows that would otherwise be required under the contract.
264<br />
<strong>Telkom</strong> Annual Report 2009<br />
Notes to the annual financial statements (continued)<br />
for the three years ended March 31, 2009<br />
2. SIGNIFICANT ACCOUNTING POLICIES (continued)<br />
Summary of significant accounting policies (continued)<br />
Financial instruments (continued)<br />
Financial instruments: Disclosures<br />
The Company groups its financial instruments into classes of<br />
similar instruments and where disclosure is required, it discloses<br />
them by class. It also discloses information about the nature and<br />
extent of risks arising from its financial instruments (refer to<br />
note 12).<br />
Foreign currencies<br />
The functional and presentation currency of the Company is the<br />
South African Rand (Z<strong>AR</strong>).<br />
Transactions denominated in foreign currencies are measured at<br />
the rate of exchange at transaction date. Monetary items<br />
denominated in foreign currencies are remeasured at the rate of<br />
exchange at settlement date or balance sheet date, whichever<br />
occurs first. Exchange differences on the settlement or translation<br />
of monetary assets and liabilities are included in finance<br />
charges and fair value movements in the period in which they<br />
arise. Non-monetary items that are measured in terms of<br />
historical cost in a foreign currency are translated using the<br />
exchange rates as at the dates of the initial transactions. Nonmonetary<br />
items measured at fair value in a foreign currency are<br />
translated using the exchange rates at the date when the fair<br />
value is determined.<br />
Treasury shares<br />
Where the Company acquires, or in substance acquires, its<br />
own shares, such shares are measured at cost and disclosed as<br />
a reduction of equity. No gain or loss is recognised in profit or<br />
loss on the purchase, sale, issue or cancellation of the<br />
Company’s own equity instruments. Such shares are not<br />
remeasured for changes in fair value.<br />
Where the Company chooses or is required to buy equity<br />
instruments from another party to satisfy its obligations to its<br />
employees under the share-based payment arrangement by<br />
delivery of its own shares, the transaction is accounted for as<br />
equity-settled. This applies regardless of whether the employee’s<br />
rights to the equity instruments were granted by the Company<br />
itself or by its shareholders or was settled by the Company itself<br />
or its shareholders.<br />
Leases<br />
A lease is classified as a finance lease if it transfers substantially<br />
all the risks and rewards incidental to ownership. All other<br />
leases are classified as operating leases.<br />
Where the Company enters into a service agreement as a<br />
supplier or a customer that depends on the use of a specific<br />
asset, and conveys the right to control the use of the specific<br />
asset, the arrangement is assessed to determine whether it<br />
contains a lease. Once it has been concluded that an<br />
arrangement contains a lease, it is assessed against the criteria<br />
in IAS17 to determine if the arrangement should be recognised<br />
as a finance lease or operating lease.<br />
The land and buildings elements of a lease of land and<br />
buildings are considered separately for the purposes of lease<br />
classification unless it is impractical to do so.<br />
Lessee<br />
Operating lease payments are recognised in the income<br />
statement on a straight-line basis over the lease term.<br />
Assets acquired in terms of finance leases are capitalised at the<br />
lower of fair value and the present value of the minimum lease<br />
payments at inception of the lease and depreciated over the<br />
lesser of the useful life of the asset and the lease term. The<br />
capital element of future obligations under the leases is included<br />
as a liability in the balance sheet. Lease finance costs are<br />
amortised in the income statement over the lease term using the<br />
interest rate implicit in the lease. Where a sale and leaseback<br />
transaction results in a finance lease, any excess of sale<br />
proceeds over the carrying amount is deferred and recognised<br />
in the income statement over the term of the lease.<br />
Lessor<br />
Operating lease revenue is recognised in the income statement<br />
on a straight-line basis over the lease term.<br />
Assets held under a finance lease are recognised in the balance<br />
sheet and presented as a receivable at an amount equal to the<br />
net investment in the lease. The recognition of finance income<br />
is based on a pattern reflecting a constant periodic rate of return<br />
on the net investment in the finance lease.<br />
Employee benefits<br />
Post-employment benefits<br />
The Company provides defined benefit and defined contribution<br />
plans for the benefit of employees. These plans are funded by<br />
the employees and the Company, taking into account<br />
recommendations of the independent actuaries. The postretirement<br />
telephone rebate liability is unfunded.<br />
Defined contribution plans<br />
The Company’s funding of the defined contribution plans is<br />
charged to employee expenses in the same year as the related<br />
service is provided.
Notes to the annual financial statements (continued)<br />
for the three years ended March 31, 2009<br />
2. SIGNIFICANT ACCOUNTING POLICIES (continued)<br />
Summary of significant accounting policies (continued)<br />
Employee benefits (continued)<br />
Defined benefit plans<br />
The Company provides defined benefit plans for pension,<br />
retirement, post-retirement medical aid benefits and telephone<br />
rebates to qualifying employees. The Company’s net obligation<br />
in respect of defined benefits is calculated separately for each<br />
plan by estimating the amount of future benefits earned in return<br />
for services rendered.<br />
The amount recognised in the balance sheet represents the<br />
present value of the defined benefit obligations, calculated by<br />
using the projected unit credit method, as adjusted for<br />
unrecognised actuarial gains and losses, unrecognised past<br />
service costs and reduced by the fair value of the related plan<br />
assets. The amount of any surplus recognised and reflected as<br />
a defined benefit asset is limited to unrecognised actuarial<br />
losses and past service costs plus the present value of available<br />
refunds and reductions in future contributions to the plan. To the<br />
extent that there is uncertainty as to the entitlement to the surplus,<br />
no asset is recognised. No gain is recognised solely as a result<br />
of an actuarial loss or past service cost in the current period and<br />
no loss is recognised solely as a result of an actuarial gain or<br />
past service cost in the current period.<br />
Actuarial gains and losses are recognised as employee<br />
expenses when the cumulative unrecognised gains and losses<br />
for each individual plan exceed 10% of the greater of the<br />
present value of the Company’s obligation and the fair value of<br />
plan assets at the beginning of the year. These gains or losses<br />
are amortised on a straight-line basis over 10 years for all the<br />
defined benefit plans, except gains or losses related to the<br />
pensioners in the <strong>Telkom</strong> Retirement Fund or unless the standard<br />
requires faster recognition. For the <strong>Telkom</strong> Retirement Fund<br />
pensioners, the cumulative unrecognised actuarial gains and<br />
losses in excess of the 10% corridor at the beginning of the year<br />
are recognised immediately.<br />
Past service costs are recognised immediately to the extent that<br />
the benefits are vested, otherwise they are recognised on a<br />
straight-line basis over the average period the benefits become<br />
vested.<br />
Leave benefits<br />
Annual leave entitlement is provided for over the period that the<br />
leave accrues and is subject to a cap of 22 days.<br />
<strong>Telkom</strong> Annual Report 2009 265<br />
Workforce reduction<br />
Workforce reduction expenses are payable when employment<br />
is terminated before the normal retirement age or when an<br />
employee accepts voluntary redundancy in exchange for<br />
benefits. Workforce reduction benefits are recognised when the<br />
entity is demonstrably committed and it is probable that the<br />
expenses will be incurred. In the case of an offer made to<br />
encourage voluntary redundancy, the measurement of<br />
termination benefits is based on the number of employees<br />
expected to accept the offer.<br />
Share-based compensation<br />
The grants of equity instruments, made to employees in terms of<br />
the <strong>Telkom</strong> Conditional Share Plan, are classified as equitysettled<br />
share-based payment transactions. The expense relating<br />
to the services rendered by the employees, and the<br />
corresponding increase in equity, is measured at the fair value<br />
of the equity instruments at their date of grant based on the<br />
market price at grant date, adjusted for the lack of entitlement to<br />
dividends during the vesting period. This compensation cost is<br />
recognised over the vesting period, based on the best available<br />
estimate at each balance sheet date of the number of equity<br />
instruments that are expected to vest.<br />
Short-term employee benefits<br />
The cost of all short-term employee benefits is recognised during<br />
the year the employees render services, unless the Company<br />
uses the services of employees in the construction of an asset<br />
and the benefits received meet the recognition criteria of an<br />
asset, at which stage it is included as part of the related<br />
property, plant and equipment or intangible asset item.<br />
Provisions<br />
Provisions are recognised when the Company has a present<br />
obligation (legal or constructive) as a result of a past event, it is<br />
probable that an outflow of resources will be required to settle<br />
the obligation, and a reliable estimate can be made of the<br />
amount of the obligation. Provisions are reviewed at each<br />
balance sheet date and adjusted to reflect the current best<br />
estimate. Where the effect of the time value of money is<br />
material, the amount of the provision is the present value of the<br />
expenditures expected to be required to settle the obligation.
266<br />
<strong>Telkom</strong> Annual Report 2009<br />
Notes to the annual financial statements (continued)<br />
for the three years ended March 31, 2009<br />
3. REVENUE<br />
2007 2008 2009<br />
Rm Rm Rm<br />
3.1 Total revenue 35,818 36,641 37,058<br />
Operating revenue 32,340 32,571 33,659<br />
Other income (excluding profit on disposal of property, plant and<br />
equipment, intangible assets and investments, refer to note 4) 276 331 492<br />
Investment income (refer to note 6) 3,202 3,739 2,907<br />
3.2 Operating revenue 32,340 32,571 33,659<br />
Subscriptions, connections and other usage 6,286 6,330 6,614<br />
Traffic 16,740 15,949 15,323<br />
Domestic (local and long distance) 7,563 6,327 5,670<br />
Fixed-to-mobile 7,646 7,557 7,420<br />
International (outgoing) 988 986 933<br />
Subscription based calling plans 543 1,079 1,300<br />
Interconnection 1,639 1,757 2,084<br />
Data 7,489 8,308 9,310<br />
Sundry revenue 186 227 328<br />
4. OTHER INCOME 655 498 524<br />
Other income (included in Total revenue, refer to note 3) 276 331 492<br />
Interest received from trade receivables 181 211 214<br />
Other interest 8 37 189<br />
Sundry income 87 83 89<br />
Profit on disposal of property, plant and equipment and intangible<br />
assets 15 167 32<br />
Profit on disposal of investment 364 – –<br />
The increase in the current year’s other interest is a result of the<br />
increase in loans to subsidiaries (refer to note 11).
Notes to the annual financial statements (continued)<br />
for the three years ended March 31, 2009<br />
5. OPERATING EXPENSES<br />
Operating expenses comprise:<br />
<strong>Telkom</strong> Annual Report 2009 267<br />
2007 2008 2009<br />
Rm Rm Rm<br />
5.1 Employee expenses 7,077 7,386 7,990<br />
Salaries and wages 5,076 5,519 5,742<br />
Medical aid contributions 377 407 404<br />
Retirement contributions 439 460 460<br />
Post-retirement pension and retirement fund (refer to note 25) 33 5 29<br />
Current service cost 5 5 4<br />
Interest cost 329 509 633<br />
Expected return on plan assets (508) (713) (825)<br />
Actuarial gain (136) (16) –<br />
Settlement loss/(gain) 21 (2) (3)<br />
Asset limitation 322 222 220<br />
Post-retirement medical aid (refer to note 25) 329 277 455<br />
Current service cost 83 84 95<br />
Interest cost 285 321 426<br />
Expected return on plan asset (188) (257) (223)<br />
Actuarial loss 149 129 157<br />
Telephone rebates (refer to note 25) 104 27 61<br />
Current service cost 4 3 6<br />
Interest cost 19 22 39<br />
Past service cost 76 2 2<br />
Actuarial loss 5 – 14<br />
Share-based compensation expense (refer to note 22 and 25) 141 522 554<br />
Other benefits* 1,274 969 1,021<br />
Employee expenses capitalised (696) (800) (736)<br />
* Other benefits include annual leave, performance incentive,<br />
service bonuses, skills development and workforce<br />
reduction expenses.<br />
5.2 Payments to other operators 6,461 6,902 7,536<br />
Payments to other network operators consist of expenses in<br />
respect of interconnection with other network operators.<br />
5.3 Selling, general and administrative expenses 3,970 3,904 6,580<br />
Selling and administrative expenses 1,329 1,108 3,428<br />
Maintenance 1,900 1,996 2,293<br />
Marketing 604 583 574<br />
Bad debts (refer to note 17) 137 217 285<br />
Included in the current year’s selling and administrative expenses, a total impairment loss of R2,178 million (2008: R229 million;<br />
2007: RNil) has been recognised on investments.
268<br />
<strong>Telkom</strong> Annual Report 2009<br />
Notes to the annual financial statements (continued)<br />
for the three years ended March 31, 2009<br />
5. OPERATING EXPENSES (continued)<br />
2007 2008 2009<br />
Rm Rm Rm<br />
5.4 Service fees 2,236 2,410 2,760<br />
Facilities and property management 1,140 1,221 1,261<br />
Consultancy services 209 160 324<br />
Security and other 833 978 1,122<br />
Auditors’ remuneration 54 51 53<br />
Audit services 53 51 50<br />
Company auditors 47 46 46<br />
Current year 47 43 46<br />
Prior year underprovision – 3 –<br />
Other auditors – current year 6 5 4<br />
Other services 1 – 3<br />
Included in the current year’s consultancy services is an amount<br />
of R177 million relating to services rendered in respect of the<br />
transaction to dispose of the Company’s stake in Vodacom<br />
Group (Proprietary) Limited.<br />
The increase in the current year’s security and other costs is mainly<br />
attributable to the new contract negotiated to secure the copper<br />
network in the Company’s drive to cutting down on cable thefts.<br />
5.5 Operating leases 762 619 613<br />
Land and buildings 131 142 166<br />
Equipment 79 49 58<br />
Vehicles 552 428 389<br />
5.6 Depreciation, amortisation and write-offs 3,583 3,732 4,358<br />
Depreciation of property, plant and equipment (refer to note 9) 2,994 3,062 3,398<br />
Amortisation of intangible assets (refer to note 10) 305 408 638<br />
Write-offs of property, plant and equipment and intangible assets 284 262 322<br />
Included in the current year’s amortisation of intangible assets is an<br />
amount of R134 million relating to the FIFA brand intangible asset.<br />
In recognition of the changed usage patterns of certain items of property,<br />
plant and equipment and intangible assets, the Company revised their<br />
remaining useful lives as at March 31. The assets affected were<br />
individual items of Network equipment, Data processing equipment,<br />
Support equipment, Freehold land and buildings and Intangible assets.<br />
The revised estimated useful lives of these assets as set out below,<br />
resulted in a decrease of the current year depreciation and amortisation<br />
charges of R11,4 million (2008: R196 million; 2007: R942 million).<br />
Previous life Revised life<br />
Years Years<br />
Property, plant and equipment<br />
Other 2 – 15 2 – 20
Notes to the annual financial statements (continued)<br />
for the three years ended March 31, 2009<br />
<strong>Telkom</strong> Annual Report 2009 269<br />
2007 2008 2009<br />
Rm Rm Rm<br />
6. INVESTMENT INCOME 3,202 3,739 2,907<br />
Interest income 196 142 160<br />
Dividend income from joint venture 2,700 2,970 2,600<br />
Dividend income from subsidiaries 306 627 147<br />
Included in investment income is an amount of R160 million<br />
(2008: R142 million; 2007: R196 million) which relates to<br />
interest earned from financial assets not measured at fair value<br />
through profit or loss.<br />
7. FINANCE CH<strong>AR</strong>GES AND FAIR VALUE MOVEMENTS 1,027 1,289 1,460<br />
Finance charges on interest-bearing debt 1,142 1,499 1,655<br />
Local debt 1,303 1,675 1,818<br />
Finance charges capitalised (161) (176) (163)<br />
Foreign exchange gains and losses and fair value movements (115) (210) (195)<br />
Foreign exchange losses/(gains) 58 116 (318)<br />
Fair value adjustments on derivative instruments (173) (326) 123<br />
Capitalisation rate 14.8% 12.6% 12.4%<br />
Included in finance charges is an amount of R1,655 million (2008: R1,499 million; 2007: R1,142 million) which relates to interest paid<br />
on financial liabilities not measured at fair value through profit or loss.
270<br />
<strong>Telkom</strong> Annual Report 2009<br />
Notes to the annual financial statements (continued)<br />
for the three years ended March 31, 2009<br />
2007 2008 2009<br />
Rm Rm Rm<br />
8. TAXATION 2,690 2,599 516<br />
South African normal company taxation 1,874 1,879 1,510<br />
Current taxation 1,907 1,879 1,540<br />
Overprovision for prior year (33) – (30)<br />
Deferred taxation 521 357 (1,150)<br />
Temporary differences – normal company taxation 561 255 111<br />
Temporary difference – secondary taxation on companies<br />
(’STC’) taxation credits (raised)/utilised (41) 157 (87)<br />
Capital gains taxation (’CGT’) – – (1,280)<br />
Change in taxation rate – (55) –<br />
Underprovision in prior year 1 – 106<br />
Secondary taxation on companies 295 363 156<br />
Reconciliation of taxation rate % % %<br />
Effective rate 24.2 24.6 8.9<br />
South African normal rate of taxation 29.0 29.0 28.0<br />
Adjusted for: (4.8) (4.4) (19.1)<br />
Change in taxation rate – (0.5) –<br />
Exempt income (8.3) (10.6) (13.9)<br />
Disallowable expenditure 1.5 1.8 13.8<br />
STC taxation credits (raised)/utilised (0.4) 1.5 (1.5)<br />
STC taxation charge 2.7 3.4 2.7<br />
CGT asset – – (22.1)<br />
Other – – 0.6<br />
Net (overprovision)/underprovision for prior year (0.3) – 1.3<br />
The Company has historically filed, and continues to file, all required income taxation returns. Management believes that the principles<br />
applied in determining the Company’s taxation obligations are consistent with the principles and interpretations of South African taxation<br />
laws.<br />
Included in the current year’s deferred taxation expense is an amount of R1,280 million relating to the deferred taxation on the CGT<br />
base cost of the investments which are held for sale.<br />
The decrease in the deferred taxation expense is mainly due to the temporary difference on CGT as well as the decrease in STC<br />
taxation credits.<br />
South African normal rate of taxation has decreased from 29% to 28% effective from the March 31, 2009 financial year.
Notes to the annual financial statements (continued)<br />
for the three years ended March 31, 2009<br />
<strong>Telkom</strong> Annual Report 2009 271<br />
2007 2008 2009<br />
Accumulated Carrying Accumulated Carrying Accumulated Carrying<br />
Cost depreciation value Cost depreciation value Cost depreciation value<br />
Rm Rm Rm Rm Rm Rm Rm Rm Rm<br />
9. PROPERTY,<br />
PLANT AND<br />
EQUIPMENT<br />
Freehold land<br />
and buildings<br />
Leasehold<br />
4,381 (1,829) 2,552 4,581 (1,988) 2,593 4,886 (2,128) 2,758<br />
buildings<br />
Network<br />
496 (299) 197 534 (348) 186 519 (355) 164<br />
equipment<br />
Support<br />
49,780 (25,774) 24,006 52,952 (27,366) 25,586 57,438 (29,470) 27,968<br />
equipment<br />
Furniture and<br />
office<br />
3,584 (2,209) 1,375 3,863 (2,377) 1,486 3,916 (2,479) 1,437<br />
equipment<br />
Data processing<br />
equipment and<br />
345 (236) 109 372 (265) 107 387 (286) 101<br />
software<br />
Under<br />
4,758 (3,022) 1,736 4,951 (3,103) 1,848 5,041 (3,309) 1,732<br />
construction 2,530 – 2,530 3,362 – 3,362 2,907 – 2,907<br />
Other 456 (347) 109 476 (371) 105 694 (416) 278<br />
66,330 (33,716) 32,614 71,091 (35,818) 35,273 75,788 (38,443) 37,345<br />
Fully depreciated assets with a cost of R155 million (2008: R498 million; 2007: R1,225 million) were derecognised in the 2009 financial<br />
year. This has reduced both the cost and accumulated depreciation of property, plant and equipment.<br />
Property, plant and equipment with a carrying value of R158 million (2008: R188 million; 2007: R203 million) are pledged as security.<br />
Details of the loans are disclosed in note 23.
272<br />
<strong>Telkom</strong> Annual Report 2009<br />
Notes to the annual financial statements (continued)<br />
for the three years ended March 31, 2009<br />
9. PROPERTY, PLANT AND EQUIPMENT (continued)<br />
The carrying amounts of property, plant and equipment can be reconciled as follows:<br />
Carrying Carrying<br />
value at Write-offs value at<br />
beginning and end<br />
of year Additions Transfers reversals Disposals Depreciation of year<br />
Rm Rm Rm Rm Rm Rm Rm<br />
2009<br />
Freehold land and buildings 2,593 258 81 (5) (2) (167) 2,758<br />
Leasehold buildings 186 2 – – – (24) 164<br />
Network equipment 25,586 2,830 2,292 (141) (71) (2,528) 27,968<br />
Support equipment 1,486 127 118 (12) – (282) 1,437<br />
Furniture and office equipment 107 7 8 – – (21) 101<br />
Data processing equipment<br />
and software 1,848 145 63 (4) – (320) 1,732<br />
Under construction 3,362 2,281 (2,627) (109) – – 2,907<br />
Other 105 216 14 (1) – (56) 278<br />
35,273 5,866 (51) (272) (73) (3,398) 37,345<br />
2008<br />
Freehold land and buildings 2,552 198 22 (3) (8) (168) 2,593<br />
Leasehold buildings 197 7 30 – – (48) 186<br />
Network equipment 24,006 2,693 1,308 (96) (88) (2,237) 25,586<br />
Support equipment 1,375 257 117 (7) – (256) 1,486<br />
Furniture and office equipment 109 26 1 – – (29) 107<br />
Data processing equipment<br />
and software 1,736 268 161 (14) – (303) 1,848<br />
Under construction 2,530 2,588 (1,725) (31) – – 3,362<br />
Other 109 7 10 – – (21) 105<br />
32,614 6,044 (76) (151) (96) (3,062) 35,273<br />
2007<br />
Freehold land and buildings 2,610 102 (8) 17 – (169) 2,552<br />
Leasehold buildings 240 – – – (14) (29) 197<br />
Network equipment 23,253 2,599 847 (190) (240) (2,263) 24,006<br />
Support equipment 1,134 352 105 (13) – (203) 1,375<br />
Furniture and office equipment 104 11 5 – – (11) 109<br />
Data processing equipment<br />
and software 1,779 303 (48) (9) – (289) 1,736<br />
Under construction 1,316 2,163 (912) (37) – – 2,530<br />
Other 52 16 72 (1) – (30) 109<br />
30,488 5,546 61 (233) (254) (2,994) 32,614<br />
Full details of land and buildings are available for inspection at the registered offices of the Company.<br />
The Company does not have temporarily idle property, plant and equipment.<br />
A major portion of this capital expenditure relates to the expansion of existing networks and services. An extensive build programme that<br />
provides capacity for growth in services, with focus on the Next Generation Network technologies, has resulted in an increase in property,<br />
plant and equipment additions which is expected to continue over the next few years.<br />
Included in the current year’s additions in the other category is an amount of R179 million (2008: R31 million; 2007: RNil) that relates<br />
to finance leases.<br />
An amount of R71 million (2008: R88 million; 2007: R240 million) under property, plant and equipment disposals relates to the<br />
reclassification of Customer Premises Equipment at the start of the lease. These disposals are as a result of the Company entering into a<br />
leasing arrangement.
Notes to the annual financial statements (continued)<br />
for the three years ended March 31, 2009<br />
10. INTANGIBLE<br />
ASSETS<br />
<strong>Telkom</strong> Annual Report 2009 273<br />
2007 2008 2009<br />
Accumulated Carrying Accumulated Carrying Accumulated Carrying<br />
Cost amortisation value Cost amortisation value Cost amortisation value<br />
Rm Rm Rm Rm Rm Rm Rm Rm Rm<br />
Trademarks,<br />
copyrights<br />
and FIFA brand 52 (52) – 197 (59) 138 457 (203) 254<br />
Software<br />
Under<br />
5,306 (2,913) 2,393 6,239 (3,312) 2,927 7,031 (3,785) 3,246<br />
construction 1,109 – 1,109 741 – 741 488 – 488<br />
6,467 (2,965) 3,502 7,177 (3,371) 3,806 7,976 (3,988) 3,988<br />
The carrying amounts of intangible assets can be reconciled as follows:<br />
Carrying Carrying<br />
value at value at<br />
beginning end<br />
of year Additions Transfers Write-offs Disposals Amortisation of year<br />
Rm Rm Rm Rm Rm Rm Rm<br />
2009<br />
Trademarks, copyrights<br />
and FIFA brand 138 260 – – – (144) 254<br />
Software 2,927 207 607 (1) – (494) 3,246<br />
Under construction 741 357 (555) (55) – – 488<br />
3,806 824 52 (56) – (638) 3,988<br />
2008<br />
Trademarks and copyrights – 144 – – – (6) 138<br />
Software 2,393 250 688 (2) – (402) 2,927<br />
Under construction 1,109 353 (612) (109) – – 741<br />
3,502 747 76 (111) – (408) 3,806<br />
2007<br />
Software 1,804 323 575 (4) – (305) 2,393<br />
Under construction 1,063 729 (636) (47) – – 1,109<br />
2,867 1,052 (61) (51) – (305) 3,502<br />
There are no intangible assets whose title is restricted, or that have been pledged as security for liabilities at March 31, 2009.<br />
Intangible assets that are material to the Company consist of Software, Copyrights and Trademarks whose average remaining amortisation<br />
period is 5.6 years (2008: 5.9 years; 2007: 6.58 years).<br />
No intangible asset has been assessed as having an indefinite useful life.
274<br />
<strong>Telkom</strong> Annual Report 2009<br />
Notes to the annual financial statements (continued)<br />
for the three years ended March 31, 2009<br />
2007 2008 2009<br />
Rm Rm Rm<br />
11. INVESTMENTS 887 3,883 7,693<br />
Special purpose entity – cell captive<br />
Cost 535 535 535<br />
Subsidiaries 352 3,348 7,158<br />
Trudon (formerly TDS Directory Operations) (Proprietary) Limited<br />
64.90% shareholding at cost 167 167 167<br />
Swiftnet (Proprietary) Limited**<br />
100% shareholding at cost 25 25 –<br />
Rossal No 65 (Proprietary) Limited – – –<br />
100% shareholding at cost (R100) – – –<br />
Acajou Investments (Proprietary) Limited<br />
100% shareholding at cost (R100) – – –<br />
Intekom (Proprietary) Limited<br />
100% shareholding at cost 10 10 10<br />
Q-Trunk (Proprietary) Limited – – –<br />
100% shareholding at cost 10 10 10<br />
Loan 30 26 22<br />
Impairment (40) (36) (32)<br />
<strong>Telkom</strong> Media (Proprietary) Limited** – 109 –<br />
75% shareholding at cost (R2,868) – – –<br />
Loan – 326 –<br />
Impairment of loan – (217) –<br />
Africa Online Limited 150 212 275<br />
100% shareholding at cost 150 150 150<br />
Impairment of investment – (12) (97)<br />
Loan – 74 222<br />
Multi-Links Telecommunications Limited* – 840 5,595<br />
25% shareholding at cost – – 1,339<br />
Impairment of investment – – (969)<br />
Loan – 840 5,225<br />
<strong>Telkom</strong> Communications International (Proprietary) Limited<br />
100% shareholding at cost (R12) – – –<br />
<strong>Telkom</strong> International (Proprietary) Limited* – 1,985 1,111<br />
100% shareholding at cost (R100) – – –<br />
Loan – 1,985 1,985<br />
Impairment of loan – – (874)<br />
Available-for-sale<br />
Unlisted investment<br />
Rascom<br />
0.69% (2008: 0.69%; 2007: 0.69%) interest in Regional African<br />
Satellite Communications Organisation, headquartered in Abidjan,<br />
Ivory Coast, at cost – – –<br />
Cost 1 1 1<br />
Impairment (1) (1) (1)<br />
Incorporation<br />
The subsidiaries and joint venture are all incorporated in the Republic of South Africa, with the exception of <strong>Telkom</strong> Communications<br />
International (Proprietary) Limited and Africa Online Limited that are incorporated in the Republic of Mauritius, and Multi-Links<br />
Telecommunications (Proprietary) Limited, which is incorporated in Nigeria.<br />
* The 75% shareholding in Multi-Links Telecommunications Limited is an indirect investment through <strong>Telkom</strong> International (Proprietary) Limited.<br />
** The investments Swiftnet (Proprietary) Limited and <strong>Telkom</strong> Media (Proprietary) Limited are both classified as assets held for sale in the 2009 financial year<br />
in terms of IFRS5. (Refer to note 16.)<br />
The aggregate directors’ valuation of the above investments is R321 million (2008: R7,658 million; 2007: R6,690 million) based on net<br />
asset values.
