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THE SECURITIES EXCHANGE ACT OF 1934
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THE SECURITIES EXCHANGE ACT OF 1934
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THE SECURITIES EXCHANGE ACT OF 1934
the Securities and Exchange Commission.
file such reports) and (2) has been subject to such filing requirements for the past 90 days.
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Financial Statements of this Annual Report on Form 20-F and the consolidated financial information
of the Telkom Group and Vodacom as of and for the years ended March 31, 2004 and 2003
contained herein have been restated from those financial statements previously presented to reflect
certain restatements, reclassifications and changes in accounting policies. The consolidated financial
statements and related financial information of the Telkom Group and Vodacom as of and for each of
the years ended March 31, 2002 and 2001 cannot be provided on a restated basis without unreasonable
effort or expense. The Telkom Group has not amended, and does not intend to amend, its
previously filed Annual Reports on Form 20-F for the years affected by the restatements,
reclassifications and changes in accounting policies that ended prior to the year ended March 31,
2005. For this reason, those prior Annual Reports and the consolidated financial statements and
applicable notes thereto, auditors’ reports and related financial information contained in such reports
should no longer be relied upon. For a description of the restatements, see Item 5. “Operating and
Financial Review and Prospects,” note 2 of the notes to the audited consolidated financial statements
of the Telkom Group and note 23 of the notes to the audited consolidated financial statements of
Vodacom included herein.
and references to “Telkom” in this annual report refer only to Telkom SA Limited. References to
“Vodacom” in this annual report refer to Telkom’s 50% owned joint venture, Vodacom Group
(Proprietary) Limited, and its subsidiaries. We do not control Vodacom, the management of which
requires consensus agreement among its shareholders who are party to Vodacom’s joint venture
agreement.
forward looking statements within the meaning of the U.S. Private Securities Litigation Reform Act of
1995, specifically Section 27A of the U.S. Securities Act of 1933, as amended, and Section 21E of
the U.S. Securities Exchange Act of 1934, as amended. All statements, other than statements of
historical facts, including, among others, statements regarding our future financial position and plans,
strategies, objectives, capital expenditures, projected costs and anticipated cost savings and financing
plans, as well as projected levels of growth in the communications market, are forward looking
statements. Forward looking statements can generally be identified by the use of terminology such as
“may,” “will,” “should,” “expect,” “envisage,” “int end,” “plan,” “project,” “estimate,” “anticipate,” “believe,”
“hope,” “can,” “is designed to” or similar phrases, although the absence of such words does not
necessarily mean that a statement is not forward looking.
historical results or from any future results expressed or implied by such forward looking statements.
Among the factors that could cause our actual results or outcomes to differ materially from our
expectations are those risks identified in Item 3. “Key Information–Risk Factors,” including, but not
limited to, increased competition in the South African fixed-line and mobile communications markets;
developments in the regulatory environment; continued mobile growth and reductions in Vodacom’s
and Telkom’s net interconnect margins; Vodacom’s and Telkom’s ability to expand their operations and
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conditions in South Africa and in other countries where Vodacom and Telkom invest; our ability to
attract and retain key personnel; our inability to appoint a majority of Vodacom’s directors and the
consensus approval rights at Vodacom may limit our flexibility and ability to implement our preferred
strategies; Vodacom’s continued payment of dividends or distributions to us; our ability to improve and
maintain our management information and other systems; our negative working capital; changes and
delays in the implementation of new technologies; our ability to reduce theft, vandalism, network and
payphone fraud and lost revenue to non-licensed operators; our ability to improve our internal control
over financial reporting; health risks to related mobile handsets, base stations and associated
equ ipment; our control by the Government of the Republic of South Africa; the outcome of regulatory,
legal and arbitration proceedings, including tariff approvals, and the outcome of Telkom’s hearing
before the Competition Commission related to the VANs litigation, its proceedings with Telcordia
Technologies Incorporated and others; our ability to negotiate favorable terms, rates and conditions for
the provision of interconnection services; our ability to implement and recover the substantial capital
and operational costs associated with carrier pre-selection, number portability and monitoring and
interception; Telkom’s ability to comply with the South African Public Finance Management Act and
South African Public Audit Act and the impact of the Municipal Property Rates Act; fluctuations in the
value of the Rand; the impact of unemployment, poverty, crime and HIV infection, labor laws and
exchange control restrictions in South Africa; and other matters not yet known to us or not currently
considered material by us.
entirety by these cautionary statements. Moreover, unless we are required by law to update these
statements, we will not necessarily update any of these statements after the date of this annual
report, either to conform them to actual results or to changes in our expectations.
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includes our 50% interest in the results, assets, liabilities and equity of Vodacom, which we
proportionately consolidate. Unless otherwise indicated, fixed-line statistical data is derived from the
results of operations of our fixed-line segment, which provides fixed-line voice and data
communications services through Telkom; directory services through our 64.9% owned subsidiary,
Telkom Directory Services; and wireless data services through our wholly owned subsidiary, Swiftnet.
Group and note 23 of the notes to the audited consolidated financial statements of Vodacom included
in this annual report.
policies. The consolidated financial statements and related financial information of the Telkom Group
and Vodacom as of and for each of the years ended March 31, 2002 and 2001 cannot be provided on
a restated basis without unreasonable effort or expense. The Telkom Group has not amended,
and does not intend to amend, its previously filed Annual Reports on Form 20-F for the years affected
by the restatements, reclassifications and changes in accounting policies that ended prior to the year
ended March 31, 2005. For this reason, those prior Annual Reports and the consolidated financial
statements and applicable notes thereto, auditors’ reports and related financial information contained
in such reports should no longer be relied upon.
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financial statements included in this annual report, which have been audited by Ernst & Young,
Registered Accountants and Auditors, Chartered Accountants (SA).
US Generally Accepted Accounting Principles, or US GAAP. For a description of the principal
differences between IFRS and US GAAP relevant to the consolidated financial statements of the
Telkom Group and a reconciliation to US GAAP of net income and shareholders’ equity, see note 47
of the notes to the audited consolidated financial statements of the Telkom Group as of and for each
of the three years ended March 31, 2005 included in this annual report.
additional information to investors since it is widely accepted by analysts and investors as a basis for
comparing a company’s underlying operating profitability with that of other companies as it is not
influenced by past capital expenditures or business acquisitions, a company’s capital structure or the
relevant tax regime. This is particularly the case in a capital intensive industry such as
communications. It is also a widely accepted indicator of a company’s ability to service its long-term
debt and other fixed obligations and to fund its continued growth. EBITDA is not a US GAAP or IFRS
measure. You should not construe EBITDA as an alternative to operating profit or cash flows from
operating activities determined in accordance with US GAAP or IFRS or as a measure of liquidity.
EBITDA is not defined in the same manner by all companies and may not be comparable to other
similarly titled measures of other companies unless the definition is the same. In addition, the
calculation of EBITDA for the maintenance of our covenants contained in our TL20 bond is based on
accounting policies in use, consistently applied, at the time the indebtedness was incurred. As a
result, EBITDA for purposes of those covenants is not calculated in the same manner as it is
calculated in the table below.
payphones, but excluding internal lines in service. We calculate fixed-line penetration, or teledensity,
based on the total number of telephone lines in service at the end of the period per 100 persons in
the population of South Africa. Population is the estimated South African population at the mid year in
the periods indicated as published by Statistics South Africa, a South African governmental
department. We calculate fixed-line traffic, other than international outgoing mobile traffic,
international interconnection traffic and international voice over internet protocol traffic, by dividing
traffic operating revenue for the particular category by the weighted average tariff for such category
during the relevant period. Fixed-line international outgoing mobile traffic and international
interconnect ion traffic are based on the traffic registered through the respective exchanges and
reflected in international interconnection invoices. International voice over internet protocol traffic is
based on the traffic reflected in invoices. We calculate revenue per fixed access line by dividing total
fixed-line revenue during the period, excluding data and directories and other revenue, by the average
number of fixed access lines during the period. We calculate our number of fixed lines per fixed-line
employee on the basis of fixed access lines in service at period end divided by the number of
employees of Telkom at period end.
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“Key Information–Exchange Rates” on March 31, 2005, the date of the Telkom Group’s most recent
consolidated balance sheet included in this annual report. These translations should not be construed
as representations that the Rand amounts could actually be converted into US dollars at these rates
or at all.
and the notes thereto of the Telkom Group and Vodacom Group included in this annual report.
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ended March 31, 2005, 2004 and 2003, respectively.
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liabilities related to Telkom’s arbitration with Telcordia in terms of IAS21 and IAS39 in finance charges as a result of the
strengthening of the Rand. In addition, we included a provision for interest of R40 million related to Telcordia in finance
charges in the year ended March 31, 2003 and a provision for legal fees of R58 million related to Telcordia is included in
services rendered in the year ended March 31, 2003. In the year ended March 31, 2004, all of these provisions were
reversed.
and R189 million in the 2005, 2004 and 2003 financial years, respectively.
Africa.
ISDN line includes two access channels and each primary ISDN line includes 30 access channels.
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Vodacom’s results of operations. Unless otherwise indicated, information with respect to Vodacom’s
other African operations in the Vodacom table reflects 100% of the operations of Vodacom’s
subsidiaries in Lesotho, Tanzania and Mozambique. Vodacom Congo was fully consolidated as a
subsidiary in Vodacom’s consolidated financial statements effective April 1, 2004 after certain clauses
granting the outside shareholders participating rights had been removed from the Vodacom Congo
shareholders agreement. As a result, unless otherwise indicated, information with respect to Vodacom
Congo in the table reflects Vocacom’s 51% joint venture interest in Vodacom Congo that was
proportionately consolidated in Vodacom’s consolidated financial statements in the years ended
March 31, 2004 and 2003 and 100% of Vodacom Congo in the year ended March 31, 2005. We
proportionately consolidate our 50% interest in Vodacom in the Telkom Group’s consolidated financial
statements. Vodacom’s other operating income, direct network operating costs, depreciation, staff
expenses, marketing and advertising expenses, general administration expenses, amortization of
intangible assets and integration costs, disposal of operations and impairments are presented as
separate line items in Vodacom’s consolidated financial statements, but have been combined under
the heading “operating expenses” in the table set forth below.
expensed immediately in accordance with the principles contained in United States
accounting guidance as detailed in the Emerging Issues Task Issue No. 00-21, Revenue
Arrangements with Multiple deliverables;
revised IAS21;
operating structure. These reclassifications did not impact net profit, net assets or cash flows
and include the following:
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upgrades on handsets and the transfer of handsets between different management systems;
and
has a right of set off in the relevant section of the balance sheet.
decreased with R549.8 million and R737.5 million in the years ended March 31, 2003 and 2004,
respectively.
statements of Vodacom included in this annual report.
changes to the basis of preparation. The selected financial information and consolidated financial
statements as of and for each of the two years ended March 31, 2002 have not been presented
as these cannot be provided on a comparable basis, without unreasonable effort or expense.
The Telkom Group has not amended, and does not intend to amend, its previously filed Annual
Reports on Form 20-F. For this reason, those prior Annual Reports and the consolidated financial
statements and applicable notes thereto, and related financial information contained in such reports
should not be relied upon.
statements included in this annual report, which were audited by Deloitte & Touche Registered
Accountants and Auditors, Chartered Accountants (SA).
IFRS and US GAAP relevant to the financial statements of Vodacom and a reconciliation to US GAAP
of net income and shareholders’ equity, see note 45 of the notes to the audited consolidated financial
statements of Vodacom as of and for each of the three years ended March 31, 2005 included in this
annual report.
information to investors since it is widely accepted by analysts and investors as a basis for comparing
a company’s underlying operating profitability with that of other companies as it is not influenced by
past capital expenditures or business acquisitions, a company’s capital structure or the relevant tax
regime. This is particularly the case in a capital intensive industry such as communications. It is also a
widely accepted indicator of a company’s ability to service its long-term debt and other fixed
obligations and to fund its continued growth. EBITDA is not a US GAAP or IFRS measure. You should
not construe EBITDA as an alternative to operating profit or cash flows from operating activities
determined in accordance with US GAAP or IFRS or as a measure of liquidity. EBITDA is not define d
in the same manner by all companies and may not be comparable to other similarly titled measures of
other companies unless the definition is the same.
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indicated. See Item 4. “Information on the Company–Business Overview–Mobile
Communications–South Africa–Customers” for a discussion of Vodacom’s procedures with respect to
disconnections and inactive customers. Vodacom’s churn is calculated by dividing the average
monthly number of disconnections during the period by the average monthly total reported customer
base during the period. Vodacom’s market share is derived from Vodacom’s total customers, MTN’s
total reported mobile subscribers and Cell C’s total estimated mobile subscribers. Vodacom calculates
penetration, or teledensity, based on the total number of customers at the end of the period per
100 persons in the population of South Africa. Population is the estimated South Africa n population at
the mid-year in the periods indicated as published by Statistics South Africa, a South African
governmental department. Vodacom’s traffic comprises total traffic registered on Vodacom’s network,
including bundled minutes, outgoing international roaming calls and calls to free services, but
excluding national and incoming international roaming calls. Vodacom’s average monthly revenue per
customer, or ARPU, is calculated by dividing the average monthly revenue during the period by the
average monthly total reported customer base during the period. ARPU excludes revenue from
equipment sales, other sales and services and revenue from national and international users roaming
on Vodacom’s networks. Vodacom’s average monthly minutes of use per customer, or average MOU,
is calculated by dividing the average monthly minutes during the period by the average monthly total
reported customer base during the period. MOU excludes calls to free serv ices, bundled minutes and
data minutes. Cumulative network capital expenditure per customer is the cumulative network capital
expenditure since the launch of Vodacom’s South African network divided by Vodacom’s average
customers in South Africa for the period.
“Key Information–Exchange Rates,” on March 31, 2005, the date of Vodacom’s most recent balance
sheet included in this annual report. These translations should not be construed as representations
that the Rand amounts could actually be converted into US dollars at these rates or at all.
and the notes thereto of the Telkom Group and Vodacom Group included in this annual report.
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Amounts in accordance with IFRS
Revenue
Net profit for the year
Amounts in accordance with IFRS
Total assets
Shareholders’ equity
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2003, respectively.
facilities.
generating activity has been recorded for a period of three consecutive months. In the 2005 financial year, a software
error was identified in the calculation of inactive customers. Vodacom has corrected inactive customers as of March 31,
2005. Information for prior years is unavailable.
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the credit risk terminates their contract due to non-payment. Prepaid customers were disconnected if they did not
recharge their vouchers after being in time window lock for six months for periods prior to November and December 2002,
for four months for periods from November and December 2002 until April 2003 and for three months from April 2003 until
December 2003. Time window lock occurs when a customer’s paid active time window, or access period expires. In
December 2003, Vodacom changed the deactivation rule for prepaid customers to align itself with European and industry
standards. From December 2003, prepaid customers are disconnected from its network if they record no revenue
generating activity within a period of 215 consecutive days. See “Item 4. “Information on the Company–Business
Overview–Mobile communications-South Africa-Customers.”
Includes 100% of Vodacom’s employees in the Democratic Republic of the Congo.
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class A ordinary share or class B ordinary share, unless the same dividend is declared to holders of
all ordinary shares. The following table sets forth information with respect to dividends paid by Telkom.
Dividends are expressed in Rands and translated, solely for the convenience of the reader, into
Dollars at the Rand noon buying rate described in Item 3. “Key Information–Exchange Rates” below
on the relevant dividend payment date. The actual rate that cash dividends are converted to Dollars
by the depositary may not equal the Rand noon buying rate on the dividend payment date.
the year.
held by Telkom and its subsidiaries.
by Telkom and its subsidiaries.
shareholders registered as of July 1, 2005, which are not included in the table.
with a competitive return on their investment, while assuring sufficient reinvestment of profits to enable
us to achieve our strategy. Telkom may revise its dividend policy from time to time. The determination
to pay dividends, and the amount of the dividends, will depend upon, among other things, the
following:
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shareholders if there are reasonable grounds for believing that:
of dividends and payments to shareholders must be approved by at least two of the directors
appointed by the Government. Pursuant to Telkom’s memorandum and articles of association, the
Government is a significant shareholder for so long as it holds the class A ordinary share and at least
15% of Telkom’s issued ordinary shares. This percentage is to be reduced from time to time to reflect
the dilutive effect of issuances of new ordinary shares, but may not be less than 10%.
with IFRS to distributable reserves in accordance with IFRS for the periods indicated.
Information–Taxation,” Telkom is required to pay secondary tax on companies at a flat rate of 12.5%
in respect of the amount of certain dividends declared by it net of any dividends received from our
joint venture and subsidiaries. As a result of the payment of secondary tax on companies, the amount
of dividends that may actually be paid is less than the amount of distributable reserves. Distributable
reserves are available for distribution based on Telkom’s dividend policy. Telkom’s board of directors
decides on an annual basis the amount of distributable reserves to be reinvested in operations and
the amount of any remaining funds that are available for distribution to shareholders or possible share
repurchases.
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depositary’s custodian, which will convert the dividends into Dollars, at the rate of exchange
applicable on the date such dividends are paid, for disbursement to holders. Fluctuations in the
exchange rate between Rands and Dollars and expenses of the depositary will affect the Dollar
amounts actually received by holders of ADSs upon conversion by the depositary of such cash
dividends.
exchange control regulations for the free transferability of cash dividends to holders of ordinary
shares or ADSs. See Item 10. “Additional Information–Exchange Controls.”
companies pay secondary tax on companies as described above. Capitalization shares or stock
dividends distributed to holders of ordinary shares do not incur secondary tax on companies. Because
of this tax treatment, it has become common practice in South Africa for companies to offer
capitalization shares in lieu of cash dividends. Capitalization shares are shares issued by a company,
the payment for which is allocated out of the company’s reserves, including share premium, or
unappropriated profits.
R74.58 per share, including costs, which are being held in treasury for purposes of the Telkom
conditional share plan. Between August 3, 2004 and September 15, 2004 Rossal repurchased
another 9,531,454 shares at a volume weighted average price of R78.49 per share, including costs,
which are also being held in treasury for purposes of the Telkom conditional share plan. On June 4,
2004, Telkom purchased Acajou (Proprietary) Limited, or Acajou, a wholly owned subsidiary of
Telkom, for share repurchase activities other than repurchases for the Telkom conditional share plan.
Between June 7, 2004 and September 30, 2004, Acajou purchased 10,849,058 shares at a volume
weighted average price of R76.12 per share, including costs, which are also being held in treasury.
directly, such shares must be cancelled.
the Issuer and Affiliated Purchasers.”
between the nominal value of the share and the value purchased, unless purchased from the share
premium of the company that does not comprise capitalized profit. The tax on such a deemed
dividend is payable by the company at a rate of 12.5%.
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New York expressed in Rands per $1.00.
particular rate or at all. Unless otherwise stated, translations of Rand amounts into Dollars have been
made at R6.22 per $1.00, the Rand noon buying rate on March 31, 2005, the date of the Telkom
Group’s most recent balance sheet included in this annual report. These translations should not be
construed as representations that the Rand amounts could actually be converted into US dollars at
these rates or at all.
the relevant period and the average Rand noon buying rate is computed using the Rand noon buying
rate on the last business day of each month during the period indicated.
of Telkom, on conversion of dividends, if any, paid in Rands on the ordinary shares and may affect
the Dollar trading price of the ADSs on the New York Stock Exchange.
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thereto included elsewhere in this annual report before making an investment decision with respect to
Telkom’s ordinary shares or ADSs.
reduction in overall average tariffs and market share in our fixed-line business, which could
cause our growth rates, operating revenue, costs and net profit to decline.
years has competed with mobile operators, value added network service operators, or VANS
operators, Sentech Limited, formerly known as Sentech (Proprietary) Limited and referred to herein
as Sentech, which was issued an international carrier of carriers license and a multi media license in
May 2002, and with service providers who use least cost routing technology. In addition, in September
2004, the South African Minister of Communications granted a license to provide public switched
telecommunications services to a second national operator that will be 30% owned by Transtel
Limited, or Transtel, and Eskom Enterprises (Proprietary) Limited, or Esitel, which are beneficially
owned by the South African Government, and other strategic equity investors, including 26%
beneficially owned by TATA Africa Hol dings (Proprietary) Limited, a member of the TATA Group.
ICASA is in the process of issuing this license. Further competition may arise as a result of an
assessment by the Minister of Communications of the feasibility of issuing additional licenses to
provide or resell public switched telecommunications services from May 2005, however, no
determination has yet been published. A process has also commenced to issue additional licenses to
small business operators to provide telecommunications services in underserviced areas with a
teledensity of less than 5%. The Minister of Communications has identified 27 of these underserviced
areas. ICASA has issued licenses to successful bidders in seven of these areas and it is expected
that further licenses will be issued in 2005 and later.
links and whether VANS operators are allowed to provide voice over internet protocol to the general
public or only to their own customers to whom they provide value added services, however, if mobile
cellular operators are permitted to self provide fixed telecommunications links and VANS operators
are permitted to provide voice over internet protocol to the general public, we would face significantly
more competition in the provision of leased lines and voice services. We cannot predict which view
will prevail because the necessary regulations have not yet been published. In addition, in March
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convergence and establish the legal framework for convergence in the broadcasting, broadcasting
signal distribution and telecommunications sectors. We expect that the new licensing framework will
result in the market becoming more horizontally integrated and will further increase competition in our
fixed-line business. In addition, the process of converting our licenses to the new licensing framework
may be lengthy and complex and could result in the imposition of additional obligations and limitations
in connection with the converted licenses, which could disrupt our business operations and decrease
our net profit.
are continuing to improve customer loyalty and maintaining its leadership in the South African
communications market. As a result of increasing competition, we anticipate a reduction in overall
average tariffs and market share in our fixed-line business, which could cause our growth rates,
operating revenue and net profit to decline.
has resulted in significant customer migration and call substitution from fixed-line to mobile
services. If this customer migration and call substitution continues, our growth rates,
operating revenue and net profit could decline.
Limited, a public company listed on the JSE, or MTN, and Cell C (Proprietary) Limited or Cell C, for
customers. Telkom also competes with other service providers who use least cost routing technology
that enables fixed-to-mobile calls from corporate private branch exchanges to bypass our fixed-line
network by being transferred directly to mobile networks. Telkom has experienced significant customer
migration in recent years from fixed-line services to mobile services, as well as substitution of calls
placed using mobile services rather than our fixed-line service, with the increase in mobile penetration
in South Africa. If this migration continues, our growth rates, operating revenue and net profit could
decline.
the number of Vodacom and Telkom calls terminating on other mobile networks as opposed to
our fixed-line network. Vodacom’s and Telkom’s margins and net profit could decline if this
trend continues.
calls from Vodacom’s network and our fixed-line network terminating on other mobile networks rather
than our fixed-line network. Vodacom’s interconnection payments have increased and its margins have
decreased because the cost of terminating calls on other mobile networks is higher than the cost of
terminating calls on Telkom’s fixed-line network. As a result, Vodacom’s South African net interconnect
revenue has been declining in recent years. Similarly, Telkom has incurred increased payments to
other operators as a result of the growth in interconnection traffic for fixed-line calls terminating on
other mobile networks. If mobile customers continue to increase and there is little or no growth in
fixed-line customers, this trend could continue and Vodacom’s and Telkom’s mar gins and net profit
could decline.
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African countries may result in a reduction of Vodacom’s average tariffs and Vodacom’s
market share and increased customer acquisition and retention costs, which could cause
Vodacom’s growth rates, revenue and net profit to decline.
held approximately 35% and Cell C held approximately 9% of the South African mobile
communications market, based on total estimated customers. Increasing competition, together with
the further liberalization of the South African telecommunications industry, may result in a reduction in
Vodacom’s overall average tariffs, loss of market share and increased customer acquisition and
retention costs, which could cause Vodacom’s growth rates, revenue and net profit to decline.
may decline as a result of political, economic, regulatory and legal developments in the
countries where Vodacom has invested.
Group recently confirmed their intention to form a consortium together to undertake a joint bid for a
controlling stake in Nigeria’s V-Mobile. These countries have political, economic, regulatory and legal
systems that are still in the process of transformation and are less developed than those in the
Republic of South Africa. Political or economic upheaval or changes in laws and regulations or in their
application may harm the operations of the companies in which Vodacom invests and impact the
value of these investments. The regulatory environments in these countries often lack clarity in a
number of areas and are subject to varying interpretations. In addition, many of these countries suffer
from extreme poverty, civil strife, political conflict and political mismanagement, all of which could
cause the value of Vodacom’s investments in these countries and Vodacom’s revenue and net profit to
decline. In particular, the DRC’s first democratic elections are planned for the coming year, the
outcome of which will determine future political stability and economic growth.
negotiating commercially acceptable interconnection agreements and collecting amounts due under
interconnection agreements as Vodacom has experienced in Tanzania and the Democratic Republic
of the Congo. In addition, a number of jurisdictions in which Vodacom invests have imposed price
controls, particularly for interconnection, which could reduce Vodacom’s net profit and cause the value
of Vodacom’s investments in these other African countries to decline. There are also foreign exchange
control restrictions in South Africa, which may restrict Vodacom’s ability to fund its investments in
these countries, and there are foreign exchange controls in a majority of these countries, which may
restrict Vodacom’s ability to extract value from these investments.
available investment opportunities for our fixed-line business in other African countries is
limited. Moreover, the acquisition of mobile operators and licenses and the consummation of
other investments in other African countries may be unsuccessful, which could have a material
adverse effect on Vodacom’s and Telkom’s future growth.
countries throughout the African continent. There are significant risks associated with Vodacom’s and
Telkom’s ability to identify and successfully acquire mobile operators and licenses or make other
investments in other African countries. There are a limited number of mobile operators and licenses
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substantial competition for the types of mobile operators and licenses Vodacom targets and
investment opportunities that would meet Telkom’s criteria. As described in the previous risk factor,
many countries in Africa have political, economic, regulatory and legal systems that are still in the
process of transformation and are less developed than those in the Republic of South Africa and
many of these countries suffer from extreme poverty, civil strife, political conflict and political
mismanagement and are subject to less developed corporate governance, business practices and
bureaucratic and regulatory delays. In addition, South African foreign exchange control limitations
could delay or prevent investments by Vodacom and Telkom in these countries. There are also a
limited number of partners that are a ble to arrange their own funding to invest in ventures in other
African countries with Telkom and Vodacom and Telkom does not have significant prior experience
investing outside of South Africa. To the extent Vodacom and Telkom are not able to grow through
acquisitions and other investments in other African countries, our stock price could decline. Moreover,
Vodacom and Telkom could expend a substantial amount of time and capital pursuing acquisitions
they do not consummate, which could adversely affect their business, financial condition, results of
operations and growth.
growth in other African countries will depend upon their ability to monitor operations, maintain effective
quality, corporate governance and financial controls and significantly expand their internal
management, technical and accounting systems, all of which will result in higher operating expenses.
The integration of acquired mobile operators or licenses and other businesses and investments in
other African countries may involve, among other things, integration of switching, transmission,
technical, sales, marketing, billing, accounting, quality control, management, personnel, payroll,
regulatory compliance and other systems and operating hardware and software, some of which may
be incompatible with their existing systems and therefore may need to be replaced. In addition,
telecommunications operators generally experience higher customer and employee turnover rates
during and after an acquisition or launch of service. We cannot assure that Vodacom and Telkom will
be able to integrate successfully the mobile operators, mobile licenses or other operations they may
acquire in other African countries.
including a new chief executive officer, our business operations could be disrupted and could
impact on our ability to compete successfully.
and Vodacom do not have long term employment agreements with a majority of their senior
management, any of whom may terminate their employment with us. The loss of key personnel could
disrupt our business operations if we are unable to replace them with similarly qualified individuals.
Following the sale by Thintana Communications of its remaining interest in Telkom in November 2004,
all of Thintana’s representatives on Telkom’s board and management designees were replaced. In
addition, in April 2005, Sizwe Nxasana, Telkom’s chief executive officer, announced that he had
decided not to renew his service contract, which expires on December 31, 2005 in order to explore
new challenges. We expect that competition for employees in the South African communications
industry will increase as new competitors enter the market. If we lose a number of our key employees
to our competitors or are not able to continue to attract and retain highly qualified employees,
including a new chief executive officer, our business operations could be disrupted and our ability to
compete could be harmed.
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directing committee and the Vodacom joint venture agreement contains approval rights that
may limit our flexibility and ability to implement our preferred strategies.
Vodacom’s directors or members of its directing committee. In addition, under our memorandum and
articles of association, the Government is entitled to nominate the directors we appoint to the
Vodacom board. The Vodacom joint venture agreement, which governs the relationship between
Telkom and the other shareholders of Vodacom, requires each of Vodacom’s shareholders who own
10% or more of Vodacom’s shares to approve certain material transactions. As a result of these
factors, we may not be able to impose strategies on Vodacom that we believe to be beneficial to us
without the approval of Vodacom’s other shareholders.
may not be able to pay dividends and service its debt and could be required to lower or defer
capital expenditures, dividends and debt reduction, which could cause the trading prices of
Telkom’s ordinary shares and ADSs to decline.
from Telkom and has no obligation to pay dividends or make other distributions to Telkom. Vodacom’s
ability to pay dividends and make other distributions to Telkom may be restricted by, among other
things, its operations and the availability of funds and the terms of credit and debt arrangements
entered into by it, as well as statutory and other legal restrictions. In addition, Vodacom’s ability to pay
dividends or make distributions to Telkom and its other shareholders requires the approval of
Vodacom’s shareholders who own 10% or more of Vodacom’s shares. To the extent that Vodacom is
unable to, or otherwise does not, pay dividends or make other distributions to Telkom in the future,
Telkom may not be able to pay dividends and service its debt and could be required to lower or defer
capital expenditures, dividends and debt reduction, which could cause the trading prices of Telkom’s
ordinary shares and ADSs to decline.
systems, our ability to provide accurate and comprehensive operating information and to
compete may be harmed.
budgeting and planning processes difficult. In addition, our billing and other information systems are
not yet fully integrated and therefore are not capable of providing us with comprehensive and detailed
operating information, including the traffic carried on our fixed-line network, and we cannot provide a
single bill for customers with multiple locations and products. To address these problems, we are in
the process of developing and implementing a unified customer management system capable of
generating a single bill for a customer. The full integration between our various operational support
systems is not expected to be complete until 2007 or 2008. Since November 2003, we have renewed
our focus on information risk management and have identified several requirements for improved
security of Telkom& #8217;s information technology systems. Completion and compliance verification is
expected during the 2006 financial year. To the extent we are not able to improve our systems and
fully address these vulnerabilities, our ability to provide accurate and comprehensive operating
information and to compete effectively in the increasingly liberalized South African communications
market may be harmed. In addition, some of the information systems in Vodacom’s other African
operations are new and are not capable of providing management on a real-time basis with operating
data and financial information.
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require us to defer capital expenditures and we may not be able to pay dividends and our
operations and financial condition could be adversely affected.
March 31, 2003. Negative working capital arises when current liabilities are greater than current
assets. We intend to fund current liabilities through a combination of operating cash flows, new
borrowings and borrowings available under existing credit facilities. We had R4.8 billion available
under existing credit facilities as of March 31, 2005. If we are unable to generate sufficient operating
cash flows or borrowings to fund our current liabilities, our operating and financial flexibility could be
impaired and we may be required to defer capital expenditures and may not be able to pay dividends
and our business operations and financial condition could be negatively impacted.
substantial additional investments in technologies, which could reduce our return on
investment and net profit.
technology obsolete. We may have to make substantial additional investments in new technologies to
remain competitive. New technologies we choose may prove not to be commercially successful. As a
result, we could lose customers, fail to attract new customers or incur substantial costs in order to
maintain our customer bases, which could reduce our return on investments and net profit.
deployment of new technologies and services and cause our growth rates and net profit to
decline.
number of suppliers and make significant capital investments in connection with communications
technologies. If technologies are not developed or delivered by our suppliers on time or do not
perform according to expectations or achieve commercial acceptance, we may be required to delay
service introductions and make additional capital expenditures and we could be required to write-off
investments in technology, which could cause our growth rates and net profit to decline.
lost revenue due to non-licensed operators in our fixed-line business, our fixed-line fault rates
could increase and our operating revenue and net profit could decline.
payphone fraud in our fixed-line business. Theft and vandalism have caused our fixed-line fault rates
to increase and the repair time on our network and the network downtime associated with such faults
and network fraud and payphone fraud have resulted in lost operating revenue and significant costs.
We have also lost operating revenue to non-licensed operators providing telecommunications services
in South Africa. If we are unable to continue to minimize theft, vandalism, network fraud and
payphone fraud or if we continue to lose operating revenue to non-licensed operators in our fixed-line
business, our fixed-line fault rates could increase and our operating revenue and net profit could
decline.
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auditors may not be able to attest to their effectiveness, which could have a significant adverse
effect on our business operations, reputation and net profit.
required by Section 404 of the U.S. Sarbanes-Oxley Act of 2002 and the rules and regulations of the
SEC thereunder, which we refer to as Section 404. We are currently performing the system and
process evaluation and testing required, and any necessary remediation, in an effort to comply with
the management certification and auditor attestation requirements of Section 404. The management
certification and auditor attestation requirements of Section 404 will initially apply to Telkom for its
annual report on Form 20-F for the year ended March 31, 2007. In the course of our ongoing
Section 404 evaluation, we have identified areas of internal control over financial reporting that may
need improvement and have designed enhanced processes and controls and plan to design additional
enhanced processes and co ntrols, as necessary, to address these and any other issues that might be
identified in the future through this review. In addition, as discussed in Item 15. “Controls and
Procedures”, Telkom has identified errors in its consolidated financial statements and determined that
it was necessary to restate its previously issued consolidated financial statements and its auditors,
Ernst & Young, have notified Telkom that they had identified two material weaknesses and five
significant deficiencies under standards established by the Public Company Accounting Oversight
Board.
with Section 404 in a timely manner. If we are not able to implement the requirements of Section 404
in a timely manner or with adequate compliance, our independent auditors may not be able to attest
to the effectiveness of our internal control over financial reporting and we may be subject to sanctions
or investigation by regulatory authorities, such as the SEC. As a result, there could be a negative
reaction in the financial markets due to a loss of confidence in the reliability of our financial
statements. In addition, we may be required to incur costs in improving our internal control system.
Any such action could negatively affect our results and have a significant adverse effect on our
business operations, reputation and net profit.
equipment and any related publicity or litigation could make it difficult to find attractive sites
for base stations and reduce Vodacom’s growth rates, customer base, average usage per
customer and net profit.
handsets or base stations and related publicity or litigation, could make it difficult to find attractive
sites for base stations and reduce Vodacom’s growth rates, customer base, average usage per
customer and net profit.
Shareholders
exercise control over Telkom’s strategic direction and major corporate actions.
ownership and voting arrangements provided for in Telkom’s articles of association, the Government
is entitled to appoint five of Telkom’s directors, and is able to exert considerable influence over
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directors of Telkom’s subsidiaries and the Vodacom joint venture. In addition, as of June 28, 2005, the
Public Investment Corporation, an investment management company wholly owned by the South
African Government, held 14.5% of Telkom’s issued and 15.1% of Telkom’s outstanding ordinary
shares, which includes 6.1% of Telkom issued and 6.4% of Telkom’s outstanding shares acquired in
the market, and, through its ownership of Telkom’s class B ordinary share, is entitled to appoint one of
Telkom’s directors.
services. Telkom’s articles of association also require the approval of directors appointed by the
Government in order for Telkom or any of its subsidiaries, including Vodacom, to enter into major
corporate actions and transactions, including amendments to Telkom’s management structure and the
powers of Telkom’s operating committee, the approval of Telkom’s dividend policy and payment of
dividends, increases in Telkom’s indebtedness beyond certain limits and changes of control. As a
result, without the approval and participation of the Government, Telkom is not able to consummate
transactions involving an actual or potential change of control, including transactions in which you
might otherwise receive a premium for your ordinary shares or ADSs over market prices. Because the
Government exercises control over Telkom, holders of ordinary shares and ADSs lack meaningful
power to approve decisions of Telkom’s board of directors or to influence our strategic direction and
major corporate actions.
Telkom and policymaker for, and customer of, the telecommunications industry in a manner
that may be favorable to our competitors and unfavorable to us.
equity stakes in other industry participants, including Sentech, and will have an indirect 30% equity
interest in the second national operator. To further its policy of liberalization of the telecommunications
industry, the Government may adopt and implement policies and exercise its right to approve
regulations that benefit our competitors but are not beneficial to us. In addition, to further other
political or social objectives, the Government may act in a manner that may be detrimental to our
business but advantageous to our competitors.
least 9% of our total fixed-line operating revenue, excluding directory services and other revenue, in
the year ended March 31, 2005. The Government could transfer some or all of its business to the
second national operator or other operators when they commence operations. Legislation has been
enacted to centralize all procurement of telecommunications and information technology services by
the Government, through one agency. If the Government transfers some or all of its business to other
operators, our operating revenue and net profit could decline.
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and final regulations addressing a number of significant matters have not yet been issued. The
interpretation of existing regulations, or the adoption of new policies or regulations that are
unfavorable to us, could disrupt our business operations and could cause our net profit and
the trading prices of Telkom’s ordinary shares and ADSs to decline.
is subject to interpretation, review and amendment as the telecommunications industry is further
developed and liberalized. In addition, the regulatory process entails a public comment process,
which, in light of the politicized issue of privatization of industries such as telecommunications in
South Africa, makes the outcome of the regulations uncertain and may cause delays in the regulatory
process. A number of significant matters have not been addressed or clarified, including:
customers to whom they provide value added service;
telecommunications services, on a resale basis, during the first two years of its license and
beyond;
lack adequate resources to effectively fulfill its regulatory and licensing functions and to deal with
regulatory challenges that continue to change given the rapidly evolving telecommunications
environment. This combination of factors creates further uncertainties in the regulatory arena and the
ability of ICASA to effectively fulfill its functions. We cannot predict the outcome or timing of any
amendments or modifications to applicable regulations or the interpretation thereof, the release of
new regulations or their impact on us. The Minister of Communications has indicated that an
amendment to the legislation establishing ICASA will shortly be tabled in Parliament. We do not know
what amendments will be proposed or the functions and powers of ICASA in the context of new
convergence legislation.
the regulation of telecommunications services in South Africa, the imposition of unfavorable terms in
our licenses or the loss or unfavorable amendment of any license could disrupt our business
operations and could cause our net profit and the trading prices of Telkom’s ordinary shares and
ADSs to decline.
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not able to meet the minimum requirements of these black economic empowerment initiatives or
restrictions, some of our business customers may be required or elect to obtain all or some of their
telecommunications services from our competitors who may fulfill such ownership requirements.
in pricing and could reduce our net profit. Vodacom’s revenue and net profit could decline if
wholesale price controls are imposed on it.
of specified services that we previously had the exclusive right to provide. Historically, the overall
tariffs for all services in the basket and a sub-basket of services provided to residential customers
could not be increased by more than 1.5% below inflation in South Africa, based on the consumer
price index and measured using revenue for the services in the basket at constant volumes for the
prior year. The Minister of Communications has published regulations on a new price control regime
that provides for the cap to be increased from 1.5% to 3.5% and the inclusion of ADSL products and
services in the basket for which there is a price cap, effective from August 1, 2005 through July 31,
2008. In addition, from January 1, 2003, the price of any individual product or service included in the
basket coul d not be increased by more than 5% above inflation in South Africa in any year. Effective
August 1, 2005, the price of services in the residential sub-basket, leased lines up to and including
lines of a capacity of 2Mbit/s and the installation and rental of business exchange lines may not be
increased by more than 5% above inflation in South Africa in any year. Our tariffs for these services
are filed with ICASA for approval. In addition, Vodacom’s revenue and net profit could decline if
wholesale price controls are imposed on it. These limitations on our customer tariffs limit our pricing
flexibility and could reduce our net profit.
had committed a prohibited practice, as set out in the Competitions Act of 1998, Telkom could
incur a penalty, its business and financial condition could be materially adversely affected and
its revenue and net profit could decline.
Commission of the Republic of South Africa regarding alleged anti-competitive practices on the part of
Telkom. The Competition Commission found, among other things, that several aspects of Telkom’s
conduct prima facie contravened the Competition Act, 89 of 1998, and referred certain of the
complaints to the Competition Tribunal for adjudication. The complaints deal with Telkom’s alleged
refusal to provide telecommunications facilities to certain VANS providers to construct their networks,
refusal to lease access facilities to VANS providers, provision of bundled and cross subsidized
competitive services with monopoly services, discriminatory pricing with regard to leased line services
and alleged refusal to peer with certain VANS providers. Telkom has brought an application in the
South African H igh Court challenging the Competition Tribunal’s jurisdiction to adjudicate this matter.
These matters and the amount of Telkom’s liability are expected to be finalized within the next year. If
these complaints are upheld, however, Telkom could be required to cease these practices and fined an
amount of up to 10% of Telkom’s annual turnover or be ordered to divest itself of the relevant
business. Telkom is currently unable to predict the amount that it may eventually be required to pay. If
Telkom is required to cease these practices, divest itself of the relevant business or pay significant
fines, Telkom’s business and financial condition could be materially adversely affected and its revenue
and net profit could decline.
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substantial damages in its arbitration proceedings against Telkom, Telkom would be required
to fund such payments from cash flows or drawings on its existing credit facilities, which
could cause Telkom’s indebtedness to increase and its net profit to decline.
15.5% per year. The arbitration proceedings relate to the cancellation of an agreement entered into
between Telkom and Telcordia during June 1999 for the development and supply of an integrated
end-to-end customer assurance and activation system by Telcordia. In September 2002, a partial
award was issued by the arbitrator in favor of Telcordia. Telkom subsequently filed an application in
the South African High Court to review and set aside the partial award, which was granted. On November 29,
2004, the Supreme Court of Appeals granted Telcordia leave to appeal. Telcordia has since filed a
notice of appeal. Telcordia also petitioned the United States District Court for the District of Columbia
to confirm the partial award, which petition was dismissed, along with a subsequent appeal and a
similar petition in the United States District Court of New Jersey. Telcordia has since appealed this
dismissal. Telkom is currently unable to predict when the dispute will be resolved or the amount that it
may eventually be required to pay Telcordia, if any, and has reversed all of its provisions for estimated
liabilities, including interest and legal fees. If Telcordia recovers substantial damages from Telkom,
Telkom would be required to fund such payments from cash flows or drawings on its existing credit
facilities, which could cause its indebtedness to increase and its net profit to decline.
interconnection services and facilities leasing services, our business operations could be
disrupted and our net profit could decline.
Africa and to lease or otherwise make our telecommunications facilities available to any entity lawfully
providing or utilizing telecommunications services in South Africa. Telkom will also be required to allow
the second national operator to use all of its telecommunications facilities and shared access to the
local loop for the provision of public switched telecommunications services on a resale basis for the
first two years of its license. Telkom may also be required to lease or otherwise make its
telecommunications facilities available to the second national operator for the provision of services,
other than public switched telecommunications services on a resale basis, during the first two years
and beyond. The terms and conditions for the provision of these services and facilities are, or will be,
s et out in interconnection agreements and facilities leasing agreements negotiated and agreed to by
Telkom with these other entities.
Services and facilities at cost based prices to Public Operators, such as MTN, Vodacom, Cell C,
Sentech, the small business operators and eventually the second national operator. None of these
operators have been declared to be Major Operators. New draft interconnection and facilities leasing
regulations have been proposed by ICASA and published for comment that would extend the right to
cost based prices to all licensees. To the extent that we are unable to reach agreement with these
entities for the provision of these services, including the applicable tariffs, or to the extent that the
terms and conditions of our agreements are found to be inconsistent with the relevant legislation or
regulations, such terms and conditions may be determined and imposed on us by ICASA. In May 2005
ICASA initiated an enq uiry into whether MTN and Vodacom should be declared Major Operators, which
would require them to provide interconnection services also at cost based prices. If we are unable to
negotiate favorable terms and conditions for the provision of the services and facilities covered by the
guidelines or ICASA otherwise imposes terms and conditions that are unfavorable to us, our business
operations could be disrupted and our net profit could decline.
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implementation of carrier pre-selection, number portability and monitoring and interception or
are unable to implement these requirements in a timely manner, our business operations could
be disrupted and our net profit could decline.
international calls, by December 31, 2003. The Telecommunications Act mandates that number
portability, which will enable customers to retain their fixed-line and mobile telephone numbers if they
switch between fixed-line operators or between mobile operators, will be introduced starting in 2005.
We will incur substantial set-up and maintenance time and costs in connection with the
implementation of these requirements, which could disrupt our business operations. The extent of
recoverability of these costs have not yet been determined and finalized by ICASA. Telkom has
conditioned its exchanges to handle call-by-call carrier pre-selection by December 31, 2003. We will
not be able to fully implement carrier pre-selection until the second national operator is licensed and
the second national operator’s int erconnection systems and the inter operator process and systems to
support carrier pre-selection become available. The carrier pre-selection regulations provide for
call-by-call carrier pre-selection to be implemented by Telkom two months and automatic carrier
pre-selection to be implemented ten months after having received such request from another operator
although a lead time of 12 to 18 months is estimated by Telkom for implementation of automatic
carrier pre-selection. In addition, commencing in July 2003, all licensees, including Telkom and
Vodacom were required to install equipment and implement procedures that will allow certain
agencies in the Government of the Republic of South Africa to intercept and monitor communications
over our respective networks and retain records and copies of such communications. The procedures
and timetable for the full implementation of the interception and monitoring legislation requirements
have not been finalized. However, Telkom and Voda com have not been able to comply with the time
frame contemplated by the current draft of this legislation. To the extent that we have not complied or
are unable to comply with these requirements or are unable to substantially recover these costs of
compliance, our business operations could be disrupted and our net profit could decline.
Management Act, 1 of 1999, or PFMA, and the provisions of the South African Public Audit Act
of 2004, or PAA, Telkom could incur increased expenses and its net profit could decline and
compliance with the PFMA and PAA could result in the delisting of Telkom’s ordinary shares
and ADSs from the JSE and New York Stock Exchange.
has been informed by the South African Auditor-General that it will not be required to comply with the
PAA until such date. If Telkom does not obtain a further exemption from the PFMA or if it is required
to comply with the PAA or its existing exemption from the PFMA is revoked for any reason or it is
otherwise required to comply with the PFMA or PAA, Telkom may be compelled to prepare a second
set of financial statements in compliance with accounting principles and practices prescribed by the
Government of the Republic of South Africa which do not correlate with IFRS or US GAAP and would
require Telkom to incur additional costs. Telkom would also be required to comply with, what it
believes to be, extremely prescriptive treasury regulations issued pursuant to the PFMA and PAA, to
provide the Government with a dvance access to proprietary and potentially price sensitive information
and to seek the prior approval of South African governmental authorities to enter into certain material
agreements, to maintain certain bank accounts, to formulate and implement certain investment
strategies or to discharge its auditors, which would preclude Telkom from acting in the same manner
as its competitors and other listed companies. If Telkom is required to comply with the PFMA and
PAA, Telkom may not be able to comply with the Listings Requirements of the JSE or the listing rules
of the NYSE and Telkom’s ordinary shares and ADSs could be delisted.
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a result of the enactment of the South African Municipal Property Rates Act, 6 of 2004.
policy that must be adopted and regularly reviewed by municipalities with community participation
facilitated through the municipalities annual budget process. Due in part to the fact that no rate has to
date been prescribed, it is too early to assess exactly how the new Act would affect us. As a
substantial landowner in South Africa, our total property tax expense could increase significantly and
our net profit could decline as a result of the implementation of this Act.
significant impact on the amount of Telkom’s dividends, the trading prices of Telkom’s
ordinary shares and ADSs, our operating revenue, operating expenses, net profit, capital
expenditures and on the comparability of our results between financial periods.
has increased from R11.38 per $1.00 as of March 29, 2002 to R7.90 per $1.00 as of March 31, 2003,
R6.32 per $1.00 as of March 31, 2004 and R6.22 per $1.00 as of March 31, 2005.
cause our net profit to fluctuate. In addition, the volatility of the Rand as measured against the Dollar
and the Euro in the three years ended March 31, 2005 resulted in significant net foreign exchange
losses primarily in each of the two years ended March 31, 2004, in terms of IAS39. See Item 5.
“Operating and Financial Review and Prospects–Operating Results–Principal Factors That Affect our
Results of Operations-Volatility of the Rand and adoption of IAS39. ”Fluctuations in currency
exchange rates between the South African Rand and the currencies in African countries where
Vodacom invests could decrease the value of these businesses and Vodacom’s and our net profit.
the South African communications market and our growth rates, operating revenue and net
profit, as well as the trading prices of Telkom’s ordinary shares and ADSs, to decline.
investment into South Africa, have prompted emigration of skilled workers and have impacted
economic growth negatively. Although it is difficult to predict the effect of these problems on South
African businesses or the Government of the Republic of South Africa’s efforts to solve them, these
problems could cause the size of the communications market and our growth rates, operating revenue
and net profit, as well as the trading prices of Telkom’s ordinary shares and ADSs, to decline.
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communications market and our growth rates, operating revenue and net profit to decline.
potential growth in the economy is unclear at this time although employee related costs in South
Africa are expected to increase as a result of the AIDS epidemic and the size of the South African
population and communications market could decline. Our growth rates, operating revenue and net
profit could decline if employee related expenses increase or our labor supply or the size of the South
African population and communications market decline.
collective bargaining and the cost of compliance with South African labor laws could limit our
operating flexibility and disrupt our fixed-line business operations and reduce our net profit.
and publicly opposed our privatization and have instituted and in the future could institute work
stoppages to oppose changes in our shareholding structure or gain leverage in negotiating collective
bargaining agreements. In addition, a number of South African trade unions, including the trade
unions of our employees, have close links to various political parties and have had a significant
influence in South Africa as vehicles for social and political reform and in the collective bargaining
process. Since 1995 South Africa has enacted various labor laws that enhance the rights of
employees, which have imposed costs on us and have limited our flexibility and ability to implement
workforce reductions. If we are unable to implement workforce reductions as necessary, particularly
as a result of increased c ompetition, or experience significant labor disputes, work stoppages,
increased employee expenses as a result of collective bargaining or compliance with labor laws, our
fixed-line business operations could be disrupted and our net profit could be reduced.
investments and procure foreign denominated financings.
of Lesotho and Swaziland, and non-residents of the Common Monetary Area. In particular, South
African companies are generally not permitted, without the prior approval of the Exchange Control
authorities, to export capital from South Africa or to hold foreign currency in excess of certain
prescribed limits.
years, it is difficult to predict whether or how it will further relax or abolish exchange control measures
in the future. See Item 10. “Additional Information–Exchange Controls.”
trading prices of Telkom’s ordinary shares and ADSs to decline.
Investment Corporation owned 14.5% of Telkom’s issued and 15.1% of Telkom’s outstanding ordinary
shares, which includes 6.1% of Telkom’s issued and 6.4% of Telkom’s outstanding shares acquired in
the market, plus the class B ordinary share, and the Elephant Consortium owned 6.7% of Telkom’s
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granted to persons employed by Telkom on March 4, 2003 and eligible former employees of Telkom,
options to purchase 11,140,636 of its ordinary shares, representing 2% of Telkom’s issued and
outstanding ordinary share capital, which are exercisable in four equal tranches over a period of three
years commencing six months after March 4, 2003. In addition Telkom has adopted a management
and employee incentive plan that provides for the issue or grant of up to 22,281,272 ordinary shares,
of which 2,943,124 have been granted as of March 31, 2005. Sales of substantial amounts of shares
by Telkom’s shareholders, or by Telkom, or the appearance that a large number of shares are
available for sale, could cause the trading prices of Telkom’s ordinary shares and ADSs to decline.
Telkom has entered into a registration rights agreement with the Government of the Republic of South
Africa. Pursuant to the agreement, the Government has the right to cause Telkom to either effect a
JSE public offering in South Africa, or register with the Securities and Exchange Commission all or
part of their ordinary shares, or both.
respects from the rights of shareholders under the laws of other jurisdictions.
ADS holders are governed by Telkom’s articles of association and by South African law. These rights
differ in material respects from the rights of shareholders in companies incorporated elsewhere, such
as in the United States. In particular, South African law significantly limits the circumstances under
which shareholders of South African companies may institute litigation on behalf of a company. For a
description of the differences between shareholders’ rights under South African law and Delaware law,
see Item 10. “Additional Information–Memorandum and Articles of Incorporation–Comparison of
Shareholders’ Rights Under South African and Delaware Law.”
outside of South Africa or bring actions based on securities laws of jurisdictions other than
South Africa against Telkom or against members of its board.
executive officers are located in whole or in substantial part in South Africa. As a result, it may not be
possible for you to effect service of legal process within the United States or elsewhere outside of the
Republic of South Africa upon our directors or officers, including with respect to matters arising under
US federal securities laws or applicable state securities laws. Moreover, it may not be possible for you
to enforce against Telkom or the members of its board of directors and executive officers judgments
obtained in courts outside South Africa, including the United States, based on the civil liability
provisions of the securities laws of those countries, including those of the United States. A foreign
judgment is not directly enforceable in South Africa, but constitutes a cause of action, wh ich may be
enforced by South African courts with the approval of the South African Minister of Trade and
Industry. In addition, awards of punitive damages will not be enforceable in South Africa. Although it is
possible for an investor to bring an action against Telkom in a South African civil court to enforce
rights in terms of US federal securities laws, these laws will not be enforced if they are penal or
revenue or taxation laws or laws which are contrary to South African public policy. It is not possible
therefore for an investor to seek to impose criminal liability on us in a South African court arising from
a violation of US federal securities laws.
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limited liquidity of ordinary shares traded on the JSE.
addition, as of March 31, 2005, only 1% of the 262,872,235 ordinary shares publicly traded, including
treasury shares, were represented by ADSs trading on the NYSE. The limited liquidity of the ordinary
shares and ADSs could depress the trading prices of the ordinary shares and ADSs and could limit
your ability to sell a substantial number of ordinary shares or ADSs in a timely manner, especially by
means of a large block trade.
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1991/005476/06. Telkom’s principal executive offices are located at Telkom Towers North,
152 Proes Street, Pretoria 0002, Gauteng Province, South Africa. Telkom’s telephone number is
(27) (12) 311 3566 and its internet address is http:/ /www.telkom.co.za. Information contained on
Telkom’s website is not part of this annual report.
Communications beneficially owned a 15.1% interest in Telkom’s issued ordinary shares, including the
class B ordinary share, and remained a significant shareholder. In November 2004 Thintana
Communications announced that it sold its remaining 15.1% interest in Telkom’s issued ordinary
shares, including its class B ordinary share, to the Public Investment Corporation, an investment
management company wholly owned by the South African Government. Following the sale by
Thintana Communications, all of Thintana Communications’ representatives on Telkom’s board and its
management designees were replaced.
ordinary share that it had acquired from Thintana Communications, plus an additional 6.1% of
Telkom’s issued and 6.4% of Telkom’s outstanding ordinary shares that it had acquired in the market,
and the Elephant Consortium beneficially owned 6.7% of Telkom’s issued and 7.0% of Telkom’s
outstanding ordinary shares that it had acquired from the Public Investment Corporation after being
acquired by the Public Investment Corporation from Thintana Communications. As a result of the
foregoing, as of June 28, 2005, the Public Investment Corporation is not a “significant shareholder” of
Telkom, however, it is entitled to appoint one executive or non-executive director to Telkom’s board of
directors, as the holder of the class B ordinary share. As of June 28, 2005, the Government of the
Republic of South Africa owned 37.7% of Telkom’s issued and 39.4% of Telkom’s outstanding
ordinary shares, plus the class A ordinary share, and is entitled to appoint five directors, including two
executive directors, to Telkom’s board of directors and is the only “significant shareholder” of Telkom.
Minister of Communications granted an additional license to provide public switched
telecommunications services to a second national operator that will be 30% owned by Transtel and
Esitel, which are beneficially owned by the South African Government, and other strategic equity
investors, including 26% beneficially owned by TATA Africa Holdings (Proprietary) Limited, a member
of the TATA Group. ICASA is in the process of issuing this license. Further competition may arise as
a result of an assessment by the Minister of Communications of the feasibility of issuing additional
licenses to provide or resell public switched telecommunications services from May 2005, however,
no determination has yet been published.
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Minister of Communications has identified 27 of these underserviced areas. ICASA has issued
licenses to successful bidders in seven of these areas and it is expected that further licenses will be
issued in 2005 and later.
links and whether VANS operators are allowed to provide voice over internet protocol to the general
public or only to their own customers to whom they provide value added services, however, if mobile
cellular operators are permitted to self provide fixed telecommunications links and VANS operators
are permitted to provide voice over internet protocol to the general public, we would face significantly
more competition in the provision of leased lines and voice services. We cannot predict which view
will prevail because the necessary regulations have not yet been published.
broadcasting signal distribution and telecommunications sectors. The Portfolio Committee on
Communications invited written comments in April 2005 and public hearings are expected to continue
through to August 2005. The bill aims to supplement or replace current sector specific legislation and
change the market structure from a vertically integrated, infrastructure based, market structure to a
horizontally integrated, service based, technology neutral, market structure with a number of separate
licenses being issued for communications network services, communications services, application
services, broadcasting services and radio frequency spectrum licenses. Existing licenses are
expected to be grandfathered until converted to new licenses in line with the convergence legislation.
We expect that the new licensing f ramework will result in the market becoming more horizontally
integrated and will further increase competition in our fixed-line business. In addition, the process of
converting our licenses to the new licensing framework may be lengthy and complex and could result
in the imposition of additional obligations and limitations in connection with the converted licenses,
which could disrupt our business operations and decrease our net profit.
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provided by an operator within two months of it being requested by another operator. In phase two,
fully automatic pre-selection will be implemented and must be provided by an operator within
ten months of it being requested by another operator.
portability will be introduced in phases with block number portability to be introduced in 2005,
provided a second licensed fixed-line operator exists, and individual number portability at a later
stage, but within 12 months from being requested by an operator. Implementation of number
portability requires the publication of functional specification regulations for fixed and for mobile
number portability. Consultation on the mobile number portability functional specification is in
progress. The consultation process on the fixed number portability functional specification has not
commenced yet.
services in the basket for which there is a price cap, effective from August 1, 2005 through July 31,
2008.
members of the new Consortium believe that the combination of Vodacom’s extensive expertise in the
African telecommunications markets and the Virgin Group’s skills in successfully operating in highly
competitive markets provide a competitive proposition.
able to market Vodafone branded products and services. As part of the launch of its 3G network and
its alliance with Vodafone, Vodacom launched Vodafone Mobile Connect, a 3G/GPRS datacard
providing fast, secure access to corporate networks from laptop computers, Vodafone Live! with global
and local content, picture and video messaging and downloads, and BlackBerry®. Vodacom’s alliance
with Vodafone also provides Vodacom access to Vodafone’s global research and development in
respect of 3G and access to Vodafone’s marketing and buying powers in respect of 3G technologies.
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owned subsidiary, purchased an 85.75% equity stake in Smartcom (Proprietary) Limited for
R77.2 million acquiring an additional 40,000 contract customers. On February 1, 2005, Vodacom
acquired the contract customer base, dealer agreements and five employees of Tiscali South Africa
for R40.1 million. As a result of these acquisitions, Vodacom directly controlled 78.3% of its contract
customer base and 98.4% of its prepaid customer base in South Africa as of March 31, 2005.
Competition Commission approval.
challenges. Mr. Nxasana will continue as Telkom’s chief executive officer up to December 31, 2005
while the Telkom board seeks the appointment of his successor. Mr. Nxasana intends to work closely
with the new chief executive officer to ensure an orderly handover of his responsibilities.
1991, the Government of the Republic of South Africa transferred the entire telecommunications
enterprise of the Department of Post and Telecommunications of the Republic of South Africa to
Telkom as part of a commercialization process intended to liberalize certain sectors of South Africa’s
economy. Between 1991, when Telkom was incorporated and 1996, when the South African
Telecommunications Act, 103 of 1996, was enacted, we were the exclusive provider of public
switched telecommunications services, including international voice services in South Africa, acting
pursuant to the now repealed South African Post Office Act, 44 of 1958. Telkom remained a wholly
state owned enterprise until May 14, 1997, when the Government of the Republic of South Africa sold
a 30% equity interest in Telkom to Thinta na Communications LLC, a Delaware limited liability
company, 60% beneficially owned by SBC Communications, Inc. and 40% beneficially owned by
Telekom Malaysia S.D.N. Berhard.
Government with 67% of Telkom’s issued and outstanding ordinary share capital prior to our initial
public offering. Due to funding constraints Ucingo disposed of its entire shareholding on September 17,
2003. As part of the sale to Thintana Communications, the then Minister of Posts,
Telecommunications and Broadcasting of the Republic of South Africa entered into an agreement with
Thintana Communications under which Thintana Communications undertook significant operational
and managerial responsibilities and acquired the ability to exercise effective operational and
managerial control over us until May 2002. Pursuant to the agreement, Thintana Communications had
the power to staff certain management positions with individuals seconded to Telkom from
SBC Communications and Telekom Malaysia. In addition, Thintan a Communications and the
Government were entitled to appoint a number of directors to Telkom’s board of directors, based on
their ownership of Telkom, and a number of our corporate actions were subject to specific approval by
Thintana Communications and the Government or their board representatives. These matters
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dividends. Until May 2002, Thintana Communications was also entitled to appoint the majority of the
members of Telkom’s operating committee, thus granting it control over many of our significant
operational matters. These matters generally included the preparation and implementation of
business plans and annual budgets for approval by Telkom’s board of directors and the performance
of obligations and the exercise of rights under Telkom’s public switched telecommunications services
license.
ordinary shares through the exercise of an over-allotment option. The initial public offering price was
R28.00 per ordinary share and $13.98 per ADS. As part of the global offering, the Government of the
Republic of South Africa sold 4,967,914 ordinary shares to individuals in possession of a valid South
African identity number and who provided a South African postal address, or groups of such
individuals, known as stokvels, at a 20% discount to the initial public offering price in a Khulisa offer
targeted at historically disadvantaged individuals and stokvels. The Government of the Republic of
South Africa agreed to reward one bonus share for every five shares purchased by individuals and
stokvels in the Khulisa offer if they held the ordinary shares purchased by them in the Khulisa offer to
be held in the Kh ulisa Trust until the second anniversary of the JSE listing date. On March 4, 2005,
the second anniversary of Telkom’s listing, 785,610 bonus shares were allotted by the South African
Government to qualifying shareholders under the Khulisa offer. The Government of the Republic of
South Africa also sold 7,045,078 ordinary shares to individuals in possession of a valid South African
identity number and who provided a South African postal address at a 5% discount to the initial public
offering price. As part of the global offering, on March 4, 2003, the Government granted to persons
employed by Telkom on March 4, 2003 and eligible former employees of Telkom, options to purchase
11,140,636 of its ordinary shares, through the Diabo Share Trust, which are exercisable in four equal
tranches over a period of three years commencing six months after March 4, 2003.
line business from a majority governmental owned entity to a market and profit-oriented business. Our
transformation program aimed to reorganize our fixed-line business along functional lines from the
previous regional structure, change our corporate culture and improve the skills of our South African
employees, increase our marketing efforts, outsource non-core operations and manage revenue
generation and operating expenses more effectively. Our fixed-line transformation program has
benefited significantly from the management, marketing, technical and financial expertise of our
previous strategic equity investors. Our transformation program is largely complete.
through March 31, 2005. At April 30, 2005, we had 26,133 Telkom employees. We spent R961 million,
R302 million and R244 million in the years ended March 31, 2005, 2004 and 2003, respectively, on
our workforce reduction program. We will evaluate future workforce reductions based on business and
operational requirements.
engineering workshop, catering services and buildings management operations.
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assets. We had consolidated operating revenue of R43.1 billion ($6.9 billion), profit for the year
attributable to the equity holders of Telkom of R6.7 billion ($1.1 billion) and cash flow from operating
activities of R15.7 billion ($2.5 billion) in the year ended March 31, 2005 and we had total assets of
R57.6 billion ($9.3 billion) and equity attributable to the equity holders of Telkom of R26.9 billion
($4.3 billion) as of March 31, 2005. As of March 31, 2005, we had approximately 4.8 million telephone
access lines in service and 99.9% of our telephone access lines were connected to digital exchanges.
