| Mon 13 Nov 2006, 9:50 | | Telkom Sept 06 interim results |
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March 31, September September
30, 30,
2006 2005 2006
Rm Rm Rm
16. Number of shares in
issue
Issued and fully paid 6,791 6,791 5,339
533,891,032 (September 5,449 5,449 5,339
30, 2005: 544,944,897;
March 31, 2006:
544,944,897) ordinary
shares of R10 each
1 (September 30, 2005: - - -
1; March 31, 2006: 1)
Class A ordinary share
of R10
1 (September 30, 2005: - - -
1; March 31, 2006: 1)
Class B ordinary share
of R10
Share premium 1,342 1,342 -
Number of Number of Number of
shares shares shares
The following table
illustrates the
movement within the
number of shares
issued:
Shares in issue at 557,031,819 557,031,819 544,944,899
beginning of year
Shares bought back (12,086,920) (12,086,920) (11,053,865)
Shares in issue at end 544,944,899 544,944,899 533,891,034
of year/period
The unissued shares are under the control of the directors of Telkom until
the next Annual General Meeting. The directors have been given the authority
by the shareholders to buy back Telkom"s own shares up to a limit of 20% of
the issued share capital as at October 20, 2006. This authority expires at
the next Annual General Meeting.
March 31, September 30, September 30,
2006 2005 2006
Rm Rm Rm
Treasury shares (1,809) (1,809) (1,775)
At September 30, 2006 12,237,061 (September 30, 2005: 12,687,521; March 31,
2006: 12,687,521) and 10,849,058 (September 30, 2005: 10,849,058; March 31,
2006: 10,849,058) ordinary shares in Telkom, with a fair value of R1,646
million (September 30, 2005: R1,600 million; March 31, 2006: R2,038 million)
and R1,459 million (September 30, 2005: R1,369 million; March 31, 2006:
R1,743 million) are currently held as treasury shares by its subsidiaries
Rossal No 65 (Proprietary) Limited and Acajou Investments (Proprietary)
Limited respectively.
The shares held by Rossal No 65 (Proprietary) Limited are reserved for issue
in terms of the Telkom Conditional Share Plan (TCSP) (Refer to note 17).
The reduction in the treasury shares is due to 450,460 shares that vested in
terms of the TCSP during the six months ended September 30, 2006.
Share buy-back
During the six months ended September 30, 2006 Telkom bought back 11,053,865
ordinary shares at a total consideration of R1,454 million. This reduced
Share capital by R110 million, Share premium by R1,342 million and Retained
earnings by R2 million.
During the year ended March 31, 2006 Telkom bought back 12,086,920 ordinary
shares at a total consideration of R1,502 million. This reduced Share capital
by R121 million and Share premium by R1,381 million.
The shares bought back in the current period are in the process of being
cancelled from the issued share capital by the Registrar of Companies.
March 31, September 30, September 30,
2006 2005 2006
Rm Rm Rm
17. Share-based
compensation
reserve
The compensation reserve represents the cumulative fair value of the equity-
settled share-based payment transactions recognised in employee expenses
during the vesting period of the equity instruments granted to all employees
in terms of the Telkom Conditional Share Plan.
Balance at 68 68 151
beginning of year
Net increase in 83 23 52
equity
Employee cost 120 60 86
Accelerated (37) (37) -
vesting of shares
Vesting and - - (34)
transfer of shares
Balance at end of 151 91 203
year/period
The following tables illustrate the movement of the maximum number of shares
that will vest to employees:
Number of Number of Number of
shares shares shares
August 2004 grant:
Outstanding at beginning 2,943,124 2,943,124 2,414,207
of the year
Granted during the 90 - 1,077
year/period
Forfeited during the (67,573) (43,792) (38,226)
year/period
Settled during the (444,093) (416,903) -
year/period
Vested during the (17,341) (17,341) (450,460)
year/period
Outstanding at end of the 2,414,207 2,465,088 1,926,598
year/period
June 2005 grant:
Outstanding at beginning - - 1,930,687
of the year
Granted during the 2,024,465 2,024,387 935
year/period
Forfeited during the (62,354) (30,503) (32,564)
year/period
Settled during the (19,096) - -
year/period
Vested during the (12,328) (12,328) -
year/period
Outstanding at end of the 1,930,687 1,981,556 1,899,058
year/period
At September 30, 2006 the estimated total compensation expense to be
recognised over the vesting period is R375 million (September 30, 2005: R376
million; March 31, 2006: R381 million), of which R86 million (September 30,
2005: R55 million; March 31, 2006: R127 million) was recognised in employee
expenses for the six months ended September 30, 2006.