Notes to the annual financial statements (continued)<br />
for the three years ended March 31, 2009<br />
12. FINANCIAL INSTRUMENTS AND RISK MANAGEMENT<br />
Risk management<br />
<strong>Telkom</strong> Annual Report 2009 275<br />
Exposure to continuously changing market conditions has made management of financial risk critical for the Company. Treasury policies,<br />
risk limits and control procedures are continuously monitored by the Board of Directors through its audit and risk committee.<br />
The Company holds or issues financial instruments to finance its operations, for the temporary investment of short-term funds and to manage<br />
currency and interest rate risks. In addition, financial instruments such as trade receivables and payables arise directly from the Company’s<br />
operations.<br />
The Company finances its operations primarily by a mixture of issued share capital, retained earnings, long-term and short-term loans. The<br />
Company uses derivative financial instruments to manage its exposure to market risks from changes in interest and foreign exchange rates.<br />
The derivatives used for this purpose are principally interest rate swaps and forward exchange contracts. The Company does not speculate<br />
in derivative instruments.<br />
The table below sets out the classification of financial assets and liabilities:<br />
At fair<br />
value<br />
through Financial<br />
profit liabilities<br />
or loss at Loans Available Total<br />
held for amortised Held-to- and for carrying Fair<br />
trading cost maturity receivables sale value value<br />
Notes Rm Rm Rm Rm Rm Rm Rm<br />
Classes of financial instruments<br />
per balance sheet<br />
2009<br />
Assets 154 – 1,044 15,062 34 16,294 16,460<br />
Trade and other receivables* 17 – – – 6,153 – 6,153 6,153<br />
Investments 11 – – – 7,693 – 7,693 7,693<br />
Finance lease receivable<br />
Assets held for sale and<br />
13 – – – 275 – 275 275<br />
discontinued operations 16 – – – – 34 34 200<br />
Other financial assets 154 – 1,044 – – 1,198 1,198<br />
Repurchase agreements 18 – – 1,044 – – 1,044 1,044<br />
Interest rate swaps 18 4 – – – – 4 4<br />
Forward exchange contracts 18 150 – – – – 150 150<br />
Cash and cash equivalents 19 – – – 941 – 941 941<br />
Liabilities (225) (23,257) – – – (23,482) (24,555)<br />
Interest-bearing debt 23 – (17,704) – – – (17,704) (18,777)<br />
Trade and other payables 27 – (5,424) – – – (5,424) (5,424)<br />
Shareholders for dividend 32 – (23) – – – (23) (23)<br />
Credit facilities utilised 19 – (106) – – – (106) (106)<br />
Other financial liabilities (225) – – – – (225) (225)<br />
Interest rate swaps 18 (72) – – – – (72) (72)<br />
Forward exchange contracts 18 (153) – – – – (153) (153)<br />
(71) (23,257) 1,044 15,062 34 (7,188) (8,095)
276<br />
<strong>Telkom</strong> Annual Report 2009<br />
Notes to the annual financial statements (continued)<br />
for the three years ended March 31, 2009<br />
12. FINANCIAL INSTRUMENTS AND RISK MANAGEMENT (continued)<br />
At fair value<br />
through Financial<br />
profit or liabilities at Total<br />
loss held amortised Held-to- Loans and Available carrying Fair<br />
for trading cost maturity receivables for sale value value<br />
Notes Rm Rm Rm Rm Rm Rm Rm<br />
Classes of financial instruments<br />
per balance sheet<br />
2008<br />
Assets 443 – – 11,224 – 11,667 11,667<br />
Trade and other receivables* 17 – – – 6,593 – 6,593 6,593<br />
Investments 11 – – – 3,883 – 3,883 3,883<br />
Finance lease receivable 13 – – – 265 – 265 265<br />
Other financial assets 443 – – – – 443 443<br />
Forward exchange contracts 18 443 – – – – 443 443<br />
Cash and cash equivalents 19 – – – 483 – 483 483<br />
Liabilities (168) (18,346) – – – (18,514) (19,029)<br />
Interest bearing debt 23 – (13,362) – – – (13,362) (13,877)<br />
Trade and other payables 27 – (4,923) – – – (4,923) (4,923)<br />
Shareholders for dividend 32 – (20) – – – (20) (20)<br />
Credit facilities utilised 19 – (41) – – – (41) (41)<br />
Other financial liabilities (168) – – – – (168) (168)<br />
Forward exchange contracts 18 (168) – – – – (168) (168)<br />
275 (18,346) – 11,224 – (6,847) (7,362)<br />
Classes of financial instruments<br />
per balance sheet<br />
2007<br />
Assets 229 – – 7,025 – 7,254 7,254<br />
Trade and other receivables* 17 – – – 5,755 – 5,755 5,755<br />
Investments 11 – – – 887 – 887 887<br />
Finance lease receivable 13 – – – 207 – 207 207<br />
Other financial assets 229 – – – – 229 229<br />
Bills of exchange 18 98 – – – – 98 98<br />
Forward exchange contracts 18 131 – – – – 131 131<br />
Cash and cash equivalents 19 – – – 176 – 176 176<br />
Liabilities (155) (13,333) – – – (13,488) (14,849)<br />
Interest bearing debt 23 (98) (8,985) – – – (9,083) (10,444)<br />
Trade and other payables 27 – (4,333) – – – (4,333) (4,333)<br />
Shareholders for dividend 32 – (15) – – – (15) (15)<br />
Credit facilities utilised 19 – – – – – – –<br />
Other financial liabilities (57) – – – – (57) (57)<br />
Interest rate swaps 18 (26) – – – – (26) (26)<br />
Forward exchange contracts 18 (31) – – – – (31) (31)<br />
74 (13,333) – 7,025 – (6,234) (7,595)<br />
* Trade and other receivables are disclosed net of prepayments of R267 million (2008: R266 million; 2007: R165 million).
Notes to the annual financial statements (continued)<br />
for the three years ended March 31, 2009<br />
12. FINANCIAL INSTRUMENTS AND RISK MANAGEMENT (continued)<br />
12.1. Fair value of financial instruments<br />
<strong>Telkom</strong> Annual Report 2009 277<br />
Carrying value of all financial instruments noted in the balance sheet approximates fair value except as disclosed below.<br />
The estimated net fair values as at March 31, 2009, have been determined using available market information and appropriate valuation<br />
methodologies as outlined below. This value is not necessarily indicative of the amounts that the Company could realise in the normal course<br />
of business.<br />
Derivatives are recognised at fair value.<br />
The fair values of derivatives are determined using quoted prices or, where such prices are not available, discounted cash flow analysis is<br />
used. These amounts reflect the approximate values of the net derivative position at the balance sheet date.<br />
The carrying value of receivables, bank balances, repurchase agreements and other liquid funds, payables and accruals, approximate<br />
their fair value due to the short-term maturities of these instruments.<br />
The fair values of the borrowings disclosed above are based on quoted prices or, where such prices are not available, the expected future<br />
payments discounted at market interest rates, as a result they differ from carrying values.<br />
The fair values of listed investments are based on quoted market prices.<br />
12.2 Interest rate risk management<br />
Interest rate risk arises from the repricing of the Company’s forward cover and floating rate debt as well as incremental funding or new<br />
borrowings and the refinancing of existing borrowings.<br />
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<br />
in a cost efficient manner and to hedge specific exposure in the interest rate repricing profile of the existing borrowings and anticipated<br />
peak additional borrowings, the Company makes use of interest rate derivatives as approved in terms of the Company policy limits. Fixed<br />
rate debt represents approximately 64.86% (2008: 57.03%; 2007: 98.83%) of the total debt. The debt profile of mainly fixed rate debt<br />
has been maintained to limit the Company’s exposure to interest rate increases given the size of the Company’s debt portfolio. There were<br />
no changes in the policies and processes for managing and measuring the risk from the previous period.<br />
The table below summarises the interest rate swaps outstanding as at March 31:<br />
Notional<br />
Weighted<br />
average<br />
coupon<br />
Average amount rate<br />
maturity Currency Rm %<br />
2009<br />
Interest rate swaps outstanding<br />
Pay fixed 2-5 years Z<strong>AR</strong> 2,000 10.84<br />
2008<br />
Interest rate swaps outstanding<br />
Pay fixed – – – –<br />
2007<br />
Interest rate swaps outstanding<br />
Pay fixed < 1 year Z<strong>AR</strong> 1,000 14.67<br />
Pay fixed<br />
The floating rate is based on the three months JIB<strong>AR</strong>, and is settled quarterly in arrears. The interest rate swaps are used to manage<br />
interest rate risk on debt instruments.
278<br />
<strong>Telkom</strong> Annual Report 2009<br />
Notes to the annual financial statements (continued)<br />
for the three years ended March 31, 2009<br />
12. FINANCIAL INSTRUMENTS AND RISK MANAGEMENT (continued)<br />
12.3. Credit risk management<br />
Credit risk is the risk due to uncertainty in a counterparty’s ability to meet its obligations as they fall due.<br />
Credit risk arises from derivative contracts entered into with financial institutions with a rating of A1 or better. The Company is not exposed<br />
to significant concentrations of credit risk. Credit limits are set on an individual basis. The maximum exposure to the Company from<br />
counterparties in respect of derivative contracts is a net favourable position of R29 million (2008: R289 million; 2007: R103 million). No<br />
collateral is required when entering into derivative contracts. Credit limits are reviewed on an annual basis or when information becomes<br />
available in the market. The Company limits the exposure to any counterparty and exposures are monitored daily. The Company expects<br />
that all counterparties will meet their obligations.<br />
With regard to credit risk arising from other financial assets of the Company, which comprises held-to-maturity investments, financial assets<br />
held at fair value through profit or loss, loans and receivables and available-for-sale assets (other than equity investments), the Company’s<br />
exposure to credit risk arises from a potential default by a counterparty, with a maximum exposure equal to the carrying amount of these<br />
instruments.<br />
The Company’s exposure to credit risk is influenced mainly by the individual characteristics of each type of customer. Management reduces<br />
the risk of irrecoverable debt by improving credit management through credit checks and limits. To reduce the risk of counterparty failure,<br />
limits are set based on the individual ratings of counterparties by well-known ratings agencies. Trade receivables comprise a large<br />
widespread customer base, covering residential, business, government, wholesale, global and corporate customer profiles.<br />
Credit checks are performed on all customers, other than prepaid customers, on application for new services on an ongoing basis where<br />
appropriate.<br />
The Company establishes an allowance for impairment that represents its estimate of incurred losses in respect of trade and other<br />
receivables. The collective loss allowance is determined based on historical data of payment statistics for similar financial assets as well<br />
as expected future cash flows. Refer to note 17.<br />
The Company has provided a financial guarantee to Africa Online Limited for bank loans. At March 31, 2009 there was R26 million<br />
(2008: R23 million; 2007: RNil) outstanding.<br />
<strong>Telkom</strong> guarantees a certain portion of employees’ housing loans. The amount guaranteed differs depending on facts such as employment<br />
period and salary rates. When an employee leaves the employment of <strong>Telkom</strong>, any housing debt guaranteed by <strong>Telkom</strong> is settled before<br />
any pension payout can be made to the employee. The Company recognises a provision when it becomes probable that a guarantee will<br />
be called. There is no provision outstanding in respect of these contingencies. The maximum amount of the guarantee in the event of the<br />
default is R12 million. The fair value of the guarantee at March 31, 2009 was RNil (2008: RNil; 2007: RNil).<br />
Given the deterioration of credit markets, stricter objectives, policies and processes were applied for managing and measuring the risk than<br />
in the previous period.
Notes to the annual financial statements (continued)<br />
for the three years ended March 31, 2009<br />
12. FINANCIAL INSTRUMENTS AND RISK MANAGEMENT (continued)<br />
12.3 Credit risk management (continued)<br />
The maximum exposure to credit risk for financial assets at the reporting date by type of customer was:<br />
<strong>Telkom</strong> Annual Report 2009 279<br />
Carrying amount<br />
2007 2008 2009<br />
Rm Rm Rm<br />
Trade receivables 3,831 4,316 4,239<br />
Business and residential 1,924 1,824 1,870<br />
Global, corporate and wholesale 1,701 1,950 1,921<br />
Government 318 368 444<br />
Other 41 334 209<br />
Impairment of trade receivables (153) (160) (205)<br />
Derivatives 229 443 154<br />
Loans receivable – 3,008 6,558<br />
Other receivables* 1,924 2,277 1,914<br />
* Excluding prepayments.<br />
The ageing of trade receivables at the reporting date was:<br />
5,984 10,044 12,865<br />
2007 2008 2009<br />
Rm Rm Rm<br />
Not past due/current 3,250 3,654 3,361<br />
Ageing of past due but not impaired<br />
21 to 60 days 290 320 379<br />
61 to 90 days 70 83 92<br />
91 to 120 days 41 55 62<br />
120+ days 180 204 345<br />
The ageing in the allowance for the impairment of trade<br />
receivables at reporting date was:<br />
3,831 4,316 4,239<br />
Ageing of impaired trade receivables:<br />
Current defaulted 24 26 23<br />
21 to 60 days 21 25 29<br />
61 to 90 days 14 23 18<br />
91 to 120 days 13 16 28<br />
120+ days 81 70 107<br />
153 160 205<br />
The movement in the allowance for impairment in respect of trade receivables during the year is disclosed in note 17.<br />
Included in the allowance for doubtful debts are individually impaired receivables with a balance of R49 million (2008: R32 million; 2007:<br />
R49 million) which have been identified as being unable to service their debt obligation. The impairment recognised represents the<br />
difference between the carrying amount of these trade receivables and the present value of the expected liquidation proceeds. The<br />
Company does not hold any collateral over these balances.<br />
During the 2009 year end the Company renegotiated the terms of trade receivables amounting to R1.9 million from a long outstanding<br />
customer. No impairment losses were recognised.
280<br />
<strong>Telkom</strong> Annual Report 2009<br />
Notes to the annual financial statements (continued)<br />
for the three years ended March 31, 2009<br />
12. FINANCIAL INSTRUMENTS AND RISK MANAGEMENT (continued)<br />
12.4. Liquidity risk management<br />
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<br />
liquidity risk as a result of uncertain cash flows as well as capital commitments of the Company. Liquidity risk is managed by <strong>Telkom</strong>’s<br />
Corporate Finance division in accordance with policies and guidelines formulated by <strong>Telkom</strong>’s executive committee. In terms of its borrowing<br />
requirements the Company ensures that sufficient facilities exist to meet its immediate obligations. In terms of its long-term liquidity risk, the<br />
Company maintains a reasonable balance between the period over which assets generate funds and the period over which the respective<br />
assets are funded. Short-term liquidity gaps may be funded through repurchase agreements and commercial paper bills.<br />
There were no material changes in the exposure to liquidity risk and its objectives, policies and processes for managing and measuring<br />
the risk during the 2009 financial year.<br />
The table below summarises the maturity profile of the Company’s financial liabilities based on undiscounted contractual cash flow at the<br />
balance sheet date:<br />
Contractual<br />
Carrying cash < 6 6 – 12 1 – 2 2 – 5<br />
amount flows months months years years > 5 years<br />
Notes Rm Rm Rm Rm Rm Rm Rm<br />
2009<br />
Non-derivative financial liabilities<br />
Interest-bearing debt (excluding<br />
finance leases) 23 16,720 18,297 5,059 2,500 1,815 5,167 3,756<br />
Credit facilities utilised 19 106 106 106 – – – –<br />
Trade and other payables 27 5,424 5,528 5,399 129 – – –<br />
Finance lease liabilities 34 984 1,846 82 82 171 516 995<br />
Derivative financial liabilities<br />
Other financial liabilities 18 225 235 147 6 82 – –<br />
Interest rate swaps 72 82 – – 82 – –<br />
Forward exchange contracts 153 153 147 6 – – –<br />
23,459 26,012 10,793 2,717 2,068 5,683 4,751<br />
2008<br />
Non-derivative financial liabilities<br />
Interest-bearing debt (excluding<br />
finance leases) 23 12,505 14,403 4,882 1,200 3,900 1,823 2,598<br />
Credit facilities utilised 19 41 41 41 – – – –<br />
Trade and other payables 27 4,923 4,923 4,609 314 – – –<br />
Finance lease liabilities 34 857 1,794 64 62 123 395 1,150<br />
Derivative financial liabilities<br />
Other financial liabilities<br />
Forward exchange contracts 18 168 168 83 85 – – –<br />
18,494 21,329 9,679 1,661 4,023 2,218 3,748
Notes to the annual financial statements (continued)<br />
for the three years ended March 31, 2009<br />
12. FINANCIAL INSTRUMENTS AND RISK MANAGEMENT (continued)<br />
12.4. Liquidity risk management (continued)<br />
Contractual<br />
<strong>Telkom</strong> Annual Report 2009 281<br />
Carrying cash < 6 6 – 12 1 – 2 2 – 5<br />
amount flows months months years years > 5 years<br />
Notes Rm Rm Rm Rm Rm Rm Rm<br />
2007<br />
Non-derivative financial liabilities<br />
Interest-bearing debt (excluding<br />
finance leases) 23 8,231 10,416 1,350 4,680 – 1,806 2,580<br />
Trade and other payables 27 4,333 4,333 3,887 446 – – –<br />
Finance lease liabilities 34 852 1,903 59 61 137 356 1,290<br />
Derivative financial liabilities<br />
Other financial liabilities 18 57 57 51 6 – – –<br />
Interest rate swaps 26 26 26 – – – –<br />
Forward exchange contracts 31 31 25 6 – – –<br />
13,473 16,709 5,347 5,193 137 2,162 3,870<br />
12.5. Foreign currency exchange rate risk management<br />
The Company manages its foreign currency exchange rate risk by economically hedging all identifiable exposures via various financial<br />
instruments suitable to the Company’s risk exposure.<br />
Forward exchange contracts have been entered into to reduce the foreign currency exposure on the Company’s operations and liabilities.<br />
The Company also enters into foreign forward exchange contracts to economically hedge interest expense and purchase and sale<br />
commitments denominated in foreign currencies (primarily United States dollars and euros). The purpose of the Company’s foreign currency<br />
hedging activities is to protect the Company from the risk that the eventual net cash flows will be adversely affected by changes in exchange<br />
rates.<br />
There were no changes in the exposure to foreign currency exchange rate risk and its objectives, policies and processes for managing and<br />
measuring the risk from the previous period.
282<br />
<strong>Telkom</strong> Annual Report 2009<br />
Notes to the annual financial statements (continued)<br />
for the three years ended March 31, 2009<br />
12. FINANCIAL INSTRUMENTS AND RISK MANAGEMENT (continued)<br />
12.5. Foreign currency exchange rate risk management (continued)<br />
The following table details the foreign forward exchange contracts outstanding at year end:<br />
Foreign<br />
contract Forward<br />
amount amount Fair value<br />
To buy m Rm Rm<br />
2009<br />
Currency<br />
US$ 155 1,477 14<br />
Euro 92 1,205 (24)<br />
Other 36 69 (3)<br />
2008<br />
Currency<br />
US$ 123 915 107<br />
Euro 173 1,923 319<br />
Other 40 166 17<br />
2007<br />
Currency<br />
US$ 165 1,209 2<br />
Euro 102 991 12<br />
Other 68 80 2<br />
To sell<br />
2009<br />
Currency<br />
US$ 99 947 (22)<br />
Euro 35 485 28<br />
Other 21 43 4<br />
2008<br />
Currency<br />
US$ 78 593 (67)<br />
Euro 69 803 (98)<br />
Other 22 105 (2)<br />
2007<br />
Currency<br />
US$ 122 994 88<br />
Euro 50 483 (5)<br />
Other 31 40 1<br />
2,751<br />
3,004<br />
2,280<br />
1,475<br />
1,501<br />
1,517
Notes to the annual financial statements (continued)<br />
for the three years ended March 31, 2009<br />
12. FINANCIAL INSTRUMENTS AND RISK MANAGEMENT (continued)<br />
12.5. Foreign currency exchange rate risk management (continued)<br />
<strong>Telkom</strong> Annual Report 2009 283<br />
The Company has various monetary assets and liabilities in currencies other than the Company’s functional currency. The following table<br />
represents the net currency exposure (net carrying amount of foreign denominated monetary assets and liabilities) of the Company<br />
according to the different foreign currencies.<br />
Euro<br />
United<br />
States<br />
Dollar Other<br />
Rm Rm Rm<br />
2009<br />
Net foreign currency monetary assets/(liabilities)<br />
Functional currency of company operation<br />
South African rand 203 6,097 19<br />
2008<br />
Net foreign currency monetary assets/(liabilities)<br />
Functional currency of company operation<br />
South African rand 219 1,117 51<br />
2007<br />
Net foreign currency monetary assets/(liabilities)<br />
Functional currency of company operation<br />
South African rand 282 90 70<br />
Currency swaps<br />
There were no currency swaps in place at March 31, 2009, 2008 and 2007.
284<br />
<strong>Telkom</strong> Annual Report 2009<br />
Notes to the annual financial statements (continued)<br />
for the three years ended March 31, 2009<br />
12. FINANCIAL INSTRUMENTS AND RISK MANAGEMENT (continued)<br />
12.6 Sensitivity analysis<br />
Interest rate risk<br />
The following table illustrates the sensitivity to a reasonably possible change in the interest rates, with all other variables held constant:<br />
Classes of financial instruments per balance sheet<br />
+1% movement –1% movement<br />
Other Other<br />
movements movements<br />
Profit in equity Profit in equity<br />
Rm Rm Rm Rm<br />
2009<br />
Assets<br />
Trade and other receivables 5 – (5) –<br />
Investments 56 – (56)<br />
Other financial assets 28 – (28) –<br />
Repurchase agreements 10 – (10) –<br />
Interest rate swaps 18 – (18) –<br />
Liabilities<br />
Interest-bearing debt (62) 62<br />
Other financial liabilities 15 – (15) –<br />
Interest rate swaps 15 – (15) –<br />
42 – (42) –<br />
2008<br />
Assets<br />
Trade and other receivables 5 – (5) –<br />
Investments 9 – (9) –<br />
Liabilities<br />
Interest-bearing debt (57) – 57 –<br />
(43) – 43 –
Notes to the annual financial statements (continued)<br />
for the three years ended March 31, 2009<br />
12. FINANCIAL INSTRUMENTS AND RISK MANAGEMENT (continued)<br />
12.6 Sensitivity analysis (continued)<br />
Interest rate risk (continued)<br />
<strong>Telkom</strong> Annual Report 2009 285<br />
+1% movement –1% movement<br />
Other Other<br />
movements movements<br />
Profit in equity Profit in equity<br />
Rm Rm Rm Rm<br />
2007<br />
Assets<br />
Trade and other receivables 4 – (4) –<br />
Liabilities<br />
Interest-bearing debt 1 – – –<br />
Other financial liabilities 2 – (2) –<br />
Interest rate swaps 2 – (2) –<br />
7 – (6) –<br />
Foreign exchange currency risk<br />
The following table illustrates the sensitivity to a reasonably possible change in the exchange rates, with all other variables held constant.<br />
+10% movement –10% movement<br />
(depreciation) (appreciation)<br />
Other Other<br />
movements movements<br />
Profit in equity Profit in equity<br />
Rm Rm Rm Rm<br />
Classes of financial instruments per balance sheet<br />
2009<br />
Assets<br />
Trade and other receivables 40 – (40) –<br />
Investments 545 – (545) –<br />
Other financial assets 1 – (1) –<br />
Forward exchange contract 1 – (1)<br />
Liabilities<br />
Interest-bearing debt (14) – 14 –<br />
Trade and other payables (60) – 60 –<br />
Other financial liabilities 128 – (128) –<br />
Forward exchange contract 128 – (128) –<br />
640 – (640) –
286<br />
<strong>Telkom</strong> Annual Report 2009<br />
Notes to the annual financial statements (continued)<br />
for the three years ended March 31, 2009<br />
12. FINANCIAL INSTRUMENTS AND RISK MANAGEMENT (continued)<br />
12.6 Sensitivity analysis (continued)<br />
Foreign exchange currency risk (continued)<br />
+10% movement –10% movement<br />
(depreciation) (appreciation)<br />
Other Other<br />
movements movements<br />
Profit in equity Profit in equity<br />
Rm Rm Rm Rm<br />
2008<br />
Assets<br />
Trade and other receivables 10 – (10) –<br />
Investments 91 – (91) –<br />
Other financial assets 331 – (331) –<br />
Forward exchange contract 331 – (331) –<br />
Liabilities<br />
Interest-bearing debt (10) – 10 –<br />
Trade and other payables<br />
Other financial liabilities<br />
(95) – 95 –<br />
Forward exchange contract (153) – 153 –<br />
174 – (174) –<br />
2007<br />
Assets<br />
Trade and other receivables 10 – (10) –<br />
Other financial assets 74 – (74) –<br />
Forward exchange contract 74 – (74) –<br />
Liabilities<br />
Interest-bearing debt (10) – 10 –<br />
Trade and other payables (40) – 40 –<br />
Other financial liabilities 11 – (11) –<br />
Forward exchange contract 11 – (11) –<br />
45 – (45) –<br />
2007 2008 2009<br />
R R R<br />
12.7. Exchange rate table (closing rate)<br />
United States dollar 7.248 8.132 9.484<br />
Euro 9.649 12.854 12.617<br />
Pound Sterling 14.189 16.166 13.555<br />
Swedish krona 1.033 1.370 1.153<br />
Japanese yen 0.061 0.082 0.097
Notes to the annual financial statements (continued)<br />
for the three years ended March 31, 2009<br />
12. FINANCIAL INSTRUMENTS AND RISK MANAGEMENT (continued)<br />
12.8. Capital management<br />
<strong>Telkom</strong> Annual Report 2009 287<br />
The Board’s policy is to maintain a strong capital base so as to sustain investor, creditor, market confidence and future development of the<br />
business. Capital comprises equity attributable to equity holders of the Company. The Company monitors capital using net debt to EBITDA<br />
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<br />
debts, credit facilities and other financial liabilities, less cash and cash equivalents and other financial assets.<br />
<strong>Telkom</strong> plans on continuing its share buy-back strategy based on certain criteria, including market conditions, availability of cash and other<br />
investment opportunities and needs.<br />
All of <strong>Telkom</strong>’s issued and outstanding ordinary shares, including the class A ordinary share and the class B ordinary share, rank equal for<br />
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<br />
declared to holders of all ordinary shares. <strong>Telkom</strong>’s current dividend policy aims to provide shareholders with a competitive return on their<br />
investment, while assuring sufficient reinvestment of profits to enable us to achieve our strategy. <strong>Telkom</strong> may revise its dividend policy from<br />
time to time. The determination to pay dividends, and the amount of the dividends, will depend upon, among other things, the earnings,<br />
financial position, capital requirements, general business conditions, cash flows, net debt levels and share buy-back plans.<br />
The Company has access to financing facilities, the total unused amount of which is R6,226 million at the balance sheet date.<br />
There were no changes in the Company’s approach to capital management during the year.<br />
The Company is not subject to externally imposed capital requirements.<br />
The net debt to EBITDA ratio is as follows:<br />
2007 2008 2009<br />
Rm Rm Rm<br />
Non-current portion of interest-bearing debt 3,308 7,336 10,193<br />
Current portion of interest -bearing debt 5,775 6,026 7,511<br />
Other financial liabilities 57 168 225<br />
Less: Cash and cash equivalents (176) (483) (941)<br />
Plus: Credit facilities utilised – 41 106<br />
Less: Other financial assets (229) (443) (1,198)<br />
Net debt 8,735 12,645 15,896<br />
EBITDA 12,489 11,848 8,704<br />
Net debt to EBITDA ratio 0.70 1.07 1.83
288<br />
<strong>Telkom</strong> Annual Report 2009<br />
Notes to the annual financial statements (continued)<br />
for the three years ended March 31, 2009<br />
13. FINANCE LEASE RECEIVABLES<br />
The Company provides voice and non-voice services to its customers, which make use of router and PABX equipment that is dedicated to<br />
specific customers. The disclosed information relates to certain customer arrangements which were assessed to be finance leases in terms<br />
of IAS17.<br />
Total < 1 year 1 – 5 years > 5 years<br />
Rm Rm Rm Rm<br />
2009<br />
Minimum lease payments<br />
Lease payments receivable 360 142 219 –<br />
Unearned finance income (85) (33) (53) –<br />
Present value of minimum lease payments 275 109 166 –<br />
Lease receivables 275 109 166 –<br />
2008<br />
Minimum lease payments<br />
Lease payments receivable 345 135 210 –<br />
Unearned finance income (80) (30) (50) –<br />
Present value of minimum lease payments 265 105 160 –<br />
Lease receivables 265 105 160 –<br />
2007<br />
Minimum lease payments<br />
Lease payments receivable 273 92 181 –<br />
Unearned finance income (66) (21) (45) –<br />
Present value of minimum lease payments 207 71 136 –<br />
Lease receivables 207 71 136 –
Notes to the annual financial statements (continued)<br />
for the three years ended March 31, 2009<br />
<strong>Telkom</strong> Annual Report 2009 289<br />
2007 2008 2009<br />
Rm Rm Rm<br />
14. DEFERRED TAXATION (990) (1,347) (198)<br />
Opening balance (469) (990) (1,347)<br />
Income statement movements (521) (357) 1,149<br />
Temporary differences (520) (412) 1,255<br />
Capital allowances (467) (446) (310)<br />
Provisions and other allowances (94) 191 199<br />
Capital gains taxation asset – – 1,279<br />
Secondary taxation credits raised/(utilised) 41 (157) 87<br />
Underprovision prior year (1) – (106)<br />
Change in taxation rate – 55 –<br />
The balance comprises: (990) (1,347) (198)<br />
Capital allowances (2,527) (2,870) (3,181)<br />
Provisions and other allowances 1,197 1,340 1,434<br />
Capital gains taxation asset – – 1,279<br />
STC taxation credits 340 183 270<br />
Deferred taxation balance is made up as follows: (990) (1,347) (198)<br />
Deferred taxation assets 340 183 1,549<br />
Deferred taxation liabilities (1,330) (1,530) (1,747)<br />
Unutilised STC credits 2,718 1,830 2,700<br />
Secondary taxation on companies (STC) is provided for at a rate of 10% on the amount by which dividends declared by the Company<br />
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<br />
as a taxation expense when dividends are declared.<br />
The deferred taxation asset represents STC credits on past dividends received that are available to be utilised against dividends declared.<br />
The deferred taxation asset also includes deferred tax on capital gains tax (CGT) base cost of the Vodacom Group (Proprietary) Limited<br />
and Swiftnet (Proprietary) Limited (Swiftnet) investments that will be utilised against the future CGT liability on the Vodacom and Swiftnet<br />
transactions. It is considered probable that these credits will be utilised in the future. The asset will be released as a taxation expense when<br />
dividends are declared and when the CGT liability arises.<br />
The deferred taxation liability increased mainly due to the increase in the difference between the carrying value and taxation value of<br />
assets, as a result of the change in the estimate of useful lives of assets.