We offer business, residential and payphone customers a wide range of services and products,
including:
services, international voice over internet protocol services, subscription based value-added
voice services and customer premises equipment sales;
networking services and internet access and related information technology services;
estimated market share of approximately 56% as of March 31, 2005 based on total estimated
customers. Vodacom had 15.5 million customers as of March 31, 2005, of which 12.8 million were in
South Africa. Vodacom has investments in mobile communications network operators in Lesotho,
Tanzania, the Democratic Republic of the Congo and Mozambique. Vodacom had consolidated
revenue of R27.3 billion ($4.4 billion), net profit attributable to equity shareholders of R3.9 billion
($621 million) and cash flow from operating activities of R4.2 billion ($667 million) in the year ended
March 31, 2005 and total assets of R22.6 billion ($3.6 billion) and equity attributable to equity holders
of Vodacom of R7.8 billion ($1.3 billion) as of March 31, 2005.
African fixed-line communications market.
line roll-out. Key to achieving our objectives is our continued focus on rigorous cost management,
efficiency improvements, deployment of key technologies and the successful implementation of our
business strategy.
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innovative telecommunications provider that caters to their individual needs;
and provisioning of TelkomInternet via the telkomsa.net website.
South Africa.
services. Since 1997, we have:
exchanges;
increasing our use of optical fiber;
increased fiber optic transmission capability between South Africa and international
destinations;
protocol and virtual private networks.
internet services with the expertise to expand our service offerings.
internet services. We have undertaken the following actions to strengthen our data communications
service capabilities and improve our integrated communications service offerings:
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networks;
Systems, Gilat and Sun Microsystems to provide fully integrated communications solutions over
our core fixed-line network and satellites and have introduced several flexible and cost effective
options for these products;
continent; and
and have appointed a highly qualified management team pursuant to our succession plan.
management team, their participation on our operating and executive committee and their employees
who served as our officers. With the sale of Thintana Communications’ interest in Telkom, we have
appointed a highly qualified management team pursuant to our succession plan.
brand recognition, extensive network coverage and distribution channels.
customers. Vodacom has an extensive network that covers approximately 96% of South Africa’s
population based on the last official census conducted in 2001 and approximately 67% of the total
land surface area of South Africa as of March 31, 2005. Vodacom has a broad distribution network
consisting of Vodacom owned shops and sales forces and independent dealers, franchises, national
chains and Telkom Direct shops.
other African countries, primarily in Sub-Saharan Africa.
monitored against key investment criteria, focusing primarily on countries with stable economic and
political conditions or good prospects for growth, market leadership and profitability. Other key factors
include Vodacom’s ability to gain majority ownership, develop strong local partnership relationships
and obtain non-recourse financing. Other African operations are branded under the “Vodacom” name.
its experienced local and international shareholders, Vodafone, VenFin and us.
world to offer prepaid mobile communications services on an intelligent network platform and to offer
its customers coverage across the whole of Africa where commercial roaming based on the Global
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South African mobile communications network operator to provide nationwide coverage in South
Africa.
which, Vodacom is able to market Vodafone branded products and services, such as Vodafone Mobile
Connect, Vodafone Live! and BlackBerry®. Vodacom’s alliance with Vodafone also provides Vodacom
access to Vodafone’s global research and development in respect of 3G and access to Vodafone’s
marketing and buying powers in respect of 3G technologies.
communications markets. We also are seeking to increase the synergies between our fixed-line
business and Vodacom and support Vodacom’s strategy of establishing and maintaining leading
positions in other African mobile markets, primarily in Sub-Saharan Africa. We believe that increased
competition and emerging technologies place greater importance on the need to further develop our
group strategy and increase our focus on growth opportunities. We intend to continue working closely
with Vodacom to build synergies on a commercial basis for both companies. In order to achieve our
goals, we intend to pursue the following strategies:
to our residential fixed-line customers, aggressively marketing our price advantages and
entering into long-term contracts with corporate and business customers.
In the 2005 financial year we continued to see strong demand for ISDN and ADSL, with 10.5%
growth in ISDN channels to approximately 720,000 and significant growth in ADSL customers to
approximately 58,532 customers as of March 31, 2005. We plan to introduce new packages
and will seek to increase the penetration of existing packages and calling plans through
improved sales channels. In the 2004 financial year, we have launched a bundled ADSL service
with a free modem, have entered into real estate development contracts in affluent areas and
have launched international voice over internet protocol services and Xtratime.
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In addition, we will seek to maximize the number of customers connected to our network
through a targeted deployment of our prepaid offerings where we have existing capacity. In
addition to growing our hubbing business, we intend to expand our presence in Africa through
Vodacom, as well as pursuing new viable business opportunities, such as offering third party
products and services to African operators and resellers. In the 2005 financial year, prepaid
lines grew 3.7% to approximately 887,000 customers, representing 18.8% of our total fixed
access lines as of March 31, 2005, as compared to 18.3% as of March 31, 2004. In October
2003, TelkomInternet also became powered by satellite, a broadband based internet access
offering.
branches, and enhancing operations support and network reliability, as well as aggressively
building stronger customer association with the Telkom brand. We improved distribution through
on-line ordering of products and services for TelkomDirect and Vodashops, and on-line viewing
of customer accounts.
fixed-line business.
improve our business operations through the following strategies:
In the 2005 financial year, Telkom employees declined 10.5% to 28,972 and our number of fixed
lines per Telkom employee increased to 163 as of March 31, 2005. Telkom placed a moratorium
on involuntary workforce reductions for the year ending March 31, 2006.
saving program in our fixed-line business contributed to the approximately 3.3% decrease in
total fixed-line operating expenses. Our current initiatives include cable alarm systems,
enhanced fraud management, consolidation of stores, space optimization and continual
reduction of our vehicle fleet.
service and enhance operational efficiencies. During the 2004 financial year, we implemented
the first phase of our new workforce management system. This system controls the scheduling,
routing, dispatching and ticketing of the surveillance control and analysis division in our national
network operations center, as well as the dispatchable field technicians in our network field
organization. Workforce management includes scheduling, routing, dispatching and tracking of
the dispatchable workforce. In addition to this, a fault management solution was successfully
implemented in the National Network Operation Centre, providing functionality to allow for the
centralized management of all network events. This accelerates the real-time and accurate
detection of problems in the network by e vent collection, filtering, and correlation. In the 2005
financial year this solution delivered the filtering, and correlation functionality for 12 network
technologies. Roll-out of this solution to a further 36 network technologies will be done in the
2006 financial year. Phase 1 of an enterprise asset management solution was also implemented
in the 2005 financial year. This solution provides the platform for holistic asset lifecycle
management, which will be fully operative in the 2006 financial year. The roll-out of workforce
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customer management for selected segments solution, enabling Telkom to have a single view of
its customer, is planned to start towards the end of the 2006 financial year.
tied to demand and are only deployed where strategically required, such as operating support
systems, or where returns can be achieved in excess of our cost of capital. Our more stringent
investment criteria for capital investment contributed in part to the 42.4% decline in fixed-line
capital expenditure in the 2003 financial year and a further 3.8% reduction in the 2004 financial
year. Our consolidated capital expenditures in property, plant and equipment for the 2006
financial year is budgeted to be approximately R7.9 billion, of which approximately R5.0 billion
is budgeted to be spent in our fixed-line segment and approximately R2.9 billion is budgeted to
be spent in our mobile segment, which is our 50% share of Vodacom’s capital expenditure of
approximately R5.9 billion .
new converged IP services and the development of new fixed wireless products.
term corporate customer relationships:
leveraging our extensive corporate customer relationships. Through our strong sales force we
intend to increase sales of managed data networking services, internet access services,
internet protocol based communications services and related data center and connectivity
services, such as web hosting, server hosting, storage and security. In the 2005 financial year,
fixed-line data services revenue increased 15.7% to R5.8 billion.
services. Telkom is currently involved with a trial with MNet, a satellite pay-TV operator,
on internet protocol television.
preparation for increased competition and the emergence of new technologies. Telkom and
Vodacom entered into a commercial agreement relating to joint distribution and procurement
initiatives, which they began implementing in the 2004 financial year. In addition, Vodacom and
Telkom are testing fixed mobile products, such as WiFi, but no products are currently ready for
launch.
and to enhance skills retention.
share ownership plans. The Telkom conditional share plan was approved at our annual general
meeting held on January 27, 2004. We have also initiated leadership and management
development programs and targeted development initiatives.
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beneficial guidelines for managing our employees. In attempting to actively avoid involuntary
separations whilst Telkom is managing its headcount, Telkom concluded collective agreements
with the ATU and CWU on February 3 and February 11, 2005 respectively, that position a
revised approach focusing on utilizing a combination of voluntary separations and a reduction in
other staff related expenditure. On November 27, 2002, we launched “The Agency” an
alternative strategy to assist employees seeking alternative employment and avoid disruptions
from job losses.
respond to future competition and creating an entrepreneurial culture. In the 2004 financial year,
we began to roll-out the “Mentorship” programs in key areas of the business, through which a
more experienced, often more senior person, shares their knowledge, skills and experience with
a less experienced, usually more junior person. The main objectives of these mentorship
programs are to improve skills, achieve greater employee satisfaction and build and retain
talent.
and expand into other African markets.
achieve sustainable growth in profits and cash flow, while maintaining its leading market position in
South Africa, growing its operations in other African countries and establishing new operations in
select African countries, primarily in sub-Saharan Africa. In order to achieve these objectives,
Vodacom intends to pursue the following strategies:
customer base, customer acquisition and retention costs, capital expenditures and operating
expenses. Vodacom also intends to streamline its relationship with its customers by seeking
increased direct ownership of service providers. On April 16, 2004, Smartphone, Vodacom’s
51% owned subsidiary, purchased an 85.75% equity stake in Smartcom (Proprietary) Limited.
On February 1, 2005, Vodacom acquired the contract customer base, dealer agreements and
five employees of Tiscali, South Africa. Vodacom now directly controls 78.3% of its contract
customers and 98.4% of its prepaid customers in South Africa. In addition, Vodacom believes
more aggressive capital spending in the short term will ensure sustained growth. An offer to
purchase a 51% stake in Cointel VAS (Proprietary) Limited for R112.2 million was made by the
Vodacom Group during the year. Vodacom is currently awaiting Competition Commission
approval.
as multimedia messaging services, information and banking services and location based
services through alliances with content service providers, while remaining focused on its core
mobile business. Vodacom launched the first commercial 3G network in South Africa in
December 2004. Vodacom also entered into an alliance with Vodafone, pursuant to which
Vodacom is able to market Vodafone branded products and services, including Vodafone Mobile
Connect, Vodafone Live! and BlackBerry®. In the 2004 financial year, Vodacom launched
Look4me, Look4it and Office Anywhere. Vodacom will seek to develop and market in co-
operation with us, new business and residential bundled fixed-wireless products.
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acquiring additional mobile licenses or operators in other African markets in the future, focusing
primarily on countries in sub-Saharan Africa that have stable economic and political conditions
and good prospects for growth, market leadership and profitability. In its other African
operations, Vodacom seeks to gain majority ownership, develop strong local partnership
relationships and obtain non-recourse financing. Vodacom’s revenue from other African
operations increased 51.1% in the year ended March 31, 2005 to R2.3 billion and 21.9% in the
year ended March 31, 2004 to R1.5 billion from R1.2 billion in the year ended March 31, 2003,
50% of which is included in the Telkom Group’s revenue. Telkom also intends on expanding into
other African markets through acqui sitions of fixed and/or mobile licenses or operators.
voice services and customer premises equipment;
traffic services;
international destinations;
services and internet access and related information technology services; and
premises and our fixed-line network. Each PSTN line includes one access channel, each basic ISDN
line includes two access channels and each primary ISDN line includes 30 access channels. Each
ISDN line transmits signals at speeds of 64 kilobits per second per channel. Subscriptions to ADSL
are included in our data services revenue. We expect growth in the provisioning of ISDN lines will
increase our revenue, as subscription fees for ISDN lines are higher than those for PSTN lines.
telephone service. All costs, including installation, telephone equipment, line rental and call charges,
are paid in advance so that there are no monthly phone bills. We target our prepaid service mainly at
first time homephone customers who do not have sufficient credit history and are located in areas
where we can provide access to our network without significant additional investment. Customers who
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to migrate to our prepaid service option in order to reduce future non-payments while satisfying
demand for our services.
calling, voice-mail, toll free calling, ShareCall, which permits callers and recipients to share call costs,
speed dialing, enhanced fax services and calling card services for payphones. These services
complement our basic voice services and provide us with additional revenue while satisfying customer
demand, enhancing our brand and increasing customer loyalty.
approximately 40% were coin operated and combination payphones and the remainder were card
operated payphones.
excluding internal lines in service. Telkom had 108,521, 140,950 and 134,972 internal lines as of March 31, 2005, 2004
and 2003, respectively. Each PSTN line includes one access channel, each basic ISDN line includes two access channels
and each primary ISDN line includes 30 access channels.
disconnections by the average number of fixed access lines in service during the period.
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2005 financial year. Telkom is focused on offering value-for-money and is increasingly launching
bundled minute packages and calling plans such as XtraTime and Surf Anytime. These actions led to
a net line growth of 1.0%, excluding Telkom internal lines, in the 2005 financial year. The increase in
the number of subscriber lines in the 2005 financial year was mainly as a result of fewer
disconnections than in the prior year and increased ISDN and prepaid PSTN lines, partially offset by
lower postpaid PSTN lines and lower connections. The decrease in the number of subscriber lines in
the 2004 financial year was mainly as a result of lower postpaid PSTN lines and lower connections,
partially offset by fewer disconnections than in the prior year and increased ISDN and prepaid PSTN
lines. The decrease in the n umber of postpaid PSTN access lines in service in both the 2005 and
2004 financial years was primarily as a result of customer migration to mobile and data services and
our prepaid PSTN service and lower connections, partially offset by lower disconnections. The
increase in the number of postpaid ISDN channels was driven by increased demand for higher
bandwidth and functionality. The increase in prepaid lines was mainly due to our increased marketing
efforts for our prepaid telephone services, particularly to first-time residential customers with poor or
no credit histories, and postpaid customers encouraged to migrate to prepaid services due to late
payments and credit difficulties.
initiated disconnections. Included in disconnections and churn are those customers who have
terminated their service with Telkom and subsequently subscribed to a new service with Telkom as a
result of relocation of premises or change of subscription to a different type of service. The decrease
in churn over the three years ended March 31, 2005 is directly related to the lower level of
disconnections, real estate development contracts in affluent areas, marketing campaigns, lengthened
prepaid suspension time and, in the 2004 financial year, changes in credit policies, partially offset by
the lower number of fixed access lines in service in the 2004 financial year.
business customers in South Africa. The market in South Africa for such equipment and systems,
commonly known as customer premises equipment, is characterized by high competition and low
profit margins. We believe, however, that the supply and servicing of customer premises equipment is
an essential element of providing a full service to our customers. During the 2004 financial year we
launched our internet protocol enabled PBX product called Opticon, to compliment the range of
internet protocol equipment that we sell through our partner agreements with Siemens and Cisco.
tariffs that vary depending on the destination, distance and the length and day and time of call. Local
traffic services are for calls made to destinations less than 50km from origination. Long distance traffic
services are for calls made to national destinations greater than 50km from origination. We provide
international outgoing telephone services, including both voice and data traffic. All international traffic
to and from South Africa was legally required to be routed through our network until May 7, 2002. We
provide direct international dialing access to over 230 destinations. In the 2004 financial year, we
implemented a voice over internet protocol product to customers operating international call centers.
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the particular category by the weighted average tariff for such category during the relevant period.
2004 financial years due to a decrease in the number of postpaid PSTN lines in service primarily as a
result of customer migration to mobile and data services and our prepaid PSTN service and lower
connections, partially offset by lower disconnections, and was positively impacted by an increase in
prepaid PSTN lines and ISDN lines. In addition, traffic was adversely affected in both years by the
increasing substitution of calls placed using mobile services rather than our fixed-line service and
traffic was adversely impacted in the 2005 financial year due to dial-up traffic being substituted by our
ADSL service, as well as increased competition in our payphone business.
consisting of call termination and call transit, as well as access, through our network, to other
services, including FreeCall 080, ShareCall 0860 and HomeFree, emergency services and directory
enquiry services. We will also be required to provide interconnection services to the second national
operator and to other licensees.
establish ourselves as the principal international telecommunications hub for Africa through our
investments in undersea cables and our network and our arrangements with other operators in Africa
in order to continue to increase international hubbing revenue.
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than international outgoing mobile traffic and international interconnection traffic, by dividing
interconnection revenue for the particular category by the weighted average tariff for such category
during the relevant period. Fixed-line international outgoing mobile traffic and international
interconnection traffic are based on the traffic registered through the respective exchanges and
reflected in international interconnection invoices.
emergency services and directory enquiry services. The increase in domestic mobile interconnection
traffic in the years ended March 31, 2004 and 2005 was primarily due to an overall increase in mobile
calls as a result of growth in the mobile market, partially offset by increased mobile-to-mobile calls
bypassing our network.
as a result of more traffic terminating on our network due to increased activity of callback operators.
International interconnection traffic increased in the year ended March 31, 2004 primarily due to
growth in the international market.
have a growing portfolio of data transmission products tailored to different customer needs from high
bandwidth mission critical applications to low bandwidth best effort applications. We also offer our
customers tailor-made cost effective customer specific solutions.
for high volume data or multimedia transmission. Leased lines are our principal data transmission
service and include Diginet, Diginet Plus and Megaline services. We also provide leased lines to
broadcasters for audio and video services. Our leased line customers pay an initial installation charge
and a recurring fee based on the type, length and capacity of the leased line. Leased line charges
have decreased in the 2005 financial year and we expect that competition will increase pressure on
prices in the future.
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by existing agreements. We entered into broadband fixed link leasing agreements with Vodacom and
MTN in the 2004 financial year and with Cell C in the 2005 financial year. These agreements offer
speeds of 45Mb/s and 155Mb/s and include formalized service level agreements and a term and
volume discount structure, as a counter to the competitive challenges that are expected to occur in
this area of the business.
needs of our customers. The following table indicates our product offerings as of March 31, 2005:
and HomeDSL 384 Supreme, which are bundled with line rental and include a free modem, free
Callmore voice minutes and other value added services such as free WiFi minutes on a 24 month
contract.
allows customers to share bandwidth more cost effectively based on a virtual private network concept.
Our packet-based services include packet-switched services, frame relay services, asynchronous
transfer mode services and internet protocol services.
X.25 protocol, which is a worldwide standard for transmitting data using packet-switched networks.
Packet-switched services are based on a mature technology and account for a significant but
declining amount of our data transmission service revenue. Although traffic still has shown some
growth in recent years, we are increasingly offering migration to other packet based services, such as
frame relay based services, asynchronous transfer mode based services and internet protocol services.
connecting local area networks. Instead of leasing high capacity lines in order to accommodate
occasional or intermittent high data volumes, customers using frame relay pay for capacity sufficient
to satisfy their average requirements with the flexibility to use more than average capacity during peak
periods. Frame relay based services account for a growing percentage of our data transmission
service revenue. This is due primarily to the significant increase in the amount of internet and
corporate local access network traffic carried on our frame relay networks and the growing number of
applications that require the speed and flexibility of more advanced technologies.
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at speeds from 2 megabits per second up to 155 megabits per second. ATM Express provides a
medium for companies to transmit high volumes of information at high speeds over their wide area
network with high quality and reliable connections. Voice, video and data applications can be
supported simultaneously over a connection. Megaline Plus is a broadband service providing for the
carrying of voice and video at a constant bit rate across our asynchronous transfer mode network.
ATM Express and Megaline Plus serve as an integral component of our integrated virtual private
network service offering that allows for the convergence of voice, data, video, e-commerce and web
services across a single access medium over our network. We expect our asynchronous transfer
mode based service revenue to grow as a result of c ustomers’ growing demand for bandwidth,
flexibility and reliability.
customers the ability to converge voice, data and video applications over a single, managed VPN.
On the international front we have invested in an internet protocol and voice-over internet protocol
network and launched a regional clearinghouse to serve as a hub for voice traffic on the African
continent. We intend to launch additional internet protocol data transmission products in the future.
We offer a wide range of integrated and customized networking services, including planning,
installation, management and maintenance of corporate wide data, voice and video communications
networks, as well as other value-added services, such as capacity, configuration and software version
management on customers’ networks. To support our service commitment, we offer guaranteed
service level agreements on a wide range of our products, which guarantee availability, or uptime, of
the network, through the use of our national network operations center.
packet-based services discussed above, and our Spacestream and IVSat products, which are satellite
based products. Spacestream is a high quality, flexible satellite networking service that supports data,
voice, fax, video and multimedia applications, both domestically and into the rest of Africa.
following table sets forth information regarding the number of managed network sites for each of our
managed data networking services as of the dates indicated.
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bandwidths ranging from 2.4 kb/s up to 155 Mb/s. The international private line circuits use both cable
infrastructures, such as submarine cables, or satellite infrastructure. This product is complimented by
our three global alliances with Infonet, Equant and BT, which are used to offer customers connectivity
based on these companies’ global networks. Our global alliances have coverage throughout the world
and it is easier for customers to use them from an ordering, installation and support point of view, as
they have physical presence or formally appointed partners in each country. Due to the packet-based
nature of these global networks, the cost efficiencies inherent in these networks can be passed on to
customers to ensure more affordable services.
wholesale internet access provision market and are focused on growing our position in the retail
internet access market. We also package our TelkomInternet product with ADSL and ISDN services,
as well as our newly introduced satellite access products, SpaceStream Express and SpaceStream
Office.
access through dial-up service since 1997. SAIX derives revenue for its access services primarily from
fees paid by Internet service providers and value added network providers for its dial-up services.
customers. These services include e-mail, web page hosting and administration, technical support,
virus protection and domain name registration. TelkomInternet derives revenue primarily from fees
paid by customers for its dial-up services.
effective sharing of the satellite platform making the service more affordable. Following the successful
introduction of TelkomInternet via satellite, Telkom expanded its SpaceStream Express product into
Africa branded as SpaceStream Africa.
Internet leased lines
Internet dial-up subscribers
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traffic routed over our fixed-line network.
hosting, managed infrastructure hosting, web application hosting, security services, disaster recovery,
storage services and application service provider hosting. Our security services include firewalls,
intrusion detection, and spam and virus protection.
message translation services. CyberTrade, our web based e-commerce service provider, provides
users with a secure platform to perform online banking and stock market trading, to buy and sell
goods and products from electronic merchants and to access critical information. During the 2004
financial year, we introduced an online bill service for residential and small business customers that
enables them to control and manage their accounts more effectively. In September 2003, we
introduced Cyber Trade Mall, an electronic shopping portal that enables online shopping in a secure
environment.
year ended March 31, 2005, Telkom Directory Services published approximately 7.4 million white and
yellow directories. Telkom Directory Services also provides electronic yellow pages and value added
content through full color advertisements. Telkom Directory Services has improved the accessibility
and distribution of the directories through door-to-door delivery and electronic media. We also provide
national telephone inquiries and directory services.
our X.25 network, Saponet-P, to its customer base. Services include retail credit card and check point
of sale terminal verification, telemetry, security and vehicle tracking.
competition. Our tariff rebalancing program has resulted in a decrease in the ratio of tariffs for long
distance calls to all destinations over 200 km compared to tariffs for local calls from 13.2:1 as of
March 31, 1997 to 2.7:1 as of March 31, 2002 and 2.2:1 as of March 31, 2005. The weighted average
effective price per minute to all international destinations decreased approximately 44% from January 1,
1998 to March 31, 2002. We will continue to rebalance and revise our fixed-line tariffs to be more
closely aligned with the cost of providing services in order to compete in the telecommunications
market. In January 2005, we decreased our long distance tariffs by 10% and the average tariff to all
international destinations by 28% to ensure that Telkom remains competitive in the increasingly
liberalized telecommunications market. The following table shows our long distance to local call ratio
for the periods indicated.
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including installations; prepaid and postpaid line rental; local, long distance and international calls;
fixed-to-mobile calls; public payphone calls; ISDN services; our Diginet product; and our Megaline
product. Approximately 80% of Telkom’s operating revenue in the year ended March 31, 2005 was
included in this basket. Our tariffs for these services are filed with ICASA for approval. Historically, the
overall tariffs for all services in the basket could not be increased by more than 1.5% below inflation in
South Africa, based on the consumer price index and measured using revenue for the services in the
basket at constant volumes for the prior year. In addition, the overall tariffs for a sub-basket of
services provided to residential customers could not be increased by more than 1.5% below inflation
in South Africa, based on the consumer price index and measured using revenue for the services in
the basket at constant values for the prior year. The Minister of Communications has published
regulations on a new price control regime that provides for the cap to be increased from 1.5% to 3.5%
and the inclusion of ADSL products and services in the basket for which there is a price cap, effective
from August 1, 2005 through July 31, 2008. In addition, prior to January 1, 2003, the price of any
individual product or service included in the basket could not be increased by more than 20% above
inflation in South Africa in any year. From January 1, 2003, the price of any individual product or
service included in the basket could not be increased by more than 5% above inflation in South Africa
in any year. Effective August 1, 2005, the price of services in the residential sub-basket, leased lines
up to and including lines of a capacity of 2Mbit/s and the installation and rental of bu siness exchange
lines may not be increased by more than 5% above inflation in South Africa in any year.
2005. In December 2002, as a result of an out of court settlement related to our tariff increase in the
prior year, ICASA approved our tariff filing providing for a 9.5% increase in the overall tariffs for all
services in the basket effective January 1, 2003, based on the increase in the consumer price index
for the twelve months ended September 30, 2002 of 12.5%. Statistics South Africa Limited
subsequently revised the calculation of the consumer price index for the twelve months ended
September 30, 2002 downward to 11.2%, although our tariffs were not affected. See Item 3. “Key
Information–Risk Factors–Risks Related to Regulatory and Legal Matters–Our tariffs are subject to
approval by the regulatory authorities, which may limit our flexibility in pricing and could reduce our net
profit. Vodacom’s revenue and net profit could decline if wholesale price controls are imposed on it
above and “–Regulation and License Requirements” below. All tariffs include value added tax at a rate
of 14%.
we offer rate stability programs on certain data products that fix rates at the lower of the prevailing
rates or the rate at the time of the contract. We also offer term discounts on our ISDN primary
service.
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Installation
Installation
Installation
Installation
Installation
Installation
limitations. These include the duration of the call, the distance between the points of origin and
destination, and the time of day and day of the week the call is made.
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Local minimum call charge (0-50km) for first unit
Local minimum call charge (0-50km) for first unit
fixed-to-mobile calls.
calls. Monday to Thursday 8 p.m. to 7 a.m. the next morning, and Friday 8 p.m. to Monday 7 a.m. for fixed-to-mobile calls.
December 31, 2003. The peak fixed-to-mobile call rate per minute for MTN was reduced to R1.84 as of February 1, 2003
through June 30, 2003 and to R1.82 as of July 1, 2003 through December 31, 2003. The peak fixed-to-mobile call rate
per minute for Cell C was reduced to R1.82 as of August 1, 2003 through December 31, 2003.
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outgoing traffic tariffs per minute as of January 1, 2003, 2004 and 2005 for residential and business
customers to the ten most frequently called countries based on traffic.
basis. For national calls from mobile users to fixed-line customers, the mobile operator pays us a
termination fee. The risk of uncollectables is carried by the originating operator. For incoming
international calls destined for mobile users, we pay the mobile operator a termination rate which is
the same as the rate we pay for fixed-to-mobile calls, and for outgoing international calls originating
from mobile users, the mobile operators pay to us our standard retail rate for international calls, less a
discount.
to interconnection between South African licensed operators. Telkom amended its interconnection
agreements with Vodacom and MTN and entered into a new interconnection agreement with Cell C
effective in November 2001. Telkom’s interconnection agreements provide for annual increases in the
portion of fixed-to-mobile tariffs retained by Telkom and the termination rates payable by Telkom to the
mobile operators as well as the termination rates payable to Telkom from the mobile operators for
mobile-to-fixed calls.
interconnection tariffs as of January 1, 2003, 2004 and 2005. Fixed-to-mobile tariffs are billed for the
first 60 seconds and 30 second increments thereafter. Termination rates paid to mobile operators are
paid on a per second basis.
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Termination rate paid to Telkom
effect from February 1, 2003, and with effect from July 1, 2003, the peak period retail rate for calls to Vodacom and
MTN customers was reduced to R1.82 per minute. The peak period retail rate for calls to Cell C was reduced from
R1.88 to R1.82 per minute with effect from August 1, 2003.
January 6, 2003. The peak period termination rate paid to Cell C was reduced to R1.24 per minute with effect from
January 6, 2003, and later increased to R1.40 per minute with effect from March 1, 2003.
the monthly tariffs for our data leased lines using 20 km distances and ADSL service as of the dates
indicated. Subscription to ADSL service also requires the subscription to a PSTN postpaid line.
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(ZAR, including value-added tax)
each of the sub-categories within our business customer category. Our business customer category
accounted for approximately 73% of our total fixed-line operating revenue, excluding directories and
other revenue, in the year ended March 31, 2005 and approximately 43% of our total fixed access
lines as of March 31, 2005.
2005. Global and corporate customers accounted for approximately 15.8% of our total fixed-line
operating revenue, excluding directories and other revenue, in the year ended March 31, 2005 and
approximately 12% of our total fixed access lines as of March 31, 2005. We have increased our sales
and marketing efforts aimed at our large global and corporate customers in order to continue to
improve customer loyalty. We offer tailored packaged solutions and seek to enter into long-term
relationships with our global and corporate customers in order to maintain our leadership position in
this customer market. We market and sell our products and services to these customers primarily
through corporate account managers, supported by a team of specialists in the field of pre-sales
consulting, project management and post-sal es service managers.
excluding certain Government owned parastatal companies, accounted for at least 9% of our total
fixed-line operating revenue, excluding directories and other revenue, in the year ended March 31,
2005 and approximately 4% of our total fixed access lines as of March 31, 2005. We also offer
tailored packaged solutions and seek to enter into long term relationships with our government and
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retaining business customers. We market and sell our products and services to these customers
primarily through customer account managers and sales representatives, the Telkom Business Call
Center and customer service branches. As of March 31, 2005, we had approximately 128 customer
service branches and Telkom Direct shops located throughout South Africa to assist our business
customers in finding the products and end user equipment that best fits their needs. Demand for value
added products by our business segment increased in the year ended March 31, 2004, such as
Teleconferencing, SmartAccess, FaxAnswer, CallAnswer, IdentiCall and Mail Manager. In the 2005
financial year, we have been successful in signing our business customers to long term service
agreements. We have also been successful in growing our IS DN and prepaid access lines, internet
access, PBX, satellite and data, including ADSL, products and services.
We expect wholesale revenue from domestic operators to increase with the entrance of the second
national operator and the further liberalization of the South African telecommunications industry.
Products sold to wholesale customers primarily include mobile and international voice termination
services, data services and international transiting services. We also provide internet protocol
services to internet service providers. We are currently focusing on developing wholesale products
that cater to the needs of a more liberalized fixed-line market in terms of the second national operator
and the underserviced area licensees in South Africa by providing interconnection and facilities
leasing. We are also expanding our wholesale product portfolio to go into non-traditional markets
outside of South Africa. Our marketing and sales strategy for the wholesale services market is to be
the carrier of choice for other operators and the connectivity provider of choice for domestic and other
African service providers. We believe our digital network both in South Africa and in our international
undersea cables provides a solid foundation from which we can leverage these services. We
continuously revisit destinations for wholesale voice termination services. We intend to focus on
expanding our relationships with international operators and further increasing the penetration of our
transiting and connectivity services to international operators, including other African operators, for
traffic into and out of Africa.
line revenue, excluding directories and other revenue, in the year ended March 31, 2005 and
approximately 53% of our total fixed access lines as of March 31, 2005. Prepaid residential
customers accounted for approximately 35% of our residential fixed access lines as of March 31,
2005, compared to 33% of our residential fixed access as of March 31, 2004.
time increasing revenue per customer. We intend to continue to introduce calling plans that target high
use customers and are designed to increase consumers’ value for money. We conduct extensive
advertising campaigns aimed at educating residential customers about our tariffs and price
advantages. We market and sell our residential products through our customer call centers, customer
service branches, mobile vans, Vodacom’s customer service branches and Telkom Direct shops, the
South African Post Office, independent distributors and vendors and through telemarketing. We are
focused on increasing the penetration of our ISDN and ADSL services to retail and high-end
residential customers through targeted direct advertising to high internet usage subscribers. We have
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powered by ADSL, by more than 49% in the 2005 financial year. In the 2004 financial year, we also
have implemented free reconnect services for customers who move from one location to another
provided they reconnect within 3 months. We also grant a 50% discount to customers ordering a
second line.
ended March 31, 2005 and approximately 4% of our total fixed access lines as of March 31, 2005.
areas. Our key focus area is the premier market, which includes municipalities, prisons, gas stations,
shopping malls, taxi stands, airports, bus stops and train stations. In furtherance of this goal, we
target and enter into nationwide contracts with multi location telephone providers to ensure wider
distribution of our payphones. We market and sell our payphone products through our sales managers
and representatives and sales call centers. In order to improve efficiencies in public services and
telephony, Telkom implemented a quality management system in compliance with the South African
Bureau of Standards ISO9001:2000 standards, which was certified by the South African Bureau of
Standards in 2003. The aim was to develop products and services based on these quality standards
in an effort to grow and impro ve public telephony revenues and create a customer relations center.
Telkom’s aim was also to provide a “one-stop-shop” for support to all our customers.
corporate customers, who are responsible for ensuring that all new installations and repairs are
performed in a satisfactory and timely manner. In addition, we have established a corporate customer
call center in Cape Town for our global and corporate customers, capable of making minor
infrastructure changes from a single location. We also use professional program managers to manage
the implementation of complex network solutions. We offer service level agreements on a number of
our existing data communications products where technology allows us to do so and our goal is to
introduce service level agreements on all new data communications products in the future. We confer
VIP status on each of our global and corporate customers and other selected customers that allows
them direct access to key people within our or ganization to ensure quick resolution of any problems
they may have regarding our products and services.
environment. An ambassador acts as a single point of contact for those customers in the event of any
queries relating to our products and services. In addition, our Telkom business call center provides
customer support for our medium and small business customers. We also offer a broad range of
internet based customer care tools to allow customers to manage their relationship with us more
conveniently. The Telkom and TelkomInternet websites offer online services such as fault reporting for
voice services, automated online registration and password changes for internet services, electronic
bill presentation and an email query facility.
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Internet.
and to provide the appropriate solutions and services. In order to take advantage of economies of
scale in scheduling, we have consolidated our six voice installation and fault management centers into
two centers to address faults, installation and service appointment scheduling and have consolidated
our six data installation and fault management centers into two centers.
2Mb data and subrate data. Prior to the 2004 financial year, specific service orders for these service categories, where
the customer required the service to be provided outside of the standard provisioning interval, were excluded from the
calculation. The standard provisioning interval is the standard lead time Telkom indicates to customers that a service
order will take from order to provisioning completion. As from the 2004 financial year, all service orders were used to
calculate the performance calculation to be aligned with this calculation methodology used for voice services.
the calculation. Additionally we segment our service delivery measures to be more in line with how
our market has been segmented both in terms of customer segmentation, as well as product
segmentation.
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second is a customer fulfillment index, comprising percentage installed in time, time to first failure and
quality of installation. The following table sets forth information regarding measurements included in
our new methodology, during the periods indicated.
rates in the last 15 weeks of the 2005 financial year, which impacted on Telkom’s service levels.
($6.7 billion), of which R27.9 billion ($4.5 billion) was for network modernization and line roll out in
order to comply with our license obligations and prepare for competition. Our five-year line roll-out
program in our fixed-line business was largely completed in 2002. We spent approximately R4.1 billion
($660 million) on fixed-line capital expenditure in the year ended March 31, 2005. Telkom’s strategy is
to reposition itself to a predominantly internet protocol network in order to offer converged services
and increase its ADSL offerings. Telkom expects that significant investment in the network will be
required to support this expanded offering.
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in Centurion, Pretoria. Our national network operations center enables us to be more proactive in
anticipating, localizing and isolating problems, such as congestion and cable breaks, so that they can
be corrected promptly. The national network operations center is capable of providing up to the
minute, real-time visual summary of the status of our entire network. Our national network operations
center includes an emergency restoration and control center that manages all network failure
restorations. Network service management specialists are able to obtain up to the minute information
from this center in order to proactively update global and corporate customers who have services
affected by any major network failure, including voice and data network services.
Switch digitalization has made our network more efficient and has enabled us to offer new value-
added voice and data services, including caller line identification, electronic call answering and the
provisioning of innovative billing systems. Our switching network infrastructure is based on to a two-
tier structure utilizing large capacity digital switches. The upper, or primary, tier is used for the
switching of long distance and international traffic and the lower, or secondary, tier is used for the
switching of regional and local traffic.
volumes during peak times. Each of the primary switching centers is interconnected by at least two
self healing diverse routes. Interconnection between our network and the networks of the three South
African mobile operators takes place at primary level switches in the main centers. Two international
telephone switching centers serve as the international gateways. Secondary switching centers are
connected to the primary switching centers by at least two self-healing diverse routes. Each
secondary switching center includes one switch with internal redundancy mechanisms.
meshed topology, which provides a dual path to each connection point. The ring topology consists of
interlocking self-healing rings, while the meshed topology consists of high capacity digital cross-
connects connected in meshed fashion via high capacity digital links. The primary tier consists of
eight stacked rings and fifteen digital cross-connects, while the secondary tier consists of 490 rings
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management capability, provides for faster provision and modification of service, improved grade of
service and lower maintenance costs. Telkom is investing in additional capacity to meet requirements
for growth in data traffic and leased lines.
hierarchical ring in our network as a “first office application” during the 2005 financial year.
replace obsolete equipment in rural areas. Fiber in the loop has been and is deployed in the form of
optical fiber distributed concentrators, digital line concentrators and digital loop carriers as well as
fiber to mainly corporate customer sites. Telkom is deploying additional access network infrastructure
to enable the provisioning of ISDN and ADSL services on demand. In addition, Telkom is focusing on
the rehabilitation of its existing access network infrastructure to improve the reliability of its network.
transfer mode network. The present available bandwidth between the core switches on our
asynchronous transfer mode network is 120 STM-1s or 17.97 Gbit/s, while the available bandwidth
between the access switches, metropolitan switches and core switches is 361 STM-1s or 54 Gbit/s.
Access to our asynchronous transfer mode network is primarily provided via fiber.
with an estimated dial-up base of greater than 305,000 customers, including Telkom and other
internet service providers as of March 31, 2005.
endpoints have been deployed. Broadband capability has been introduced and currently supports an
ADSL customer base of approximately 58,500 as of March 31, 2005.
ADSL customers. Our ADSL footprint covers 76.6% of our customer base and consists of 546 digital
subscriber line access multiplexers, serving approximately 58,532 customers as of March 31, 2005,
an increase from 20,313 customers as of March 31, 2004 and 2,669 customers as of March 31,
2003. This network is managed from our national network operations center.
hosted on our voice over internet protocol network. Telkom has points of presence for connectivity to
the voice over internet protocol network in Amsterdam, London, New York and Ashburn (Washington D.C.),
with plans to expand to the Far East. The network can terminate 60 media gateways, or approximately
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9.6 kbit/s channels thus enabling us to reduce the cost of international calls, while maintaining the
perceived voice quality of a 64 kbit/s call.
digital assistant can connect to the service while in the coverage area. WiFi is mainly targeted at hotel
groups, major shopping malls and some sites on national routes.
It can be used for a number of applications, including access broadband connections for hotspots and
high-speed enterprise connectivity for businesses. The technology is designed to reduce investment
risks for operators and service providers by enabling Telkom to more cost effectively take advantage
of the market potential of wireless broadband access.
internet protocol via customer premises gateways. Testing on this system version is expected to be
concluded by July 2005. Service testing has been confined to Telkom employees. Telkom has a
memorandum of understanding in place with Intel Corporation for the interchange of information on
WiMax in order to keep up with the latest WiMax developments.
of very small aperture terminals and other satellite transmitters located at strategic locations
throughout the country. Telkom has satellite bandwidth available from Intelsat in the Atlantic and
Indian Ocean regions. Telkom also has access to satellite capacity from 64kbps to 45 Mbps upon
request. The Indian Ocean region can be connected to two satellites and the Atlantic Ocean region
can be connected to three satellites. Satellite access is provided from our earth stations at
Hartebeeshoek, west of Pretoria, Crowthorn in Gauteng and Klipheuwel in Cape Town. Currently we
have satellite voice and data connectivity to locations not reachable via undersea cable, including
most African countries and to the Americas, Australia and Europe.
capacity owner on the SAT-2 submarine cable system with the right to use approximately 65% of the
combined capacity. Consistent with our strategy of increasing international carrier traffic on our
network, we have invested approximately $85 million in the SAFE and SAT-3/WASC submarine cable
systems that were introduced into service during 2002. The cable systems provide fiber optic
connectivity between South Africa and international destinations. These cable systems utilize the
latest technology available in order to provide improved high speed voice, data, video and other on
demand high bandwidth services and have increased fiber optic bandwidth between Europe and
Africa significantly. We have the right to approximately 20% of the combined capacity on the SAFE
and SAT-3/WASC submarine cable systems, making us the l argest capacity owner in these cable
systems out of the 36 telecommunications operators who have invested over $650 million in these
cables. We believe we are uniquely positioned to exploit the synergies between our extensive fixed-
line network in South Africa and our investments in these cables in order to become the
communications hub of Africa. The length of the SAFE cable is approximately 13,100 km and the
SAT-3/WASC is approximately 14,300 km.
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permit us to make timely and informed business decisions and respond to our customers’ needs with
tailored solutions. We have dedicated significant resources to the design and implementation of our
new operations support systems based on a comprehensive and well defined information technology
strategy.
services. The center is safeguarded by state of the art environmental and security systems capable of
performing maintenance without impacting service or availability. The complex houses a 2,100 square
meter data center and over 9,000 square meters of usable office space and includes a twenty four
hour command/operations center. The command center contains a large video wall that enables
personnel to keep abreast of the current state of our information technology infrastructure twenty four
hours a day.
Centurion and its sister data center site in Bellville locations for redundancy purposes. Both operations
can be monitored and operated from either location via service management tools and critical
systems have data transferred between these sites for rapid disaster recovery should it be necessary.
In addition to the growth and leveraging of operational functionality, the power support systems have
been upgraded to add one more level of environmental redundancy. This redundancy is shared
between the data center and the new national business solutions center building to reduce cost.
providing Telkom with a centralized information technology backbone. The national business solutions
center was commissioned and eleven of our external hosting clients have been relocated into this
building for hosting and support. Both the data center and the national business solution center are
operated from a command center and now provides an additional 3,000 square meters of computer
room space designed to the same specifications as our primary data center requirements. In addition,
this new facility gives Telkom the ability to provide high availability configurations that are split
between both buildings for redundancy purposes. Network reliability has also been enhanced by
creating a totally redundant, shared network environment between the data center, the national
business solution center buildin g and the national network operations center.
liberalization of the South African telecommunications industry. These systems include an initiative
aimed at providing an automated mechanism to manage and optimize the workforce, a
provisioning/fulfillment system designed to manage the end-to-end delivery of products and services,
a customer assurance system designed to track and resolve customer service problems and a
customer care system designed to better manage customer relationships. The first phase of the
workforce management system was completed in the 2004 financial year. The roll-out of the second
and third phase of the workforce management system is planned for the 2006 financial year. The roll-
out of the customer management system for selected segments, enabling Telkom to have a single
view of its customer, is planned to commence towards the end of the 2006 financial year. In addition
to this, a fault management solution was successfully implemented in the national network operations
center allowing for the centralized management of all network events by technology. This accelerates
the real-time and accurate detection of problems in the network by event collection, filtering and
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2005 financial year. This solution provides the platform for holistic asset lifecycle management, which
is expected to be fully operative in the 2006 financial year.
other telecommunications service providers in those areas that are fully liberalized, such as the
provision of value-added data network services, and Sentech, which was issued an international
carrier of carriers license and a multi media license in May 2002. In addition, we compete with other
service providers who use least cost routing technology that enables fixed-to-mobile calls from
corporate private branch exchanges to be transferred directly to mobile networks. The entry of
multinational corporations to South Africa is expected to be a further incentive for global
communications operators, which already service these corporations abroad, to establish or enhance
their presence in South Africa.
owned by Transtel and Esitel, which are beneficially owned by the South African Government, and
other strategic equity investors, including 26% beneficially owned by TATA Africa Holdings
(Proprietary) Limited, a member of the TATA Group. ICASA is in the process of issuing this license.
Further competition may arise as a result of an assessment by the Minister of Communications on the
feasibility of issuing additional licenses to provide or resell public switched telecommunications
services from May 2005, however, no determination has yet been published. ICASA has issued
licenses to small business operators to provide telecommunications services in seven underserviced
service areas with a teledensity of less than 5% and it is expected that further licenses will be issued
in 2005.
links and whether VANS operators are allowed to provide voice over internet protocol to the general
public or only to their own customers to whom they provide value added services, however, if mobile
cellular operators are permitted to self provide fixed telecommunications links and VANS operators
are permitted to provide voice over internet protocol to the general public, we would face significantly
more competition in the provision of leased lines and voice services. We cannot predict which view
will prevail because the necessary regulations have not yet been published.
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broadcasting, broadcasting signal distribution and telecommunications sectors. We expect that the
new licensing framework will result in the market becoming more horizontally integrated and will
further increase competition in our fixed-line business.
As a result of increasing competition, we anticipate a reduction in overall average tariffs and market
share in our fixed-line business, which could cause our growth rates, operating revenue and net profit
to decline.
telecommunications services in the future. We intend to introduce new products and services and
tariff structures with the aim of gaining additional revenue and increasing current revenue generated
from existing products.
overall price. We have established cross functional sourcing teams staffed with individuals from
different areas of our organization to evaluate and make recommendations on certain bids, which,
depending on value, require the further approval of our executive committee and notification of certain
approvals to our board of directors. Bid requests are published in our weekly tender bulletin and on
our web site. We are required to adopt affirmative procurement policies that favor historically
disadvantaged suppliers. We seek to utilize at least two suppliers for all critical equipment where
possible in order to minimize supply risk. In the year ended March 31, 2005, our top twenty suppliers
accounted for approximately 60% of all purchases and our main supplier was Total Facilities
Management Company, which ac counted for approximately 14% of all expenditure. During the year
ended March 31, 2005, Telkom directed R5.2 billion to black economic empowerment suppliers,
representing 61.9% of Telkom’s total procurement spending, compared to R4.6 billion in the year
ended March 31, 2004.
Africa with an estimated market share of approximately 56% as of March 31, 2005 based on total
estimated customers. Vodacom has investments in mobile communications network operators in
Lesotho, Tanzania, the Democratic Republic of the Congo and Mozambique.
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people in South Africa, representing approximately 96% of the country’s population based on the last
official census conducted in 2001 and approximately 67% of the total land surface of the country. The
estimated penetration rate for mobile communications in the Republic of South Africa has increased
to 49.5% as of March 31, 2005.
commenced service in June 1994. This mobile cellular telecommunications service license was
confirmed and reissued in August 2002 pursuant to the Telecommunications Act, 103 of 1996. In
addition, Vodacom was awarded a permanent 1800 MHz license and a 3G spectrum license during
the 2005 financial year.
a history of innovation as illustrated by its record of product offerings. Vodacom was the first mobile
communications network operator in the world to offer prepaid mobile communications services on an
intelligent network platform and to offer its customers coverage across the whole of Africa where
commercial GSM roaming is available. Vodacom was also the first mobile communications network
operator in South Africa with nationwide coverage. Vodacom launched the first commercial
3G network in South Africa in December 2004. Vodacom also entered into an alliance with Vodafone,
pursuant to which Vodacom is able to market Vodafone branded products and services. As part of the
launch of its 3G network and its alliance with Vodafone, Vodacom launched Vodafone Mobile
Connect, Vodafone Live! and BlackBerry&r eg;. Vodacom’s alliance with Vodafone also provides Vodacom
access to Vodafone’s global research and development in respect of 3G and access to Vodafone’s
marketing and buying powers in respect of 3G technologies. In the future, Vodacom intends to
continue to focus on offering premier interactive voice response, premium short messaging services,
general packet radio services, multimedia services and fixed-to-mobile products.
range of mobile service packages designed to appeal to specific customer segments. Vodacom offers
two broad categories of contract subscription packages, leisure packages, such as Weekend
Everyday for residential customers, and business packages, such as Business Call for business
customers. Vodacom launched the Family Top Up package in the 2004 financial year, which combines
the benefits of a contract service with the financial control offered by a prepaid service and is
designed to facilitate migrations to contract packages from existing prepaid packages. Vodacom’s
Family Top Up package has proven highly successful and has contributed to the growth in contract
customers. As of March 31, 2005, 19.8% of Vodacom’s contract customers were Top Up customers
compared to 5.1% as of March 31, 20 04.
waiting and short message service capabilities. Depending on the contract package, customers either
pay a fixed monthly charge and receive a set number of free minutes or pay a monthly subscription
for access plus a per minute or per second fee. In addition, Vodamail Executive is available to all
contract packages on request. This is an integrated voice and fax mailbox that offers features such as
Faxmail, group distribution list and voice-mail messaging.
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and has experienced rapid growth and has been a significant element in the growth of Vodacom’s
mobile customer base. Vodacom’s 4U is a prepaid per second billing product targeted at the youth
market who have higher usage of SMS and a need for per second billing. Since its inception, the
number of 4U subscribers has increased significantly and as of March 31, 2005, approximately 70.7%
of Vodacom’s prepaid customers were 4U customers. Vodago and 4U provide instant access to the
Vodacom network and enable low volume customers to control mobile telephone costs based on
usage because there are no long term contracts. Fax and certain data services are not available to
Vodago customers.
2005 financial year, Vodacom introduced a new Super six 4U starter pack and changed the Vodago
Super six starter pack to include free SMSs. Recharge-related innovations in the 2005 financial year
included the Yebo 5 voucher, adding SMS as a recharge channel, and the addition of electronic
recharge as a service to the Vodacom4me portal. Remaining airtime value and time window are
accumulated provided the customer recharges a voucher before the time window expires. The
accumulated time window cannot exceed 24 months. Vodacom also offers a voucher that entitles
customers to receive unlimited incoming calls for 365 days. This voucher does not entitle the customer
to make outgoing calls, but can be combined with other vouchers that entitle the customer to make
outgoing calls as well as accumulate airtime.
electronically and through the use of banking networks. Because prepaid customers pay in advance
for their mobile service, the risk of bad debts is eliminated and the risk of fraud is substantially
reduced. In addition, prepaid services provide cost savings to Vodacom as bills do not need to be sent
to prepaid customers and handsets for prepaid customers are not subsidized. There are less service
offerings for the prepaid mobile communications market than there are for the contract base market.
Following the launch of 4U, Vodacom is continuing to implement initiatives to expand its prepaid
mobile communications service offerings and to gain a greater understanding of its prepaid customer
base and its requirements.
Vodacom brand. Community service phones are purchased by local entrepreneurs who resell
community phone services. Community service phones are preloaded with airtime and can be
recharged electronically by telephone shop operators when the airtime on the phone expires.
aggregate license target of 22,000 community service phones. The development of community
service phones has made it possible to provide mobile access to the more than 20 million South
Africans who live in communities where there is less than one telephone line per hundred people and
have improved the quality of life for many South Africans who previously had no access to
telecommunications. Community service phones have also been a cost effective method of
significantly increasing traffic revenue on Vodacom’s network due to their low roll-out costs to
Vodacom and low barriers to entry for customers. Community service phones generated ARPUs of
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Vodacom intends to appropriately adopt its business model for community service phones in its other
African operations.
commerce services, short messaging services, mobile multimedia services, data services, mobile
internet access, fax services and twin call services, the latter of which enable customers to use two
mobile phones under the same number. Vodacom’s Call Sponsor offering enables contract customers
to sponsor the calls of up to three prepaid customers. Vodacom has experienced substantial growth in
the use of its value-added voice and data services, resulting in increased traffic revenue on its
network. Short messaging services were the key contributor to Vodacom’s R1.2 billion, R943 million
and R581 million of data revenue in South Africa in the years ended March 31, 2005, 2004 and 2003,
respectively. Vodacom transmitted approximately 2.4 billion short messaging services over its network
in the y ear ended March 31, 2005, up from approximately 2.0 billion and 1.5 billion in the years ended
March 31, 2004 and 2003, respectively.
branded products and services. As part of the launch of its 3G network and its alliance with
Vodafone, Vodacom launched Vodafone Mobile Connect, a 3G/GPRS datacard providing fast, secure
access to corporate networks from laptop computers, Vodafone Live! with global and local content,
picture and video messaging and downloads, and Blackberry®. As of March 31, 2005, Vodacom had
10,853 3G users on its network. Vodacom had acquired 5,105 Mobile Connect Card users as of
March 31, 2005 in the four months since its launch. In the 2004 financial year, Vodacom launched
SMS-only roaming and promotional offerings such as MMS and SMS bundles. Vodacom launched
MyLife, its MMS and GPRS network service, on October 17, 2002, Office Anywhere in August 2003,
Look4me in February 2004 and Look4it in March 2004.
March 31, 2003. Vodacom expects that the broad introduction of “always on” faster response and
generally higher speed packet-switched data services, such as GPRS and universal mobile
telecommunications system, or UMTS, will provide the platform for future value-added services.
amounted to approximately 2.4 million units, a year-on-year growth of approximately 14% and 40.5%
from the 2005 and 2004 financial years, respectively. Camera phones have now become more
affordable and are available on prepaid and contract offerings. In addition, bluetooth technology is
available on most mid- and high-end phones. Vodacom intends to focus on Vodafone Live! in the 2006
financial year with specific emphasis on customized phones and content. Vodacom purchases
handsets at current market prices.
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SIM-card, are required to utilize handsets on either the Vodacom or other mobile communications
network operators’ networks, unless the handset is network locked.
Vodacom operates. Vodacom will also provide these services to the second national operator and
other South African communications licensees when they commence operations.
allowing the routing of calls over Vodacom’s mobile communications network. The Cell C national
roaming agreement has been amended to allow for continuous roaming in certain urban areas.
international roaming agreements. As of March 31, 2005, Vodacom had international roaming
agreements with 301 mobile communications network operators in 153 countries. Vodacom also
receives revenue from its roaming partners for calls made in South Africa by their customers. In 2006,
Vodacom intends to seek to focus on networks in the more popular destinations and to conclude 3G,
GPRS, prepaid and SMS agreements with Vodafone and other networks to further enhance data
offerings for roamers and visitors alike.
in South Africa, which represents an estimated penetration rate of 49.5% of the population. As of
March 31, 2005, Vodacom estimated that its customers represented approximately 56% of South
African mobile communications customers making Vodacom the leading mobile communications
network provider in South Africa based on total estimated customers.
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Customers (thousands)
disconnected, including inactive customers, as of the end of the period indicated.
generating activity has been recorded for a period of three consecutive months. In the 2005 financial year, a software
error was identified in the calculation of inactive customers. Vodacom has corrected inactive customers as of March 31,
2005. Information for prior years is unavailable.
total reported customer base during the period. See below for a discussion of when customers are disconnected from
Vodacom’s network.
customers were disconnected if they did not recharge their vouchers after being in time window lock
for six months for periods prior to November and December 2002, for four months for periods from
November and December 2002 until April 2003 and for three months from April 2003 until December
2003. Time window lock occurs when a customer’s paid active time window, or access period, expires.
In December 2003, Vodacom changed the deactivation rule for prepaid customers to align itself with
European and industry standards. From December 2003, prepaid customers are disconnected from its
network if they record no revenue generating activity within a period of 215 consecutive days.
and rural, outlying areas of South Africa. Vodacom also attributes its growth to the launch of its
prepaid services, which have enabled those that lack access to credit and steady income to obtain
telephone service. Vodacom believes that its aggressive marketing campaign, the creation of strong
distribution channels for Vodacom’s products and services and the introduction of new value-added
voice and data services have further contributed to growth.
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Vodacom has seen a decrease in connection incentive levels in the market. The strong growth in
customers was a direct result of the large number of gross connections achieved, with continued
levels of handset support to service providers in respect of the contract base, coupled with decreased
churn in the contract and prepaid bases. Growth in contract customers was largely due to the
increase in connections in Vodacom’s hybrid product, Family Top Up.
driven by the continued demand for basic voice telephone services. Vodacom believes that mobile
communications services provide a cost effective means of telephone services for customers in
underserviced and rural, outlying areas. Vodacom’s efforts will therefore continue to focus on growing
customer numbers while carefully managing its existing customer base, marginal revenue per
customer and customer related acquisition and retention costs. Vodacom, MTN and Cell C each
provide connection commissions to service providers and dealers, or agents. These are often utilized
by agents to subsidize handsets as an incentive for customers to switch operators to obtain a new
handset and to reduce the cost of access. As a result, Vodacom focuses on keeping its contract churn
rate low and retaining high value cu stomers through focused handset upgrade policies and other
retention measures, while continuously monitoring customer acquisition and retention costs. Vodacom
also actively manages churn through customer relationship management systems, developing its own
distribution and logistics capabilities and other retention initiatives. Prepaid customer churn is
negatively affected by the high rate of unemployment in South Africa and the low cost of access.
abroad and incoming calls received by Vodacom’s customers in South Africa, excluding national and
incoming international calls.
Vodacom sets its contract subscription package tariffs utilizing a balanced mix of access and usage.
For those tariff packages where voice usage is high, the per minute rate is lowered and the monthly
subscription tariff is raised. For those packages where the voice usage is low, the per minute tariff
rate is increased and the monthly subscription tariff is lowered. For those users where the monthly
subscription tariff is a barrier to entry, Vodacom offers prepaid packages with no monthly subscription
tariff, but sets the per minute voice tariff rate higher. Tariff rates for SMS messaging are based on the
fact that lower cost channels are used to carry SMS traffic.
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increased the amounts mobile operators are required to pay one another for the termination of
mobile-to-mobile calls from November 2001. These amendments also introduced an interconnection
rate of 4 SA Cents for the termination of calls by mobile operators for calls originating from other
mobile operator’s community service phones, whereas previously these calls were terminated at no
charge. These amendments have increased Vodacom’s payments to other operators, while increasing
the interconnection revenue received by Vodacom. Effective January 2005, the mobile-to-mobile
interconnection rates for both commercial and community service telephone originated calls were
increased from R1.23 peak and R0.73 off peak to R1.25 peak and R0.77 off peak for commercial
calls and from R0.04 peak and R0.04 off peak to R0.06 peak and R0.06 off peak for community
service calls, in each case exclusive of VAT.
between 7:00 a.m. and 8:00 p.m. Off peak hours are all other times and all day during public holidays.
Tariffs for international calls vary according to the destination country of the call. In November 2001,
Vodacom launched new products for its contract and prepaid packages where calls are charged in
one second increments. The following tariffs for Vodacom’s packages are charged in time units of one
minute for the first minute and thereafter in units of 30 seconds. Vodacom’s most recent annual tariff
increases were lodged on September 6, 2004 and approved by ICASA on September 13, 2004. The
average tariff increase was 0.4%, effective November 1, 2004.
Mobile-to-fixed peak calls
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120 free off peak minutes per month. Calls are charged for the first 60 second increment and 30 second increments
thereafter. As of March 31, 2005, “Weekend Everyday” customers accounted for 82.7% of Vodacom’s total contract
customers.
minutes per month. Calls are charged for the first 60 second increment and 30 second increments thereafter. As of March 31,
2005, “Business Call” customers accounted for 16.8% of Vodacom’s total contract customers.
60 second increment and 30 second increments thereafter.
widely recognized by customers. Vodacom’s advertising and promotion campaign is focused on
television advertising and sponsorship of sporting and entertainment events.
Company (Proprietary) Limited, a company incorporated in the Republic of South Africa, and the other
independent and exclusive service providers. In recent years, Vodacom has purchased a number of
the previously independent service providers and consolidated its sales and distribution operations
into Vodacom Service Provider Company. On March 1, 2004, Vodacom purchased 51% of
Smartphone acquiring an additional 2.5 million prepaid customers. On April 16, 2004, Smartphone
purchased an 85.75% equity stake in Smartcom (Proprietary) Limited acquiring an additional
40,000 contract customers. On February 1, 2005, Vodacom acquired the contract customer base,
dealer agreements and five employees of Tiscali South Africa. As a result of these acquisitions,
Vodacom directly controlled 78.3% of its contract customer base an d 98.4% of its prepaid customer
base in South Africa as of March 31, 2005.
approval.
and prepaid customers. Vodacom utilized two exclusive service providers and two independent non-
exclusive service providers as of March 31, 2005. As of March 31, 2005, 96.1% of Vodacom’s total
customer base, 80.5% of its contract customer base and 99.0% of its prepaid customer base in South
Africa was managed by exclusive service providers or controlled directly by Vodacom.
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products. Loyalty and retention programs played an integral role in achieving this objective. Vodacom
also sought to increase its contract customer base by migrating appropriate high-end prepaid
customers to contracts in the 2005 financial year.
dealers for the acquisition and activation of each new customer for all contract packages.
for the retention of all contract packages, excluding Vodacom 4U. The purpose of these incentives is
to minimize customer churn.
acquisition and activation of each new customer for all prepaid packages.
maintain and increase their loyalty to, and exclusivity with, Vodacom. These incentives include
exclusivity payments and advances to service providers in respect of purchases of assets for stores
and providing distribution outlets with distribution subsidies to maintain the loyalty of distribution
outlets through the stimulation of sales.
sourced handsets provided to customers, which are recorded as a net against revenue.
response, via e-mail and through Vodacom’s web sites. Vodacom’s key focus area for the 2005
financial year has been Vodacom’s customer self service. More than 70% of customer queries in the
2005 financial year were handled by the interactive voice response system and more than 85% of
customer queries were resolved on the first call. Consequently, Vodacom has significantly improved its
customer information systems and become increasingly proactive in developing relationships with its
customers, particularly in the high revenue segment of the market. Vodacom is currently planning to
establish more walk-in centers in other parts of the country.
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in Vodacom’s customer retention initiatives. Although customer focus has always been important to
Vodacom, during the last three years customer relationship management has become a key strategic
focus area and an important philosophy in Vodacom. The current year saw ongoing integration of
support systems and staff training as part of improving this continuously challenging area. Vodacom
strives to improve relationships with customers by understanding their needs, their likes, dislikes, how
they use its products and how they would like Vodacom to interact with them. Vodacom reassures its
performance through independent customer satisfaction surveys designed by Vodafone and
conducted on a quarterly basis. Vodacom launched its Vodacom Customer Reward Program to
recognize and reward for influential and high spending contract individuals, which it believes, has
contributed to a very low churn in this sector.
2005 the Vodacare infrastructure consisted of 27 branches and franchises in all the major centers
providing walk-in customer support to Vodacom customers, and an advanced repair center hub for
high-level repairs situated in Midrand. Vodacom believes that, with an average of 38,000 repairs per
month, this dedicated customer service support infrastructure differentiates Vodacom’s service from
that of its competitors. During the 2004 financial year, Vodacom launched a new 48 hour swap
program to further increase service levels. The primary focus is to manage and facilitate the process
of putting the customer back on the air with as little interruption as possible and is achieved by using
a combination of repairs, swaps, refurbished handsets, loan handsets, and managed repairs through
third parties.
and customer service systems. Vodacom believes that the new information systems will allow for the
development of enhanced service management processes.
tariff rates, more customized billing information and GPRS services. Vodacom monitors its exposure
to credit loss and customer fraud through a credit scoring system that evaluates potential contract
customers. The evaluation process has led to decreases in contract customer churn rates and
increases in the overall credit quality of its mobile contract customers. For its prepaid customers,
Vodacom offers the option to recharge over the telephone using credit cards in order to make the
recharge process quicker and easier.
reported customers.
transceiver stations, including transceivers and GPRS functionality across the network.
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mediation systems for a variety of interactive voice response and electronic recharging options,
including commercial bank ATM and point of sale terminal recharging.
connect infrastructure. In addition, Vodacom operates an extensive data network for its internal
requirements, based on internet protocol, point-to-point frame relay and X.25 services, which was
supported by the cross-connect network and more than 50 packet/frame/circuit nodes as of
March 31, 2005.
mobile internet gateway platform supporting advanced SIM toolkit applications and an intelligent
network platform.
providing a high level of service quality despite an extremely varied distribution of traffic, difficult
terrain conditions and a complex regulatory environment. In the year ended March 31, 2005, Vodacom
had a call retention rate of 99.6% and a call success rate of 99.2% in South Africa.