March 31, September September 30,
30,
2006 2005 2006
Rm Rm Rm
Interest-
bearing debt
Long-term 7,655 9,702 8,544
portion of
interest-
bearing debt
Local debt 6,296 8,320 6,484
Foreign debt 127 198 857
Finance 1,232 1,184 1,203
leases
Current 3,468 2,228 3,722
portion of
interest-
bearing debt
Local debt 2,642 1,433 3,437
Foreign debt 786 763 237
Finance 40 32 48
leases
Movements in borrowings for the six month period ended September 30, 2006 are
as follows:
Repayments/refinancing
Commercial Paper Bills with a nominal value of R430 million were redeemed in
the current financial period. These redemptions were financed with cash flow
from operations. Commercial Paper Bills with a nominal value of R1,146
million were issued and were outstanding as at September 30, 2006. These
Commercial Paper Bills range in maturities from 3 to 5 days.
The medium-term loan to Vodacom International Limited that amounts to R1,382
million (Group share: R691 million) was refinanced during the current period.
The loan is now repayable on July 26, 2009 and bears interest at an effective
interest rate of LIBOR plus 0.35%.
Repayment/refinancing of current portion of interest-bearing debt
The repayment/refinancing of R3,722 million of the current portion of
interest-bearing debt will depend
on the market circumstances at the time of repayment. Included in the R3,722
million current portion is R2,100 million nominal value of the TL06 local
bond that was repaid/refinanced on October 31, 2006 with cash from operations
and Commercial Paper Bills respectively.
Management believes that sufficient funding facilities will be available at
the date of repayment/refinancing.
March 31, September September
30, 30,
2006 2005 2006
Rm Rm Rm
19. Commitments
Capital commitments
Capital commitments 10,265 4,938 6,621
authorised
Fixed-line 6,519 3,236 3,955
Mobile 3,746 1,702 2,666
Commitments against 842 1,264 2,067
authorized capital
expenditure
Fixed-line 200 550 721
Mobile 642 714 1,346
Authorised capital 9,423 3,674 4,554
expenditure not yet
contracted
Fixed-line 6,319 2,686 3,234
Mobile 3,104 988 1,320
Management expects these commitments to be financed from internally generated
cash and other borrowings.
Other
The Group exposure is 50% of the following items:
Regulation of Interception of Communications and Communications-Related
Information Act (`the Act")
The Act was proclaimed in the Government Gazette and has been made effective
September 30, 2005 with the exception of the provisions dealing with customer
registration which will come into effect once the legislative amendments
allowing for electronic registration process are finalised. The cellular
operators have succeeded in obtaining in principle support by the Department
of Justice for an electronic registration process. The legislative amendments
necessary to allow for electronic registration process are anticipated to be
finalised before the end of 2006. Though the legislative process is still to
be finalised, the other obligations imposed on the telecommunications
services providers in terms of the legislation have become effective. In
particular, the Vodacom Group had until May 28, 2006 to acquire and implement
the monitoring and interception facilities as per the technical
specifications of the facilities agreed upon between the Group and the
Department of Justice and promulgated on November 28, 2005. A reliable
estimate of capital and operating costs that will potentially be incurred in
order to comply with the provisions of the Act going forward cannot be
determined at this stage.
Global Alliance fees
The Vodacom Group pays annual fees from February 18, 2005 for the services
provided by Vodafone Group Plc. The fee is calculated as a percentage of
revenue and amounts to R119 million (March 31, 2006: R175 million).
Cointel VAS (Proprietary) Limited
An offer to acquire the remaining 49% interest in Cointel VAS (Proprietary)
Limited (`Cointel") for R147 million from the minority shareholders was made
and accepted. The effective date of the transaction is October 4, 2006.