290<br />
<strong>Telkom</strong> Annual Report 2009<br />
Notes to the annual financial statements (continued)<br />
for the three years ended March 31, 2009<br />
2007 2008 2009<br />
Rm Rm Rm<br />
15. INVENTORIES 839 873 1,331<br />
Gross inventories 972 1,072 1,522<br />
Write-down of inventories to net realisable value (133) (199) (191)<br />
Inventories consist of the following categories: 839 873 1,331<br />
Installation material, maintenance material and<br />
network equipment 771 827 1,048<br />
Merchandise 68 46 284<br />
Write-down of inventories to net realisable value 133 199 191<br />
Opening balance 63 133 199<br />
Charged to selling, general and administrative expenses 152 164 167<br />
Inventories written-off (82) (98) (174)<br />
Inventory levels as at March 31, 2009, 2008 and 2007 have<br />
increased due to the accelerated roll-out of the Next Generation<br />
Network required to improve customer service, and the<br />
acquisition of merchandise for the W-CDMA roll-out.<br />
16. ASSETS HELD FOR SALE AND DISCONTINUED OPERATIONS 34<br />
16.1 Assets held for sale<br />
Joint venture<br />
34<br />
Vodacom Group (Proprietary) Limited (Vodacom) –<br />
50% shareholding at cost (R50)<br />
In the current financial year the Company announced a decision<br />
to dispose of its entire shareholding in Vodacom through selling<br />
15% of its shareholding to Vodafone, a wholly owned subsidiary<br />
of Vodafone Group Plc and unbundling its remaining 35% stake<br />
to its shareholders pursuant to a listing of Vodacom on the main<br />
board of the JSE Limited. The decision was taken in line with the<br />
Company’s strategy to unlock shareholder value.<br />
This investment is reclassified as held-for-sale in terms of IFRS5<br />
as all the requirements for being classified as held-for-sale are met.<br />
Subsidiary<br />
Swiftnet (Proprietary) Limited (Swiftnet) 34<br />
100% shareholding at cost 25<br />
Loan 9<br />
In February 2009, <strong>Telkom</strong>’s management took a decision to dispose of its 100% investment in Swiftnet, trading under the name Fastnet<br />
Wireless Services. Swiftnet has been classified as held for sale as all criteria for this classification have been met.
Notes to the annual financial statements (continued)<br />
for the three years ended March 31, 2009<br />
16. ASSETS HELD FOR SALE AND DISCONTINUED OPERATIONS (continued)<br />
16.2 Discontinued operations<br />
Subsidiary<br />
<strong>Telkom</strong> Media (Proprietary) Limited<br />
<strong>Telkom</strong> Annual Report 2009 291<br />
On August 31, 2006, <strong>Telkom</strong> created a new subsidiary, <strong>Telkom</strong> Media (Proprietary) Limited with a black economic empowerment (BEE)<br />
shareholding. ICASA awarded <strong>Telkom</strong> Media a commercial satellite and cable subscription broadcast licence on September 12, 2007.<br />
On March 31, 2008, the <strong>Telkom</strong> Board took a decision to substantially reduce its investment in <strong>Telkom</strong> Media and as such <strong>Telkom</strong> Media<br />
reduced its operational expenses and commitments to a minimum.<br />
<strong>Telkom</strong> Media was classified as held for sale in September 2008 interim financial statements. At year end the investment did not meet the<br />
held for sale criteria as management was unable to sell the investment for its expected price and therefore decided to abandon it.<br />
2007 2008 2009<br />
Rm Rm Rm<br />
17. TRADE AND OTHER RECEIVABLES 5,920 6,859 6,420<br />
Trade receivables 3,831 4,316 4,239<br />
Gross trade receivables 3,984 4,476 4,444<br />
Impairment of receivables (153) (160) (205)<br />
Prepayments and other receivables 2,089 2,543 2,181<br />
Impairment allowance account for receivables 153 160 205<br />
Opening balance 184 153 160<br />
Charged to selling, general and administrative expenses 137 217 285<br />
Receivables written-off (168) (210) (240)<br />
Refer to note 12 for detailed credit risk analysis.<br />
18. OTHER FINANCIAL ASSETS AND LIABILITIES 229 443 1,198<br />
Other financial assets consist of:<br />
Held-to-maturity<br />
Repurchase agreements – – 1,044<br />
At fair value through profit or loss 229 443 154<br />
Bills of exchange 98 – –<br />
Derivative instruments (refer to note 12) 131 443 154<br />
Repurchase agreements<br />
The Company manages a portfolio of repurchase agreements in the<br />
South African capital and money markets, with a view to generating<br />
additional investment income on the favourable interest rates provided<br />
on these transactions. Interest received from the borrower is based on<br />
the current market related yield. There were no repurchase agreements<br />
held at March 31, 2008 and 2007.<br />
Bills of exchange<br />
The fair value of bills of exchange has been calculated with reference<br />
to the Bond Exchange of South Africa quoted prices.<br />
Derivative instruments<br />
Derivative assets at fair value consists of interest rate swaps of R4 million<br />
(2008: RNil; 2007: RNil) and forward exchange contracts of R150 million<br />
(2008: R443 million; 2007: R131 million).<br />
Other financial liabilities consist of:<br />
At fair value through profit or loss<br />
Derivative instruments (57) (168) (225)<br />
Derivative liabilities at fair value consists of interest rate swaps of R72 million (2008: RNil; 2007: R26 million) and forward exchange<br />
contracts of R153 million (2008: R168 million; 2007: R31 million).
292<br />
<strong>Telkom</strong> Annual Report 2009<br />
Notes to the annual financial statements (continued)<br />
for the three years ended March 31, 2009<br />
19. CASH AND CASH EQUIVALENTS<br />
2007 2008 2009<br />
Rm Rm Rm<br />
Cash shown as current assets 176 483 941<br />
Cash and bank balances 76 83 601<br />
Short-term deposits 100 400 340<br />
Credit facilities utilised – (41) (106)<br />
Net cash and cash equivalents 176 442 835<br />
Undrawn borrowing facilities 6,566 5,894 6,226<br />
The undrawn borrowing facilities are unsecured when drawn, bear interest at a rate that will be mutually agreed between the borrower<br />
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<br />
March 31, 2009, R3,000 million of these undrawn facilities were committed.<br />
Borrowing powers<br />
To borrow money, <strong>Telkom</strong>’s directors may mortgage or encumber <strong>Telkom</strong>’s property or any part thereof and issue debentures, whether<br />
secured or unsecured, whether outright or as security for debt, liability or obligation of <strong>Telkom</strong> or any third party. For this purpose the<br />
borrowing powers of <strong>Telkom</strong> are unlimited, but are subject to restrictive financial covenants of the loan facility as indicated on note 23.
Notes to the annual financial statements (continued)<br />
for the three years ended March 31, 2009<br />
20. SH<strong>AR</strong>E CAPITAL<br />
Authorised and issued share capital and share premium are<br />
made up as follows:<br />
<strong>Telkom</strong> Annual Report 2009 293<br />
2007 2008 2009<br />
Rm Rm Rm<br />
Authorised 10,000 10,000 10,000<br />
999,999,998 ordinary shares of R10 each 10,000 10,000 10,000<br />
1 class A ordinary share of R10 – – –<br />
1 class B ordinary share of R10 – – –<br />
Issued and fully paid 5,329 5,208 5,208<br />
520,783,898 (2008: 520,784,184; 2007: 532,855,528)<br />
ordinary shares of R10 each 5,329 5,208 5,208<br />
1 (2008: 1; 2007: 1) class A ordinary share of R10 – – –<br />
1 (2008: 1; 2007: 1) class B ordinary share of R10 – – –<br />
The following table illustrates the movement in the number of shares issued:<br />
Number of Number of Number of<br />
shares shares shares<br />
Shares in issue at beginning of year 544,944,901 532,855,530 520,784,186<br />
Shares bought back and cancelled (12,089,371) (12,071,344) (286)<br />
Shares in issue at end of year 532,855,530 520,784,186 520,783,900<br />
Full details of the voting rights of ordinary, class A and class B shares are documented in the articles of association of the Company.<br />
Share buy-back<br />
During the financial year <strong>Telkom</strong> bought back 286 ordinary shares at a total consideration of R30,425. The shares were bought back and<br />
cancelled in order to allow <strong>Telkom</strong> shareholders to participate in the proposed unbundling of Vodacom Group on a one to one basis. This<br />
reduced share capital by R2,860 and retained earnings by R27,565.<br />
During the year ended March 31, 2008 <strong>Telkom</strong> bought back 12,071,344 ordinary shares at a total consideration of R1,647 million.<br />
This reduced share capital by R121 million and retained earnings by R1,526 million.<br />
During the year ended March 31, 2007, <strong>Telkom</strong> bought back 12,089,371 ordinary shares at a total consideration of R1,596 million.<br />
This reduced share capital by R120 million, share premium by R1,342 million and retained earnings by R134 million.<br />
Capital management<br />
Refer to note 12 for detailed capital management disclosure.
294<br />
<strong>Telkom</strong> Annual Report 2009<br />
Notes to the annual financial statements (continued)<br />
for the three years ended March 31, 2009<br />
2007 2008 2009<br />
Rm Rm Rm<br />
21. TREASURY SH<strong>AR</strong>E RESERVE (1,778) (1,642) (1,521)<br />
This reserve represents amounts paid by <strong>Telkom</strong> to Rossal No 65<br />
(Proprietary) Limited and Acajou Investments (Proprietary) Limited,<br />
subsidiaries, for the acquisition of the Company’s shares to be<br />
utilised in terms of the <strong>Telkom</strong> Conditional Share Plan (TCSP).<br />
Treasury shares<br />
At March 31, 2009, 11,646,680 (2008: 10,493,141;<br />
2007: 12,237,016) and 8,143,556 (2008: 10,849,058;<br />
2007: 10,849,058) ordinary shares in <strong>Telkom</strong>, with a fair value of<br />
R1,229 million (2008: R1,377 million; 2007: R2,031 million) and<br />
R859 million (2008: R1,423 million; 2007: R1,801 million) are<br />
held as treasury shares by its subsidiaries Rossal No 65 (Proprietary)<br />
Limited and Acajou Investments (Proprietary) Limited, respectively.<br />
The shares held by Rossal No 65 (Proprietary) Limited and Acajou<br />
Investments (Proprietary) Limited are reserved for issue in terms of the TCSP.<br />
The decrease in the number of treasury shares is due to 1,552,029<br />
(2008: 1,743,375; 2007: 450,505) shares that vested in terms<br />
of the TCSP during the current financial year.<br />
The fair value of these shares at the date of vesting was R228 million<br />
(2008: R301 million; 2007: R59 million).<br />
22. SH<strong>AR</strong>E-BASED COMPENSATION RESERVE<br />
This reserve represents the cumulative grant fair value of the equitysettled<br />
share-based payment transactions recognised in employee<br />
expenses over the vesting period of the equity instruments granted<br />
to employees in terms of the <strong>Telkom</strong> Conditional Share Plan<br />
(refer to note 25).<br />
No consideration is payable on the shares issued to employees,<br />
but performance criteria will have to be met in order for the granted<br />
shares to vest. The ultimate number of shares that will vest may differ<br />
based on certain individual and <strong>Telkom</strong> performance conditions being<br />
met. The related compensation expense is recognised over the vesting<br />
period of the shares granted, commencing on the grant date.<br />
The following table illustrates the movement within the share-based<br />
compensation reserve:<br />
Balance at beginning of year 151 257 643<br />
Net increase in equity 106 386 433<br />
Employee cost 141 522 554<br />
Vesting and transfer of shares (35) (136) (121)<br />
Balance at end of year 257 643 1,076<br />
At March 31, 2009 the estimated total compensation expense to be recognised over the vesting period was R1,824 million (2008:<br />
R2,151 million; 2007: R580 million), of which R554 million (2008: R522 million; 2007: R141 million) was recognised in employee<br />
expenses for the year.
Notes to the annual financial statements (continued)<br />
for the three years ended March 31, 2009<br />
23. INTEREST-BE<strong>AR</strong>ING DEBT<br />
<strong>Telkom</strong> Annual Report 2009 295<br />
2007 2008 2009<br />
Rm Rm Rm<br />
Non-current interest-bearing debt 3,308 7,336 10,193<br />
Total interest-bearing debt (refer to note 12) 9,083 13,362 17,704<br />
Gross interest-bearing debt 10,416 14,403 18,296<br />
Discount on debt instruments issued (2,185) (1,898) (1,576)<br />
Finance leases 852 857 984<br />
Less: Current portion of interest-bearing debt (5,775) (6,026) (7,511)<br />
Local debt (5,771) (6,000) (7,476)<br />
Locally registered <strong>Telkom</strong> debt instruments (4,432) – –<br />
Call borrowings – (2,600) –<br />
Term loans – – (2,000)<br />
Commercial paper bills (1,339) (3,400) (5,476)<br />
Foreign debt – – –<br />
Finance leases (4) (26) (35)<br />
Total interest-bearing debt is made up as follows: 9,083 13,362 17,704<br />
(a) Local debt 8,125 12,365 16,582<br />
Locally registered <strong>Telkom</strong> debt instruments 6,786 8,164 11,106<br />
Name, maturity, rate p.a., nominal value<br />
TK01, 2008, 10%, RNil (2008: RNil; 2007: R4,680 million) 4,432 – –<br />
TL12, 2012, 12.45%, R1,060 million (2008: RNil;<br />
2007: RNil) – – 1,059<br />
TL15, 2015, 11.9%, R1,160 million (2008: RNil;<br />
2007: RNil) – – 1,159<br />
TL20, 2020, 6%, R2,500 million (2008: R2,500 million;<br />
2007: R2,500 million) 1,246 1,283 1,325<br />
PP02, 2010, 0%, R430 million (2008: R430 million;<br />
2007: R430 million) 264 304 349<br />
PP03, 2010, 0%, R1,350 million (2008: R1,350 million;<br />
2007: R1,350 million) 844 977 1,131<br />
Call borrowings, 2009, 11.58%, RNil (2008: R2,600 million;<br />
2007: RNil) – 2,600 –<br />
Term loans, 2010, 9.67%, R2,000 million (2008: R3,000 million;<br />
2007: RNil) – 3,000 2,000<br />
Syndicated loans, 2014, 11.46%, R4,100 million (2008: RNil;<br />
2007: RNil) – – 4,083<br />
Total interest-bearing debt is made up of R17,704 million debt at amortised cost (2008: R13,362 million debt at amortised cost; 2007:<br />
R8,985 million debt at amortised cost and R98 million debt at fair value through profit or loss).
296<br />
<strong>Telkom</strong> Annual Report 2009<br />
Notes to the annual financial statements (continued)<br />
for the three years ended March 31, 2009<br />
23. INTEREST-BE<strong>AR</strong>ING DEBT (continued)<br />
Local bonds<br />
The local <strong>Telkom</strong> bonds are unsecured, but a Side letter to the Subscription<br />
Agreement (as amended) of the TL20 bond contains a number of restrictive<br />
covenants which, if not met, could result in the early redemption of the loan.<br />
The local bonds limit <strong>Telkom</strong>’s ability to create encumbrances on revenue or<br />
assets, and secure any indebtedness without securing the outstanding bonds<br />
equally and rateably with such indebtedness. The term loan agreements<br />
limit <strong>Telkom</strong>’s ability to encumber, cede, assign, sell or otherwise dispose<br />
of a material portion of its assets without prior written consent of the Lenders,<br />
which will not be unreasonably withheld. The syndicated loan agreement<br />
contains restrictive covenants as well as restrictions on encumbrances,<br />
disposals, Group guarantees and Group loans.<br />
2007 2008 2009<br />
Rm Rm Rm<br />
Commercial paper bills<br />
Rate p.a., nominal value<br />
2009, 11.44% (2008: 11.71%; 2007: 9.04%), R5,559 million<br />
(2008: R4,383 million; 2007: R1,350 million)<br />
1,339 4,201 5,476<br />
(b) Foreign debt<br />
Maturity, rate p.a., nominal value<br />
Euro: 2010 – 2025, 0.10% – 0.14% (2008: 0.10% – 0.14%;<br />
2007: 0.10% – 0.14%), e11 million (2008: e11 million;<br />
2007: e11 million)<br />
106 140 138<br />
(c) Finance leases<br />
The finance leases are secured by buildings with a carrying value of<br />
R152 million (2008: R174 million; 2007: R197 million) and office<br />
equipment with a book value of R6 million (2008: R14 million;<br />
2007: R6 million) (refer to note 9). These amounts are repayable<br />
within periods ranging from 1 to 11 years. Interest rates vary<br />
between 13.43% and 37.78%.<br />
852 857 984<br />
Included in non-current and current debt is:<br />
Debt guaranteed by the South African Government 4,537 140 138<br />
The Company may issue or re-issue locally registered debt instruments in terms of the Post Office Amendment Act 85 of 1991. The<br />
borrowing powers of the Company are set out as per note 19.<br />
Repayments/refinancing of current portion of interest-bearing debt<br />
The Company issued new local bonds, the TL12 and TL15 with a nominal value of R1,060 million and R1,160 million respectively and<br />
entered into a syndicated loan agreement with a nominal value of R4,100 million during the current year. Commercial Paper Bills with a<br />
nominal value of R11,025 million were issued and Commercial Paper debt with a nominal value of R9,849 million was repaid during the<br />
current year.<br />
The R7,559 million nominal value of current portion of interest-bearing debt as at March 31, 2009 is expected to be repaid/refinanced<br />
from proceeds of the Vodacom sale.<br />
Management believes that sufficient funding facilities will be available at the date of repayment/refinancing.
Notes to the annual financial statements (continued)<br />
for the three years ended March 31, 2009<br />
<strong>Telkom</strong> Annual Report 2009 297<br />
2007 2008 2009<br />
Rm Rm Rm<br />
24. PROVISIONS 1,203 1,445 1,830<br />
Employee related 2,351 2,477 3,079<br />
Annual leave 363 364 415<br />
Balance at beginning of year 316 363 364<br />
Charged to employee expenses 53 10 66<br />
Leave paid (6) (9) (15)<br />
Post-retirement medical aid (refer to note 25) 1,120 1,336 1,723<br />
Balance at beginning of year 2,589 1,120 1,336<br />
Interest cost 285 321 426<br />
Current service cost 83 84 95<br />
Expected return on plan asset (188) (257) (223)<br />
Actuarial loss 149 129 157<br />
Termination settlement – – (5)<br />
Plan asset – initial recognition (1,720) – –<br />
Contributions paid (78) (61) (63)<br />
Telephone rebates (refer to note 25) 282 287 325<br />
Balance at beginning of year 198 282 287<br />
Interest cost 19 22 39<br />
Current service cost 4 3 6<br />
Past service cost 76 2 2<br />
Actuarial loss 5 – 14<br />
Benefits paid (20) (22) (23)<br />
Bonus 586 490 616<br />
Balance at beginning of year 637 586 490<br />
Charged to employee expenses 656 473 577<br />
Payments made (707) (569) (451)<br />
Non-employee related 558 608 704<br />
Supplier dispute (refer to note 35) 527 569 664<br />
Balance at beginning of year – 527 569<br />
Net movements 527 42 95<br />
Other 31 39 40<br />
Less: Current portion of provisions (1,706) (1,640) (1,953)<br />
Annual leave (363) (364) (415)<br />
Post-retirement medical aid (185) (185) (224)<br />
Telephone rebates (26) (26) (29)<br />
Bonus (586) (490) (616)<br />
Supplier dispute (refer to note 35) (527) (569) (664)<br />
Other (19) (6) (5)
298<br />
<strong>Telkom</strong> Annual Report 2009<br />
Notes to the annual financial statements (continued)<br />
for the three years ended March 31, 2009<br />
24. PROVISIONS (continued)<br />
Annual leave<br />
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<br />
22 days which must be taken within an 18 month leave cycle. The leave cycle is reviewed annually and is in accordance with legislation.<br />
Bonus<br />
The bonus scheme consists of performance bonuses which are dependent on achievement of certain financial and non-financial targets.<br />
The bonus is payable to all qualifying employees bi-annually after the Company’s results have been made public.<br />
Supplier dispute<br />
The Company provided R664 million (2008: R569 million; 2007: R527 million) for its estimate of the probable liability as discussed in<br />
note 35. The net movement in the provision of R95 million consists of finance charges and fair value movements.<br />
Other<br />
Included in other provisions is an amount provided for asset retirement obligations.<br />
25. EMPLOYEE BENEFITS<br />
The Company provides benefits for all its permanent employees through the <strong>Telkom</strong> Pension Fund and the <strong>Telkom</strong> Retirement Fund.<br />
Membership to one of the funds is compulsory. In addition, certain retired employees receive medical aid benefits and a telephone rebate.<br />
The liabilities for all of the benefits are actuarially determined in accordance with accounting requirements each year. In addition, statutory<br />
funding valuations for the retirement and pension funds are performed at intervals not exceeding three years.<br />
At March 31, 2009, the Company employed 23,520 employees (2008: 24,879; 2007: 25,864).<br />
Actuarial valuations were performed by qualified actuaries to determine the benefit obligation, plan asset and service costs for the pension<br />
and retirement funds for each of the financial periods presented.<br />
The <strong>Telkom</strong> Pension Fund<br />
The <strong>Telkom</strong> Pension Fund is a defined benefit fund that was established in terms of the Post Office Amendment Act 85, of 1991.<br />
The latest actuarial valuation performed at March 31, 2009 indicates that the pension fund is in a surplus position of R94 million after<br />
unrecognised gains. The recognition of the surplus is limited due to the application of the asset limitation criteria in IAS19 (revised).<br />
With effect from July 1, 1995, the <strong>Telkom</strong> Pension Fund was closed to new members. During the year ended March 31, 2007 a settlement<br />
event occurred in the <strong>Telkom</strong> Pension Fund whereby 106 members were transferred to the <strong>Telkom</strong> Retirement Fund. The funded status of the<br />
<strong>Telkom</strong> Pension Fund is disclosed below.