As of March 31, 2005, approximately 8% of Vodacom’s base stations were 3G enabled and Vodacom
had installed dual band (GSM900/GSM1800MHz) base transceiver stations in 1,348 locations,
including 425 in Gauteng, 225 in KwaZulu Natal, 132 in the Western Cape, 126 in the Eastern Cape
and 33 in the Central region. In addition, all base transceiver stations in metropolitan areas have been
upgraded with dual band antennas and feeder cables to accommodate GSM1800MHz equipment.
Vodacom had operational dual band base stations in 1,348 locations in South Africa comprising
8,137 GSM1800MHz transceivers.
possible. Furthermore, attention has been given to management of electromagnetic emissions to
ensure compliance with recognized international environmental standards such as those developed by
the International Commission on Non Ionizing Radiation Protection.
where calls are billed on a per second or per minute basis, customers utilizing GPRS services are
billed according to the number of bytes of data sent or received.
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spend in this area.
Limited, a public company listed on the JSE, and Cell C. Cell C commenced operations in November
2001. As of March 31, 2005, Vodacom was the market leader with approximately a 56% market share
based on the total estimated customers in the South African mobile communications market, while
MTN had approximately a 35% market share and Cell C had approximately a 9% market share.
Vodacom competes primarily on the basis of product quality, availability and network coverage.
Vodacom believes that increased competition could have an adverse impact on its tariffs and churn
rate.
additional mobile licenses or operators primarily in other sub-Saharan African markets. Investments
outside of South Africa are evaluated and monitored against key investment criteria, focusing primarily
on countries with stable economic and political conditions or good prospects for growth, market
leadership and profitability. Other key factors include Vodacom’s ability to gain majority ownership,
develop strong local partnership relationships and obtain non-recourse financing. Other African
operators are branded under the “Vodacom” name.
operations outside South Africa has grown significantly to 2,645,000 as of March 31, 2005 from
1,492,000 as of March 31, 2004 and 773,000 as of March 31, 2003. Revenue from Vodacom’s
operations outside of South Africa has grown to R2,272 million in the year ended March 31, 2005
from R1,505 million in the year ended March 31, 2004 and R1,235 million in the year ended March 31,
2003. Our share of Vodacom’s operating loss from other African operations was R98 million in the
year ended March 31, 2005, compared to an operating profit of R29 million and R33 million in the
years ended March 31, 2004 and March 31, 2003, respectively.
Consortium believe that the combination of Vodacom’s extensive expertise in the African
telecommunications markets and the Virgin Group’s skills in successfully operating in highly
competitive markets provide a competitive proposition.
operations in Nigeria with the intention of acquiring an equity stake in the business. On May 31, 2004,
however, Vodacom announced that it had elected to terminate the management contract and abandon
its plan to make an equity investment in the business of VEE Networks in Nigeria. Vodacom continued
to provide technical support to VEE Networks for a period of six months. Vodacom is currently a
defendant in certain legal proceedings related to its activities in Nigeria prior to the termination of the
Management Agreement.
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operations.
Lesotho
disconnected, including inactive customers, as of the end of the period indicated.
customer base during the period. ARPU excludes revenue from equipment sales, other sales and services and revenue
from national and international users roaming on Vodacom’s networks.
Republic of Lesotho, owns the remaining 11.7% of Vodacom Lesotho. Vodacom Lesotho’s network
was commercially launched in May 1996. Vodacom Lesotho’s license has a term of 16 years with
13 years remaining.
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inclusion in the Vodacom portfolio. The network has 46 base transceiver stations, one mobile service
switching center, two base station controllers, one short message service center, one intelligent
network platform and one voicemail platform. Vodacom Lesotho’s cumulative capital expenditures
through March 31, 2005 were R211 million, compared to R201 million through March 31, 2004 and
R185 million through March 31, 2003.
handset. Vodacom Lesotho also offers public phone services and a direct connect service allowing
customers to access the Vodacom Lesotho network directly from their PABX. Vodacom Lesotho’s
distribution is maintained via seven Vodashops, six Super Dealers and three retail groups and
Vodacom products can be purchased from over 100 outlets in Lesotho. Customers are serviced
through a walk-in customer care center or via a customer care call center.
for 96.6% of Vodacom Lesotho’s total customers as of March 31, 2005, compared to 95.0% as of
March 31, 2004. The net increase in total customers in the year ended March 31, 2005 is the result of
70,000 gross connections for the year, compared to 51,000 in the year ended March 31, 2004,
coupled with a lower churn rate. Vodacom Lesotho had a churn rate of 17.3% in the 2005 financial
year, compared to 65.1% in the 2004 financial year. The lower churn rate in the 2005 financial year
was due to completion of the clean-up of the inactive customer base and the result of the introduction
of a seven-month disconnection policy in April 2004. The high churn rate in the 2004 financial year
was the result of an ongoing process of cleaning up the inactive customer base.
international roaming agreements than that of Vodacom Lesotho. Econet-Ezicell has a signed
interconnect agreement with Vodacom Lesotho. Vodacom Lesotho had an estimated 80% market
share as of March 31, 2005 and 2004 based on the total estimated mobile market.
98% from 1,176 to 2,333.
international gateway to provide data services, and a further amendment to Telecom Lesotho’s license
allowing it to provide a product, Flexi-Save, which is a mobile service using the Econet Ezi-Cell
infrastructure. The license to Bethlehem Technologies has been challenged through court action by
Lesotho Telecommunications Corporation.
March 2004, which increased the interconnect rate for calls terminating to the Southern African
Customs Union, including South Africa, to M2.30 and M1.90 for peak and off peak calls, respectively,
from M1.00.
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Tanzania, owns a 16% interest in Vodacom Tanzania, and Caspian Construction Proprietary Limited,
a company incorporated in Tanzania, owns a 19% interest in Vodacom Tanzania. Vodacom Tanzania
has a 15 year license to operate a GSM network in Tanzania, which became effective on December 21,
1999. The roll-out of the network commenced in March 2000 and the commercial launch of the
network occurred in August 2000.
2005 were R1.4 billion, or TSH240.1 billion, compared to R1.1 billion, or TSH201.0 billion, through
March 31, 2004. Network coverage expanded to approximately 12% of the land surface of Tanzania
and approximately 43% of the population as of March 31, 2005, compared to approximately 9% of
the land surface and approximately 38% of the population as of March 31, 2004 and approximately
6% of the land surface and approximately 25% of the population as of March 31, 2003.
continues to form an integral part of the company’s public phone offering and strategy. Vodacom
Tanzania was the first operator in Tanzania to introduce per second billing on October 3, 2003.
Per-second billing has proved highly successful and as of March 31, 2005, approximately 980,000 of
Vodacom Tanzania’s customers were utilizing this service, compared to approximately 400,000 as of
March 31, 2004. Vodacom Tanzania currently offers international roaming on 139 networks in
80 countries. Vodacom Tanzania launched an interactive voice response in the 2004 financial year
to improve customer service levels. Customers can now be served in 2 languages, namely Kiswahili
and English.
change significantly in the near future. Despite challenging market conditions, Vodacom Tanzania has
increased the number of customers registered on its network by 75.6% to approximately 1,201,000 as
of March 31, 2005 from approximately 684,000 as of March 31, 2004 mainly because of a 84.7%
increase in gross connections to approximately 746,000 in the year ended March 31, 2005, compared
to approximately 404,000 in the year ended March 31, 2004. Vodacom Tanzania had a churn rate of
29.6% in the 2005 financial year and 30.0% in the 2004 financial year due to the high levels of
competition in Tanzania.
operator the Tanzania Telecommunication Company Limited, or TTCL. TTCL is the sole fixed-line
operator licensed to provide basic telecommunications services in mainland Tanzania. Dutch based
Celtel International B.V. (formerly MSI Cellular Investments Holdings B.V.) owns 35% of TTCL and has
management control of the company. In Zanzibar, Zantel is the sole operator granted a fixed-line
license, with international gateway rights for traffic originating on its own network.
on per second billing calls terminating on other networks and at the same time removed the
differential off-net pricing, resulting in a 20% tariff decrease. In respect of per minute billing for calls
terminating on other networks, the tariffs decreased by 5.5% and at the same time Vodacom removed
the differential off-net pricing, resulting in 18% tariff decrease. Further reductions in tariffs on both
postpaid and public phones have also been made during the period. Intense pricing competition has
led to a price war between the operators and has significantly affected Vodacom Tanzania’s ARPUs
in Tanzania.
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March 31, 2004 and approximately 53% as of March 31, 2003. Vodacom estimates that Celtel had a
market share of approximately 26% and approximately 25%, Mobitel had a market share of
approximately 11% and approximately 14% and Zantel had a market share of approximately 4% and
approximately 4% as of March 31, 2005 and 2004, respectively, based on the total estimated mobile
market.
8 secondees who are employed out of Vodacom International Limited. Effective April 1, 2005, a new
managing director, Romeo Khumalo, took over from Jose dos Santos, who was transferred to
Vodacom Mozambique.
issues are addressed via a consultative forum where staff are given a platform to address issues and
agreed actions are monitored on a monthly basis.
from 17.5 US cents to 10 US cents from August 1, 2004 and 8.9 US cents from January 1, 2005 with
further annual reductions in the future. Vodacom submitted comments in support of its views on the
introduction of cost based interconnection and Vodacom Tanzania challenged the process by which
the termination rates were introduced. A public hearing was held during September 2004 to discuss
these issues, the result of which was that the revised 2005 interconnect rates were introduced from
October 1, 2004 and the further reduction was delayed by two months to March 1, 2005.
liberalisation of the telecommunications market within the country. The Ministry of
Telecommunications is currently engaging the industry in respect of a new regulatory framework,
and accordingly licensing of services has yet to be finalized. Vodacom Tanzania has in the meantime
commenced routing of international traffic via Zantel at rates which are expected to improve margins
over those offered by the Tanzanian Telecommunications Company Limited.
incorporated in the Democratic Republic of the Congo. Vodacom owns a 51% interest in Vodacom
Congo, while Congolese Wireless Network owns the remaining 49% interest in Vodacom Congo.
Congolese Wireless Network s.p.r.l. had a limited existing network in the Democratic Republic of the
Congo. Although Vodacom has a majority voting interest in Vodacom Congo, the other shareholders
had certain approval and veto rights granting them joint control over the joint venture. Vodacom is
ultimately responsible for the funding of the operations of Vodacom Congo for the first three years
pursuant to its shareholders agreement. Vodacom Congo’s network was officially launched under the
Vodacom brand in May 2002. Vodacom Congo has 13 years remaining on its license.
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consolidated as a subsidiary in Vodacom’s financial statements after certain clauses granting the
outside shareholders participating rights were removed from the shareholders agreement.
the general population. ARPU was affected negatively, with the lower end users spending substantially
less. Despite aggressive competition for market share, Vodacom managed to increase profitability as
well as maintain its share of the market. An aggressive coverage strategy was the main contributing
factor in achieving the successes in customer growth and improved profitability for the financial year.
provinces of the Democratic Republic of the Congo, including 130 towns and consisted of 289 base
stations and four mobile service switching centers as of March 31, 2005, compared to 71 towns,
227 base stations and four mobile service switching centers as of March 31, 2004. Network capacity
in the main centers has also been upgraded to maintain quality and service. Vodacom covered
approximately 26% of the geographical area of the Democratic Republic of the Congo and
approximately 65% of the population as of March 31, 2005, compared to approximately 25% of the
geographical area and approximately 55% of the population as of March 31, 2004.
finance. Vodacom Congo’s cumulative capital expenditures through March 31, 2005 were
US$281 million, compared to US$227 million through March 31, 2004.
customer service. The prepaid and public phone products are aimed at the general Congolese market
with the main competitive advantage being coverage and network quality.
Tshiluba. Vodacom Congo’s interactive voice response handled in excess of 31,000 calls per day as of
March 31, 2005. Vodacom Congo has been successful in establishing international roaming
agreements with 206 operators in 99 countries.
customers significantly in the 2005 financial year to approximately 1.0 million customers as of March 31,
2005 from approximately 670,000 customers as of March 31, 2004 as a result of approximately
565,000 gross connections and a churn percentage of 23.1% in the 2005 financial year, compared to
approximately 513,000 gross connections and a churn percentage of 20.2% in the 2004 financial year.
Vodacom competes on the basis of low priced quality handsets, effective distribution channels,
coverage and network quality.
on the total estimated mobile market. Celtel, recently acquired by Mobile Telecommunications
Company is the main competitor in the Democratic Republic of the Congo. Celtel is focusing its
coverage in the main city centers. Celtel has embarked on an aggressive pricing campaign and further
coverage rollout. Celtel had an estimated market share of approximately 46% as of March 31, 2005,
compared to approximately 45% as of March 31, 2004 based on the total estimated mobile market.
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estimated market shares of approximately 4% and 3%, respectively, as of March 31, 2005.
identifying and training of local staff is a continuous focus of the company as part of the skills transfer
process.
changes to the framework, taxation and funding of universal access. The National Regulatory Agency
is working with the World Bank to allow for the assistance of experts and consultants within the limit
of the credits that will be allocated to the Democratic Republic of Congo to formalize terms of
reference for regulatory activities. Draft guidelines for wholesale pricing and interconnection are under
discussion with the National Regulatory Agency and are expected to be prepared for discussion and
implementation in the 2006 financial year. The President of the National Regulatory Agency stated
that decisions will be implemented for the substantial increase of telecommunications fees in respect
of spectrum, numbering, and the universal service fund. Consultations of the telecommunications
industry are being cond ucted.
order established RCD as a recognized political power and SuperCell was granted a national license.
Although the issue remains unresolved, the National Regulatory Agency’s position is currently that no
local interconnection is allowed with SuperCell. In view of the controversy associated with SuperCell’s
operations, the Minister of Post, Telephone and Telegraph was forced to subject the validity of the
licence to a minimum investment in the Democratic Republic of the Congo of core network elements.
Mozambique and the remaining 2% is held by a local consortium named EMOTEL. Vodacom
Mozambique was awarded its license in August of 2002, but due to the fixed-line operator and the
cellular operator being one company with no interconnect rates applicable, the license was not
accepted until August 2003 when the issues were satisfactorily resolved. The license is a 2G GSM
license and will expire in December 2018.
had a capacity of 350,000 customers as of March 31, 2005, with an increase to a capacity of
500,000 planned for 2006. Vodacom Mozambique’s cumulative capital expenditures through
March 31, 2005 were R696 million, or MZM 2,173.7 billion, compared to R478 million, or
MZM 1,785.6 billion, through March 31, 2004.
connections in the 2005 financial year. The post-paid products are mainly aimed at the corporate and
business market, while the prepaid products are aimed at the large informal market. Vodacom
Mozambique has an interactive voice response in place and customer care can handle customer
queries in two languages, namely Portuguese and English.
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result of 225,000 gross connections in the 2005 financial year, as well as a churn rate of 11.3%.
fixed-line operator. Vodacom Mozambique has managed to increase its estimated market share to
approximately 33% as of March 31, 2005, compared to approximately 11% as of March 31, 2004
based on the total estimated mobile market, by offering competitive coverage through an aggressive
roll-out program, despite extensive competition from mCel lowering prices and increasing discounts to
distributors, which has put significant pressure on ARPU and revenues.
during the initial two years of operations to assist in setting-up the business and training local
employees. The majority of the contracts for the existing secondees expire between August 2005 and
October 2005 when it is expected that the number of secondees will reduce. Effective April 1, 2005, a
new managing director, Josè dos Santos, took over from Clive Tarr, who returned to Vodacom South
Africa.
Reference Proposal released in October 2004, was US$0.09. Vodacom is negotiating with TDM
regarding the technical aspects of the new interconnection proposal, but it seems unlikely that there
will be agreement on termination rates, with the issue likely having to be referred to the regulator.
make microwave spectrum relatively expensive. The latest communications with the regulator
indicated that this amount may be deducted from the annual 3% of net operating income license fee.
Discussions with the regulator are continuing. Telkom obtained approval for a microwave link with
Vodacom Mozambique, which was completed in December 2004 and commissioned in January 2005.
the Fund. It is expected that the regulations will only be approved after the National Regulatory
Authority appointed consultants, Intelecon Research & Consulting Ltd, from Canada, have presented
their findings. Preliminary findings were presented during April and May 2005, while draft legislation is
expected by the end of 2005. Vodacom is well into year three in terms of its license obligations for
infrastructure roll-out.
coverage in order to increase its market share and improve its minutes of usage.
and awards bids to the best supplier based on the best overall score, taking into account technical
specification, delivery time, costing, financial viability and the participation of black economic
empowerment partners.
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Alcatel and Motorola for the radio networks.
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us. Many of these regulations are relatively new and are subject to amendment and finalization as the
telecommunications industry is further developed and liberalized. We cannot predict the outcome or
timing of any amendments or modifications to the applicable regulations or their interpretation or the
impact on us. In some instances, final regulations have not yet been promulgated.
Telecommunications and Telkom was incorporated as the successor of the telecommunications
enterprise. The Postmaster General and the Department of Posts and Telecommunications, however,
retained general regulatory functions and continued to regulate the telecommunications industry until
the Telecommunications Act, 103 of 1996, came into effect in 1996. On September 30, 1993, under
the regulatory regime of the Postmaster General, the Department of Posts and Telecommunications
and the Post Office Act, 44 of 1958, Vodacom and MTN were issued two national mobile cellular
telecommunications licenses. These licenses were the first major commercial licenses granted to
direct competitors of Telkom.
virtually all the telecommunications provisions of the Post Office Act, 44 of 1958, established the
South African Telecommunications Regulatory Authority, which was replaced in 2000 by ICASA when
the South African Telecommunications Regulatory Authority and the Independent Broadcasting
Authority were merged; and vested the South African Telecommunications Regulatory Authority with
almost all regulatory functions relating to the telecommunications and broadcasting industries,
including a major role in the issuance of telecommunications licenses. However, certain types of
licenses, including licenses for public switched telecommunications services, mobile cellular
telecommunications services, national long-distance and international telecommunications services,
may not be issued or applied for without a prior public invitation by the Minister of Communications
setting out the criteria for their issuance. These licenses can only be granted by the Minister of
Communications on recommendation from ICASA. In addition, the Telecommunications Act, 103 of
1996, gives the Minister of Communications authority to grant licenses using alternative methods such
as by way of auction or tender. The Minister of Communications has a policy-making role, entitling her
to issue policy directions consistent with the objectives of the Telecommunications Act and giving her
the ability to issue invitations to apply for the above mentioned licenses and the granting thereof.
General. The Director General does not, however, have any regulatory power under the
Telecommunications Act, 103 of 1996.
which enable us to continue providing the telecommunications services we provided prior to the
Telecommunications Act, 103 of 1996. On May 7, 1997, we were issued with a formal written public
switched telecommunications services license, a value added network services license and a radio
frequency spectrum license under this new regulatory regime. We operate under these licenses today.
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of the Republic of South Africa. The Telecommunications Act, 103 of 1996, now makes provision for
the issue of an additional license to provide public switched telecommunications services to a second
national operator and for the issue of additional licenses to small business operators to provide
telecommunications services in areas with a teledensity of less than 5%.
in May 2002. The relevant amendments introduce the possibility of further competition from May 2005
should the Minister of Communications, after conducting a feasibility assessment, determine that one
or more additional licenses to provide or resell public switched telecommunications services should be
awarded, however, no determination has yet been published.
over all functions of the dissolved South African Telecommunications Regulatory Authority and the
Independent Broadcasting Authority, which previously acted as regulators of the telecommunications
and the broadcasting industries, respectively. Deriving its powers from the Telecommunications Act,
103 of 1996, the Independent Communications Authority of South Africa Act, 13 of 2000, and the
Independent Broadcasting Authority Act, 153 of 1993, ICASA currently serves as the primary
regulatory and licensing authority for the South African communications industry, except with respect
to those specific licenses that can only be granted by the Minister of Communications. In respect of
these specific licenses, ICASA is empowered to evaluate license applications made in response to
invitations issued by the Minister of Communications and to make recommendations to the Minister,
who is vested with the final power to grant licenses, which are then issued by ICASA. Upon its
establishment, ICASA inherited a legacy of regulatory problems from its predecessors. It has been
reported that ICASA may currently lack adequate resources to effectively fulfill its regulatory and
licensing functions and to deal with regulatory challenges that continue to change given the rapidly
evolving telecommunications environment.
publish policy directions consistent with the objectives of the Telecommunications Act, 103 of 1996.
Once such policy directions have been issued, ICASA is obliged to perform its regulatory and other
functions in accordance with such directions. In addition, the Telecommunications Act, 103 of 1996,
entitles ICASA to make regulations, drafts of which must first be published in the Government Gazette
for public comment before final regulations can be prescribed and published in the Government
Gazette by the Minister of Communications.
court of law for compliance with the objectives and other provisions of the Telecommunications Act,
103 of 1996, and other relevant laws such as the South African Constitution.
and the regulations governing the telecommunications industry in the Republic of South Africa are
evolving, lack of clarity exists in a number of areas and that are still subject to interpretation, review
and amendment. Therefore there is some degree of regulatory uncertainty for Telkom, Vodacom and
other communications providers.
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outcome of the process uncertain and may cause delays.
owned by Transtel and Esitel, which are beneficially owned by the South African Government, and
other strategic equity investors, including 26% beneficially owned by TATA Africa Holdings
(Proprietary) Limited, a member of the TATA Group. ICASA is in the process of issuing this license.
Minister of Communications has identified 27 of these underserviced areas. ICASA has issued
licenses to successful bidders in seven of these areas and it is expected that further licenses will be
issued in 2005 and later.
links and whether VANS operators are allowed to provide voice over internet protocol to the general
public or only to their own customers to whom they provide value added services, however, if mobile
cellular operators are permitted to self provide fixed telecommunications links and VANS operators
are permitted to provide voice over internet protocol to the general public, we would face significantly
more competition in the provision of leased lines and voice services. We cannot predict which view
will prevail because the necessary regulations have not yet been published.
broadcasting signal distribution and telecommunications sectors. The Portfolio Committee on
Communications invited written comments in April 2005 and public hearings are expected to continue
through to August 2005. The Bill aims to supplement or replace current sector specific legislation and
change the market structure from a vertically integrated, infrastructure based, market structure to a
horizontally integrated, service based, technology neutral, market structure with a number of separate
licenses being issued for different areas. Pursuant to the current version of the Convergence Bill,
licenses would be awarded for the following areas:
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other services will be subject to class licenses. Existing licenses are expected to be grandfathered
until converted to new licenses in line with the convergence legislation. We expect that the new
licensing framework will result in the market becoming more horizontally integrated and will further
increase competition in our fixed-line business. In addition, the process of converting our licenses to
the new licensing framework may be lengthy and complex and could result in the imposition of
additional obligations and limitations in connection with the converted licenses, which could disrupt
our business operations and decrease our net profit.
right of any licensed operator to interconnect with operators licensed to provide public switched
telecommunication services, including the second national operator. The Telecommunications Act,
103 of 1996, empowers ICASA to prescribe guidelines as to the terms and conditions of
interconnection agreements and it confers on ICASA powers to intervene and propose, or to set its
own terms and conditions where the parties are unable to reach an agreement or the agreed terms
are not consistent with the relevant guidelines. Any terms and conditions of an interconnection
agreement set by ICASA are binding between the parties.
declared to be “Public Operators,” that certain operators may be declared to be “Major Operators,”
and that certain telecommunication services may be declared to be “Essential Services.” A Major
Operator must provide Essential Services to Public Operators at the Long Run Incremental Cost, or
LRIC, of those services, including a reasonable allocation of common costs.
services to be Essential Services and the second national operator, the mobile cellular operators and
the underserviced area licensees to be Public Operators. An amendment to the Telecommunications
Act in 2004 declares that, for the purpose of the interconnection guidelines, Sentech, Telkom, the
second national operator, the mobile cellular operators, national long-distance licensees, local area
licensees, under serviced areas licensees, and public payphone licensees are Public Operators. The
guidelines further prescribe that the Essential Services must be made available at the “Fully Allocated
Cost” of those services for the first two years, and thereafter, LRIC based interconnection prices will
become mandatory. In May 2005 ICASA initiated an enquiry into whether MTN and Vodacom should
be d eclared Major Operators. If MTN and Vodacom were declared to be Major Operators, they would
be required, like Telkom, to provide interconnection services at LRIC based interconnection prices.
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interconnection services at LRIC based prices to all licensees. The consultative process on these
guidelines has not yet been concluded.
agreement, on substantially the same terms, was negotiated and concluded with Cell C.
103 of 1996, guarantees the right of licensed operators to obtain telecommunications facilities from
operators licensed to provide public switched telecommunication services, including the second
national operator, and it empowers ICASA to prescribe guidelines for facilities leasing agreements.
The Telecommunications Act, 103 of 1996, confers on ICASA powers to intervene and propose, or to
set its own terms and conditions where the parties are unable to reach an agreement or where the
agreed terms are not consistent with the relevant guidelines, regulations or the Telecommunications Act,
103 of 1996. Any terms and conditions of a facilities leasing agreement set by ICASA are binding
between the parties.
“Public Operators,” that certain operators may be declared to be “Major Operators,” and that certain
telecommunication facilities may be declared to be “Essential Facilities.” A Major Operator must
provide Essential Facilities to Public Operators at the LRIC of those facilities, including a reasonable
allocation of common costs. An amendment to the Telecommunications Act in 2004 declares that, for
the purpose of the facilities leasing guidelines, Sentech, Telkom, the second national operator, the
mobile cellular operators, national long-distance licensees, local area licensees, and licensees in
underserviced areas are Public Operators.
basis, for the purpose of providing public switched telecommunication services. The second national
operator will be able to lease facilities from Telkom for a two year period to provide its services, and is
allowed to have shared access to the local loop for a period of two years. It is unclear whether we will
be required to allow access to the second national operator at LRIC-based prices beyond such two
year period in respect of other services, although the guidelines issued by ICASA may be interpreted
to prescribe that beyond the two year period, LRIC prices will become mandatory as described below.
We may also be required to lease or otherwise make our telecommunications facilities available to the
second national operator beyond the first two years of its license.
Essential Facilities. Among those essential facilities is shared access to the local loop by the second
national operator for the first two years of its license. The guidelines further prescribe that the
Essential Facilities must be made available at the Fully Allocated Cost of those facilities for the first
two years and thereafter LRIC based prices will become mandatory.
obtain facilities at LRIC based prices to all licensees. The consultative process on these guidelines
has not yet been concluded. If we are unable to negotiate favorable terms and conditions for the
provision of the services and facilities covered by the guidelines or ICASA otherwise imposes terms
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including: installations; prepaid and postpaid line rental; local, long distance and international calls;
fixed-to-mobile calls; public payphone calls; ISDN services; our Diginet product; and our Megaline
product. Approximately 80% of Telkom’s operating revenue in the year ended March 31, 2005 was
included in this basket. Our tariffs for these services are filed with ICASA for approval. Revenue from
services in the basket may not be used to subsidize other products and services outside the basket.
Historically, the overall tariffs for all services in the basket could not be increased by more than 1.5%
below inflation in South Africa, based on the consumer price index and measured using revenue for the
services in the basket at constant volumes for the prior year. In addition, the overall tariffs for a
sub-basket of services provided to residential customers could not be increased by more than 1.5%
below inflation in South Africa, based on the consumer price index and measured using revenue for the
services in the basket at constant values for the prior year. The Minister of Communications has
published regulations on a new price control regime that provides for the cap to be increased from
1.5% to 3.5% and the inclusion of ADSL products and services in the basket for which there is a price
cap, effective from August 1, 2005 through July 31, 2008. In addition, prior to January 1, 2003, the price
of any individual product or service included in the basket could not be increased by more than 20%
above inflation in South Africa in any year. From January 1, 2003, the price of any individual product or
service included in the basket may not be increased by more than 5% above inflation in South Africa in
any year. Effective August 1, 2005, the price of services in the residential sub-b asket, leased lines up to
and including lines of a capacity of 2Mbit/s and the installation and rental of business exchange lines
may not be increased by more than 5% above inflation in South Africa in any year.
2005. In December 2002, as a result of an out of court settlement related to our tariff increase in the
prior year, ICASA approved our tariff filing providing for a 9.5% increase in the overall tariffs for all
services in the basket effective January 1, 2003, based on the increase in the consumer price index
for the twelve months ended September 30, 2002 of 12.5%. Statistics South Africa Limited
subsequently revised the calculation of the consumer price index for the twelve months ended
September 30, 2002 downward to 11.2%, although our tariffs were not affected.
could reduce our net profit. Vodacom’s revenue and net profit could decline if wholesale price controls
are imposed on it.”
some cases, a basket of services, greater than the percentage annual increase in the consumer price
index is allowed without ICASA’s approval. Vodacom’s most recent annual tariff increases were lodged
on September 6, 2004 and approved by ICASA on September 13, 2004. The average tariff increase
was 0.4%, effective November 1, 2004.
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provide service to underserviced villages and to replace analog lines with digital lines. We elected not
to roll-out lines in our last year of exclusivity where it was not economical to do so. As a result, we
missed our line roll-out target by 16,448 lines, or 0.6%. Our license required us to pay penalties for
missing the service quality and line roll-out targets contained in our license. Based on the previous
requirements contained in our existing license, we incurred total penalties for failing to meet these
targets of approximately R15 million. We do not currently anticipate that we will have any additional
fixed-line roll-out targets.
into a contract with us for such service, and to install, connect, maintain and repair a telephone to use
such service, and provide access to emergency organizations and directory information services.
However, we are not required to provide the foregoing services where ICASA determines that the
demand for such services can be met by other means and, as a result, it would be unduly
burdensome in the circumstances for us to provide the telecommunications service requested.
population. The obligation will be a contribution to the Universal Service Fund, or USF, and ongoing
universal service obligations imposed on us through the generic terms of our license. In the past we
had to contribute to the USF R10 million per annum escalated by inflation from 1997. Beginning in the
2005 financial year, such contribution is set at 0.2% of the prior year’s revenue for Telkom. The first
such payment was made in July 2004. Vodacom’s contribution to the USF is on the same basis as
Telkom. New social obligations were imposed with Vodacom’s new 1800MHz license and third
generation spectrum license whereby Vodacom must provide and distribute 2.5 million SIM cards and
125,000 handsets over a period of five years to underserviced persons in underserviced areas and
internet to 5 ,140 schools over an eight year period.
by June 1, 1999, which Vodacom satisfied. More than 25,000 community service telephones were
deployed as of March 31, 2005. Two deployment methods are in use, namely a phone shop based
telephone and portable telephone deployed at educational or other community institutions. Good
progress has been made with the phasing out of the portable handsets and replacing them with
phone shop based telephones, called Sigis.
services telephone operators in areas such as financial management and marketing. Vodacom’s
future universal service obligations will also consist of a contribution to the USF, and possible new
universal access obligations.
using a specific accounting methodology set out in a Chart of Accounts and Cost Allocation Manual,
or COA/CAM. The adoption of this methodology by us requires the aggregating and disaggregating of
general ledger accounts in a different manner than we prepare accounts in accordance with IFRS. It
also requires a reconciliation of the accounts. We were required to put the necessary accounting and
management information systems, which would have enabled us to prepare such reports and
accounts, in place by May 7, 2002, subject to ICASA issuing the COA/CAM regulations. The
regulations, however, were only published on July 19, 2002. The regulations required the first
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regulations also recognized the burden placed by the reporting requirements on operators and
subsequently adopted a phased implementation approach. Accordingly, we have made written
submissions to ICASA setting out the steps to be taken, work involved and proposed timeframes to
implement systems to comply with the reporting obligations of the regulations. Following negotiations,
ICASA agreed to postpone the deadline for the submission of audited regulatory financial statements
on an historic cost basis to September 30, 2004 and on a current cost basis, including LRIC
statements to June 30, 2005. Telkom submitted audited historic cost reports on September 30, 2004.
Telkom does not currently believe that it will be able to provide audited regulatory financial statements
by June 30, 2005 and has requested IC ASA for an extension to provide audited regulatory financial
statements on a current cost basis until September 30, 2005 and on a LRIC basis until September
2006. These regulations also required us to develop procedures manuals that set out how we will
implement the COA/CAM accounting methodology in practice. The procedures manual for the
accounting separation on an historical basis was approved by ICASA on June 30, 2004, while
the procedures manual for the conversion to the current cost basis was submitted to ICASA on
July 5, 2005 and for the accounting on a LRIC basis will be submitted in 2006.
exchanges to provide call-by-call carrier selection by December 2003. We will not be able to fully
implement carrier pre-selection until the second national operator is licensed and the second national
operator’s interconnection systems and the inter-operator process and systems to support carrier
pre-selection become available. The carrier pre-selection regulations provide for call-by-call carrier
pre-selection to be implemented by Telkom two months and automatic carrier pre-selection to be
implemented ten months after having received such request from another operator. A lead time of
12 to 18 months from the date of the request is estimated by Telkom for implementation of automatic-
carrier pre-selection. Regulations indicate that the system set-up costs may be recovered as part of
the prescribed an nual review of fees and charges, but no further detail is available. We are currently
engaged with ICASA to define the manner in which such costs could be recovered.
may not be effective and would result in further market share losses. Carrier pre-selection is not
applicable to mobile cellular operators.
between mobile cellular operators will be introduced starting in 2005. The regulations for the
implementation of fixed-to-fixed and mobile-to-mobile number portability are being developed. It is
currently expected that Telkom will be required to provide “block” number portability in 2005, provided
a second licensed fixed-line operator exists, and individual number portability later, but within
12 months being requested by an operator. Implementation of number portability requires the
publication of functional specification regulations for fixed and for mobile number portability.
Consultation on the mobile number portability functional specification is in progress. The consultation
process on the fixed number portability functional specification has not commenced yet. The set-up
and per-operator costs are typically the largest cost components of implementing number portability.
Similar to carrier pre-selection, there is a risk of not fully recovering system set-up costs. New draft
guidelines are expected soon. Although the license for the second national operator has not yet been
issued, the statutory deadline remains in force.
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are no rules dealing specifically with equal and unbundled access to shared resources.
license, it is envisioned that as the industry is further liberalized, operators such as us with existing
facilities and access lines, will be obliged to make these available to new entrants. The second
national operator will be entitled to lease our telecommunications facilities for a period of two years
after being licensed. Furthermore, although it is not our interpretation, the relevant provisions may be
interpreted that the second national operator may have shared access to the local loop, which is
understood to mean access to the higher bandwidth for xDSL applications beyond such two years.
The foregoing is an exception to the generic provision that the local loop will not be unbundled during
the first two years of the second national operator’s license.
were issued a written license by the Minister for Posts, Telecommunications and Broadcasting to
provide public switched telecommunications services in South Africa for a minimum period of
25 years, which included our exclusivity period of five years that ended on May 7, 2002.
situated on a single piece of land or two or more contiguous pieces of land owned by the same
person, or maintained by Transnet or Eskom as authorized under the Telecommunications Act,
103 of 1996;
premises equipment and software, provided that ICASA consents to the commercial marketing,
distribution or sale of such facilities or equipment.
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provided with a public switched telecommunications service license or an underserviced area license.
A fixed-mobile service is a service that permits a customer of the licensee to access the public
switched telecommunications network of the licensee and obtain telecommunications services from
such licensee from either a fixed point or while in motion within the local exchange area, but does not
permit or include call handover between cells. Our public switched telecommunications service license
has not yet been amended to include fixed-mobile services and it is not expected that it will be so
amended until a license is issued to a second national operator.
103 of 1996, and fail to correct the non-compliance within 90 days of being requested to comply, or if
we are placed in final liquidation or put under a provisional or final judicial management order.
for the protection of customer confidentiality and other information that we receive from our customers
in the course of providing telecommunications services to them. Bills to our customers must reflect
the type of service, the units for which charges are made, and at a minimum, the starting time of
each connection, the number called and the duration and number of units for each call. Our records
must identify for customers the basis for the amount charged for the use of our services and we are
required to retain such information to allow ICASA the ability to have an independent quality
assurance check performed to ensure that the billing process complies with the aforesaid
requirements.
hours. Our procedures for dealing with customer complaints must include a procedure for referring
any disputes relating to such complaints to an affordable independent arbitration procedure instead of
a court. Finally, we are required, in consultation with ICASA, to prepare and publish a code of practice
that duly takes account of predominant regional languages, giving guidance to our customers in
respect of any disputes with or complaints from such customers relating to the provision of
telecommunications services.
what extent ICASA will seek to impose new service and installation targets in our public switched
telecommunications services license or impose additional obligations on us. However, under our
existing license, such a review and amendment can, in some instances, only be effected through a
public comment process with our participation, and in other instances, only with our consent. We
cannot, however, predict the outcome of such a contemplated review.
issued a written license by the Minister for Posts, Telecommunications and Broadcasting to provide
value-added network services on a non-exclusive basis for a period of 25 years.
are placed in final liquidation or under a provisional or final judicial management order.
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license by the Minister for Posts, Telecommunications and Broadcasting to use the relevant bands of
radio frequency spectrum. We use the radio spectrum for the provision of fixed links within our
network, both land based and satellite, and for wireless local loop applications. Where these bands
were licensed to us on a shared or non-exclusive basis, ICASA is to ensure that any other licenses
issued to other entities do not create harmful interference with our use of the radio frequency
spectrum. Our use of the radio frequency spectrum is subject to our compliance with the relevant
provisions of international telecommunications conventions, the radio regulations and the International
Telecommunications Union radio regulations agreed to or adopted by the Republic of South Africa.
We are only authorized to use o ur assigned frequency bands for the provision of public switched
telecommunication services.
comply, or if we are placed in final liquidation or under a provisional or final judicial management
order. Additionally, our radio frequency license will terminate if our public switched telecommunication
services license is terminated.
frequency spectrum and radio frequency spectrum for the provision of third generation services. Cell C’s
existing license already includes the right to use radio frequency spectrum in the 1800 MHz band.
Vodacom and MTN have obtained licenses for the use of 1800 MHz radio frequency spectrum and
radio frequency spectrum for the provision of third generation services and Telkom has applied for
such licenses.
of Vodacom and MTN. On the same date, Vodacom was issued with a mobile cellular
telecommunications license for a validity period of 15 years.
the terms and conditions of the written mobile cellular telecommunications license issued by the
Postmaster-General and the multiparty implementation agreement, and on August 19, 2002, Vodacom
was issued a written mobile cellular telecommunications service license by the Minister of
Communications and ICASA, pursuant to the Telecommunications Act, 103 of 1996, incorporating the
terms and conditions of the original license and agreement, subject to certain legislatively mandated
changes. Under this license, Vodacom is authorized to construct, maintain and use its public land
mobile communications network for the provision of mobile cellular telecommunications services, and
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communications networks of other licensed mobile cellular telecommunications service providers. An
initial license fee of R100,000,000 was payable by Vodacom and an ongoing license fee of 5% of
Vodacom’s audited net operational income generated from the provision of the licensed services is
payable by Vodacom quarterly in arrears.
if there is a change in the direct or indirect ownership of 25% of the issued voting share capital of
Vodacom in any one transfer or a change in the ownership of any of the issued voting share capital of
Vodacom that results in a change to the composition of one-quarter of Vodacom’s board of directors, in
either case without ICASA’s prior written approval, Vodacom takes steps to deregister itself or is
deregistered, or Vodacom fails to pay the required license fee after due demand by ICASA.
mobile terminal equipment using GSM cellular telephony technology. For the duration of this license,
Vodacom’s network must conform to the GSM specification standards and recommendations of the
International Telecommunications Union as adopted by South Africa, as well as with the GSM
specifications set by the European Technical Standards Institute, or ETSI.
practicable and sets out certain customer service standards with which Vodacom is required to
comply. This license also requires Vodacom to use reasonable endeavors to ensure that certain
information is kept confidential. Vodacom is obliged to provide directory services and to liaise with
other licensees in that regard. Vodacom and its service providers are not entitled to show any undue
preference to any person or class of person and Vodacom must develop, publish and enforce
guidelines for use by its personnel when handling inquiries and complaints from customers to whom it
supplies telecommunications facilities. These guidelines must be included in its contracts with service
providers and must be published and available to customers. Vodacom’s license prescribes that the
guidelines must address the follo wing areas of the provision of customer services:
frequency spectrum for purposes of providing mobile cellular telecommunications services, valid for the
duration of Vodacom’s mobile telecommunications license of fifteen years. Vodacom was also granted
a license, effective July 1, 1995 for the use of an additional 1-2 MHz of GSM900MHz radio frequency
spectrum under its mobile cellular telecommunications license. Pursuant to the Telecommunications
Act, 103 of 1996, the three mobile cellular licensees were given the right, upon application, to be
granted licenses to use 1800MHz frequency spectrum on payment of fees as determined by the
Minister of Communications. In addition, Vodacom was awarded a permanent 1800MHz license on
October 29, 2004 and a 3G spectrum license on November 30, 2004. The license fees for 1800MHz
and 3G spectrum is R5 million ac cess fee each per annum and R100,000 per MHz pair.
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set of regulations repeals the previous set of regulations under which Vodacom had to re-apply for its
VANS license on February 27, 2004. In terms of the new regulations, Vodacom “shall be deemed to
have applied in accordance with these regulations.” ICASA will now consider Vodacom’s re-application
for its VANS license in terms of these regulations. Vodacom’s current VANS license remains valid until
such time as a new VANS license is re-issued by ICASA.
consultation with Vodacom, publish these statistics.
2005 in the 0765 and 0766 number ranges.
market,” which is a market where there are fewer than five licensees. Pursuant to these regulations,
no person who holds a direct or indirect 5% ownership interest in Telkom, other than the Government
of the Republic of South Africa and passive institutional investors who do not participate in our
management, is entitled to hold a 5% or greater ownership interest in any other licensed operator
providing the same category of telecommunications services as Telkom in that concentrated market,
such as the second national operator. The same prohibition applies in relation to a person holding
such an ownership interest in both Vodacom and another mobile cellular telecommunications service
licensee. In addition, licensees such as Telkom and Vodacom are required to maintain accurate and
detailed records ind icating the name, address, telephone number, e-mail address and other contact
details of all persons holding a direct or indirect ownership interest of 5% or more in the licensee, the
number of shares or other ownership interests owned of record by each such person, the identity of
each such person entitled to vote, and must annually file such information with ICASA. ICASA is
entitled, at the request of the licensee, to waive the licensee’s obligations with respect to maintaining
certain of the information where the licensee’s issued share capital is listed on the JSE or any other
internationally recognized securities exchange and the information is not kept in the ordinary course
with respect to such listed issued share capital and is not otherwise required by such exchanges.
Under the same regulations, licensees such as Telkom and Vodacom are required to obtain the prior
written approval of ICASA, in an application that is signed by the licensee, the transferor and th e
transferee, for any transfer of a control interest in the licensee. A control interest in a licensee includes
a direct or indirect:
1996, and the regulations thereunder after the transfer concerned. Any transfer in violation of these
regulations is void.
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industry in South Africa. The Competition Commission and ICASA have come to an arrangement
regarding jurisdictional issues existing between the two regulations. Under the provision of these two
Acts, we may not act uncompetitively or unfairly discriminate against any person.
Africa are embodied in the provisions of the Telecommunications Act, 103 of 1996, in respect of the
liberalization of the South African telecommunications industry.
put in place procedures that would allow certain agencies of the Government of the Republic of
South Africa to intercept and monitor communications over our respective networks and to retain
records and copies of such communications for a prescribed period of time commencing in July 2003.
The Minister of Communications has not, however, prescribed the type of communications related
information to be stored and the manner and period such information must be stored. The storage
period is expected to be between three and five years from the date of transmission.
Telecommunications service providers must obtain and retain full information relating to the identity of
each customer. Telkom’s and Vodacom’s compliance with this requirement will require Telkom and
Vodacom to incur substantial set-up and maintenance time and costs. Our estimated capital
expenditure and the extent of the cost recoverability have not been determined.
provisions that identify us as rendering a public service. As a result, some decisions that would
otherwise be normal business decisions in other listed companies need to go through a consultative
process with the Government before we can make them.
a black economic empowerment investor acquired a 40% equity stake in Swiftnet, subject to its ability
to raise the necessary funding. The black economic empowerment investor failed to meet its
obligations resulting in Telkom reacquiring this stake thus placing Swiftnet in breach of its license
requirement. ICASA has required Swiftnet to remedy the breach of its license. If not remedied, there
is a risk of Swiftnet’s license being revoked. Telkom, in consultation with ICASA, is in the process of
openly tendering to obtain a suitable black economic empowerment partner. ICASA is being kept
informed of all proceedings.
framework for the promotion of transformation in the ICT sector through the establishment of a
balanced scorecard on empowerment. The scoring of the balanced scorecard will ultimately
determine the black economic empowerment status of a company intending to engage Government
when applying for a license in a regulated economic activity, entering into a public-private partnership,
or engaging in any economic activity in South Africa. As such this process is of vital importance to
Telkom and Vodacom. Telkom and Vodacom have been actively involved in the development of the
BEE Charter for the ICT sector. A final draft was sent to the Minister of Communications in May 2005
and is in the process for Cabinet approval.
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Directory Services subsidiary; and wireless data services through our wholly owned Swiftnet
subsidiary. Our mobile segment consists of our 50% interest in Vodacom, our joint venture.
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March 31, 2005. In addition, our information technology center comprises approximately
22,000 square meters and our network operations center comprised approximately 24,000 square
meters as of March 31, 2005. Our executive offices are leased from the Telkom Retirement Fund
under a lease agreement which will expire on January 31, 2019. The total area of all our properties
as of March 31, 2005 comprised approximately 2.5 million square meters consisting of approximately
1.5 million square meters of owned, approximately 403,000 square meters of leased and
approximately 597,000 square meters of other type properties. As of March 31, 2005, we leased
approximately 234,000 square meters of office space pursuant to lease agreements. Except as stated
to the contrary below, our leases expire at various times ranging f rom one month to five years.
shops, 252 customer service centers, three information technology centers and one network
management center as of March 31, 2005.
Bellville, South Africa
South Africa
South Africa
South Africa
South Africa
South Africa
Hartebeesthoek
South Africa
Johannesburg,
South Africa
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Republic of South Africa, of Meersig Building, 48 West Avenue, Centurion. The consideration paid to
Total Facilities Management Company for management services in the year ended March 31, 2005
was R152 million. The management agreement terminates on March 31, 2011.
primarily consist of 6,026 base transceiver stations, 242 base station controllers, 31 mobile switching
centers including VLR’s and gateways, a network management center and a customer service center
as of March 31, 2005. The total area of all of Vodacom’s properties, excluding its network and retail
outlets, was approximately 150,700 square meters as of March 31, 2005, consisting of approximately
102,200 square meters of owned properties and approximately 48,500 square meters of leased
properties. Vodacom’s leases expire at various times on terms up to 14 years.
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The Telkom Group and Vodacom have prepared their financial statements in accordance with IFRS,
which differs in certain respects from US GAAP. For a description of the principal differences between
IFRS and US GAAP relevant to the financial statements of the Telkom Group and Vodacom and a
reconciliation to US GAAP of net income and shareholders’ equity, see note 47 of the notes to the
audited consolidated financial statements of the Telkom Group as of and for each of the three years
in the period ended March 31, 2005 and note 45 of the notes to the audited consolidated financial
statements of Vodacom as of and for each of the three years in the period ended March 31, 2005.
expensed immediately in accordance with the principles contained in United States accounting
guidance as detailed in the Emerging Issues Task Force Issue No. 00-21, Revenue
Arrangements with Multiple Deliverables;
the revised IAS21; and
handsets and the transfer of handsets between different management systems;
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has a right of set off in the relevant section of the balance sheet; and
lower impact of HIV/AIDS in the context of total sick leave taken.
operating structure. The principal reclassifications were as follows:
financial statements of Vodacom included in this annual report.
accounting policies that ended prior to the year ended March 31, 2005. For this reason, those prior
Annual Reports and the consolidated financial statements and applicable notes thereto, auditors’
reports and related financial information contained in such reports should no longer be relied upon.
March 31, 2004
R11,222 million in the 2005 financial year and 38.4% to R 9,245 million in the 2004 financial year.
inclusion of 100% of Vodacom Congo’s results. Vodacom’s operating revenue increased in the 2004
financial year primarily driven by strong customer growth and standard tariff increases. The increase
in fixed-line operating revenue in the 2005 financial year was primarily due to continued growth in data
services, higher subscriptions and connections tariffs and higher interconnection revenue from
domestic mobile operators, partially offset by a decrease in traffic, lower average long distance and
international outgoing tariffs and lower interconnection revenue from international operators.
The increase in fixed-line operating revenue in the 2004 financial year was primarily due to increased
subscriptions and connections tariffs, growth in data services, increased long-distance, local,
international and fixed-to-mobile tariffs and increased interconnection traffic, partially offset by lower
long-distance and fixed-to-mobile traffic.
operating expenses in both years. The increase in mobile operating expenses in the 2005 and 2004
financial years was primarily due to increased selling, general and administrative expenses as a result
of an increase in selling, distribution and other expenses, incentive costs, regulatory and license fees
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African operations and increased competition, increased payments to other network operators due to
higher outgoing traffic and the increased percentage of outgoing traffic terminating on other mobile
networks, increased depreciation, amortization and impairments and higher staff costs associated
with increased headcount, salaries and employee deferred bonus incentive accrual to support the
growth in operations. In addition, operating leases increased in the 2005 financial year and decreased
in the 2004 financial year while services rendered decreased in the 2005 financial year and remained
flat in the 2004 financial year. The decrease in fixed-line operating expenses in the 2005 financial year
was primarily due to lower depreciation, amortization, impairments and write-offs, services rendered,
payments t o other network operators and operating leases, partially offset by higher employee
expenses and selling, general and administrative expenses. Fixed-line operating expenses decreased
in the 2004 financial year primarily due to reduced payments to other network operators, selling,
general and administrative expenses, services rendered and operating leases, partially offset by
increased depreciation, amortization, impairments and write-offs and employee expenses.
and 2004 financial years, respectively. The increases recorded in fixed-line operating profit were
primarily due to higher revenue and a decline in operating expenses, while mobile operating profit
increases were primarily due to increased operating revenue as a result of customer growth, partially
offset by increases in operating expenses.
expense and lower net fair value and exchange losses on financial instruments and, to a lesser extent,
increased investment income, partially offset by increased taxes. Finance charges decreased primarily
due to lower interest expenses resulting from lower interest bearing debt levels and reduced net fair
value and exchange losses on financial instruments. Investment income increased primarily due to
increased interest received associated with higher average balances in investment and bank accounts.
Investment income has been reclassified to exclude interest on trade and other receivables, which is
included in “other income.”
increased dividends and repurchase shares, thus distributing controllable cash to shareholders.
Consolidated capital expenditures in property, plant and equipment for the 2006 financial year is
budgeted to be approximately R7,970 million, of which R5,029 million is budgeted to be spent in the
fixed-line segment and the remaining R2,941 million (50% share of Vodacom’s total budgeted capital
expenditure of R5,881 million) is budgeted to be spent in the mobile segment.
communications market through our 50% interest in Vodacom, the largest mobile communications
network operator in South Africa based on total reported customers. We also provide directory
services and wireless data services through our subsidiaries, Telkom Directory Services (Proprietary)
Limited and Swiftnet (Proprietary) Limited, respectively.
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services, international voice over internet protocol services, subscription based value added
voice services and customer premises equipment sales;
networking services, and internet access and related information technology services;
In September 2004, the South African Minister of Communications granted a license to provide public
switched telecommunications services to a second national operator that will be 30% owned by
Transtel and Esitel, which are beneficially owned by the South African Government, and other
strategic equity investors, including 26% beneficially owned by TATA Africa Holdings (Proprietary)
Limited, a member of the TATA Group. ICASA is in the process of issuing this license. Further
competition may arise as a result of an assessment by the Minister of Communications of the
feasibility of issuing additional licenses to provide or resell public switched telecommunications
services from May 2005, however, no determination has yet been published. A process has also
commenced to issue additional licenses to small business operators t o provide telecommunications
services in underserviced areas with a teledensity of less than 5%. The Minister of Communications
has identified 27 of theses underserviced areas. ICASA has issued licenses to successful bidders in
seven of these areas and it is expected that further licenses will be issued in 2005 and later.
In addition, we face increased competition from mobile operators, value added network operators and
private network operators as a result of determinations by the South African Minister of
Communications in September 2004 and we expect that a new licensing framework to be
implemented in connection with a new Convergence Bill will result in further increased competition in
our fixed-line business.
that are fully liberalized, such as the provision of value added network services, for a number of
years. The current South African mobile communications market consists of three mobile
communications network operators, Vodacom, MTN and Cell C. We also compete with other service
providers who use least cost routing technology that enables fixed-to-mobile calls from corporate
private branch exchanges to bypass our network by being transferred directly to mobile networks.
In recent periods, our fixed-line business has experienced significant customer migration from our
fixed-line services to mobile services, as well as substitution of calls placed using mobile services
rather than our fixed-line service.
anywhere in South Africa to get connected, regardless of whether landlines are available. In January
2004, Sentech launched a wireless high-speed internet access service offering speeds equivalent to
fixed-line options like ADSL. Following the launch of Vodacom’s 3G network, Vodacom customers are
also now able to browse the internet on a high speed platform.
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increase our churn rates. As competition intensifies, the main challenges our fixed-line business faces
are continuing to improve customer loyalty and maintaining our leadership in the South African
communications market. As a result of increasing competition, we anticipate a reduction in overall
average tariffs and market share in our fixed-line business. Increased future competition may result in
a reduction in Vodacom’s overall average tariffs, loss of market share and an increase in its customer
acquisition and retention costs. However, we expect competition to stimulate overall market demand
for communications services. See “Risk Factors–Risks Related to our Business–Increased
competition in the South African telecommunications market may result in a reduction in overall
ave rage tariffs and market share in our fixed-line business, which could cause our growth rates,
operating revenue and net profit to decline” contained in Item 3. Key Information and “Regulation and
License Requirements–Regulation–Overview” contained in Item 4. Information on the Company.
economically disadvantaged communities of the population, communications providers must compete
with other basic necessities for customers’ limited resources. In a number of areas of the country and
for particular communities, mobile services are the preferred alternative to fixed-line services,
primarily due to mobility.
disconnections, the number of our fixed lines in service decreased by a compound annual rate of
1.0% over the five years ended March 31, 2004. Our total fixed access lines increased 1.0% in the
2005 financial year, however, due to lower disconnections and increased ISDN and prepaid PSTN
lines. Although the fixed-line penetration rate in South Africa was only 10.1% as of March 31, 2005,
due to the diverse rural geography and demographic factors in South Africa, we do not expect fixed-
line penetration rates to increase significantly in the near term. In light of these market conditions, we
will seek to maximize the utilization of existing capacity, largely through increased sales of our prepaid
and other products.
an estimated 2.4% at March 31, 1997 to an estimated 49.5% at March 31, 2005. As a result,
Vodacom’s South African revenue increased 17.5% and 17.3% in the 2004 and 2005 financial years,
respectively. While we believe the mobile penetration rate will continue to increase, we do not expect
that it will continue to grow at the same high rates that it has experienced in the recent past.
Consequently, Vodacom is placing increased focus on customer retention and maintaining its market
leadership by providing innovative value added services and data products and superior customer
service in addition to its previous focus on customer acquisition, as well as selective growth in other
African countries. In furtherance of this strategy, in the 2005 financial year, Vodacom signed an
alliance with its 35% shareh older, Vodafone Group Plc, which will give Vodacom access to Vodafone’s
branded products and services, global research and development in respect of 3G and access to
Vodafone’s marketing and buying powers in respect of 3G technologies. In addition, Vodacom
launched the first commercial 3G network in South Africa in December 2004. As part of this launch,
Vodacom also launched Vodafone Mobile Connect, a 3G/GPRS datacard providing fast, secure
access to corporate networks from laptop computers, Vodafone live!, with global and local content,
picture and video messaging and downloads, and Blackberry®.
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March 31, 2005 and 90.1% of all gross connections were prepaid customers in the 2005 financial year.
Vodacom expects the number of prepaid mobile users to continue to grow at a greater rate than
contract mobile users. The increasing number of prepaid users, who tend to have lower average usage,
and the lower overall usage as the lower end of the market is penetrated have resulted in decreasing
overall average revenue per customer. As a result, total South African ARPU decreased to R163 per
month in the 2005 financial year from R177 per month in the 2004 financial year and R183 per month
in the 2003 financial year. South African contract ARPU decreased to R624 per month in the 2005
financial year from R634 per month in the 2004 financial year. South African contract ARPU was
R629 per month in the 2003 financia l year. South African prepaid ARPU decreased to R78 per month in
the 2005 financial year from R90 per month in the 2004 and 2003 financial years. In the 2005 financial
year, contract and prepaid customer ARPU was also negatively impacted by the introduction of the
Family Top Up product, which contributed to the migration of higher spending prepaid customers, who
tend to spend less than existing contract customers, to contracts.
competition. Our tariff rebalancing program has resulted in a decrease in the ratio of tariffs for long
distance calls to all destinations over 200 km compared to tariffs for local calls from 13.2:1 as of
March 31, 1997 to 2.7:1 as of March 31, 2002 and 2.2:1 as of March 31, 2005. The weighted average
effective price per minute to all international destinations decreased approximately 44% from January
1, 1998 to March 31, 2002. We will continue to rebalance and revise our fixed-line tariffs to be more
closely aligned with the cost of providing services in order to compete in the telecommunications
market. The rebalancing of tariffs was performed within a price cap mechanism imposed by regulations
that limited increases in the overall tariffs in a basket of specified services that we previously had the
exclu sive right to provide. Approximately 80% of Telkom’s operating revenue in the year ended
March 31, 2005 was included in this basket. Prices on these services are filed with ICASA for approval.
January 1, 2005. In December 2002, as a result of an out-of-court settlement related to our tariff
increase in the prior year, ICASA approved our tariff filing providing for a 9.5% increase in the overall
tariffs for all services in the basket effective January 1, 2003, based on the increase in the consumer
price index for the twelve months ended September 30, 2002 of 12.5%. Statistics South Africa Limited
subsequently revised the calculation of the consumer price index for the twelve months ended
September 30, 2002 downward to 11.2%, although our tariffs were not affected. The Minister of
Communications has published regulations on a new price control regime that provides for the cap to
be increased from 1.5% to 3.5% and the inclusion of ADSL products and services in the basket for
which there is a price cap, ef fective from August 1, 2005 through July 31, 2008. Effective August 1,
2005, the price of services in the residential sub-basket, leased lines up to and including lines of a
capacity of 2Mbit/s and the installation and rental of business exchange lines may not be increased
by more than 5% above inflation in South Africa in any year.
From January 1, 2005, we decreased our long distance tariffs by 10% and the average tariff to all
international destinations decreased by 28% with rates of R1.70 per minute (VAT inclusive) for major
destinations like the United States, United Kingdom and Australia. The price of local peak calls
increased by 5.5% to 40 SA Cents per minute (VAT inclusive) and monthly prices for subscriptions
increased by 6.3% in the 2005 financial year. From August 1, 2005, Telkom’s ADSL prices will have
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approximately 20% for HomeDSL 384 since January 2005. Telkom’s recently introduced HomeDSL
192 will also reduce by approximately 18% to R270 per month. Telkom has also lowered its
international private leased circuits prices by approximately 23% in the 2005 financial year and from
August 2005 international private leased circuits prices will be lowered by a further 28%.
could reduce our net profit. Vodacom’s revenue and net profit could decline if wholesale price controls
are imposed on it.” and Item 4. “Information on the Company-Business Overview-Fixed-line
Communications-Fees and Tariffs–Tariff Rebalancing” and Item 4. “Information on the
Company–Regulation and License Requirements.”
calls from Vodacom’s network and our fixed-line network terminating on other mobile networks rather
than our fixed-line network. Vodacom’s interconnection payments have increased and its margins have
decreased because the cost of terminating calls on other mobile networks is higher than the cost of
terminating calls on Telkom’s fixed-line network. As a result, Vodacom’s South African net interconnect
revenue has been declining in recent years. Similarly, Telkom has incurred increased payments to
other operators as a result of the growth in interconnection traffic for fixed-line calls terminating on
other mobile networks. If mobile customers continue to increase and there is little or no growth in
fixed-line customers, this trend could continue and Vodacom’s and Telkom’s mar gins and net profit
could decline.
51% owned subsidiary, purchased an 85.75% equity stake in Smartcom (Proprietary) Limited for
R77.2 million acquiring an additional 40,000 contract customers. On February 1, 2005, Vodacom
acquired the contract customer base, dealer agreements and five employees of Tiscali South Africa
for R40.1 million. The net goodwill arising on this business combination amounted to R9.8 million.
As a result of these acquisitions, Vodacom directly controlled 78.3% of its contract customer base and
98.4% of its prepaid customer base in South Africa as of March 31, 2005.
Competition Commission approval.
the Dollar has increased from R11.38 per $1.00 as of March 29, 2002 to R7.90 per $1.00 as of
March 31, 2003, R6.32 per $1.00 as of March 31, 2004 and R6.22 per $1.00 as of March 31, 2005.
Telkom’s policy is to hedge its foreign denominated debt and operating and capital expenditures.
Vodacom’s policy is to hedge its foreign denominated commitments for operating and capital
expenditures for its South African operations. Currency exchange hedges are not always commercially
available in other African countries. Decreases in the value of the Rand as measured against other
currencies could increase the future cost in Rand terms of future foreign denominated debt, future
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expenditures. During the year ended March 31, 2002, Telkom and Vodacom prospectively adopted
IAS39-Recognition and Measurement of Financial Instruments. Under this standard, fair value
adjustments on financial instruments are recorded in the Telkom Group’s consolidated financial
statements in the period they occur. The effect of the application of this standard decreased our
consolidated profit before tax by R9 million, R776 million and R1,332 million in the 2005, 2004 and
2003 financial years, respectively, due to the increase in the value of the Rand as measured against
the Dollar and the Euro in those years, a decreasing interest rate environment in South Africa and fair
value gains from investments classified as held for trading. Future exchange rate and financial market
volatility may continue to material ly impact our future results due to the large volume of foreign
exchange contracts entered into by us to cover our foreign currency denominated debt, financing and
operating costs and capital expenditures.
payphone fraud in our fixed-line business. Theft and vandalism have caused our fixed-line fault rates
to increase and the repair time on our network and the downtime associated with such faults and
network fraud and payphone fraud have resulted in lost operating revenue and significant costs. We
have also lost operating revenue to non-licensed operators providing telecommunications services in
South Africa. If we are unable to continue to minimize theft, vandalism, network fraud and payphone
fraud, or if we continue to lose operating revenue to non-licensed operators in our fixed-line business,
our fixed-line fault rates could increase and our operating revenue and net profit could decline.
and profit oriented enterprise
line business from a majority governmental owned entity to a market and profit oriented business.
To achieve this, we began a transformation program in 1997 with the help of our previous strategic
equity investors to reorganize our fixed-line business along functional lines. Our focus was to change
our corporate culture and improve the skills of our South African employees, increase our marketing
efforts, outsource non-core operations and manage revenue generation and operating expenses more
effectively. Our transformation program is largely complete.
through March 31, 2005. At April 30, 2005, we had 26,133 Telkom employees. We spent R961 million,
R302 million and R244 million in the years ended March 31, 2005, 2004 and 2003, respectively, on
our workforce reduction program. We will evaluate future workforce reductions based on business and
operational requirements.
ended March 31, 2005 were:
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network terminating on other mobile networks rather than our fixed-line network and the fact
that the cost of terminating calls on other mobile networks is higher than the cost of terminating
calls on Telkom’s fixed-line network, as well as higher interconnection tariffs;
operations and profitability of our fixed-line segment; and
network terminating on other mobile networks rather than our fixed-line network and the fact
that the cost of terminating calls on other mobile networks is higher than the cost of terminating
calls on Telkom’s fixed-line network, as well as higher interconnection tariffs;
fixed-line segment;
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and prepare for competition; and
through our 64.9% owned subsidiary, Telkom Directory Services; and wireless data services through
our wholly owned subsidiary, Swiftnet. Our mobile segment consists of our 50% interest in Vodacom.
Telkom Group’s consolidated financial statements and in the period-to-period discussion below. We
fully consolidate our Telkom Directory Services and Swiftnet subsidiaries in the Telkom Group’s
consolidated financial statements.
March 31, 2003
indicated.