Subsequent to the purchase, Cointel will be fully sold by Vodacom Group
(Proprietary) Limited to Smartphone SP (Proprietary) Limited for R300 million
effective October 9, 2006. The Vodacom Group"s effective shareholding in
Cointel will therefore increase from 51% to 70% subsequent to the completion
of these transactions.
Africell Cellular Services (Proprietary) Limited
An offer to acquire the cellular business of Africell Cellular Services
(Proprietary) Limited for R80 million was made and accepted. Competition
Commission approval has been obtained and the effective date of the
transaction is October 1, 2006. Management is still in the process of
determining the fair value of all the identifiable assets, liabilities and
contingent liabilities relating to Africell and disclosure thereof as
required per IFRS3 Business Combinations would therefore be premature.
March 31, September 30, September 30,
2006 2005 2006
Rm Rm Rm
20. Contingencies
Third parties 30 30 31
Fixed-line 27 30 28
Mobile 3 - 3
Guarantee of 55 61 45
employee housing
loans
Third parties
These amounts represent sundry disputes with third parties that are not
individually significant and that the Group does not intend to settle.
Guarantee of employee housing loans
Telkom guarantees a certain portion of employees" housing loans. The amount
guaranteed differs depending on facts such as employment period and salary
rates. When an employee leaves the employment of Telkom, any housing debt
guaranteed by Telkom is settled before any pension payout can be made to the
employee. Telkom recognises a provision when it becomes probable that a
guarantee will be called. There is no provision outstanding in respect of
these contingencies. The maximum amount of the guarantee in the event of the
default is as disclosed above.
Supplier dispute
Expenditure of R594 million was incurred up to March 31, 2002 for the
development and installation of an integrated end-to-end customer assurance
and activation system to be supplied by Telcordia. In the 2001 financial
year, the agreement with Telcordia was terminated and in that year, the
Company wrote off R119 million of this investment. Following an assessment of
the viability of the project, the balance of the Telcordia investment was
written off in the 2002 financial year. During March 2001, the dispute was
taken to arbitration where Telcordia was seeking approximately USD130 million
plus interest at a rate of 15.50% per year for money outstanding and damages.
In September 2002, a partial ruling was issued by the arbitrator in favour of
Telcordia. Telkom brought an application in the High Court in South Africa to
review and set aside the partial award. Judgement in Telkom"s favour was
handed down on November 27, 2003.
On July 29, 2004, Telcordia filed a further petition to enforce the
arbitrator"s partial award in the District Court of New Jersey, USA. On
December 8, 2004 the court dismissed Telcordia"s petition. Telcordia"s
subsequent appeal was dismissed by the 3rd Circuit Appeal Court with one
exception - it reversed the issue of the dismissal of the previous courts"
decision on the basis that the US courts did not have personal jurisdiction
over Telkom. Telkom has instructed its attorneys to pursue an appeal on this
aspect only, to prevent Telcordia from bringing similar petitions in the
future.
On November 29, 2004, the Supreme Court of Appeals, Bloemfontein granted
Telcordia leave to appeal. The appeal was set down for hearing on October 30
and 31, 2006. Judgement is expected to be handed down before the end of 2006.
The dispute between Telkom and Telcordia and the amount of Telkom"s liability
are not expected to be finalised until the end of 2006. As Telkom does not
believe it has a present obligation, it has provided RNil (September 30,
2005: RNil, March 31, 2006: RNil) for its estimate of probable liabilities.
Competition Commission
The South African Value Added Network Services
The South African Value Added Network Services (`SAVA"), an association of
value added network services (`VANS") providers, filed complaints against
Telkom at the Competition Commission regarding alleged anti-competitive
practices on the part of Telkom. Certain of the complaints have been referred
to the Competition Tribunal by the Competition Commission for adjudication. A
maximum administrative penalty of up to 10%, calculated with reference to
Telkom"s annual turnover, excluding the turnover of subsidiaries and joint
ventures, for the financial year prior to the complaint date, may be imposed
if it is found that Telkom has committed a prohibited practice as set out in
the Competition Act, 1998 (as amended). The Competition Commission has to
date not imposed the maximum penalty.