Notes to the annual financial statements (continued)<br />
for the three years ended March 31, 2009<br />
25. EMPLOYEE BENEFITS (continued)<br />
<strong>Telkom</strong> Annual Report 2009 299<br />
2007 2008 2009<br />
Rm Rm Rm<br />
The <strong>Telkom</strong> Pension Fund<br />
The net periodic retirement costs include the following components:<br />
Interest and service cost on projected benefit obligations 22 21 21<br />
Expected return on plan assets (19) (27) (28)<br />
Recognised actuarial loss/(gain) 9 (16) –<br />
Settlement loss/(gain) 21 (2) (3)<br />
Asset limitation – 29 39<br />
Net periodic pension expense recognised 33 5 29<br />
Pension fund contributions (refer to note 5.1) 8 5 (1)<br />
The status of the pension plan obligation is as follows:<br />
At beginning of year 281 205 204<br />
Interest and service cost 22 21 21<br />
Employee contributions 2 2 2<br />
Benefits paid (2) (3) (5)<br />
Settlements (70) (15) (22)<br />
Actuarial gain (28) (6) (1)<br />
Benefit obligation at end of year 205 204 199<br />
Plan assets at fair value:<br />
At beginning of year 243 284 311<br />
Expected return on plan assets 19 27 28<br />
Benefits paid (2) (3) (5)<br />
Contributions 10 8 2<br />
Settlements (61) (15) (22)<br />
Actuarial gain/(loss) 75 10 (67)<br />
Plan assets at end of year 284 311 247
300<br />
<strong>Telkom</strong> Annual Report 2009<br />
Notes to the annual financial statements (continued)<br />
for the three years ended March 31, 2009<br />
25. EMPLOYEE BENEFITS (continued)<br />
The <strong>Telkom</strong> Pension Fund (continued)<br />
2007 2008 2009<br />
Rm Rm Rm<br />
Present value of funded obligation 205 204 199<br />
Fair value of plan assets (284) (311) (247)<br />
Fund surplus (79) (107) (48)<br />
Unrecognised net actuarial gain/(loss) 25 23 (46)<br />
Net surplus (54) (84) (94)<br />
Asset limitation – 29 39<br />
Recognised net asset (54) (55) (55)<br />
Expected return on plan assets 19 27 28<br />
Actuarial return/(loss) on plan assets 75 10 (67)<br />
Actual return/(loss) on plan assets 94 37 (39)<br />
Principal actuarial assumptions were as follows:<br />
Discount rate (%) 7.5 9.0 8.7<br />
Yield on government bonds (%) 7.5 9.0 8.7<br />
Long-term return on equities (%) 10.5 11.0 12.0<br />
Long-term return on cash (%) 5.5 7.0 7.5<br />
Expected return on plan assets (%) 9.7 9.8 10.5<br />
Salary inflation rate (%) 6.0 7.5 7.2<br />
Pension increase allowance (%) 2.9 4.3 4.0<br />
The overall long-term expected rate of return on assets is 10.5%.<br />
This is based on the portfolio as a whole and not the sum of the<br />
returns of individual asset categories. The expected return takes<br />
into account the asset allocation of the <strong>Telkom</strong> Pension Fund<br />
and expected long-term return of these assets, of which South<br />
African equities and bonds are the largest contributors.<br />
The assumed rates of mortality are determined by reference to<br />
the SA85-90 (Light) Ultimate table, as published by the Actuarial<br />
Society of South Africa, for pre-retirement purposes and the PA(90)<br />
Ultimate table, minus one year age rating as published by the<br />
Institute and Faculty of Actuaries in London and Scotland, for<br />
retirement purposes.<br />
Funding level per statutory actuarial valuation (%) 100.0 100.0 100.0<br />
The number of employees registered under the <strong>Telkom</strong> Pension Fund<br />
The fund portfolio consists of the following:<br />
153 146 123<br />
Equities (%) 74 54 57<br />
Bonds (%) 5 5 25<br />
Cash (%) 3 23 3<br />
Foreign investments (%) 16 18 15<br />
Insurance policies (%) 2 – –<br />
The total expected contributions payable to the pension fund for the next financial year are R1 million.
Notes to the annual financial statements (continued)<br />
for the three years ended March 31, 2009<br />
25. EMPLOYEE BENEFITS (continued)<br />
The <strong>Telkom</strong> Retirement Fund<br />
<strong>Telkom</strong> Annual Report 2009 301<br />
The <strong>Telkom</strong> Retirement Fund was established on July 1, 1995 as a hybrid defined benefit and defined contribution plan. Existing employees<br />
were given the option to either remain in the <strong>Telkom</strong> Pension Fund or to be transferred to the <strong>Telkom</strong> Retirement Fund. All pensioners of the<br />
<strong>Telkom</strong> Pension Fund and employees who retired after July 1, 1995 were transferred to the <strong>Telkom</strong> Retirement Fund. Upon transfer the<br />
Government ceased to guarantee the deficit in the <strong>Telkom</strong> Retirement Fund. Subsequent to July 1, 1995 further transfers of existing<br />
employees occurred.<br />
The <strong>Telkom</strong> Retirement Fund is a defined contribution fund with regard to in-service members. On retirement, an employee is transferred<br />
from the defined contribution plan to a defined benefit plan. <strong>Telkom</strong>, as a guarantor, is contingently liable for any deficit in the <strong>Telkom</strong><br />
Retirement Fund. Moreover, all of the assets in the Fund, including any potential excess, belong to the participants of the scheme. The<br />
Company is unable to benefit from the excess in the form of future reduced contributions.<br />
<strong>Telkom</strong> guarantees any actuarial shortfall of the pensioner pool in the retirement fund. This liability is initially funded through assets of the<br />
retirement fund. The latest actuarial valuation performed at March 31, 2009 indicates that the retirement fund is in a surplus funding position<br />
of R1,549 million after unrecognised losses.<br />
The <strong>Telkom</strong> Retirement Fund is governed by the Pension Funds Act 24 of 1956. In terms of section 37A of this Act, the pension benefits<br />
payable to the pensioners cannot be reduced. If therefore the present value of the funded obligation were to exceed the fair value of plan<br />
assets, <strong>Telkom</strong> would be required to fund the statutory deficit.<br />
The information presented below is intended only to comply with the disclosure requirements of IAS19 (revised) and not to suggest that the<br />
Company has a potential asset with regard to this Fund.<br />
The funded status of the <strong>Telkom</strong> Retirement Fund is disclosed below:<br />
2007 2008 2009<br />
Rm Rm Rm<br />
<strong>Telkom</strong> Retirement Fund<br />
The net periodic retirement costs include the following components:<br />
Interest and service cost on projected benefit obligations 312 493 616<br />
Expected return on plan assets (489) (686) (796)<br />
Recognised actuarial gain (145) – –<br />
Net periodic pension expense not recognised (asset limitation) (322) (193) (180)<br />
Retirement fund contributions (refer to note 5.1) 439 460 460<br />
Benefit obligation:<br />
At beginning of year 4,377 6,581 7,101<br />
Interest cost 312 493 616<br />
Benefits paid (486) (488) (520)<br />
Liability for new pensioners 44 14 143<br />
Actuarial loss/(gain) 2,334 501 (636)<br />
Benefit obligation at end of year 6,581 7,101 6,704<br />
Plan assets at fair value:<br />
At beginning of year 5,973 7,661 7,991<br />
Expected return on plan assets 489 686 796<br />
Benefits paid (486) (488) (520)<br />
Asset backing new pensioners’ liabilities 44 14 143<br />
Actuarial gain/(loss) 1,641 118 (1,735)<br />
Plan assets at end of year 7,661 7,991 6,675
302<br />
<strong>Telkom</strong> Annual Report 2009<br />
Notes to the annual financial statements (continued)<br />
for the three years ended March 31, 2009<br />
25. EMPLOYEE BENEFITS (continued)<br />
The <strong>Telkom</strong> Retirement Fund (continued)<br />
2007 2008 2009<br />
Rm Rm Rm<br />
Present value of funded obligation 6,581 7,101 6,704<br />
Fair value of plan assets (7,661) (7,991) (6,675)<br />
Fund (surplus)/deficit (1,080) (890) 29<br />
Unrecognised net actuarial loss (96) (478) (1,578)<br />
Unrecognised net asset (1,176) (1,368) (1,549)<br />
Expected return on plan assets 489 686 796<br />
Actuarial gain/(loss) on plan assets 1,641 118 (1,735)<br />
Actual gain/(loss) on plan assets 2,130 804 (939)<br />
Included in the fair value of plan assets is:<br />
Office buildings occupied by <strong>Telkom</strong> 371 596 619<br />
<strong>Telkom</strong> bonds 21 10 –<br />
<strong>Telkom</strong> shares 284 141 132<br />
The <strong>Telkom</strong> Retirement Fund invests its funds in South Africa and<br />
internationally. Twelve fund managers invest in South Africa and<br />
five of these managers specialise in trades with bonds on behalf<br />
of the Retirement Fund. The international investment portfolio<br />
consists of global equity and hedged funds.<br />
Principal actuarial assumptions were as follows:<br />
Discount rate (%) 7.5 9.0 8.7<br />
Yield on government bonds (%) 7.5 9.0 8.7<br />
Long-term return on equities (%) 10.5 11.0 12.0<br />
Long-term return on cash (%) 5.5 7.0 7.5<br />
Expected return on plan assets (%) 9.3 10.3 10.7<br />
Pension increase allowance (%) 4.5 6.0 4.0<br />
The overall long-term expected rate of return on assets is 10.7%. This is<br />
based on the portfolio as a whole and not the sum of the returns of<br />
individual asset categories. The expected return takes into account the<br />
asset allocation of the <strong>Telkom</strong> Retirement Fund and expected longterm<br />
return on these assets, of which South African equities, foreign<br />
investments and South African index-linked bonds are the largest contributors.<br />
The assumed rates of mortality are determined by reference to the<br />
SA85-90 (Light) Ultimate table, as published by the Actuarial Society of<br />
South Africa, for pre-retirement purposes and the PA(90) Ultimate table,<br />
minus one year age rating as published by the Institute and Faculty of<br />
Actuaries in London and Scotland, for retirement purposes.<br />
Funding level per statutory actuarial valuation (%) 100 100 100<br />
The number of pensioners registered under the <strong>Telkom</strong> Retirement Fund<br />
The number of in-service employees registered under the <strong>Telkom</strong><br />
14,451 14,255 13,617<br />
Retirement Fund 25,766 24,939 23,389
Notes to the annual financial statements (continued)<br />
for the three years ended March 31, 2009<br />
25. EMPLOYEE BENEFITS (continued)<br />
The <strong>Telkom</strong> Retirement Fund (continued)<br />
<strong>Telkom</strong> Annual Report 2009 303<br />
2007 2008 2009<br />
Rm Rm Rm<br />
The fund portfolio consists of the following:<br />
Equities (%) 59 70 55<br />
Property (%) 2 2 –<br />
Bonds (%) 19 11 5<br />
Cash (%) 7 1 5<br />
Foreign investments (%) 13 16 20<br />
Index linked (%) – – 15<br />
The expected pension benefits payments for the year ending March 31, 2010 are R541,000.<br />
Medical benefits<br />
The Company makes certain contributions to medical funds in respect of current and retired employees. The scheme is a defined benefit<br />
plan. The expense in respect of current employees’ medical aid is disclosed in note 5.1. The amounts due in respect of post-retirement<br />
medical benefits to current and retired employees have been actuarially determined and provided for as set out in note 24. The Company<br />
has terminated future post-retirement medical benefits in respect of employees joining after July 1, 2000.<br />
There are three major categories of members entitled to the post-retirement medical aid: pensioners who retired before 1994 (Pre-94); those<br />
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,<br />
which increases annually with the average salary increase.<br />
Eligible employees must be employed by <strong>Telkom</strong> until retirement age to qualify for the post-retirement medical aid benefit. The most recent<br />
actuarial valuation of the benefit was performed as at March 31, 2009.<br />
The Company has allocated certain investments to fund this liability as set out in note 11.<br />
2007 2008 2009<br />
Rm Rm Rm<br />
Medical aid<br />
Benefit obligation:<br />
At beginning of year 3,889 4,366 4,831<br />
Interest cost 285 321 426<br />
Current service cost 83 84 95<br />
Actuarial loss 281 246 246<br />
Termination settlement – – (5)<br />
Benefits paid from plan assets (94) (125) (141)<br />
Contributions paid by the Company (78) (61) (63)<br />
Benefit obligation at end of year 4,366 4,831 5,389
304<br />
<strong>Telkom</strong> Annual Report 2009<br />
Notes to the annual financial statements (continued)<br />
for the three years ended March 31, 2009<br />
25. EMPLOYEE BENEFITS (continued)<br />
Medical benefits (continued)<br />
Plan assets at fair value:<br />
2007 2008 2009<br />
Rm Rm Rm<br />
At beginning of year – 1,961 1,929<br />
Plan asset – initial recognition 1,720 – –<br />
Expected return on plan assets 188 257 223<br />
Benefits paid from plan assets (94) (125) (141)<br />
Actuarial gain/(loss) 147 (164) (393)<br />
Plan assets at end of year 1,961 1,929 1,618<br />
Present value of funded obligation 4,366 4,831 5,389<br />
Fair value of plan assets (1,961) (1,929) (1,618)<br />
Fund deficit 2,405 2,902 3,771<br />
Unrecognised net actuarial loss (1,285) (1,566) (2,048)<br />
Liability as disclosed in the balance sheet (refer to note 24) 1,120 1,336 1,723<br />
Expected return on plan assets 188 257 223<br />
Actuarial return on plan assets 147 (164) (393)<br />
Actual gain/(loss) on plan assets 335 93 (170)<br />
Principal actuarial assumptions were as follows:<br />
Discount rate (%) 7.5 9.0 8.7<br />
Expected return on plan assets (%) 13.5 12.0 11.0<br />
Salary inflation rate (%) 6.0 7.5 7.2<br />
Medical inflation rate (%) 6.5 8.0 7.7<br />
The assumed rates of mortality are determined by reference to the<br />
SA85-90 (Light) Ultimate table, as published by the Actuarial Society<br />
of South Africa, for pre-retirement purposes and the PA(90) Ultimate<br />
table, minus one year age rating as published by the Institute and<br />
Faculty of Actuaries in London and Scotland, for retirement purposes.<br />
Contractual retirement age 65 65 65<br />
Average retirement age 60 60 60<br />
Number of members 17,119 15,526 13,883<br />
Number of pensioners 8,494 8,430 8,397
Notes to the annual financial statements (continued)<br />
for the three years ended March 31, 2009<br />
25. EMPLOYEE BENEFITS (continued)<br />
Medical benefits (continued)<br />
<strong>Telkom</strong> Annual Report 2009 305<br />
The valuation results are sensitive to changes in the underlying assumptions. The following table provides an indication of the impact of<br />
changing some of the valuation assumptions:<br />
Current<br />
assumption Decrease Increase<br />
Rm Rm Rm<br />
Medical cost inflation rate 7.7% -1.0% +1.0%<br />
Benefit obligation 5,389 (736) 921<br />
Percentage change (13.7)% 17.1%<br />
Service cost and interest cost 2009/2010 555 (84) 108<br />
Percentage change (15.1)% 19.5%<br />
Discount rate 8.7% -1.0% +1.0%<br />
Benefit obligation 5,389 933 (734)<br />
Percentage change 17.3% (13.6)%<br />
Service cost and interest cost 2009/2010 555 46 (37)<br />
Percentage change 8.3% (6.7)%<br />
Post-retirement mortality rate PA(90) ultimate- 1 -10.0% +10.0%<br />
Benefit obligation 5,389 221 (197)<br />
Percentage change 4.1% (3.7)%<br />
Service cost and interest cost 2009/2010 555 23 (20)<br />
Percentage change 4.1% (3.6)%<br />
2007 2008 2009<br />
The fund portfolio consists of the following:<br />
Equities (%) 59 56 30<br />
Bonds (%) 3 2 2<br />
Cash and money market investments (%) 21 33 10<br />
Foreign investments (%) 9 9 9<br />
Insurance policies (%) 8 – 49
306<br />
<strong>Telkom</strong> Annual Report 2009<br />
Notes to the annual financial statements (continued)<br />
for the three years ended March 31, 2009<br />
25. EMPLOYEE BENEFITS (continued)<br />
Telephone rebates<br />
The Company provides telephone rebates to its pensioners. The most recent actuarial valuation was performed at March 31, 2009.<br />
Eligible employees must be employed by the Company until retirement age to qualify for the telephone rebates. The scheme is a defined<br />
benefit plan.<br />
The status of the telephone rebate liability is disclosed below:<br />
2007 2008 2009<br />
Rm Rm Rm<br />
Benefit obligation opening balance 251 307 443<br />
Service cost 4 3 6<br />
Interest cost 19 22 39<br />
Actuarial (gain)/loss (39) 133 19<br />
Amendments 93 – –<br />
Benefits paid (21) (22) (23)<br />
Present value of unfunded obligation 307 443 484<br />
Unrecognised net actuarial loss and past service cost (25) (156) (159)<br />
Liability as disclosed in the balance sheet (refer to note 24) 282 287 325<br />
Principal actuarial assumptions were as follows:<br />
Discount rate (%) 7.5 9.0 8.7<br />
Rebate inflation rate (%) – 4.0 4.0<br />
Contractual retirement age 65 65 65<br />
Average retirement age 60 60 60<br />
The assumed rates of mortality are determined by reference to the<br />
standard published mortality table PA (90) Ultimate standard tables,<br />
as published by the Institute and Faculty of Actuaries in London<br />
and Scotland, rated down one year to value the pensioners.<br />
Number of members 19,515 18,766 17,034<br />
Number of pensioners 10,918 10,680 10,499<br />
<strong>Telkom</strong> Conditional Share Plan<br />
<strong>Telkom</strong>’s shareholders approved the <strong>Telkom</strong> Conditional Share Plan at the January 2004 Annual General Meeting. The scheme covers both<br />
operational and management employees and is aimed at giving shares to <strong>Telkom</strong> employees, at a RNil exercise price, at the end of the<br />
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<br />
three years thereafter, while the shares allocated in 2006 and 2007 together with management shares vest fully after three years.<br />
Although the number of shares awarded to employees will be communicated at the grant date, the ultimate number of shares that vest may<br />
differ based on certain performance conditions being met.<br />
The <strong>Telkom</strong> Board approved the fourth enhanced allocation of shares to employees as at September 4, 2007, with a grant date of<br />
September 27, 2007, the day that the employees and the Company shared a common understanding of the terms and conditions of the<br />
grant. A total number of 6,089,810 shares were granted.<br />
The Board has also approved an enhanced allocation for the November 2006 grant on September 4, 2007 with a grant date of<br />
September 27, 2007. The number of additional shares granted with regard to the 2006 allocation is 4,966,860 shares.
Notes to the annual financial statements (continued)<br />
for the three years ended March 31, 2009<br />
25. EMPLOYEE BENEFITS (continued)<br />
<strong>Telkom</strong> Conditional Share Plan (continued)<br />
<strong>Telkom</strong> Annual Report 2009 307<br />
The weighted average remaining vesting period for the shares outstanding as at March 31, 2009 is 0.71 years (2008: 1.25 years;<br />
2007: 1.75 years).<br />
2007 2008 2009<br />
The following table illustrates the movement of the maximum number<br />
of shares that will vest to employees for the August 2004 grant:<br />
Outstanding at beginning of the year 2,414,207 1,883,991 420,590<br />
Granted during the year 1,212 252 –<br />
Forfeited during the year (80,923) (43,790) (3,985)<br />
Vested during the year (450,505) (1,419,863) (416,605)<br />
Outstanding at end of the year 1,883,991 420,590 –<br />
The following table illustrates the movement of the maximum number<br />
of shares that will vest to employees for the June 2005 grant:<br />
Outstanding at beginning of the year 1,930,687 1,864,041 1,435,387<br />
Granted during the year 1,005 3,469 52,954<br />
Forfeited during the year (67,651) (108,177) (45,188)<br />
Vested during the year – (323,946) (1,135,424)<br />
Outstanding at end of the year 1,864,041 1,435,387 307,729<br />
The following table illustrates the movement of the maximum number<br />
of shares that will vest to employees for the November 2006 grant:<br />
Outstanding at beginning of the year – 1,773,361 1,640,980<br />
Granted during the year 1,825,488 833 –<br />
Forfeited during the year (52,127) (133,214) (132,614)<br />
Outstanding at end of the year 1,773,361 1,640,980 1,508,366<br />
The following table illustrates the movement of the maximum number<br />
of shares that will vest to employees relating to the additional<br />
November 2006 grant:<br />
Outstanding at beginning of the year – – 4,812,305<br />
Granted during the year – 4,984,693 25,775<br />
Forfeited during the year – (172,388) (389,357)<br />
Outstanding at end of the year – 4,812,305 4,448,723<br />
The following table illustrates the movement of the maximum number<br />
of shares that will vest to employees for the September 2007 grant:<br />
Outstanding at beginning of the year – – 5,846,636<br />
Granted during the year – 6,117,163 23,650<br />
Forfeited during the year – (270,527) (509,185)<br />
Outstanding at end of the year – 5,846,636 5,361,101
308<br />
<strong>Telkom</strong> Annual Report 2009<br />
Notes to the annual financial statements (continued)<br />
for the three years ended March 31, 2009<br />
25. EMPLOYEE BENEFITS (continued)<br />
<strong>Telkom</strong> Conditional Share Plan (continued)<br />
The fair value of the shares granted have been calculated by an actuary using the Black-Scholes-Merton model and the following values<br />
at grant date:<br />
August 8, June 23, November 2, September 4,<br />
2004 2005 2006 2007<br />
Grant Grant Grant Grant<br />
Market share price (R) 77.50 111.00 141.25 173.00<br />
Dividend yield (%) 2.60 3.60 3.50 3.50<br />
2007 2008 2009<br />
Rm Rm Rm<br />
The principal assumptions used in calculating the expected number<br />
of shares that will vest are as follows:<br />
Employee turnover (%) 5 5 9<br />
Meeting specified performance criteria (%) 100 100 75<br />
The amounts for the current and previous four years are as follows:<br />
2005 2006 2007 2008 2009<br />
Rm Rm Rm Rm Rm<br />
<strong>Telkom</strong> Pension Fund<br />
Defined benefit obligation (186) (281) (205) (204) (199)<br />
Plan assets 231 243 284 311 247<br />
Surplus/(deficit) 45 (38) 79 107 48<br />
Asset limitation – – – (29) (39)<br />
Unrecognised actuarial loss/(gain) 89 118 (25) (23) 46<br />
Recognised net asset 134 80 54 55 55<br />
Experience adjustment on assets 75 10 (67)<br />
Experience adjustment on liabilities 28 (6) 1<br />
<strong>Telkom</strong> Retirement Fund<br />
Defined benefit obligation (4,020) (4,377) (6,581) (7,101) (6,704)<br />
Plan assets 4,477 5,973 7,661 7,991 6,675<br />
Surplus/(deficit) 457 1,596 1,080 890 (29)<br />
Unrecognised actuarial gain/(loss) 312 (742) 96 478 1,578<br />
Unrecognised net asset 769 854 1,176 1,368 1,549<br />
Experience adjustment on assets* 1,641 118 (1,735)<br />
Experience adjustment on liabilities* 1,234 485 (645)
Notes to the annual financial statements (continued)<br />
for the three years ended March 31, 2009<br />
25. EMPLOYEE BENEFITS (continued)<br />
<strong>Telkom</strong> Annual Report 2009 309<br />
2005 2006 2007 2008 2009<br />
Rm Rm Rm Rm Rm<br />
Medical benefits<br />
Defined benefit obligation (3,057) (3,889) (4,366) (4,831) (5,389)<br />
Plan assets – – 1,961 1,929 1,618<br />
Deficit (3,057) (3,889) (2,405) (2,902) (3,771)<br />
Unrecognised actuarial loss 648 1,300 1,285 1,566 2,048<br />
Liability recognised (2,409) (2,589) (1,120) (1,336) (1,723)<br />
Experience adjustment on assets 147 (164) (393)<br />
Experience adjustment on liabilities 28 193 246<br />
Telephone rebates<br />
Defined benefit obligation (177) (251) (307) (443) (484)<br />
Unrecognised actuarial (gain)/loss (2) 53 25 156 159<br />
Liability recognised (179) (198) (282) (287) (325)<br />
Experience adjustment on liabilities (25) 2 2<br />
The experience adjustments on assets and liabilities for each of the financial periods ended March 31, 2005 and 2006 have not been<br />
disclosed due to the fact that it was impractical to determine the information.<br />
* During the March 31, 2007 year end <strong>Telkom</strong> actuaries performed a full valuation while for the March 31, 2006 year end a roll forward method was used,<br />
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<br />
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<br />
of plan assets.<br />
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<br />
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<br />
year end.<br />
2007 2008 2009<br />
Rm Rm Rm<br />
26. DEFERRED REVENUE 1,846 2,294 2,822<br />
Non-current deferred revenue 739 870 996<br />
Current portion of deferred revenue 1,107 1,424 1,826<br />
Included in deferred revenue is profit on the sale and leaseback of certain <strong>Telkom</strong> buildings of R107 million, consisting of a non-current<br />
portion of R96 million (2008: R107 million; 2007: R118 million) and a current portion of R11 million (2008: R11 million; 2007:<br />
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<br />
(refer to note 34).