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holders of Telkom
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EBITDA
increased in the 2005 financial year primarily due to strong customer growth and the inclusion of
100% of Vodacom Congo’s results. Vodacom’s operating revenue increased in the 2004 financial year
primarily driven by strong customer growth and standard tariff increases. The increase in fixed-line
operating revenue in the 2005 financial year was primarily due to continued growth in data services,
higher subscriptions and connections tariffs and higher interconnection revenue from domestic mobile
operators, partially offset by a decrease in traffic, lower average long distance and international
outgoing tariffs and lower interconnection revenue from international operators. The increase in fixed-
line operating revenue in the 2004 financial year was primarily due to increased subscriptions and
connec tions tariffs, growth in data services, increased long-distance, local, international and fixed-to-
mobile tariffs and increased interconnection traffic, partially offset by lower long-distance and fixed-to-
mobile traffic. Fixed-line operating revenue accounted for 72.9%, 76.3% and 79.2% of our
consolidated operating revenue before intercompany eliminations in the years ended March 31, 2005,
2004 and 2003, respectively.
sale of our equity investment in New Skies Satellite N.V., a satellite company. The decrease in fixed-
line other income in the 2004 year was due to reduced non-recurring profit from the sale of our
investment in Inmarsat and other Telkom assets as compared to the profit on sale of Intelsat in the
2003 financial year.
operating expenses in both years. The increase in mobile operating expenses in the 2005 and 2004
financial years was primarily due to increased selling, general and administrative expenses as a result
of an increase in selling, distribution and other expenses, incentive costs, regulatory and license fees
and marketing expense to support the launch of 3G, growth in Vodacom’s South African and other
African operations and increased competition, increased payments to other network operators due to
higher outgoing traffic and the increased percentage of outgoing traffic terminating on other mobile
networks, increased depreciation, amortization and impairments and higher staff costs associated
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growth in operations. In addition, operating leases increased in the 2005 financial year and decreased
in the 2004 financial year while services rendered decreased in the 2005 financial year and remained
flat in the 2004 financial year.
network operators and operating leases, partially offset by higher employee expenses and selling,
general and administrative expenses. Depreciation, amortization, impairments and write-offs were
lower primarily due to the increase in the useful life of certain assets, the non-recurring accelerated
depreciation of certain assets in the 2004 financial year and certain assets being fully depreciated in
the 2004 financial year. Services rendered were lower due to decreased property management
expenses resulting from space optimization and general efficiencies and reduced fees paid to
Thintana Communications. Payments to other network operators decreased in the 2005 financial year
primarily due to lower international tariffs and a decrease in the Rand value of international settlement
rates due to the strengthe ning of the Rand against the SDR, the notional currency in which
international rates are determined, and, to a lesser extent, a reduction in calls from our fixed-line
network to the mobile networks and internationally, partially offset by higher mobile settlement rates.
The lower operating leases were primarily due to the continued reduction of our vehicle fleet size, the
continued relocation of employees from leased properties to owned properties and improvements in
overall space utilization. Employee expenses increased in the year ended March 31, 2005 primarily
due to higher workforce reduction expenses, salary increases and overtime, partially offset by the
lower headcount and related benefits and higher employee costs capitalized. Selling, general and
administrative expenses increased in the year ended March 31, 2005 primarily due to increased other
expenses, which were significantly impacted in the 2004 financial year as a result of the reversal in
the 2004 financial year o f the R325 million provision for the Telcordia dispute, higher materials and
maintenance expenses and higher marketing costs, partially offset by lower bad debts and a more
favorable exchange rate.
and operating leases, partially offset by increased depreciation, amortization, impairments and write-
offs and employee expenses. Payments to other network operators decreased primarily due to lower
volumes of calls from our fixed-line network to the mobile networks and favorable exchange rates
resulting in lower international settlement rates. Selling, general and administrative expenses were
significantly impacted by the reversal of the R325 million provision for the Telcordia dispute. Selling,
general and administration expenses decreased primarily due to lower materials and maintenance
expenses impacted mainly by improved efficiencies and cost saving initiatives, reduced cable theft and
a favorable exchange rate. Services rendered was lower due to non-recurring expenses related to our
initial public offering incurred in the 2003 financial year and the reduction in fees paid to Thintana
Communications as a result of fewer key personnel, reduced management fees and a more favorable
exchange rate. Operating leases decreased primarily due to a decrease in the number of vehicles in
our fleet, the continued relocation of employees from leased properties to owned properties and
improvements in overall space utilization. Employee expenses increased marginally due to our
workforce reduction program.
mobile operating profit primarily as a result of increased mobile operating revenue due to customer
growth, partially offset by increases in operating expenses.
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financial year and 25.8% to R322 million in the 2004 financial year from R256 million in the 2003
financial year primarily due to increased interest received as a result of higher average balances in
investment and bank accounts. Investment income has been reclassified to exclude interest on trade
and other receivables, which is included in “other income.”
exchange gains and losses.
financial instruments. The lower net fair value and exchange losses was a result of fair value gains on
derivative instruments for foreign loans and foreign goods and services purchased due to the
strengthening of the Rand, offset in part by foreign exchange losses due to the volatility of the Rand.
Finance charges decreased in the year ended March 31, 2004 due to reduced net fair value and
exchange losses on financial instruments, lower interest bearing debt levels and lower interest
expense, which included the Telcordia interest reversal. The net fair value and exchange losses on
financial instruments decreased in the 2004 financial year, due to the reduced fair value losses on
derivative instruments for foreign loans and purchases of foreign goods and services, partially offset
by lower foreign exchang e gains on foreign liabilities as a result of the appreciation of the Rand.
in the year ended March 31, 2003. The increases in both the 2005 and 2004 financial years were
primarily due to the increase in our pre-tax income. The following table sets forth information related
to our effective tax rate for the Telkom Group, Telkom Company and Vodacom for the periods
indicated:
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Telkom Group
reversal of the Telcordia provision in the 2004 financial year and lower deferred tax on Secondary
Taxation on Companies credits in the 2005 financial year. In addition, the Telkom effective tax rate was
impacted in the 2005 financial year by the receipt of approximately R1.9 billion in dividends from our
subsidiaries and Vodacom joint venture, which increased Telkom’s net income but was not taxable to
Telkom. The Telkom Group and Telkom were in a tax paying position for the 2005 financial year and
provisional taxes of R1.5 billion are payable by July 2005. The higher effective tax rate for Vodacom is
largely as a result of the Secondary Taxation on Companies paid on the dividends declared by
Vodacom. The significant decrease in the effective tax rate of Telkom and the Telkom Group in the
2004 fi nancial year is primarily due to the reversal of the provision for Telcordia in the 2004 financial
year, which increased the net income of Telkom and the Telkom Group, but was not taxable to Telkom
or the Telkom Group. In addition, the Telkom effective tax rate was further impacted in the 2004
financial year by the receipt of approximately R1.2 billion in dividends from our subsidiaries and
Vodacom joint venture, which increased Telkom’s net income, but was not taxable to Telkom.
increased in profits in our Telkom Directory Services subsidiary. Minority interests in the income of
subsidiaries decreased 4.2% to R69 million in the year ended March 31, 2004 from R72 million in the
year ended March 31, 2003 primarily due to a 24.6% reduction in profits at Vodacom Tanzania.
segment. The increases were bolstered by lower interest expense and lower net fair value and
exchange losses on financial instruments in those years and, to a lesser extent, increased investment
income, partially offset by increased taxes.
segment based on revenue and profit contribution.
international outgoing traffic and international voice over internet protocol services; and
interconnection, which comprise terminating and hubbing traffic. We also derive fixed-line operating
revenue from our data business, which includes data transmission services, managed data networking
services and internet access and related information technology services and our wireless data
services and directory businesses.
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change by major revenue stream for the periods indicated.
interconnection revenue from domestic mobile operators, partially offset by a decline in traffic, as well
as lower average long distance and international outgoing tariffs and lower interconnection revenue
from international operators. The increase in fixed-line operating revenue in the 2004 financial year
was primarily due to increased subscription and connection tariffs, growth in data services, increased
long-distance, local, international and fixed-to-mobile tariffs and increased interconnection traffic,
partially offset by lower long-distance and fixed-to-mobile traffic.
migration to mobile and data services and our prepaid PSTN service and lower connections, offset in
part by lower disconnections, and was positively impacted by an increase in prepaid PSTN lines and
ISDN lines. In addition, traffic was adversely affected in both years by the increasing substitution of
calls placed using mobile services rather than our fixed-line service and traffic was adversely
impacted in the 2005 financial year due to dial-up traffic being substituted by our ADSL service, as
well as increased competition in our payphones business. As a result, traffic declined 4.8% and 0.3%
in the 2005 and 2004 financial years. Revenue per fixed access line decreased 1.6% to R5,236 in the
2005 financial year and increased 3.5% to R5,321 in the 2004 financial year from R5,143 in the 2003
financial year. The decrease in revenue per fixed access line in the 2005 financial year was primarily
due to the decline in traffic, as well as lower average long distance and international outgoing tariffs.
The increase in revenue per fixed access line in the 2004 financial year was primarily due to increased
subscription and connections tariffs and traffic tariffs, as well as increased penetration of subscription
based value-added voice services and higher revenue generating access services such as ISDN.
customer premises equipment for postpaid and prepaid PSTN lines, including ISDN channels and
private payphones. Subscriptions and connections revenue is principally a function of the number and
mix of residential and business lines in service, the number of private payphones in service and the
corresponding charges. The following table sets forth information related to our fixed-line subscription
and connection revenue during the periods indicated.
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internal lines in service and public payphones. Telkom had 108,521, 140,950 and 134,972 internal lines as of March 31,
2005, 2004 and 2003, respectively. Each PSTN line includes one access channel, each basic ISDN line includes two
access channels and each primary ISDN line includes 30 access channels.
offset by lower postpaid PSTN lines. The monthly prices for subscriptions increased by 6.3% on
January 1, 2005 and 7.5% on January 1, 2004. Additionally, there was an increase in revenue from
rental of customer premises equipment and voice enhanced services as a result of tariff increases
and an increase in the penetration of voice enhanced services. This was partially offset by lower
installation and reconnection revenue resulting from fewer installations and reconnections. Revenue
from subscriptions and connections increased in the 2004 financial year mainly due to an increase in
average monthly subscriptions and connections tariffs, increased sales and rental of customer
premises equipment and increased ISDN and prepaid lines in service, partially offset by the lower
number of postpaid PSTN lines in se rvice. The decrease in the number of postpaid PSTN access
lines in service in both the 2005 and 2004 financial years was primarily as a result of customer
migration to mobile and data services and our prepaid PSTN service and lower connections, partially
offset by lower disconnections. The increase in the number of postpaid ISDN channels was driven by
increased demand for higher bandwidth and functionality. The increase in prepaid lines was mainly
due to our increased marketing efforts for our prepaid telephone services, particularly to first-time
residential customers with poor or no credit histories, and postpaid customers encouraged to migrate
to prepaid services due to late payments and credit difficulties.
connection tariffs” and for a discussion of the number of customers during the periods, see Item 4.
“Information on the Company–Business Overview–Fixed-line communications–Products and
services.”
principally a function of tariffs and the number, duration and mix between relatively more costly
domestic long distance, international and fixed-to-mobile calls and relatively less costly local calls.
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percentages)
except percentages)
except percentages)
except percentages)
of minutes, except percentages)
percentages)
monthly access line (minutes)
weighted average tariff during the relevant period. Traffic includes internet traffic.
cumulative number of monthly access lines in the period.
mobile tariffs. Traffic revenue increased in the 2004 financial year mainly due to increased local, long-
distance, international and fixed-to-mobile tariffs, partially offset by lower long distance, international
outgoing and fixed-to-mobile traffic.
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services in the price cap basket effective January 1, 2005. In December 2002, as a result of an out-
of-court settlement related to our tariff increase in the prior year, ICASA approved our tariff filing
providing for a 9.5% increase in the overall tariffs for all services in the basket effective
January 1, 2003.
2004 financial years due to a decrease in the number of postpaid PSTN lines in service primarily as a
result of customer migration to mobile and data services and our prepaid PSTN service and lower
connections, partially offset by lower disconnections, and was positively impacted by an increase in
prepaid PSTN lines and ISDN lines. In addition, traffic was adversely affected in both years by the
increasing substitution of calls placed using mobile services rather than our fixed-line service and
traffic was adversely impacted in the 2005 financial year due to dial-up traffic being substituted by our
ADSL service, as well as increased competition in our payphone business.
communications–Traffic.”
penetration of discount and calling plans to counteract mobile substitution and stimulate usage, which
effectively lowers the cost to the customer. The decline in local traffic revenue in the 2005 financial
year was partially offset by increased local traffic tariffs. The price of local peak calls increased by
5.3% to 40 SA Cents per minute (VAT inclusive) on January 1, 2005. Local traffic revenue increased
in the 2004 financial year primarily due to increased local tariffs partially offset by increased growth in
our discount and calling plans designed to combat mobile substitution.
the 2004 financial year mainly due to increased long distance traffic tariffs, partially offset by decreased long distance traffic. We increased our fixed-line long distance traffic tariffs on January 1, 2003 and
decreased our fixed-line long distance traffic tariffs by 10% on January 1, 2005.
tariffs and the number, duration and time of call. Fixed-to-mobile traffic revenue decreased in the 2005
and 2004 financial years primarily due to lower fixed-to-mobile traffic and increased discounts on
fixed-to-mobile calls to combat mobile substitution, partially offset by increased fixed-to-mobile tariffs.
Fixed-to-mobile traffic decreased in the 2005 and 2004 financial years primarily as a result of an
increase in the number of mobile subscribers, resulting in increased mobile-to-mobile traffic and less
fixed-to-mobile traffic, particularly in our payphone segment.
and is a function of tariffs and the number, duration and mix of calls to destinations outside South
Africa. In the 2005 financial year, international outgoing traffic revenue declined primarily as a result of
a decrease in the average international outgoing tariffs and a decline in traffic. From January 1, 2005,
the average tariffs to all international destinations decreased by 28% with rates of R1.70 per minute
(VAT inclusive) for major destinations like the United States, United Kingdom and Australia.
International outgoing traffic revenue increased in the year ended March 31, 2004 primarily due to an
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partially offset by lower international outgoing traffic. We increased our average fixed-line international
outgoing tariffs on January 1, 2003. International outgoing traffic was also adversely impacted in the
2005 financial year due to increased competition from call back operators.
interconnection services includes payments from domestic mobile and international operators
regardless of where the traffic originates or terminates. The following table sets forth information
related to interconnection revenue for the periods indicated.
Interconnection revenue from domestic mobile
Interconnection revenue from international
total domestic mobile-to-fixed interconnection traffic revenue by the weighted average domestic mobile-to-fixed
interconnection traffic tariffs during the relevant period. International outgoing mobile traffic is based on the traffic
registered through the respective exchanges and reflected in international interconnection invoices.
invoices.
as emergency services and directory enquiry services. Interconnection revenue from domestic mobile
operators increased in the 2005 and 2004 financial years mainly due to increased traffic from
domestic mobile operators and tariff increases, partially offset by lower tariffs on mobile international
outgoing calls in the 2005 financial year. Domestic mobile interconnection traffic increased in the years
ended March 31, 2005 and 2004 primarily due to an overall increase in mobile calls as a result of a
growing mobile market, partially offset by increased mobile-to-mobile calls bypassing our network.
March 31, 2004 and R349 million in the year ended March 31, 2003. Fifty percent of these amounts
were attributable to our interest in Vodacom and were eliminated from the Telkom Group’s revenue on
consolidation. We expect interconnection revenue from domestic operators to increase as a result of
the entrance of the second national operator in the future and the further liberalization of the South
African telecommunications industry.
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from foreign operators for interconnection hubbing traffic through our network to other foreign
networks. International interconnection traffic consists of international termination traffic and
international hubbing traffic. Interconnection revenue from international operators decreased in the
year ended March 31, 2005 primarily due to lower international settlement rates and a decrease in the
Rand value of international settlement rates due to the strengthening of the Rand against the SDR,
the notional currency in which international rates are determined and lower traffic transiting through
our network to other foreign networks due to aggressive competition in the international market. This
was partially offset by an increase in international interconnect traffic terminating on our network
mainly as a result of increased activity of call back operators in the market. Interconnection revenue
from international operators decreased in the year ended March 31, 2004 primarily due to decreases
in the international interconnection settlement rates in line with international trends and a decrease in
the Rand value of international settlement rates due to the appreciation of the Rand against the SDR.
The decrease was partially offset by increased international interconnect traffic as a result of the
growth in the international market.
services. In addition, data services include revenue from ADSL, which we launched in August 2002.
Revenue from data services is mainly a function of the number of subscriptions, tariffs, bandwidth and
distance. The following table sets forth information related to revenue from data services for the
periods indicated.
mobile operators.
penetration of leased lines in corporate and business markets, increased demand for bandwidth with
higher capacity and increased tariffs for the 2004 financial year and, to a lesser extent, increased
numbers of customers using managed data networking services. Revenue from leased line facilities
from mobile operators increased in the year ended March 31, 2005 primarily due to the roll out
of third generation and universal mobile telecommunications system products by the mobile operators.
Revenue from leased line facilities from mobile operators decreased in the year ended
March 31, 2004 due to network optimization initiatives by the mobile operators.
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and 2003, respectively. Fifty percent of these amounts were attributable to our interest in Vodacom
and were eliminated from the Telkom Group’s revenue on consolidation.
degree, wireless data services revenue from our subsidiary, Swiftnet, and other miscellaneous
revenue, including revenue from the sale of materials. Revenue from directories and other services
increased in the years ended March 31, 2005 and 2004 primarily due to increases in directory
services revenue from Telkom Directory Services as a result of increased marketing efforts resulting
in increased spending on advertising by existing customers and additional advertising revenue from
new customers and an annual tariff increase.
category for the periods indicated.
ended March 31, 2005, 2004 and 2003, respectively.
liabilities related to Telkom’s arbitration with Telcordia in terms of IAS21 and IAS39 in finance charges as a result of the
strengthening of the Rand. In addition, we included a provision for interest of R40 million related to Telcordia in finance
charges in the year ended March 31, 2003 and a provision for legal fees of R58 million related to Telcordia is included in
services rendered in the year ended March 31, 2003. In the year ended March 31, 2004, all of these provisions were
reversed.
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and related benefits and higher employee costs capitalized. Employee expenses increased in the year
ended March 31, 2004 primarily due to higher workforce reduction expenses, salary increases and
associated benefits, partially offset by reduced overtime and lower headcount.
part-time and temporary workers, to a substantial degree offset by an 8% increase in base salaries
and wages in line with collective bargaining agreements, an average 5% increase in salaries and
wages for management employees and overtime to manage the substantial increase in the number of
faults due to inclement weather. Salaries and wages decreased in the year ended March 31, 2004
primarily due to lower overtime, enabled by the implementation of a multiple shift schedule, the
ongoing decrease in the number of employees as a result of our employee reduction program and
reduced part-time and temporary workers, to a substantial degree offset by a 9% increase in base
salaries and wages resulting from collective bargaining agreements.
Benefits decreased in the 2005 financial year primarily due to the reduced number of employees as a
result of our workforce reduction program and related benefits. Benefits increased marginally in the
2004 financial year due to a requirement to calculate the amount inclusive of the contributions for
pension and medical aid in the leave provision, to a substantial degree offset by the reduced number
of employees.
employees for new careers outside Telkom. Workforce reduction expenses increased in the year
ended March 31, 2005 due to the substantially higher number of employees accepting enhanced
voluntary severance packages, as compared to the previous year, and the offering and acceptance of
more enhanced packages resulting in an increased average workforce reduction package per
employee. Workforce reduction expenses increased in the year ended March 31, 2004 due to the
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resulting in the average workforce reduction package per employee increasing substantially.
We notified 5,041 employees in the 2005 financial year compared to 1,633 employees in the 2004
financial year and 2,124 employees in the 2003 financial year in terms of our workforce reduction
program. For additional information related to our fixed-line employee numbers, see Item 4.
“Information on the Company–Business Overview–Fixed–line communications–Employees.”
increased in the year ended March 31, 2005 primarily due to increased capital expenditures during the
year and to a lesser degree the higher labor demand on many projects that are in the realization
phase. Employee related expenses capitalized increased in the year ended March 31, 2004 due to the
substitution of internal labor in lieu of subcontractors.
calls on their networks and to international network operators for terminating outgoing international
calls and traffic transiting through their networks.
strengthening of the Rand against the SDR, the notional currency in which international settlement
rates are determined, and, to a lesser extent, a reduction in calls from our fixed-line network to the
mobile networks and internationally, partially offset by the higher mobile settlement rates. Payments to
other network operators decreased in the year ended March 31, 2004 primarily due to lower volumes
of calls from our fixed-line network to the mobile networks and the strength of the Rand against the
SDR, resulting in lower international settlement rates. Payments to other network operators include
payments made by our fixed-line business to Vodacom, which were R2,761 million, R2,764 million and
R2,978 million in the years ended March 31, 2005, 2004 and 2003, respectively. Fifty percent of these
amounts w ere attributable to our interest in Vodacom and were eliminated from the Telkom Group’s
expenses on consolidation.
expenses, including obsolete stock and cost of sales.
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respectively, was reclassified from other expenses to bad debt expenses.
liabilities related to Telkom’s arbitration with Telcordia in terms of IAS21 and IAS39 in finance charges as a result of the
strengthening of the Rand. In addition, we included a provision for interest of R40 million related to Telcordia in finance
charges in the year ended March 31, 2003 and a provision for legal fees of R58 million related to Telcordia is included in
services rendered in the year ended March 31, 2003. In the year ended March 31, 2004, all of these provisions were
reversed.
year as a result of the reversal in the 2004 financial year of the R325 million provision for the
Telcordia dispute, higher materials and maintenance expenses and higher marketing costs, partially
offset by lower bad debts and a more favorable exchange rate. Selling, general and administrative
expenses decreased in the year ended March 31, 2004 primarily due to the reversal of the
R325 million provision for the Telcordia dispute and lower materials and maintenance expenses as a
result of improved efficiencies and cost saving initiatives, reduced cable theft and a favorable
exchange rate. The decrease in selling, general and administrative expenses in the 2004 financial year
was partially offset by slightly higher bad debts and marketing expense.
year ended March 31, 2005 primarily as a result of higher custom duties, annual escalation on
maintenance contracts, bush-cutting projects and increased maintenance due to increased faults as a
result of inclement weather, partially offset by a more favorable exchange rate. Materials and
maintenance expenses decreased in the year ended March 31, 2004 primarily due to the impact of
improved efficiencies and cost saving initiatives, a lower incidence of theft and faults in the network
and a favorable exchange rate.
March 31, 2004 primarily due to increased branding cost to support South Africa’s 2010 soccer world
cup bid being partially offset by lower expenses for education and other image campaigns. We expect
marketing expenses to continue to increase in the future in response to increased competition from
the second national operator and the further liberalization of the South African communications
industry generally.
Bad debt increased in the year ended March 31, 2004 mainly due to revenue growth of R1.4 billion in
the same period. Bad debt as a percentage of revenue was 0.6%, 0.8% and 0.8% in the 2005, 2004
and 2003 financial years, respectively.
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the reversal of the R325 million provision for the Telcordia dispute in the 2004 financial year, lowering
expenses in that year. Excluding the reversal of the Telcordia provision, other expenses decreased in
the 2005 financial year primarily due to lower irrecoverable staff debt and lower costs of sales of
customer premises equipment. Other expenses decreased in the year ended March 31, 2004 primarily
due to reversal of the R325 million provision for the Telcordia dispute following the judgment handed
down by the South African High Court on November 27, 2003 setting aside the partial award and
issuing a cost order in favor of Telkom. For a more detailed discussion on the Telcordia dispute,
please refer to Item 8 Financial Information–Legal Proceedings. Excluding the reversal of the
Telcordia provisi on in the 2004 financial year, other expenses increased in the 2004 financial year.
providers of other professional services, such as Thintana Communications and external auditors.
Security refers to services to safeguard the network and contracts to ensure a safe work environment,
such as guard services.
usage.
favorable exchange rate and the termination of the strategic services agreement following the sale of
Thintana Communications’ shares in November 2004. Payments to consultants decreased in the year
ended March 31, 2004 primarily due to the non-recurring professional services expenses related to
our initial public offering in the 2003 financial year and a reduction in fees paid to Thintana
Communications as a result of fewer key personnel, reduced management fees and a more favorable
exchange rate, and a reversal of legal fees related to Telcordia. Consultants, security and other
payments include expenses of R57 million, R154 million and R273 million in the years ended
March 31, 2005, 2004 and 2003, respectively, for the strategic services provided by our previous
strategic equity investor, Thintana Communic ations, pursuant to our strategic service agreement.
A part of these payments made to Thintana Communications relate to capital projects and have been
capitalized. Consultants, security and other payments included R213 million of expenses related to
our initial public offering in the year ended March 31, 2003.
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11,849 vehicles as of March 31, 2004 and 10,458 vehicles as of March 31, 2005. Our space
optimization program, which relocated employees from leased premises to owned premises and
improved overall space utilization, also contributed to the lower lease expense.
useful life of certain assets, the non-recurring accelerated depreciation of certain assets in the 2004
financial year and certain assets nearing their useful lives in the 2004 financial year. Depreciation,
amortization, impairments and write-offs increased in the year ended March 31, 2004 primarily due to
ongoing investment in telecommunications equipment, data processing and support equipment and
higher impairments and write-offs due to the write-off of an increased level of assets and the
additional impairment of network related assets. We incurred a R149 million impairment of Telkom’s
satellite earth station at Hartebeespoort in the 2004 financial year. Excluding this impairment, write-
offs were relatively flat in the year ended March 31, 2005. Write-offs decreased significantly in the
year e nded March 31, 2004 primarily due to the write-off of fewer network assets.
operating profit margin increased from 15.3% in the 2003 financial year to 21.4% in the 2004 financial
year and 25.4% in the 2005 financial year.
56% market share as of March 31, 2005 based on total estimated customers in South Africa. In
addition to its South African operations, Vodacom has investments in mobile communications network
operators in Lesotho, Tanzania, the Democratic Republic of the Congo and Mozambique. In June
2005, Vodacom and the Virgin Group confirmed their intention to form a consortium together to
undertake a joint bid for a controlling stake in Nigeria’s V-Mobile.
costs and capital expenditures per customer for its other African operations are generally higher than
for its South African operations. Customers in other African countries increased significantly over the
past three financial years to 2,645,000 as of March 31, 2005 from 1,492,000 as of March 31, 2004
and 773,000 as of March 31, 2003. A substantial portion of the growth was from prepaid services.
Services outside of South Africa are mainly prepaid due to the lack of banking systems and credit
histories.
African countries for the periods indicated. All amounts in this table and the discussion of our mobile
segment that follows represent 50% of Vodacom’s results of operations unless otherwise stated and
are before the elimination of intercompany transactions with us.
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finance charges, investment income and depreciation, amortization and impairments. See footnote 4 in Item 3. “Key
Information–Selected Historical Consolidated Financial and Other Data of Vodacom” for a reconciliation of EBITDA of
Vodacom to net profit. See footnote 2 in the table under. “Operating and Financial Review and Prospects–Results of
Operations–Year ended March 31, 2005 compared to year ended March 31, 2004 and year ended March 31, 2003-
Consolidated results” for a reconciliation of mobile EBITDA to operating profit. We believe that EBITDA provides
meaningful additional information to investors since it is widely accepted by analysts and investors as a basis for
comparing a company’s underlying operating profitability with that of other companies as it is not influenced by past
capital expenditures or business acquisitions, a company’s capital structure or the relevant tax regime. This is
particularly the case in a capital intensive industry such as communications. It is also a widely accepted indicator of a
company’s ability to service its long-term debt and other fixed obligations and to fund its continued growth. EBITDA is not
a US GAAP or IFRS measure. You should not construe EBITDA as an alternative to operating profit or cash flows from
operating activities determined in accordance with US GAAP or IFRS or as a measure of liquidity. EBITDA is not defined
in the same manner by all companies and may not be comparable to other similarly titled measures of other companies
unless the definition is the same.
customers registered on Vodacom’s network; interconnection revenue from other operators for the
termination of calls on Vodacom’s network and national roaming revenue from Cell C; revenue from
equipment sales, including sales of handsets and accessories; and revenue from international
services, including airtime charges for the use of Vodacom’s network through roaming of customers
from other international networks and Vodacom customers who roam abroad.
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change by revenue type for the periods indicated.
traffic minutes.
Customers (thousands) (at period end)
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Customers (thousands) (at period end)
disconnected, including inactive customers, as of the end of the period indicated.
generating activity has been recorded for a period of three consecutive months. In the 2005 financial year, a software
error was identified in the calculation of inactive customers. Vodacom has corrected inactive customers as of March 31,
2005. Information for prior years is unavailable.
international roaming calls and calls to free services, but excluding national and incoming international roaming calls.
total reported customer base during the period. MOU excludes calls to free services, bundled minutes and data minutes.
customer base during the period. ARPU excludes revenues from equipment sales, other sales and services and revenues
from national and international users roaming on Vodacom’s networks.
monthly total reported customer base during the period. Vodacom’s contract customers are disconnected when they
terminate their contract, or their service provider who carries the credit risk terminates their contract due to non-payment.
Prepaid customers were disconnected if they did not recharge their vouchers after being in time window lock for six
months for periods prior to November and December 2002, for four months for periods from November and December
2002 until April 2003 and for three months from April 2003 until December 2003. Time window lock occurs when a
customer’s paid active time window, or access period, expires. In December 2003, Vodacom changed the deactivation
rule for prepaid customers to align itself with European and industry standards. From De cember 2003, prepaid customers
are disconnected from its network if they record no revenue generating activity within a period of 215 consecutive days.
See Item 4. “Information on the Company–Business Overview–Mobile communications–South Africa-Customers.”
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increased in the 2005 financial year primarily due to the growth of Vodacom’s customer base and the
continued uptake of new handsets in South Africa as a result of cheaper Rand-prices of new
handsets and the added functionality of new phones based on new technologies such as camera
phones and color screens. Vodacom’s operating revenue increased in the year ended March 31, 2004
primarily driven by strong customer growth and standard tariff increases. Equipment sales increased
primarily due to Vodacom’s expanded customer base in its Vodacom Congo operations and the
significant increase in sales of new handsets in South Africa fuelled by cheaper Rand-prices of MMS-
and GPRS-enabled handsets coupled with the added functionality of the new phones, such as built in
digital cameras, as well as increased connections.
March 31, 2004 and R617 million in the year ended March 31, 2003. The increase in Vodacom’s
operating revenue from other African countries in the 2005 financial year was primarily due to
significant customer growth and the inclusion of 100% of Vodacom Congo’s results, partially offset by
declining ARPU and Rand-based revenue due to the strengthening of the South African Rand against
the U.S. Dollar and Tanzanian Shilling. The increase in Vodacom’s revenue from other African
countries in the 2004 financial year was primarily due to substantial increases in the number of
customers in Vodacom’s operations in the Democratic Republic of Congo and Tanzania, partially
offset by the strength of the Rand, which resulted in lower foreign currency denominated tariffs.
Revenue from Vodacom’s other African countries as a percentage of Vodacom’s total mobile
operating revenue increased to 8.3% in the year ended March 31, 2005 from 6.6% in the year ended
March 31, 2004 and 6.4% in the year ended March 31, 2003.
March 31, 2005 and 90.1% of all gross connections were prepaid customers in the 2005 financial
year. Vodacom expects the number of prepaid mobile users to continue to grow at a greater rate than
contract mobile users. The increasing number of prepaid users, who tend to have lower average
usage, and the lower overall usage as the lower end of the market is penetrated have resulted in
decreasing overall average revenue per customer. As a result, total South African ARPU decreased to
R163 per month in the 2005 financial year from R177 per month in the 2004 financial year and
R183 per month in the 2003 financial year. South African contract ARPU decreased to R624 per
month in the 2005 financial year from R634 per month in the 2004 financial year. South African
contract ARPU was R629 per month in the 2003 financi al year. South African prepaid ARPU
decreased to R78 per month in the 2005 financial year from R90 per month in the 2004 and 2003
financial years. In the 2005 financial year, contract and prepaid customer ARPU were also negatively
impacted by the introduction of the Family Top Up product, which contributed to the migration of
higher spending prepaid customers, who tend to spend less than existing contract customers, to
contracts.
have contributed to churn. Handsets for prepaid customers are not subsidized by Vodacom as these
users have the freedom of switching operators and contribute to churn. Vodacom is more vulnerable
to churn than other mobile communications providers in South Africa since it has the largest number
of customers in South Africa.
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maintain a high level of handset support to service providers in order to reduce churn. As a result of
its efforts, Vodacom’s churn rate for contract customers in South Africa decreased to 9.1% in the 2005
financial year from 10.1% in the 2004 financial year and 11.9% in the 2003 financial year. Vodacom’s
churn rate for prepaid customers in South Africa decreased to 30.3% in the 2005 financial year from
41.3% in the 2004 financial year. Vodacom’s churn rate for prepaid customers in South Africa was
34.0% in the 2003 financial year. The decrease in prepaid churn in the 2005 financial year was also a
result of a change in business rules. Prepaid customers were disconnected if they did not recharge
their vouchers after being in time window lock for six months for periods prior to November and
D ecember 2002, for four months for periods from November and December 2002 until April 2003 and
for three months from April 2003 until December 2003. Time window lock occurs when a customer’s
paid active time window, or access period, expires. In December 2003, Vodacom changed the
deactivation rule for prepaid customers to align itself with European and industry standards. From
December 2003, prepaid customers are disconnected from its network if they record no revenue
generating activity within a period of 215 consecutive days. For a discussion of Vodacom’s churn rate,
see Item 4. “Information on the Company–Business Overview–Mobile communications–South
Africa–Customers.” Prepaid churn is adversely impeded by an increasingly competitive market, lower
barriers to entry for prepaid customers in South Africa and the volatile nature of the prepaid customer
base.
also includes fees paid by Vodacom’s prepaid phone customers for prepaid starter phone packages,
airtime recharge vouchers and incomer vouchers, which entitle customers to receive unlimited
incoming calls for 365 days. Airtime revenue depends on the total number of customers, traffic
volume, mix of prepaid and contract customers and tariffs.
in the year ended March 31, 2004 primarily due to the increase in the number of Vodacom’s
customers, and, to a lesser extent, standard tariff increases. As Vodacom’s primary market in South
Africa continues to mature and Vodacom continues to connect more marginal customers in its South
African operations, Vodacom expects that growth in airtime in South Africa will continue to slow. Total
customers increased 38.0% and 29.7% in the years ended March 31, 2005 and 2004, respectively,
primarily due to strong prepaid customer growth in South Africa and significant customer growth in
Vodacom’s operations outside of South Africa. New products, packages and services also had a
substantial role in Vodacom’s customer growth in the 2005 and 2004 financial years. For a discussion
of Vo dacom’s customers and traffic see Item 4. “Information on the Company–Business
Overview–Mobile communications-South Africa–Customers” and Item 4. “Information on the
Company–Business Overview–Mobile communications–South Africa–Traffic.”
GPRS, third generation services, or 3G, and Mobile connect. Vodacom’s mobile data revenue
increased in the years ended March 31, 2005, 2004 and 2003 primarily due to increased SMS usage,
while traffic increased to 2.4 billion SMSs over its network in the year ended March 31, 2005 from
2.0 billion SMSs in the year ended March 31, 2004 and 1.5 billion SMSs in the year ended
March 31, 2003.
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secure access to corporate networks from laptop computers, Vodafone live!, with global and local
content, picture and video messaging and downloads, and Blackberry®. As of March 31, 2005,
Vodacom had 10,853 3G users on its network and had acquired 5,105 Mobile Connect Card users as
of March 31, 2005 in the four months since its launch. Vodacom introduced SMS only roaming and a
number of promotional offerings such as MMS and SMS bundles in the 2004 financial year. SMS
roaming affords customers the ability to activate SMS-only roaming.
Interconnection revenue includes revenue from Cell C for national roaming services. Vodacom does
not have a roaming agreement with MTN. Vodacom generates national roaming revenue when its
mobile network carries a call made from a Cell C customer. Interconnection revenue depends on the
volume of traffic terminating on Vodacom’s network, the interconnection termination rates payable by
ourselves and the other mobile operators to Vodacom and national roaming rates.
the increased number of Vodacom’s customers and South African mobile users generally. Adding to
the growth in interconnection revenue in the 2005 and 2004 financial years was an overall increase in
Cell C’s customer base and the resultant increase in national roaming revenue as well as increased
interconnection revenue from Vodacom’s other African operations. The increases were partially offset
by a reduced number of fixed-line calls from Telkom’s network terminating on Vodacom’s network.
Interconnection revenue in our mobile segment included R1,364 million, R1,367 million and
R1,473 million in the years ended March 31, 2005, 2004 and 2003, respectively, for services received
from our fixed-line business, which were eliminated from the Telkom Group’s revenue on
c onsolidation.
providers in bulk at purchase discounts in order to lower the cost of handset subsidization for contract
customers. Equipment sales revenue fluctuates based on whether external providers and Vodacom’s
other African operators source equipment from Vodacom in South Africa or purchase equipment from
third party service providers.
cheaper Rand-prices of new handsets and the added functionality of new phones based on new
technologies such as camera phones and color screens. Vodacom’s revenue from equipment sales
increased in the year ended March 31, 2004 primarily due to Vodacom’s expanded customer base in
its Vodacom Congo operations and the significant increase in sales of new handsets in South Africa
fuelled by cheaper Rand-prices of MMS and GPRS enabled handsets coupled with the added
functionality of the new phones, such as built in digital cameras, as well as increased connections.
abroad and revenue from international customers roaming on Vodacom’s networks. International
airtime increased 34.5% to R444 million in the year ended March 31, 2005 from R330 million in the
year ended March 31, 2004 primarily as a result of increases in international airtime from Vodacom
Congo and Vodacom South Africa, as well as an increase in roaming partners. The increase in South
African international airtime was offset in part by the strengthening of the Rand against the trade-
weighted basket of international currencies in the 2005 financial year. Vodacom’s revenue from
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R270 million in the 2003 financial year primarily due to increased call activity in South Africa and other
African countries.
primarily as a result of the reallocation of value-added services revenue, which was previously
included under other sales and services, to airtime connection and access. The decrease was offset
marginally by other sales and services revenue received in Smartcom (Proprietary) Limited.
Vodacom’s other revenue decreased 2.2% to R179 million in the year ended
March 31, 2004 from R183 million in the year ended March 31, 2003 primarily due to a decline in the
sale of non-core assets.
presented in accordance with the line items reflected in the Telkom Group’s consolidated operating
expenses which are different from the operating expense line items contained in Vodacom’s
consolidated financial statements.
incentive scheme.
annual group-wide salary increase and higher deferred bonus incentive accrual associated with
Vodacom’s increased net profit. Vodacom’s employee expenses increased in the year ended
March 31, 2004 primarily due to the employee deferred bonus incentive accrual resulting from
Vodacom’s higher net profit, an average group-wide salary increase of 8.0% and a 4.6% increase in
the number of employees.
3,904 employees as of March 31, 2003. Total headcount in Vodacom’s other African countries
increased by 36.5% to 1,039 employees as of March 31, 2005 and 51.6% to 761 employees as of
March 31, 2004 from 502 employees as of March 31, 2003. Total headcount excludes outsourced
employees. Employee productivity in South Africa and other African countries, as measured by
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and 24.0% to 2,434 customers per employee as of March 31, 2004 from 1,963 customers per
employee as of March 31, 2003. Including outsourced employees, employee productivity in South
Africa and other African countries, as measured by customers per employee, increased 22.7% to
2,987 customers per employee as of March 31, 2005 and 23.9% to 2,434 customers per employee as
of March 31, 2004 from 1,963 customers per employee as of March 31, 2003.
terminating calls on other operators’ networks. Vodacom’s payments to other network operators
increased significantly in the years ended March 31, 2005 and 2004 as a result of increased outgoing
traffic in line with increased customer growth and the increasing percentage of outgoing traffic
terminating on the other mobile networks rather than Telkom’s fixed-line network as the cost of
terminating calls on other mobile networks is higher than calls terminating on Telkom’s fixed-line
network. The increase was also due to the increase in interconnection tariffs under Vodacom’s
interconnection agreements in January 2003 for traffic terminating on other mobile networks and
Telkom’s fixed-line network. As the mobile communications market continues to grow in South Africa,
Vodacom expects that interconnection charges will continue to increase and adversely impact
Vodacom’s profit margins.
fees paid to our fixed-line segment, which were eliminated from the Telkom Group’s operating
expenses on consolidation.
license fees, bad debts and various other general administrative expenses, including accommodation,
information technology costs, office administration, consultant expenses, social economic investment
and insurance.
incentive costs, regulatory and license fees and marketing expenses to support the launch of 3G
in the 2005 financial year, growth in Vodacom’s South African and African operations and increased
competition.
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distribution and other expenses in the 2005 financial year was primarily due to an increase in
customer connections, competition and revenue, as well as the inclusion of 100% of Vodacom Congo
and the full year inclusion of Vodacom Mozambique and Smartphone. The increase in selling,
distribution and other expenses in the 2004 financial year was directly related to the increase in
customer connections, competition and operating revenue and also contains significant expense due
to Vodacom’s continued expansion into Africa as well as the pursuit of operations in Nigeria, including
expenses related to secondees to other African countries and high overhead costs such as
accommodation, insurance and consulting fees.
Blackberry® and Vodafone Live and continued marketing of Vodacom Mozambique. The increase in
marketing expenses in the 2004 financial year was mainly due to inflationary increases in South
African expenditure and the marketing expenses incurred launching Vodacom Mozambique, partially
offset by decreases in Rand terms in Vodacom Tanzania, Vodacom Congo and Vodacom Lesotho.
The increase in regulatory and license fees during the same period was directly related to the
increase in operating revenues and corresponding payments under Vodacom’s existing licenses,
coupled with payments made to secure licenses for GSM1800MHz frequency spectrum in South
Africa.
Services rendered decreased in the year ended March 31, 2005 primarily due to the cost associated
with the Nigeria investment in the 2004 financial year. Services rendered remained flat for the year
ended March 31, 2004.
Vodacom’s operating leases for the year ended March 31, 2005 was primarily due to an increase in
the lease of transmission lines. Vodacom’s operating leases decreased in the year ended
March 31, 2004 as Vodacom elected to purchase certain buildings that were previously leased.
Operating leases in our mobile segment included R281 million, R233 million and R241 million in the
years ended March 31, 2005, 2004 and 2003, respectively, for operating lease payments to our fixed-
line segment, which were eliminated from the Telkom Group’s operating expenses on consolidation.
was primarily due to the R268 million impairment of Vodacom Mozambique’s assets in terms of IAS36,
infrastructure resulting from the introduction of 3G and the amortization of intangible assets in
Smartcall. The increase in the 2004 financial year was primarily the result of depreciation and
amortization of capital expenditures Vodacom incurred in building out its network in South Africa and
other sub-Saharan African countries. Amortization of intangibles increased slightly in the years ended
March 31, 2005 and March 31, 2004. In addition, because of the strengthening of the Rand against
the U.S. dollar in the years ended March 31, 2005 and 2004, depreciation on foreign denominated
capital expenditure in Vodacom’s other African operations have been translated at a lower exchange
rate than in th e past, which resulted in a relatively lower depreciation charge in Vodacom’s other
African operations.
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by increases in operating expenses. As a result, the mobile operating profit margin increased from
22.3% in the 2003 financial year to 22.9% in the 2004 financial year and 23.7% in the 2005 financial
year.
from capital raised in the markets. The increase in cash flows from operating activities in the 2005
financial year was primarily due to higher cash receipts from customers and lower finance charges,
offset in part by higher taxation, increased cash paid to suppliers and dividends paid. The increase in
cash flows from operating activities in the 2004 financial year was primarily due to higher cash
receipts from customers, lower cash paid to suppliers and decreased finance charges, partially offset
by dividends and increased taxes paid.
countries. The increase in cash flows used in investing activities in the 2005 financial year was
primarily due to higher capital expenditure in our fixed-line and mobile segments. The decrease in
cash flows used in investing activities in the 2004 financial year was primarily due to an overall
reduction in capital expenditure, mainly in our mobile segment.
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13% unsecured local bond due May 31, 2004 and a net of R1,445 million of commercial paper bills
and utilized R1,710 million for the repurchase of Telkom shares. We further increased our interest-
bearing investments by R4,303 million by placing excess cash in short-term repurchase agreements.
Vodacom entered into a US$ 180 million, medium term loan for Vodacom Congo to replace Vodacom
Group’s share of extended credit facilities relating to Vodacom Congo of US$16.3 million and Euro
38.8 million, which were repaid during the year. Telkom’s 50% share of the Vodacom debt is included
in Telkom’s consolidated financial statements.
R4,311 million 10.75% unsecured local bond due September 30, 2003 and a R1,201 million 13%
unsecured local bond due May 31, 2004. A net R67 million of commercial paper bills was repaid and
we also settled R140 million of repurchase agreements and bills of exchange of R1,978 million.
Vodacom repaid R920 million of shareholder loans in the 2004 financial year. Vodacom Congo (RDC)
s.p.r.l., a subsidiary of Vodacom, entered into a Euro revolving credit facility of 11.5 million Euro
(R186.9 million) and Vodacom Tanzania Limited, a subsidiary of Vodacom, repaid $4 million and
TSH4,388 million (R56 million) in the 2004 financial year. Telkom’s 50% share of the Vodacom debt is
included in Telkom’s consolidated financial statements.
commercial paper bills, a R689 million 10.75% unsecured local bond due September 30, 2003, a
R359 million loan from European Investment Bank and a R200 million 12.5% coupon, unsecured loan
stock due April 15, 2002 in the 2003 financial year. We increased our interest bearing investments,
including repurchase agreements and bills of exchange, by R468 million. We also incurred
R154 million in costs related to our initial public offering in the 2003 financial year. Vodacom repaid
R426 million of its debt including the repayment of R400 million of funding loans, in the 2003 financial
year. Telkom’s 50% share of R213 million is included in loans repaid. Vodacom raised foreign debt of
R932 million primarily as a result of a R336 million utilization of an extended credit facility for
Vodacom Congo and a R502 m illion draw down of a project financing facility in Tanzania.
Telkom’s 50% share of R419 million is included in loans raised.
March 31, 2003. Negative working capital arises when current liabilities are greater than current
assets. The decrease in negative working capital in the 2005 financial year was primarily due to
increased cash generated from operations. In the 2005 financial year, we increased our interest-
bearing investments to facilitate the payment of dividends and taxes payable in the 2006 financial
year. In the 2004 financial year, we redeemed R1.2 billion of our consolidated R3.5 billion of
indebtedness that was due in the 2005 financial year, which contributed to the improvement in working
capital in the 2004 financial year. Telkom is of the opinion that the Telkom Group’s cash flows from
operations, together with proceeds from liquidity available under credit facilities and in the capital
markets, will be sufficient to meet the Telkom Group’s present working capital requirements for the
twelve months following the da te of this annual report. We intend to fund current liabilities through a
combination of operating cash flows, new borrowings and borrowings available under existing credit
facilities. We had 4.8 billion available under existing credit facilities as of March 31, 2005. See Item 3.
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our operating and financial flexibility and require us to defer capital expenditures and we may not be
able to pay dividends and our operations and financial condition could be adversely affected.”
Fixed-line
financial year of R4.6 billion largely due to more stringent investment criteria for capital investment in
our fixed-line segment and savings resulting from the relative strength of the Rand against the
US Dollar and Euro. The 6.2% increase in fixed-line capital expenditure in the 2005 financial year was
primarily due to the earlier implementation of softswitch technology, the deployment of technologies to
support our growing data services business, continued rehabilitation of the access network,
increasing the efficiencies and redundancies in the transport network and expenditure for access line
deployment in selected high growth residential areas. The 20.9% increase in mobile capital
expenditure in the 2005 financial year was primarily due to increased investment in network
infrastructure due to the increa sed customer base and higher traffic and to support Vodacom’s
investment in 3G technologies. In the future, we intend to continue to selectively invest in our fixed-line
segment based on customer demand, economic viability and the availability of other investment
opportunities. We also intend to concentrate capital expenditures in growing business areas, such as
data services, and for improving the quality and efficiency of our network and support systems. Our
consolidated capital expenditures in property, plant and equipment for the 2006 financial year is
budgeted to be approximately R7.9 billion, of which approximately R5.0 billion is budgeted to be spent
in our fixed-line segment and approximately R2.9 billion is budgeted to be spent in our mobile
segment, which is our 50% share of Vodacom’s capital expenditure of approximately R5.9 billion. This
amount does not include any amount that Vodacom may expend in connection with its bid for the
Nigerian Mobile operation s. Our capital expenditures are continuously examined and evaluated
against the economic benefit and may be revised in light of changing business conditions, regulatory
requirements, investment opportunities and other business factors.
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March 31, 2005, are as follows:
as of April 1, 2005. The original master lease agreement was for a period of five years and
expired on March 31, 2005. The agreement has been extended for a further period of 3 years, up to
March 31, 2008. As there is no minimum usage clause in the master lease agreement, only the lease
payments for the one year renewal period are included in the table above. The leases of individual
vehicles are renewed annually.
Competition Commission of the Republic of South Africa regarding alleged anti-competitive practices
on the part of Telkom. The Competition Commission found, among other things, that several aspects
of Telkom’s conduct prima facie contravened the Competition Act, 89 of 1998, and referred certain of
the complaints to the Competition Tribunal for adjudication. The complaints deal with Telkom’s alleged
refusal to provide telecommunications facilities to certain VANS providers to construct their networks,
refusal to lease access facilities to VANS providers, provision of bundled and cross subsidized
competitive services with monopoly services, discriminatory pricing with regard to leased line services
and alleged refusal to peer with certain VANS providers. Telkom has brought an application in the
Sou th African High Court challenging the Competition Tribunal’s jurisdiction to adjudicate this matter.
These matters and the amount of Telkom’s liability are expected to be finalized within the next year.
If these complaints are upheld, however, Telkom could be required to cease these practices and fined
an amount of up to 10% of Telkom’s annual turnover or be ordered to divest itself of the relevant
business. Telkom is currently unable to predict the amount that it may eventually be required to pay.
If Telkom is required to cease these practices, divest itself of the relevant business or pay significant
fines, Telkom’s business and financial condition could be materially adversely affected and its revenue
and net profit could decline. See Item 3. “Key Information–Risk Factors–Risks Related to Regulatory
and Legal Matters–If the Competition Commission of the Republic of South Africa were to conclude
that Telkom had committed a prohibite d practice, as set out in the Competitions Act of 1988, Telkom
could incur a penalty, its business and financial condition could be materially adversely affected and
its revenue and net profit could decline.”
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15.5% per year. The arbitration proceedings relate to the cancellation of an agreement entered into
between Telkom and Telcordia during June 1999 for the development and supply of an integrated end-
to-end customer assurance and activation system by Telcordia. In September 2002, a partial award
was issued by the arbitrator in favor of Telcordia. Telkom subsequently filed an application in the
South African High Court to review and set aside the partial award. On November 27, 2003, the South
African High Court set aside the partial award and issued a cost order in favor of Telkom. On May 3,
2004, the South African High Court dismissed an application by Telcordia for leave to appeal and
ordered Telcordia to pay the legal costs of Telkom. On November 29, 2004, the Supreme Court of
Appeals granted Telcordia l eave to appeal. Telcordia has since filed a notice of appeal. Telcordia also
petitioned the United States District Court for the District of Columbia to confirm the partial award,
which petition was dismissed, along with a subsequent appeal. Following the dismissal of the appeal,
Telcordia filed a similar petition in United States District Court of New Jersey. The United States
District Court of New Jersey also dismissed Telcordia’s petition, reaffirming the decision of the United
States District Court of Columbia. Telcordia has since appealed this dismissal. Telkom is currently
unable to predict when the dispute will be resolved or the amount that it may eventually be required to
pay Telcordia, if any, and has reversed all of its provisions for estimated liabilities, including interest
and legal fees. As a result, as of March 31, 2005, Telkom had no provision for this claim. If Telcordia
recovers substantial damages from Telkom, Telkom would be required to fund such payments from
cash flows or drawings on its existing credit facilities, which could cause its indebtedness to increase
and its net profit to decline. See Item 3. “Key Information–Risk Factors–Risks Related to Regulatory
and Legal Matters–If Telcordia Technologies Incorporated, a New Jersey corporation, were able to
recover substantial damages in its arbitration proceedings against Telkom, Telkom would be required
to fund such payments from cash flows or drawings on its existing credit facilities, which could cause
Telkom’s indebtedness to increase and its net profit to decline” and Item 8. “Financial
Information–Consolidated Financial Statements and Other Financial Information–Legal Proceedings.”
herein for additional information related to contingent liabilities of the Telkom Group and Vodacom,
respectively.
current and retired employees. We set up a special purpose entity in the 2002 financial year for the
purpose of funding these post retirement medical benefit obligations. This special purpose entity is
purely used as a financing tool as we still retain our obligation to provide post retirement medical aid
benefits to retired employees. As a result, it does not meet the definition of a plan asset in terms of
IAS19-Employee Benefits. Our interest in the special purpose entity is by way of equity, and this entity
is fully consolidated in the Telkom Group’s financial statements. The cumulative value of the funds in
this special purpose entity was R2,208 million, R1,370 million and R938 million as of March 31, 2005,
2004 and 2003, respectively.
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Obligations
markets and its associated cost of funding depends in part on our credit ratings. We maintain an
active dialog with the principal credit rating agencies who review our ratings periodically. Standard &
Poor’s International Ratings, LLC, a division of McGraw-Hill Companies Inc., and Moody’s Investors
Services Inc, have rated our foreign debt BBB and Baa1, respectively as of March 31, 2005. We have
not solicited a rating on our local Rand denominated debt due to our long standing relationships with
Rand denominated investors. As of March 31, 2005, 66.4% of our debt was local debt, compared to
73.4% as of March 31, 2004 and 77.3% as of March 31, 2003. Our Rand denominated debt bears
interest at rates ranging from 10 basis points to 70 basis points above treasuries and the effective
interest rat e for the year ended March 31, 2005 was 15.2%. Fixed rate debt represented
approximately 91.5% of the total consolidated debt as of March 31, 2005.
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March 31, 2005.
Bonds
10% statutorily guaranteed
2006 (TL06)
2010 (PP02)
(PP03)
with a maturity not later
than April 4, 2005. The
average discount rate on
these commercial paper
bills is 14.06% per annum.
R111.5 million unsecured
Bank Limited, repayable
The Standard Bank of
South Africa Limited,
FirstRand Bank Limited,
Commerzbank AG,
Calyon Corporate and
Investment bank, various
Sumitomo Mitsui Banking
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Communications Limited
Company
finance for Vodacom
Tanzania Limited
International Limited
(R.D.C) s.p.r.l.
in issue.
Africa.
of South Africa with effect from April 1, 2005.
existing TL06 bond.
outstanding indebtedness in the above table is convertible into other securities and, being debt
instruments, were not offered or issued to our existing shareholders. The bonds in the above table
were issued to, and are currently held by, a number of third parties pursuant to public offers and
private placements undertaken by us. Telkom’s special purpose entity established to fund post
retirement medical benefits obligations indirectly held R45 million in nominal value of Telkom’s 10.5%
unsecured local bond due October 31, 2006 (TL06) and 300,903 of Telkom’s ordinary shares as of
March 31, 2005.
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services and for general working capital purposes.
cross default provisions. In addition, our R2.5 billion 6% local bonds due February 24, 2020 contain
financial maintenance covenants requiring the Telkom Group to maintain the following ratios:
use at the time the indebtedness was incurred, EBITDA for purposes of the ratios is not calculated in
the same manner as it is calculated elsewhere in this document. The covenants will be effective for so
long as the initial subscriber holds at least 70% in nominal value of the bonds. We were in compliance
with the above ratios during the year ended March 31, 2005.
of the Republic of South Africa does not guarantee debt incurred thereafter or Vodacom’s debt. As of
March 31, 2005, R4.1 billion of our total debt of R14 billion was guaranteed by the Government of the
Republic of South Africa.
to Rands and managed per our policy and control manual which stipulates guidelines on exposure to
fixed and floating rate debt. Telkom’s philosophy is to target a fixed/floating debt ratio of at least 65%
fixed, adjusted to market conditions considering the interest rates at that time. If interest rates are low,
Telkom will establish a higher than 65% fixed/floating debt ratio and when interest rates are high,
Telkom seeks to establish the ratio closer to a 65% fixed/floating debt ratio.
between IFRS and US GAAP and the effects on net income and shareholders’ equity, relating to the
consolidated financial statements of the Telkom Group are described in note 47 to the Telkom Group’s
consolidated financial statements included elsewhere in this annual report. The description of the
differences and the effects on net income and shareholders’ equity of Vodacom are included in
note 45 of Vodacom’s consolidated financial statements included elsewhere in this annual report.
As further discussed in those financial statements, the most significant differences between IFRS and
US GAAP relating to the Telkom Group’s consolidated financial statements include revenue
recognition, sale and leaseback transactions, derivative financial instruments, goodwill, share issue
exp enses and deferred income taxes and for Vodacom they include derivative financial instruments,
goodwill, joint venture accounting, deferred bonus incentive schemes and deferred income taxes.
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critical accounting policies, among others, affect its more significant judgments and estimates used in
the preparation of our consolidated financial statements and are critical to the business operations
and the understanding of the results of our operations.
and litigation on an ongoing basis. We base our estimates on historical experience and on various
other assumptions that we believe to be reasonable under the circumstances, the results of which
form the basis for making our judgments about carrying values of assets and liabilities that are not
readily available from other sources. Actual results may differ from those resulting from estimates
made under different assumptions and conditions.
consideration received or receivable. Revenue is recognized only when it is probable that the
economic benefits associated with a transaction will flow to us and the amount of revenue, and
associated costs incurred or to be incurred can be reliably measured.
prepaid airtime or phone cards forfeited being recognized on expiration date, while activation revenue
is recognized over the average estimated life of the customer. Revenue from the sale of equipment is
recognized when the customer accepts delivery. Other revenue is recognized when the right to receive
payment has been established.
respective assets. If these estimates or their fair value assessments change in the future and result in
changes in the asset’s estimated remaining useful life, we may need to record impairment charges for
these assets not previously recorded. Goodwill associated with the excess purchase price over the fair
value of assets acquired and other identifiable intangible assets, such as trademarks and licenses,
are tested for impairment on an annual basis.
charged on a straight line basis over the estimated useful lives of the assets. On a regular basis, we
review the useful lives and economic capacity of the long-lived assets with reference to any events or
circumstances that may indicate that an adjustment to the depreciation period is necessary.
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In 2005, we increased the useful life of certain assets and reduced depreciation expenses
by R542 million.
factors, market conditions and operational performance. Future events could cause us to conclude
that impairment indicators exist and that the specified long-lived asset is impaired. The fair values
determined are dependent upon the forecasted performance of our business, changes in the
telecommunications industry and the overall economic environment. We measure any impairment
based upon a comparison of the carrying amounts of the asset to its fair value, which is determined
by using a forecasted discounted cash flow method.
these estimates, or their fair value assessments, change in the future or if the forecasts are not met,
we may have to record additional impairment charges not previously recognized. Any resulting
additional impairment loss could have a material impact on our results of operations and financial
condition.
allowance, we analyze historical bad debts, customer concentrations, current customer credit
worthiness, current economic trends, changes in our customer payment patterns and customers’
respective risk profiles. If the financial condition of our customers were to deteriorate, resulting in an
impairment of their ability to make payments, additional allowances may be required. A considerable
amount of judgment is required in assessing the ultimate realization of these receivables including the
current credit worthiness of each customer.
revenue and depreciation for tax or accounting purposes. These temporary differences result in
deferred tax assets and liabilities being recognized. We must then assess the probability of our
deferred tax assets being recoverable from future taxable income. To the extent that we believe that
recovery is not probable, we will reduce the amount of deferred tax assets. The carrying value of our
net deferred tax assets assumes that we will be able to generate sufficient future taxable income in
certain tax jurisdictions, based on estimates and assumptions. While we have considered future
taxable income and ongoing prudent and feasible tax planning strategies in assessing the need for
the valuation allowance, in the event that we were to determine that we would not be able to realize
our deferred tax assets in the future, a valuation allowance may be required which would reduce
income in the period that such determination was made.
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“Employers Accounting for Provisions” and SFAS 106, “Employers’ Accounting for Post Retirement
Benefits Other Than Pensions” for these benefits. Under these accounting standards, assumptions are
made regarding the valuation of benefit obligations and performance of plan assets. The guiding
principle of these standards is delayed recognition of differences between actual results and those
assumed. This allows for a smoothed recognition of changes in benefit obligations and plan
performance over the estimated working lives of the employees who benefit under these plans.
benefit obligation a company will record.
differ from estimated results based on the above assumptions.
employment benefit costs and credits may occur in the future in addition to changes resulting from
fluctuations in our related headcount.
about future demand and market conditions. If actual market conditions are less favorable than those
projected by management, additional inventory write downs may be required.
We have recorded the probable estimated liability related to those claims where there is a range of
loss. Because of the uncertainties relating to both the outcome and the amount and range of the loss
on the pending litigation and arbitration proceedings, management is unable to make a reasonable
estimate of the liability that could result from an unfavorable outcome. As additional information
becomes available, we will assess the potential liability related to our pending litigation and arbitration
proceedings and revise our estimates. Such revisions in our estimates of the potential liability could
materially impact our results of operation and financial position. See Item 8. “Financial
Information–Consolidated Financial Statements and Other Financial Information–Legal Proceedings.”
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estimate of the achievements of the specific financial metrics. Adjustments to accruals are made on a
quarterly basis as forecasts of financial performance are updated. At year-end, the accruals are
adjusted to reflect the actual results achieved.
and price quotations for similar instruments traded in different markets. Fair value for certain
derivatives are based on pricing models that consider current market and contractual prices for the
underlying financial instruments or commodities, as well as the time value and yield curve or volatility
factors underlying the positions. Pricing models and their underlying assumptions impact the amount
and timing of unrealized gains and losses recognized, and the use of different pricing models or
assumptions could produce different financial results.
balance sheet, and capital leases, which are leases capitalized on the balance sheet.
in a change to the amounts recognized in the financial statements.
where the lessee previously owned the leased assets. In these instances it is important to analyze the
facts relating to the transactions to determine whether the transactions are finance/capital leases or
operating leases, which will result in either on-balance sheet or off-balance sheet recognition,
respectively.
contingencies. Provisions are recognized when the Telkom Group has a present obligation, legal or
constructive, as a result of a past event and it is probable that an outflow of resources will be required
to settle the obligation. Provisions are reviewed at each balance sheet date and adjusted to reflect
management’s best estimate. While management does not anticipate any significant changes to the
provisions reflected in the accompanying consolidated financial statements, changes in assumptions
or related facts and circumstances could result in significant changes in the future.
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revenue, net of these discounts as the cards are used.
the subscriber the airtime that arises from the subscribers’ use of the Vodacom network.
and certain administrative services in relation to customers connected to the Vodacom network, such
as sales force and customer care and billing of individual customers for which they are compensated
by Vodacom. In effect, Vodacom has simply outsourced these functions, which they would otherwise
have performed internally, incurred and recorded as expenses, and the contract between Vodacom
and their dealers and service providers specifies what these functions are and how they will be
compensated by incentive commissions.
each deliverable, based on the fair value of each deliverable on a stand alone basis as a percentage
of the aggregated fair value of the individual deliverables. Revenue allocated to the identified
deliverables in each revenue arrangement and the cost and commissions paid to service providers
and dealers that are applicable to these identified deliverables are recognized based on the same
recognition criteria of the individual deliverable at the time the product or service is delivered.
service provider or dealer.
deliverable, based on the fair value of each deliverable on a stand alone basis as a percentage of the
aggregated fair value of the individual deliverables. Revenue allocated to the identified deliverables in
each revenue arrangement and the cost and commissions paid to service providers and dealers that
are applicable to these identified deliverables are recognized on the same recognition criteria of the
individual deliverable at the time the product or service is delivered.
relationship period.