Telkom has brought an application in the High Court in respect of the
Competition Tribunal"s jurisdiction to adjudicate this matter. Only the
Competition Commission has opposed the application. Telkom is currently
waiting for certain confidential documents contained in the Competition
Commission"s record of proceedings, after which Telkom may supplement their
papers if necessary and after which the Competition Commission must file
their answering affidavit. Telkom"s attorneys are corresponding with the
Competition Commission in this regard. Telkom is currently waiting for the
Competition Commission to file its record of proceedings. The Competition
Commission has now approached the High Court on application for an order
directing which of the confidential documents can be included in the record
of proceedings.
Telkom does not expect the Competition Tribunal to adjudicate on this matter
within the next financial year.
The Internet Service Providers Association
The Internet Service Providers Association (`ISPA"), an association of
internet service providers (`ISPs"), filed complaints against Telkom at the
Competition Commission regarding alleged anti-competitive practices on the
part of Telkom. A maximum administrative penalty of up to 10%, calculated
with reference to Telkom"s annual turnover, excluding the turnover of
subsidiaries and joint ventures, for the financial year prior to the
complaint date, may be imposed if it is found that Telkom has committed a
prohibited practice as set out in the Competition Act, 1998 (as amended). The
complaints deal with the cost of access to the South African Internet
Exchange (`SAIX"), the prices offered by TelkomInternet, the alleged delay in
provision of facilities to ISPs and the alleged favourable installation
timelines offered to TelkomInternet customers. The Competition Commission has
formally requested Telkom to provide it with certain records of orders placed
for certain services, in an attempt to first investigate the latter aspects
of the complaint.
Retention incentives
The Vodacom Group has committed a maximum of R1,296 million (September 30,
2005: R243 million; March 31, 2006: R456 million) in respect of customers
already beyond their normal 24 month contract period, but who have not yet
upgraded to new contracts, and therefore have not utilised the incentive
available for such upgrades. The Group has not provided for this liability,
as no legal obligation exists, since the customers have not yet entered into
new contracts.
Activation bonuses
The Vodacom Group has a potential liability in respect of activation bonuses
payable related to starterpacks sold which have not yet been validated. The
exposure is estimated at approximately R8 million (March 31, 2006: R9
million).
Negative working capital ratio
At each of the financial periods ended September 30, 2006, September 30, 2005
and the year ended March 31, 2006 the Group had a negative working capital
ratio. A negative working capital ratio arises when current liabilities are
greater than current assets. Current liabilities are intended to be financed
from operating cash flows, new borrowings and borrowings available under
existing credit facilities.
VM, S.A.R.L. call option
In terms of the shareholders" agreement, the Vodacom Group"s minority
shareholder in VM, S.A.R.L., Empresa Mocambicana De Telecommunicacoes
S.A.R.L. (`Emotel") has a call option for a period of four years following
the commencement date, August 23, 2003. In terms of the option, Emotel shall
be entitled to call on Vodacom International Limited such number of shares in
and claims on loan accounts against VM, S.A.R.L. as constitute 25% of the
entire issued share capital of that company. Emotel can exercise this option
in full increments of 1%. The option can only be exercised on April 1 or
October 1 of each calendar year for the duration of the option. The option
price is specified in the shareholders" agreement. The call option has a RNil
value at September 30, 2006 (March 31, 2006: RNil).
Smartphone SP (Proprietary) Limited put option
In terms of the shareholders" agreement, the minority shareholders of
Smartphone SP (Proprietary) Limited have a put option against Vodacom Group
(Proprietary) Limited, should the Vodacom Group or the company terminate or
fail to renew the service provider agreement for any reason other than the
expiry or cancellation of the Group"s South African licence. The put option
has a RNil value at September 30, 2006 (March 31, 2006: RNil) as the
conditions set out in the agreement have not been met.
Smartcom (Proprietary) Limited put option
In terms of the agreement between the Vodacom Group, Smartphone SP
(Proprietary) Limited (`Smartphone") and the minority shareholders of
Smartcom (Proprietary) Limited (`Smartcom"), all shareholders of Smartcom
have a put option against the Vodacom Group, should the Vodacom Group reduce
the standard service provider discount below certain percentages as
stipulated in the put option agreement. The put option has a RNil value at
September 30, 2006 (March 31, 2006: RNil) as the conditions set out in the
agreement have not been met.
Congolese Wireless Network s.p.r.l. put option
In terms of a shareholders" agreement, the Vodacom Group"s joint venture
partner in Vodacom Congo (RDC) s.p.r.l., Congolese Wireless Network s.p.r.l.