310<br />
<strong>Telkom</strong> Annual Report 2009<br />
Notes to the annual financial statements (continued)<br />
for the three years ended March 31, 2009<br />
2007 2008 2009<br />
Rm Rm Rm<br />
27. TRADE AND OTHER PAYABLES 4,333 4,923 5,424<br />
Trade payables 2,761 3,267 3,035<br />
Finance cost accrued 22 39 156<br />
Accruals and other payables 1,550 1,617 2,233<br />
Accruals and other payables mainly represent amounts payable<br />
for goods received, net of Value Added Tax obligations and<br />
licence fees.<br />
Included in accruals and other payables are amounts owed<br />
to Rossal No 65 (Proprietary) Limited of R342 million<br />
(2008: RNil; 2007: R148 million) and Intekom (Proprietary) Limited<br />
of R23 million (2008: R13 million; 2007: R5 million).<br />
28. RECONCILIATION OF PROFIT FOR THE YE<strong>AR</strong> TO CASH<br />
GENERATED FROM OPERATIONS<br />
Cash generated from operations 12,660 12,662 12,027<br />
Profit for the year 8,391 7,967 5,277<br />
Finance charges and fair value movements 1,027 1,289 1,459<br />
Taxation 2,690 2,599 516<br />
Investment income (3,202) (3,739) (2,906)<br />
Interest received from debtors (189) (248) (404)<br />
Non-cash items 4,565 4,637 7,981<br />
Depreciation, amortisation and write-offs 3,583 3,732 4,358<br />
Cost of equipment disposed when recognising finance leases 240 88 71<br />
Recognition of the FIFA brand intangible asset from deferred revenue – – (261)<br />
Increase in provisions<br />
Profit on disposal of property, plant and equipment and intangible<br />
1,103 757 1,439<br />
assets (15) (167) (32)<br />
Profit on disposal of investment (364) – –<br />
Interest received from subsidiaries<br />
Loss on disposal of property, plant and equipment and intangible<br />
– – 221<br />
assets 1 2 6<br />
Impairment of investments and loans 17 225 2,179<br />
(Increase)/decrease in working capital (622) 157 104<br />
Inventories (459) (202) (627)<br />
Accounts receivable (319) (196) 848<br />
Accounts payable 156 555 (117)
Notes to the annual financial statements (continued)<br />
for the three years ended March 31, 2009<br />
<strong>Telkom</strong> Annual Report 2009 311<br />
2007 2008 2009<br />
Rm Rm Rm<br />
29. DIVIDEND RECEIVED 2,950 3,536 3,242<br />
Dividend income per income statement (refer to note 6) 3,006 3,597 2,747<br />
Dividend accrued for the previous year 1,479 1,535 1,595<br />
Dividend accrued for the current year (1,535) (1,596) (1,100)<br />
Dividend received consists of: 2,950 3,536 3,242<br />
Dividend received from joint venture 2,650 2,825 3,095<br />
Dividend received from subsidiaries 300 711 147<br />
30. FINANCE CH<strong>AR</strong>GES PAID (886) (842) (466)<br />
Finance charges per income statement (1,027) (1,289) (1,460)<br />
Non-cash items 141 447 994<br />
Movements in interest accruals (81) 49 255<br />
Net discount amortised 409 568 698<br />
Fair value adjustment (172) (275) (29)<br />
Unrealised (loss)/gain (15) 105 70<br />
31. TAXATION PAID (3,852) (1,716) (1,764)<br />
Taxation (payable)/receivable at beginning of year (1,164) 519 (7)<br />
South African normal company taxation (excluding deferred taxation) (1,874) (1,879) (1,510)<br />
Secondary taxation on companies (295) (363) (156)<br />
Taxation (payable)/receivable at end of year (519) 7 (91)<br />
32. DIVIDEND PAID (4,874) (5,858) (3,435)<br />
Dividend payable at beginning of year (4) (15) (20)<br />
Declared during the year – dividend on ordinary shares: (4,885) (5,863) (3,438)<br />
Final dividend for 2006: 500 cents (2,714) – –<br />
Special dividend for 2006: 400 cents (2,171) – –<br />
Final dividend for 2007: 600 cents – (3,198) –<br />
Special dividend for 2007: 500 cents – (2,665) –<br />
Final dividend for 2008 : 660 cents (3,438)<br />
Dividend payable at end of year 15 20 23
312<br />
<strong>Telkom</strong> Annual Report 2009<br />
Notes to the annual financial statements (continued)<br />
for the three years ended March 31, 2009<br />
33. ACQUISITION OF MINORITY INTEREST IN SUBSIDI<strong>AR</strong>Y<br />
Multi-Links Telecommunications (Proprietary) Limited (Multi-Links)<br />
<strong>Telkom</strong> acquired 75% of the issued share capital of Multi-Links Telecommunications Limited through <strong>Telkom</strong> International (Proprietary) Limited,<br />
from Kenston Investment Limited on May 1, 2007. <strong>Telkom</strong> also granted Kenston the irrevocable right and option (put option) to require<br />
<strong>Telkom</strong> to acquire all of the shares held by Kenston (25% shareholding) in Multi-Links, at any time during the 90 day period following<br />
the second anniversary of the effective date. The put option was exercised on January 21, 2009 for R1,328 million (US$130 million at<br />
US$1 = R10,2188).<br />
34. COMMITMENTS<br />
2007 2008 2009<br />
Rm Rm Rm<br />
Capital commitments<br />
Capital commitments authorised 7,000 7,000 6,991<br />
Commitments against authorised capital expenditure 507 652 539<br />
Authorised capital expenditure not yet contracted 6,493 6,348 6,452<br />
Capital commitments comprise commitments for property, plant and equipment and software included in intangible assets.<br />
Management expects these commitments to be financed from proceeds of Vodacom sale.<br />
2010 FIFA World Cup commitments<br />
The FIFA World Cup commitment is an executory contract which requires the Company to develop the fixed-line components of the<br />
necessary telecommunications infrastructure needed to broadcast this event to the world. This encompasses the provisioning of the fixedline<br />
telecommunications related products and services and, where applicable, the services of qualified personnel necessary for the<br />
planning, management, delivery, installation and de-installation, operation, maintenance and satisfactory functioning of these products and<br />
services. Furthermore as a National Supporter, <strong>Telkom</strong> owns a tier 3 sponsorship that grants <strong>Telkom</strong> a package of advertising, promotional<br />
and marketing rights that are exercisable within the borders of South Africa. <strong>Telkom</strong> entered into a barter transaction in return for which it<br />
has an outstanding commitment to FIFA of R243 million (2008: R260 million). This has been recognised in intangible assets (note 10).
Notes to the annual financial statements (continued)<br />
for the three years ended March 31, 2009<br />
34. COMMITMENTS (continued)<br />
<strong>Telkom</strong> Annual Report 2009 313<br />
Total 5 years<br />
Rm Rm Rm Rm<br />
Operating lease commitments and receivables<br />
2009<br />
Cash flow<br />
Land and buildings 432 158 262 12<br />
Rental receivable on buildings (271) (99) (170) (2)<br />
Vehicles 1,137 261 876 –<br />
Equipment 15 6 9 –<br />
Customer premises equipment receivable 88 49 39 –<br />
Total cash flow 1,401 375 1,016 10<br />
The above figures represent actual cash flows relating<br />
to operating leases expected during the periods<br />
specified. However, due to the straight-lining effect of<br />
operating leases, the amounts that would be recognised<br />
in the income statement in the periods specified, would<br />
be as follows:<br />
Income statement<br />
Land and buildings 399 152 237 10<br />
Rental receivable on buildings (250) (96) (153) (1)<br />
Vehicles 1,137 261 876 –<br />
Equipment 15 6 9 –<br />
Customer premises equipment receivable 88 49 39 –<br />
Total to be recognised in the income statement 1,389 372 1,008 9<br />
Vehicles, equipment and customer premises equipment<br />
have no fixed annual escalation, therefore the cash<br />
flows and income statement recognition would be<br />
the same.<br />
2008<br />
Cash flow<br />
Land and buildings 366 141 224 1<br />
Rental receivable on buildings (266) (94) (169) (3)<br />
Vehicles 1,430 226 1,204 –<br />
Equipment 13 10 3 –<br />
Customer premises equipment receivable (84) (45) (39) –<br />
Total cash flow 1,459 238 1,223 (2)<br />
Income statement<br />
Land and buildings 330 133 196 1<br />
Rental receivable on buildings (246) (92) (152) (2)<br />
Vehicles 1,430 226 1,204 –<br />
Equipment 13 10 3 –<br />
Customer premises equipment receivable (84) (45) (39) –<br />
Total to be recognised in the income statement 1,443 232 1,212 (1)
314<br />
<strong>Telkom</strong> Annual Report 2009<br />
Notes to the annual financial statements (continued)<br />
for the three years ended March 31, 2009<br />
34. COMMITMENTS (continued)<br />
Operating lease commitments and receivables (continued)<br />
Total 5 years<br />
Rm Rm Rm Rm<br />
2007<br />
Cash flow<br />
Land and buildings 371 134 236 1<br />
Rental receivable on buildings (269) (91) (174) (4)<br />
Vehicles 564 564 – –<br />
Equipment 23 6 17 –<br />
Customer premises equipment receivable (57) (30) (27) –<br />
Total cash flow 632 583 52 (3)<br />
Income statement<br />
Land and buildings 332 128 203 1<br />
Rental receivable on buildings (249) (90) (156) (3)<br />
Vehicles 564 564 – –<br />
Equipment 23 6 17 –<br />
Customer premises equipment receivable (57) (30) (27) –<br />
Total to be recognised in the income statement 613 578 37 (2)<br />
Operating leases<br />
The Company leases certain buildings, vehicles and equipment. The majority of the lease terms negotiated for equipment-related premises<br />
are ten years with other leases signed for five and three years. The majority of the leases normally contain an option clause entitling <strong>Telkom</strong><br />
to renew the lease agreements for a period usually equal to the main lease term.<br />
The minimum lease payments under these agreements are subject to annual escalations, which range from 6% to 15%.<br />
Penalties in terms of the lease agreements are only payable should <strong>Telkom</strong> vacate the premises and negotiate to terminate the lease<br />
agreement prior to the expiry date, in which case the settlement payment will be negotiated in accordance with the market conditions of<br />
the premises. Future minimum lease payments under operating leases are included in the note above. Onerous leases for buildings, of<br />
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<br />
provisions, refer to note 24.<br />
The master lease agreement for vehicles was for a period of five years and then extended for an additional three years which resulted in<br />
the lease expiring on March 31, 2008. During August 2007 new terms were negotiated and approved and as a result the operating<br />
lease commitments for vehicles are based on the new agreement which expires on March 31, 2013.<br />
In accordance with this agreement <strong>Telkom</strong> is not allowed to lease any similar vehicle as specified in the contract from any other service<br />
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<br />
which are not part of the agreement.<br />
The agreement is structured to have no lease increases on vehicles that are continually leased from the lessor. If a vehicle is, however,<br />
replaced by a new similar vehicle, the lease costs of the newest vehicle will increase by the Consumer Price Index. All leased vehicles are,<br />
however, subject to any variance in the interest rate fluctuations and are adjusted as and when the adjustments are announced by the South<br />
African Reserve Bank. The leases of individual vehicles are renewed annually.
Notes to the annual financial statements (continued)<br />
for the three years ended March 31, 2009<br />
34. COMMITMENTS (continued)<br />
Operating leases (continued)<br />
<strong>Telkom</strong> Annual Report 2009 315<br />
The master lease agreements for office equipment are with two suppliers with initial periods of 36 months effective from November 25,<br />
2005. Upon expiry of the initial lease agreement on November 25, 2008, an extension of the lease was negotiated until November 24,<br />
2009. In terms of these agreements the leases of individual equipment shall be valid at a fixed fee for the entire period.<br />
Total 5 years<br />
Rm Rm Rm Rm<br />
Finance lease commitments<br />
Vehicles<br />
2009<br />
Minimum lease payments 187 47 140 –<br />
Finance charges (38) (15) (23) –<br />
Finance lease obligation 149 32 117 –<br />
2008<br />
Minimum lease payments 242 48 194 –<br />
Finance charges (59) (20) (39) –<br />
Finance lease obligation 183 28 155 –<br />
Buildings<br />
2009<br />
Minimum lease payments 1,652 111 545 995<br />
Finance charges (822) (111) (426) (284)<br />
Finance lease obligation 830 – 119 711<br />
2008<br />
Minimum lease payments 1,778 126 502 1,150<br />
Finance charges (936) (114) (439) (383)<br />
Finance lease obligation* 842 12 63 767<br />
2007<br />
Minimum lease payments 1,897 120 487 1,290<br />
Finance charges (1,051) (116) (446) (489)<br />
Finance lease obligation 846 4 41 801<br />
Equipment<br />
2009<br />
Minimum lease payments 7 5 2 –<br />
Finance charges (2) (1) (1) –<br />
Finance lease obligation 5 4 1 –<br />
*These prior year figures have been restated to include the finance lease obligation with regard to the Campus property.
316<br />
<strong>Telkom</strong> Annual Report 2009<br />
Notes to the annual financial statements (continued)<br />
for the three years ended March 31, 2009<br />
34. COMMITMENTS (continued)<br />
Finance lease commitments (continued)<br />
Equipment (continued)<br />
Total 5 years<br />
Rm Rm Rm Rm<br />
2008<br />
Minimum lease payments 16 – 16 –<br />
Finance charges (2) – (2) –<br />
Finance lease obligation 14 – 14 –<br />
2007<br />
Minimum lease payments 6 – 6 –<br />
Finance charges – – – –<br />
Finance lease obligation 6 – 6 –<br />
Finance leases<br />
Finance leases on vehicles relates to the lease of Swap bodies. The lease term for the Swap bodies is April 2008 to April 2013.<br />
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<br />
negotiated for the buildings is for a period of 25 years ending 2019. The minimum lease payments are subject to an annual escalation<br />
of 10% p.a. <strong>Telkom</strong> has the right to sublet part of the buildings. In case of breach of contract, the lessor is entitled to cancel the lease<br />
agreement and claim damages.<br />
Finance charges accruing on one of the Company’s building leases exceed the lease payments for the next three years. Minimum lease<br />
payments for the next five years do not result in any income accruing to the Company.<br />
Finance leases on equipment mainly relates to office equipment. The lease term negotiated for the finance leases is for the period of three<br />
years ending in 2011.<br />
35. CONTINGENCIES<br />
Supplier dispute<br />
Telcordia instituted arbitration proceedings against <strong>Telkom</strong> in March 2001 before a single arbitrator of the International Court of Arbitration,<br />
operating under the auspices of the International Chamber of Commerce. Telcordia is seeking to recover approximately US$130 million<br />
for monies outstanding and damages, plus costs and interest at a rate of 15.5% per year which was increased by Telcordia to<br />
US$172 million in the 2007 financial year and subsequently decreased to US$128 million in the 2008 financial year. The arbitration<br />
proceeding relates to the cancellation of an agreement entered into between <strong>Telkom</strong> and Telcordia during June 1999 for the development<br />
and supply of an integrated end-to-end customer assurance and activation system by Telcordia.<br />
In September 2002, the arbitrator found that <strong>Telkom</strong> had wrongfully repudiated the contract and a partial award was issued by the<br />
arbitrator in favour of Telcordia. <strong>Telkom</strong> subsequently filed an application in the South African High Court to review and set aside the partial<br />
award.<br />
On November 27, 2003, the South African High Court set aside the partial award and issued a cost order in favour of <strong>Telkom</strong>. On<br />
May 3, 2004, the South African High Court dismissed an application by Telcordia for leave to appeal and ordered Telcordia to pay the<br />
legal costs of <strong>Telkom</strong>.<br />
On November 29, 2004, the Supreme Court of Appeals granted Telcordia leave to appeal. Telcordia filed a notice of appeal and also<br />
petitioned the United States District Court for the District of Columbia to confirm the partial award, which petition was dismissed, along<br />
with a subsequent appeal. Following the dismissal of the appeal, Telcordia filed a similar petition in the United States District Court of New<br />
Jersey. The United States District Court of New Jersey also dismissed Telcordia’s petition, reaffirming the decision of the United States District<br />
Court of Columbia. Telcordia appealed this dismissal, which was later dismissed by the Appeals Court of New Jersey.
Notes to the annual financial statements (continued)<br />
for the three years ended March 31, 2009<br />
35. CONTINGENCIES (continued)<br />
Supplier dispute (continued)<br />
<strong>Telkom</strong> Annual Report 2009 317<br />
The appeal by Telcordia in the Supreme Court of Appeals was set down for and heard on October 30 and October 31, 2006. Following<br />
the successful upholding of the appeal, <strong>Telkom</strong> filed an application for leave to appeal to the Constitutional Court on only the issue revolving<br />
around the Supreme Court of Appeals’ failure to recognise <strong>Telkom</strong>’s rights of access to the courts under the South African Arbitration Act.<br />
The Constitutional Court has since dismissed <strong>Telkom</strong>’s appeal with costs. The Constitutional Court judgment brought to finality the dispute<br />
over the merits of Telcordia’s claim against <strong>Telkom</strong> and the parties reconvened the arbitration in May 2007 to deal with the amount of<br />
damages to which Telcordia is entitled.<br />
Two hearings were held at the International Dispute Resolutions Centre, or IDRC. The first hearing was held in London on May 21, 2007<br />
and was a ’directions hearing’, in terms of which the parties consented to a ruling by the arbitrator setting out a consolidated list of<br />
proposals and issues to form part of the damages hearing.<br />
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<br />
out of part of <strong>Telkom</strong>’s defence on the basis that <strong>Telkom</strong> had raised issues in its defence that had already been heard by the arbitrator prior<br />
to his partial award. This application was dismissed by the arbitrator. The arbitrator also made a ruling compelling Telcordia to provide<br />
certain particulars requested by <strong>Telkom</strong> with regard to the claims by Telcordia. In his ruling, the arbitrator also set out a list of issues for<br />
determination of the damages.<br />
The mediation took place in London in February and April of 2008 without success. In the interim the parties have agreed to the<br />
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<br />
provided by Telcordia, who will make a recommendation to the arbitrator in dealing with the amount of the claims. A further hearing was<br />
held before the arbitrator in October 2008 during which the arbitrator permitted <strong>Telkom</strong> to amend its statement of defence. Further hearings<br />
were held before the software expert in November 2008 and he has made his report available. Further hearings took place before the<br />
arbitrator in April 2009.<br />
The parties have now agreed that the whole question of “integration” of the software will be done at an experts only hearing (no lawyers)<br />
before Mr P Burns, a software expert in Johannesburg during October 2009. The hearings before the software expert will have an impact<br />
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<br />
Johannesburg.<br />
Although <strong>Telkom</strong> is currently unable to predict the exact amount that it may eventually be required to pay Telcordia, it has made provisions<br />
for estimated liabilities in respect of the Telcordia claim in the sum of US$70 million (R664 million), including interest and legal fees. <strong>Telkom</strong><br />
will be required to fund any payments to Telcordia from cash flows or the incurrence of debt and the amount of any damages above<br />
<strong>Telkom</strong>’s provision would increase <strong>Telkom</strong>’s liabilities and decrease its net profit, which could have a material adverse effect on its financial<br />
condition, cash flows and results of operations.<br />
A provision has been raised based on management’s best estimate of the probable payments in this regard.<br />
2007 2008 2009<br />
Rm Rm Rm<br />
Supplier dispute liability included in current portion of provisions 527 569 664*<br />
The provision has increased from March 31, 2007 due to exchange rate movements.<br />
* US$70 million (2008: US$70 million; 2007 US$70 million).
318<br />
<strong>Telkom</strong> Annual Report 2009<br />
Notes to the annual financial statements (continued)<br />
for the three years ended March 31, 2009<br />
35. CONTINGENCIES (continued)<br />
Competition Commission<br />
<strong>Telkom</strong> is a party to a number of legal and arbitration proceedings filed by parties with the South African Competition Commission alleging<br />
anti-competitive practices described below. If <strong>Telkom</strong> were found to have committed prohibited practices as contained in the Competition<br />
Act, 1998, as amended, <strong>Telkom</strong> could be required to cease these practices, divest these businesses and be fined a penalty of up to 10%<br />
of <strong>Telkom</strong>’s annual turnover, excluding the turnover of subsidiaries and joint ventures, for each complaint for the financial years prior to the<br />
dates of the complaints. The Competition Commission has to date not imposed the maximum penalty on any offender.<br />
On July 31, 2008, <strong>Telkom</strong> received a summons issued by the Competition Commission requesting information in connection with<br />
investigations being conducted by the Competition Commission into five complaints against <strong>Telkom</strong> described in greater detail below by<br />
the Internet Service Association, MWEB, Internet solutions and Verizon SA Limited. The summons was subsequently withdrawn by the<br />
Competition Commission following on agreement with <strong>Telkom</strong> in a co-operative process with the Competition Commission as part of the<br />
Competition Commission’s ongoing investigations into these complaints. The investigation is expected to be finalised in the 2009 calendar<br />
year.<br />
As competition continues to increase, we expect that we will become involved in an increasing number of disputes regarding the legality<br />
of services and products provided by us and third parties. These disputes may range from court lawsuits to complaints lodged by or against<br />
us with various regulatory bodies. We are currently unable to predict the amount that we may eventually be required to pay in these<br />
proceedings, however, we have not included provisions for any of these claims in our financial statements. In addition, we may need to<br />
spend substantial amounts defending or prosecuting these claims even if we are ultimately successful. If <strong>Telkom</strong> is required to cease these<br />
practices, divest itself of the relevant businesses or pay significant fines, <strong>Telkom</strong>’s business and financial condition could be materially<br />
adversely affected and its revenue and net profit could decline. We may be required to fund any penalties or damages from cash flows<br />
or drawings on our credit facilities, which could cause our indebtedness to increase.<br />
Independent Cellular Services Provider Association of South Africa (ICSPA)<br />
In 2002, the ICSPA filed a complaint against <strong>Telkom</strong> at the Competition Commission in terms of the Competition Act, alleging that <strong>Telkom</strong><br />
had entered into contracts with large corporations, providing large discounts with the effect of discouraging the corporates from using the<br />
‘premicell’ device installed by their members. ICSPA also alleged various contraventions of the Competition Act by <strong>Telkom</strong>. <strong>Telkom</strong> provided<br />
the Competition Commission with certain information requested. <strong>Telkom</strong> also referred the Competition Commission to its High Court<br />
application in respect of utilisation of the ‘premicell’ device. The Competition Commission declined to refer the matter to the Competition<br />
Tribunal. ICSPA then referred the matter to the Competition Tribunal on September 18, 2003. <strong>Telkom</strong> filed its answering affidavit on<br />
November 28, 2003. ICSPA has taken no further action since then.<br />
The South African Value Added Network Services (SAVA)<br />
On May 7, 2002, the South African Value Added Network Services Providers’ Association, an association of VANS providers, filed<br />
complaints against <strong>Telkom</strong> at the Competition Commission of the Republic of South Africa under the South African Competition Act, 89 of<br />
1998, alleging, among other things, that <strong>Telkom</strong> was abusing its dominant position in contravention of the Competition Act, 89 of 1998,<br />
and that it was engaged in price discrimination. The Competition Commission determined, among other things, that several aspects of<br />
<strong>Telkom</strong>’s conduct contravened the Competition Act, 89 of 1998, and referred certain of the relevant complaints to the Competition Tribunal<br />
for adjudication. The referred complaints deal with <strong>Telkom</strong>’s alleged refusal to provide telecommunications facilities to certain VANS<br />
providers to construct their networks, refusal to lease access facilities to VANS providers, provision of bundled and cross subsidised<br />
competitive services with monopoly services, discriminatory pricing with regard to leased line services and alleged refusal to peer with<br />
certain VANS providers.
Notes to the annual financial statements (continued)<br />
for the three years ended March 31, 2009<br />
35. CONTINGENCIES (continued)<br />
Competition Commission (continued)<br />
The South African Value Added Network Services (SAVA) (continued)<br />
<strong>Telkom</strong> Annual Report 2009 319<br />
<strong>Telkom</strong> brought an application for review against the Competition Commission and the Competition Tribunal in the South African High<br />
Court, in respect of the decision by the Competition Commission to refer the matters to the Competition Tribunal. <strong>Telkom</strong> is of the view that<br />
the Competition Tribunal does not have jurisdiction to adjudicate these matters and argued that ICASA has the requisite jurisdiction. In the<br />
review application, <strong>Telkom</strong> also sought to set aside the decision by the Competition Commission to refer the complaints to the Competition<br />
Tribunal on the basis that the Competition Commission was biased, that the referral was out of time and that the Competition Commission<br />
had not adhered to the memorandum of understanding between it and ICASA. Only the Competition Commission opposed the application<br />
and filed an answering affidavit.<br />
The main complaint at the Competition Commission was held over pending the outcome of the review application.<br />
The application for review was heard on April 24 and 25, 2008. The South African High Court judge set aside the decision of the<br />
Competition Commission to refer the SAVA complaints and the Omnilink complaint against <strong>Telkom</strong> discussed below to the Competition<br />
Tribunal. The decision was made based on three grounds, namely that:<br />
• the Competition Commission failed to comply with the peremptory provisions of the memorandum of understanding between the<br />
Competition Commission and ICASA;<br />
• the referral was out of time, on the basis that the agreements with the complainants to extend the time which the Competition Commission<br />
was allowed to investigate the complaints were invalid; and<br />
• the Competition Commission’s reliance on a report by the Link Centre created reasonable apprehension of bias, since some of the<br />
complainants contribute financially to the Link Centre and the Link Centre’s advisory board includes employees of the complainants in<br />
the SAVA complaints.<br />
The judge did not make a decision on the question of jurisdiction (ie, whether ICASA or the Competition Tribunal has the jurisdiction to<br />
deal with competition matters in the electronic communications industry).<br />
On july 3, 2008, the Competition Commission filed an application for leave to appeal the decision of the High Court on the basis that<br />
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<br />
a ground for review. <strong>Telkom</strong> then filed an application for leave to cross-appeal on July 11, 2008. The main basis of <strong>Telkom</strong>’s cross-appeal<br />
is that <strong>Telkom</strong> believes that the judge erred in failing to make a decision as to whether ICASA or the Competition Commission and<br />
Competition Tribunal should deal with this type of complaint. The application for leave to appeal as well as the application for leave to<br />
cross-appeal were granted by the Pretoria High Court on October 9, 2008. The parties are attending to the filing of the record of<br />
proceedings before the High Court as well as the parties’ heads of argument, after which the Registrar of the Supreme Court of Appeal<br />
will inform the parties of the date for the hearing. The main complaint before the Competition Tribunal will continue to be held over pending<br />
the outcome of the appeal and cross-appeal.<br />
This matter is not expected to be finalised within the 2010 financial year.<br />
Omnilink<br />
On August 22, 2002, Omnilink filed a complaint against <strong>Telkom</strong> at the Competition Commission alleging that <strong>Telkom</strong> was abusing its<br />
dominance by discriminating in its price for Diginet services as against those charged to VANS and the price charged to customers who<br />
apply for a <strong>Telkom</strong> VPN solution. The Competition Commission conducted an enquiry and subsequently referred the complaint, together<br />
with the SAVA complaint, to the Competition Tribunal for adjudication. This matter is currently being dealt with together with the SAVA matter<br />
discussed above.
320<br />
<strong>Telkom</strong> Annual Report 2009<br />
Notes to the annual financial statements (continued)<br />
for the three years ended March 31, 2009<br />
35. CONTINGENCIES (continued)<br />
Competition Commission (continued)<br />
Orion/<strong>Telkom</strong> (Standard Bank and Edcon): Competition Tribunal<br />
In April 2003, Orion filed a complaint against <strong>Telkom</strong>, Standard Bank and Edcon at the Competition Commission concerning <strong>Telkom</strong>’s<br />
discounts offered on public switched telecommunication services to corporate customers. In terms of the rules of the Competition<br />
Commission, the Competition Commission, who acts as an investigator, had one year to investigate the complaint. Orion simultaneously<br />
with the filing of the complaint, also filed an application against <strong>Telkom</strong>, Standard Bank and Edcon at the Competition Tribunal, for an<br />
interim order interdicting and restraining <strong>Telkom</strong> from offering Orion’s corporate customers reduced rates associated with <strong>Telkom</strong>’s Cellsaver<br />
discount plan.<br />
The Competition Commission completed its investigation and decided that there was no prima facie evidence of any contravention of the<br />
Competition Act. Orion however referred the matter to the Competition Tribunal in terms of section 51 of the Competition Act, which allows<br />
for parties to refer matters to the Competition Tribunal themselves. <strong>Telkom</strong> has not yet filed its answering affidavit in the main complaint<br />
before the Competition Tribunal. To date there have been no further developments on this matter.<br />
The Internet Service Providers Association (ISPA)<br />
In December 2005, the ISPA, an association of ISPs, filed complaints against <strong>Telkom</strong> at the Competition Commission regarding alleged<br />
anti-competitive practices on the part of <strong>Telkom</strong>. The complaints deal with the cost of access to SAIX, the prices offered by <strong>Telkom</strong>Internet,<br />
the alleged delay in provision of facilities to ISPs and the alleged favourable installation timelines offered to <strong>Telkom</strong>Internet customers. The<br />
Competition Commission has formally requested <strong>Telkom</strong> to provide it with certain records of orders placed for certain services, in an attempt<br />
to first investigate the latter aspects of the complaint. <strong>Telkom</strong> provided the Competition Commission with the information.<br />
MWEB and Internet Solutions (IS)<br />
On June 29, 2005, MWEB and Internet Solutions, or IS, jointly lodged a complaint with the Competition Commission against <strong>Telkom</strong> and<br />
also requested interim relief at the Competition Tribunal. The complaint at the Competition Commission mainly deals with <strong>Telkom</strong>’s pricing<br />
for ADSL retail products and its IP Connect products, the termination of the peering link between <strong>Telkom</strong> and IS, the wholesale pricing of<br />
SAIX bandwidth for ADSL users of other internet service providers, the architecture of <strong>Telkom</strong>’s ADSL access route and the manner in which<br />
internet service providers can only connect to <strong>Telkom</strong>’s edge service router via IP Connect as well as alleged excessive pricing for bandwidth<br />
on <strong>Telkom</strong>’s international undersea cable. The application for interim relief at the Competition Tribunal dealt with allegations that <strong>Telkom</strong><br />
should maintain the peering link between IS and <strong>Telkom</strong> in terms of its current peering agreement, and demanded that <strong>Telkom</strong> treat the<br />
traffic generated by ADSL customers of MWEB as traffic destined for the peering link and that <strong>Telkom</strong> upgrade its peering link to<br />
accommodate the increased ADSL traffic emanating from MWEB and maintain a maximum of 65% utilisation. <strong>Telkom</strong> filed its answering<br />
affidavit, and is awaiting IS and MWEB’s replying affidavit.<br />
Since then, <strong>Telkom</strong> has entered into a new peering agreement with IS and has responded to numerous documentation and information<br />
requests from the Competition Commission. To date neither MWEB nor IS has filed a replying affidavit in the interim relief application.<br />
MWEB<br />
On June 5, 2007, MWEB brought an application against <strong>Telkom</strong> for interim relief at the Competition Tribunal with regard to the manner<br />
in which <strong>Telkom</strong> provides wholesale ADSL internet connections. MWEB requested the Competition Tribunal to grant an order of interim<br />
relief against <strong>Telkom</strong> to charge MWEB a wholesale price for the provision of ADSL internet connections which is not higher than the lowest<br />
retail price. MWEB further applied for an order that <strong>Telkom</strong> implement the migration of end customers from <strong>Telkom</strong> PSTS ADSL access to<br />
MWEB without interruption of the service. <strong>Telkom</strong> raised the objection that the Competition Tribunal does not have jurisdiction to hear the<br />
matter in its answering affidavit filed at the Competition Tribunal. <strong>Telkom</strong> still had to “plead over” as to the merits of the matter. <strong>Telkom</strong> also<br />
filed an application in the Transvaal Provincial Division of the South African High Court on July 3, 2007 for an order declaring that the<br />
Competition Tribunal does not have jurisdiction to hear the application for interim relief made to it by MWEB.