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ordinary share, and the Public Investment Corporation, as the beneficial holder of the class B ordinary
share, are entitled to appoint directors based on the percentage of the issued ordinary shares owned
by them. As of the date hereof, the Government is entitled to appoint five directors, including two
executive directors, and the Public Investment Corporation is entitled to appoint one executive
or non-executive director to Telkom’s board of directors. Telkom’s shareholders are entitled to appoint,
in a general meeting, that number of directors, if any, that are not appointed by the holder of the class A
ordinary share, the holder of the class B ordinary share or the board of directors. The shareholders in
a general meeting are not entitled to fill a vacancy created by a director appointed by either the holder
of the class A ordinary share or the class B ordinary share. If, as of March 4, 2011, the class A
ordinary share and class B ordinary share have not otherwise been converted into ordinary shares
under the terms of Telkom’s articles of association, they will be so converted and the rights of the
Government and the Public Investment Corporation as holders of the class A ordinary share and
class B ordinary share, respectively, including their rights to appoint members of Telkom’s board of
directors will be terminated.
that the chief executive officer shall be an executive director nominated and appointed at least every
three years by the board of directors, after consultation with the Government, for so long as it is a
significant shareholder. Pursuant to Telkom’s articles of association, the board of directors is required
to meet at least once a quarter.
ordinary shares, subject to adjustment to reflect additional issuances of ordinary shares by Telkom
after March 4, 2003, provided that the percentage will not be lower than 10%.
Communications beneficially owned a 15.1% interest in Telkom, including the class B ordinary share,
and remained a significant shareholder. In November 2004 Thintana Communications announced that
it sold its remaining 15.1% interest in Telkom, including its class B ordinary share, to the Public
Investment Corporation, an investment management company wholly owned by the South African
Government. Following the sale by Thintana Communications, all of Thintana Communications’
representatives on Telkom’s board and its management designees were replaced.
ordinary share that it had acquired from Thintana Communications, plus an additional 6.1% of
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Elephant Consortium beneficially owned 6.7% of Telkom’s issued and 7.0% of Telkom’s outstanding
ordinary shares that it had acquired from the Public Investment Corporation after being acquired by
the Public Investment Corporation from Thintana Communications. As a result of the foregoing, as of
June 28, 2005, the Public Investment Corporation is not a “significant shareholder” of Telkom,
however, it is entitled to appoint one executive or non-executive director to Telkom’s board of directors,
as the holder of the class B ordinary share. As of June 28, 2005, the Government of the Republic of
South Africa owned 37.7% of Telkom’s issued and 39.4% of Telkom’s outstanding ordinary shares,
plus the class A ordinary share, and is entitled to appoint five directors, including two executive
directors, to Telkom’s board of directors and is the only “significant shareholder” of Telkom.
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3610
Street,
Johannesburg, 2001
Boulevard, Fourways,
2055
Sandton, 2196
Faerie Glen, 0043
Faerie Glen, 0043
contract which expires on December 31, 2005 in order to explore new challenges. Mr. Nxasana will continue as Telkom’s chief executive officer up to December 31, 2005 while the Telkom board seeks the appointment of his successor.
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director of the National Association of Democratic Lawyers, which focuses on human rights and
transformation in the administration of justice. She is chairman of the Chris Hani Baragwanath
Reconstruction Trust, Majweng Resources (Mining), Eco-Electrical (Proprietary) Limited and Arch
Equity (Proprietary) Limited. Nomazizi also serves as director in Women’s Development Micro
Finance, Mvelaphanda Resources, Grinrod Limited and SA Black Women Investment Holdings.
Ms. Mtshotshisa holds a B. Curis degree from the University of South Africa.
from June 1996 to March 1998. He is a director of Vodacom Group (Proprietary) Limited, Business
Against Crime-South Africa (Association incorporated in terms of Section 21), Zenex 1995 Trust and
Zenex Foundation, Telkom Directory Services (Proprietary) Limited and First Rand Bank and Holdings
Limited and chairman of the Audit Committee of the South African Revenue Service Audit Committee.
He holds a Bachelor of Commerce degree and a Bachelor of Accounting Science (honors) degree
from the University of South Africa and is a chartered accountant (South Africa). Mr. Nxasana was
awarded an honorary doctorate from the University of Fort Hare, and was awarded a business
excellence award from the South African Chamber of Commerce America in 2005.
specializes in constitutional litigation and administrative law. Dumisani has acted as a High Court
Judge and has served on the executive board of National Association of Democratic Lawyers. He is
chairman of STRB Attorneys in Johannesburg, deputy chairman of the ABSA regional board (Eastern
Cape), a member of ABSA board (Commercial Bank) and a director of Smith Tabata Buchanan
Boyes. Mr. Tabata holds a Bachelor of Procuration LLB.
Consultants. He has more than 15 years business experience ranging from manufacturing industry to
the financial sector, particularly in the formulation and implementation of strategy. He has extensive
experience in the healthcare sector having been the executive director of Medscheme Holding (then,
the largest medical scheme administrator in South Africa). He is the former chief executive officer of
Bonitas Medical Aid Fund and served as President and chief executive officer of Foskor Limited
(largest producer of phosphoric acid in South Africa). He is a current non-executive director of the
Gas Corporation of South Africa (iGas), Global Business Equilibrium and a former director of
PetroSA Limited. Mr. Tenza holds a Bachelor of Commerce Bachelor of Accounting Science
(Honours) and a MBA and he is a Certif ied Public Accountant (USA).
she was head of Finance & Economic Affairs, Gauteng. Thenjiwe is a board member at DBSA,
PetroSA Limited and is a member of the audit committees of Poslec and Rosslyn Mining Company.
She is currently a member of SAICA (South African Institute of Chartered Accountants) and ABASA
(the Association of Black Accountants of South Africa). She has served on various other bodies,
such as the UNISA Transformation Forum. Ms. Chikane is a chartered accountant.
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re-engineering and strategy development. He is a member of SAICA and ABASA. In 1999, Thabo was
appointed by the Minister of Finance to the Financial Services Board Insider Trading Directorate. In
2001, Thabo was appointed as a commissioner on the Fiscal & Financial Commission. He serves as
chairman of the Board of Trustees for the Education Foundation and NGO involved in the Curriculum
Development and policy research on education in South Africa. Mr. Mosololi holds a Diploma in
Project Management, MAP, EDP and is a chartered accountant.
Corporation and serves on various executive and board committees, including Audit, Employment
Equity & Development, and Market Development. Lazarus brings in-depth knowledge of the African
telecommunications markets as he previously worked as the managing director of MTN International
and as an executive director of MTN Group. In this role he was responsible for operations in Nigeria,
Cameroon, Uganda, Swaziland and Rwanda and Mauritius. Prior to this, he was managing director of
M-Net and chief executive officer of MIH South Africa. Mr. Zim holds a Bachelor of Commerce
(Honours) and a Masters in Commerce.
Financial Services Board, South African Reserve Bank, the Financial Services Authority in the United
Kingdom, and other regulatory bodies. He also oversees overall financial management and reporting,
communication with shareholders, and the management of Finance and Risk Departments. Prior to
joining Decillion, Marius was Financial Director of PSG Investment Bank and Executive vice President,
Professional Services at the Industrial Development Corporation. Mr. Mostert holds a Bachelor of
Commerce (Cum Laude), Bachelor of Commerce (Honours) (Investment Management), MBA,
Doctorate in Commerce and is a chartered accountant.
Isibaya Fund since August 2003. He was previously a private sector investments manager at DBSA
and has worked for the Commonwealth Development Corporation, where he was involved in the
capital funding for infrastructure projects. Tshepo is a non-executive director of Bakwena Platinum
Corridor Concession. Mr. Mahloele holds a Bachelor of Procurationis.
position she has held since 2003. Albertinah is a non-executive director of South African Airways and an investment committee member of the Eskom Pension and Provident Fund. She is a chartered accountant. She has worked as corporate finance executive at NM Rothchilds and Sons Limited, and as a corporate finance director at UBS Warburg. Ms. Ngwezi also holds a higher diploma in accounting.
to that he was a senior lecturer in Roman-Dutch Law at the University of Cape Town. He was the
founder member of CDRT (Community Dispute Resolution Trust) and is past chairman of the
Johannesburg branch of NADEL. He has published a law journal article on the Contracts in Restraint
of Trade in Roman and Roman-Dutch Law. Brahm is also a member of Advocates of Transformation.
Mr. du Plessis holds a Bachelor of Arts, LLB and LLM.
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to the Public Investment Corporation in November 2004.
financial director for Teba Bank Ltd from April 1999 to November 2000 and finance executive for the
African Bank Ltd since March 1998. He holds a Bachelor of Accounting Science (Honours) degree
from the University of South Africa and is a chartered accountant (South Africa).
affairs in October 1995 and managing executive of international and special markets in 1999. Prior to
joining Telkom, she worked for GEC and Siemens (South Africa). She is a council member of the
South African Bureau of Standards, a director of Telkom Directory Services (Proprietary) Limited and
holds a Bachelor of Science degree in Electrical and Electronic Engineering from the University of
Cape Town.
worked in various engineering and commercial positions in Telkom since 1977. He is a member of the
Professional Institute of Engineers of South Africa (ECSA) and holds a Bachelor of Science degree in
Electrical and Electronic Engineering from the University of Cape Town.
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Officer of Vodacom Group
Craig was the senior general manager of mobile communications at Telkom until 1993, when he left to
form Vodacom. Mr. Knott-Craig is also a director of several Vodacom subsidiaries. Mr. Knott-Craig
holds a Bachelor of Science degree in Electrical Engineering cum laude from the University of Cape
Town and a Master of Business Leadership degree from the University of South Africa. He was
inducted as one of the eight Gold Members of the GSM Association’s 2001 inaugural “Roll of Honour”
for his contribution to bringing mobile telephone to South Africa. He serves as a Commissioner on the
Presidential National Commission on Information Society & Development for ICTs.
Vodacom’s inception
in 1993. Mr. Crouse is also a director of several Vodacom subsidiaries. Mr. Crouse holds a Bachelor of
Commerce degree and a Certificate in the Theory of Accounting from the University of Port Elizabeth
and is a Chartered Accountant (South Africa).
Mr. Joosub worked in Vodacom’s finance department since 1994 and was managing director and
founder of Vodacom Equipment Company (Proprietary) Limited, the handset distribution company in
the Vodacom Group, before merging it with Vodacom Service Provider Company (Proprietary) Limited.
Shameel Aziz-Joosub also serves as director of Vodacom Group (Proprietary) Limited. Mr. Joosub
holds a Bachelor of Commerce (Honors) degree from the University of South Africa and holds a
Masters of Business Administration degree from the University of Southern Queensland, Australia,
and is an Associated General Accountant and Commercial and Financial Accountant (South Africa).
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Bachelor of Science degree in Engineering and a Masters in Engineering degree from the University
of Stellenbosch and a Master of Business Administration degree from the Stellenbosch Business
School. Mr. Uys joined Vodacom in 1993 as a member of the initial engineering team.
reserved matters unless authorized by the board, if, and to the extent that, the matters are not within
the scope of the exclusive powers and authority delegated to the operating committee referred to
below. In addition, the authorizing resolution of the board relating to any Government reserved matter
must have received the affirmative vote of at least two of the directors appointed by the Government.
The following are Government reserved matters:
resources review committee referred to below, and at any time, the countermanding, amending
or supplementing of any decision or action made or taken by the operating committee or the
human resources review committee before May 8, 2004;
be, exceeds minimum thresholds;
Government has an interest in the contract in question that conflicts with the interest of Telkom
or the applicable subsidiary;
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Companies Act, 61 of 1973, requires such appointment to be made by directors;
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Emoluments per director:
Non-executive
financial year
financial year
to the Telkom Retirement Fund.
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individual award. The team award constitutes 80% and the individual award 20% of the overall award.
The team award is based 70% on Telkom financial drivers and 30% on Telkom performance drivers.
The individual award is based on the performance of the individual. Payment of bonuses for the 2005
financial year took place in June 2005.
executive directors receive no other pay or benefits other than directors’ fees, with the exception of
reimbursement of expenses incurred in connection with their directorships. The non-executive
directors do not participate in the share scheme, bonus scheme or incentive plans outlined herein and
are not eligible for pension scheme membership.
available for purposes of the plan, representing 4% of Telkom’s issued ordinary share capital as of
March 31, 2005. Allocation to management employees in terms of this plan shall not exceed 2% of
Telkom’s issued ordinary share capital. The remaining 2% is reserved for the remainder of the staff.
No one participant in the plan may acquire more than 0.05% of Telkom’s issued ordinary share
capital.
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the employee or procure the transfer to the employee, free of cash, the number of shares awarded to
the employee, subject to certain performance criteria applicable to him or her being met within a
specified period. The number of shares ultimately awarded to the employee, however, is dependent
upon the extent to which the employee meets certain performance criteria and, in any event, must not
exceed the number awarded. For a management employee, the performance criteria must be met over
three years. For a non-management employee, the performance criteria must be met for one-third of
his or her shares at the end of two years, for the next third at the end of three years and for the last
third at the end of four years, each from the date of his or her conditional contract. At the end of
these periods, t he rights of the employees will vest, provided that each performance criterion has
been met and the employee is still a Telkom employee. Subject to the board’s discretion, if the
employment is terminated due to death, other than suicide, workforce reduction where he or she does
not receive a voluntary severance package, outsourcing, normal retirement or workforce reduction due
to ill health, his or her rights will remain unaffected; otherwise, the employee will lose his or her rights
to acquire any shares apart from the rights that have already vested. Subject to the board’s discretion,
the board may decide to make a cash payout based on certain criteria for employees who accept
voluntary service packages pursuant to the workforce reduction program. A Telkom employee cannot
receive any dividends for awarded shares or be entitled to vote, with respect to awarded shares until
their rights to shares are vested. In addition, a Telkom employee may not assign any of his or he r
rights or obligations under this plan.
Telkom’s performance enhancement process. The following illustrates how individual performance
influences the number of shares:
individual’s performance as assessed through Telkom’s performance and development management
system. However, the number of ordinary shares will depend on a sliding scale of the Telkom financial
performance, as measured by Telkom’s gain-sharing plan. The following table illustrates the sliding
scale:
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conditional share plan. The second allocation was made based on the following:
the Diabo Share Trust, established for the benefit of:
resigned voluntarily or were dismissed on grounds of misconduct, fraud or other grounds
justifying summary dismissal at common law before 8:59 a.m. (S.A. time) on March 4, 2003
were excluded from participation in this scheme.
stamp duty, brokerage and related costs payable on the transfer of these ordinary shares. The shares
will be exercisable over a period of three years in four equal tranches. Three tranches were exercised
in September 2003, March 2004 and March 2005. These persons may also elect to have some or all
of the shares disposed of for their benefit. Such persons did not need to remain employed with
Telkom after 9:00 a.m. (S.A. time) on March 4, 2003 in order to continue participating in the scheme
and persons who were employed by Telkom after 9:00 a.m. (S.A. time) on March 4, 2003 will not
otherwise have the right to participate in the scheme.
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the Sarbanes Oxley Act of 2002.
Requirements which came into effect on September 1, 2003. Telkom is required to disclose the extent
of its new compliance with King II and provide reasons for non compliance.
principles set out in King II. These areas of non compliance stem mainly from certain provisions in
Telkom’s articles of association framed to safeguard the interests of the two controlling shareholders,
that at the time of the listing were the Government of the Republic of South Africa and Thintana
Communications. We have been informed that the Public Investment Corporation’s shareholding fell
below 15% of Telkom’s issued ordinary shares. As a result, it is no longer a “significant shareholder”.
The Government is now the sole “significant shareholder.” The Government’s reserved matters as a
“significant shareholder” holding the class A ordinary shares were unaffected by the sale by Thintana
Communications of its entire shareholding in Telkom. Most of the areas of non-compliance will be
resolved by no later than March 5, 2011, when the provisions of Telkom’s articles of association
resulting in non-compliance with King II fall away or earlier if the “significant shareholders”
shareholding falls below certain stipulated levels.
and class B ordinary shares, respectively. Based on their ordinary shareholding and their holding of
the class A and class B shares, the Government is entitled to appoint five directors, including two
executive directors, and the Public Investment Corporation is entitled to appoint one executive or non-
executive director, to the board, as of June 28, 2005.
No single director or block of directors dominates decision making at board meetings.
the class B shareholder. The chief executive officer is appointed by the board on a renewable service
contract, in consultation with each significant shareholder.
issues that require board resolutions between scheduled meetings. Certain members of senior
management are in attendance at board meetings. Other members of management are periodically
invited to make presentations on particular issues of interest to the board.
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on the issues at hand.
company secretary. Where a newly appointed director has no or limited board experience, the
induction program is structured to meet the individual director’s specific needs.
established by the board to consider specific issues and make recommendations to the board. Board
and special committees are free to take independent professional advice at the cost of Telkom in
carrying out their delegated duties.
members.
NE Mtshotshisa (Chairman)
SE Nxasana
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expansion, equipment procurement, tariff setting and packaging, customer service and
marketing; and
executive committee. The executive committee consists of seven members.
resignation dates of members.
SM McKenzie (resigned November 22, 2004)
SE Nxasana (Chairman)
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and risk management committee may, other than in his or her capacity as a member of that
committee, the board or any other committee of the board, accept any consulting, advisory or other
compensatory fee from Telkom or any subsidiary of Telkom or be an affiliated person of Telkom or
any subsidiary or vendor of Telkom. See Directors’ Interest in note 41 of the Consolidated Financial
Statements.
work;
questionable accounting or auditing matters;
employed by the committee;
actuarial services, internal audit outsourcing services and legal services not related to the audit.
During the 2005 financial year, the committee pre approved the engagement of the independent
auditors to provide audit services based on a tender process. The committee also pre approves
proposed audit related services, tax services and other permissible services. The pre approval policy
requires all auditing and non audit services provided by the external auditors to be pre approved by
the audit and risk management committee. The chairman of the audit and risk management
committee is the primary member of the audit and risk management committee that has the authority
to pre approve audit and non audit services outside of the meetings and, in his absence, any member
of the audit and risk management co mmittee.
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fraudulently influence, coerce, manipulate or mislead the external auditors intentionally or through
negligent actions.
requirements of Form 20-F of the SEC. The SEC has determined that the audit committee financial
expert designation does not impose on the person with that designation, any duties, obligations or
liability that are greater than the duties, obligations or liabilities imposed on such person as a member
of the audit committee of the board of directors in the absence of such designation. Mr. Tenza is a
qualified certified public accountant.
MP Moyo (Chairman) (resigned September 18, 2004)
June 29, 2005)
YR Tenza (Chairman) (appointed November 11, 2004)
The terms of reference of the human resources review committee were incorporated into those of the
human resources review and remuneration committee.
committee reviews the terms upon which Telkom’s executive directors and senior management are
employed and compensated and upon which Telkom’s non-executive directors and executive directors
are compensated and makes recommendations to the board with respect to such matters. Actions of
the human resources review committee must be approved by a majority vote of its members. In the
event of a tie, the chairperson of the human resources review committee shall have a casting vote.
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NE Mtshotshisa (Chairman)
CK Mokoena (Group Executive: Centre for Learning)
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attract and retain the directors needed to run Telkom’s business successfully. In order to avoid paying
more than is necessary and to ensure that Telkom offers competitive packages, Telkom constantly
benchmarks itself against its peer group.
the board, and is sensitive to the remuneration and employment conditions elsewhere in the Telkom
Group. In doing so, performance related elements of the remuneration constitute a large proportion of
the total remuneration package of the chief executive officer and are specifically designed to align his
interests with those of shareholders and to give such executive directors incentives to perform at the
highest level.
commitments to the circumstances of the case with the broad aim of avoiding rewarding poor
performance, while dealing fairly with cases where departure is not due to poor performance.
human resources review and remuneration committee. Non executive directors are not, as part of
their remuneration, allocated shares in Telkom but may purchase shares in Telkom.
professional advice about the affairs of Telkom at Telkom’s expense.
sensitive information that has not yet been made public. In addition, Telkom imposes a “closed period”
from the end of the reporting periods (i.e., year-end and half year-end) until the publication of the
results during which period the directors, officers and employees of Telkom are prohibited from
dealing in Telkom’s securities.
executive officer needs to deal in Telkom’s shares outside closed periods, the chairman must give the
approval. Where the chairman needs to deal in Telkom’s shares outside the closed periods, prior
approval must be obtained from the insider trading compliance officer. Directors’ dealings in Telkom’s
securities are published on SENS within the regulated timeframes. The SENS announcements that
were published during the year are made available on the website www.telkom.co.za/ir. Our website
and the information contained therein or connected thereto shall not be deemed to be incorporated
into or a part of this annual report.
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risk management system are designed to enable us to anticipate risks and to manage them carefully
in the pursuit of our business goals. The principles, guidelines, processes and responsibilities of our
internal control system have been defined and established to help ensure prompt and accurate
accounting of all business transactions and to continuously provide reliable information about the
Telkom Group’s financial position for internal and external use. The board of directors continuously
monitors treasury policies, risk limits and control procedures. The audit and risk management
committee reviews the effectiveness of the risk management processes and reports regularly to the
board.
interim and annual financial information as well as other price sensitive public reports, including any
reports to ICASA and other information that Telkom is statutorily obliged to disclose.
statements, and have established a formal and transparent arrangement for considering the financial
reporting and internal control principles.
investors, shareholders and communities to ensure that Telkom’s integrity is not compromised.
Outside the Scope of Telkom Duties, as well as other Telkom policies, procedures and applicable laws
as amended from time to time.
employees are clearly communications. Employees are expected to act in the exclusive interest of
Telkom. Procedures have been put in place to deal with conflicts of interest where these arise in the
course of employees’ day-to-day activities, such as disciplinary action, suspension or even termination
of employment and civil or criminal proceedings. Telkom has established a confidential hotline service
to encourage and enable whistle blowing. As part of the business code of ethics, there is a policy to
protect whistleblowers from discrimination and harassment. Telkom has also introduced fraud and
management systems.
www.telkom.co.za/ir. Information contained on Telkom’s website or connected thereto shall not be
deemed to be incorporated into or a part of this annual report.
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against people from previously disadvantaged groups in the workplace. Unfair discrimination in the
workplace on the basis of gender, race, culture, religion, etc., is prohibited.
keep its shareholders intelligently informed. Telkom has established an investor relations function and
an investor relations portal (www.telkom.co.za/ir) for communication with investors. Information
contained on Telkom’s investor portal is not a part of this annual report.
rules on corporate governance, responsibility for financial reports and other disclosures, auditor
independence, audit committees and enhanced disclosures for United States and foreign companies
listed or reporting in the United States, especially in the area of audit committee composition and
authority. As a result of its listing on the New York Stock Exchange Telkom is subject to the Sarbanes-
Oxley Act. Many of the provisions of the Sarbanes-Oxley Act are new and are subject to SEC
rulemaking and interpretation. Telkom is closely monitoring SEC rulemaking proceedings pursuant to
the Sarbanes-Oxley Act to ensure its compliance with any rules as they become applicable to Telkom
as a foreign private issuer.
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Telkom Unions, or ATU, comprising the South African Communications Union, or SACU, and the
MWU-Solidarity Union. Some of our employees also belong to other unions that are not recognized by
Telkom for collective bargaining purposes, including the Postal Union, the Society of Telkom
Engineers, the South African Steel and Allied Workers Union and the United Association of South
Africa. As of March 31, 2005, approximately 75% of our total Telkom employees were union
members.
employees in Telkom’s bargaining unit, excluding our Telkom Directory Services and Swiftnet
subsidiaries, with ATU and CWU. In addition, Telkom signed a new collective recognition agreement
with ATU and CWU in mid-2004, designed to enhance the relationship between shop stewards and
management.
Africa as vehicles for social and political reform and in the collective bargaining process. Since 1995,
South Africa has enacted various labor laws that enhance the rights of employees and have resulted
in increased compliance costs.
and
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corporate cultural change and improving customer satisfaction. In order to improve the skill levels of
our employees, we invested R402 million in employee training and development in the year ended
March 31, 2005.
management team, their participation on our operating committee and their employees who served as
our officers. Leadership development continues to remain our primary priority, with specific focus on
previously disadvantaged groups. We have launched a number of initiatives designed to train our
employees and encourage employee retention.
through March 31, 2005. At April 30, 2005, we had 26,133 Telkom employees. In October 2002,
Telkom and its recognized trade unions agreed to embark on a process of implementing alternative
strategies and approaches to avoid and minimize job losses and to create new career opportunities
for Telkom employees. On November 27, 2002, we launched “The Agency for Career Opportunities”
as an alternative strategy to assist employees seeking alternative employment and avoid disruptions
from job losses.
February 11, 2005 respectively, that position a revised approach focusing on utilizing a combination of
voluntary separations and a reduction in other staff related expenditure.
Includes 100% of Vodacom’s employees in the Democratic Republic of the Congo.
participation in unions was approximately 13.3% as of March 31, 2005, approximately 7.9% as of
March 31, 2004 and approximately 6.4% as of March 31,2003. Vodacom believes that the relationship
between its management and its employees and labor unions is good.
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Outstanding
Executive
SE Nxasana
NE Mtshotshisa
Executive
SE Nxasana
change between the balance sheet date and the date of issue of the financial statements.
As of March 31, 2005, Telkom’s directors and senior management (14 persons) collectively
beneficially held 5,474 ordinary shares.
In June 2004, Telkom allocated 17,341 ordinary shares to Sizwe Nxasana, 5,534 ordinary shares
to Kaushik Patel, 6,638 ordinary shares to Nombulelo Moholi and 6,549 ordinary shares to Reuben
September under its conditional share plan. These shares do not vest until three years from the date of grant subject to company performance.
As of March 31, 2005 each of Telkom’s senior management (4 persons) held 204 share options
issued through the Diabo Share Trust.
The foregoing information does not include ordinary shares held by the Government or the Public Investment Corporation.
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1991, Telkom’s business was conducted as a division of the Department of Posts and
Telecommunications of the Government of the Republic of South Africa. On September 30, 1991, the
Government of the Republic of South Africa embarked upon a commercialization process through
which the Department of Posts and Telecommunications transferred its telecommunications enterprise
to Telkom. Telkom remained a wholly state owned entity until May 14, 1997, when the Government of
the Republic of South Africa sold a 30% equity stake in Telkom to Thintana Communications, which is
60% beneficially owned by SBC Communications and 40% beneficially owned by Telekom Malaysia.
In March 2001, the Government sold a 3% equity stake in Telkom from its holdings to Ucingo
Investments, a consortium of black empowerment investors. On March 7, 2003, the Government sold
154,199,467 of its ordinary shares in a global initial public offering, including 14,941,513 ordinary
shares through the exercise of an over-allotment option. Prior to the global offering, the Government
owned 67% of Telkom’s issued and outstanding ordinary shares. Due to funding constraints, Ucingo
disposed of its entire shareholding on September 17, 2003. As part of the global offering, on March 4,
2003, the Government granted to persons employed by Telkom on March 4, 2003 and eligible former
employees of Telkom, options to purchase 11,140,636 of its ordinary shares, through the Diabo Share
Trust, which are exercisable in four equal tranches over a period of three years commencing six
months after March 4, 2003, which are held by the Government until exercised. On March 4, 2005, the
second anniversary of Telkom’s listing, 785,160 bonus shares were allotted by the South African
Government to qualifying shareholders under the Khuli sa offer. Thintana Communications sold a
14.9% interest in Telkom to South African and certain international institutional investors in June 2004.
In November 2004, Thintana Communications announced that it sold its remaining 15.1% interest in
Telkom, including its class B ordinary share, to the Public Investment Corporation, an investment
management company wholly owned by the South African Government.
information is based on public filings and disclosures.
the class. Includes 2,999,721 ordinary shares held in Diabo Trust.
Includes 6.1% of Telkom’s issued and 6.4% of Telkom’s outstanding shares acquired in the market.
(approximately 0.4% of Telkom’s issued and outstanding ordinary shares) were registered in the name
of Standard Bank of South Africa. As of June 30, 2005, ADRs evidencing approximately
565,080 ADSs were held of record by approximately 2 record holders. The 2,260,320 ordinary shares
represented by those ADRs (approximately 0.4% of Telkom’s issued and outstanding ordinary shares)
were registered in the name of Standard Bank of South Africa. Some of these ADRs were held of
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approximately 94 million publicly traded ordinary shares were held of record outside of South Africa.
Since certain of Telkom’s ADRs and ordinary shares are held by brokers or other nominees, the
number of ADRs and ordinary shares held of record and the number of record holders outside of
South Africa may not be representative of the location of where the beneficial holders are resident.
and approximately 300,903 of Telkom’s ordinary shares as of March 31, 2005.
being held in treasury for purposes of the Telkom conditional share plan. Between August 3, 2004 and
September 15, 2004 Rossal repurchased another 9,531,454 shares at a volume weighted average
price of R78.49 per share, including costs, which are also being held in treasury for purposes of the
Telkom conditional share plan. On June 4, 2004, Telkom purchased Acajou for share repurchase
activities other than repurchases for the Telkom conditional share plan. Between June 7, 2004 and
September 30, 2004, Acajou purchased 10,849,058 shares at a volume weighted average price of
R76.12 per share, including costs, which are also being held in treasury.
directly, such shares must be cancelled.
share capital. Except as disclosed above, Telkom is not directly or indirectly owned or controlled by
any other corporation, foreign government or any other natural or legal person severally or jointly and
Telkom is not aware of any arrangements, the operation of which may at a subsequent date result in
a change of control of Telkom. The Government, as a significant shareholder holding the class A
ordinary share, has special voting rights that are more fully described in Item 6. “Directors, Senior
Management and Employees” below.
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remaining 15.1% shareholding in Telkom. Telkom was not a party to the shareholders’ agreement.
Telkom is not aware of any new shareholders’ agreement that may have been negotiated between the
current class A and class B shareholders.
shareholders” pursuant to Telkom’s articles of association.
things, that, to the extent legally possible:
agreement;
the establishment and operation of the audit and risk management committee and the right of
Thintana Communications to perform a financial and/or operations audit and risk management
of Telkom and its subsidiaries;
any ordinary shares to, or encumber any ordinary shares in favor of, any transferee whose
business involved the provision of telecommunications services and whose annual revenues
exceeded $100 million, except in a distribution on any securities exchange where neither the
seller nor any person acting on its behalf was aware that the relevant transaction had been pre-
arranged with a buyer that was a telecommunications provider;
make Telkom a world class communications operator responsive to the needs of the customer,
to satisfy economically viable demands for basic telephony needs in South Africa and to
increase coverage of priority customers, such as educational and medical facilities, community
centers and governmental agencies, through an accelerated network roll-out program, to enable
genuine economic empowerment of South African disadvantaged groups, to transform Telkom
into a company representative of South African demographics, to create training and skills
development opportunities in the telecommunications sector, to create economic growth and
employment opportunities through the creation of an “information society” and to ensure that
these strategic objectives were incorporated into Telkom’s busi ness plan;
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Thintana Communications agreed that it would be preferable for Telkom to do so;
Communications with the prior approval of the other party; and
shareholders and attempt to reach consensus on how to vote their shares in respect of every item
that was on the agenda for the relevant meeting, subject to certain escalation procedures and
abstention and mandatory joint veto rights for shareholder reserved matters.
extent legally possible, Telkom’s board of directors consisted of a maximum of eleven directors.
To the extent that the Government held more ordinary shares in Telkom than Thintana
Communications, the Government and Thintana Communications were required to use their best
endeavors to procure that the chairperson of Telkom’s board of directors was a candidate nominated
by the Government from among the non-executive directors and, to the extent that the Government
held fewer ordinary shares than Thintana Communications, the chairperson of Telkom’s board of
directors was to be appointed by Telkom’s board of directors from among the non-executive directors.
The Government and Thintana Communications also undertook to use reasonable efforts to ensure
the membership of Telkom’s bo ard was representative of South African demographics, provided that
Thintana Communications was entitled to appoint up to two directors in its sole discretion.
with the underwriters in connection with the initial public offering. The Government and Thintana
Communications had reciprocal rights of first offer for the purchase of each other’s shares, subject to
certain exceptions.
activities, or those of its subsidiaries or Vodacom, in the Republic of South Africa. Thintana
Communications was also required to use reasonable efforts to offer to Telkom an opportunity to
participate, on mutually agreed and commercially reasonable terms and conditions, in any
telecommunications investments which it or any of its affiliates proposes making in sub-Saharan
Africa.
Telecommunications Act, 103 of 1996, in relation to Telkom which could reasonably be expected to
have an adverse effect on Telkom, its business or prospects or Thintana Communications’ investment
in Telkom and against certain amendments to Telkom’s licenses made without Telkom’s consent if
such amendment had a material adverse effect on Telkom, its business or prospects or Thintana
Communications’ investment in Telkom.
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Sdn. Bhd, or Telekom Management. Pursuant to that agreement, Thintana Communications was
entitled and obliged, with the right to request others, including SBC Management and Telekom
Management and their affiliates, to provide personnel to Telkom. Pursuant to the agreement, SBC
Management and Telekom Management provided personnel to Telkom, as requested by Thintana
Communications. These personnel filled certain key managerial positions, such as the chief operating
officer, chief strategic officer and financial controller, in which they provided strategic services for
Telkom. The strategic services related to the following: business management, oversight of personnel
matters, development and implementation of marketing plans and other corporate strategies, network
planning and supervision, network operations, budget planning, payroll processing, internal financial
support services, technical advice and assistance, regulatory compliance, customer billing and other
related services.
pursuant to the agreement. As of March 31, 2004, that number had been reduced to 18 such
positions. After May 7, 2002, Thintana Communications had been obliged to make reasonable efforts
to fill any of the managerial positions which it was entitled to fill, with members of South African
groups historically discriminated against on the grounds of race, color, origin or gender. Telkom paid a
fee for the services of each person provided to it pursuant to the strategic services agreement.
effective on January 16, 2003. Under this new strategic services agreement, Thintana
Communications continued to be entitled and obliged to provide personnel to Telkom to fill
approximately 20 key management positions and certain additional senior managers during the
financial years ending March 31, 2003 and 2004. After May 2004, Thintana Communications only had
the right to appoint six positions. Telkom itself was entitled to request, if and when it required, certain
additional senior managers during those same two financial years. All the personnel were to be
appointed to provide the same strategic services as those to be provided under the original strategic
services agreement. As and when vacancies occurred in those positions, personnel were to be
selected by Thintana Communications and provided to Telkom, for appointment by Telkom to fill the
vacancies, in accordance with the requirements of the new strategic services agreement. These
requirements included a consultative process between Telkom and Thintana Communications for the
appointments. They also provided for a gradual decrease in the number of the more senior personnel
to be provided by Thintana Communications. In any event, wherever it was feasible, vacancies were
required to be filled by suitably qualified historically disadvantaged individuals. Telkom was required to
continue to pay to Thintana Communications, or any other personnel provider who provided personnel
at the request of Thintana Communications, a fee for the services of each person provided to Telkom
under the new strategic services agreement. Telkom had requested, and our strategic equity investors
had agreed to provide, 12 additional positions pursuant to the strategic services agreement during the
2005 financial year, all of whom resigned by November 26, 2004.
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services agreements.
effect a JSE public offering in South Africa, or register with the Securities and Exchange Commission
all or part of its ordinary shares, or both, at any time starting after the Minister’s 545 day lock-up
period after the expiration of or release from Thintana Communications’ 180-day lockup period. The
Government can demand any number of successive registrations, but no more than one in any
calendar year, provided that Thintana Communications was entitled to two such registrations prior to
the Government becoming entitled to demand any registrations. In addition, the Government has the
right to have its ordinary shares registered or sold in a listed public offering any time that Telkom or
any other person seeks registration of, or a listed public offering for, Telkom’s issued and outstanding
ordinary shares.
by Telkom or by any other person, Telkom would be required to bear and pay all expenses incurred in
connection with such offering or registration, including all registration, listing and filing and
qualification fees, as well as underwriting discount and commissions. However, in the event that the
Government exercises its right to demand Telkom to effect a JSE public offering or US registration of
ordinary shares held by it, Telkom would be required to bear and pay all expenses incurred in
connection with registration, listing and filing or qualifications, however, certain fees relating to such
registration or listing shall be borne by the Government. In that case, underwriting discounts and
commissions will be borne by each relevant party based on the number of shares issued or sold by
that party. T elkom is required to indemnify certain parties, including the Government and the
underwriters and their respective directors, officers, employees and agents against certain losses in
connection with such public offering or registration.
Communications has the most direct role in our business. However, we have interactions with several
other Ministries, including the Ministry of Finance for matters relating to taxation, the Ministry of Labor
for matters relating to employment and the Ministry of Trade and Industry for matters relating to the
communications industry.
public limited liability company by South African law and Telkom’s articles of association.
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South Africa. The Ministry is also responsible for administering the Telecommunications Act,
103 of 1996, and the Independent Communications Authority of South Africa Act, 13 of 2000.
international telecommunications service, a service to be provided by small businesses in
underserviced areas with a teledensity of less than 5% or a mobile telecommunications service.
and, with respect to telecommunications, from the Telecommunications Act, 103 of 1996. ICASA
serves as the primary regulatory and licensing authority for the South African telecommunications and
broadcasting industries, except for specific licenses that can only be granted by the Minister of
Communications. The Minister of Communications has indicated that an amendment to the legislation
establishing ICASA will shortly be tabled in Parliament. We do not know what amendments will be
proposed or the functions and powers of ICASA in the context of new convergence legislation.
Telecommunications Act;
to apply and, where such licenses are granted by the Minister, issue such licenses and, in all
other cases grant and issue telecommunication licenses;
regulations; and
Telecommunications Act.
Telkom pursuant to the PFMA and PAA. Telkom has obtained a temporary exemption from certain
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General that it will not be required to comply with the PAA until such date. Telkom submitted an
application to the National Treasury to motivate amending the PFMA so as to exclude companies
listed on the JSE, such as Telkom, from the provisions of the Act while such companies remain so
listed. See Item 3. “Key Information–Risk Factors–Risks Related to Regulatory and Legal Matters–If
Telkom is required to comply with the provisions of the South African Public Finance Management Act,
1 of 1999, or PFMA, and the provisions of the South Africa Public Audit Act of 2004, or PAA, Telkom
could incur increased expenses and its net profit could decline and compliance with the PFMA and
PAA could result in the delisting of Telkom’s ordinary shares and ADSs from the JSE and the New
York Stock Exchange.”
and agencies of the Government as separate customers, and the provision of services to any one
department or agency does not constitute a material part of our revenues. Legislation has been
enacted to centralize all procurement by the Government through one agency. We estimate that in the
year ended March 31, 2005, Government customers, excluding certain Government owned parastatal
companies, accounted for at least 9% of our total fixed-line revenue, excluding directory services and
other revenue. If the Government transfers some or all of its business to other operators, our
operating revenue and net profit could decline.
2005, R4.1 billion of our total indebtedness of R14 billion was guaranteed by the Government of the
Republic of South Africa.
Telkom, Vodafone, VenFin, Vodacom and other related parties.
right to appoint three directors, VenFin has the right to appoint one director and the remaining four
directors are appointed by shareholders holding 10% or more of the issued shares of Vodacom who
are a party to the joint venture agreement. Currently, the only shareholders holding beneficially 10%
or more of the issued shares in Vodacom are Telkom, Vodafone and VenFin and the four board
members appointed by Telkom and these shareholders are senior management of Vodacom.
this committee. This authority cannot be revoked without the prior written consent of the shareholders
holding 10% or more of the issued shares of Vodacom. The directing committee comprises all
directors appointed to Vodacom’s board by shareholders holding 10% or more of the issued shares of
Vodacom. Currently, the directing committee consists of eight members comprising four directors
appointed by Telkom, three directors appointed by Vodafone and one director appointed by VenFin.
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Vodacom or any of its subsidiaries that are a party to the joint venture agreement taking any of the
following actions:
to ensure the consensus matter is not consummated. Should any dispute arise between the
shareholders holding 10% or more of the issued shares of Vodacom regarding the failure of those
shareholders to reach consensus, the dispute is to be referred for determination to the chairpersons
of those shareholders at the request of any shareholder holding 10% or more of the issued shares of
Vodacom. If the chairpersons fail to reach agreement on the consensus matter in question, each
shareholder is entitled to enforce any rights through any competent court.
consensus matter requiring the unanimous written consent of those shareholders holding 10% or
more of the issued shares of Vodacom. The following matters require unanimous approval:
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Africa. This restraint lapses with respect to each party two years after the date such party ceases to
be a shareholder of Vodacom or upon termination of the joint venture agreement.
system or otherwise participate in any mobile telecommunications activities in any African country, a
major portion of which is situated below the equator, unless the party proposing to engage in such
activity first offers Vodacom the opportunity to pursue such activity and Vodacom declines. Any
decision by Vodacom to become involved in a GSM or analogue system in this territory requires the
written consent of those shareholders holding 10% or more of the issued shares of Vodacom.
accounts in Vodacom to the other parties to the joint venture agreement. If none of the non-
transferring parties accepts such an offer to purchase all of the shares and claims offered on the
terms in the notice, then the selling shareholder has the right to sell the shares and an equivalent
portion of its claims to a third party at a price not lower than the price, and upon the terms, set forth in
the seller’s original offer.
Office, independent distributors and vendors and through telemarketing.
Old Mutual held approximately 20.5 million shares in Telkom as of March 31, 2005.
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Telkom paid R5.4 million to Beslin Sethuni workwear in the year ended March 31, 2004 for these
services.
time. Telkom paid R3,192 and R90,000 to Bowman Gilfillan Inc. in the years ended March 31, 2005
and 2004, respectively, for these services. The outstanding creditors’ balance at November 25, 2004
was RNil.
2004, were Thintana Communications’ representatives on Telkom’s board of directors. In addition, a
number of our senior management were appointed through Thintana Communications. See Item 7.
“Major Shareholders and Related Party Transactions” for a discussion of the arrangements between
Thintana Communications and us and the fees Telkom paid to Thintana Communications for strategic
services in the years ended March 31, 2004 and 2005. SBC Communications paid Bowman Gilfillan Inc. a total of R380,107 in fees during the year ended March 31, 2004 for Mr. Valkin’s services as a director of Telkom.
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African Competition Act, 89 of 1998, alleging, among other things, that Telkom was abusing its
dominant position in contravention of the Competition Act, 89 of 1998, and that it was engaged in
price discrimination. The Competition Commission found, among other things, that several aspects of
Telkom’s conduct prima facie contravened the Competition Act, 89 of 1998, and referred certain of the
complaints to the Competition Tribunal for adjudication. The complaints deal with Telkom’s alleged
refusal to provide telecommunications facilities to certain VANS providers to construct their networks,
refusal to lease access facilities to VANS providers, provision of bundled and cross subsidized
competitive services with monopoly services, discriminatory pricing with regard to leased line services
and alleged re fusal to peer with certain VANS providers. Telkom has brought an application in the
South African High Court challenging the Competition Tribunal’s jurisdiction to adjudicate this matter.
These matters and the amount of Telkom’s liability are expected to be finalized within the next year. If
these complaints are upheld, however, Telkom could be required to cease these practices and fined an
amount of up to 10% of Telkom’s annual turnover or be ordered to divest itself of the relevant
business. Telkom is currently unable to predict the amount that it may eventually be required to pay. If
Telkom is required to cease these practices, divest itself of the relevant business or pay significant
fines, Telkom’s business and financial condition could be materially adversely affected and its revenue
and net profit could decline.
Commerce, which is seated in Paris, France. The seat of the arbitration is in Johannesburg, South
Africa. Telcordia is seeking to recover approximately $130 million for monies outstanding and
damages, plus costs and interest at a rate of 15.5% per year. The arbitration proceedings relate to the
cancellation of an agreement entered into between Telkom and Telcordia during June 1999 for the
development and supply of an integrated end-to-end customer assurance and activation system by
Telcordia. In September 2002, a partial award was issued by the arbitrator in favor of Telcordia.
Telkom subsequently filed an application in the South African High Court to review and set aside the
partial award. On November 27, 2003, the South African High Court set aside the partial award and
issued a cost order in favor of Telkom. On May 3, 2004, the South African High Court dismissed an
application by Telcordia for leave to appeal and ordered Telcordia to pay the legal costs of Telkom. On
November 29, 2004 the Supreme Court of Appeals granted Telcordia leave to appeal. Telcordia has
since filed a notice of appeal. Telcordia also petitioned the United States District Court for the District
of Columbia to confirm the partial award, which petition was dismissed, along with a subsequent
appeal. Following the dismissal of the appeal, Telcordia filed a similar petition in the United States
District Court of New Jersey. The United States District Court of New Jersey also dismissed
Telcordia’s petition, reaffirming the decision of the United States District Court of Colombia. Telcordia
has since appealed this dismissal. Telkom is currently unable to predict when the dispute will be
resolved or the amount that it may eventually be required to pay Telcordia, if any, and has reversed all
of its pr ovisions for estimated liabilities, including interest and legal fees. If Telcordia recovers
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or drawings on its existing credit facilities, which could cause its indebtedness to increase and its net
profit to decline.
regarding the legality of services and products provided by us and/or by third parties. These disputes
may range from court lawsuits to complaints lodged by or against us with various regulatory bodies.
For instance on April 17, 2003, ORION filed a complaint and launched interim proceedings against
Telkom with the South African competition authorities. The complaint and proceedings relate to certain
discount plans that Telkom has in place or is negotiating with some of its business customers. The
complainant alleges that Telkom is specifically targeting the complainant’s customers, who would
otherwise be using the complainants’ least cost routing technology, which enables fixed-to-mobile calls
from corporate branch exchanges to be transferred directly to mobile networks, and that Telkom’s
action s are exclusionary and based on predatory pricing. The Competition Commission has declined
to refer the complaint to the Competion Tribunal. The complainant has however referred the complaint
to the tribunal. In another high court matter, Telkom has reached a settlement with 13 respondents in
terms of which Telkom accepted the validity of a judgment made in October 2003 in the Pretoria High
Court which found least-cost routing is legal. In December 2003, Telkom was given leave to appeal
the original ruling, an option that it has decided not to pursue.
operations in Nigeria with the intention of acquiring an equity stake in the business. On May 31, 2004,
however, Vodacom announced that it had elected to terminate the management contract and abandon
its plan to make an equity investment in the business of VEE Networks in Nigeria. Vodacom continued
to provide technical support to VEE Networks for a period of six months, until September 30, 2004, on
which date 7 employees returned to South Africa and 22 employees were employed by VEE Networks
in Nigeria. Vodacom is currently a defendant in certain legal proceedings related to its activities in
Nigeria. The Nigerian court before which this matter was brought ruled on January 27, 2005, that it
did not have jurisdiction to hear this matter and the correct court to hear the matter was the Federal
High Court of Ni geria, and accordingly struck the matter out for want of jurisdiction. Notwithstanding,
the plaintiff, Econet Wireless Limited, has appealed against this judgement and the appeal is
pending. Vodacom is not currently able to estimate the outcome or extent of any claims or damages
for which it may be liable if it is not successful in defending these claims.
annual report.
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its ADSs are listed on the New York Stock Exchange, Inc. under the symbol “TKG.” The ADSs are
evidenced by American Depositary Receipts, or ADRs, issued by The Bank of New York, as
depositary, under the Deposit Agreement, dated as of March 3, 2003, among Telkom, The Bank of
New York, as depositary, and the registered and beneficial owners from time to time of ADRs. The
following table sets forth, for the periods indicated:
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the NYSE through March 31, 2003.
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African Companies Act, 61 of 1973, and the Listings Requirements of the JSE. This summary is
qualified in its entirety by the provisions of Telkom’s memorandum and articles of association and by
the applicable provisions of South African law and the Listings Requirements of the JSE. You should
refer to the full text of Telkom’s new memorandum and articles of association, which is incorporated
by reference as an exhibit to this annual report.
by its memorandum and articles of association and the provisions of the South African Companies Act,
61 of 1973. Telkom is also subject to the Listings Requirements of the JSE and the New York Stock
Exchange.
conversion of one ordinary share held by the Government into one class A ordinary share with a par
value of R10 and one ordinary share held by Thintana Communications into one class B ordinary
share with a par value of R10. As a result, as of March 31, 2004, the date of Telkom’s most recent
balance sheet included in this annual report, and as of the date of this annual report, Telkom’s
authorized share capital was R10,000,000,000, divided into 999,999,998 ordinary shares with a par
value of R10 each, one class A ordinary share with a par value of R10 and one class B ordinary
share with a par value of R10, and its issued share capital was R5,570,318,190, divided into
557,031,817 ordinary shares with a par value of R10 each, one class A ordinary share with a par
value of R10 and one class B o rdinary share with a par value of R10. Only ordinary shares are listed
on the JSE and ADSs listed on the New York Stock Exchange only represent ordinary shares. The
class A and B ordinary shares are not listed on any stock exchange.
value of R10 each, and its issued share capital was R5,570,318,190, divided into 557,031,819
ordinary shares with a par value of R10 each and its share premium was R2,723,000,000. No
alterations to Telkom’s share capital occurred during the five years preceding the date of this annual
report, other than the alteration of Telkom’s authorized and issued share capital on March 4, 2003.
articles of association, selected provisions of which are described in this annual report, the class A
ordinary share and the class B ordinary share rank equally with the ordinary shares.
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the Diabo Share Trust. The exercise price is R33.81 per share. The share options are exercisable in
four equal tranches. Three tranches were exercised in September 2003, March 2004 and March 2005.
The remaining share options are exercisable during March 6, 2006 to March 10, 2006.
issued ordinary shares, which percentage will be adjusted from time to time to reflect the dilutive
effect of any issuance of new ordinary shares by Telkom after March 4, 2003, provided that the
percentage will not be lower than 10%. A significant shareholder has certain specific rights in terms of
Telkom’s memorandum and articles of association as more fully described below. As of the date
hereof, the Government is the only significant shareholder.
automatically be so converted and the rights of the holders of the class A ordinary share and class B
ordinary share, including any rights as significant shareholders, will be terminated under Telkom’s
articles of association.
shareholders may not declare a greater dividend in a general meeting than is recommended by the
board and provided further that no dividend may be declared to a holder of the class A ordinary share
or class B ordinary share, unless the same dividend is declared to holders of all ordinary shares. In
addition, the declaration or distribution of dividends or other distributions must be approved by the
board as a reserved matter. See Item 6. “Directors, Senior Management and Employees-Directors and
Senior Management-Reserved Matters.”
of publication of the announcement of the declaration of the dividend. This date may not be sooner
than 14 days after the date of such publication. All unclaimed dividends may be invested or otherwise
utilized by the board for Telkom’s benefit until claimed, provided that dividends unclaimed after a
period of three years shall be forfeited. Forfeited dividends revert to Telkom or its assigns.
previously have given to Telkom in writing or by electronic transfer to such bank account as the
shareholder may previously have given to Telkom in writing. Telkom will not be responsible for any loss
in transmission. Subject to the approval of shareholders in a general meeting, any dividend may be
paid and satisfied, either wholly or in part, by the distribution of specific assets as the board may
determine and direct at the time of declaring the dividend.
dividend be paid to shareholders having registered addresses outside South Africa or who have given
written instructions requesting payment at addresses outside South Africa, shall be paid in a currency
other than South African currency. Holders of ADSs on the relevant record date will be entitled to
receive any dividends payable in respect of the ordinary shares underlying the ADSs, subject to the
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Dollars and paid by the depositary to holders of ADSs, net of conversion expenses of the depositary,
in accordance with the deposit agreement, a copy of which is incorporated by reference to Exhibit 2.2
to this annual report.
only and, in the case of a poll, that proportion of the total votes which the aggregate amount of the
nominal value of the shares held by that shareholder bears to the aggregate of the nominal value of
all the shares issued by Telkom. For a description of shareholders’ rights to request a poll, see Item 10.
“Additional Information–Memorandum and Articles of Association–General Meetings of Shareholders.”
A shareholder is entitled to appoint a proxy to attend, speak and vote at any meeting on the
shareholder’s behalf. The proxy need not be a shareholder of Telkom.
meeting may authorize the board to allot and issue shares or grant options over unissued shares to
such persons at such times, and generally on such terms and conditions, and for such consideration,
whether payable in cash or otherwise, as it may decide. Telkom’s shareholders granted to the board
the authority to allot and issue up to 22,281,272, representing 4% of Telkom’s issued ordinary share
capital, ordinary shares to the participants under Telkom’s conditional share plan in a general meeting
held on January 27, 2004. There may not be any increase or reduction in Telkom’s issued share
capital or that of any of its subsidiaries without the authorization of the board as a reserved matter.
See Item 6. “Directors, Senior Management and Employees-Directors and Senior Manageme nt-
Reserved Matters.” No change in the number of issued class A ordinary shares or class B ordinary
shares may be made without the approval of the holder of the class A ordinary share and class B
ordinary share, respectively.
issued for the acquisition of assets. The shareholders may, however, grant either a general approval in
a general meeting authorizing the directors to issue ordinary shares for cash or a specific approval for
a particular issue of ordinary shares, without first offering them to existing shareholders. Issues of
ordinary shares for cash pursuant to a general approval in the aggregate in any one financial year
may not exceed 15% of the issued share capital of that class. The maximum discount at which
securities may be issued under a general approval is 10% of the weighted average trading price of
those securities over 30 business days on the JSE prior to the date that the price of the issue is
determined or agreed by the directors. A specific approval to issue ordinary shares is subject to,
among other things, the disclosure of the number, or maximum number, of securities to be issued and
disclosure of whether the discount at which the securities are to be issued is unlimited and, if not, the
limit. A general and specific approval are each subject to the requirement of approval of a 75%
majority of votes cast by shareholders present or represented by proxy at a general meeting,
excluding, in the case of a specific approval, any parties and their associates participating in the
specific issue for cash. As of the date hereof, except for the authority referred to above, no general or
specific approval authorizing the directors to issue shares for cash has been granted to the board by
the shareholders of Telkom.
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available for distribution as a dividend and not required for the payment or provision of dividends on
preference shares, to pay for Telkom’s authorized but unissued shares to be issued as fully paid
capitalization shares to shareholders entitled to receive such distributions as a dividend.
any usual common form or in such other form as the board of directors may approve if such transfer
does not arise pursuant to a trade of such shares on the JSE. The transferor will be deemed to
remain the holder of the ordinary shares until the name of the transferee is entered in Telkom’s share
register in respect of the transferred ordinary shares. Every instrument of transfer presented for
registration must be accompanied by the certificate representing the ordinary shares to be transferred
and/or such other evidence Telkom may require to prove the title of the transferor or the transferor’s
right to transfer the ordinary shares.
Totally Electronic Limited, or STRATE. A dematerialized share is not evidenced by a share certificate
and may not be transferred by an instrument in writing, but is represented and transferred by means
of electronic book entries.
is to be transferred to an eligible Ministry, it may be so transferred only if it is transferred together with
as many shares as would be sufficient to constitute the transferee a significant shareholder without
taking account of any other shares already held by or on behalf of such transferee at the time of the
actual delivery of the class A share to the transferee pursuant to the applicable underlying contract,
and only after consultation with the class B shareholder. The class A share will be converted into an
ordinary share on March 4, 2011 or if, at any time before then, it ceases to be held by the Minister, as
defined in the articles of association, or the class B share is converted into an ordinary share.
significant shareholder without taking account of any other shares already held by or on behalf of
such transferee at the time of the actual delivery of the class B share to the transferee pursuant to the
applicable underlying contract, and only after consultation with the class A shareholder. The class B
share will be converted into an ordinary share on March 4, 2011 or if, at any time before then, the
class B shareholder ceases to hold at least 5% of Telkom’s issued shares.
a beneficial interest in the shares held by the registered holder and the number and class of those
shares. Moreover, an issuer of shares may, by notice in writing, require a person who is a registered
holder of, or whom the issuer knows or has reasonable cause to believe, has a beneficial interest in,
a share issued by the issuer to identify to the issuer the person on whose behalf a share is held.
The addressee of the notice may also be required to give particulars of the extent of the beneficial
interest held during the three years preceding the date of the notice. All issuers of shares are obliged
to establish and maintain a register of the disclosures described above and to publish in their annual
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the total number of shares of that class issued by the issuer together with the extent of those
beneficial interests.
to the approval of the South African Reserve Bank.
date of its last preceding annual general meeting. The board may convene a general meeting
whenever it thinks fit and must do so on the request of 100 shareholders or of shareholders holding,
at the date of request, not less than one-twentieth of shares carrying voting rights.
resolutions are proposed, and at least 14 “clear days” intervening notice for all other general
meetings. “Clear days” exclude the date on which notice is given, and the date on which the meeting
is held.
of association require notices of general meetings to be in writing and to be given or served on any
shareholder either by sending the notice, or a message advising that the notice is available on a
website and containing the address of such website by electronic mail or telefacsimile to an electronic
mail address or telefacsimile number notified to Telkom for this purpose. Alternatively, the written
notice may be given by delivery in person or by sending it through the post, properly addressed, to a
shareholder at his or her address shown in the register of shareholders or to a beneficial holder of
Telkom’s shares at the address which has been disclosed to Telkom and recorded in its register of
such disclosures. Notice may be given to any beneficial holder of Telkom’s shares who has not
disclosed his or her address, electronic mail address or telefacsimile number to Telkom, by publishing
that notice or an advertisement that such notice is available on a website, in the South African
Government Gazette and any newspaper determined by Telkom’s directors. Any notice to
shareholders must simultaneously be given to the secretary or other suitable official of any recognized
stock exchange on which Telkom’s shares are listed in accordance with the requirements of the stock
exchange. Every notice shall be deemed to have been received on the date on which it is so delivered
and, if it is sent by post, on the day on which it is posted. If it is published in the South African
Government Gazette or if it is advertised in the Government Gazette, it is deemed to have been
received on the date it appears in the Government Gazette. If it is sent by electronic mail or
telefacsimile, it is deemed to have been sent on the day it is sent or transmitted.
in the case of a shareholder which is a company, by representation, and entitled to vote, provided that
no quorum will be constituted if the class A shareholder and class B shareholder are not duly
represented. If within thirty minutes from the time appointed for the meeting a quorum is not present,
the meeting will stand adjourned to the same day in the next week, or if that day is a South African
public holiday or a Saturday or Sunday, the next succeeding day other than a South African public
holiday, Saturday or Sunday, at the same time and place. The quorum at the adjourned meeting shall
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not established because of the absence of the class A shareholder or class B shareholder, the
presence of the absent shareholder is not required to establish a quorum at the adjourned meeting. In
order to pass a special resolution, shareholders holding in the aggregate not less than one fourth of
the total votes of all shareholders entitled to vote must be present in person or by proxy at the
meeting.
to vote and holding in aggregate not less than one tenth of Telkom’s issued share capital.
fourths of the number of Telkom’s shareholders entitled to vote who are present in person, by proxy or
by representation or, where a poll has been demanded, by not less than three fourths of the total
votes to which the shareholders present in person, by proxy or by representation are entitled.
director, has any right to inspect any of Telkom’s accounting record books, accounts or documents.
year concerned and the profit or loss of Telkom and all of its consolidated subsidiaries for that
financial year.
Telkom’s shareholders in a general meeting and with a resolution of Telkom’s directors. Any increase
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by directors as a reserved matter. See Item 6. “Directors, Senior Management and
Employees–Directors and Senior Management–Reserved Matters.”
variation that adversely affects those rights may be made without the written consent or ratification of
the holders of three fourths of the issued shares of that class or a resolution passed in the same
manner as a special resolution at a separate general meeting of the holders of such shares.
of any of the provisions of Telkom’s memorandum and articles of association that would alter or
change the powers, preferences or special rights of the class A ordinary share or class B ordinary
share or the holder of the class A ordinary share or class B ordinary share, as the case may be, so as
to affect either adversely. Telkom’s memorandum and articles of association further require Telkom to
obtain written consent from the Government before issuing any securities or amending any existing
securities in a manner that would adversely affect the Government’s right under a special condition set
forth in Telkom’s memorandum of association, including the creation of a new class of shares or the
amendment of the rights attached to an existing class of shares to provide them with rights superior
to or equal to or adversely affecting the rights of Government under this condition. This special
condition provides, among other things, that Telkom must obtain written consent from the Government
before:
or
the cancellation of any shares of any other class.
proportion to the numbers of shares held by them, subject to the rights of any shareholders to whom
shares have been issued on special conditions and subject to Telkom’s right to set-off unpaid capital
or premium against the liability, if any, of shareholders. Furthermore, with the authority of a special
resolution, the liquidator may divide among the shareholders, in specie or kind, the whole or any part
of the assets, whether or not those assets consist of property of one kind or different kinds.
Matters.”
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holding company.
Companies Act, 61 of 1973, provides that a company may, by special resolution, if authorized by its
memorandum and articles of association, approve the acquisition of its shares; provided that a
company may not make any payment in whatever form to acquire any share issued by that company if
there are reasonable grounds for believing that the company is or would, after the payment, be unable
to pay its debts or if the consolidated assets of the company fairly valued would, after the payment,
be less than the consolidated liabilities of the company. The South African Companies Act, 61 of 1973,
also provides that:
debts and solvency.
a general authority to acquire its issued shares by way of a renewable mandate which is valid until the
company’s next annual general meeting, provided that such authority may not extend beyond
15 months from the date of the granting of the general authority. The general authority is subject to,
among other things, the following:
preceding the date on which the transaction is effected.
acquire Telkom’s issued and outstanding ordinary share capital from time to time, upon such terms
and conditions and in such amounts as the directors of Telkom and/or its subsidiaries may from time
to time decide, but always subject to the Companies Act, 61 of 1973, as amended, and the listing
requirements from time to time of the JSE, which general approval shall endure until the following
annual general meeting of Telkom, which was held on October 14, 2004. At this meeting, the
shareholders of Telkom provided general approval for the share repurchase program until the next
Annual General Meeting or 15 months from the date of the resolution, whichever period is shorter.
ordinary share, respectively, are entitled to appoint directors based on the percentage of the issued
ordinary shares owned by them as follows:
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two executive directors and, in the case of the Government, one executive director;
two executive directors and, in the case of the Government, three non-executive directors;
two executive directors and, in the case of the Government, two non-executive directors; and
executive director and, in the case of the Government, one non-executive director.
to fill a vacancy of a director appointed by the Government or the Public Investment Corporation, as
holders of the Class A ordinary share and the Class B ordinary share, respectively.
ordinary share and the holder of the class B ordinary share and any directors appointed by the
directors after the conclusion of Telkom’s preceding annual general meeting, are required to retire
from office but are eligible for re election. The directors to retire are those who have been longest in
office or, as between directors appointed by a general meeting who have been in office for an equal
length of time, in the absence of agreement, determined by lot. If, after such retirements, there would
remain in office any director appointed by a general meeting who would have held office for three
years since his last election, he shall also retire at such annual general meeting. In addition, those
directors appointed by a general meeting since the last annual general meeting are required to retire
f rom office. A retiring director is eligible for re election. Directors appointed by the holder of the
class A ordinary share or the holder of the class B ordinary share, as the case may be, can be
removed and replaced at any time upon receipt by Telkom of written notice from the holder of the
class A ordinary share or the holder of the class B ordinary share, as the case may be.
directors. Telkom’s directors shall be paid all their traveling and other expenses properly incurred by
them in the execution of their duties in or about Telkom’s business, which are approved or ratified by
Telkom’s directors.
services that are outside the scope of ordinary duties of a director, may be paid such extra
remuneration or allowances as Telkom’s directors, excluding the director in question, may determine.
by virtue of his or her interest in securities in Telkom and in certain other limited circumstances.
A director may not be counted in the quorum of a meeting in relation to any resolution in which he or
she is not permitted to vote.
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that Telkom is entitled to appoint to the boards of directors of its subsidiaries and Vodacom.
The number of directors that the Government is entitled to nominate is based on the ratio of the
number of ordinary shares owned by the Government to the sum of the ordinary shares owned by the
Government and the Public Investment Corporation, as the class B shareholder.
share and class B ordinary share, respectively, including their rights of appointment of directors to
Telkom’s board of directors and the boards of directors of Telkom’s subsidiaries and Vodacom, will be
terminated.
whether outright or as security for any debt, liability or obligation of Telkom or of any third party. For
this purpose, the borrowing powers of the directors are unlimited. Telkom’s borrowing powers have
not been exceeded during the past three years.
exercise voting rights attaching to any of its ordinary shares.
Companies Act, 61 of 1973, a shareholder may, under certain circumstances, seek relief from the
court if the shareholder has been unfairly prejudiced. These provisions are designed to provide relief
for oppressed shareholders without necessarily overruling the majority’s decision. There may also be
common law and statutory personal actions available to a shareholder of a company.
accordance with two main fiduciary duties, the duty to act in the best interests of the company and the
duty to act with due care and skill. The fiduciary duty to act in the best interests of the company
includes a duty that the directors must avoid a conflict between their personal interests and the
interests of the company, prohibits the directors from using their fiduciary position for personal benefit,
prohibits the directors from exceeding the powers of the company and prohibits the directors from
exercising any power for an improper or collateral purpose. The fiduciary duty to act with due care and
skill includes the requirement that the directors must not act negligently, fraudulently or recklessly and
must exercise judgment as to what is in the best interests of the company. South African law provide s
for personal liability of directors if they conduct the business of the company fraudulently or
recklessly. Under Delaware law, the fiduciary duties of directors consist of the duty of care, the duty of
loyalty and the duty of disclosure. The fiduciary duty of care requires directors to inform themselves of
all material information reasonably available to them prior to making a business decision. The
fiduciary duty of loyalty prohibits directors from using their position of trust and confidence to further
their private interests. The fiduciary duty of disclosure requires directors to disclose to stockholders all
material facts germane to a transaction involving stockholder approval.