(`CWN") has a put option which comes into effect three years after the
commencement date, December 1, 2001, and for a maximum of five years
thereafter. In terms of the option, CWN shall be entitled to put to Vodacom
International Limited such number of shares in and claims on its loan account
against Vodacom Congo (RDC) s.p.r.l. as constitute 19% of the entire issued
share capital of that company. CWN can exercise this option in a maximum of
three tranches and each tranche must consist of at least 5% of the entire
issued share capital of Vodacom Congo (RDC) s.p.r.l. The option price will be
fair market value of the related shares at the date the put option is
exercised.
In terms of IAS32 Financial Instruments: Disclosure and Presentation
(`IAS32"), a contract that contains an obligation for an entity to purchase
its own equity instruments for cash or another financial asset gives rise to
a financial liability for the present value of the redemption amount. In
accordance with IAS39 Financial Instruments: Recognition and Measurement
(`IAS39"), all subsequent changes in the fair value of the financial
liability should be recognised as income or expense within the consolidated
income statement.
In terms of IAS32, the put option gives rise to a financial liability of R183
million (Group share: R92 million) at September 30, 2006 (March 31, 2006:
RNil).
Cointel VAS (Proprietary) Limited put option
In terms of the sale of shares agreement between the Vodacom Group and the
sellers of shares in Cointel VAS (Proprietary) Limited (`Cointel"), the
sellers have been granted a put option that requires Vodacom Group to
purchase all (and not part only) of the sellers" shares in Cointel. The
sellers will only be capable to exercise the put option if the recharge
agreement with Vodacom (Proprietary) Limited is not continued after August
31, 2008 on terms and conditions reasonably acceptable to the sellers. The
put option has a RNil value at September 30, 2006 (March 31, 2006: RNil) as
the conditions set out in the agreement have not been met.
March 31, September 30, September 30,
2006 2005 2006
Rm Rm Rm
21. Segment information
Eliminations represent
the inter-segmental
transactions that have
been eliminated
against segment
results. The mobile
segment represents the
Group"s joint venture
Vodacom.
Business Segment
Consolidated revenue 47,625 23,447 25,147
Fixed-line 32,749 16,398 16,514
??To external 32,039 16,074 16,139
customers
??Intercompany 710 324 375
Mobile 17,021 8,088 9,733
??To external 15,586 7,373 9,008
customers
??Intercompany 1,435 715 725
Elimination (2,145) (1,039) (1,100)
Other income 480 287 213
Fixed-line 430 270 189
Mobile 50 20 24
Elimination - (3) -
Operating expenses 33,428 16,109 17,675
Fixed-line 22,937 11,156 11,501
Elimination (1,435) (718) (725)
Mobile 12,636 5,995 7,274
Elimination (710) (324) (375)
Consolidated operating 14,677 7,625 7,685
profit
Fixed-line 10,242 5,512 5,202
Elimination 725 394 350
Mobile 4,435 2,113 2,483
Elimination (725) (394) (350)
Consolidated 397 217 170
investment income
Fixed-line 2,583 1,037 1,406
Elimination (2,250) (850) (1,250)
Mobile 64 30 14
Consolidated finance 1,223 744 437
charges
Fixed-line 839 524 425
Mobile 384 220 12
Consolidated taxation 4,523 2,739 2,844
Fixed-line 2,981 2,012 1,916
Mobile 1,542 727 928
Minority interests 139 71 74
Fixed-line 81 59 53
Mobile 58 12 21
Profit attributable to 9,189 4,288 4,500
equity holders of
Telkom
Fixed-line 8,924 3,954 4,214
Elimination (1,525) (456) (900)
Mobile 2,515 1,184 1,536
Elimination (725) (394) (350)
Consolidated assets 54,306 50,586 53,540
Fixed-line 43,748 39,199 42,120
Mobile 12,262 12,550 13,029
Elimination (1,704) (1,163) (1,609)
Investments 2,963 2,523 1,235
Fixed-line 2,861 2,523 1,112
Mobile 102 - 123
Financial assets 275 394 576
Fixed-line 256 262 434
Mobile 19 132 142
Total assets 57,544 53,503 55,351
Consolidated 15,171 15,124 14,380
liabilities
Fixed-line 10,409 9,603 9,000
Mobile 6,466 6,684 6,989
Elimination (1,704) (1,163) (1,609)