Notes to the annual financial statements (continued)<br />
for the three years ended March 31, 2009<br />
35. CONTINGENCIES (continued)<br />
Competition Commission (continued)<br />
MWEB (continued)<br />
<strong>Telkom</strong> Annual Report 2009 321<br />
The application before the High Court was set down for hearing during the first quarter of the 2009 financial year. The parties however<br />
entered into settlement negotiations, which resulted in the withdrawal of the interim relief application at the Competition Tribunal by MWEB<br />
as well as a withdrawal of the jurisdictional challenge filed at the South African High Court by <strong>Telkom</strong>. The parties are in further<br />
negotiations.<br />
Verizon SA Limited (Verizon)<br />
Verizon filed a complaint against <strong>Telkom</strong> on March 22, 2007 alleging that <strong>Telkom</strong> charges an excessive price on services rendered to<br />
Verizon, thereby inducing Verizon’s customers not to deal with Verizon, engages in exclusionary conduct through “margin squeeze” in<br />
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<br />
Verizon, and that <strong>Telkom</strong> engages in price discrimination against Verizon.<br />
Internet Solutions (IS)<br />
IS filed a complaint against <strong>Telkom</strong> at the Competition Commission during December 2007. The complaint alleges abusive conduct by<br />
<strong>Telkom</strong>. IS specifically alleges that <strong>Telkom</strong> is charging excessive prices that bear no reasonable relation to the economic value of the goods<br />
or services, that <strong>Telkom</strong> has raised the wholesale cost to downstream competitors, while also reducing the downstream retail price to clients;<br />
engaging in margin squeeze, that <strong>Telkom</strong> has introduced a series of bundled products (namely <strong>Telkom</strong> Closer Products) that limit the ability<br />
of rivals in particular markets to compete effectively, and <strong>Telkom</strong> is offering discriminatory prices in relation to a number of infrastructural<br />
and service items that IS is compelled to purchase from <strong>Telkom</strong>.<br />
While that complaint was being investigated by the Competition Commission, IS brought an application to the Competition Commission<br />
for interim relief requesting: that <strong>Telkom</strong> be ordered to charge IS a wholesale price for telecommunication facilities to provide virtual private<br />
network services to its customers no higher than the lowest retail price for such connection charged to <strong>Telkom</strong>’s VPN Supreme customers<br />
and ordering that the costs of the application be paid by <strong>Telkom</strong>.<br />
<strong>Telkom</strong> opposed the application by IS at the Competition Tribunal although it is unable to finalise its opposing papers due to difficulties<br />
associated with the manner in which IS claimed confidentiality over the application. No further activity has taken place with regard to the<br />
interim relief application to date.<br />
Maredi Telecom and Broadcasting (Proprietary) Limited (Maredi)<br />
Maredi served a notice of motion on <strong>Telkom</strong>, Ericsson SA and Telsaf Data (Pty) Limited on January 8, 2009. The matter relates to a tender<br />
published by <strong>Telkom</strong> for the supply of point-to-point split mount microwave equipment. Maredi, Telsaf, Ericsson and a fourth company,<br />
Mobax, were shortlisted. The tender was awarded by <strong>Telkom</strong> to Telsaf and Ericsson.
322<br />
<strong>Telkom</strong> Annual Report 2009<br />
Notes to the annual financial statements (continued)<br />
for the three years ended March 31, 2009<br />
35. CONTINGENCIES (continued)<br />
Competition Commission (continued)<br />
Maredi Telecom and Broadcasting (Proprietary) Limited (Maredi) (continued)<br />
Maredi applied for a court order, with a court hearing date set for February 3, 2009, requesting that the court prevent <strong>Telkom</strong> from entering<br />
into a contract with Ericsson and Telsaf or either party, and from ordering goods or services from Ericsson and Telsaf pursuant to the tender.<br />
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<br />
aforementioned parties, and refer the tender back to <strong>Telkom</strong> in order for <strong>Telkom</strong> to reconsider its award. Maredi alleged that there were<br />
certain irregularities in the tender process in that <strong>Telkom</strong> did not follow fair procedures by failing to comply with its own mandatory<br />
procedural requirements, that <strong>Telkom</strong> acted arbitrarily and in bad faith, that <strong>Telkom</strong> was biased in favour of Ericsson and that Ericsson should<br />
have been disqualified as it failed to meet <strong>Telkom</strong>’s critical criteria as set out in the tender.<br />
Numerous allegations in the application, including accusations against certain members of the Procurement Review Council and allegations<br />
by Maredi of compliance by them to the technical critical criteria, were refuted by <strong>Telkom</strong>. <strong>Telkom</strong> and Ericsson opposed the application<br />
and filed their respective opposing affidavits. Telsaf did not oppose the application. The matter was ultimately set down for hearing on<br />
February 20, 2009 and Maredi’s application was dismissed with costs. However, Maredi is proceeding with a review application in the<br />
ordinary course and <strong>Telkom</strong> is opposing the application.<br />
<strong>Telkom</strong> is not currently able to predict when these disputes may be resolved or the amount that it may eventually be required to pay,<br />
however, it has not included provisions for all of these claims in its annual financial statements. In addition, <strong>Telkom</strong> may need to spend<br />
substantial amounts defending or prosecuting these claims even if it was ultimately successful. If <strong>Telkom</strong> were to lose these or future legal<br />
and arbitration proceedings, it could be prohibited from engaging in certain business activities and could be required to pay substantial<br />
penalties and damages, which could cause its revenue and net profit to decline and have a material adverse impact on its business and<br />
financial condition. <strong>Telkom</strong> may be required to fund any penalties or damages from cash flows or drawings on its credit facilities, which<br />
could cause its indebtedness to increase.<br />
<strong>Telkom</strong> is party to various additional proceedings and lawsuits in the ordinary course of its business, which management does not believe<br />
will have a material adverse impact on <strong>Telkom</strong>.<br />
Negative working capital ratio<br />
At each of the financial periods ended March 31, 2009, 2008 and 2007 the Company had a negative working capital ratio. A negative<br />
working capital ratio arises when current liabilities are greater than current assets. Current liabilities are intended to be financed from<br />
operating cash flows, new borrowings and borrowings available under existing credit facilities.
Notes to the annual financial statements (continued)<br />
for the three years ended March 31, 2009<br />
36. DIRECTORS’ INTERESTS<br />
<strong>Telkom</strong> Annual Report 2009 323<br />
ST Arnold, RJ Huntley, E Spio-Garbrah, KST Matthews and VB Lawrence, five of <strong>Telkom</strong>’s Board members, are the South African<br />
Government’s representative on <strong>Telkom</strong>’s Board of Directors. At March 31, 2009, the Government held 39.76% (2008: 39.42%, 2007:<br />
38.83%) of <strong>Telkom</strong>’s shares.<br />
B Molefe is a Public Investment Corporation (‘PIC’) representative on <strong>Telkom</strong>’s Board of Directors. As at March 31, 2009 the PIC held<br />
15.63% (2008: 15.23%, 2007: 15.27%) of <strong>Telkom</strong>’s shares.<br />
Beneficial Non-beneficial<br />
Direct Indirect Direct Indirect<br />
Directors’ shareholding (Number of shares)<br />
2009<br />
Executive<br />
RJ September 90,815 1,820 – –<br />
PG Nelson 19,182 – – –<br />
109,997 1,820 – –<br />
Non-executive<br />
PG Joubert – 15,000 – –<br />
D Barber – 1,200 – –<br />
– 16,200 – –<br />
2008<br />
Executive<br />
RJ September 7,155 – – –<br />
Total 7,155 – – –<br />
2007<br />
Non-executive<br />
TF Mosololi 455 – – –<br />
Total 455 – – –<br />
The directors’ shareholding changed between the balance sheet date and the date of issue of the financial statements and this has been<br />
reflected in the above information.<br />
2007 2008 2009<br />
Rm Rm Rm<br />
Directors’ emoluments 7 36 20<br />
Executive<br />
For services as directors<br />
Non-executive<br />
4 31 15<br />
For services as directors 3 5 5
324<br />
<strong>Telkom</strong> Annual Report 2009<br />
Notes to the annual financial statements (continued)<br />
for the three years ended March 31, 2009<br />
36. DIRECTORS’ INTERESTS (continued)<br />
Directors’ emoluments (continued)<br />
Performance Fringe and<br />
Fees Remuneration bonus other benefits Total<br />
R R R R R<br />
2009<br />
Emoluments per director:<br />
Non-executive 5,028,084 – – – 5,028,084<br />
ST Arnold 1,030,000 – – – 1,030,000<br />
B du Plessis 498,000 – – – 498,000<br />
PSC Luthuli 642,000 – – – 642,000<br />
KST Matthews 441,000 – – – 441,000<br />
B Molefe 159,551 – – – 159,551<br />
AG Rhoda 124,001 – – – 124,001<br />
RJ Huntley 533,000 – – – 533,000<br />
Dr E Spio-Garbrah** 622,750 – – – 622,750<br />
Dr VB Lawrence** 359,000 – – – 359,000<br />
DD Barber 293,667 – – – 293,667<br />
PG Joubert 302,778 – – – 302,778<br />
Executive – 4,530,912 2,289,947 7,848,357 14,669,216<br />
RJ September* – 3,555,800 1,841,396 7,430,452 12,827,648<br />
PG Nelson* – 975,112 448,551 417,905 1,841,568<br />
Total emoluments – paid by <strong>Telkom</strong> 5,005,747 4,530,912 2,289,947 7,848,357 19,674,963<br />
2008<br />
Emoluments per director:<br />
Non-executive 4,633,933 – – – 4,633,933<br />
ST Arnold 1,124,373 – – – 1,124,373<br />
B du Plessis 393,967 – – – 393,967<br />
MJ Lamberti – – – – –<br />
PSC Luthuli 502,117 – – – 502,117<br />
TD Mahloele 357,684 – – – 357,684<br />
KST Matthews 501,217 – – – 501,217<br />
TF Mosololi 174,960 – – – 174,960<br />
M Mostert *** 229,433 – – – 229,433<br />
DD Tabata 250,583 – – – 250,583<br />
YR Tenza 305,633 – – – 305,633<br />
PL Zim 5,333 – – – 5,333<br />
B Molefe 20,497 – – – 20,497<br />
A Rhoda 14,286 – – – 14,286<br />
RJ Huntley 193,833 – – – 193,833<br />
Dr E Spio-Garbrah** 273,841 – – – 273,841<br />
Dr VB Lawrence** 286,176 – – – 286,176<br />
Executive – 14,489,833 3,436,308 13,244,896 31,171,037<br />
RJ September* – 2,453,757 3,436,308 13,218,772 19,108,837<br />
CEO – 1,016,524 3,436,308 10,438,538 14,891,370<br />
Acting CEO – 1,437,233 – 2,780,234 4,217,467<br />
LRR Molotsane* – 12,036,076 – 26,124 12,062,200<br />
Total emoluments – paid by <strong>Telkom</strong> 4,633,933 14,489,833 3,436,308 13,244,896 35,804,970
Notes to the annual financial statements (continued)<br />
for the three years ended March 31, 2009<br />
36. DIRECTORS’ INTERESTS (continued)<br />
Directors’ emoluments (continued)<br />
Performance Fringe and<br />
<strong>Telkom</strong> Annual Report 2009 325<br />
Fees Remuneration bonus other benefits Total<br />
R R R R R<br />
2007<br />
Emoluments per director:<br />
Non-executive 2,641,168 – – – 2,641,168<br />
NE Mtshotshisa 463,050 – – – 463,050<br />
ST Arnold 353,719 – – – 353,719<br />
TCP Chikane 32,670 – – – 32,670<br />
B du Plessis 213,367 – – – 213,367<br />
PSC Luthuli 205,417 – – – 205,417<br />
TD Mahloele 166,667 – – – 166,667<br />
K Matthews 109,643 – – – 109,643<br />
TF Mosololi 214,417 – – – 214,417<br />
M Mostert 232,417 – – – 232,417<br />
DD Tabata 175,367 – – – 175,367<br />
YR Tenza 321,767 – – – 321,767<br />
PL Zim 152,667 – – – 152,667<br />
Executive – 2,272,785 – 1,653,202 3,925,987<br />
LRR Molotsane* – 2,272,785 – 1,653,202 3,925,987<br />
Total emoluments – paid<br />
by <strong>Telkom</strong> 2,641,168 2,272,785 – 1,653,202 6,567,155<br />
* Included in fringe and other benefits is a pension contribution for LRR Molotsane of RNil (2008: R4,690; 2007: R295,462), RJ September of<br />
R462,254 (2008: R280,261; 2007: RNil) and PG Nelson of R126,765 (2008: RNil; 2007: RNil) at March 31, 2009 paid to the <strong>Telkom</strong> Retirement<br />
Fund.<br />
** Foreign directors.<br />
*** In the absence of an internal corporate finance division, and pending the structuring and staffing thereof, the <strong>Telkom</strong> Board resolved that it was in the best<br />
interest of the Company and the shareholders to deploy the highest quality skills currently resident in <strong>Telkom</strong>, to evaluate, structure and make<br />
recommendations to the Board on major transactions. During 2008 M Mostert led all efforts in this regard and was remunerated accordingly. Moreover<br />
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<br />
his involvement in the transaction evaluated.
326<br />
<strong>Telkom</strong> Annual Report 2009<br />
Notes to the annual financial statements (continued)<br />
for the three years ended March 31, 2009<br />
37. RELATED P<strong>AR</strong>TIES<br />
Details of material transactions and balances with related parties not disclosed separately in the annual financial statements were as<br />
follows:<br />
2007 2008 2009<br />
Rm Rm Rm<br />
With joint venture:<br />
Vodacom Group (Proprietary) Limited<br />
Related party balances<br />
Trade receivables 122 99 121<br />
Dividend receivable 1,450 1,595 1,100<br />
Trade payables (706) (691) (650)<br />
Related party transactions<br />
Revenue (1,510) (1,632) (1,781)<br />
Expenses 2,974 3,050 3,066<br />
Dividend received (2,700) (2,970) (2,600)<br />
Audit fees 6 5 4<br />
Revenue includes interconnect fees and lease and installation<br />
of transmission lines.<br />
Expenses mostly represent interconnect expenses.<br />
With shareholders:<br />
Public Investment Corporation<br />
There were no material transactions between the Company and<br />
the Public Investment Corporation.<br />
Government<br />
Related party balances<br />
Trade receivables 271 326 386<br />
Related party transactions<br />
Revenue (2,458) (2,623) (2,767)<br />
With subsidiaries:<br />
Trudon Proprietary Limited (formerly trading as TDS Directory<br />
Operations (Proprietary) Limited)<br />
Related party balances<br />
Trade receivables 6 7 10<br />
Trade payables (100) (151) (141)<br />
Dividend receivable 84 – –<br />
Related party transactions<br />
Revenue (57) (59) (62)<br />
Expenses 12 20 15<br />
Dividend received (149) (120) (47)
Notes to the annual financial statements (continued)<br />
for the three years ended March 31, 2009<br />
37. RELATED P<strong>AR</strong>TIES (continued)<br />
With subsidiaries: (continued)<br />
Swiftnet (Proprietary) Limited<br />
Related party balances<br />
<strong>Telkom</strong> Annual Report 2009 327<br />
2007 2008 2009<br />
Rm Rm Rm<br />
Trade receivables – – 1<br />
Trade payables (14) (12) (15)<br />
Loan from subsidiary – – 10<br />
Related party transactions<br />
Revenue (16) (18) (17)<br />
Expenses – – 1<br />
Income includes data calls and billing fees.<br />
Rossal No 65 (Proprietary) Limited<br />
Related party balances<br />
Accruals and other payables (148) – (342)<br />
Loan to subsidiary – 30 –<br />
The loan is unsecured, interest-free and has no fixed repayment<br />
terms. The loan has been subordinated in favour of other creditors.<br />
Related party transactions<br />
Dividend paid 110 115 59<br />
Dividend received (56) (290) (29)<br />
Acajou Investments (Proprietary) Limited<br />
Related party balances<br />
(Accruals and other payables)/receivables (98) – 285<br />
Related party transactions<br />
Dividend paid 98 119 72<br />
Dividend received (100) (217) (71)<br />
Intekom (Proprietary) Limited<br />
Related party balances<br />
Accruals and other payables (5) (13) (23)<br />
Related party transactions<br />
Expenses 7 8 10<br />
Q-Trunk (Proprietary) Limited<br />
Related party balances<br />
Loan to subsidiary 30 26 22<br />
Impairment of loan (30) (26) (22)<br />
The loan is unsecured, interest-free and has<br />
no fixed repayment terms. The loan has been<br />
subordinated in favour of other creditors.<br />
Related party transactions<br />
Expenses 6 6 6
328<br />
<strong>Telkom</strong> Annual Report 2009<br />
Notes to the annual financial statements (continued)<br />
for the three years ended March 31, 2009<br />
37. RELATED P<strong>AR</strong>TIES (continued)<br />
2007 2008 2009<br />
Rm Rm Rm<br />
With subsidiaries: (continued)<br />
Special purpose entity – cell captive<br />
Related party balances<br />
Investment – sinking fund (refer to note 11) 535 535 535<br />
Related party transactions<br />
Investment income (19) – –<br />
Africa Online Limited (Africa Online)<br />
Related party balances<br />
Loan to subsidiary – 74 236<br />
Trade receivables – – 4<br />
Trade payables – (4) –<br />
Related party transactions<br />
Revenue – (4) –<br />
Investment income – (2) (11)<br />
The loan is unsecured and bears interest at 3 month<br />
US$ LIBOR plus 5%. The loan has no fixed repayment terms.<br />
Multi-Links Telecommunications (Proprietary) Limited (Multi-Links)<br />
Related party balances<br />
Loan to subsidiary – 840 5,225<br />
Trade receivables – – 75<br />
Trade payables – (21) –<br />
Related party transactions<br />
Revenue – (21) (55)<br />
Investment income – (34) (178)<br />
The loan is unsecured and bears interest at 3 month US$ LIBOR<br />
plus 5%. The loan may be prepaid in full or in whole, provided<br />
that each part prepayment may not be less than US$1 million.<br />
The advances must be repaid on May 1, 2009, July 1,<br />
2009 and January 29, 2010.<br />
<strong>Telkom</strong> International (Proprietary) Limited<br />
Related party transactions<br />
Loan to subsidiary – 1,985 1,985<br />
Impairment of loan – – (874)<br />
The loan has been used to purchase a 75% shareholding in<br />
Multi-Links Telecommunications (Proprietary) Limited. The loan<br />
is unsecured and has no fixed repayment term.
Notes to the annual financial statements (continued)<br />
for the three years ended March 31, 2009<br />
37. RELATED P<strong>AR</strong>TIES (continued)<br />
With subsidiaries: (continued)<br />
<strong>Telkom</strong> Media (Proprietary) Limited<br />
Related party transactions<br />
<strong>Telkom</strong> Annual Report 2009 329<br />
2007 2008 2009<br />
Rm Rm Rm<br />
Loan to subsidiary – 326 471<br />
Impairment of loan – (217) (471)<br />
The loan is interest-free and has no repayment terms.<br />
<strong>Telkom</strong> Foundation<br />
Related party transactions<br />
Expenses 54 58 54<br />
With entities under common control:<br />
Major public entities<br />
Related party balances<br />
Trade receivables 51 26 50<br />
Trade payables (2) (5) (3)<br />
The outstanding balances are unsecured and will be settled in<br />
cash in the ordinary course of business.<br />
Related party transactions<br />
Revenue (400) (485) (445)<br />
Expenses 206 201 180<br />
Rent received (29) (21) (20)<br />
Rent paid 18 18 19<br />
Income with major public entities for the year ended March 31,<br />
2007 has been restated due to additional BAN numbers being<br />
included in our calculation of income with major public entities.<br />
The effect of this is only on the disclosure of the related party<br />
note and has a RNil effect on the Company’s profit.<br />
Key management personnel compensation:<br />
(Including directors’ emoluments)<br />
Related party transactions<br />
Short-term employee benefits 108 114 54<br />
Post-employment benefits 3 3 5<br />
Termination benefits – 27 –<br />
Equity compensation benefits 8 24 36<br />
The fair value of the shares that vested in the current<br />
year is R11 million (2008: R12 million; 2007: RNil).
330<br />
<strong>Telkom</strong> Annual Report 2009<br />
Notes to the annual financial statements (continued)<br />
for the three years ended March 31, 2009<br />
37. RELATED P<strong>AR</strong>TIES (continued)<br />
Terms and conditions of transactions with related parties<br />
The sales to and purchases from related parties of telecommunication services are made at arm’s length prices. Except as indicated above,<br />
outstanding balances at the year end are unsecured, interest-free (except for interest charged on overdue telephone accounts) and settlement<br />
occurs in cash. Apart from the bank guarantee to the amount not exceeding R23 million (US$3 million) provided to Africa Online Limited,<br />
there have been no guarantees provided or received for related party receivables or payables. Except as indicated above for the year<br />
ended March 31, 2009, the Company has not impaired any amounts owed by related parties (2008: RNil; 2007: RNil). This assessment<br />
is undertaken each financial year through examining the financial position of the related party and the market in which the related party<br />
operates.<br />
38. SIGNIFICANT EVENTS<br />
<strong>Telkom</strong> Renaissance<br />
On November 14, 2008, <strong>Telkom</strong>’s Board of Directors approved the new organisation structure which is designed to fit <strong>Telkom</strong>’s defend<br />
and growth strategy. The new structure is effective April 1, 2009 and is being managed through a project called <strong>Telkom</strong> Renaissance.<br />
The Group has been restructured into three operating Business Units namely <strong>Telkom</strong> South Africa, <strong>Telkom</strong> International and <strong>Telkom</strong> Data<br />
Centre Operations. The <strong>Telkom</strong> Renaissance initiative will occur over the next 24 months to ensure that all the necessary remodelling,<br />
reorganising, revitalising and re-engineering happens in order to make the new structure function optimally.<br />
This initiative is a complete transformation of the way <strong>Telkom</strong> focuses on servicing its customers and creating value for its stakeholders. It is<br />
a positive, purposeful change towards a more accountable and competitive company. This change is a necessary part of <strong>Telkom</strong>’s strategy<br />
to maintain and grow market share in South Africa whilst building a strong footprint on the African continent.<br />
Capability Management<br />
<strong>Telkom</strong> will seek to manage costs and address service delivery constraints by realigning its structure and resources to better match its<br />
transforming information, communications and technology business.<br />
The transformation of the communications industry and increasing market and competitive pressure has put communication companies such<br />
as <strong>Telkom</strong> under increasing revenue and expense constraints while being required to improve customer service. As a result capability<br />
management is designed to ensure that the capabilities needed to succeed in a converged communications market are established through<br />
the optimal utilisation of external as well as internal capabilities, extracting efficiencies, where possible, through scale of a rapidly maturing<br />
retail and wholesale market and better organised functional areas in a more deregulated and liberalised communications market.<br />
Capability management includes the internal consolidation of certain functional areas and the optimisation of strategic supplier and service<br />
provider relationships improving performance in other functional areas.<br />
Capability Management will be concerned with assisting in addressing the margin and service delivery pressures by reassessing the<br />
operational service delivery methodology currently deployed with a view of increasing flexibility, reducing expense while improving service<br />
delivery across <strong>Telkom</strong>.<br />
Given the challenges <strong>Telkom</strong> faces in rolling out broadband, converged and data services, maintaining our legacy network and expanding<br />
our operations across the African continent, employees’ skills and performance must be aligned with our strategy to ensure financial,<br />
operational and transformational targets, customer expectations and shareholder expectations are met.<br />
The immediate objective therefore is to remodel service delivery. This is one of the strategic initiatives under Project Renaissance and will<br />
focus on the following:<br />
• Identify and assess existing capabilities;<br />
• Establish a <strong>Telkom</strong> Capability Inventory;<br />
• Determine future capability requirements;<br />
• Identify and develop a set of optimal service delivery options for achieving current and future strategic objectives; and
Notes to the annual financial statements (continued)<br />
for the three years ended March 31, 2009<br />
38. SIGNIFICANT EVENTS (continued)<br />
Capability Management (continued)<br />
• Enable <strong>Telkom</strong> South Africa, <strong>Telkom</strong> International and <strong>Telkom</strong> Data Centre Operations to:<br />
– Improve resource efficiency;<br />
– Improve capital productivity; and<br />
– Improve service delivery.<br />
<strong>Telkom</strong> Annual Report 2009 331<br />
A memorandum of understanding was entered into between <strong>Telkom</strong> and organised labour which included issues such as the deferment of<br />
the Managed Services Partner outsourcing project implementation post April 2009 and the establishment of a restructuring forum where all<br />
restructuring initiatives will be debated between the parties concerned.<br />
<strong>Telkom</strong> Management Services (Proprietary) Limited (TMS)<br />
TMS was registered as a company during August 2008. <strong>Telkom</strong>’s Board approved the establishment of TMS as a part of <strong>Telkom</strong>’s strategic<br />
plan to grow revenue and expand geographic reach.<br />
Appointment of director<br />
On November 10, 2008, <strong>Telkom</strong> announced the appointment of Mr Peter Nelson as Chief Financial Officer and director of the Company<br />
with effect from December 8, 2008.<br />
39. SUBSEQUENT EVENTS<br />
Dividends<br />
The <strong>Telkom</strong> Board declared an ordinary dividend of 115 cents (2008: 660 cents, 2007: 600 cents) per share and a special dividend<br />
of 260 cents (2008: Nil cents, 2007: 500 cents) per share on June 19, 2009, payable on July 20, 2009 to shareholders registered on<br />
July 17, 2009.<br />
Acquisition of MWEB Africa Limited and majority equity stake in MWEB Namibia (Proprietary) Limited<br />
On November 10, 2008, <strong>Telkom</strong> International (Proprietary) Limited, a wholly owned subsidiary of <strong>Telkom</strong>, announced it had entered into<br />
agreements to acquire 100% of MWEB Africa Limited (‘MWEB Africa’) and 75% of MWEB Namibia (Proprietary) Limited (’MWEB<br />
Namibia‘) . The purchase price for the MWEB Africa Group including AFSAT and MWEB Namibia is US$55 million (approximately R498<br />
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<br />
finalised. These shareholdings will be acquired from Multichoice Africa Limited and MIH Holdings Limited respectively, which are members<br />
of the Naspers Limited Group.<br />
MWEB Africa is an internet services provider in sub-Saharan Africa (excluding South Africa) which also provides network access services<br />
in some countries and is headquartered in Mauritius with operations in Namibia, Nigeria, Kenya, Tanzania, Uganda and Zimbabwe, an<br />
agency arrangement in Botswana and distributors in 26 sub-Saharan African countries.<br />
The acquisition of MWEB is part of the Group’s strategy of growing its broadband and solidifying its market position through acquisitions.<br />
The successful conclusion of the agreements being entered into is subject to conditions precedent, including regulatory approvals being<br />
obtained in certain African jurisdictions.<br />
Subsequent to year end, on April 21, 2009, the conditions precedent to the sale were fulfilled.<br />
AT&T strategic agreement<br />
On April 16, 2009, <strong>Telkom</strong> and AT&T, the global communications leader, entered into a strategic agreement which aims to extend AT&T’s<br />
global networking reach to sub-Saharan Africa and boost <strong>Telkom</strong>’s strategy to grow a strong ICT footprint on the African continent. The<br />
agreement will allow both companies to explore ways to provide global seamless communication and technology solutions and services<br />
to multinational customers, ether based in or seeking to extend their operations in sub-Saharan Africa.<br />
Under the terms of the memorandum of understanding, the two companies will begin work towards definitive agreements that would<br />
• directly connect the <strong>Telkom</strong> regional network and the AT&T global network;<br />
• deliver a wider geographic footprint of telecommunication services, in both sub-Saharan Africa and other global points;<br />
• enhance mobile service capabilities for corporate customers in sub-Saharan Africa;<br />
• extend global VPN (Virtual Private Network) services to support the state of art network requirements of customers either headquartered<br />
in or seeking to expand sites in sub-Saharan Africa;<br />
• explore other potential opportunities in areas such as Telepresence, hosting and professional services; and<br />
• expand the existing global wholesale voice services relationship between <strong>Telkom</strong> Group and AT&T.