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exercisable by that shareholder is that proportion of the total votes in the company which the
aggregate amount of the nominal value of the shares held by that shareholder bears to the total
amount of the nominal value of all the shares in the company. Any shareholder of a company entitled
to attend and vote at a meeting of the company is entitled to appoint another person or persons,
whether a member or not, to act for such shareholder by proxy.
stockholder entitled to vote at a meeting of stockholders may authorize another person or persons to
act for the stockholder by proxy for up to three years from its date, or for a longer period if the proxy
specifically provides.
preemptive rights. However, the Listings Requirements of the JSE require that unissued ordinary
shares of a company listed on the JSE be offered first to existing shareholders in proportion to their
holdings of shares of that company unless the shares are issued for the acquisition of assets. See
this Item “–Memorandum and Articles of Association–Issue of Additional Shares and Preemption
Rights.”
these rights.
multiplied by the number of open directorships. Under cumulative voting, a shareholder may cast all or
any number of the shareholder’s votes for a single candidate or for any number of candidates.
individual director equals the number of votes generally exercisable by that shareholder. South African
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persons as directors of the company by a single resolution shall not be moved, unless a resolution
that it shall be so moved has first been agreed to by the meeting without any vote being given
against it.
without prior notice and without a formal vote, if the required written consent setting forth that action
to be taken and waiving the required prior notice is signed by all shareholders.
written consent setting forth the action to be taken is signed by the number of holders of outstanding
stock that would be necessary to authorize or take the action at a meeting at which all shares entitled
to vote thereon were present and voted, unless otherwise provided in the certificate of incorporation of
the company. Prompt notice of the taking of any action by less than unanimous consent must be
given to shareholders who did not consent to the action.
as Telkom in order to ensure the equal treatment of shareholders. For this purpose, the SRP has
promulgated a code, which is loosely based on the U.K. City Code on Take-Overs and Mergers,
setting out general principles and specific rules regulating take-overs and mergers. The SRP requires
that a mandatory offer be made to shareholders, at specified prices, in circumstances where:
company listed on the JSE is required to obtain shareholder approval for any transaction between that
company and a “material” shareholder if the JSE considers that shareholder to have a significant
interest in or influence over the company. A “material” shareholder is any person who is or within
twelve months preceding the date of the transaction was entitled to exercise or controls the exercise
of 10% or more of the votes permitted to be cast at a general meeting of the company.
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acquirer has gained a significant holding in the company.
company or a subsidiary with an interested stockholder that beneficially owns 15% or more of a
company’s voting stock, within three years after the person becomes an interested stockholder,
unless:
shares owned by persons who are directors and also officers of interested stockholders and
shares owned by specified employee benefit plans; or
stockholders by the affirmation vote of the holders of at least 66.67% of the outstanding voting
stock, excluding shares held by the interested stockholder.
incorporation or to the bylaws of the company, which amendment must be approved by a majority of
the shares entitled to vote and may not be further amended by the board of directors of the company.
This amendment is not effective until twelve months following its adoption.
or extract from the register of shareholders, and the company shall either furnish such copy or extract
or afford such person adequate facilities for making such copy or extract. If access to the register of
shareholders for the purpose of making any inspection or any copy or extract or facilities for making
any copy or extract is refused or not granted or furnished within fourteen days after a written request
to that effect has been delivered to the company, the company, and any director or officer of the
company who knowingly is a party to the refusal or default, shall be guilty of an offense. The person
denied access may apply to court for relief.
interest as a stockholder. If the company refuses to permit an inspection or does not reply to the
demand within five business days, the stockholder may apply to the Delaware Court of Chancery for
an order to compel the inspection.
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shall consist of one or more members, each of whom shall be a natural person. The actual number of
directors shall be fixed by the company’s organizational documents. Directors need not be
shareholders unless required by the organizational documents. The organizational documents may
prescribe other qualifications for directors as well.
accordance with its organizational documents with such titles and duties as may be set out in the
organizational documents or as may be determined by the company. Any share certificates signed by
two directors of the company, or one director and one other officer of the company authorized by the
directors for such purpose, evidences title to the shares concerned. The duties of the company
secretary of a company include ensuring that minutes of all shareholders’ meetings, directors’
meetings and meetings of any board committees are properly recorded.
of one or more members, each of whom is a natural person. The actual number of directors shall be
fixed by the company’s bylaws or in its certificate of incorporation. Directors need not be stockholders
unless required by the bylaws or certificate of incorporation. The bylaws or certificate of incorporation
may prescribe other qualifications for directors as well.
as may be necessary to enable the company to sign instruments and stock certificates. One of the
officers shall have the duty to record the proceedings of the meetings of the stockholders and
directors. Officers are chosen in the manner and hold their offices for the terms prescribed by the
bylaws or determined by the board of directors or other governing body.
after the date of the last annual general meeting of the company. If for any reason an annual general
meeting of the company is not or cannot be held in this manner, the South African Registrar of
Companies may, on application by the company or any shareholder or its legal representative, call or
direct the calling of a general meeting of the company which shall be deemed to be an annual
general meeting. South African law requires that the annual financial statements of the company as
well as group financial statements be considered at the annual general meeting. Furthermore, the
company’s auditor must be appointed at the annual general meeting and the meeting must address
the business which is required to be dealt with pursuant to the organizational documents of the
company. Directors are appointed by a general meeting, unless otherwise provided in the
organizational documents of the company. The JSE Listings Requirements require that the
appointment of a director to fill a casual vacancy or as an addition to the board must be confirmed at
the next annual general meeting of the company.
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organizational documents of the company or by two or more shareholders holding not less than one
tenth of its issued share capital.
time designated by the company’s bylaws. Stockholders may, unless the certificate of incorporation
provides otherwise, act by written consent to elect directors. In addition, any other proper business
may be transacted at the annual meeting. If an annual meeting is not held within 30 days of the date
designated for such a meeting, or is not held for a period of 13 months after the last annual meeting,
the Delaware Court of Chancery may summarily order a meeting to be held upon the application of
any shareholder or director.
shareholders if there are reasonable grounds for believing that:
preceding fiscal year, subject to any restrictions in the company’s certificate of incorporation.
Dividends may not be paid out of net profits if, after payment of the dividend, the capital of the company
would be less than the capital represented by the issued and outstanding stock of all classes having a
preference upon the distribution of assets.
shall not make any payment to repurchase any shares issued by the company if there are reasonable
grounds for believing that the company is or would, after the payment, be unable to pay its debts or if
the consolidated assets of the company would, after the payment, be less than the consolidated
liabilities of the company.
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redemption would cause any impairment of the capital of the company, except that a company may
purchase or redeem out of its capital any of its own shares which are entitled upon any distribution of
the company’s assets, whether by dividend or liquidation, to a preference over another class or series
of its stock, or, if no shares entitled to such a preference are outstanding, any of its own shares, if the
shares will be retired upon their acquisition and the capital of the company reduced in accordance
with Delaware law.
company from any liability which by law would otherwise attach to such person in respect of any
negligence, default, breach of duty or breach of trust of which the person may be guilty in relation to
the company or to indemnify the person against any such liability is void. A company may, however,
indemnify a director or officer as described in this Item “–Indemnification of officers and
directors–South Africa.” If, in any proceedings for negligence, default, breach of duty or breach of
trust against any director or officer of a company, it appears to the court that the person concerned is
or may be liable, but that the person has acted honestly and reasonably, and that, considering all facts
and circumstances of the case, including those concerned with the person’s appointment, t he person
ought fairly to be excused for the wrongdoing, the court may relieve the person, either wholly or partly,
from liability on terms determined by the court.
damages for breach of the director’s fiduciary duty, provided that a director’s liability shall not be
limited:
defending any proceedings, whether civil or criminal, in which judgment is given in the person’s favor,
in which the person is acquitted or the proceedings are abandoned or in connection with any
application in which the court relieves the person from liability on the basis that the person acted
honestly and reasonably and that the person ought fairly to be excused for negligence, default, breach
of duty or breach of trust.
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to any third party suit or proceeding on account of being a director, officer, employee or agent of the
company against expenses, including attorneys’ fees, judgments, fines and amounts paid in
settlement reasonably incurred by the officer or director in connection with the action, through, among
other things, a majority vote of the directors who were not parties to the suit or proceeding, even if
less than a quorum, if the individual:
to its best interests; and
expenses incurred thereby.
for certain material agreements we have entered into.
description of all of the exchange control regulations and does not cover exchange control
consequences that depend upon your particular circumstances. We recommend that you consult your
own advisor about the exchange control consequences in your particular situation. The discussion in
this section is based on current South African laws and regulations. Changes in laws may alter the
exchange control provisions that apply to you, possibly on a retroactive basis.
by the South African exchange control regulations. The South African exchange control regulations
form part of the general monetary policy of South Africa. The regulations are issued pursuant to
section 9 of the Currency and Exchanges Act, 9 of 1933. Pursuant to the regulations, the control over
South African capital and/or revenue reserves, as well as their accruals and spending, is vested in the
Minister of Finance.
day administration and functioning of exchange controls. Excon has wide discretion but exercises its
powers within certain policy guidelines. Within prescribed limits, authorized dealers in foreign
exchange are permitted to deal in foreign exchange in accordance with the provisions and
requirements of the exchange control rulings, which rulings are issued by Excon, as the delegatee of
the Minister of Finance, and contain certain administrative measures, as well as conditions and limits
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residents have been granted general approval, pursuant to the rulings, to deal in South African assets
and to invest and disinvest in South Africa.
Namibia, and the Kingdoms of Lesotho and Swaziland. Transactions between residents of the
Common Monetary Area, on the one hand, including companies, and non-residents of the Common
Monetary Area, on the other hand, are subject to these exchange control regulations.
on inward foreign investment and the administrative costs associated therewith. The South African
Minister of Finance has indicated that all remaining exchange controls are likely to be dismantled as
soon as circumstances permit. There has, since 1996, been a gradual relaxation of exchange
controls. The gradual approach to the abolition of exchange controls adopted by the Government of
South Africa is designed to allow the economy to adjust more smoothly to the removal of controls that
have been in place for a considerable period of time. The stated objective of the authorities is equality
of treatment between residents and non-residents with respect to inflows and outflows of capital. The
focus of regulation, subsequent to the abolition of exchange controls, is expected to favor the positive
aspects of pr udential financial supervision.
without the approval of Excon, are generally not permitted to export capital from South Africa or hold
foreign currency. In addition, South African companies are required to obtain the approval of Excon
prior to raising foreign funding on the strength of their South African balance sheets, which would
permit recourse to South Africa in the event of defaults. Where 75% or more of a South African
company’s capital, voting power, power of control or earnings is directly or indirectly controlled by non-
residents, such a company is designated an affected person by the South African Reserve Bank, and
certain restrictions are placed on its ability to obtain local financial assistance. Telkom is not, and has
never been, designated an affected person by the South African Reserve Bank.
Africa profits of foreign operations and are limited in their ability to utilize profits of one foreign
business to finance operations of a different foreign business. South African companies establishing
subsidiaries, branches, offices or joint ventures abroad are generally required to submit financial
statements on these operations to Excon on an annual basis. As a result, a South African company’s
ability to raise and deploy capital outside the Common Monetary Area is restricted.
will be abolished or modified by the South African Government in the future, although some of the
more salient changes to the South African exchange control provisions over the past few years have
been as follows:
placement transactions to acquire foreign investments. The latter mechanism entails the
placement of the locally quoted company’s shares with long-term overseas holders who, in
payment for the shares, provide the foreign currency abroad which the company then uses to
acquire the target investment. Since February 2001, institutional investors are no longer entitled
to make use of the asset swap mechanism but are, however, entitled to invest either 15% or
20%, depending on the type of institutional investor, of total assets in foreign investments;
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investments. However, the approval of Excon is required in advance and companies will need to
comply with Excon’s investment criteria in establishing such new ventures, which investment
criteria include, among other things, demonstrating benefit to South Africa and control of the
foreign entity. Excon has however reserved the right to stagger capital outflows relating to very
large foreign investments in order to manage the potential impact on the foreign exchange
market;
repatriated to South Africa after October 26, 2004, may thereafter be transferred abroad again
at any time and for any purpose; and
exchange commitments covering the movement of goods.
under the control of an authorized dealer. These blocked funds may only be invested in:
switching purposes, without the approval of Excon. Authorized dealers must at all times be able
to demonstrate that listed securities or financial instruments which are dematerialized or
immobilized in a central securities depositary are being held subject to the control of the
authorized dealer concerned;
prior to emigration remain subject to the blocking procedure. The Minister of Finance stated on
February 26, 2003 that emigrants’ blocked assets are to be unwound and such emigrants are entitled,
on application to Excon and subject to an exiting schedule and an exit charge of 10% to exit such
blocked assets from South Africa.
financial sector strengthening is the shift to a system of prudential regulation. Prudential regulations
are applied internationally to protect policyholders and pensioners from excessive risk, and typically
include restrictions on foreign asset holdings. Institutional investors will be allowed to invest, on
approval, up to existing foreign asset limits. These foreign asset limits are 15% of total assets for long
term insurers, pension funds and fund managers and 20% of total assets for unit trust companies.
The previous restriction based on 10% of the prior year’s net inflow of funds will no longer apply. The
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transfer of such funds in the interest of overall financial stability. The new dispensation became
operational May 1, 2003.
exchange control allowance for foreign direct investment into Africa was increased from R750 million
to R2 billion, in line with South Africa’s commitment to the New Partnership for Africa’s Development,
or NEPAD. In order to facilitate global expansion of South African companies from a domestic base,
the exchange control allowances for direct investment outside of Africa was increased from
R500 million to R1 billion. In October 2004 the previous Exchange Control limits imposed on new
foreign direct investments by South African companies were abolished, subject to certain provisions
which relate to the Exchange Control Department of the South African Reserve Bank’s investment
criteria. It is provided that companies wishing to establish new overseas ventures or new ventures in
Africa are now pe rmitted to transfer unlimited amounts into Africa and abroad in order to finance
approved investments. However, the approval of Excon is required in advance and companies will
need to comply with Excon’s investment criteria in establishing such new ventures, which investment
criteria include, among other things, demonstrating benefit to South Africa and control of the foreign
entity. Excon has however reserved the right to stagger capital outflows relating to very large
foreign investments in order to manage the potential impact on the foreign exchange market.
disincentive for the repatriation of dividends and income. Accordingly, it is proposed that dividends
repatriated from foreign subsidiaries should be eligible for an exchange control credit, which will allow
them to be re-exported, upon application, for approved foreign direct investments. This change will be
synchronized with the removal of the foreign dividends tax, where the taxpayer has a meaningful say
in the foreign subsidiary paying the dividend. In October 2004 the obligation on South African
companies to repatriate dividends of approved foreign investments to South Africa was abolished and
South African companies will accordingly be entitled to retain aboard foreign dividends which relate to
the operation of approved foreign investments and any foreign dividends which may be repatriated to
South Afri ca after October 26, 2004, may thereafter be transferred aboard again, at any time and for
any purpose.
allowance were placed in “emigrants’ blocked accounts” in order to preserve foreign reserves.
These blocked assets are now being unwound. The following new dispensations currently apply:
allowance for both residents and emigrants of R750,000 per individual (or R1.5 million in
respect of family units).
already exited) must apply to the Exchange Control Department of the South African Reserve
Bank to do so. Approval will be subject to an exiting schedule and an exit charge of 10% of the
amount. The same dispensation will apply for new emigrants.
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proceeds from the sale of ordinary shares on the JSE on behalf of shareholders who are not
residents of the Common Monetary Area are freely remittable to such shareholders. Share certificates
held by non-residents will be endorsed with the words “non-resident.”
are listed on the JSE are freely remittable. See Item 3. “Dividends and Dividend Policy.”
ADSs, subject to the terms of the deposit agreement. Subject to exceptions provided in the deposit
agreement, cash dividends paid in Rands will be converted by the depositary to Dollars and paid by
the depositary to holders of ADSs, net of conversion expenses of the depositary, in accordance with
the deposit agreement. The depositary will charge holders of ADSs, to the extent applicable, taxes
and other governmental charges and specified fees and other expenses. See Item 3. “Dividends and
Dividend Policy.”
sale of the relevant shares.
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summary is not a comprehensive description of all of the tax considerations that may be relevant to a
decision to acquire purchase, own or dispose of Telkom’s shares or ADSs and does not cover tax
consequences that depend upon your particular tax circumstances. This discussion is only a general
discussion; it is not a substitute for tax advice.
section is based on current law. Changes in laws may alter the tax treatment of Telkom’s ordinary
shares or ADSs, as applicable, possibly on a retroactive basis.
shareholder is resident in the Republic of South Africa. Any future decision to re-impose a withholding
tax on dividends declared by South African residents to non-resident shareholders is generally
permissible under the terms of a reciprocal tax treaty entered into between the Republic of South
Africa and the United States in 1997. That treaty, however, provides that any withholding tax
introduced in the future shall be limited to:
voting stock of the relevant company declaring such dividend; and
Although the STC is the liability of the South African resident company which declares the dividend, it
would reduce the amount available for distribution. See this Item “–Secondary tax on companies.”
source within or deemed to be within the Republic of South Africa. These exceptions include normal
dividends received from South African companies, such as Telkom; interest received from sources in
the Republic of South Africa, including on stocks or securities issued by the government, provided the
non-resident is (a) a natural person who was not physically in South Africa for more than 183 days
during the particular tax year or (b) at any time in that tax year did not carry on business through a
permanent establishment in South Africa.
year of assessment for tax purposes, the person was physically present in the Republic of South
Africa for certain prescribed periods in the three years prior to and during the tax year in question.
Non-natural persons, including companies and trusts, are deemed to be resident in the Republic of
South Africa for tax purposes if they were incorporated or formed in the Republic of South Africa or
have their place of effective management in the Republic of South Africa. However, a person, natural
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exclusively a resident of another country in terms of a double taxation agreement entered into
between the Republic of South Africa and that other country.
are of a revenue nature as opposed to a capital nature. Essentially, a profit is viewed as being of a
revenue nature if it is made pursuant to the operation of a business or scheme of profit making and
not incidentally or as a result of a mere realization of a share held for long-term investment purposes.
In determining whether the income derived from the disposal of such shares is of a capital or revenue
nature, the South African tax authorities and courts look at, among other things, the intention of the
holder of the shares to determine whether the disposal gave rise to a capital or a revenue profit.
Currently profits derived from the disposal of South African shares held as long-term investments are
generally regarded to be profits of a capital nature and are not subject to South African income tax,but may be subject to capital gains tax. See this Item “–Capital gains tax” for a discussion of the
imposition of capital gains tax. Generally, the distribution of profits by way of dividends paid by
a South African resident company, such as Telkom, in the ordinary course, is not deductible by the
company and is exempt from South African taxation for the recipient.
being from a South African source, which would generally be the case where the trading activities take
place in South Africa.
regarded as an income tax taxable benefit in the hands of the relevant shareholder if that shareholder
is an employee or director of Telkom and that share was acquired from Telkom, its associated
institutions or a third party by arrangement with it, or if that shareholder is an employee of the
Government of the Republic of South Africa and that share was acquired from the Government, its
associated institutions or a third party by arrangement with it.
resident with tax relief. The tax treaty between South Africa and the United States provides that profits
of an enterprise of a US resident shall only be taxed in South Africa if such US resident carries on a
business in South Africa through a permanent establishment situated in South Africa. Thus if South
Africa has taxing rights to any profits generated by the disposal of shares by a US resident to the
extent that such US resident carries on business through a permanent establishment in South Africa
and the share dealing activities form part of such permanent establishment’s business, the
US resident will, in principle, be taxed on the profits of the disposal to the extent that such profits are
from a source within or deemed to be within South Africa.
29% of their taxable income. See also this Item “–Secondary tax on companies.”
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58 of 1962, to incorporate therein a substantive new schedule known as the Eighth Schedule. The
relevant capital gains tax rates are summarized in the table below.
in a taxpayer’s taxable income. An asset is very broadly defined in the legislation and includes shares
in a South African company. If, however, the profits of the disposal were subject to income tax, no
capital gains tax liability would arise.
loss. Each capital gain is determined by deducting from the proceeds accruing to the taxpayer from
the relevant disposal, the base cost of the asset and each portion of the proceeds already subject to
income tax. The base cost includes all direct costs in respect of the acquisition, improvement and
disposal of the asset. The net capital gain for the tax year, in the case of natural persons and certain
special trusts only, is reduced by an annual exclusion of R10,000.
effective rate at which capital gains are taxed:
Special
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which trade is carried on in South Africa or (b) the shares held by the non-resident, alone or with any
connected person, represent at least 20% of the equity of a company and 80% or more of the net
value of the non-trading assets of such company, such as Telkom, comprise immovable property
located in South Africa. However, pursuant to the tax treaty between South Africa and the United
States, South Africa only has taxing rights to the extent that the shares disposed of form part of the
business property of a permanent establishment in South Africa.
premium of the shares.
of South Africa at the rate 0.25% of the arm’s length consideration payable for the shares concerned
or their market value, whichever is greater. In respect of transactions involving uncertificated or
dematerialized shares listed on a securities exchange in South Africa, uncertificated securities tax is
payable at the same rates as set out above on every change in beneficial ownership thereof pursuant
to the Uncertificated Securities Tax Act, 31 of 1998. Uncertificated shares are shares that are not
evidenced by a certificate and are transferable without a written instrument.
company regardless of whether the transfer is executed within or outside South Africa. There are
certain exceptions to the payment of stamp duty where, for example, the instrument of transfer is
executed outside South Africa and registration of transfer is effected in any branch register kept by the
relevant company outside of South Africa, subject to certain provisions set forth in the South African
Stamp Duties Act, 77 of 1968. Transfers of ADSs between non-residents of South Africa are not
subject to South African stamp duty or uncertificated securities tax; however, if shares are withdrawn
from the deposit facility, stamp duty or uncertificated securities tax is payable on the subsequent
transfer of the shares. An acquisition of shares from the depositary by an investor in exchange for
ADSs representing th e shares, including an acquisition upon termination of a deposit arrangement,
renders an investor liable to South African stamp duty or uncertificated securities tax at the same rate
as stamp duty or uncertificated securities tax on a subsequent transfer of shares, upon the
registration of the investor as the holder or new beneficial owner of shares.
dividend cycle. The net amount of dividends declared by a company is the excess of the dividends
declared by the company over the amount of most dividends accruing to the company during the
relevant dividend cycle. A dividend cycle runs from the date of accrual of a dividend to the
shareholders to the next shareholder accrual date. Any excess of dividends accruing to a company in
a relevant dividend cycle, excluding those foreign dividends which are not exempt from South African
income tax, over the dividends paid in such cycle are carried forward by the company to the
succeeding dividend cycle as an STC credit.
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and normal corporate income tax being separately determined. Accordingly, a company without a
normal tax liability may have a liability for STC, and vice versa, and may be liable for both normal tax
and STC on profits distributed. STC creates an effective tax rate on companies of 36.89%.
Capitalization shares awarded and distributed in lieu of cash dividends do not incur STC at that stage
and it has become common practice for listed South African companies to offer capitalization shares
in lieu of cash dividends. No South African tax, including withholding tax, is payable in respect of the
receipt of these shares by the recipients thereof. However, STC will arise to the extent capitalized
profits used to award the capitalization shares are subsequently paid to shareholders whether in
connection with a liquidation or reconstruction of the company or a repayment of capital, including a
share buy-back.
circumstances, non-US holders, as of the date of this annual report. This discussion is based on the
US Internal Revenue Code of 1986, as amended, and existing final, temporary and proposed
Treasury Regulations, rulings and judicial decisions, all as of the date hereof and all of which are
subject to prospective or retroactive changes, which could affect the tax consequences as described
below.
ADSs, as applicable, as a capital asset for tax purposes, generally, for investment purposes, within the
meaning of Section 1221 of the US Internal Revenue Code of 1986. This discussion does not
address the tax consequences that may be relevant to you if you are a member of a class of holders
subject to special rules, including:
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does not address any aspect of US federal gift or estate tax, or the state, local or foreign tax
consequences of an investment in the ordinary shares or ADSs.
decisions of the trust; or (b) the trust was in existence on August 20, 1996, and on August 19,
1996 was treated as a domestic trust and has elected to be treated as a US person.
respect to ordinary shares or ADSs will be a dividend to the extent those distributions are made out of
our current and accumulated earnings and profits, as determined for US federal income tax purposes.
Any such distribution generally will be included in your gross income as foreign source dividend
income on the date the distribution is received, which in the case of a US holder of ADSs will be the
date of receipt by the depositary. Distributions in excess of our current and accumulated earnings and
profits will be treated first as a nontaxable return of capital, reducing your tax basis in the ordinary
shares or ADSs. Any such distribution in excess of your tax basis in the ordinary shares or ADSs will
be treated as capital gain and will be either long-term or short-term depending upon whether you haveheld the ordinary shares or ADSs for more than one year. Generally, the maximum tax rate on
qualified dividends is 15% for individuals for tax years 2003 through 2008. We expect our dividends to
be qualified dividends as long as our ordinary shares or ADSs continue to be readily tradable on the
New York Stock Exchange, you have held our ordinary shares or ADSs for more than 60 days, we are
not a PFIC for US federal income tax purposes in the taxable year in which we pay a dividend and we
were not a PFIC in the preceding taxable year.
will not be able to demonstrate that a distribution is not out of earnings and profits.
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amount calculated by reference to the exchange rate in effect on the day you, in the case of ordinary
shares, or the depositary, in the case of ADSs, receive the dividend whether or not the payment is
converted into Dollars at that time. Any gain or loss that you recognize on a subsequent conversion of
Rands into Dollars will be US source ordinary income or loss.
difference between the amount realized on the sale or other disposition and your tax basis in the
ordinary shares or ADSs, which is generally the cost of the ordinary shares or ADSs reduced by any
previous distributions that are not characterized as dividends. Any recognized gain or loss will be long-
term capital gain or loss if the ordinary shares or ADSs have been held for more than one year on the
date of the sale or other disposition. In general, any capital gain or loss recognized will be treated as
US source income or loss, as the case may be, for US foreign tax credit purposes. Your ability to
deduct capital losses may be subject to limitations. Currently, there is a maximum tax rate of 15% on
net long-term capital gains of non-corporate taxpayers with respect to transactions after May 5, 2003
through December 31, 2008.
of cash basis and electing accrual basis taxpayers, the settlement date. You will have a tax basis in
the Rands received equal to the US Dollar amount of the Rands received. Any gain or loss you realize
on a subsequent conversion of Rands into US Dollars generally will be US source ordinary income or
loss.
Matters–Stamp duty.” In such case, stamp duty or MST, as applicable, will not be a creditable tax for
US foreign tax credit purposes.
PFIC. A determination of whether a non-US company is a PFIC must be made on an annual basis,
and our status could change depending among other things upon changes in our activities and assets
and upon the gross receipts of corporations of which we own a 25 percent or more interest, but which
we do not control. If we were to become a PFIC, US holders would be subject to additional federal
income taxes on any excess distributions received and any gain realized from the sale or other
disposition of the ordinary shares or ADSs plus an interest charge on certain taxes treated as having
been deferred by US holders under the PFIC rules whether or not we continue to be a PFIC.
including the advisability and availability of making certain elections that may alleviate the tax
consequences referred to above.
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connected with the conduct of a US trade or business, and if an applicable income tax treaty so
requires as a condition for you to be subject to US federal income tax on a net income basis in
respect of income from our ordinary shares or ADSs, as applicable, such dividends are attributable to
a permanent establishment that you maintain in the United States.
income tax on a net income basis in respect of gain from the sale or other disposition of our
ordinary shares or ADSs, as applicable, such gain is attributable to a permanent establishment
maintained by you in the United States; or
fixed place of business that you maintain in the United States or you have a tax home in the
United States.
with the conduct of that trade or business generally will be subject to regular US federal income tax in
the same manner as income of a US Holder, as discussed above. In addition, if you are a corporation,
your earnings and profits that are attributable to that effectively connected income, subject to certain
adjustments, may be subject to an additional branch profits tax at a rate of 30%, or any lower rate as
may be specified by an applicable tax treaty.
redemption of our ordinary shares or ADSs, to US holders. We, our agent, a broker, the trustee or any
paying agent, as the case may be, may be required to withhold tax from any payment that is subject
to backup withholding if the US holder fails to furnish the US holder’s taxpayer identification number,
to certify that such US holder is not subject to backup withholding, or to otherwise comply with the
applicable requirements of the backup withholding rules. The backup withholding rate is currently
28%. This legislation is scheduled to expire and the backup withholding rate will be 31% for amounts
paid after December 31, 2010 unless Congress enacts legislation providing otherwise. US holders
required to establish their exempt status must generally provide such certification on IRS Form W-9,
entitle d Request for Taxpayer Identification Number. Certain US holders, including, among others,
corporations, are not subject to the backup withholding and information reporting requirements.
such a non-US holder provides a taxpayer identification number, certifies to its foreign status, or
otherwise establishes an exemption. Non-US holders required to establish their exempt status must
generally provide such certification on IRS Form W8-BEN, entitled Certificate of Foreign Status.
furnished to the IRS.
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TAX LAWS TO THEIR PARTICULAR SITUATIONS AS WELL AS TO ANY ADDITIONAL TAX
CONSEQUENCES RESULTING FROM PURCHASING, HOLDING OR DISPOSING OF SHARES,
INCLUDING THE APPLICABILITY AND EFFECT OF THE TAX LAWS OF ANY STATE, LOCAL OR
FOREIGN JURISDICTION, AND ESTATE, GIFT, AND INHERITANCE LAWS.
information with the SEC. As a foreign private issuer, we are exempt from Exchange Act rules
regarding the content and furnishing of proxy statements to shareholders and rules relating to short
swing profit reporting and liability.
of the SEC located at 450 Fifth Street, N.W., Washington, D.C. 20549, United States. You may obtain
more information concerning the operation of the public reference section of the SEC by calling the
SEC at 1-800-SEC-0330. In addition, the reports and other information we file with the SEC are also
available for reading and copying at the offices of the New York Stock Exchange, 11 Wall Street,
New York, New York 10005, United States. We also maintain an internet site at
http://www.telkom.co.za. Our website and the information contained therein or connected thereto shall
not be deemed to be incorporated into or a part of this annual report.
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continuously monitored by Telkom’s board of directors through its audit and risk management
committee.
example trade debtors and trade creditors, arise directly from our operations.
risks from changes in interest and foreign exchange rates. The derivatives used for this purpose are
principally interest rate swaps, currency swaps and forward exchange contracts.
as approved pursuant to our group policy. Fixed rate debt represented 91.5%, 86.9% and 90.1% of
our total consolidated debt as of March 31, 2005, 2004 and 2003, respectively. A debt profile of
mainly fixed rate debt has been maintained to limit our exposure to interest rate increases.
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Telkom
Fixed rate (ZAR
Long term debt, including
current portion
Long term debt
Variable rate
(percentage)
Variable rate
short term debt
Long term debt, including
current portion
current portion
Average interest rate
Long term debt, including
current portion
Long term debt, including
current portion
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floating
floating
EURO
ZAR
rate (EURO/ZAR)
floating ZAR
rate (EURO/ZAR)
exchange contracts to hedge interest expense and purchase and sale commitments denominated in
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activities is to protect us from the risk that the eventual net flows will be adversely affected by changes
in exchange rates.
Long term debt
Fixed rate (EURO
Fixed rate (USD
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US Dollar
Notional Amount (millions)
Notional Amount (millions)
Notional Amount (millions)
Notional Amount (millions)
Notional Amount (millions)
US Dollar
Notional Amount (millions)
Notional Amount (millions)
Notional Amount (millions)
Notional Amount (millions)
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EURO
Notional Amount (millions)
US Dollar
Notional Amount (millions)
Notional Amount (millions)
Notional Amount (millions)
Notional Amount (millions)
Notional Amount (millions)
US Dollar
Notional Amount (millions)
Notional Amount (millions)
Notional Amount (millions)
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Receive fixed EURO, pay
Credit limits are reviewed on a yearly basis or when information becomes available in the market. We
limit our exposure to any counterparty and these exposures are monitored daily. We expect that all
counterparties will meet their obligations.
ensure that sufficient facilities exist to meet our immediate obligations. Telkom’s operating committee
maintains a reasonable balance between the period over which assets generate funds and the period
over which the respective assets are funded in order to manage long-term liquidity risk.
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March 31, 2007, Section 404 of the U.S. Sarbanes-Oxley Act of 2002 will require Telkom to include an
internal control report by management with Telkom’s Annual Report on Form 20-F. The internal control
report must contain (1) a statement of management’s responsibility for establishing and maintaining
adequate internal control over financial reporting for Telkom, (2) a statement identifying the framework
used by management to conduct the required evaluation of the effectiveness of its internal control
over financial reporting, (3) management’s assessment of the effectiveness of its internal control over
financial reporting as of the end of its most recent fiscal year, including a statement as to whether or
not its internal control over financial reporting is effective and (4) a statement that its independ ent
auditors have issued an attestation report on management’s assessment of its internal control over
financial reporting. We are currently performing the system and process evaluation and testing
required, and any necessary remediation, in an effort to comply with the management certification
and auditor attestation requirements of Section 404.
controls and plan to design additional enhanced processes and controls, as necessary, to address
these and any other issues that might be identified in the future through this review. In addition, we
have identified errors in our consolidated financial statements and determined that it was necessary to
restate our previously issued consolidated financial statements as described in note 2 of the notes to
Telkom Group’s audited consolidated financial statements and note 23 of the notes to Vodacom’s
audited consolidated financial statements included in this annual report and Telkom’s auditors,
Ernst & Young, have notified us that they had identified two material weaknesses and five significant
deficiencies under standards established by the Public Company Accounting Oversight Board.
“Communication of Internal Control Structure Related Matters Noted in an Audit”, or SAS 60. The
issuance of United States Public Company Accounting Oversight Board, or PCAOB, Auditing
Standard No. 2 “An Audit if Internal Control Over Financial Reporting Performed in Conjunction with
An Audit of Financial Statements”, necessitated a number of conforming amendments.
Auditing Standard No. 2, such as non-accelerated filers and foreign private issuers, the PCAOB has
issued transitional auditing standards that supersede the requirements of SAS 60 and require
Telkom’s auditors to communicate, in writing, all control deficiencies that are considered to be either
“significant deficiencies” or “material weaknesses” as defined in PCAOB Auditing Standard No. 2 to
the Audit and Risk Management Committee. Telkom’s auditors do not have a responsibility to search
for material weaknesses when they are not performing an integrated audit, however, they do have a
responsibility to communicate those material weaknesses and significant deficiencies that they
become aware of during their audit.
reporting. In addition, the threshold for a “material weakness” was previously defined as a reportable
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reduce to a relatively low level the risk that errors or irregularities in amounts that would be material in
relation to the financial statements. The new definition of a “material weakness” is a significant
deficiency or combination of significant deficiencies, that results in more than a remote likelihood that
a material misstatement of the annual or interim financial statements will not be prevented or
detected.
enquiries and procedures, management reconsidered the useful life assessment of all assets and has
reassessed the useful life. In respect of the following three asset categories:
a decrease in the 2005 depreciation charge of R542 million. Ernst & Young stated that while
management had processes in place to assess revisions in useful lives, these processes were
focused primarily on identifying potential reductions in asset useful lives as opposed to situations
where extensions to useful lives may have been required. Accordingly, Telkom did not have
appropriate controls in place to ensure changes in such estimates, in terms of extensions to useful
lives, are identified in a timely manner. This deficiency therefore relates to the design effectiveness of
internal controls to ensure compliance with IAS 16 as it does not extend the useful life of assets if
expectations are significantly different from pervious estimates. Consequently assets may be
depreciated faster than their us eful life resulting in an overstatement of depreciation expense.
Management has rectified this situation and this now forms part of the annual assessment process for
the revision of useful lives.
2002, it incorrectly applied information available in its calculation of the accumulated sick leave
expected to be taken by employees. The correction of the calculation resulted in a decrease to the
provision and a corresponding increase to retained earnings of R330 million at March 31, 2002.
Ernst & Young stated that this is indicative of a deficiency in the design of related internal controls
and the lack of appropriate internal controls over the selection and application of key principles used
in determining the sick leave provision could result in non compliance with IAS 19. The provision for
sick leave was overstated resulting in a restatement of financial statements previously reported.
Management has corrected this error in its consolidated financial statements for the
2005 financial year.
sufficient skilled accounting personnel to ensure appropriate assessment and application of generally
accepted accounting principles in the financial statements and related disclosure, particularly in light
of the numerous and complex amendments to both IFRS and US GAAP as a result of the current
convergence of international accounting standards. These controls include controls that support the
financial statement close process. In addition, Ernst & Young noted that Telkom has insufficient
internal resources with expertise in US GAAP and SEC financial reporting requirements and was
unable to prepare financial information in accordance with US GAAP on a timely basis. The
insufficient resources and procedures increase the risk of material misstatements in Telkom’s annual
financial stateme nts. Telkom is in the process of seeking to hire additional accounting personnel with
the sufficient skills.
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manner in which the records are kept it is difficult to correlate the carrying amount of assets leased
with respective lease contracts. As a result, Telkom does not appear to have adequate systems in
place to enable it to analyze its rental agreements in order to determine whether the substance of the
agreements constitute finance leases and the lease agreements may be inappropriately accounted for
resulting in misstated financial results and position. Telkom has initiated a project to evaluate all such
contracts to ensure correct accounting treatment in terms of the relevant accounting statement.
the operating effectiveness of the related internal controls. There is an increased risk that
unauthorized changes to SAP basis settings could be effected which could result in material fraud or
misappropriations. Management has restricted access to Telkom’s SAP system basis authorizations.
committee or the board of directors. Misinterpretations of the basis of computing targets and actual
drivers could result in material under/over statement of bonus expenses. The remuneration committee
for the new financial year has approved a specific formula to calculate the team award bonus to
address this situation.
formalized central register of fraud risks, relevant to its different environments/business areas. Based
on the Ernst & Young’s audit procedures, nothing has come to its attention to cause it to believe that
there are any material unmanaged fraud risks in the business, although there is increased risk of
undetected fraud occurring. Telkom has established a centralized fraud register and intends to
formalize a process for each different environment/business area in this regard.
considering the control deficiencies and intends to take action as it considers appropriate.
of March 31, 2005, the end of the period covered by this annual report, of our disclosure controls and
procedures within the meaning of Rule 13a-15(e) of the U.S. Securities Exchange Act of 1934, as
amended, which we refer to as the Exchange Act. Based on this evaluation, and as a result of the
foregoing material weaknesses, that were identified, our chief executive officer and our chief financial
officer concluded that, as of such date, our disclosure controls and procedures were not effective for
recording, processing, summarizing and reporting the material information we are required to disclose
in the reports we file or submit under the Exchange Act, within the time periods specified in the rules
and forms of the SEC. Except as described above, there were no significant changes in our internal
con trol over financial reporting that occurred during the period covered by this annual report that have
materially affected, or that are reasonably likely to materially affect, our internal control over financial
reporting.
with Section 404 in a timely manner. If we are not able to implement the requirements of Section 404
in a timely manner or with adequate compliance or our independent auditors are not able to attest as
to the effectiveness of our internal control over financial reporting, we may be subject to sanctions or
investigation by regulatory authorities, such as the U.S. Securities and Exchange Commission, or
SEC. As a result, there could be a negative reaction in the financial markets due to a loss of
confidence in the reliability of our financial statements. In addition, we may be required to incur costs
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negatively affect our results.
requirements of Form 20-F of the SEC. The SEC has determined that the audit committee financial
expert designation does not impose on the person with that designation, any duties, obligations or
liability that are greater than the duties, obligations or liabilities imposed on such person as a member
of the audit committee of the board of directors in the absence of such designation. Mr. Tenza is a
qualified certified public accountant.
accounting officer or controller. Telkom’s business code of ethics, taken together with its disclosure of
information policy, are designed to comply with the requirements of Item 16B of Form 20-F. Telkom’s
business code of ethics seeks to instill in its employees the spirit of fairness, respect and ethical
standards in dealing with Telkom’s stakeholders. In business dealings on behalf of Telkom, employees
are expected to avoid activities that might give rise to conflicts of interest. Employees are expected to
act in the exclusive interest of Telkom. Procedures have been put in place to deal with conflicts of
interest where these arise in the course of employees’ day-to-day activities.
with developments both inside and outside Telkom.
other than audit fees, audit related fees and tax fees for each of the 2005, 2004 and 2003 financial
years:
board of directors, which concluded that the provision of such services by the independent
accountants was compatible with the maintenance of that firm’s independence in the conduct of its
auditing functions.
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result in an amount of fees less than 10% of the independent accountant’s total audit engagement fee
for individual services; provided that all such fees must be less than 50% of the total audit fees for
Telkom’s annual audit engagement. In addition, services to be provided by the independent
accountants that are not within the category of pre-approved services must be approved by the audit
committee prior to engagement, regardless of the service being requested and the amount, but
subject to the restrictions above.
independent accountants, and must include a detailed description of the services to be provided and
a joint statement confirming that the provision of the proposed services does not impair the
independence of the independent accountants.
the audit committee at its next scheduled meeting. The audit committee does not delegate to
management its responsibilities to pre-approve services to be performed by the independent
accountants.
the Telkom conditional share plan. The following table sets forth information with respect to Telkom’s
share repurchases in the 2004 and 2005 financial years.
Telkom, to acquire up to 20% of Telkom’s issued share capital, upon such terms and conditions, and in such amounts as
the directors of Telkom and/or its subsidiaries may from time to time decide. The repurchases are subject to the provisions
of the Companies Act, 61 of 1973, as amended, and the Listing Requirements of the JSE. In terms of the South African
Companies Act, 61 of 1973, a subsidiary company may not acquire more than 10% of the shares in its holding company
and if the holding company acquires its own shares directly, such shares must be cancelled. This approval was valid until
the next Annual General Meeting, which was held on October 14, 2004. At this meeting, the shareholders of Telkom
provided general approval for the share repurchase program until the next An nual General Meeting, or for 15 months from
the date of the resolution, whichever period is shorter.
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(Incorporated by reference to Exhibit 3.1 to Telkom’s Registration Statement on
Form F-1 (File No. 333 102834) (the “F-1”)).
Form F-1)
York, as Depositary, and Owners and Beneficial Owners of American Depositary
Receipts issued thereunder, including the form of American Depositary Receipt
(Incorporated by reference to Exhibit 4.2 to the F-1)
Communications LLC, SBC International Management Services, Inc. and Telkom
Management Services SDN Berhard (Incorporated by reference to Exhibit 10.1
to the F-1)
Company (Proprietary) Limited (Incorporated by reference to Exhibit 10.3 to the F-1)
between Telkom and systems Applications Project (Africa) (Proprietary) Limited
(Incorporated by reference to Exhibit 10.4 to the F-1)
Vodacom Group (Proprietary) Limited, Mobile Telephone Network (Proprietary)
Limited, the Postmaster General and the Government of the Republic of South Africa
(Incorporated by reference to Exhibit 10.5 to the F-1)
Group (Proprietary) Limited, as amended by agreements among Telkom, Vodacom
Group (Proprietary) Limited and MTN on August 22, 1996, January 12, 1998, July 21,
1998 and September 4, 2001 (Incorporated by reference to Exhibit 10.6 to the F-1)
amended by agreements among Telkom, Vodacom Group (Proprietary) Limited and
MTN on August 22, 1996, January 12, 1998, July 21, 1998, and September 14, 2001
(Incorporated by reference to Exhibit 10.7 to the F-1)
Cell C, as amended by agreement among Telkom, Vodacom Group (Proprietary)
Limited and Cell C, dated September 18, 2001 (Incorporated by reference to
Exhibit 10.8 to the F-1)
plc, Rembrant Group Limited, Vodacom Group, Vodacom, Vodac and Vodafone
Holdings (SA) (Proprietary) Limited (Incorporated by reference to Exhibit 10.9 to
the F-1)
Communications of the Government of the Republic of South Africa and Thintana
Communications LLC (Incorporated by reference to Exhibit 10.10 to the F-1)
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Communications of the Government of the Republic of South Africa, Thintana
Communications LLC and Telkom SA Limited (Incorporated by reference to
Exhibit 10.11 to the F-1)
Annual Report on Form 20-F for the year ended March 31, 2004 (the “20-F”))
reference to Exhibit 4.12 to the 20-F)
Exhibit 11.1 to the 20-F)
Exhibit 11.2 to the 20-F)
promulgated under Section 302 of the Sarbanes Oxley Act of 2002
under Section 302 of the Sarbanes Oxley Act of 2002
Rule 13a 14(b) (17 CFR 240.13a 14(b)) or Rule 15d 14(b) (17 CFR 240.15d 14(b))
and Section 1350 of Chapter 63 of Title 18 of the United States Code (18 U.S.C.
1350), promulgated under Section 906 of the Sarbanes Oxley Act of 2002
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Content to the consolidated annual financial statements
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2004 and 2003, and the related consolidated statements of income, shareholders’ equity, and cash flows for each of the three years then ended set out
on pages F-3 to F-96. These financial statements are the responsibility of the Group’s directors. Our responsibility is to express an opinion on these financial
statements based on our audits. We did not audit the financial statements of Vodacom Group (Proprietary) Limited, a 50% joint venture proportionally
consolidated, which statements reflect total assets constituting 20% at March 2005, 19% at 2004 and 16% at 2003, and total revenues constituting
32% for the year ended March 2005, 28% for the year ended 2004 and 26% for the year ended 2003 of the related consolidated totals. Those
statements were audited by other auditors whose report has been furnished to us and our opinion, insofar as it relates to the amounts included for
Vodacom Group (Proprietary) Limited, is based solely on the report of the other auditors.
that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. We were
not engaged to perform an audit of the Group’s internal control over financial reporting. Our audits included consideration of internal control over financial
reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the
effectiveness of the Group’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test
basis, evidence supporting the amounts and disclosures in the consolidated financial statements, assessing the accounting principles used and significantestimates made by management, and evaluating the overall financial statement presentation. We believe that our audits, and the report of other
auditors, provide a reasonable basis for our opinion.
respects, the consolidated financial position of Telkom SA Limited and its subsidiaries at March 31, 2005, 2004 and 2003, and the consolidated results
of their operations and their cash flows for the years then ended, in conformity with International Financial Reporting Standards, which differ in certain
respects from U.S. generally accepted accounting principles (see Note 47 to the consolidated financial statements).
Payment, IFRS3 – Business Combinations, IAS21 – The Effects of Changes in Foreign Exchange Rates and IAS27 – Consolidated and Separate Financial
Statements. The Group also changed certain of its revenue recognition policies to analogise to guidance issued under accounting standards generally
accepted in the United States.
Chartered Accountants (SA)
June 2, 2005
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Equity holders of Telkom SA Limited
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Non-current assets
Equity attributable to equity holders of Telkom SA Limited
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(Refer note 22)
(Refer note 22) (net of tax of R11 million)
(Refer note 22)
(Refer note 22)
(Refer note 22) (net of tax of R5 million)
(Refer note 22)
(Refer note 22)
(Refer note 22) (net of tax of RNil)
(Refer note 22)
compensation reserve
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incorporated in the Republic of South Africa (‘South Africa’).
The Company, its subsidiaries and joint ventures (‘the Group’)
is the leading provider of fixed-line voice and data
communications services in South Africa and mobile
communications services through Vodacom Group (Proprietary)
Limited (‘Vodacom’) in South Africa and certain other African
countries. The Group’s services and products include:
as enhanced services and customer premises equipment
sales and directory services;
services; and
and security services.
Reporting Standards ('IFRS') of the International Accounting
Standards Board ('IASB') and the Companies Act in
South Africa.
The preparation of financial statements requires the use of
estimates and assumptions that affect the reported amounts
of assets and liabilities and disclosure of contingent assets
and liabilities at the date of the financial statements and
the reported amounts of revenue and expenses during the
reporting periods. Although these estimates are based on
management's knowledge of current events and actions that
the Group may undertake in the future, actual results
ultimately may differ from those estimates.
The financial statements are prepared on the historical cost
basis, with the exception of certain financial instruments and
share-based payments which are measured at fair value.
Details of the Group’s significant accounting policies are set out
below, and are consistent with those applied in the previous
financial year except for the following:
designed to form the IASB's 'stable platform', which
are applicable for financial years beginning on or after
January 1, 2005;
to revenue recognition, minority interest and goodwill
translation and amortisation;
are applicable for financial years beginning on or after
April 1, 2004;
accordance with current period classification and
presentation; and
relating to mobile equipment sales, deferred taxation and
sick leave liability.
Reporting Standards
During December 2003, the IASB issued various amendments
to current International Financial Reporting Standards (‘The
Improvements Project’). These changes are effective for
financial years commencing on or after January 1, 2005.
Entities are required to adopt all changes to a current standard
at the same time, but may elect to adopt selected standards in
earlier periods, provided that all standards are adopted by the
financial year commencing on or after January 1, 2005.
adopted for the year under review:
The Group early adopted IFRS2 in the current year. The effect
of the adoption of the standard in the current year is an
increase of R68 million in employee expenses (Refer note 5.1)
and R68 million in the share-based compensation reserve (Refer
note 21). There was no impact on the prior years as no grants
were made prior to April 1, 2004.
In addition to the standard referred to above, the Group
has also early adopted the following revised and new
standards during the year under review. This has not impacted
the Group’s cash flow information for the years ended
March 31, 2004 and 2003, but impacted on the Group’s
results for the years ended March 31, 2004 and 2003 (Refer
accompanying tables), and on the disclosure of certain items.
• IAS2 Inventories
• IAS8 Accounting Policies, Changes in Accounting Estimates
• IAS21 The Effects of Changes in Foreign Exchange Rates
• IAS27 Consolidated and Separate Financial Statements
• IAS28 Investments in Associates
• IAS31 Interests in Joint Ventures
• IAS32 Financial Instruments: Disclosure and Presentation
• IAS33 Earnings per Share
• IAS39 Financial Instruments: Recognition and Measurement
• IFRS5 Non-current Assets Held for Sale and Discontinued
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activation revenue and costs in accordance with the principles
contained in United States accounting guidance as detailed in the
Emerging Issues Task Force (‘EITF’) Issue No. 00-21, Revenue
Arrangements with Multiple Deliverables, as it provides further
guidance on revenue recognition. EITF 00-21, which is applicable
to revenue arrangements with multiple deliverables, requires the
allocation of the total arrangement consideration to each
identifiable deliverable based on its relative fair value. Revenue
allocated to each identifiable deliverable and related cost is
recognised based on the same recognition criteria for each
deliverable at the time that the product or service is delivered. The
revised accounting policy results in activation revenue and costs
(limited to related r evenue) being deferred and recognised
ratably over the average expected life of the customer. The
excess of the costs over revenues is expensed immediately.
Previously, activation revenue and costs were recognised upon
activation of the customer.
The Group restated its balance sheets for the years ended
March 31, 2004 and 2003 to reflect the deferral of activation
revenue and costs. No changes were made to the income
statement due to the immateriality of these amounts. As such,
the change in accounting policy does not impact the Group’s
results or cash flow information for the years ended March 31,
2004 and 2003.
minority interest to equity. The Group has accordingly reclassified
transactions with minorities into equity. The change in
accounting policy does not impact the Group’s cash flow
information for the years ended March 31, 2004 and 2003.
currency denominated goodwill based on the revised IAS21.
Goodwill that originated from the purchase of a foreign
operation was previously translated at the exchange rate on the
transaction date. This goodwill is now translated at exchange
rates ruling at the balance sheet date. The change in accounting
policy does not impact the Group’s cash flow information for the
years ended March 31, 2004 and 2003, but impacted on the
Group’s results as per accompanying table.
this standard, goodwill is no longer amortised, but tested for
impairment on an annual basis. Goodwill was previously
amortised over its expected useful life. The change in policy does
not impact the Group’s results or cashflow information for the
years ended March 31, 2004 and 2003. If the Group continued
to amortise goodwill, as well as translate the amortisation of
recorded goodwill amortisation of R95 million. The balance of
goodwill would have been stated at R175 million at
March 31, 2005.
receivables to Deferred expenses; and
The Group has restated revenue relating to mobile equipment
sales, deferred taxation and sick leave liability.
ended March 31, 2004 and 2003 for the incorrect gross up of
revenue and direct network operating costs related to internal
channel upgrades and inter system profits. The Group previously
incorrectly recorded revenue and direct network operating costs
when handsets were provided to customers on upgrades and
when handsets were transferred between different management
systems. The restatement does not impact the Group’s results
and cash flow information for the years ended March 31, 2004
and 2003.
of the non-current deferred taxation asset and the non-current
deferred taxation liability where the Group has right of set-off in
the relevant section of the balance sheet. The Group previously
reflected the gross deferred taxation asset and the gross
deferred taxation liability. The restatement does not impact the
Group’s results or cash flow information for the years ended
March 31, 2004 and 2003.
HIV/AIDS within its business and the potential impact on sick
leave to be taken by employees infected by the disease, it did
not have accurate information on the extent of the disease or its
related impact on sick leave days to be taken as a result.
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leave taken.
expected, and in the future does not expect, to pay any portion
of the employee's unused accumulated sick leave entitlement.
The correction of the calculation resulted in a decrease to the
provision and a corresponding increase to retained earnings of
R330 million at March 31, 2002. The impact on the income
statement for each year presented is insignificant.
prior and subsequent to the restatements, reclassifications and
changes in accounting policies as discussed in this note:
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and administrative
expenses
amortisation,
impairment and
write-offs
equity holders of
Telkom SA Limited
receivables
of deferred expenses
other financial assets
reserves
of deferred revenue
financial liabilities
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administrative expenses
amortisation,
impairment and
write-offs
equity holders of
Telkom SA Limited
receivables
deferred expenses
other financial assets
reserves
liabilities
deferred revenue
financial liabilities
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IAS16 Property, Plant and Equipment
item of property, plant and equipment as a combination of
various components with separate useful lives or consumption
patterns. These separate components are used to calculate
depreciation, test for derecognition and for the treatment of
expenditure to replace or renew a component of that item of
property, plant and equipment. It further confirms that the cost
of an item of property, plant and equipment should include not
only the initial estimate of the costs relating to dismantlement,
removal or restoration of the property at the time of installing
the item, but also during the period of use for purposes other
than producing inventory. The residual value and useful life of
an asset must be reviewed annually. Residual value should not
include expected future inflation. There is no ce ssation of
depreciation when assets are idle. The possible impact of the
standard has not been determined due to additional system
changes required in order to comply with the requirements of
the standard.
required to be split into two elements – a lease of the land
and a separate lease of the buildings. All initial direct costs
incurred by a lessor in negotiating a finance lease need to be
included in the initial measurement of the finance lease
receivables. Initial direct costs incurred by lessors in negotiating
an operating lease are added to the carrying amount of the
leased asset and recognised over the lease term on the same
basis as the lease income. This standard provides special
transitional provisions, with retrospective application under
certain circumstances not required. The possible impact of the
standard has not been determined due to additional system
changes required in order to comply with the requirements of
the standard.
entities are no longer exempt from providing related party
disclosure in separate financial statements. The revised
standard now explicitly requires the disclosure of
compensation of key management personnel (which now
includes non-executive directors). The scope for the revised
standard is extended to include, amongst others, close family
members of key management personnel of the entity or its
parent. Disclosure of related party transactions including the
terms and conditions, securing of outstanding balances, the
nature of the consideration payable on settlement, details of
any guarantees and provision for doubtful debt are also
required. The possible impact entails additional disclosure for
related party transactions.
lease that meets the definition of investment property may be
treated as investment property if the operating lease is
accounted for as if it were a finance lease in accordance with
IAS40. The possible impact of the standard is not expected to
be material.
Restoration and Similar Liabilities
or after September 1, 2004, but earlier application is
encouraged. Under IFRIC1 the effect of any changes to an
existing obligation must be added to or deducted from the
cost of the related asset and depreciated prospectively over
the asset's useful life. The possible impact of the
interpretation is not expected to be material.
Contains a Lease
after January 1, 2006, but earlier application is encouraged.
Under IFRIC4, where an entity enters into an arrangement that
depends on the use of a specific asset and conveys the right to
control this specific asset, the arrangement should be treated as
a lease under IAS17. The arrangements that are in substance
leases should be assessed against criteria included in IAS17 to
determine if the arrangement should be accounted for as
finance leases or operating leases. The transitional provisions
require the Group to assess existing arrangements at the
beginning of the earliest period for which comparative
information under IFRS is presented on the basis of facts and
circumstances existing at the start of that period. The Group is
currently evaluating the effects of this interpretation.
issues, or to all reinsurance contracts that it holds. IFRS4 is the
first guidance by the IASB on recognition, measurement and
disclosure of insurance contracts. The standard is effective for
annual periods commencing on or after January 1, 2005. An
insurer need not apply some aspects of the IFRS to
comparative information that relates to annual periods
beginning before January 1, 2005. The possible impact of the
standard is not expected to be material.
SA Limited, its subsidiaries and joint ventures. Subsidiaries are
those entities over whose financial and operating policies the
Group has the ability to exercise control, so as to obtain
benefits from their activities. Joint ventures are those enterprises
over which the Group exercises joint control in terms of a
contractual agreement. Joint ventures are accounted for using
the proportionate consolidation method on a line-by-line basis.
Intra-group balances and transactions, and any unrealised gains
and losses arising from intra-group transactions, are eliminated
in preparing the consolidated financial statements. Unrealised
gains and losses arising from transactions with jointly controlled
entities are eliminated to the extent of the Group’s interest in
the enterprises.
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method of accounting. On acquisition of a subsidiary or joint
venture, any excess of the purchase price over the fair value of
the Group’s interest in the net assets is recognised as goodwill
on acquisition. Minority interests are calculated on the fair value
of assets and liabilities. Where there is loss of control of a
subsidiary, the consolidated financial statements include the
results for the part of the reporting year during which the Group
has control.
finance costs capitalised by Telkom and by Vodacom. In Telkom,
financing costs directly associated with the acquisition or
construction of qualifying assets are capitalised. This treatment
differs from the treatment by Vodacom whereby borrowing
costs are expensed as they are incurred. Applying the Group
policy to Vodacom does not result in any additional finance
costs capitalised as there are no qualifying assets in Vodacom.
accumulated depreciation and accumulated impairment losses.
Depreciation is charged from the date of commissioning on a
straight-line basis over the estimated useful life. Assets under
construction represents freehold land and buildings, software,
network and support equipment and includes all direct
expenditure but excludes the costs of abnormal amounts of
waste material, labour, or other resources incurred in the
production of self-constructed assets. The estimated useful life
of individual assets are reviewed on a periodic basis in terms
of its useful life to the Group.
and equipment are:
instruments, for any indication of impairment. When indicators,
including changes in technology, market, economic, legal and
operating environments occur and result in changes of the asset’s
estimated remaining useful life, an impairment test is performed.
of the present value of projected cash flows covering the
remaining useful lives of the assets, and the net realisable
value. Impairment losses are recognised when the asset's
carrying value exceeds its estimated recoverable amount.
The recoverable amount is determined for the cash-generating
unit to which the asset belongs.
goodwill, is reversed through the income statement if the
recoverable amount increases as a result of a change in the
estimates used to determine the recoverable amount, but not
to an amount higher than the carrying amount that would
have been determined (net of depreciation) had no
impairment loss been recognised in prior years.
and/or for capital appreciation, are stated at cost less
accumulated depreciation and accumulated impairment losses.
Depreciation is calculated so as to write off the cost of the
investment property on a straight-line basis, over its estimated
useful life to its estimated residual value. Depreciation
commences when the property is ready for its intended use.
investment properties is:
Goodwill
excess of the cost of the business combination over the
Group’s interest in the net fair value of the identifiable assets,
liabilities and contingent liabilities. Goodwill on the acquisition
of subsidiaries and joint ventures is included in intangible
assets. Following initial recognition, goodwill is measured at
cost less any accumulated impairment losses. Goodwill is
tested for impairment annually, or more frequently if events or
changes in circumstances indicate that the carrying value may
be impaired. Gains and losses on the disposal of an entity
include the carrying amount of goodwill relating to the entity
sold. A recognised impairment loss is not reversed.
are stated at cost less accumulated amortisation and any
accumulated impairment losses. Amortisation commences
when the intangible assets are available for their intended use
and is recognised on a straight-line basis over the assets’
expected useful lives.
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of expected future cash flows when the obligation to dismantle
or restore the site arises. The increase in the related asset's
carrying value is depreciated over its estimated useful life. The
unwinding of the discount is included in finance charges.
maintenance of its telecommunications network, unless these
add to the value of the assets or prolong the useful lives.
construction of assets that require more than three months to
complete and place in service are capitalised at interest rates
relating to loans specifically raised for that purpose, or at the
weighted average borrowing rate where the general pool of
Group borrowings was utilised. Other borrowing costs are
expensed as incurred.
are stated at the lower of cost, determined on a weighted
average basis, or estimated net realisable value. Merchandise
inventories are stated at the lower of cost, determined on a
first-in first-out (‘FIFO’) basis, or estimated net realisable
value. Provision for obsolete inventories is calculated based on
the product life cycle, technology and movement trends of the
individual inventory items.
Recognition and initial measurement
plus, in the case of financial assets and liabilities not at fair
value through profit or loss, transaction costs that are directly
attributable to the acquisition or issue. Financial instruments
are recognised when the Group becomes a party to their
contractual arrangements. Regular way transactions are
accounted for on settlement date.
assets as ‘at fair value through profit or loss’, ‘held-to-maturity
investments’, ‘loans and receivables’, or ‘available-for-sale’. The
Group measures financial assets at fair value through profit or
loss, including all derivatives, at their fair value, with gains and
losses arising on the changes in fair value recognised in net
profit or loss for the year. For those financial assets classified as
available-for-sale, the Group will, after initial recognition,
measure these assets at fair value, with the gains and losses
taken directly to equity. Held-to-maturity assets, and loans and
receivables are measured at amortised cost using the effective
interest method. Fair value adjustments on unlisted investments
are made if the fair value can be measured reliably.
liabilities at amortised cost using the effective interest method,
except for financial liabilities at fair value through profit or loss.
Such liabilities, including derivative liabilities, are measured at fair
value, with gains and losses arising on the change in fair value
recognised in net finance charges for the year.
on the relevant market information. These estimates are
calculated with reference to the market rates using industry
standard valuation techniques.
which is calculated by reference to the quoted selling price at
the close of business on the balance sheet date.
original invoice amount where the effect of discounting is not
material. Long-term trade receivables are subsequently
measured at amortised cost.
measured at amortised cost using the effective interest rate
method. Those that do not have a fixed maturity are carried at
cost of the consideration given. Bills of exchange held as
trading instruments are carried at fair value.
held on call and term deposits with an initial maturity of less
than three months.
subsequent to initial recognition with gains and losses taken to
finance charges. The fair values of forward exchange contracts
are calculated by reference to current forward exchange rates
for contracts with similar maturity profiles. The fair values of
interest rate swap contracts are determined as the difference in
the present value of the future net interest cash flows. The fair
value of currency swaps is determined with reference to the
present value of expected future cash flows. The Group’s
derivative transactions, while providing effective economic
hedges under the risk management policies, do not qualify for
hedge accounting under the specific rules of IAS39.
derecognised. These transactions are treated as collateralised
arrangements and classified as non-trading liabilities and
carried at amortised cost.
recognised. These transactions are treated as collateralised
lending arrangements and classified as loans. Loans are
recorded at amortised cost.
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cost based on the yield to maturity of the new issue.
contract is discharged. The difference between the carrying
value of the bond and the amount paid to extinguish the
obligation is included in finance charges.
are carried at amortised cost. The Group does not actively
trade in bonds.
be derecognised and a gain or loss recognised when the Group
loses the contractual rights or extinguishes the obligation.
between the consideration and the carrying amount on the
settlement date is included in net profit or loss for the year.