Interest-bearing debt 11,123 11,930 12,266
Fixed-line 9,889 10,638 10,894
Mobile 1,234 1,292 1,372
Financial liabilities 235 350 122
Fixed-line 205 297 119
Mobile 30 53 3
Tax liabilities 1,549 1,576 583
Fixed-line 1,234 1,298 342
Mobile 315 278 241
Total liabilities 28,078 28,980 27,351
Other segment
information
Capital expenditure 6,310 2,565 3,913
for property, plant
and equipment
Fixed-line 3,960 1,423 2,546
Mobile 2,350 1,142 1,367
Capital expenditure 1,196 531 277
for intangible assets
Fixed-line 975 435 73
Mobile 221 96 204
Depreciation and 5,714 2,740 2,454
amortisation
Fixed-line 4,216 2,037 1,667
Mobile 1,498 703 787
Impairment and asset 162 64 86
write-offs
Fixed-line 188 98 67
Mobile (26) (34) 19
March September September
31, 30, 30,
2006 2005 2006
Rm Rm Rm
22. Related parties
Details of material
transactions and balances
with related parties not
disclosed elsewhere in
the condensed
consolidated interim
financial statements were
as follows:
With joint venture:
Vodacom Group
(Proprietary) Limited
Related party balances
Trade receivables 48 46 59
Trade payables (256) (267) (303)
Related party
transactions
Income (710) (324) (375)
Expenses 1,435 715 725
Audit fees 3 1 1
With shareholder:
Government
Related party balances
Trade receivables 194 214 236
Related party
transactions
Revenue (2,106) (1,060) (1,105)
With entities under
common control:
Major public entities
Related party balances
Trade receivables 30 32 46
Trade payables (2) (2) (5)
The outstanding balances
are unsecured and will be
settled in cash in the
ordinary course of
business.
Related party
transactions
Revenue (346) (172) (149)
Expenses 172 79 94
Rent received (17) (5) (9)
Rent paid 56 5 35
With key management
personnel:
(Including directors"
emoluments)
Short-term employee 171 90 114
benefits*
Post-employment benefits 4 1 3
Termination benefits 12 2 -
Equity compensation 6 3 2
benefits
* The comparatives for March 31, 2006 and September 30, 2005 were restated to
include directors" emoluments of Vodacom which were previously excluded.
Terms and conditions of transactions with related parties
The sales to and purchases from related parties of telecommunication services
are made at arm"s length prices. Except as indicated above, outstanding
balances at the year-end are unsecured, interest free and settlement occurs
in cash. There have been no guarantees provided or received for any related
party receivables or payables. Except as indicated above, for the six months
ended September 30, 2006, the Group has not made any impairment of amounts
owed by related parties (September 30, 2005: Nil; March 31, 2006: Nil). This
assessment is undertaken each financial year through examining the financial
position of the related party and the market in which the related party
operates.
March 31, September 30, September 30,
2006 2005 2006
Rm Rm Rm
23. Acquisition of minorities
Smartphone SP (Proprietary) Limited and subsidiaries
On August 30, 2006, the Vodacom Group acquired a further 19% interest in the
equity of Smartphone SP (Proprietary) Limited, which had a 85.75%
shareholding in Smartcom (Proprietary) Limited at that time, 100%
shareholding in Stand 13 Eastwood Road Dunkeld (Proprietary) Limited and 52%
shareholding in Ithuba Smartcall (Proprietary) Limited. The acquisition was
preliminarily accounted for using the parent entity extension method.
Minority interest acquired 11
Goodwill 157
Purchase price (including capitalised cost) 168
The purchase price (excluding capitalised cost) of R167 million was payable
at September 30, 2006 and included as part of Trade and other payables at
that date. The goodwill related to the acquisition represents future
synergies and are allocated to the South African cash-generating unit.
Smartcom (Proprietary) Limited
On September 13, 2006, the Vodacom Group acquired a further 2.25% interest in
the equity of Smartcom (Proprietary) Limited. The acquisition was
preliminarily accounted for using the parent entity extension method.
Minority interest acquired (