332<br />
<strong>Telkom</strong> Annual Report 2009<br />
Notes to the annual financial statements (continued)<br />
for the three years ended March 31, 2009<br />
39. SUBSEQUENT EVENTS (continued)<br />
<strong>Telkom</strong> Media (Proprietary) Limited (<strong>Telkom</strong> Media)<br />
On August 31, 2006, <strong>Telkom</strong> created a new subsidiary, <strong>Telkom</strong> Media (Proprietary) Limited, with a black economic empowerment (‘BEE’)<br />
shareholding. ICASA awarded <strong>Telkom</strong> Media a commercial satellite and cable subscription broadcast licence on September 12, 2007.<br />
On March 31, 2008, the <strong>Telkom</strong> Board took a decision to substantially reduce its investment in <strong>Telkom</strong> Media and as such <strong>Telkom</strong> Media<br />
reduced its operational expenses and commitments to a minimum. <strong>Telkom</strong> Media did not meet the held for sale criteria at year end as<br />
management were unable to sell the disposal group for its expected price and therefore decided to abandon it.<br />
Subsequent to year end <strong>Telkom</strong> was approached by potential buyers of <strong>Telkom</strong>’s interest in <strong>Telkom</strong> Media and negotiations with the potential<br />
buyer were concluded. On May 4, 2009, <strong>Telkom</strong> sold its 75% interest in <strong>Telkom</strong> Media to Shenzhen Media South Africa (Proprietary)<br />
Limited for a nominal amount.<br />
Disposal and unbundling of stake in Vodacom<br />
In 2008 <strong>Telkom</strong> announced a decision to dispose of its entire stake in Vodacom through selling of 15% of its stake to Vodafone, a wholly<br />
owned subsidiary of Vodafone Group plc and unbundling its remaining 35% stake to its shareholders pursuant to a listing of Vodacom on<br />
the main board of JSE Limited.<br />
On May 18, 2009 Vodacom was successfully listed on the main board of the JSE Limited and a special dividend of R19 was distributed<br />
to all <strong>Telkom</strong> shareholders. <strong>Telkom</strong> successfully completed the unbundling of Vodacom shares to its shareholders on May 25, 2009.<br />
Bookbuilding of Vodacom Group (Proprietary) Limited shares<br />
On June 2, 2009, <strong>Telkom</strong> announced the successful completion of the accelerated bookbuilding of Vodacom shares, raising R1,540 million<br />
for "ineligible shareholders". The directors of <strong>Telkom</strong>, in consultation with Vodafone, determined that <strong>Telkom</strong> shareholders in the United States<br />
of America would be regarded as "ineligible shareholders" for the unbundling of Vodacom shares to shareholders of <strong>Telkom</strong>, which was<br />
completed on May 25, 2009, and would therefore not receive Vodacom shares in such distributions.<br />
The proceeds from the offering, net of applicable fees, expenses, taxes and charges, will be distributed to the "ineligible shareholders" in<br />
proportion to their entitlement to Vodacom shares.<br />
New York Stock Exchange listing<br />
Given the current global economic climate and the absolute necessity for <strong>Telkom</strong> to reduce its cost profile, the Board has decided to delist<br />
from the New York Stock Exchange. Maintaining a listing in the United States of America is expensive and takes considerable management<br />
time. The methodology employed and discipline gained from Sarbanes-Oxley reporting requirements will be retained to ensure strict<br />
governance compliance and transparent financial reporting.<br />
<strong>Telkom</strong> is comfortable that the Johannesburg Stock Exchange provides sufficient access to capital for both South African and global<br />
investors. <strong>Telkom</strong> intends to maintain a level 1 American Depository Receipt programme to facilitate over-the-counter- trading in the United<br />
States of America.<br />
<strong>Telkom</strong> Communications International (Proprietary) Limited<br />
The Abacus Financial Services (Mauritius) Limited issued a notice under section 265 (5) of the Companies Act 1984 that <strong>Telkom</strong><br />
Communications International (Proprietary) Limited has been dissolved with effect from May 12, 2009.<br />
Other matters<br />
The directors are not aware of any other matter or circumstance since the financial year ended March 31, 2009 and the date of this<br />
report, or otherwise dealt with in the financial statements, which significantly affects the financial position of the Company and the results<br />
of its operations.
Notes to the annual financial statements (continued)<br />
for the three years ended March 31, 2009<br />
40. ACCOUNTING PRONOUNCEMENTS NOT YET ADOPTED<br />
<strong>Telkom</strong> Annual Report 2009 333<br />
The Company has not early adopted the following standards, interpretations and amendments that have been issued and are not yet<br />
effective:<br />
IFRS1 First-time Adoption of International Financial Reporting Standards: Cost of an Investment in a Subsidiary, Jointly Controlled Entity<br />
or Associate (amended)<br />
This amendment is effective for annual periods beginning on or after January 1, 2009. This standard is amended to allow an entity, in its<br />
separate financial statements, to determine the cost of investments in subsidiaries, jointly controlled entities or associates (in its opening IFRS<br />
financial statements) as one of the following amounts:<br />
• Cost determined in accordance with IAS27<br />
• At the fair value of the investment at the date of the transition to IFRS, determined in accordance with IAS39 Financial Instruments:<br />
Recognition and Measurement<br />
• The previous GAAP carrying amount of the investment at the date of transition to IFRS<br />
This determination is made for each investment, rather than being a policy decision.<br />
The amendment does not have an impact on the annual financial statements.<br />
IFRS2 Share-based Payment: Vesting Conditions and Cancellations (amended)<br />
This amendment is effective for annual periods beginning on or after January 1, 2009. The amendments to IFRS2 Share-based Payment<br />
clarifies the definition of vesting conditions and the accounting treatment of cancellations by the counterparty to a share-based arrangement.<br />
The amendment will not have a material impact on the Company’s financial statements.<br />
IFRS2 Share-Based Payment: Group Cash-Settled Share-Based Payment Arrangements (amended)<br />
This amendment is effective for annual periods beginning on or after January 1, 2010. The amendment clarifies how an individual<br />
subsidiary in a group should account for some share-based payment arrangements in its own financial statements. The amendment will not<br />
have a material impact on the Company’s financial statements.<br />
IFRS3 Business Combinations (revised)<br />
The revisions are effective for annual periods beginning on or after July 1, 2009 .The revised standard still applies the acquisition method<br />
of accounting for business combinations, with some significant changes. For example, all payments to purchase a business are to be<br />
recorded at fair value at the acquisition date, with contingent payments classified as debt subsequently re-measured through the income<br />
statement. There is a choice on an acquisition-by-acquisition basis to measure the non-controlling interest in the acquiree either at fair value<br />
or at the non-controlling interest’s proportionate share of the acquiree’s net assets. All acquisition-related costs should be expensed. The<br />
revised standard will not have an impact on the annual financial statements.<br />
IFRS7 Financial Instruments: Disclosures (amended)<br />
The interpretation is applicable for annual periods beginning on or after January 1, 2009. The amendment requires enhanced disclosures<br />
about fair value measurements and liquidity risk. The impact of the amendment is being evaluated.<br />
IFRS8 Operating Segments<br />
This standard is effective for annual periods beginning on or after January 1, 2009. The standard requires operating segments to be<br />
identified on the basis of internal reports about components of the entity that are regularly reviewed by the chief operating decision maker<br />
in order to allocate resources to the segment and to assess its performance. The impact of this standard is currently being evaluated.<br />
IFRIC9 Reassessment of Embedded Derivatives (amended)<br />
The amendment is effective for annual periods ending on or after June 30, 2009. The amendment clarifies that on reclassification of a<br />
financial asset out of the ‘fair value through profit or loss’ category, all embedded derivatives have to be assessed and, if necessary,<br />
separately accounted for in financial statements. The amendment will not have an impact on the financial statements as <strong>Telkom</strong> does not<br />
have material embedded derivatives.
334<br />
<strong>Telkom</strong> Annual Report 2009<br />
Notes to the annual financial statements (continued)<br />
for the three years ended March 31, 2009<br />
40. ACCOUNTING PRONOUNCEMENTS NOT YET ADOPTED (continued)<br />
IFRIC13 Customer Loyalty Programmes<br />
The interpretation is effective for annual periods beginning on or after July 1, 2008. The interpretation requires loyalty award credits granted<br />
to customers in connection with a sales transaction to be accounted for as a separate component of the sales transaction. The consideration<br />
received in the sales transaction would, therefore, be allocated between the loyalty award credits and the other components of the sale.<br />
IFRIC13 is not relevant to the Company’s operations because none of the Company’s companies operate any loyalty programmes.<br />
Where the cost of fulfilling the awards is expected to exceed the consideration received, the entity will have to recognise an onerous<br />
contract liability. The impact of this amendment is being evaluated.<br />
IFRIC15 Agreements for the Construction of Real Estate<br />
The interpretation is effective for annual periods beginning on or after January 1, 2009. The aim of this interpretation is to determine<br />
whether an agreement for the construction of real estate is within the scope of IAS11 Construction Contracts or IAS18 Revenue.<br />
This interpretation is not relevant to the Company’s operations as the Company does not construct real estates.<br />
IFRIC16 Hedges of a Net Investment in a Foreign Operation<br />
The interpretation is effective for annual periods beginning on or after October 1, 2008. The interpretation provides guidance in respect<br />
of hedges of foreign currency gains and losses on a net investment in a foreign operation. This includes the fact that net investment hedging<br />
relates to differences in functional currency and not presentation currency, and hedging instruments may be held anywhere in the Group.<br />
The interpretation will not have an impact on the Company’s financial statements.<br />
IFRIC17 Distributions of Non-Cash Assets to Owners<br />
The interpretation is effective for annual periods beginning on or after July 1, 2009. The interpretation provides guidance on how an entity<br />
should account for non-cash distributions to its owners and/or distributions that give owners a choice of receiving either non-cash assets or<br />
a cash alternative. The impact of the amendment is being evaluated.<br />
IFRIC 18 Transfer of Assets from Customers<br />
The interpretation is effective for annual periods beginning on or after July 1, 2009.<br />
IFRIC18 clarifies the requirements of IFRSs for agreements in which an entity receives from a customer an item of property, plant and<br />
equipment (‘PPE’) that the entity must then use either to connect the customer to a network or to provide the customer with ongoing access<br />
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<br />
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<br />
supply of goods or services. The impact of this interpretation is currently being evaluated.<br />
IAS1 Presentation of Financial Statement (revised)<br />
The revised standard is effective for annual periods beginning on or after January 1, 2009.<br />
IAS1R introduces a statement of comprehensive income with two optional formats and refers to the balance sheet and cash flow statement<br />
by different names: the ‘statement of financial position’ and ‘statement of cash flows’, respectively. The revision to the standard will result<br />
in changes in the way the annual financial statements are presented.<br />
IAS7 Cash Flow Statement: Consequential Amendments arising from Amendments to IAS16<br />
The amendment is effective for annual periods beginning on or after January 1, 2009. IAS7 as amended requires cash receipts and<br />
payments relating to purchase, rental and sale of property, plant and equipment held for rental to be treated as cash flows from operating<br />
activities. The impact of this amendment is being evaluated.<br />
IAS23 Borrowing Costs (revised)<br />
The revised standard applies to borrowing costs relating to qualifying assets for which the commencement date for capitalisation is on or<br />
after January 1, 2009. The revised standard requires all borrowing costs that are directly attributable to the acquisition, construction or<br />
production of qualifying assets to be capitalised. The Company does not expect the adoption of the standard to have a material impact.
Notes to the annual financial statements (continued)<br />
for the three years ended March 31, 2009<br />
40. ACCOUNTING PRONOUNCEMENTS NOT YET ADOPTED (continued)<br />
IAS27 Consolidated and Separate Financial Statements (revised)<br />
<strong>Telkom</strong> Annual Report 2009 335<br />
The revisions are effective for annual periods beginning on or after July 1, 2009. The revised standard requires the effects of all transactions<br />
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<br />
or gains and losses. The standard also specifies the accounting when control is lost. Any remaining interest in the entity is re-measured to<br />
fair value, and a gain or loss is recognised in profit or loss. The impact of the revised standard is being evaluated.<br />
IAS27 Consolidated and Separate Financial Statements – Cost of an Investment in a Subsidiary, Jointly Controlled Entity or Associate<br />
(amended)<br />
The amended standard is effective for annual periods beginning on or after January 1, 2009. The amended standard is for the following<br />
changes in respect of the holding company’s separate financial statements:<br />
• The deletion of the ‘cost method’. Making the distinction between pre- and post-acquisition profits is no longer required. All dividends<br />
will be recognised in profit or loss. However, the payment of such dividends requires the entity to consider whether there is an indicator<br />
of impairment; and<br />
• In cases of reorganisations where a new parent is inserted above an existing parent of the Group (subject to meeting specific<br />
requirements), the cost of the subsidiary is the previous carrying amount of its share of equity items in the subsidiary rather than its fair<br />
value. The impact of this amended standard is currently being evaluated.<br />
Amendment to IAS32 Financial Instruments Presentation and IAS1 Presentation of Financial Statements, Puttable Financial Instruments<br />
The amendment is effective for periods beginning January 1, 2009. The amendments classify puttable financial instruments, or components<br />
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<br />
liquidation, as equity, provided they have particular features and meet specific conditions. The impact of this amended standard is being<br />
evaluated.<br />
IAS39: Financial Instruments: Recognition and Measurement (amended)<br />
The amendment is effective for annual periods ending on or after June 30, 2009. The amendment clarifies that on reclassification of a<br />
financial asset out of the ‘fair value through profit or loss’ category, all embedded derivatives have to be assessed and, if necessary,<br />
separately accounted for in financial statements. The amendment will not have an impact on the financial statements as <strong>Telkom</strong> does not<br />
have material embedded derivatives.<br />
IAS39 Financial Instruments: Recognition and Measurement – Eligible Hedged Items (amended)<br />
The amendment to the standard is effective for annual periods beginning on or after July 1, 2009. The amendment clarifies that an entity<br />
is permitted to designate a portion of the fair value changes or cash flow variability of a financial instrument as a hedged item. The<br />
amendment will not have an impact on the financial statements as <strong>Telkom</strong> does not apply hedge accounting.
336<br />
<strong>Telkom</strong> Annual Report 2009<br />
Notes to the annual financial statements (continued)<br />
for the three years ended March 31, 2009<br />
40. ACCOUNTING PRONOUNCEMENTS NOT YET ADOPTED (continued)<br />
Changes as a result of the annual improvements project<br />
A number of standards were amended as a result of the annual improvements project of the IASB in May 2008 effective for annual periods<br />
beginning on or after January 1, 2009, with the exception of IFRS5 which is effective for annual periods beginning on or after July 1,<br />
2009. These standards were as follows:<br />
IFRS5 Non-Current Assets Held for Sale and Discontinued Operations<br />
IAS1 Presentation of Financial Statements<br />
IAS16 Property, Plant and Equipment<br />
IAS19 Employee Benefits<br />
IAS20 Accounting for Government Grants and Disclosure of Government Assistance<br />
IAS23 Borrowing Costs<br />
IAS27 Consolidated and Separate Financial Statements<br />
IAS28 Investments in Associates<br />
IAS29 Financial Reporting in Hyperinflationary Economies<br />
IAS31 Interests in Joint Ventures<br />
IAS36 Impairment of Assets<br />
IAS38 Intangible Assets<br />
IAS39 Financial Instruments: Recognition and Measurement<br />
IAS40 Investment Property<br />
IAS41 Agriculture.<br />
The Company will adopt the changes to these standards during the 2010 financial year with the exception of IFRS5, which will be adopted<br />
during the 2011 financial year. The Company is currently evaluating the effects of the amendments.
Shareholder analysis<br />
at March 31, 2009<br />
Number of<br />
<strong>Telkom</strong> Annual Report 2009 337<br />
shareholders % Holdings %<br />
Range of shareholders<br />
1 – 100 shares 68,789 71.69 2,392,802 0.46<br />
101 – 1 000 shares 24,353 25.38 6,839,429 1.31<br />
1 001 – 10 000 shares 2,031 2.12 5,683,371 1.09<br />
10 001 – 50 000 shares 380 0.40 9,281,138 1.78<br />
50 001 – 100 000 shares 157 0.16 11,252,414 2.16<br />
100 001 – 1 000 000 shares 217 0.23 59,384,767 11.40<br />
1 000 001 and more shares 33 0.03 425,949,977 81.80<br />
95,960 100.00 520,783,898 100.00<br />
Type of shareholder<br />
Banks 147 0.15 56,436,518 10.84<br />
Close corporations 163 0.17 236,071 0.05<br />
Empowerment 1 0.00 37,506,809 7.20<br />
Endowment funds 232 0.24 734,227 0.14<br />
Individuals 91,625 95.48 11,570,245 2.22<br />
Insurance companies 78 0.08 26,072,715 5.01<br />
Investment companies 67 0.07 13,538,084 2.60<br />
Medical aid schemes 20 0.02 437,317 0.08<br />
Mutual funds 422 0.44 40,790,503 7.83<br />
Nominees and trusts<br />
Other corporations (including the Government of the<br />
2,438 2.54 2,869,011 0.55<br />
Republic of South Africa) 126 0.13 207,218,515 39.79<br />
Own holdings 2 0.00 19,790,236 3.80<br />
Retirement funds 350 0.36 101,615,937 19.51<br />
Private companies 263 0.27 1,583,493 0.30<br />
Public companies 25 0.03 375,871 0.07<br />
Share trusts 1 0.00 8,346 0.00<br />
95,960 100.00 520,783,898 100.00<br />
Geographical holdings by owner<br />
South Africa 95,522 99.54 447,187,584 85.87<br />
United States 128 0.13 51,178,233 9.83<br />
United Kingdom 99 0.10 15,573,222 2.99<br />
Europe 65 0.07 5,506,841 1.06<br />
Other 146 0.15 1,338,018 0.26<br />
95,960 100.00 520,783,898 100.00<br />
Beneficial shareholders of more than 2%<br />
The government of the Republic of South Africa 207,038,058 39.76<br />
Black Ginger 33 (Proprietary) Limited 46,604,996 8.95<br />
Public Investment Corporation 34,773,817 6.67<br />
Elephant Consortium NewShelf 772 (Proprietary) Limited 37,506,809 7.20<br />
Liberty Group 18,151,712 3.49<br />
Rossal No 65 (Proprietary) Limited Equities 11,646,680 2.24<br />
355,722,072 68.31
338<br />
<strong>Telkom</strong> Annual Report 2009<br />
Shareholder analysis continued<br />
at March 31, 2009<br />
Public and non-public shareholders<br />
Holdings %<br />
Non-public shareholders 260,388,774 50.78<br />
The Government of the Republic of South Africa 207,038,058 39.76<br />
Empowerment 37,506,809 7.20<br />
Government buffer account 9,461 0.00<br />
Diabo share trust 8,346 0.00<br />
<strong>Telkom</strong> Treasury Stock 19,790,236 3.80<br />
Executive and non-executive directors* 83,544 0.02<br />
Subsidiaries directors* 24,098 0.00<br />
Public shareholders<br />
Institutional and retail investors 256,323,346 49.22<br />
* Director holdings consists of direct and indirect holdings.<br />
520,783,898 100.00<br />
The information above is based on registered shareholders, except where only beneficial shareholders’ information was available.
Definitions<br />
3G<br />
The generic term, 3G, is used to denote the next generation of mobile<br />
systems designed to support high-speed data transmission (144 Kbps<br />
and higher) and Internet Protocol (IP)-based services in fixed, portable<br />
and mobile environments. As envisaged by the ITU, the 3G system will<br />
integrate different service coverage zones and be a global platform<br />
and the necessary infrastructure for the distribution of converged<br />
service, whether mobile or fixed, voice or data, telecommunications,<br />
content or computing.<br />
ADSL (ASYMMETRICAL DIGITAL SUBSCRIBER LINE)<br />
ADSL is a broadband access standard which uses existing copper lines<br />
to offer high-speed digital connections over the local loop. ADSL<br />
transmits data asymmetrically, meaning that the bandwidth usage is<br />
much higher in one direction than the other. ADSL provides greater<br />
bandwidth from the exchange to the customer (ie. downloading) than<br />
from the customer to the exchange (ie. sending).<br />
<strong>AR</strong>PU<br />
Vodacom’s average monthly revenue per customer, or <strong>AR</strong>PU, is<br />
calculated by dividing the average monthly revenue during the period<br />
by the average monthly total reported customer base during the period.<br />
<strong>AR</strong>PU excludes revenue from equipment sales, other sales and services<br />
and revenue from national and international users roaming on<br />
Vodacom’s networks.<br />
ATM (ASYNCHRONOUS TRANSFER MODE)<br />
ATM is a high-speed Wide Area Network (WAN), connectionoriented,<br />
packet-switching data communications protocol that allows<br />
voice, data and video to be delivered across existing local and Wide<br />
Area Networks. ATM divides data into cells and can handle data<br />
traffic in bursts. It is asynchronous, in that the stream of cells from one<br />
particular user is not necessarily continuous.<br />
BANDWIDTH<br />
Bandwidth is a measure of the quantity of signals that can travel over<br />
a transmission medium such as copper or a glass fibre strand. It is the<br />
available space available to carry a signal. The greater the<br />
bandwidth, the greater the information carrying capacity. Bandwidth is<br />
measured in bits per second.<br />
BROADBAND<br />
Broadband is a method of measuring the capacity of different types of<br />
transmission. Digital bandwidth is measured in the rate of bits<br />
transmitted per second (bps). For example, an individual ISDN channel<br />
has a bandwidth of 64 Kbps, meaning that it transmits 64,000 bits<br />
(digital signals) every second.<br />
CAGR<br />
Compound Annual Growth Rate.<br />
<strong>Telkom</strong> Annual Report 2009 339<br />
C<strong>AR</strong>RIER PRE-SELECTION<br />
Carrier pre-selection is usually initiated by the telecoms Regulator.<br />
It enables individuals to choose which telecom will carry their traffic<br />
(mainly long distance) by a signalling contract rather than having to<br />
dial extra digits.<br />
CDMA (CODE DIVISION MULTIPLE ACCESS)<br />
CDMA is one of many technologies for digital transmission of radio<br />
signals between, for example, mobile telephones and radio base<br />
stations. In CDMA, which is a spread-spectrum modulation technology,<br />
each call is assigned a unique “pseudorandom” sequence of<br />
frequency shifts that serve as a code to distinguish it. The mobile phone<br />
is then instructed to decipher only a particular code to pluck, as it were,<br />
the right conversation off the air.<br />
CIRCUIT<br />
A circuit is a connection or line between two points. This connection<br />
can be made through various media, including copper, coaxial cable,<br />
fibre or microwave. A telephone exchange is a circuit switch.<br />
DECT (DIGITAL ENHANCED CORDLESS<br />
TELECOMMUNICATIONS)<br />
DECT is the standard for cordless telephones. DECT phones<br />
communicate using the PSTN (public switched telephone network)<br />
through a small base station in the home or office and have a working<br />
radius of between 50 and 300 metres.<br />
EBITDA<br />
EBITDA represents profit for the year before taxation, finance charges,<br />
investment income and depreciation, amortisation, impairment and<br />
write-offs.<br />
EDGE (ENHANCED DATA FOR GSM EVOLUTION)<br />
EDGE is a technology designed to enhance GSM and TDMA systems<br />
with respect to data rates and is widely considered to be the GSM<br />
evolution beyond GPRS. It enhances the data capabilities of GSM and<br />
TDMA systems by altering the RF modulation scheme to allow greater<br />
data rates per time slot. Because it uses a different modulation<br />
technique across the air-interface, EDGE requires different mobile<br />
terminals/ handsets than those designed for the GSM air-interface.<br />
EFFECTIVE TAX RATE<br />
The effective tax rate is the tax charge in the income statement divided<br />
by pre-tax profit.<br />
ETHERNET<br />
Ethernet is a protocol that defines how data is transmitted to and<br />
received from LANs. It is the most prevalent LAN protocol, with speeds<br />
of up to 10 Mbps.