For 'available-for-sale' assets, the fair value adjustment relating
to prior revaluations of assets is transferred from equity and
recognised in net profit or loss for the year.
there are any indicators of impairment of financial assets based
on observable data about one or more loss events that
occurred after the initial recognition of the asset. If such
evidence exists, the estimated recoverable amount of that
asset is determined and any impairment loss recognised for the
difference between the recoverable amount and the carrying
amount. The recoverable amount of financial assets carried at
amortised cost is calculated as the present value of expected
future cash flows discounted at the original effective interest
rate of the asset.
Rand ('ZAR').
the rate of exchange at transaction date. Monetary items
denominated in foreign currencies are measured at the rate of
exchange at settlement date or balance sheet date. Realised
and unrealised gains and losses on foreign exchange are
included in finance charges.
translated into South African Rand, the Group’s presentation
currency, for incorporation into the consolidated annual
financial statements. Assets and liabilities of foreign operations
are translated at the foreign exchange rates ruling at the
balance sheet date. Income, expenditure and cash flow items
are measured at the actual foreign exchange rate or average
exchange differences are classified as equity. On disposal, the
cumulative amounts of unrealised exchange differences that
have been deferred are recognised in the consolidated income
statement as part of the gain or loss on disposal.
operations that are part of the net investment in the foreign
operation are recognised in equity if the loans are denominated
in one of the entities' functional currencies. If the loans are
denominated in a third currency, gains or losses are recognised
in the income statement.
operation are treated as assets and liabilities of the foreign
operation and translated at the foreign exchange rates ruling
at balance sheet date.
measured at cost and disclosed as a reduction of equity.
Current taxation
the year and is adjusted for non-taxable income and
non-deductible expenditure. Current taxation is measured
at the amount expected to be paid, using taxation rates
and laws that have been enacted or substantively enacted by
the balance sheet date.
differences associated with investments in subsidiaries and joint
ventures, except where the Group is able to control the timing
of the reversal of the temporary differences and it is probable
that it will not reverse in the foreseeable future. Exchange
differences arising from the translation of foreign taxation assets
and liabilities of foreign operations are classified as a deferred
taxation expense or income.
rate of 12.5% on the amount by which dividends declared by
the Group exceeds dividends received. Deferred tax on unutilised
STC credits is recognised to the extent that STC payable on
future dividend payments is likely to be available for set-off.
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Post-employment benefits
plans for the benefit of employees. These plans are funded by
the employees and the Group, taking into account
recommendations of the independent actuaries. The post-
retirement medical and telephone rebate liabilities are unfunded.
charged to the income statement in the same year as the
related service is provided.
retirement, medical aid costs, and telephone rebates to
qualifying employees. The Group’s net obligation in respect of
defined benefits is calculated separately for each plan by
estimating the amount of future benefits earned in return for
services rendered.
present value of the defined benefit obligations, calculated by
using the projected unit credit method, as adjusted for
unrecognised actuarial gains and losses, unrecognised past
service costs and reduced by the fair value of plan assets. The
amount of any surplus recognised is limited to unrecognised
actuarial losses and past service costs plus the present value of
available refunds and reductions in future contributions to the
plan. To the extent that there is uncertainty as to the
entitlement to the surplus, no asset is recognised.
when the cumulative unrecognised gains and losses for each
individual plan exceed 10% of the greater of the present value
of the Group’s obligation or the fair value of plan assets. These
gains or losses are amortised on a straight-line basis over ten
years for all the defined benefit plans.
that the benefits are vested, otherwise they are recognised
on a straight-line basis over the average period the benefits
become vested.
accrues and is subject to a cap.
is terminated before the normal retirement age or when an
employee accepts voluntary redundancy in exchange for
benefits. Workforce reduction expenses are recognised when it
is probable that the expenses will be incurred.
including executive directors, are eligible for compensation
The benefit is recorded at the present value of the expected
future cash outflows.
of the Telkom Conditional Share Plan, are classified as equity-
settled share-based payment transactions. The expense relating
to the services rendered by the employees, and the
corresponding increase in equity, is measured at the fair value
of the equity instruments at their date of grant based on the
market price at grant date, adjusted for the lack of entitlement
to dividends during the vesting period. This compensation cost
is recognised over the vesting period, based on the best
available estimate at each balance sheet date of the number
of equity instruments that are expected to vest.
during the period the employees render services, unless the
entity uses the services of employees in the construction of an
asset and the benefits received meet the recognition criteria of
an asset, at which stage it is included as part of the related
property, plant and equipment item.
obligation (legal or constructive) as a result of a past event and
it is probable that an outflow of resources will be required to
settle the obligation, and a reliable estimate can be made of
the amount of the obligation. Provisions are reviewed at each
balance sheet date and adjusted to reflect the current best
estimate. Where the effect of the time value of money is
material, the amount of the provision is the present value of the
expenditures expected to be required to settle the obligation.
customers and excludes Value Added Tax.
arrangement, collectability is reasonably assured, and the
delivery of the product or service has occurred. In certain
circumstances revenue is split into separately identifiable
components and recognised when the related components are
delivered in order to reflect the substance of the transaction.
The value of components is determined using verifiable
objective evidence. The Group does not provide customers with
the right to a refund.
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services under postpaid and prepaid payment arrangements.
Revenue includes fees for installation and activation which
are recognised as revenue upon activation. Costs incurred on
first time installations that form an integral part of the
network are capitalised and depreciated over the life
of the customer relationship. All other installation and
activation costs are expensed as incurred. Postpaid and
prepaid service arrangements include subscription fees,
typically monthly fees, which are recognised over the
subscription period.
recognised upon delivery and acceptance of the product
or service.
and recognised based on actual usage or upon expiration of
the usage period, whichever comes first. The terms and
conditions of certain prepaid products allow the carry over of
unused minutes. Revenue related to the carry over of unused
minutes is deferred until usage or expiration.
is provided.
and recognised based on actual usage or upon expiration of
the usage period, whichever comes first.
distributors as trade discounts. Revenue for retail payphone
cards is recorded as traffic revenue, net of these discounts as
the cards are used.
roaming and international call connection services is recognised
when the call is placed or the connection provided.
network usage is recognised in the year the traffic occurs.
postpaid and prepaid payment arrangements. Revenue includes
fees for installation and activation, which are recognised as
revenue upon activation. Costs incurred on first time
installations that form an integral part of the network are
capitalised and depreciated over the life of the customer
relationship. All other installation and activation costs are
arrangements include subsciption fees, typically monthly fees,
which are recognised over the subscription period.
distribution, as the significant risks and rewards have passed.
Electronic directories' revenue is recognised on a monthly
basis, as earned.
the enterprise and the earnings process is complete.
handset and 24-month service are defined as arrangements
with multiple deliverables. The arrangement consideration is
allocated to each deliverable, based on the fair value of each
deliverable on a stand alone basis as a percentage of the
aggregated fair value of the individual deliverables. Revenue
allocated to the identified deliverables in each revenue
arrangement and the cost applicable to these identified
deliverables are recognised based on the same recognition
criteria of the individual deliverable at the time the product or
service is delivered.
delivered. Monthly service revenue received from the customer
is recognised in the period in which the service is delivered.
Airtime revenue is recognised on the usage basis. The terms
and conditions of the bundled airtime products, where
applicable, allow the carry over of unused airtime. The unused
airtime is deferred in full. Deferred revenue related to unused
airtime is recognised when utilised by the customer. Upon
termination of the customer contract, all deferred revenue for
unused airtime is recognised in income.
card and airtime are defined as arrangements with multiple
deliverables. The arrangement consideration is allocated to
each deliverable, based on the fair value of each deliverable on
a stand alone basis as a percentage of the aggregated fair
value of the individual deliverables. Revenue allocated to the
identified deliverables in each revenue arrangement and the
cost applicable to these identified deliverables are recognised
based on the same recognition criteria of the individual
deliverable at the time the product or service is delivered.
customer relationship, all deferred revenue for unused
airtime is recognised in revenue.
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right to make outgoing voice and data calls to the value of the
airtime voucher. Revenue is recognised as the customer utilises
the voucher.
which do not contain any expiry date, is recognised in the
period when the probability of these starter packs being
activated by a customer becomes remote. In this regard the
Group applies a period of 36 months before these revenue and
costs are released to the income statement.
acceptance has taken place. Equipment sales to third party
service providers are recognised when delivery is accepted.
No rights of return exist on sales to third party service providers.
the Group is entitled to the dividend. Interest is recognised on
a time proportion basis taking into account the principal
amount outstanding and the effective interest rate.
income statement on a straight-line basis over the lease term.
lower of fair value or the net present value of the minimum
lease payments at inception of the lease and depreciated over
the lesser of the useful life of the asset or the lease term. The
capital element of future obligations under the leases is
included as a liability in the balance sheet. Lease finance costs
are expensed in the income statement over the lease period
using the effective interest rate method. Where a sale and
leaseback transaction results in a finance lease, any excess of
sale proceeds over the carrying amount is deferred and
recognised in income over the term of the lease.
the primary segment reporting basis: Fixed-line and Mobile.
The Group’s two segments operate mainly in South Africa, but
the mobile segment has businesses in certain other African
countries. The geographical location of the Group’s customers
has been identified as the secondary basis of segment
reporting. The basis of segment reporting is representative of
the Group’s internal reporting structure, which is in accordance
with IFRS.
domestic and international long distance services as well
as leased lines, data transmission, directory services and
internet access.
services as well as the sale of mobile equipment.
sales to third parties at current market prices.
activations and retention of existing customers for products
delivered to the customer are expensed as incurred. Incentives
paid to service providers and dealers for new activations and
retention of existing customers for services delivered are
expensed in the period that the related revenue is recognised.
Distribution incentives paid to service providers and dealers for
exclusivity are deferred and expensed over the contractual
relationship period.
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equipment sales for the years ended March 31, 2004 with R311 million
and 2003 with R185 million (Refer note 2).
income (Refer note 6) to Other income (Refer note 2).
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interconnection with other network operators.
administrative expenses to bad debts. Selling and administrative
expenses has further reduced with R311 million (2003: R185 million)
due to the restatement of expenses relating to mobile equipment
sales (Refer note 2).
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plant and equipment, the Group reviewed their remaining useful lives in
the current year. The assets affected were network equipment and data
processing equipment and software. Accordingly, the Group revised the
estimated useful lives of these assets from five to seven years and eight years
respectively. As the prior period effects are not determinable, the estimated
remaining useful lives of these assets were adjusted prospectively, which
resulted in a decrease of the current year depreciation charge of R542 million.
Other income (Refer note 4) for the years ended March 31, 2004 with
R157 million and 2003 with R168 million (Refer note 2).
accounting policy regarding minority interests for the year ended March 31, 2003
with R47 million (Refer note 2).
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The Group operates in several African countries, and accordingly is subject to, and pays annual income taxes under the tax regimes of those countries. The Group has historically filed, and continues to file, all required income tax returns. Management believes that the principles applied in determining the Group’s tax obligations are consistent with the principles and interpretations of the relevant countries’ tax laws. The tax rules and regulations in these countries are highly complex and subject to interpretation. Additionally, for the foreseeable future, management expects such tax laws to further develop through changes in the countries' existing tax structure as well as clarification of the existing tax laws through published interpretations and the resolution of actual tax cases.
The growth of the Group, following its geographical expansion into other African countries over the past few years, has made the estimation and judgement more challenging. The resolution of taxation issues is not always within the control of the Group and it is often dependent on the efficiency of the legal processes in the relevant taxation jurisdictions in which the Group operates. Issues can, and often do, take many years to resolve. Payments in respect of taxation liabilities for an accounting period result from payments on account and on the final resolution of open items. As a result there can be substantial differences between the taxation charge in the income statement and taxation payments.
Group entities are subject to evaluation, by the relevant tax authorities, of its historic income tax filings and in connection with such reviews, disputes can arise with the taxing authorities over the interpretation or application of certain tax rules. These disputes may not necessarily be resolved in a manner that is favourable for the Group. Additionally the resolution of the disputes could result in an obligation for the Group that exceeds management's estimate.
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During the 2005 financial year, Telkom entered into an agreement with its subsidiary Rossal No 65 (Proprietary) Limited, to manage, hold and transfer shares to employees in terms of the Telkom Conditional Share Plan. A deferred tax liability of R26 million has been recorded related to this agreement.
(Refer note 2).
equity holders of Telkom SA Limited for the year of R6,724 million
(2004: R4,523 million; 2003: R1,628 million) and 541,498,547
(2004: 556,994,962; 2003: 557,031,819) weighted average
number of ordinary shares in issue.
year of R6,724 million (2004: R4,523 million; 2003: R1,628 million)
and 542,537,579 (2004: 556,994,962; 2003: 557,031,819)
diluted weighted average number of ordinary shares. The adjustment in the
weighted average number of shares is as a result of the expected future
vesting of shares already allocated to employees under the Telkom
Conditional Share Plan.
earnings of R6,899 million (2004: R4,809 million; 2003: R1,748 million)
and 541,498,547 (2004: 556,994,962; 2003: 557,031,819) weighted
average number of ordinary shares in issue.
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Profit on disposal of investment
headline earnings of R6,899 million (2004: R4,809 million;
2003: R1,748 million) and 542,537,579 (2004: 556,994,962;
2003: 557,031,819) diluted weighted average number of
ordinary shares in issue. The adjustment in the weighted average
number of shares is as a result of the expected future vesting
of shares already allocated to employees under the Telkom
Conditional Share Plan.
ordinary shares
551,509,083 (2004: 557,031,819; 2003: 557,031,819) number of ordinary shares issued. The reduction in the number of shares
represents the number of treasury shares held on date of payment.
The disclosure of headline earnings is a requirement of the JSE Securities Exchange of South Africa and is not a recognised measure under US GAAP.
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(Refer note 25)
and software
end of
and software
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and software
and software
Full details of land and buildings are available for inspection at the registered offices of the Group.
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computer software.
recoverable amount is recognised as an impairment loss.
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independent valuator, JHI Real Estate Limited, on an open market value basis at R58 million (Group share: R29 million) (2004: R60 million;
Group share: R30 million). The valuation was arrived at by reference to market evidence of transaction prices for similar properties.
Debt is collateralised over this leasehold land and building and the fair value of the lease liability included in Note 38 is R117 million (Group
share: R59 million) (2004: R110 million; Group share: R55 million).
The property rental income earned by Vodacom from its investment property, all of which is leased out under operating leases, amounted to R5 million (Group share: R3 million) (2004: R7 million; Group share: R4 million). Direct operating expenses incurred on the investment property in the period amounted to R8 million (Group share: R4 million) (2004: R2 million; Group share: R1 million).
Smartphone SP (Proprietary) Limited (Refer note 36).
During the current financial year the properties have been reclassified to Property, plant and equipment as the majority of the premises were no longer being leased to third parties.
copyrights and other
Change in comparatives
The Group restated comparatives due to a change in accounting policy for the years ended March 31, 2004 with R16 million and 2003 with R8 million (Refer note 2).
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and other
and other
and other
assessed the assets for impairment in accordance with the requirements of IAS36 Impairment of assets. The recoverable amount of these assets
have been determined based on the fair value of the assets less cost of disposal at March 31, 2005. The fair value of the assets was obtained
from a knowledgeable, willing party on an arm's length basis, based on the assumption that the assets would be disposed of on an item by item
basis. The amount with which the carrying amount exceeded the recoverable amount is recognised as an impairment loss.
that company.
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Communications Organisation,headquartered in Abidjan, Ivory Coast, at cost.
RNil (2004: RNil; 2003: R20,2 million).
headquartered in The Hague, Netherlands, at fair value. Market value:
RNil (2004: R49 million; 2003: R40 million). New Skies Satellites N.V.
was liquidated and a liquidation distribution of R55 million was received.
Accordingly, the investment has been derecognised and the gain recognised in Other income (Refer note 4).
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Communications Limited utilised this loan to ensure sufficient shareholder
loan funding by itself as a shareholder of Vodacom Tanzania Limited.
The loans and capitalised interest are collateralised by cession over all
shareholder distributions and a pledge over the shares of Vodacom Tanzania Limited. All the shareholders subordinated their loans to Vodacom Tanzania Limited for the duration of the project finance funding period.
issued during the 2003 year, bears interest at LIBOR plus 5%. Caspian
Construction Company Limited utilised this loan to ensure sufficient shareholder loan funding by itself as a shareholder of Vodacom Tanzania Limited. The loans and capitalised interest are collateralised by cession over all shareholder distributions and a pledge over the shares of Vodacom Tanzania Limited. All the shareholders subordinated their loans to Vodacom Tanzania Limited for the duration of the project finance funding period.
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2003: R938 million) that will be used to fund the post-retirement medical aid
liability. These investments have been made through a cell captive that has
been consolidated in full.
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business do not expire. The Group does not have material unutilised assessed
losses for which no deferred tax assets were raised.
the amount by which dividends declared by the Group exceeds dividends received. The deferred tax asset is raised as it is considered probable that it will be utilised in the future. The asset will be recorded as a tax expense when dividends are declared.
in accounting policies (Refer note 2).
Total other financial assets
African capital and money markets, with a view to generating additional
investment income on the favourable interest rates provided on these transactions.
Interest received from the borrower is based on the current market-related yield.
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The terms and conditions of these transactions are governed by signed International Securities Market Association ('ISMA') agreements with all counter parties and the regulations of the Bond Exchange of South Africa ('BESA').
The fair value of bills of exchange has been derived at with reference to BESA quoted prices.
Total other financial liabilities
At fair value through profit or loss
R1,101 million (2003: R1,571 million) has been reclassified from Current portion of other financial assets to Other financial assets. R153 million (2003: R143 million) has been reclassified from Current portion of other financial liabilities to Other financial liabilities. R152 million (2003: R142 million) has been reclassified from Current portion of other financial assets – derivative instruments to Current portion of other financial liabilities – derivative instruments (Refer note 2).
1999 tax year. The amount was repaid by the South African Revenue Services
during the 2004 financial year.
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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 to buy back Telkom's own shares up to a limit of 20% of the current issued share capital. This authority expires at the next annual general meeting.
in Telkom, with a fair value of R1,366 million (2004: R251 million) and
R1,166 million (2004: RNil) are currently held as treasury shares by its subsidiaries Rossal No 65 (Proprietary) Limited and Acajou Investments (Proprietary) Limited, respectively.
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2004: R5 million; 2003: R11 million)
In terms of the Short-term Insurance Act, 1998, the Vodacom cell captive partner, Nova Risk Partners Limited is required to raise a contingency reserve equal to 10% of premiums written less approved reinsurance (as defined in the Act). This reserve can be utilised only with the prior permission of the Registrar of Short-term Insurance.
The earnings from the cell captives are transferred to non-distributable reserves.
Change in comparatives
The Group restated the Foreign currency translation reserve due to a change in accounting policy for the years ended March 31, 2004 with R13 million and 2003
with R4 million (Refer note 2).
for the year ended March 31, 2003 with R2 million (Refer note 2).
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for the year ended March 31, 2003 with R33 million (Refer note 2).
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TK01, 2008, 10%, R4,658 million (2004: R4,609 million; 2003: R4,491 million)
covenants, which limit Telkom’s ability to create encumbrances on revenues or assets, and to secure any indebtedness without securing the outstanding bonds equally and rateably with such indebtedness. The TL20 loan contains restrictive financial covenants.
Telkom is a buyer or seller of last resort in the Telkom bond TK01. To eliminate the resultant exposure Telkom sells or buys government bonds. The objective of the hedging relationship is to eliminate price risk whereby value changes on the TK01 transactions are in total offset by value changes in the government stock.
Maturity, rate p.a., nominal value
2003 – 2005, 14.06% (2004: 13.5% to 15.13%), R263 million
(2004: R1,708 million; 2003: R1,766 million).
Vodacom Lesotho (Proprietary) Limited
have been determined.
United States Dollar: 2002 – 2003, 3.14%, US$Nil
(2004: US$Nil; 2003: US$1 million)
(2004: €512 million; 2003: €512 million)
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(2003: US$Nil) (Group share: US$10 million; 2003: US$Nil). At March 31, 2004, the credit facility was collateralised by guarantees provided by Vodacom and bore interest at an effective interest rate of LIBOR plus 1.5%.
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(a) Netherlands Development Finance Company US$10 million
Group share: TSH7,678 million)
Limited amounted to US$9 million (Group share: US$5 million) at March 31,
2003. The loan bore interest at an effective rate of LIBOR plus 1.5% and was repaid on July 1, 2003.
(Group share: US$ 0,5 million). The facility bears interest at 18% per annum.
2003: US$19 million; Group share: US$19 million; 2004: US$10 million,
2003: US$10 million) bear interest at a rate of 4% per annum. The preference shares are redeemable, but only after the first three years from date of inception and only on the basis that the shareholders are repaid simultaneously and in proportion to their shareholding.
R588 million (2004: R616 million; 2003: R635 million) (Refer note 10). These
amounts are repayable within periods ranging from 4 to 15 years. Interest
rates vary between 12.1% and 16.9%.
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African capital and money markets with a view to financing short-term liquidity
gaps. Interest paid by the Group is based on the current market-related yield.
transactions are initiated based on market-related interest rates, the carrying
value approximates the fair value.
of the above transactions.
agreements with all counter parties and the regulations of the BESA. The fair
value has been derived at with reference to BESA quoted prices.
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(2004: 28 days) which must be taken within an 18 month leave cycle for Telkom, and a cap of 45 days for Vodacom. The leave cycle is
reviewed annually and is in accordance with legislation.
The bonus is payable to all qualifying employees once every year after the Company's results have been made public.
members of management and is payable bi-annually in December and May to staff members. The maximum bonus payable is determined by
applying a specific formula based upon Vodacom achieving a pre-determined profit and the employee's achievement of specified performance
targets. Management and staff must be in service on May 31 to qualify for the bonus.
balance sheet date less the value at which the entitlements were issued, multiplied by the number of entitlements allocated to a participant. The
value of the bonus entitlements are determined based upon the audited consolidated financial statements of the Vodacom Group. Periodically, a
number of entitlements are issued to employees, the value of which depends on the seniority of the employee. The participating rights of
employees vest at different stages and employees are entitled to cash in their entitlements within one year after the participating rights have
vested. The provision is utilised when eligible employees receive the value of vested entitlements.
(Refer note 38).
based on claims notified and past experience.
provision for onerous contracts represents the Group’s liability in respect of onerous lease contracts related to certain buildings. The provision is
discounted for the respective periods of the lease contracts. The provision for advertising co-operation represents the funds received from handset
suppliers for expenditure not yet spent by the Group or external service providers.
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R606 million (Refer note 5.1).
R173 million). A profit of R11 million is recognised in income on a straight line basis, over the period of the lease ending 2019.
(Refer note 2).
deferred and recognised ratably over the average expected life of the customer. The excess of the costs over revenues is expensed immediately.
Previously, activation revenue and costs were recognised upon activation by the customers (Refer note 2).
2004 with R220 million and 2003 with R117 million (Refer note 2).
Vodacom Group Pension Fund. Membership is compulsory. In addition, certain retired employees receive medical aid benefits and a telephone
rebate. All of the liabilities are actuarially determined and valuations performed at intervals not exceeding three years. Actuarial calculations are
performed in the periods between valuations.
workforce reduction.
were members of the Government Service Pension Fund and Temporary Employees Pension Fund were transferred to a newly established Telkom
Pension Fund. The deficits that existed in the aforementioned State Funds were transferred to the Telkom Pension Fund. Legislation also made
provision that Telkom would guarantee the financial obligations of the Telkom Pension Fund. The South African Government guaranteed the
actuarially valued deficit of the Telkom Pension Fund as at September 20, 1991, plus interest as determined by the State Actuary. The deficit
related to the transferred members was fully repaid during 2004.
calculation performed at March 31, 2005 indicates that the pension fund is in a surplus funding position of R45 million.
are based on that valuation. Management expects to complete the next statutory valuation in June 2005.
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Interest and service cost on projected benefit obligations
At beginning of year
At beginning of year
The income statement expense is therefore the amount of pension contributions.
Discount rate (%)
year is R7 million.
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the benefit obligation, plan asset and service costs for the pension and retirement
funds for each of the financial periods presented.
Equities (%)
remain in the Telkom Pension Fund or to be transferred to the Telkom Retirement Fund. All pensioners of the Telkom Pension Fund and
employees who retired after July 1, 1995 were transferred to the Telkom Retirement Fund. At the same time the proportionate share of the
deficit relating to the transferring employees and pensioners was transferred to the Telkom Retirement Fund. Upon transfer the Government
ceased to guarantee the deficit in the Telkom Retirement Fund. Subsequent to July 1, 1995 further transfers of existing employees occurred.
benefits payable to the pensioners cannot be reduced.
defined contribution plan to a defined benefit plan. Telkom guarantees a minimum benefit to retirees that is based on their contributions and the
performance of the defined contribution plan at retirement date. Increases in the benefit subsequent to an employee’s retirement are also
guaranteed.
retirement fund. The latest actuarial calculation performed at March 31, 2005 indicates that the retirement fund is in a surplus funding position
of R457 million.
valuation. Management expects to complete the next statutory valuation in June 2005.
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Interest and service cost on projected benefit obligations
At beginning of year
At beginning of year
The income statement expense is therefore the amount of the retirement contributions.
Office buildings occupied by Telkom
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Ten fund managers invest in South Africa and four of these managers specialise
in trades with bonds on behalf of the Retirement Fund. The international
investment portfolio consists of global equity and hedged funds.
Discount rate (%)
financial year is R556 million.
Equities (%)
executive employees of Vodacom are also members of the Vodacom Executive Provident Fund, a defined contribution provident scheme. Both
schemes are administered by ABSA Consultants and Actuaries (Proprietary) Limited. The Group’s share of the current contributions to the
Pension Fund amounted to R35 million (2004: R33 million; 2003: R26 million). The Group’s share of the current contributions to the Provident
Fund amounted to R2 million (2004: R3 million; 2003: R3 million). The Vodacom employees at March 31, 2005 were 4,991
(2004: 4,609; 2003: 4,406). The South African funds are governed by the Pension Funds Act No. 24 of 1956.
plan. The expense in respect of current employees’ medical aid is disclosed in Note 5. The amounts due in respect of post-retirement medical
benefits to current and retired employees have been actuarially determined and provided for as set out in Note 27. The Company has terminated
future post-retirement medical benefits in respect of employees joining after July 1, 2000.
who retired after 1994 (‘Post-94’); and the in-service members. The Post-94 and the in-service members’ liability is subject to a Rand cap,
which increases annually with the average salary increase.
valuation of the benefit was performed as at March 31, 2005.
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Discount rate (%)
The impact of a 1 percentage point movement in the healthcare cost and salary
inflation rate is as follows:
actuarial valuation was performed in March 2005. Eligible employees must be
employed by Telkom until retirement age to qualify for the telephone rebates.
The scheme is a defined benefit plan.
Discount rate (%)
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operational and management employees and is aimed at giving shares to Telkom employees, at a RNil exercise price, at the end of the vesting
period. The vesting period for the operational employees share award is 0% in year one, 33% in each of the three years thereafter, while the
management share award vests fully after three years. Although the number of shares awarded to employees will be communicated at the grant
date, the ultimate number of shares that vest may differ based on certain performance conditions being met.
on the shares issued to employees, but performance criteria will need to be met in order for the shares to be granted and vested.
market share price of R77,50 at grant date, and adjusted for a 2.6% dividend yield.
The principal assumptions used in calculating the expected number of shares that
will vest are as follows:
vesting period was R192 million, of which R68 million was recognised in employee
expenses for the year.
cash generated from operations
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disposed of its 51% interest in Vodacom Sport and Entertainment (Proprietary)
Limited and on March 31, 2002, its 100% interest in Film Fun Holdings
(Proprietary) Limited.
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shareholders’ interests
Acquisitions
Limited for R100. This company will be utilised to administer, on behalf of Telkom SA
Limited, the Telkom Conditional Share Plan.
(Proprietary) Limited for R100. This company will be utilised to hold treasury
shares acquired in Telkom SA Limited up to the maximum as allowed by
the JSE Securities Exchange rules.
Limited, which has a 100% shareholding in Stand 13 Eastwood Road Dunkeld
(Proprietary) Limited and 53% in Ithuba Smartcall (Proprietary) Limited
of subsidiaries and joint ventures were as follows:
Aggregate fair value of net assets acquired
amount accrued interest at prime less 2% per annum from March 1, 2004 up to the date of payment.
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Limited through its 51% owned subsidiary, Smartphone SP (Proprietary) Limited.
Aggregate fair value of net assets acquired
Smartcom (Proprietary) Limited
costs excluding dividend from Smartcom (Proprietary) Limited, was paid during
April 2004. The company declared a dividend to its shareholders from pre-acquisition
reserves on August 18, 2004. The dividend was paid on August 31, 2004.
The goodwill relating to the acquisition represents future synergies and the ability
to directly control the Group’s customers.
value of the assets and liabilities were preliminarily determined as follows:
intangible asset. The goodwill related to the acquisition represents future synergies and the ability to directly control customers. It is impracticable
to disclose the revenue and profit of the business that is included in the current year’s results as the customer base was integrated into Vodacom
Service Provider Company (Proprietary) Limited. The profit and revenue related to these customers were not separately recorded. For the same
reason stated above, it would not be practicable to determine the impact on revenue and profits of the Vodacom Group for a full year.
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11, 2001. This investment is governed by a shareholders’ agreement, which previously provided the minority shareholder with certain protective
and participative rights and therefore, in terms of IAS31 Interests in Joint Ventures, Vodacom Congo was considered to be a joint venture
resulting in it being proportionately consolidated in the financial statements for the years ended March 31, 2004 and 2003.
Vodacom Congo. The shareholders’ agreement also gave Vodacom the right to appoint management and the majority of the Board of the
company. Vodacom also had a management agreement to manage the company on a day-to-day basis.
Congo now being controlled and considered to be a 51% owned subsidiary of Vodacom from April 1, 2004. Vodacom’s interest in the company
is consolidated from this date in accordance with IAS27 Consolidated and Separate Financial Statements.
consolidated at that date, were as follows:
Congo (RDC) s.p.r.l. as a subsidiary:
directly in reserves on April 1, 2004.
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at a rate linked to prime, have no specific maturity date and are subject to annual review.
uncommitted and can also be utilised for foreign loans and are subject to review at various dates (usually on an annual basis).
Provider Company
on behalf of short-term insurers and
Lloyd’s underwriters, and relating to
short-term insurance business carried on
and debit orders
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s.p.r.l. has a revolving credit facility of US$4 million of which US$3 million was utilised at March 31, 2005. Vodacom International Limited has
a revolving term loan of US$180 million which was fully utilised at March 31, 2005. Vodacom Lesotho (Proprietary) Limited has overdraft
facilities with various banks of M47 million and of which M15 million was utilised at March 31, 2005. Foreign currency term facilities are
predominantly US Dollar based, at various maturities and are utilised for bridging and short-term working capital needs.
2003: €27 million)
(Dublin) Limited
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generated cash and other borrowings.
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with other leases signed for five years and three years. The bulk of non-equipment-related premises are for leases of three years to ten years.
The majority of the leases normally contain an option clause entitling Telkom to renew the lease agreements for a period usually equal to the
main lease term.
The minimum lease payments under these agreements are subject to annual escalations, which range from 8% to 12%.
Penalties in terms of the lease agreements are only payable should Telkom vacate the premises and negotiate to terminate the lease agreement
prior to the expiry date, in which case the settlement payment will be negotiated in accordance with the market conditions of the premises.
Future minimum lease payments under operating leases are included in the above note. Onerous leases for buildings, of which Telkom has no
further use, no possibility of sub-lease and no option to cancel, are provided for in full.
The master lease agreement for vehicles was for a period of five years, and expired on March 31, 2005. A new agreement is currently being
negotiated for a period of three years on similar terms and conditions as the previous agreement and is effective April 1, 2005. In accordance
with the new agreement Telkom is not allowed to lease any similar vehicle as specified in the contract from any other service provider during the
three year period, except for rentals at airports which are utilised in cases of subsistence and travel, as well as vehicles which are not part of the
agreement. The agreement is structured to have no lease increases on vehicles that are continually leased from the lessor. If a vehicle, is
however, replaced by a new similar vehicle, the lease costs of the newest vehicle will increase by the Consumer Price Index. All leased vehicles
are, however, subject to any variance in the interest rate fluctuations and are adjusted as and when the adjustments are announced by the South
African Reserve Bank. As there is no minimum usage clause in the master lease agreement, only the lease payments for the next year have been
disclosed. The leases of individual vehicles are renewed annually.
buildings is for a period of 25 years ending 2019. The minimum lease payments are subject to an annual escalation of 10% p.a. Telkom has the
right to sub-let part of the buildings. In case of breach of contract, the lessor is entitled to cancel the lease agreement and claim damages.
Finance charges accruing on the Group’s building leases exceed the lease payments for the next five years. Minimum lease payments for the
next five years do not result in any income accruing to the Group.
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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. The maximum
amount of the guarantee in the event of the default is as disclosed above.
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 Group 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 US$130 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. On November 5, 2002, Telkom brought an application in the High Court in South Africa
to review and set aside the partial award. The hearing of the review applicatio n commenced on August 11, 2003. Judgement in Telkom’s favour
was handed down on November 27, 2003. Telcordia, however, brought an application for leave to appeal on April 28, 29 and 30, 2004. On
May 3, 2004, the High Court dismissed the application by Telcordia and ordered Telcordia to pay the legal costs of Telkom, including the cost of
two counsel. Telcordia also petitioned the United States District Court for the District of Columbia to confirm the partial ruling, which petition
Telkom has successfully resisted. Telcordia, however, filed a notice to appeal against the decision of the District Court of Columbia, which appeal
was heard on April 1, 2004. The court dismissed the appeal by Telcordia, on April 9, 2004.
On July 29, 2004, Telcordia filed a further petition to enforce the arbitrator’s partial award in the District Court of New Jersey, USA.
Telkom has instructed its attorneys to oppose the petition. Telcordia filed its petition brief in the District Court of New Jersey on October 8, 2004.
Telkom’s reply brief was served on Telcordia on October 22, 2004. The District Court of New Jersey requested oral argument to be heard on
December 8, 2004. On December 8, 2004 the court dismissed Telcordia’s petition. Telkom has since been informed that Telcordia intends to
appeal the decision. Telkom now awaits the advice of its external attorneys in Washington, USA.
On July 30, 2004, Telcordia served its petition on Telkom for leave to appeal in the Supreme Court of Appeals, Bloemfontein. Telkom was
required to file its reply to the petition on or before October 29, 2004. On November 29, 2004, the Supreme Court of Appeals, Bloemfontein,
granted Telcordia leave to appeal. Telcordia filed its Notice of Appeal on January 24, 2005. The Record of Appeal must be filed three months
thereafter. Telcordia has requested an extension to June 25, 2005 to file the Record of Appeal. Should the extension be granted, judgment in
the matter may only be given early in 2006. Telcordia’s Heads of Argument must be filed three months after the Record of Appeal has been
filed. Telkom must file its Heads of Argument two months after Telcordia has filed its Heads of Argument. A date for the hearing of the appeal
will only be allocated once all Heads of Argument have been filed.
Telkom has been requested by the South African Department of Trade and Industry to respond to issues raised by the United States Secretary of
Commerce on the dispute between Telkom and Telcordia, following concerns raised by five members of the United States House of
Representatives. Telkom has since prepared its response and submitted it to the Department of Trade and Industry.
The dispute between Telkom and Telcordia and the amount of any liability is not expected to be finalised until late 2005 or early 2006. As
Telkom no longer believes it has a probable obligation, it has provided US$Nil (March 31, 2004: US$Nil; 2003: US$44 million) for its estimate
of probable liabilities.
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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. The complaints deal with Telkom’s alleged refusal to
provide telecommunications facilities to certain VANS providers to construct their networks, alleged refusal to lease access facilities to VANS
providers, alleged discriminatory pricing with regard to leased lines services and alleged refusal to peer with certain VANS providers. A maximum
administrative penalty of up to 10%, calculated with reference to Telkom’s annual turnover excluding subsidiaries and joint ventures, in the
financial year prior to the co mplaint 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). Telkom has brought an application in the High Court in respect of the Competition Tribunal’s jurisdiction to
adjudicate this matter on the basis that:
Telecommunication Act and its PSTS licence.
licence. We do not expect the Competition Tribunal to adjudicate on this matter within the next two years.
the fact that certain provisions of the Act are still being finalised, a reliable estimate of capital and operating costs that will potentially be incurred
in order to comply with the provisions of the Act cannot be estimated at this stage.
conditions be met, the Group’s commitments in this regard are estimated at R1 billion.
but who have not yet upgraded into new contracts and therefore have not utilised the incentives available for such upgrades. The Vodacom Group
has not provided for the liability, as no legal obligation exists, since the customers have not yet entered into new contracts.
Group is currently awaiting Competition Commission approval.
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Concentration of risks
employees. Telkom employees primarily belong to the Alliance of Telkom Union and the Communication Workers Union. These employees are
bound to follow the decisions of the Union. Telkom has a good working relationship with the Unions and to date, there have been no significant
disruptions to operations due to union activities.
Telkom has various commercial contracts with suppliers of goods and services which at a high level can be classified into IT, network, commercial
(inclusive of outsourced entities), training and other. Risk reviews are conducted on a quarterly basis, while formal assessments are conducted on
an annual basis. If specific risks are highlighted during a review, a formal assessment is conducted immediately. Risk exposure is evaluated
against the following criteria:
• the value of the contract/Company spend to date;
• impact of suppliers/service providers on key strategic initiatives of the Company;
• level/intensity of associated maintenance/support received from technology suppliers;
• the period that a specific technology has already been introduced into the network;
• the extent of customisation by the Company on standard technical functionality provided by supplier/service provider;
• level of foreign exposure in currency associated with the product/service offering; and
• inherent business and financial risk associated with a supplier.
Telkom is currently one of two holders of a licence to provide public switched telephony services within South Africa. The customer base is diverse
and spread across the country. A licence has been awarded to the second network operator which is as yet not in operation. Telkom has
embarked on a process of signing long-term contracts with significant customers.
Exposure to continuously changing market conditions has highlighted the importance of financial risk management as an element of control for
the Group. Treasury policies, risk limits and control procedures are continuously monitored by the Board of Directors.
The Group holds or issues financial instruments to finance its operations, for the temporary investment of short-term funds and to manage
currency and interest rate risks. In addition, financial instruments like trade receivables and payables, arise directly from the Group’s operations.
The Group finances its operations primarily by a mixture of issued share capital, retained profit, long-term and short-term loans. The Group uses
derivative financial instruments to manage its exposure to market risks from changes in interest and foreign exchange rates. The derivatives used
for this purpose are principally interest rate swaps, currency swaps and forward exchange contracts. The Group does not speculate in derivative
instruments.
and the refinancing of existing borrowings.
cost efficient manner, the Group makes use of interest rate derivatives as approved in terms of the Group policy. Fixed rate debt represents
approximately 91.55% (2004: 86.89%; 2003: 90.06%) of the total consolidated debt, after taking the instruments listed below into
consideration. The debt profile of mainly fixed rate debt has been maintained to limit the Group’s exposure to interest rate increases given the
size of the Group’s debt portfolio. All financial instruments that reprice within one year are deemed to be floating rate debt.
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for interest-bearing debt:
interest rate risk exposure on financial assets.
Group makes use of interest rate derivatives as approved in terms of Group policy limits.
Pay fixed
Pay fixed
Pay fixed
risk on debt instruments.
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Other financial assets and liabilities
The risk arises from derivative contracts entered into with international financial institutions with a rating of A1 or better. The maximum exposure
to the Group from counterparties is a net favourable position of R1,083 million (2004: R853 million). No collateral is required when entering
into derivative contracts. Credit limits are reviewed on an annual basis or when information becomes available in the market. The Group limits its
exposure to any counterparty and exposures are monitored daily. The Group expects that all counterparties will meet their obligations.
Trade receivables
Credit limits are set on an individual and entity basis. Management reduces the risk of unrecoverable debt by improving credit management
through credit checks and levels. Trade receivables comprise a large widespread customer base, covering residential, business and corporate
customer profiles. Credit checks are performed on all customers on application for new services, and on an ongoing basis where appropriate.
Liquidity risk management
The Group is exposed to liquidity risk as a result of uncertain trade receivable related cash flows as well as capital commitments of the Group.
Liquidity risk is primarily managed by the Corporate Finance division in accordance with policies and guidelines formulated by the Executive
Committee. In terms of its borrowing requirements, the Group ensures that sufficient facilities exist to meet its immediate obligations. In terms of
its long-term liquidity risk, the Group maintains a reasonable balance between the period assets generate funds and the period the respective
assets are funded. Short-term liquidity gaps may be funded through repurchase agreements.
Available credit facilities not utilised at March 31, 2005 amounted to R4,750 million (Refer note 37).
Negative working capital ratio
For each of the financial years ended 2005, 2004 and 2003 the Group had a negative working capital ratio. A negative working capital ratio
arises when current liabilities are greater than the current assets. Current liabilities 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 Group’s minority shareholder in VM S.A.R.L, Empresa Mocabicana De Telecommunicaçòes 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 account 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
the 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 no value at March 31, 2005.
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 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 no value at March 31, 2005.
Smartcom (Proprietary) Limited put option
In terms of the agreement between Vodacom Group (Proprietary) Limited (‘the Group’), Smartphone SP (Proprietary) Limited (‘Smartphone’)
and the minority shareholders of Smartcom (Proprietary) Limited (‘Smartcom’), the minority shareholders of Smartcom have a put option
against the Group, should the Group reduce the standard service provider discount below certain percentages as stipulated in the put option
agreement or should Smartcom and Smartphone decide to terminate the agency agreement between them. The minority shareholders will not be
entitled to exercise the put option if the agency agreement is replaced by another agreement with terms no less favourable than the cancelled
agency agreement. The put option has no value at March 31, 2005, as the conditions set out in the agreement have not been met.
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Vodacom (Proprietary) Limited (‘Vodacom’) and Skyprops 134 (Proprietary) Limited (‘Company’), FirstRand grants to Vodacom Group an
irrevocable call option to require FirstRand at any time for the duration of the agreement to sell the shares in and claims against the company to
Vodacom Group on the implementation date. The option may be exercised on 30 days’ written notice by Vodacom Group before the termination
date (December 1, 2012) or if Vodacom commits a breach of the lease agreement. The call option has no value at March 31, 2005 as the face
values of the shares and claims equal the market value.
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 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 the fair market value of the related shares at the date the put option is exercised. The option has no value at
March 31, 2005.
exposures via various financial instruments suitable to the Group’s risk exposure.
and liabilities. The Group also enters into forward exchange contracts to hedge interest expense and purchase and sale commitments
denominated in foreign currencies (primarily US Dollars and Euro). The purpose of the Group’s foreign currency hedging activities is to protect the
Group from the risk that the eventual net flows will be adversely affected by changes in exchange rates.
ZAR
ZAR
ZAR
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consist of capital expenditure ordered but not yet received, future interest payments and loans denominated in foreign currency.
United States Dollar
United States Dollar
United States Dollar
United States Dollar
United States Dollar
United States Dollar
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United States Dollar
United States Dollar
United States Dollar
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values have been determined using available market information and appropriate valuation methodologies as outlined below.
amount due to the short-term maturities of these instruments.
interest rates.
These amounts reflect the approximate values of the net derivative position at the balance sheet date. The fair values of listed investments and
the underlying investments held by the cell captive are based on quoted market prices.
United States Dollar
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of Telesafe Security. Letlapa Security owns an interest in Telesafe Security, a security company which provides physical security services to
Telkom. Telkom paid R16,047,028 to Telesafe Security for the year ended March 31, 2005 for these services. The outstanding creditor’s
balance at September 18, 2004 was R3,302,781.
Gilfillan Inc., which provides legal services to Telkom from time to time. Telkom paid R3,192 for the period April 1, 2004 to November 25,
2004 for these services. The outstanding creditor’s balance at November 25 was RNil.
15, 2004) and Tan Sri Dato’Ir Md Radzi Mansor (resigned November 26, 2004), were on the Telkom Board representing Thintana
Communications on Telkom’s Board of Directors.
Directors. At March 31, 2005, the Government held 37.7% of Telkom’s issued shares.
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Mr Sizwe Nxasana, the executive director, has been granted 17,341 shares in the Group, allocated in terms of Telkom Conditional Share Plan,
which will vest on June 30, 2007.
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are thus eliminated against segment results:
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Capital expenditure for property, plant and equipment
Capital expenditure for property, plant and equipment
its subsidiaries as well as Vodacom‘s South African-based mobile communications network, the segment information of its service providers and
its other business segments. ‘Other African countries’ comprises only Vodacom‘s mobile communications networks in Tanzania, Lesotho, the
Democratic Republic of Congo and Mozambique.
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were concluded at arm‘s length. Details of material transactions and balances with
related parties not disclosed elsewhere in the consolidated annual financial statements
were as follows:
Trade receivables
Income
Revenue
Other receivables
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DRC – Democratic Republic of Congo.
company; OTH – Other.
Services (Proprietary) Limited
Limited
Limited
four subsidiaries is R500 million
(2004: R180 million,
2003: R144 million)
in the following companies
(Group share: 50% of
the interest in ordinary
share capital as indicated):
Limited (C)
Holdings Company (Proprietary)
Limited (INV)
Company (Proprietary) Limited (C)
(Proprietary) Limited previously
known as Globalstar Southern Africa
(Proprietary) Limited* (S)
Limited* (C)
Limited (C)
Limited (C)
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(Proprietary) Limited* (C)
Limited* (C)
Holdings (Proprietary) Limted
(MSC)
Limited (MSC)
(Proprietary) Limited (PROP)
(Proprietary) Limited (PROP)
Dunkeld West (Proprietary)
Limited (PROP)
(Proprietary) Limited* (OTH)
Limited
(Proprietary) Limited
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Vodacom Group (Proprietary) Limited
restatement is as follows:
Revenue
Cash flow from operating activities
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Dividends
per share on June 2, 2005 payable on July 8, 2005 for shareholders registered on July 1, 2005 which will fully utilise the available tax asset
on STC credit and result in an additional STC taxation liability of R227 million.
in the financial statements, which significantly affects the financial position of the Group and the results of its operations.
Differences between International Financial Reporting Standards and US Generally Accepted Accounting Principles
(‘IFRS’), which differ in certain respects from accounting principles generally accepted in the United States (‘US GAAP’). Application of US GAAP
would have affected the balance sheet as of March 31, 2005, 2004 and 2003 and net income for each of the three years in the periods ended
March 31, 2005 to the extent described below. A description of the differences between IFRS and US GAAP as they relate to the Group, as well
as its equity accounted investment in Vodacom, are discussed in further detail below.
2005 from South African Rand (‘ZAR’) only as a matter of convenience at the South African exchange rate of ZAR 6.22 = US$ 1, the noon
buying rate on March 31, 2005. These amounts are included for the convenience of the reader only. Such translation should not be construed as
a representation that the South African Rand amounts have been or could be converted into US Dollars at this or any other rate.
US GAAP for each of the three years ended March 31, 2005, 2004 and 2003.
of change in accounting principle
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effect of change in accounting principle
(net of tax of RNil)
of shares of 541,498,547
(2004: 556,994,962, 2003: 557,031,819)
issued shares.
change in accounting principle
accounting principle
number of shares of 542,537,579
(2004: 556,994,962, 2003: 557,031,819) ordinary shares.
The adjustment in the weighted average number of shares is as
a result of the future vesting of shares already allocated to
employees under the Telkom Conditional Share Plan.
in accounting principle
in accounting principle
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necessary to reconcile shareholders’ equity in accordance
with IFRS to the amounts in accordance with US GAAP
as at March 31, 2005, 2004 and 2003.
the caption ‘Accumulated Other Comprehensive Income’. Additionally the standard requires that companies present comprehensive income, which
is a combination of net income and changes in a company’s accumulated other comprehensive income accounts. Changes in the Group’s
accumulated other comprehensive income is reflected under non-distributable reserves.
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net income for 12 month period (net of tax of R28 million)
net income for 12 month period (net of tax of R29 million)
net income for 12 month period (net of tax of R29 million)
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statement without proportional consolidation of Vodacom.
Income statements as per US GAAP
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Cash flow from operating activities
The Staff of the US Securities and Exchange Commission issued Staff Accounting Bulletin 101 (‘SAB101’) that addresses revenue recognition
under US GAAP. Under this guidance, revenue earned from access, installation-activation and similar fees should be recognised over the estimated
life of the customer relationship. Also, SAB101 permits, but does not require, companies to defer costs directly associated with such revenue and
to also recognise these costs over the life of the customer relationship. Under IFRS the Group recognises this revenue and related costs when the
services are provided and the related costs are incurred.
In accordance with US GAAP, revenue earned from installation and activation is deferred and recognised over the expected period of the customer
relationship. The expected period of the customer relationship is 6.0 years (2004: 7.5 years, 2003: 7.5 years) for telephony voice customers
and 4.0 years (2004: 3.5 years, 2003: 4 years) for data-customers.
The Group recognises installation and activation costs, excluding those costs that are capitalised as an integral part of the network, in the period
incurred. Revenue adjustments resulted in an increase in pre-tax earnings of R62 million, R98 million and R77 million in 2005, 2004 and 2003
respectively.
b) Sale and lease-back
During the year ended March 31, 2000, Telkom outsourced its entire fleet of vehicles as well as the maintenance, fuelling, insurance, tracking
and other services to debis (a subsidiary of Daimler Chrysler SA, and not a related party) through a sale and lease-back agreement. The lease-
back was in the form of a master service level agreement covering a period of five years providing, subject to the company‘s requirements, for
the annual lease contracts for each vehicle under the agreement.
Under the provisions of IAS17, the Group recorded a gain from the transaction since it has transferred substantially all of the risks and rewards
incidental to ownership of the vehicles to debis and the criteria for profit recognition had been satisfied. The Group recognised a gain amounting
to R463 million in 2000 and accounted for the lease-backs as operating leases.
Under US GAAP, SFAS13, as amended by SFAS28, the Group determined that while the terms of the agreement provide that the assets
underlying the lease-backs would be subject to annual lease contract, renewable based upon the company‘s vehicle requirements and cancellable
under certain terms, debis‘ right of first refusal to provide all of the Group‘s requirements during the five-year term represents an economic
compulsion to renew the leases. Accordingly, the Group concluded that since the lease-back covered substantially all the assets that were sold
under the contract for substantially all their remaining useful lives, deferral of the related gain and recognition over the term of the related
agreements was appropriate.
Based on the requirements of SFAS13, a selected portion of the vehicle leases would be treated as finance leases due to the fact that when
analysed on a vehicle by vehicle basis, the present value of the minimum lease payments of certain individual vehicles exceed 90% of the fair
value of these vehicles or the lease term represents more than 75% of the remaining economic life of the vehicles. Accordingly, the full gain
realised through the sale of the vehicles has been reversed and the proceeds from the sale have been treated as an obligation. Rental payments
would be applied to interest expense on the obligation as well as to reduce the principal amount of the obligation. The resulting capital lease
assets are being depreciated over their remaining useful lives.
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in an increase in the number of vehicles being classified as capital leases. The increase in the number of capital leases was due to the lease term
of the vehicles being extended, when compared to the previous contract, with a resulting impact on the economic life and present value
calculations.
In the year ended March 31, 2000 the Group entered into a sale and lease-back of its vehicle fleet with debis, part of which is being accounted
for under US GAAP as capital leases. While no minimum usage clause exists in this contract as presented in Note 38, the Group is deemed to be
economically compelled under US GAAP to renew such leases based upon their historical requirements and contractual obligations to source any
such requirements during the contract period from debis. In accordance with the agreement Telkom is not allowed to lease any similar vehicles to
those specified in the contract from any other service provider during the five-year period.
The master lease agreement for vehicles was for a period of five years, and expired on March 31, 2005. A new agreement has been negotiated
for a period of three years on similar terms and conditions as the previous agreement and is effective April 1, 2005. In accordance with the new
agreement Telkom is not allowed to lease any similar vehicle as specified in the contract from any other service provider during the three-year
period except for the rentals at airport which are utilised in cases of subsistence and travel as well as vehicles which are not part of the
agreement. This agreement is structured to have no lease increases on vehicles that are continually leased from the lessor. If a vehicle is,
however, replaced by a new similar vehicle the lease costs of the newest vehicle, will increase by the Consumer Price Index. All leased vehicles
are, however, subject to any variance in the interest rate fluctuations and are adjusted as and when the adjustments are announced by the South
A frican Reserve Bank. The leases of individual vehicles are renewed annually.
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Under IFRS, external costs directly attributable to the issue of new shares are shown as a deduction, net of tax in equity. This is only allowed under
US GAAP, however, when the proposed listing has not been delayed more than 90 days after incurring these costs. In 2002, Telkom‘s IPO was
postponed more than 90 days. Therefore the costs incurred through March 31, 2002 related to the IPO of R44 million have been expensed. In
March 2003, these costs were expensed under IFRS. This adjustment had the effect of reversing the expense already recognised in 2002.
d) Derivative financial instruments
SFAS133 Fair value adjustments
The Group adopted IAS39 and SFAS133 on April 1, 2001. Upon adoption of IAS39, the difference between previous carrying amounts and the
fair value of derivatives, which prior to the adoption of IAS39 had been designated as cash flow hedges or fair value hedges but which do not
qualify for hedge accounting under IAS39, is recognised as an adjustment to the opening balance of retained earnings in the financial year
IAS39 is initially applied. Changes in the fair value of derivatives subsequent to April 1, 2001 are recorded in the income statement as they do
not qualify for hedge accounting.
Under US GAAP, in accordance with SFAS133, the company is required to recognise all derivatives on the balance sheet at fair value. The
SFAS133 transitional adjustments (at April 1, 2001) are recorded differently than those recorded under IAS39. For pre-existing hedge
relationships that would be considered cash flow type hedges, the transitional adjustment should be reported in OCI as a cumulative effect of the
accounting change. Any transition adjustment reported as a cumulative effect adjustment in OCI will subsequently be reclassified into earnings in
a manner consistent with the earnings effect of the hedged transaction. For pre-existing hedge relationships that would be considered fair value
type hedges, the company adjusted the carrying values of the hedged item to its fair value, but only to the extent of an offsetting transition
adjustment from the previously designated hedging instrument.
The hedged asset or liability is subsequently accounted for in a manner consistent with the appropriate accounting for such assets and liabilities.
For both cash flow and fair value hedges any portion of the derivative that is considered ineffective at transition is reported in income as a
cumulative effect of an accounting change.
Upon adoption on April 1, 2001, the Group recorded an adjustment to other comprehensive income of R440 million (net of tax of R262 million)
representing the fair value adjustment of derivatives for which the pre-existing hedge relationships would be considered cash flow type hedges.
In the 2005 fiscal year, the Group reclassified from other comprehensive income into earnings R50 million (net of tax of R29 million)
(2004: R47 million (net of tax of R29 million), 2003: R48 million (net of tax of R28 million)) as the hedged transaction impacted earnings.
Upon adoption, the Group also recorded an adjustment of R45 million to increase the carrying value of a hedged debt instrument that was the
hedged item in what would be considered a fair value type hedge. The fair value adjustment to the hedged item is limited to the extent of an
off-setting fair value adjustment to the hedging instrument. In the 2005 fiscal year, the Group amortised R11 million (2004: R11 million,
2003: R11 million) o f the adjustment to the hedged debt instrument into earnings.
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Under IFRS and US GAAP, goodwill arising on the acquisition of a foreign entity is treated as an asset of the entity and translated at the foreign
exchange rate ruling at the balance sheet date. The resulting foreign exchange transaction gain or loss is recorded in equity.
The Group adopted IFRS3 Business Combinations from April 1, 2004, under which acquired goodwill is no longer amortised, but tested for
impairment at least annually (or more frequently if impairment indicators arise). Accordingly, goodwill arising from the Group‘s investment is not
subject to amortisation as from April 1, 2004.
Under US GAAP, SFAS142 Goodwill and Other Intangible Assets is consistent with IAS38 Intangible Assets and IFRS3 which was adopted by the
Group from April 1, 2004. From this date goodwill is no longer amortised.
Prior to April 1, 2004 under IFRS, goodwill arising on the acquisition of a foreign entity was treated as an asset of the Group and translated at
the foreign exchange rate in effect at transaction date. In accordance with IFRS the Group amortised goodwill and other intangibles on a straight-
line basis over the anticipated benefit period.
Under US GAAP, goodwill arising on the acquisition of a foreign entity was translated at the actual exchange rate at the end of the period.
Furthermore, under US GAAP with effect from July 1, 2001 goodwill and intangibles with infinite lives are not amortised for business
combinations completed after June 30, 2001. For previously recorded goodwill and intangibles with infinite lives, amortisation ceased on
March 31, 2002. These adjustments resulted in an increase in income of R72 million and R74 million in 2004 and 2003, respectively.
The Group adopted SFAS142 Accounting for Goodwill and Other Intangibles effective April 1, 2002 and completed the initial step of a
transitional impairment test on all goodwill and indefinite lived intangible assets as of April 1, 2002. Management determined an impairment
of R16 million under US GAAP and IFRS with respect to the step acquisition of the minority interest in Swiftnet in May 2001, which has been
recognised as a cumulative effect of accounting change under US GAAP in the 2003 fiscal year. Subsequent impairment losses will be reflected in
operating income or loss in the income statement. There was no subsequent impairment loss recognised in fiscal years 2004 and 2005.
f) Joint venture accounting
Under IFRS, investments qualifying as joint ventures are accounted for under the proportionate consolidation method of accounting. Under the
proportionate consolidation method, the venturer records its share of each of the assets, liabilities, income and expenses of the jointly controlled
entity on a line-by-line basis with similar items in the venturer‘s financial statements. The venturer continues to record its total share of the losses
in excess of the net investment in the joint venture.
However, for US GAAP purposes where the joint ventures are equity accounted, losses are only recognised up to the net investment in the joint
venture, unless the investor has committed to continue providing financial support to the investee.
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criteria for accommodation under item 17 of Form 20-F should be reflected in the consolidated financial statements using the equity method.
The following table sets out the restated abbreviated income statement and balance sheet of the Group’s joint venture company, Vodacom, after
US GAAP adjustments.
Under IFRS, the total value of deferred bonus entitlements as calculated at the end of each financial period are provided in full on the balance
sheet date, based on the net present value of expected future cash flow.
Under US GAAP, in accordance with FIN28 Accounting for Stock Appreciation Rights and Other Variable Stock Option Awards Plans and
Interpretation of APB Opinion no’s 15 and 25, compensation cost is recognised over the service period or the vesting period if the service period
is not defined, based upon the undiscounted value of the entitlements.
h) Business combinations
Under IFRS, the Group elected to fair value 100% of the assets acquired and liabilities assumed, including minority interests. The excess of the
cost of an acquired entity over the net of the amounts assigned to assets acquired and liabilities assumed should be recognised as an asset
referred to as goodwill.
Under US GAAP, the Group should only fair value the percentage of the assets acquired and liabilities assumed, excluding minority interests.
Similar to IFRS, the excess of the cost of an acquisition over the net of the amounts assigned to assets acquired and liabilities assumed should
be recognised as an asset referred to as goodwill. As a result, the carrying amount of the goodwill for US GAAP purposes is adjusted to reflect the
different values assigned to the minority portion of assets and liabilities.
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Deferred tax benefits and liabilities are calculated, when applicable, for the differences between IFRS and US GAAP.
12.50% on any dividends distributed to shareholders. The dividend tax is payable if and only when dividends are distributed. Neither the
Company nor the shareholders receive any future tax benefits as a result of additional tax on dividends paid. As required under IFRS, Telkom will
recognise the tax effects of dividends when distributed in future. Under US GAAP, consistent with the requirements of EITF 95-9, the company
measures its income tax expense, including the tax effect of temporary differences, using the tax rate that includes the dividend tax. STC is
calculated on retained income after the 1992 fiscal year after deducting the net gains from certain capital transactions as defined and after
giving credit for dividends received from Vodacom and other sub sidiaries for which the Group had paid the related STC tax.
(2004: 36%, 2003: 57%).
requires that deferred taxes be recognised for the effect of the
excess of the amount of financial reporting over the tax basis of
such investment. According to South African tax law, the Group
would be required to pay tax at a rate of 30% on any increase
in the taxable appreciation in the value of its investment since
October 1, 2001. As such, deferred taxes have been recognised
on the increase in the carrying value of the equity accounted
investment in Vodacom since October 1, 2001.
The tax effects of the US GAAP adjustments relating to Telkom‘s
operations have been calculated based on a tax rate of
37.78%.
amounts determined under US GAAP, is as follows:
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Under IFRS, current and deferred taxation assets and liabilities are measured using taxation rates enacted unless announcements of taxation
rates by the Government have the substantive effect of actual enactment. The Group‘s deferred taxation assets and liabilities at March 31, 2005
are recorded at the substantially enacted taxation rate of 29%.
liabilities and assets is based on the provision of the enacted tax law (the effects of future changes in taxation laws or rates are not anticipated).
Therefore, the enacted rate of 30% should be used for all taxation amounts.
purpose of US GAAP.
The Group adopted IAS27 Consolidated and Separate Financial Statements, from April 1, 2004. In accordance with the guidance, the Group has
reclassified its minority interest in the balance sheet from a liability into equity. The Group applied this reclassification retrospectively.
fiscal year in the shareholders’ equity reconciliation.
Under IFRS, fees received by the Group from issuing guarantees are recognised in income as earned. A liability in respect of the guarantee is not
recognised until such time as the contingent liability is probable.
Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees and Indebtedness of Others (an interpretation of FASB
Statements No. 5, 57 and 107 and Rescission of Interpretation No. 34) (‘FIN45’) in fiscal year 2004. This interpretation clarifies that for
certain guarantees a guarantor is required to recognise, at the inception of a guarantee entered into after December 15, 2002, a liability for the
fair value of the obligation undertaken in issuing the guarantee. This interpretation does not prescribe a specific approach for subsequently
measuring the guarantor‘s recognised liability over the term of the related guarantee.
as employment period and salary rates. When an employee leaves the employment of the Company, any housing debt guaranteed by Telkom is
settled before any pension payout can be made to the employee. The fair value of guarantees subsequent to December 31, 2002 is not material
to the Group.
purposes. On the adoption of FIN45, all guarantees issued during fiscal year 2004 related to Vodacom Congo (RDC) s.p.r.l. were initially
recorded at fair value at the balance sheet and subsequently amortised into income statements as the premiums are earned.
Under IFRS when the Group has a contract that is onerous, the excess obligation is measured and recognised as a provision in accordance with
IAS37 Provisions, Contingent Liabilities and Contingent Assets. Under US GAAP, in accordance with FAS146 Accounting for Costs Associated with
Exit or Disposal of Activities, a liability for costs that will continue to be incurred under a contract for its remaining term without corresponding
economic benefit to the entity should be recognised and measured at its fair value when the entity ceased using the right conveyed by the
contract. The provision raised in respect of the Group’s onerous contracts is not significant and therefore no adjustment has been made.
The Group adopted IFRS2 Share-based Payments with prospective effect from April 1, 2004. This has resulted in the Group complying with
FAS123 (R) Share-based Payment using the modified prospective treatment and as such there is no reconciling differences on the Telkom
Conditional Share Plan.
Share options that were fully vested prior to April 1, 2004 are accounted for in accordance with APB Opinion No. 25 Accounting for Stock Issued
to Employees (‘APB25’) and related interpretations.
Accordingly, the excess of the market price of the underlying stock at the date of grant over the exercise price of the employee options, is
recognised as a shareholder capital contribution and compensation expense over the vesting period in the financial statements of the Group. The
Group recognises this compensation expense for its graded vesting stock options on a straight-line basis over the vesting period of the shares.
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the price of R33.81, expire three years from the date of grant, are not transferable other than on death, and are exercisable in four equal annual
instalments commencing on the date of grant, the first payments having been made six months from IPO date and on the first anniversary date
of the scheme.
on IPO date since it all relates to compensation for past service. As the option price exceeded the share price on that date, no compensation
expense is recorded.
as if the Group had accounted for its employee stock options under the fair value method of that Statement. The fair value for these options was
estimated at the date of grant using a binomial option pricing model with the following weighted-average assumptions:
is exercised, and discounts these to establish the fair value of the option granted.
allowed by the SEC for options granted in connection with privatising governmental entities. The Company‘s pro forma information based on fair
value calculations under SFAS123 follows:
is 338 days.
the transitional asset/liability is amortised on a straight-line basis over the remaining working lives of the employees participating in the plan
from April 1, 1989. In terms of IAS19, if this is a ‘liability’ or deficit, this is either recognised immediately or alternatively amortised over a
period of five years. In the event of an asset arising, the full amount is recognised immediately. The effect of these differences has been
immaterial to the US GAAP reconciliation.