340<br />
<strong>Telkom</strong> Annual Report 2009<br />
Definitions continued<br />
EVDO (EVOLUTION-DATA OPTIMISED OR EVOLUTION-<br />
DATA ONLY)<br />
EVDO is a telecommunications standard for the wireless transmission of<br />
data through radio signals, typically for broadband Internet access.<br />
It uses multiplexing techniques including code division multiple access<br />
(CDMA) as well as time division multiple access (TDMA) to maximise<br />
both individual user’s throughput and the overall system throughput.<br />
FIBRE OPTICS<br />
Fibre optics is where messages or signals are sent via light rather than<br />
electrical signals down a very thin strand of glass. Light transmission<br />
enables much higher data rates than conventional wire, coaxial cable<br />
and many forms of radio. Signals travel at the speed of light and do<br />
not generate nor are subject to interference.<br />
FIBRE RINGS<br />
Fibre rings have come to be used in many fibre networks as it provides<br />
more network resiliency: if there is a failure along a route and a ring is<br />
broken, the direction of the traffic can be reversed and the traffic will<br />
still reach its final destination.<br />
FIXED ACCESS LINES<br />
Fixed access lines are comprised of public switched<br />
telecommunications network lines, or PSTN lines, including integrated<br />
services digital network channels, or ISDN channels, and public and<br />
private payphones, but excluding internal lines in service.<br />
FIXED ACCESS LINES PER EMPLOYEE<br />
To calculate the number of access lines per employee the total number<br />
of access lines is divided by the number of employees at the end of the<br />
period.<br />
FIXED-LINE PENETRATION<br />
Fixed-line penetration or teledensity is based on the total number of<br />
telephone lines in service at the end of the period per 100 persons in<br />
the population of South Africa. Population is the estimated South<br />
African population at the mid-year in the periods indicated as<br />
published by Statistics South Africa, a South African Government<br />
department.<br />
FIXED-LINE TRAFFIC<br />
Fixed-line traffic, other than international outgoing mobile traffic,<br />
international interconnection traffic and international Voice over Internet<br />
Protocol traffic, is calculated by dividing traffic operating revenue for<br />
the particular category by the weighted average tariff for such<br />
category during the relevant period. Fixed-line international outgoing<br />
mobile traffic and international interconnection traffic are based on the<br />
traffic registered through the respective exchanges and reflected in<br />
international interconnection invoices. International Voice over Internet<br />
Protocol traffic is based on the traffic reflected in invoices.<br />
FRAME RELAY<br />
Frame relay is a widely implemented telecommunications service<br />
designed for cost-efficient data transmission for data traffic between<br />
local area networks and between end-points in a wide area network.<br />
The network effectively provides a permanent circuit, which means that<br />
the customer sees a continuous, dedicated connection, but does not<br />
pay for a full-time leased line.<br />
GPRS (GENERAL PACKET RADIO SERVICE)<br />
GPRS is a packet rather than a circuit-based technology. GPRS allows<br />
for faster data transmission speed to both GSM and TDMA (IS-136)<br />
networks. GPRS is a packet-switched technology that overlays the<br />
circuit-switched GSM network. The service can be introduced to<br />
cellular networks by infrastructure.<br />
GSM (GLOBAL SYSTEM FOR MOBILE)<br />
GSM is a second generation digital mobile cellular technology using<br />
a combination of frequency division multiple access (FDMA) and time<br />
division multiple access (TDMA). GSM operates in several frequency<br />
bands: 400 MHz, 900 MHz and 1800 MHz. On the TDMA side,<br />
there are eight timeslots or channels carrying calls, which operate on<br />
the same frequency. Unlike other cellular systems, GSM provides a<br />
high degree of security by using subscriber identity module (SIM) cards<br />
and GSM encryption.<br />
HSDPA<br />
High Speed Downlink Packet Access.<br />
IAS<br />
International Accounting Standards.<br />
IFRS<br />
International Financial Reporting Standards.<br />
INTERCONNECTION<br />
Interconnection refers to the joining of two or more networks. Networks<br />
need to interconnect to enable traffic to be transmitted to and from<br />
destinations. The amounts paid and received by the operators vary<br />
according to distance, time, the direction of traffic, and the type of<br />
networks involved.<br />
INTEREST COVER<br />
Interest cover is calculated by dividing EBIT by the net interest charge<br />
in the income statement. It is a measure of income gearing.<br />
ISDN (INTEGRATED SERVICES DIGITAL NETWORK)<br />
ISDN is a data communications standard used to transmit digital<br />
signals over ordinary copper telephone cables. This is one technology<br />
for overcoming the “last mile” of copper cables from the local<br />
exchange to the subscribers premises, which has proved a bottleneck<br />
for Internet access, for example. ISDN allows to carry voice and data<br />
simultaneously, in each of at least two channels capable of carrying<br />
64 Kbps. It provides up to 128 Kbps and a total capacity of 144<br />
Kbps exist.<br />
ITU (INTERNATIONAL TELECOMMUNICATIONS UNION)<br />
ITU is the global technical standard-setting body for<br />
telecommunications services.
Definitions continued<br />
LAN (LOCAL <strong>AR</strong>EA NETWORK)<br />
A LAN is a group of devices that communicate with each other within<br />
a limited geographic area, such as an office.<br />
LEASED LINE<br />
A leased line is a telecommunications transmission circuit that is<br />
reserved by a communications provider for the private use of a<br />
customer.<br />
LIBOR<br />
London Interbank Offer Rate.<br />
LOCAL LOOP<br />
The local loop is the final connection between the exchange and the<br />
home or office. It is also known as the last mile.<br />
MICROWAVE<br />
Microwave is radio transmission using very short wavelengths.<br />
MMS (MULTIMEDIA MESSAGING SERVICES)<br />
MMS is a service developed jointly together with 3GPP, allows users<br />
to combine sounds with images and text when sending messages,<br />
much like the text-only SMS.<br />
MOBILE CHURN<br />
Vodacom’s churn is calculated by dividing the average monthly number<br />
of disconnections during the period by the average monthly total<br />
reported customer base during the period.<br />
MOBILE PENETRATION<br />
Vodacom calculates penetration, or teledensity, based on the total<br />
number of customers at the end of the period per 100 persons in the<br />
population of South Africa. Population is the estimated South African<br />
population at the mid-year in the periods indicated as published by<br />
Statistics South Africa, a South African Governmental department.<br />
MOBILE TRAFFIC<br />
Vodacom’s traffic comprises total traffic registered on Vodacom’s<br />
network, including bundled minutes, outgoing international roaming<br />
calls and calls to free services, but excluding national and incoming<br />
international roaming calls.<br />
MOU (MOBILE MINUTES OF USE)<br />
Vodacom’s average monthly minutes of use per customer, or average<br />
MOU, is calculated by dividing the average monthly minutes during<br />
the period by the average monthly total reported customer base during<br />
the period. MOU excludes calls to free services, bundled minutes and<br />
data minutes.<br />
NET DEBT<br />
Net debt is all interest-bearing debt finance (long-term and short-term)<br />
less cash and marketable securities.<br />
<strong>Telkom</strong> Annual Report 2009 341<br />
NET DEBT TO TOTAL EQUITY<br />
Net debt to total equity is a measure of book leverage (gearing): net<br />
debt in the balance sheet divided by total equity (the sum of<br />
shareholders’ funds plus minority interests).<br />
NGN (NEXT GENERATION NETWORK)<br />
A Next Generation Network is a packet-based network able to<br />
provide services including telecommunication services and able to<br />
make use of multiple broadband, QoS-enabled transport technologies.<br />
It offers unrestricted access by users to different service providers.<br />
OPERATING FREE CASH FLOW<br />
Operating free cash flow is defined as cash flow from operating<br />
activities, after interest and taxation, before dividends paid, less cash<br />
flow from investing activities.<br />
PACKET SWITCHING<br />
Packet switching is designed specifically for data traffic, as it cuts the<br />
information up into small packets, which are each sent across the<br />
network separately and are then reassembled at the final destination.<br />
This allows more users to share a given amount of bandwidth. X.25,<br />
ATM and frame relay are all packet switching techniques.<br />
POP (POINT OF PRESENCE)<br />
A POP is a service provider’s location for connecting to users.<br />
Generally, POPs refer to the location where people can dial into the<br />
provider’s computer. Most providers have several POPs to allow lowcost<br />
local access via telephone lines.<br />
PSTN (PUBLIC SWITCHED TELEPHONE NETWORK)<br />
The PSTN is a collection of interconnected voice telephone networks,<br />
either for a given country or the whole world. It is the sum of the parts.<br />
It was originally entirely analog, but now increasingly digital (indeed<br />
in many developed countries digitisation has reached 100%), these<br />
networks can be either state-owned or commercially owned. PSTN is<br />
distinct from closed private networks (although these may interconnect<br />
to the PSTN) and from public data networks (PDN).<br />
REVENUE PER FIXED ACCESS LINE<br />
Revenue per fixed access line is calculated by dividing total fixed-line<br />
revenue during the period, excluding data and directories and other<br />
revenue, by the average number of fixed access lines during the<br />
period.<br />
RICA<br />
Regulation of Interception of Communication and Provision of<br />
Communication- related Information Act.<br />
ROA (RETURN ON ASSETS)<br />
Return on Assets is calculated by dividing net profit (annualised) by total<br />
assets.
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<strong>Telkom</strong> Annual Report 2009<br />
Definitions continued<br />
ROE (RETURN ON EQUITY)<br />
Return on Equity is calculated by dividing net income by the average<br />
of the shareholders’ funds.<br />
SDH (SYNCHRONOUS DIGITAL HIER<strong>AR</strong>CHY)<br />
SDH is used in most modern systems, where multimedia can be<br />
transmitted at high speeds. The networks are shaped in a ring, so that<br />
if there is a problem, the traffic can be redirected in the other direction<br />
and the caller will not detect the interruption.<br />
SMS (SHORT MESSAGE SERVICE)<br />
SMS refers to short, usually text-based messages sent by or to a<br />
wireless subscriber. They are not delivered to the recipient instantly and<br />
have some degree of transmission time delay. SMS messages are<br />
usually limited to total character lengths of 140 to 160 characters.<br />
SWITCH<br />
A switch is a computer that acts as a conduit and director of traffic. It<br />
is a means of sharing resources as a network.<br />
TOTAL INTEREST-BE<strong>AR</strong>ING DEBT<br />
Total interest-bearing debt is defined as short- and long-term interestbearing<br />
debt, including credit facilities, finance leases and other<br />
financial liabilities.<br />
UMTS (UNIVERSAL MOBILE TELECOMMUNICATIONS<br />
SYSTEM)<br />
UMTS is the Western European name for the 3G WCDMA standard<br />
adopted as an evolutionary path by the GSM world. However, it<br />
utilises the radio spectrum in a fundamentally different manner than<br />
GSM. UMTS is based on DCMA technology and the GSM standard<br />
is based on TDMA technology.<br />
VOIP (VOICE OVER INTERNET PROTOCOL)<br />
Voice over Internet Protocol is a protocol enabling voice calls to be<br />
made over the Internet. Rather than a dedicated circuit being set up<br />
between the caller and receiver, as with ordinary phone calls, the<br />
voice conversation is digitised and transmitted over Internet Protocol<br />
using packet-switched data networks.<br />
WAN (WIDE <strong>AR</strong>EA NETWORK)<br />
A WAN comprises LANs in different geographic locations that are<br />
connected, often over the public network.<br />
WAP (WIRELESS APPLICATION PROTOCOL)<br />
WAP is an application environment designed to bridge the gap<br />
between the mobile and Internet worlds. It is a set of communication<br />
protocols for wireless devices designed to provide vendor-neutral and<br />
technology- neutral access to the Internet and advanced<br />
telecommunications services.<br />
W-CDMA (WIDEBAND CODE DIVISION MULTIPLE ACCESS)<br />
W-CDMA is a 3G mobile network that supports services like highspeed<br />
Internet access, video and high quality voice transmission.<br />
WIMAX<br />
WiMAX is a standard for extending broadband wireless access to new<br />
locations and over longer distances. The technology is expected to<br />
enable multimedia applications with wireless connectivity and typically<br />
with a range of up to 30 km. It is a standard for fixed wireless access<br />
with substantially higher bandwidth capabilities than cellular networks.<br />
The emergence of further enhancements to the standard will enable<br />
nomadic data communications across an entire metropolitan area<br />
network linking homes and businesses to the core telecommunications<br />
network. WiMAX can be viewed as a technology complementing<br />
existing ADSL broadband offerings.
Special note regarding forward-looking statements<br />
Many of the statements included in this annual report, as well as oral<br />
statements that may be made by us or by officers, directors or<br />
employees acting on behalf of us, constitute or are based on forward<br />
looking statements within the meaning of the U.S. Private Securities<br />
Litigation Reform Act of 1995, specifically Section 27A of the U.S.<br />
Securities Act of 1933, as amended, and Section 21E of the U.S.<br />
Securities Exchange Act of 1934, as amended. All statements, other<br />
than statements of historical facts, including, among others, statements<br />
regarding our mobile and other strategies, future financial position and<br />
plans, objectives, capital expenditures, projected costs and<br />
anticipated cost savings and financing plans, as well as projected<br />
levels of growth in the communications market, are forward looking<br />
statements. Forward looking statements can generally be identified by<br />
the use of terminology such as “may”, “will”, “should”, “expect”,<br />
“envisage”, “intend”, “plan”, “project”, “estimate”, “anticipate”,<br />
“believe”, “hope”, “can”, “is designed to” or similar phrases, although<br />
the absence of such words does not necessarily mean that a statement<br />
is not forward looking.<br />
These forward looking statements involve a number of known and<br />
unknown risks, uncertainties and other factors that could cause our<br />
actual results and outcomes to be materially different from historical<br />
results or from any future results expressed or implied by such forward<br />
looking statements. Among the factors that could cause our actual<br />
results or outcomes to differ materially from our expectations are those<br />
risks identified in the Sustainability report – Enterprise Risk Management<br />
– Risk factors, including, but not limited to, the effect of global<br />
economic and financial conditions on us, any changes to our mobile<br />
strategy and our inability to successfully implement such strategy and<br />
organisational changes thereto, our ability to turn around Multi-Links’s<br />
financial performance; increased competition in the South African<br />
communications and data communications markets; our ability to<br />
implement our strategy of transforming from basic voice and data<br />
connectivity to fully converged solutions, developments in the regulatory<br />
environment; continued mobile growth and reductions in <strong>Telkom</strong>’s net<br />
interconnect margins; <strong>Telkom</strong>’s ability to expand its operations and<br />
make investments and acquisitions in other African countries and the<br />
general economic, political, social and legal conditions in South Africa<br />
and in other countries where <strong>Telkom</strong> invests; our ability to improve and<br />
maintain our management information and other systems; our ability to<br />
attract and retain key personnel and partners; our ability to replace<br />
revenue, profits and cash flows previously received from Vodacom with<br />
revenue, profits and cash flows from our existing and new businesses;<br />
our negative working capital; changes in technology and delays in the<br />
implementation of new technologies; our ability to reduce theft,<br />
vandalism, network and payphone fraud and lost revenue to nonlicensed<br />
operators; the amount of damages <strong>Telkom</strong> is ultimately<br />
required to pay to Telcordia Technologies Incorporated; the outcome of<br />
regulatory, legal and arbitration proceedings, including tariff<br />
approvals, and the outcome of <strong>Telkom</strong>’s hearings before the<br />
<strong>Telkom</strong> Annual Report 2009 343<br />
Competition Commission and others; any requirements that we<br />
unbundle the local loop, our ability to negotiate favourable terms, rates<br />
and conditions for the provision of interconnection services and<br />
facilities leasing services or if ICASA finds that we have significant<br />
market power or otherwise imposes unfavourable terms and conditions<br />
on us; our ability to implement and recover the substantial capital and<br />
operational costs associated with carrier preselection, number<br />
portability and the monitoring, interception and customer registration<br />
requirements contained in the South African Regulation of Interception<br />
of Communications and Provisions of Communication-Related<br />
Information Act and the impact of these requirements on our business;<br />
<strong>Telkom</strong>’s ability to comply with the South African Public Finance<br />
Management Act and South African Public Audit Act and the impact of<br />
the Municipal Property Rates Act; fluctuations in the value of the Rand<br />
and inflation rates; the impact of unemployment, poverty, crime, HIV<br />
infection, labour laws and labour relations, exchange control<br />
restrictions and power outages in South Africa; and other matters not<br />
yet known to us or not currently considered material by us.<br />
We caution you not to place undue reliance on these forward looking<br />
statements. All written and oral forward looking statements attributable<br />
to us, or persons acting on our behalf, are qualified in their entirety by<br />
these cautionary statements. Moreover, unless we are required by law<br />
to update these statements, we will not necessarily update any of these<br />
statements after the date of this annual report, either to conform them<br />
to actual results or to changes in our expectations.
344<br />
<strong>Telkom</strong> Annual Report 2009<br />
Notice of annual general meeting<br />
<strong>Telkom</strong> SA Limited<br />
(Incorporated in the Republic of South Africa)<br />
(Registration number 1991/005476/06<br />
(JSE and NYSE share code: TKG)<br />
ISIN: ZAE000044897)<br />
(<strong>Telkom</strong> or the Company)<br />
Notice is hereby given that the seventeenth annual general meeting of members will be held on Wednesday 16 September 2009 in The Bill<br />
Gallagher Room, Sandton Convention Centre, Maude Street, Sandton, South Africa at 10:00 to conduct the following business:<br />
1. To receive and consider the annual financial statements for the year ended 31 March 2009.<br />
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<br />
re-election. His profile may be found on page 29 of the annual report.<br />
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<br />
Company and to note that the individual registered auditor who will undertake the audit during the financial year ending 31 March 2010<br />
is Mr R Hillen.<br />
SPECIAL BUSINESS<br />
To consider and if deemed fit, pass the following special resolutions:<br />
Special resolution number 1<br />
It is resolved that the Company’s articles of association be and are hereby amended as follows –<br />
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<br />
2. Article 1.1.1.66 is deleted.<br />
Reason for and effect of special resolution number 1:<br />
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<br />
applicable, namely references to Vodacom, as Vodacom is no longer an associate company of the Company.<br />
Special resolution number 2<br />
RESOLVED THAT the directors of the Company be and are hereby authorised to approve the purchase by the Company, or by any of its<br />
subsidiaries, of the Company’s ordinary shares subject to the provisions of the Companies Act, 1973, as amended, and the Listings Requirements<br />
of JSE Limited (JSE) provided that:<br />
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<br />
15 (fifteen) months from the date of this resolution;<br />
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<br />
any one financial year exceed 20% (twenty percent) of the Company’s issued ordinary share capital at the time that the authority is granted;<br />
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<br />
for the 5 (five) business days immediately preceding the date of such acquisition;<br />
d) the repurchase of the ordinary shares are effected through the order book operated by the JSE trading system and done without any prior<br />
understanding or arrangement between the Company and the counter party (reported trades are prohibited);<br />
e) the Company may only appoint one agent at any point in time to effect any repurchase(s) on the Company’s behalf;<br />
f) the Company or its subsidiary may not repurchase ordinary shares during a prohibited period;<br />
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;<br />
and
<strong>Telkom</strong> Annual Report 2009 345<br />
h) should the Company or any subsidiary cumulatively repurchase, redeem or cancel 3% (three percent) of the initial number of the Company’s<br />
ordinary shares in terms of this general authority and for each 3% (three percent) in aggregate of the initial number of that class acquired<br />
thereafter in terms of this general authority, and announcement shall be made in terms of the Listings Requirements of the JSE.”<br />
Having considered the effect on the Company of the maximum repurchase under this general authority, the directors are of the opinion that:<br />
• 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<br />
of this notice of annual general meeting;<br />
• 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<br />
after the date of this notice of annual general meeting which assets and liabilities have been valued in accordance with the accounting<br />
policies used in the audited financial statements of the Group for the year ended March 31, 2009;<br />
• 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)<br />
months after the date of this notice of annual general meeting; and<br />
• the working capital of the Company and Group are considered adequate for ordinary business purposes for a period of 12 (twelve) months<br />
after the date of this notice of annual general meeting.<br />
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<br />
Company and its subsidiaries in terms of the JSE Listings Requirements prior to the commencement of any share repurchase in terms of this special<br />
resolution.<br />
Reasons for and effect of special resolution number 2:<br />
The reason for this special resolution is to grant the Company’s directors a renewable general authority or permit a subsidiary Company to acquire<br />
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<br />
ordinary shares of the Company which are in issue from time to time.<br />
The Board has considered the impact of a repurchase of up to 20% (twenty percent) of the Company’s shares, being the maximum permissible<br />
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<br />
be advantageous to the Company to repurchase such shares, it is deemed appropriate that the directors be authorised to repurchase the<br />
Company’s shares.<br />
Additional disclosures required in terms of the JSE Listings Requirements<br />
Directors and management – refer to pages 28 to 32 of the annual report.<br />
Major shareholders – refer to page 3 of the annual report.<br />
Directors’ interests in securities – refer to page 229 of the annual report.<br />
Share capital of the Company – refer to page 196 of the annual report.<br />
Directors’ responsibility statement<br />
The directors, whose names appear on pages 28 and 29 of the annual report collectively and individually accept full responsibility for the accuracy<br />
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<br />
which would make any statement false or misleading and that all reasonable enquiries to ascertain such facts have been made and that this special<br />
resolution contains all information required by the Listings Requirements of the JSE.<br />
Litigation statement<br />
The directors, whose names appear on pages 28 and 29 of the annual report , are not aware of any legal or arbitration proceedings, including<br />
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<br />
months a material effect on the Group’s financial position.<br />
Material change<br />
Other than the facts and developments reported on in the annual report which was posted to shareholders [with this notice/or similar wording],<br />
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<br />
annual financial statements and the date of this notice.
346<br />
VOTING AND PROXIES<br />
Ordinary shareholders are entitled to attend, speak and vote at the annual general meeting.<br />
Ordinary shareholders may appoint a proxy to attend, speak and vote in their stead. A proxy need not be a shareholder of the Company.<br />
Shareholders holding dematerialised shares, but not in their own name, must furnish their Central Securities Depositary Participant (CSDP) or broker<br />
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,<br />
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<br />
attached.<br />
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,<br />
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<br />
assume that you do not wish to attend the annual general meeting or send a proxy.<br />
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<br />
to you. Shareholders holding dematerialised shares in their own name, or holding shares that are not dematerialised, and who are unable to<br />
attend the annual general meeting and wish to be represented thereat, must complete the relevant form of proxy attached in accordance with the<br />
instructions therein and lodge it with or mail it to the transfer secretaries.<br />
Forms of proxy should be forwarded to reach the transfer secretaries, Computershare Investor Services (Pty) Ltd by no later than 10:00 on Tuesday<br />
15 September 2009.<br />
The completion of a form of proxy will not preclude a shareholder from attending the annual general meeting.<br />
By order of the Board<br />
Per: ML Lephadi<br />
Group Secretary<br />
10 July 2009<br />
<strong>Telkom</strong> Annual Report 2009<br />
Notice of annual general meeting continued
Form of proxy<br />
<strong>Telkom</strong> SA Limited<br />
(Incorporated in the Republic of South Africa)<br />
(Registration number 1991/005476/06<br />
(JSE and NYSE share code: TKG)<br />
ISIN: ZAE000044897)<br />
(<strong>Telkom</strong> or the Company)<br />
<strong>Telkom</strong> Annual Report 2009<br />
(For completion by certificated shareholders and own-name dematerialised shareholders . Members entitled to attend and vote at the annual<br />
general meeting may appoint one or more proxies to attend ,vote and speak at the annual general meeting in his stead.Such proxy/ies<br />
need not be a member/s of <strong>Telkom</strong>.)<br />
For use at the seventeenth annual general meeting of shareholders of <strong>Telkom</strong> to be held on Wednesday 16 September 2009 in The Bill Gallagher<br />
Room, Sandton Convention Centre, Maude Street, Sandton, South Africa, South Africa at 10:00<br />
I/We (name in BLOCK LETTERS)<br />
Of (address in BLOCK LETTERS)<br />
Being a member/members of the Company holding ordinary shares in the Company,<br />
do hereby appoint:<br />
of<br />
or failing him/her<br />
of<br />
or<br />
of<br />
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<br />
Wednesday 16 September 2009 at 10:00 or at any adjournment thereof, as follows:<br />
1. To receive and adopt the annual financial statements for the year<br />
ended 31 March 2009<br />
2. To re-elect Mr DD Barber as a director in terms of the company’s articles of association<br />
3. To re-appoint Ernst & Young Inc as auditors of the company, to hold office until the<br />
conclusion of the next annual general meeting<br />
4. Special resolution number 1<br />
5. Special resolution number 2<br />
and generally to act as my/our proxy at the said annual general meeting.<br />
(Indicate with an “x” or the relevant number of shares, in the applicable space, how you wish your votes to be cast.)<br />
Unless otherwise directed the proxy will vote as he/she thinks fit.<br />
For Against Abstain<br />
Signed at this day of 2009<br />
Signature of member assisted by (where applicable)<br />
Please read the notes on the reverse side hereof.
Notes<br />
<strong>Telkom</strong> Annual Report 2009<br />
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<br />
stead at the annual general meeting. A proxy need not be a member of the Company.<br />
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<br />
without deleting “the Chairman of the annual general meeting”, but any such deletion or insertion must be initialled by the shareholder. Any<br />
insertion or deletion not complying with the aforegoing will be declared not to have been validly effected. The person whose name stands<br />
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<br />
names follow. In the event that no names are<br />
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<br />
shareholder in the appropriate box provided. An “X” in the appropriate box indicates the maximum number of votes exercisable by that<br />
shareholder. Failure to comply with the above will be deemed to authorise the proxy to vote or abstain from voting at the annual general<br />
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<br />
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,<br />
may not exceed the maximum number of votes exercisable by the shareholder or by his/her proxy<br />
4. To be effective, completed forms of proxy must be lodged with the company’s South African transfer secretaries, Computershare Investor<br />
Services (Proprietary) Limited, no less than 24 hours before the time appointed for the holding of the annual general meeting, excluding<br />
Saturdays, Sundays and public holidays. As the annual general meeting is to be held at 10:00 on Wednesday, 16 September 2009 forms<br />
of proxy must be lodged no later than 10:00 on Tuesday, 15 September 2009.<br />
5. The completion and lodging of this form of proxy will not preclude the relevant shareholder from attending the annual general meeting and<br />
speaking and voting in person thereat instead of any proxy appointed in terms hereof.<br />
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<br />
compliance with these notes.<br />
7. Any alteration to this form, of proxy other than a deletion of alternatives, must be initialled by the signatory.<br />
8. Documentary evidence establishing the authority of the person signing this form of proxy in a representative or other legal capacity must be<br />
attached to this form of proxy unless previously recorded by the Company or the transfer secretaries or waived by the Chairman of the annual<br />
general meeting.<br />
9. Where there are joint holders of shares:<br />
• any one holder may sign this form of proxy; and<br />
• the vote of the senior shareholder (for that purpose, seniority will be determined by the order in which the names of the shareholders appear<br />
in the Company’s register) who tenders a vote (whether in person or by proxy) will<br />
10. This form of proxy is not for completion by those shareholders who have dematerialised their shares (other than those whose shareholding is<br />
recorded in their own name in the sub-register maintained by their Central Securities Depository Participant (CSDP). Such shareholders should<br />
provide their CSDP, broker or nominee with their voting instructions.<br />
South African transfer secretaries<br />
Computershare Investor Services (Proprietary) Limited<br />
Ground Floor, 70 Marshall Street<br />
Johannesburg, South Africa, 2001<br />
(PO Box 61051, Marshalltown, 2107)