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Net funding position
Service cost on benefits earned:
Interest and service cost on projected benefit obligations
Net funding position
to the amount of unrestricted retained earnings:
Retained earnings per US GAAP
annual basis the amount of earnings to be reinvested in the operations and the amount of any remaining funds that are available for distribution
to shareholders.
to declare dividends. Restricted retained earnings included in the March 31, 2005 balance amount to R4,061 million
(2004: R3,948 million, 2003: R3,481 million).
purpose only and are therefore not distributable.
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Amounts payable for advisory, management and service fees
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Group.
Opening balance
made by SFAS151 clarify that ‘abnormal’ amounts of idle facility expense, freight, handling costs, and wasted materials (spoilage) should be
recognised as current-period charges and require the allocation of fixed production overheads to inventory based on the normal capacity of the
production facilities. SFAS151 is the result of a broader effort by the FASB to improve the comparability of cross-border financial reporting by
working with the International Accounting Standards Board (‘IASB’) towards development of a single set of high-quality accounting standards.
The FASB and the IASB noted that ARB43, Chapter 4 and IAS2 Inventories, are both based on the principle that the primary basis of accounting
for inventory is cost. Both of these accounting s tandards also require that ‘abnormal’ amounts of idle freight, handling costs, and wasted
materials be recognised as period costs; however, the Boards noted that differences in the wording of the two standards could have led to the
inconsistent application of those similar requirements. The FASB concluded that clarifying the existing requirements in ARB43 by adopting
language similar to that used in IAS2 is consistent with its goals of improving financial reporting in the United States and promoting convergence
of accounting standards internationally. The guidance is effective for inventory costs incurred during fiscal years beginning after June 15, 2005.
Earlier application is permitted for inventory costs incurred during fiscal years beginning after November 23, 2004. The Group is currently
evaluating the impact of SFAS151 on its results of operations, financial position and cash flows.
amends APB29 Accounting for Non-monetary Transactions to eliminate the exception for non-monetary exchanges of similar productive assets and
replaces it with a general exception for exchanges of non-monetary assets that do not have commercial substance. SFAS153 is effective for non-
monetary asset exchanges occurring in fiscal periods beginning after June 15, 2005. The Group is currently evaluating the impact of SFAS153
on its results of operations, financial position and cash flows.
Obligations, by requiring that uncertainty about the timing and/or method of settlement of a conditional asset retirement obligation be factored
into the measurement of the obligation when sufficient information exists. FIN47 is effective for fiscal years ending after December 15, 2005.
The Group is currently evaluating the inpact of FIN47 on its results of operations, financial position and cash flows.
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REGISTERED PUBLIC ACCOUNTING FIRM*
March 31, 2005 and the related consolidated income statements, statements of changes in equity, recognised income and expenses
and cash flows for the three years then ended, set out on pages F-99 to F-187. These financial statements are the responsibility of the
Group’s directors. Our responsibility is to express an opinion on these financial statements based on our audit.
We conducted our audit in accordance with statements of South African Auditing Standards and the standards of the Public Company
Accounting Oversight Board (PCAOB) (United States). Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material misstatement. The Group is not required to have, nor were we
engaged to perform, an audit of its internal control over financial reporting. Our audit included consideration of internal control over
financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of
expressing an opinion on the effectiveness of the Group’s internal control over financial reporting. Accordingly, we express no such
opinion. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements.
An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating
the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the consolidated annual financial statements present fairly, in all material respects, the financial position of the Group as
of March 31, 2005, 2004 and 2003, and the results of its operations and its cash flows for the three years then ended, in conformity
with International Financial Reporting Standards (IFRS) and in the manner required by the Companies Act of South Africa, 1973.
goodwill, foreign exchange translations and minority interest to conform to IFRS 3: Business Combinations, International Accounting
Standard (IAS) 21: The Effects of Changes in Foreign Exchange Rates and IAS 27: Consolidated and Separate Financial Statements
respectively. The Group also changed its revenue recognition policies in line with guidance issued under generally accepted accounting
principles in the United States.
statements for the years ended March 31, 2004 and 2003. These restatements relate to equipment sales and direct network operating
costs that were previously incorrectly grossed up and deferred taxation which was restated to reflect the net amount of the non-current
deferred taxation asset and liability where the Group has the right of set off. These restatements do not impact the Group’s results or
cash flow information for these years.
in the United States of America (US GAAP). Information relating to the nature and effect of such differences is presented in Note 45
to the consolidated financial statements.
Registered Accountants and Auditors
Chartered Accountants (SA)
Pretoria,
South Africa
June 1, 2005
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Equity shareholders
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Non-current assets
Equity
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– previously reported
and restatements
the income statement
– deferred taxation
the income statement
– deferred taxation
Vodacom Congo (RDC) s.p.r.l.
income statement
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Equity shareholders
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Cash receipts from customers
Additions to property, plant and equipment
Shareholder loans repaid
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These consolidated annual financial statements have been prepared in accordance with International Financial Reporting Standards and
South African Statements of Generally Accepted Accounting Practice and have been prepared on the historical cost basis, except for
financial assets and financial liabilities (including derivative instruments) recorded at fair value. The consolidated annual financial
statements have been presented in South African Rands, as this is the currency in which the majority of the Group’s transactions are
denominated.
disclosed elsewhere (Note 23).
statements:
A.
The consolidated annual financial statements include the consolidated financial position, results of operations and cash flows of
Vodacom Group (Proprietary) Limited and its subsidiaries, both foreign and domestic, up to March 31, 2005.
income, expenses and cash flows of joint ventures are combined on a line-by-line basis with similar items in the consolidated
annual financial statements.
for intangible assets set out below.
• Acquisition of a business
accounted for at its cost plus any costs directly attributable to the acquisition. Cost represents the cash or cash equivalents
paid or the fair value or other consideration given, at the date of the acquisition. Business combinations include the
acquisition of subsidiaries and joint ventures.
measured based upon the Group’s interest in their fair value at the date of acquisition. The interest of minority shareholders
is recorded at the minority’s share of the fair value of the identifiable assets, liabilities and contingent liabilities.
Subsequently, any losses attributable to minority shareholders in excess of their interest, is allocated against the interest
of the Group.
assets and liabilities disposed of, adjusted for any related carrying amount of goodwill in accordance with the Group’s
accounting policies.
Subsidiaries are those entities controlled by the Group. Control is presumed to exist where the Group has an interest of more
than one half of the voting rights and the power to control the financial and operating activities of the entities so as to obtain
benefits from its activities. All subsidiaries are consolidated.
consolidation.
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Where necessary, accounting policies of subsidiaries are adjusted to ensure that the consolidated annual financial statements
are prepared using uniform accounting policies.
which power to exercise control ceases.
Joint ventures, for the purpose of these consolidated annual financial statements, are those entities in which the Group has joint
control through a contractual arrangement with one or more other venturers.
control, up to the date on which power to exercise joint control ceases.
Group companies and jointly controlled entities are eliminated on consolidation.
Property, plant and equipment are stated at cost less accumulated depreciation and accumulated impairment losses, if any.
Land is not depreciated and is recorded at cost less accumulated impairment losses, if any.
installation of such assets so as to bring them to a working condition for their intended use. Interest costs are not capitalised.
useful life to the estimated residual value. Depreciation commences when the asset is ready for its intended use (in the case of
infrastructure assets this is deemed to be the date of acceptance).
– GSM
– Containers
– Equipment
– Motor vehicles
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General purpose buildings and special purpose buildings are generally classified as owner-occupied. They are therefore held at
cost and depreciated as property, plant and equipment and not regarded as investment properties.
shorter, the term of the relevant lease if there is no reasonable certainty that the Group will obtain ownership by the end of the
lease term.
recognised as an expense in the period incurred. Minor plant and equipment items are also recognised as an expense in the
period acquired.
proceeds and the carrying amount of the assets, are recognised in the consolidated income statement in the period in which
they occur.
costs will be incurred, a liability for the site restoration costs is recorded. The liability recorded is measured at the present value
of the estimated future restoration costs to be incurred. The present value of the liability is capitalised to the underlying
infrastructure asset to which the restorations costs relate at the inception of the restoration obligation. These amounts are
amortised over the estimated useful life of the related infrastructure asset. The restoration liability is accredited to its future value
over the lease period.
Investment properties, which are properties held to earn rentals and/or for capital appreciation, are stated at cost less
accumulated depreciation and accumulated impairment losses, if any.
life to its estimated residual value. Depreciation commences when the property is ready for its intended use. The estimated useful
lives of depreciable properties are disclosed under property, plant and equipment and can be general purpose buildings or
special purpose buildings.
Intangible assets are stated at cost less accumulated amortisation and accumulated impairment losses, if any.
Intangible assets with an indefinite useful life are not amortised but tested for impairment on an annual basis.
fair value of identifiable assets, liabilities and contingent liabilities at the date of acquisition. Goodwill on the acquisition of
subsidiaries and joint ventures is included in intangible assets. Goodwill is tested annually for impairment and carried at cost
less accumulated impairment losses, if any. Impairment losses previously recognised are not reversed. Gains and losses on
the disposal of an entity include the carrying amount of goodwill relating to the entity sold.
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Intangible assets with a finite useful life are amortised to the consolidated income statement on a straight-line basis over their
estimated useful lives, which are reviewed on an annual basis. Amortisation commences when the intangible asset is available
for use. The residual values of intangible assets are assumed to be zero.
commencement of usage rights over the shorter of the economic life or the duration of the licence agreement.
customer bases. Customer bases are amortised on a straight-line basis over their estimated useful lives.
to develop, maintain and renew trademarks and brands internally is recognised as an expense in the period incurred.
Intangible assets not available for use are not amortised but tested for impairment on an annual basis.
Inventory is stated at the lower of cost and net realisable value. Cost is determined by the first-in-first-out method and comprises
all costs of purchase, costs of conversion and other costs incurred in bringing it to its present location and condition. Net
realisable value represents the estimated selling price in the ordinary course of business less all estimated costs to completion
and the estimated costs necessary to make the sale.
in the period that the write-down or loss occurs.
Foreign currency transactions are translated, on initial recognition, at the foreign exchange rate ruling at the date of the transaction.
date or balance sheet date. Exchange differences on the settlement or translation of monetary assets or liabilities are included in
finance costs and finance income in the period in which they arise.
The annual financial statements of foreign operations are translated into South African Rands for incorporation into the
consolidated annual financial statements. Assets and liabilities are translated at the foreign exchange rates ruling at balance
sheet date. Income, expenditure and cash flow items are translated at the actual foreign exchange rate or average foreign
exchange rates for the period.
differences that have been deferred are recognised in the consolidated income statement as part of the gain or loss on disposal.
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Gains and losses on the translation of equity loans to foreign entities that are intended to be permanent are recognised in equity
if the loans are denominated in one of the entities functional currencies. If the loans are denominated in a third currency, gains
or losses are recognised in the consolidated income statement.
translated at the foreign exchange rates ruling at balance sheet date.
The charge for current taxation is based on the results for the period and is adjusted for items that are non-assessable or
disallowed. Current taxation is measured at the amount expected to be paid, using taxation rates and laws that have been
enacted or substantively enacted by the balance sheet date.
Deferred taxation is provided using the balance sheet liability method for all temporary differences arising between the carrying
amounts of assets and liabilities, on the consolidated balance sheet, and their respective taxation bases. Deferred taxation is not
provided on differences relating to goodwill for which amortisation is not deductible for taxation purposes or on the initial
recognition of assets or liabilities, which is not a business combination and, at the time of the transaction, affects neither
accounting nor taxable profit or loss.
joint ventures, except where the Group is able to control the timing of the reversal of the temporary differences and it is
probable that it will not reverse in the foreseeable future.
the associated unused taxation losses or credits and deductible temporary differences can be utilised.
deferred taxation expense or income.
Secondary Taxation on Companies (STC) is provided for at a rate of 12.5% on the amount of the net dividend declared by
Vodacom Group (Proprietary) Limited. It is recorded as a tax expense when dividends are declared.
distribution.
The Group provides defined contribution funds for the benefit of employees, the assets of which are held in separate funds.
The funds are funded by payments from employees and the Group. Contributions to the funds are recognised as an expense
in the period in which the employee renders the related service.
The cost of all short-term employee benefits, such as salaries, employee entitlements to leave pay, bonuses, medical aid and
other contributions, are recognised during the period in which the employee renders the related service. The Group recognises
the expected cost of bonuses only when the Group has a present legal or constructive obligation to make such payment and a
reliable estimate can be made.
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Accumulative termination benefits are payable whenever:
• an employee’s employment is terminated before the normal retirement date, or
• an employee accepts voluntary redundancy.
employees according to a detailed formal plan without possibility of withdrawal or to provide termination benefits as a result of
an offer made to encourage voluntary redundancy. If the benefits fall due more than 12 months after balance sheet date, they
are discounted to present value. If the amount can be reasonably estimated, the measurement of termination benefits is based
on the number of employees expected to accept the offer.
Employees of wholly owned subsidiaries, including executive directors, are eligible for compensation benefits in the form of a
deferred bonus incentive scheme. The benefit is recorded at the present value of the expected future cash outflows.
Revenue net of discounts, which excludes Value Added Taxation and sales between Group companies, represents the invoiced
value of goods and services supplied by the Group. The Group measures revenue at the fair value of the consideration received
or receivable. Revenue is recognised only when it is probable that the economic benefits associated with a transaction will flow
to the Group and the amount of revenue, and associated costs incurred or to be incurred, can be measured reliably. If
necessary, revenue is split into separately identifiable components.
its contractual arrangements with its agents, pays them administrative fees. The Group receives in cash, the net amount equal
to the gross revenue earned less the administrative fees payable to the agents.
base. This estimate is based on past experience.
Contract products that may include deliverables such as a handset and 24-month service are defined as arrangements with
multiple deliverables. The arrangement consideration is allocated to each deliverable, based on the fair value of each
deliverable on a stand alone basis as a percentage of the aggregated fair value of the individual deliverables. Revenue
allocated to the identified deliverables in each revenue arrangement and the cost applicable to these identified deliverables
are recognised based on the same recognition criteria of the individual deliverable at the time the product or service is
delivered.
• Monthly service revenue received from the customer is recognised in the period in which the service is delivered.
• Airtime revenue is recognised on the usage basis. The terms and conditions of the bundled airtime products, where
applicable, allow the carry over of unused airtime. The unused airtime is deferred in full.
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Prepaid products that may include deliverables such as a SIM-card and airtime are defined as arrangements with multiple
deliverables. The arrangement consideration is allocated to each deliverable, based on the fair value of each deliverable on
a stand alone basis as a percentage of the aggregated fair value of the individual deliverables. Revenue allocated to the
identified deliverables in each revenue arrangement and the cost applicable to these identified deliverables are recognised
based on the same recognition criteria of the individual deliverable at the time the product or service is delivered.
• Airtime revenue is recognised on the usage basis. Unused airtime is deferred in full.
• Deferred revenue related to unused airtime is recognised when utilised by the customer. Upon termination of the customer
relationship, all deferred revenue for unused airtime is recognised in revenue.
airtime voucher. Revenue is recognised as the customer utilises the voucher.
period when the probability of these starter packs being activated by a customer becomes remote. In this regard the Group
applies a period of 36 months before these revenues and costs are released to the income statement.
Revenue net of discounts, from data services is recognised when the Group has performed the related service and depending
on the nature of the service, is recognised either at the gross amount billed to the customer or the amount receivable by the
Group as commission for facilitating the service.
All equipment sales are recognised only when delivery and acceptance has taken place.
third party service providers.
• Interconnect and international
rate applicable.
Leases involving property, plant and equipment whereby the lessor provides finance to the lessee with the asset as security, and
where the lessee assumes the significant risks and rewards of ownership of those leased assets, are classified as finance leases.
of ownership of those leased assets, are classified as operating leases.
• Finance leases
lease liability is raised. The cash equivalent cost is the lower of fair value or the present value of the minimum lease payments, at
inception of the lease. Such assets are depreciated in terms of the accounting policy on property, plant and equipment stated above.
finance costs are allocated to the consolidated income statement over the term of the lease using the effective interest rate
method, so as to produce a constant periodic rate of return on the remaining balance of the liability for each period.
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• Operating leases
lease term.
of penalty, is recognised as an expense in the period in which termination takes place.
The Group recognises all derivative instruments on the balance sheet at fair value, including certain derivative instruments
embedded in other contracts. Changes in the fair value of derivative instruments are recorded in earnings as they arise.
and characteristics are closely related to those host contracts or the host contracts are carried at fair value.
All financial instruments, other than derivatives which are dealt with above, are recognised on the consolidated balance sheet.
Financial instruments are initially recognised when the Group becomes party to the contractual terms of the instruments and are
measured at cost, which is the fair value of the consideration given (financial asset) or received (financial liability or equity instrument)
for it.
compounded instruments in terms of IAS 32: Financial Instruments: Disclosure and Presentation (“IAS 32”) on the basis of the
contractual terms.
asset.
The Group’s principal financial assets other than derivatives are investments, receivables and bank and cash balances:
profit or loss. Subsequent to initial recognition, these instruments are measured as set out below.
investments and are stated at fair value. Gains and losses from changes in fair value of available-for-sale investments are
recognised directly in equity until the financial asset is disposed of or it is determined to be impaired, at which time the
cumulative gain or loss previously recognised in equity is included in the consolidated income statement. These investments
are classified as non-current unless management intends to dispose of it within twelve months of the balance sheet date.
financial assets at fair value through profit or loss and are recorded and measured at fair value. Financial assets at fair value
through profit or loss consist of financial assets held-for-trading or those designated at fair value through profit or loss at
inception. Gains and losses on these investments are recorded in the consolidated income statement. These investments are
classified as current assets if they are either held-for-trading or are expected to be realised within twelve months of the balance
sheet date.
the Group’s management has the positive intention and ability to hold to maturity. During the year, the Group did not hold
any investments in this category.
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• Receivables
loans are stated at original investment less principal payments, amortisations, and less accumulated impairment losses.
Receivables originated by the Group by providing goods or services directly to the customer are carried at original invoice
amount less provision for doubtful receivables. A provision for doubtful receivables is established when there is objective
evidence that the Group has incurred a loss and will not be able to collect all amounts due according to the original terms
of the receivables. The amount of the provision is the difference between the carrying amount and the recoverable amount.
balance sheet date. These incurred loss events have been estimated based upon historical patterns of losses in each component,
the credit ratings allocated to the customers and reflecting the current economic climate in which the borrowers operate. When
a receivable is uncollectible, it is written off to the income statement. Subsequent recoveries are credited to the income statement.
The Group’s principal financial liabilities other than derivatives are interest bearing debt, trade and other payables, shareholder
loans, non-interest bearing debt, dividends payable, provisions and bank borrowings and other short-term debt:
Interest bearing debt is subsequently stated at amortised cost, namely original debt less principal payments and amortisations.
Any differences between proceeds and the redemption value are recognised in the income statement over the period of the debt
using the effective interest rate method. The accounting policy for finance lease obligations is dealt with under leases set out
above.
liability for at least twelve months after the balance sheet date.
preference shares are recognised in the income statement as interest expense.
it is probable that an outflow of resources embodying economic benefits will be required to settle the obligation and a
reliable estimate of the amount of the obligation can be made. A past event is deemed to give rise to a present obligation if,
taking into account all of the available evidence, it is more likely than not that a present obligation exists at balance sheet
date.
balance sheet date, taking into account risks and uncertainties surrounding the provision. Long-term provisions are
discounted to net present value.
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• Bank borrowings and other short-term debt
below.
An equity instrument is any contract that evidences a residual interest in the assets of the Group after deducting all of its
liabilities.
issue costs.
Financial assets (or a portion thereof) are de-recognised when the Group’s rights to the cash flow expire or when the Group
transfers substantially all the risks and rewards related to the financial asset or when the entity loses control of the financial
asset. On de-recognition, the difference between the carrying amount of the financial asset and proceeds receivable and any
prior adjustment to reflect fair value that had been reported in equity are included in the consolidated income statement.
cancelled or expired. On de-recognition, the difference between the carrying amount of the financial liability, including related
unamortised costs, and settlement amounts paid are included in the consolidated income statement.
The fair value of financial instruments traded in an organised financial market is measured at the applicable quoted prices.
assumptions that are based on market conditions and risks existing at balance sheet date, including independent appraisals and
discounted cash flow methods.
fair value.
Where a legally enforceable right of offset exists for recognised financial assets and financial liabilities and there is an intention
to settle the liability and realise the asset simultaneously, or to settle on a net basis, all related financial effects are offset.
Goodwill, assets that have an indefinite useful life and intangible assets not available for use are tested annually for impairment
and when events or changes in circumstances indicate that the carrying amount may not be recoverable.
the carrying amount may not be recoverable.
recognised as an expense in the consolidated income statement immediately. The recoverable amount of an asset is the higher
of the assets fair value less cost of disposal and its value in use.
knowledgeable, willing parties.
their present value using an appropriate pre-tax discount rate that reflects current market assessments of the time value of money
and the risks specific to the asset.
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For an asset that does not generate cash inflows largely independent of those from other assets, the recoverable amount is
determined for the cash-generating unit to which the asset belongs. A cash-generating unit is the smallest identifiable group
of assets that generates cash inflows that are largely independent of the cash inflows from other assets or groups of assets.
An impairment loss is recognised whenever the recoverable amount of a cash-generating unit is less than its carrying amount.
respect of the cash generating unit, if any, and then to the other assets on a pro-rata basis based on their carrying amounts.
The carrying amount of individual assets are not reduced below the higher of its value in use, zero or fair value less cost of
disposal.
determine the recoverable amount, however not to an amount higher than the carrying amount that would have been
determined had no impairment loss been recognised in prior periods. No goodwill impairment losses are reversed.
to allocate the asset’s revised carrying amount, less its estimated residual value, on a systematic basis over its remaining useful
life.
For the purpose of the consolidated cash flow statement, cash and cash equivalents comprise cash on hand, deposits held on
call, net of bank borrowings, all of which are available for use by the Group unless otherwise stated.
nature of these, the amortised cost approximates its fair value.
the proceeds received, net of direct issue costs. Finance costs, including premiums payable on settlement or redemption, are
accounted for on an accrual basis and are added to the carrying amount of the instrument to the extent that they are not settled
in the period in which they arise.
Borrowing costs are expensed as they are incurred.
Marketing and advertising costs are expensed as they are incurred.
Incentives paid to service providers and dealers for new activations and retention of existing customers for products delivered to
the customer are expensed as incurred. Incentives paid to service providers and dealers for new activations and retention of
existing customers for services delivered are expensed in the period that the related revenue is recognised.
relationship period.
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Discontinued operations are significant, distinguishable components of an enterprise or a subsidiary acquired exclusively with
a view to resell, that have been sold, abandoned or are the subject of formal plans for disposal or discontinuance.
component meets the held for sale criteria. To be held for sale:
• The sale must be probable; and
• The transfer must qualify for recognition as a completed sale within one year from classification, with limited exceptions.
The preparation of financial statements in conformity with International Financial Reporting Standards requires the use of certain
critical accounting estimates. It also requires management to exercise its judgement in the process of applying the Group’s
accounting policies. The areas involving a higher degree of judgement or complexity, or areas where assumptions and estimates
are significant to the financial statements are disclosed in the relevant sections of the financial statements. Although these
estimates are based on management’s best knowledge of current events and actions they may undertake in the future, actual
results ultimately may differ from those estimates.
Certain comparative figures have been reclassified, where required or necessary, in accordance with current period
classifications and presentation.
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Airtime and access
Goodwill
in Foreign Exchange Rates (“IAS 21”). Goodwill arising on the
acquisition of a foreign operation is now treated as an asset of the
foreign operation and translated at the foreign exchange rate ruling
at the balance sheet date (Note 23). The Group adopted IFRS 3:
Business Combinations (“IFRS 3”) on April 1, 2004. Goodwill is no
longer amortised from the 2005 year, but tested for impairment on
an annual basis (Note 23).
Intangible assets
for impairment in accordance with the requirements of IAS 36: Impairment of Assets (“IAS 36”). The recoverable amount of these
assets has been determined based on the fair value of the assets less cost of disposal at March 31, 2005. The fair value of the
assets was obtained from a knowledgeable, willing party on an arm’s length basis, based on the assumption that the assets would
be disposed of on an item by item basis. The amount with which the carrying amount exceeded the recoverable amount is
recognised as an impairment loss.
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The profit from operations is arrived at after taking the following
income/(expenditure) into account:
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Staff expenses – pension and provident fund contributions
Banks and loans
Bank overdraft
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South African normal taxation
Normal taxation on profit before taxation 1,029.2
permanent differences of Vodacom
Congo (RDC) s.p.r.l.
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2003
Land and buildings
Land and buildings
Land and buildings
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AND EQUIPMENT
(continued)
Reconciliation
2003
translation
2004
properties (Note 9)
translation
2005
minorities of Vodacom
Congo (RDC) s.p.r.l.
properties (Note 9)
translation
reclassify this software to intangibles under the requirements of IAS 38: Intangible Assets (“IAS 38”) during the 2006 financial
year when the Group will adopt the revised IAS 16: Property, Plant and Equipment (“IAS 16”).
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Freehold land and buildings
Portions 859, 847, 827, the remaining extent of Portion 45
(a portion of Portion 9), and Portion 828 (a portion of Portion 9)
of farm Randjesfontein No. 405, Registration division J.R.,
Province of Gauteng, RSA
Democratic Republic of Congo
Gombe, Kinshasa, Democratic Republic of Congo
Democratic Republic of Congo
Registration division J.R., Province of Gauteng, RSA
Portion 827 and 828 of farm Randjesfontein No. 405, RSA
(2004: R845.4 million; 2003: R884.9 million).
registered office.
equipment.
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2004
Holding 350 Erand Agricultural Holdings Ext. 1, RSA (Note 9.1)
Holding 350 Erand Agricultural Holdings Ext. 1, RSA (Note 9.1)
The fair value of the investment property at March 31, 2005 has been arrived at on the basis of a valuation carried out on
that day by JHI Real Estate Limited (2004: RMB Properties Limited) an independent valuator, on an open market value basis.
The valuation was arrived at by reference to market evidence of transaction prices for similar properties. The property has been
valued at R58.3 million (2004: R60.1 million).
R116.9 million (2004: R110.0 million).
amounted to R4.6 million (2004: R6.6 million). Direct operating expenses incurred on the investment property in the period
amounted to R7.6 million (2004: R2.1 million).
The Group acquired these properties for R9.9 million on March 1, 2004 through its equity investment in Smartphone SP
(Proprietary) Limited.
premises were no longer being leased to third parties.
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2003
Goodwill
Goodwill
Goodwill
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Reconciliation
2003
Opening balance as previously disclosed
and restatements (Note 23)
2004
Opening balance
2005
Opening balance
(RDC) s.p.r.l. (Note 30)
on the acquisition of a foreign operation is now treated as an asset on the foreign operation and translated at the foreign
exchange rate ruling at the balance sheet date (Note 23).
Loans and receivables (Note 11.1)
and loss (Note 11.2)
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Loans and receivables (Note 11.1)
bears interest at LIBOR plus 5%. Planetel Communications Limited utilised
this loan to ensure sufficient shareholder loan funding by itself as a
shareholder of Vodacom Tanzania Limited. The loans and capitalised interest
are collateralised by cession over all shareholder distributions and a pledge
over their shares of Vodacom Tanzania Limited. All the shareholders
subordinated their loans to Vodacom Tanzania Limited for the duration of the
project finance funding (Note 18).
bears interest at LIBOR plus 5%. Caspian Construction Company Limited utilised
this loan to ensure sufficient shareholder loan funding by itself as a shareholder
of Vodacom Tanzania Limited. The loans and capitalised interest are
collateralised by cession over all shareholder distributions and a pledge
over their shares of Vodacom Tanzania Limited. All the shareholders
subordinated their loans to Vodacom Tanzania Limited for the duration of the
project finance funding (Note 18).
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amounted to €10.1 million at March 31, 2004 (2003: €7.8 million), which
was charged as security for the extended credit facility of Vodacom Congo
(RDC) s.p.r.l. The deposit bore interest at EURIBOR less 0.2%. The deposit
was refunded when the facility was replaced by a medium-term loan
from Standard Bank London and RMB International (Dublin) Limited on
July 30, 2004 (Note 18).
Limited to Vodacom Congo (RDC) s.p.r.l. amounted to US$23.9 million at
March 31, 2004. The loan bore interest at LIBOR plus 6.5%. With effect from
April 1, 2004 the Group’s effective control over the company changed resulting
in Vodacom Congo (RDC) s.p.r.l. being accounted for as a subsidiary from this date.
11.2.1 Investments held for trading
Details of the maturity periods and interest rates of the
money market investments at year-end are as follows:
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Details of the maturity periods and interest rates of the money market
investments at year-end are as follows:
Details of the maturity periods and interest rates of the money market
investments at year-end are as follows:
(2003: US$18.9 million) at March 31, 2004. The preference shares
bore interest at a rate of 4% per annum and were redeemable,
but only after the first three years from date of inception and only
on the basis that the shareholders were repaid simultaneously and
in proportion to their shareholding. With effect from April 1, 2004
the Group’s control over the company changed resulting in
Vodacom Congo (RDC) s.p.r.l. being accounted for as a
subsidiary from this date.
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profit and loss
Deferred taxation assets
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certain subsidiaries is remitted, is only made where a decision has been
taken to remit such retained profits. The Group did not provide for
Secondary Taxation on Dividends (“STC”) on its undistributable earnings
which is payable when it declares dividends to its shareholders, as the
taxation will only be payable once the dividends are declared.
deferred taxation liability. The effect of this would be a R109.3 million (2004: R24.8 million; 2003: R nil) reduction in the net
deferred taxation liability for the year to R81.8 million (2004: R133.4 million; 2003: R288.4 million). During 2003 uncertainty
existed as to whether the accumulated losses incurred by Vodacom Congo (RDC) s.p.r.l. during their taxation holiday period will be
available to reduce future taxable profits after expiry of the taxation holiday period, and therefore no deferred taxation asset was
raised. During the 2004 financial year it was confirmed by the local taxation authority that the accumulated taxation losses will still
be available after expiry of the taxation holiday, resulting in the accumulated taxation asset being recognised. Vodacom Congo
(RDC) s.p .r.l. has recorded a deferred taxation asset for 2005 and 2004 financial years even though the company is incurring losses.
The Group has performed a detailed calculation of future taxable income to support the recognition of the deferred taxation asset.
![background image](https://capedge.com/proxy/20-F/0001205613-05-000126/telkom_state129n.gif)
estimation and judgement more challenging. The resolution of taxation issues is not always within the control of the Group and
it is often dependent on the efficiency of the legal processes in the relevant taxation jurisdictions in which the Group operates.
Issues can, and therefore, often do, take many years to resolve. Payments in respect of taxation liabilities for an accounting
period results from payments on account and on the final resolution of open items. As a result there can be substantial
differences between the taxation charge in the income statement and taxation payments.
Merchandise
of the South African Rand resulting in a reversal of a portion of the inventory
valuation allowance.
Trade receivables
![background image](https://capedge.com/proxy/20-F/0001205613-05-000126/telkom_state129n.gif)
Authorised
Foreign currency translation reserve (Note 16.1)
Balance at the beginning of the year – previously reported
restatements (Note 23)
Assets and liabilities are translated at the foreign exchange rates ruling at balance sheet date. Income, expenditure and cash
flow items are translated at the actual foreign exchange rate or average foreign exchange rates for the period. All resulting
unrealised foreign exchange differences are classified as equity.
permanent and only if the loans are denominated in one of the entities’ functional currencies (Note 23).
subsidiaries.
a contingency reserve equal to 10% of premiums written less approved reinsurance (as defined in the Act). This reserve can be
utilised only with the prior permission of the Registrar of Short-term Insurance.
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asset is disposed of (Note 11.3).
Distributable reserves
Finance leases (Note 18.1)
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book value of R500.1 million (2004: R512.1 million; 2003: R513.5 million),
bearing interest at fixed effective interest rates of between 12.1% and
16.9% per annum and are repayable between 3 and 8 years.
of R262.4 million (2004: R268.0 million; 2003: R273.7 million), and bearing
interest at a fixed effective interest rate of 14.8% per annum. Payments are
made every six months in arrears and commenced on March 1, 2002.
The finance lease expires on September 1, 2011.
(2004: R955.4 million; 2003: R884.9 million).
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US$8.4 million) is subordinated for the duration of the project finance
funding period of Vodacom Tanzania Limited, bears no interest from
April 1, 2002 and is thereafter available for repayment, by approval
of at least 60% of the shareholders of Vodacom Tanzania Limited.
The loan became non-interest bearing and was remeasured at amortised
cost at an effective interest rate of LIBOR plus 5% (Note 11) during the
2003 financial year. The gain on remeasurement was included in equity.
of the project finance funding period of Vodacom Tanzania Limited, bears
no interest from April 1, 2002 and is thereafter available for repayment,
by approval of at least 60% of the shareholders of Vodacom Tanzania
Limited. This loan became non-interest bearing and was remeasured at
amortised cost at an effective interest rate of LIBOR plus 5% (Note 11)
during the 2003 financial year. The gain on remeasurement was included
in equity.
facility amounted to €38.8 million (2003: €38.8 million) at March 31,
2004 which was partially collateralised by guarantees (Note 41) and a
cash deposit (Note 11), and bore interest at a rate of between EURIBOR
plus 1.5% and EURIBOR plus 1.75%. The facility was replaced by a
medium-term loan from Standard Bank London Limited and RMB International
(Dublin) Limited on July 30, 2004.
parties include the following:
(a) Netherlands Development Finance Company of US$10.1. million
Vodacom Tanzania Limited’s tangible and intangible assets. The loans bear
interest based upon the foreign currency denomination of the project financing
between 5.9% and 13.0% per annum and will be fully repaid by March 2008.
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ABSA amounted to US$16.3 million (2003: US$16.3 million) at
March 31, 2004. The credit facility was collateralised by guarantees
(Note 41) provided by the Group, which bore interest at an effective
interest rate of LIBOR plus 1.5%. The facility was replaced by a medium-
term loan from Standard Bank London Limited and RMB International
(Dublin) Limited on July 30, 2004.
by Standard Finance (Isle of Man) Limited amounted to €11.5 million
(2003: €nil) at March 31, 2004. The credit facility was collateralised by
guarantees (Note 41) provided by the Group and bore interest at an
effective interest rate of EURIBOR plus 1.5%. The facility was replaced by
a medium-term loan from Standard Bank London Limited and RMB
International (Dublin) Limited on July 30, 2004.
by Standard Finance (Isle of Man) Limited amounted to US$19.1 million
(2003: US$ nil) at March 31, 2004. The credit facility was collateralised by
guarantees (Note 41) provided by the Group and bore interest at an
effective interest rate of LIBOR plus 1.5%. The facility was replaced by a
medium-term loan from Standard Bank London Limited and RMB International
(Dublin) Limited on July 30, 2004.
RMB International (Dublin) Limited that amounts to US$180.0 million at
March 31, 2005 is collateralised by guarantees provided by the Group.
The loan is repayable on July 19, 2006 and bears interest at an effective
interest rate of LIBOR plus 0.6%.
Limited amounted to US$8.8 million at March 31, 2003. The loan bore
interest at an effective rate of LIBOR plus 1.5% and was repaid on
July 1, 2003.
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2003: US$18.9 million) bear interest at a rate of 4% per annum. The
The preference shares are redeemable, but only after the first three years
from date of inception and only on the basis that the shareholders are
repaid simultaneously and in proportion to their shareholding.
(2004: R1,167.6 million; 2003: R1,277.5 million).
2004: US$0.5 million; 2003: US$0.8 million). The facility bears interest
at 18% per annum.
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(continued)
Finance leases
(Proprietary) Limited
Tanzania Limited
International Limited
Vodacom Congo (RDC) s.p.r.l.
Trade payables
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Telkom SA Limited
of prime plus 2%. The average annualised effective interest rate during
the 2004 and 2003 financial years were 19.0% and 18.35%
respectively. The loans were repayable on demand of all the shareholders
by no later than March 31, 2019. The shareholders have deferred their
right to claim or accept payment of the amounts owing to them in favour
of all other creditors in the event of the liquidation of the Group or should
similar events occur. The shareholders elected for the loans to be repaid
on June 30, 2003.
Vodacom Lesotho (Proprietary) Limited
terms have been determined.
not be readily determined.
Deferred bonus incentive provision (Note 22.1)
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Reconciliation
2003
Balance at the beginning of the year
2004
Balance at the beginning of the year
2005
Balance at the beginning of the year
Within one year
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at the balance sheet date less the value at which the entitlements were issued, multiplied by the number of entitlements allocated
to a participant.
Periodically, a number of entitlements are issued to employees, the value of which depends on the seniority of the employee.
The participating rights of employees vest at different stages and employees are entitled to cash in their entitlements within one
year after the participating rights have vested. The provision is utilised when eligible employees receive the value of vested
entitlements.
to all levels of staff.
of the Group. The provision arises as employees render a service that increases their entitlement to future compensated leave.
The provision is utilised when employees who are entitled to leave pay, leave the employment of the Group or when the
accrued leave due to an employee, is utilised.
is based on claims notified and past experience.
provisions. The advertising provision represents the advertising expenditure not yet spent or claimed by the Group or external
service providers.
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POLICIES, RECLASSIFICATIONS
AND RESTATEMENTS
operating costs
other financial income
taxation)
(Opening balance)
(Opening balance)
(Opening balance)
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POLICIES, RECLASSIFICATIONS
AND RESTATEMENTS (continued)
operating costs
intangibles
taxation)
receivables
• IAS 27: Consolidated and Separate Financial Statements (“IAS 27”);
• IFRS 3: Business combinations (“IFRS 3”)
the Emerging Issues Task Force (EITF) of the Financial Accounting Standards Board in the United States.
as well as certain restatements and reclassifications on the balance sheet.
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Change in accounting policies
in Emerging Issues Task Force (EITF) Issue No. 00-21, Revenue Arrangements with Multiple Deliverables (“EITF 00-21”), issued in
the United States, which the Group believes is relevant to the appropriate application of International Financial Reporting
Standards. EITF 00-21 which is applicable to revenue arrangements with multiple deliverables, requires the allocation of the total
arrangement consideration to each identifiable deliverable based on its relative fair value. Revenue allocated to each identifiable
deliverable and the related cost is recognised based on the same recognition criteria for each deliverable at the time that the
product or service is delivered. The revised accounting policy results in activation revenue and costs up to the amount of the
deferred reven ue being deferred and recognised ratably over the average expected life of the customer. The excess of the costs
over revenues is expensed immediately. Previously, activation revenue and costs were recognised upon activation by the customer.
activation revenue and costs. No changes were made to the income statement due to the immateriality of these amounts.
As such, the change in accounting policy does not impact the Group’s results or cash flow information for the years ended
March 31, 2004 and 2003.
accordingly reclassified transactions with minorities into equity. The change in accounting policy does not impact the Group’s
cash flow information for the years ended March 31, 2004 and 2003.
originated from the purchase of a foreign entity was previously accounted for at the transaction date. This goodwill is now
translated at exchange rates ruling at the balance sheet date. The impact of the 2004 and 2003 financial years are set out
in the accompanying tables. The change in accounting policy does not impact the Group’s cash flow information for the years
ended March 31, 2004 and 2003.
tested for impairment on an annual basis. Goodwill was previously amortised over its expected useful life. The change in policy
does not impact the Group’s results or cashflow information for the years ended March 31, 2004 and 2003.
of R139.7 million. The balance of goodwill would have been stated at R335.5 million at March 31, 2005. Earnings per share
would have reduced to R372,170.
“Deferred revenue” and “Deferred cost” respectively. This reclassification has been effected on the balance sheet and does not
impact the Group’s results or cash flow information for the years ended March 31, 2004 and 2003.
in classification does not impact the Group’s results or cash flow information for the years ended March 31, 2004 and 2003.
and direct network operating costs related to internal channel upgrades and inter system profits. The Group previously
incorrectly recorded revenue and direct network operating costs when handsets were provided to customers on upgrades and
when handsets were transferred between different management systems. The restatement does not impact the Group’s results
and cash flow information for the years ended March 31, 2004 and 2003.
deferred taxation liability where the Group has right of set off in the relevant section of the balance sheet. The Group previously
reflected the gross deferred taxation asset and the gross deferred taxation liability. The restatement does not impact the Group’s
results or cash flow information for the years ended March 31, 2004 and 2003.
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Profit from operations
Bank overdraft
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Banks and loans
Taxation per the income statement
Additions to property, plant and equipment (Note 8)
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Disposals of Subsidiaries
Vodacom Sport & Entertainment (Proprietary) Limited
was only received in the 2003 financial year.
Smartphone SP (Proprietary) Limited and subsidiaries (Note 29.1)
Smartphone SP (Proprietary) Limited, which has a 100% shareholding in
Stand 13 Eastwood Road Dunkeld (Proprietary) Limited and 52% in Ithuba
Smartcall (Proprietary) Limited. The fair value of the assets and liabilities
acquired were determined by the Group and are as follows:
April 7, 2004. The outstanding amount accrued interest at prime less 2% per annum from March 1, 2004 up to the date of
payment.
purchase price.
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of Smartcom (Proprietary) Limited through its 51% owned subsidiary,
Smartphone SP (Proprietary) Limited. The fair value of the assets and
liabilities acquired were determined by the Group and are as follows:
by Smartcom (Proprietary) Limited
was as follows:
was paid during April 2004. The company declared a dividend to its shareholders from pre-acquisition reserves on
August 18, 2004. The dividend was paid on August 31, 2004.
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of Tiscali (Proprietary) Limited. The fair value of the assets and liabilities
acquired were preliminary determined as follows:
of Tiscali (Proprietary) Limited as it was an internally generated intangible
asset. The goodwill related to the acquisition represents future synergies
and the ability to directly control the Group’s customers. It is impracticable
to disclose the revenue and profit of the business that is included in the
current years results as the customer base was integrated into Vodacom
Service Provider Company (Proprietary) Limited. The profit and revenue
related to these customers were not separately recorded. For the same
reason stated above it would not be practicable to determine the impact
on revenue and profits of the Group for a full year.
in the finance lease agreement and acquired 100% of Skyprops 157
(Proprietary) Limited. The name of the company was subsequently changed
to Vodacom Properties No. 1 (Proprietary) Limited.
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Vodacom Congo (RDC) s.p.r.l. (“Vodacom Congo”) was previously accounted for as a joint venture (Note 35). During the current
financial year the shareholders’ agreement was amended to remove some of the participative rights of the minorities, resulting
in Vodacom Congo now being controlled and considered to be a 51% owned subsidiary of the Group from April 1, 2004.
The Group’s interest in the company is consolidated from this date in accordance with IAS 27: Consolidated and Separate
Financial Statements.
been consolidated at that date, were as follows:
for Vodacom Congo (RDC) s.p.r.l. as a subsidiary:
was recorded directly in reserves on April 1, 2004.
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Bank and cash balances
for changes in accounting policies, reclassifications and restatements
(Note 23) was based on earnings of R3,031.8 million
(2003: R2,214.6 million) at March 31, 2004 and 10,000 issued
ordinary shares (2003: 10,000) shares at March 31, 2004.
of R3,861.4 million (2004: R3,033.0 million; 2003: R2,212.1 million)
and 10,000 issued ordinary shares (2004: 10,000; 2003: 10,000).
equals diluted earnings per share.
declared ordinary dividend of R3,400.0 million (2004: R2,100.0 million;
2003: R600 million) and 10,000 issued ordinary shares (2004: 10,000;
2003: 10,000). The dividends were declared as follows:
and paid on April 1, 2005 (Final)
and paid on October 1, 2004 (Interim)
and paid on May 31, 2004 (Final)
and paid on June 30, 2003 (Final)
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Capital expenditure contracted for at the balance sheet date but not
yet incurred is as follows:
but not yet contracted for at the balance sheet date are as follows:
cash generation, extended supplier credit and bank credit.
Operating leases (Note 34.1)
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date is currently uncertain. Due to the fact that certain provisions of the Act are still being finalised, a reliable estimate of capital
and operating costs that will potentially be incurred in order to comply with the provisions of the Act cannot be estimated at this
stage.
Should all conditions be met, the Group’s commitments in this regard are estimated at R1.2 billion.
agreement. Net operational income is defined as the total invoiced revenue of the licensee excluding discounts, Value Added
Taxation and other direct taxes derived from customers of the licensee for the provision to them of the service, less net
interconnect fees and bad debts actually incurred.
revenue.
period, but who have not yet upgraded to new contracts, and therefore have not utilised the incentives 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.
The suspensive conditions of Competition Commission approval, is currently being attended to.
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Vodacom Satellite Services (Proprietary) Limited
Satellite Services (Proprietary) Limited and Vodafone Satellite Services
Limited do not recognise the liability of US$0.9 million to Globalstar LP.
This amount has been written back to income in the 2003 year as the
success of this claim is deemed to be remote. Due to the duration of the
claim process, the Board of Directors are of the opinion that the claim
will not be successful.
court of Tanzania in which the plaintiff is demanding compensation of
US$8.8 million for losses and damages allegedly incurred by them as
a result of an illegal breach of contract. The facts of the case show there
was no contract but rather a request to tender. At the end of the 2004
financial year the Group’s legal counsel was of the opinion that the Group’s
prospects of defending the matter has a very good chance of success.
December 11, 2001. This investment is governed by a shareholders’ agreement, which previously provided the minority
shareholder with certain protective and participative rights and therefore, in terms of IAS 31: Interest in Joint Ventures,
Vodacom Congo was considered to be a joint venture resulting in it being proportionally consolidated in the consolidated
annual financial statements for the years ended March 31, 2004 and 2003.
operations of Vodacom Congo. The shareholders’ agreement also gave the Group the right to appoint management and the
majority of the Board of the company. The Group also had a management agreement to manage the company on a day-to-day
basis.
in Vodacom Congo now being controlled and considered to be a 51% owned subsidiary of the Group from April 1, 2004. The
Group’s interest in the company is consolidated from this date in accordance with IAS 27: Consolidated and Separate Financial
Statements (Note 30).
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and losses as at March 31, 2004 and 2003 was as follows:
Net loss for the year after taxation
ratio arises when the Group’s current liabilities are greater than the current assets. The Group’s management believes that based
on its operating cash flow, it will be able to meet liabilities as they arise and that it is in compliance with all covenants
contained in the borrowing agreements.
connection with such reviews, disputes can arise with the taxation authorities over the interpretation or application of certain
taxation rules applicable to the Group’s business. These disputes may not necessarily be resolved in a manner that is favourable
for the Group. Additionally the resolution of the disputes could result in an obligation for the Group.
matters under review. The provisions made include estimates of anticipated interest and penalties where appropriate. Where no
reliable assessment could be made, no provisions have been raised.
taxation legislation affecting the Group and the industry in which it operates. No reliable assessment can be made at this time
of any exposure, if any, that the Group may incur.
All eligible employees of the Group are members of the Vodacom Group pension fund, a defined contribution pension scheme.
Certain executive employees of the Group are also members of the Vodacom executive provident fund, a defined contribution
provident scheme. Both schemes are administered by ABSA Consultants and Actuaries (Proprietary) Limited. Current
contributions to the pension fund amounted to R70.7 million (2004: R65.9 million; 2003: R52.5 million). Current contributions
to the provident fund amounted to R4.2 million (2004: R5.9 million; 2003: R5.4 million). South African funds are governed by
the Pension Funds Act of 1956.
The directors are not aware of any other matter or circumstance arising since the end of the financial year, not otherwise
dealt with in the Vodacom Group consolidated annual financial statements, which significantly affected the financial position of
the Group and results of its operations.
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the ordinary course of business. No guarantees have been provided.
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Key management personnel remuneration
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The Group purchases or issues financial instruments in order to finance its operations and to manage the interest rate and
currency risks that arise from its operations and sources of finance. Various financial assets and liabilities for example trade
receivables, trade payables, other payables and provisions, arise directly from the Group’s operations. Changing market
conditions expose the Group to various financial risks and have highlighted the importance of financial risk management as
an element of control for the Group. Principal financial risks faced in the normal course of the Group’s business are foreign
currency risk, interest rate risk, credit risk, price risk and liquidity risk. These risks are managed within an approved treasury
policy, subject to the limitations of the local markets in which the various group companies operate and the S outh African
Reserve Bank.
financing is arranged locally by the South African entities. A treasury division within Vodacom Group (Proprietary) Limited has
been established to provide treasury related services to the Group, including coordinating access to domestic and international
financial markets, and the managing of various financial risks relating to the Group’s operations. The treasury division is subject
to arms length fees in terms of transfer pricing for services to offshore subsidiaries.
and interest rates, and to manage the liquidity of cash resources within the Group. Trading in derivative instruments for
speculative purposes is strictly prohibited.
Directors, through the Audit Committee, the objective being to minimise exposure to foreign currency risk, interest rate risk,
credit risk and liquidity risk. These risks are managed within an approved treasury policy.
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predetermined exchange rate. The contracts are entered into in order to manage the Group’s exposure to fluctuations in foreign
currency exchange rates on specific transactions. The contracts are matched with anticipated future cash flows in foreign
currencies primarily from purchases of capital equipment. The Group’s policy is to enter into foreign exchange contracts for
100% of the committed net foreign currency payments from South Africa.
imports of GSM infrastructure. The total value of foreign exchange contracts at year-end was:
2003
United States Dollar
United States Dollar
United States Dollar
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2003
United States Dollar
United States Dollar
United States Dollar
table represents the net currency exposure of the Group according to the different functional currencies of each entity within
the Group.
Net foreign currency
monetary
assets/(liabilities)
Functional currency
of company operation
SA Rand
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AND RISK MANAGEMENT
(continued)
2004
Net foreign currency
monetary
assets/(liabilities)
Functional currency
of company operation
Net foreign currency
monetary
assets/(liabilities)
Functional currency
of company operation
borrowings which exposes the Group to fair value interest rate risk and
cash flow interest rate risk and can be summarised as follows:
Financial liabilities
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RISK MANAGEMENT (continued)
exposed to interest rate risk
Financial liabilities
Linked to fixed rates
Linked to fixed rates
principal amounts and entitle, or oblige it to pay interest at floating rates on the same notional principal amounts. The interest
rate swaps allow the Group to swap long-term debt from fixed rates into floating rates that are lower, or higher, than those
available if it had borrowed at floating rates directly. Under the interest rate swaps, the Group agrees with other parties to
exchange, at specified quarterly intervals, the difference between fixed rate and floating rate interest amounts calculated by
reference to the agreed notional principal amounts.
Compounded Quarterly) for a floating rate, linked to the BA (Banker’s Acceptance) rate plus margin of 2.00%.
BA rate plus margin of 2.25%.
Monthly) for a floating rate linked to the BA rate plus margin of 2.00%.
2003: R238.0 million) at a weighted average floating interest rate of 10.0% NACM (2004: 12.9% NACM; 2003: 15.4% NACM).
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deposits and trade receivables. The Group’s cash and cash equivalents and short-term deposits are placed with high credit
quality financial institutions. Trade receivables are presented net of an allowance for doubtful receivables. Credit risk with
respect to trade receivables is limited due to the large number of customers comprising the Group’s customer base and stringent
credit approval processes for contracted subscribers. The Group, for its South African operations, spread their credit risk
exposure amongst the high credit quality financial institutions.
SA Limited (the Group’s largest shareholder), Mobile Telecommunications Network (Proprietary) Limited (the Group’s largest
competitor), and Cell C (Proprietary) Limited (the country’s third network operator).
settlement. The Group minimises such risk by limiting the counter-parties to a group of major international banks, and does not
expect to incur any losses as a result of non-performance by these counter-parties. The positions in respect of these counter-
parties are closely monitored.
consolidated balance sheet represent the Group’s exposure to credit risk in relation to these assets. The credit exposure of
forward exchange contracts is represented by the fair value of the contracts.
and market tradable shares available for sale.
commitments of the Group. In terms of its borrowing requirements, the Group ensures that adequate funds are available to meet
its expected and unexpected financial commitments through utilisation of undrawn borrowing facilities (Note 41). In terms of its
long-term liquidity risk, a reasonable balance is maintained between the period over which assets generate funds and the
period over which the respective assets are funded.
payables, short-term provisions, dividends payable, bank overdraft, accrued expenses and short-term debt approximated
their fair values due to the short-term maturities of these assets and liabilities.
are not available, a discounted cash flow analysis is used. These amounts reflect the approximate values of the derivative
positions at balance sheet date.
interest rates.
Telecommunicaçòes 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 numbers of
shares in and claims on loan account 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 the April 1 or the 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 no value at March 31, 2005 (2004: R nil).
against Vodacom Group (Proprietary) Limited, should the Group or the company terminate and 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 no value at March 31, 2005 (2004: R nil) as the conditions set out in the agreement have not been met.
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(“Smartphone”) and the minority shareholders of Smartcom (Proprietary) Limited (“Smartcom”), the minority shareholders of
Smartcom have a put option against the Group, should the Group reduce the standard service provider discount below certain
percentages as stipulated in the put option agreement or should Smartphone decide to terminate the agency agreement
between them. The minority shareholders will not be entitled to exercise the put option if the agency agreement is replaced by
another agreement with terms no less favourable than the cancelled agency agreement. The put option has no value at
March 31, 2005 as the conditions set out in the agreement have not been met.
(“FirstRand”), Vodacom (Proprietary) Limited (“Vodacom”) and Skyprops 134 (Proprietary) Limited (“company”), FirstRand grants
to Vodacom Group an irrevocable call option to require FirstRand at any time for the duration of the agreement to sell
the shares in and claims against the company to Vodacom Group on the implementation date. The option may be exercised
on 30 days written notice by Vodacom Group before the termination date (December 1, 2012) or if Vodacom commits a
breach of the lease agreement. The call option has no value at March 31, 2005 as the face values of the shares and claims
equal the market value.
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 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 the fair market value of the related shares at the date the put option is exercised. The option has no value at March 31,
2005, 2004 and 2003.
longer amortised but rather tested for impairment on an annual basis at March 31.
one in the Democratic Republic of the Congo and one in Tanzania.
The recoverable amounts of goodwill relating to Vodacom Service Provider Company (Proprietary) Limited, Smartphone SP
(Proprietary) Limited and Smartcom (Proprietary) Limited have been determined on the basis of value in use calculations.
These companies operate in the same economic environment for which the same key assumptions were used. Both value in use
calculations use cash flow projections based on financial budgets approved by management covering a five year period and
a discount rate of 14.2% in Rand terms. Both sets of cash flows beyond the five year period are extrapolated using a steady
6.0% nominal growth rate. Management believes that this growth rate does not exceed the long-term average growth rate for
the market in which these two companies operate. Cash flow projections during the budget period for both companies are also
based on the same expected growth in operating pr ofit and Earnings before Interest, Taxation, Depreciation and Amortisation
(“EBITDA”). Management believes that any reasonable change in any of these key assumptions would not cause the aggregate
carrying amount of these companies to exceed the aggregate recoverable amount of these units.
The recoverable amount of this cash generating unit was based on a value in use calculation for Vodacom Congo (RDC) s.p.r.l.
The calculation uses cash flow projections based on financial budgets approved by management covering a five year period
and a discount rate of 18.5% in US Dollar terms. Cash flows beyond this period have been extrapolated using a steady
3.0% nominal growth rate. Management believes that this growth rate does not exceed the long-term average growth rate for
the market in which this company operates. Management believes that any reasonable possible change in the key assumptions
on which the recoverable amount is based would not cause the carrying amount to exceed its recoverable amount.
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Tanzania
The recoverable amount of this cash generating unit was based on a value in use calculation for Vodacom Tanzania Limited.
The calculation uses cash flow projections based on financial budgets approved by management covering a five year period
and a discount rate of 16.1% in US Dollar terms. Cash flows beyond this period have been extrapolated using a steady
3.0% nominal growth rate. Management believes that this growth rate does not exceed the long-term average growth rate for
the market in which this company operates. Management believes that any reasonable possible change in the key assumptions
on which the recoverable amount is based would not cause the carrying amount to exceed its recoverable amount.
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Key assumption
period
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The facilities are uncommitted and can also be utilised for loans to foreign entities and are subject to review at various dates
(usually on an annual basis).
underwriters, and relating
to short-term insurance
business carried on in
South Africa. Terminates
on May 31, 2005.
debit orders.
Limited.
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s.p.r.l. **
s.p.r.l.’s revolving
credit facility **
s.p.r.l. **
s.p.r.l. **
s.p.r.l.
*
liabilities in the balance sheet.
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The Group is primarily an integrated mobile
telecommunication and data communication business
located in South Africa and other African countries.
The primary reporting format therefore comprises the
geographic segments of the Group.
Geographical segments
Segment revenue
from operations
Segment assets
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2004
Geographical segments
Segment revenue
from operations
Depreciation and amortisation
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2005
Geographical segments
Segment revenue
from operations
Depreciation and amortisation
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2003
Business segments
Segment revenue
from operations
Depreciation and amortisation
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2004
Business segments
Segment revenue
from operations
Depreciation and amortisation
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2005
Business segments
Segment revenue
operations
financial income
from operations
based cellular network as well as all the segment information of the service providers and other business segments. “Other
African countries” comprise only of cellular networks and are located in Tanzania, Lesotho, Democratic Republic of Congo
and Mozambique, and it also includes the international holding company situated in Mauritius.
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“Unallocated” comprises the reporting relevant to Vodacom Group (Proprietary) Limited, the parent company in the Group,
Vodacom International Limited and Vodacom International Holdings (Proprietary) Limited. These companies are primarily
management services companies, that offer combined administrative, advisory and management services to companies within
the rest of the Group.
by the companies include the standard voice telecommunication services of cellular networks as well as data communication
services through the cellular network, including short message servicing (SMS), wireless application protocol (WAP), general
packet radio system (GPRS) and multimedia messaging services (MMS).
Cellular telecommunication service providers act as agents for the respective networks and sell airtime to customers.
to the internal channel upgrades and inter system profits.
a separately reportable segment.
Segment information is prepared in conformity with accounting policies adopted for preparing and presenting the consolidated
annual financial statements.
from which inter-Group revenue has been eliminated. Sales between segments are made on a commercial basis. Segment
profit/(loss) from operations represents segment revenue less segment operating expenses. Segment expenses include direct
and operating expenses. Integration costs, disposals of operations and impairments, depreciation and amortisation have been
allocated to the segments to which they relate.
operating, investing and financing activities. Unallocated assets and liabilities comprise of deferred taxation and other
unallocatable balances.
the segments to which they relate.
The information discloses interests in subsidiaries material to the financial position of the Group. The interest in the ordinary
share capital is representative of the voting power.
Republic of Congo, C – Cellular; S – Satellite; MSC – Management services company; PROP – Property company; OTH – Other
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(continued)
Vodacom (Proprietary) Limited (C)
Limited (C)
Vodacom Service Provider Company
(Proprietary) Limited (C)
Limited (C)
GSM Cellular (Proprietary)
Limited (C) *
(Proprietary) Limited (S)*
Limited (MSC)
(Proprietary) Limited (MSC)
(Proprietary) Limited *
(Proprietary) Limited (MSC)
(Proprietary) Limited (PROP) *
(Proprietary) Limited (PROP ) *
West (Proprietary) Limited (PROP)
Limited (OTH) *
(Zanzibar) (OTH) *
Limited (OTH) *
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The Group’s joint ventures during the 2004 and 2003 financial years consisted of Vodacom Congo (RDC) s.p.r.l.
The Group acquired its interest in Vodacom Congo (RDC) s.p.r.l. on December 11, 2001. During the current financial year
the shareholders’ agreement was renegotiated resulting in Vodacom Congo (RDC) s.p.r.l. considered to be a 51% owned
subsidiary (Note 30).
capital commitments:
result of the adoption of IAS 21: The Effects of Foreign Exchange Rates (“IAS 21”). Intangible assets have accordingly been restated.
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The consolidated annual financial statements have been prepared in accordance with International Financial Reporting
Standards (“IFRS”), which differs in certain respects from Generally Accepted Accounting Principles in the United States
(“US GAAP”). The effect of applying US GAAP principles to net profit and shareholders’ equity is set out below along with an
explanation of applicable differences between IFRS and US GAAP:
– restated
transition adjustments
foreign operations
effect of change in accounting policy
with IFRS – restated
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Movements in shareholders’ equity in accordance
with US GAAP
Balance at the beginning of the period
Under IFRS, the total value of deferred bonus entitlements as calculated at the end of each financial period is based on the net
present value of expected future cash payments as determined under the bonus formula over the vesting period.
Awards Plans an Interpretation of APB Opinions no. 15 and 25”, compensation cost is recognised over the service period or
the vesting period if the service period is not defined, based upon the undiscounted value of the entitlements.
The Group adopted IFRS 3: Business Combinations (“IFRS 3”) from April 1, 2004, under which acquired goodwill is no longer
amortised, but tested for impairment at least annually (or more frequently if impairment indicators arise). Accordingly, goodwill
arising from the Group’s investments is not subject to amortisation as from April 1, 2004.
(“IAS 38”) and IFRS 3 which was adopted by the Group from April 1, 2004. From this date goodwill is no longer amortised.
Under IFRS and US GAAP, goodwill arising on the acquisition of a foreign entity is treated as an asset of the entity and
translated at the foreign exchange rate ruling at the balance sheet date.
IFRS and US GAAP which are summarised below, results in a difference in the accumulated translation amount recorded in equity.
date to the amounts determined under US GAAP is as follows:
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Under IFRS, no deferred taxation liability was recognised in respect of intangible assets acquired other than in a business
combination where there was a difference at the date of acquisition between the assigned values and the taxation bases of the
assets.
differences between the assigned values and the taxation bases of intangible assets acquired. The recording of such deferred
taxation liability has no net impact on net income or shareholders’ equity as determined under US GAAP as the decrease in
income taxation expense is offset by a corresponding increase in amortisation (Note 45 g).
The Group adopted IAS 39: Financial Instruments – Recognition and Measurement (“IAS 39”) and SFAS 133: Accounting for
Derivative Instruments and Hedging Activities (“SFAS 133”) on April 1, 2001.
prior to the adoption of IAS 39 had been designated as either fair value or cash flow hedges but do not qualify as hedges
under IAS 39, is recognised as an adjustment of the opening balance of retained earnings at the beginning of the financial
year IAS 39 is initially applied. Changes in fair value of derivatives acquired after April 1, 2001 are recorded in the income
statement.
which prior to the adoption of SFAS 133 had been cash flow type hedges but do not qualify as hedges under SFAS 133, is
recognised as a cumulative effect adjustment of other comprehensive income in the year SFAS 133 is initially applied. This
amount is subsequently released into earnings in the same period or periods during which the hedged transaction affects
earnings. During the year ended March 31, 2005 R7.8 million (2004: R7.8 million; 2003: R7.8 million) was released into
earnings. The difference between previous carrying amounts and fair value of derivatives, which prior to the adoption of
SFAS 133 had been fair value type hedges, is recognised as a cumulative effect adjustment in earnings. Changes in fair value
of derivatives acquired after April 1, 2001 are recorded in the income st atement.
Under IFRS, current and deferred taxation assets and liabilities are measured using taxation rates enacted unless announcements
of taxation rates by the government have the substantive effect of actual enactment. The Group’s deferred taxation assets and
liabilities at March 31, 2005 are recorded at the substantially enacted taxation rate of 29%.
(Secondary Tax on Companies or “STC”) of 12.5% is due based on the amount of the dividends net of the STC credit for
dividends received during a dividend cycle.
are declared. IFRS also requires that deferred taxation be provided for at the undistributed rate of 29%.
measurement of current and deferred taxation liabilities and assets is based on provisions of the enacted taxation law; the
effects of future changes in taxation laws or rates are not anticipated. Therefore, the enacted rate of 30% should be used for all
taxation amounts (prior to the calculation of STC). Temporary differences should be tax effected using the taxation rate that will
apply when income is distributed, ie an effective rate of 37.78% including STC.
earnings and accrued that amount as an additional liability for US GAAP purposes.
for any period, but because temporary differences in a business combination need to be tax effected at the higher rate there is
a consequent effect on the amount of goodwill recognised in a business combination under US GAAP.
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The taxation effects of the US GAAP adjustments have been calculated based on the enacted taxation rate of 37.78%
(2004: 37.78%; 2003: 37.78%).
materially different, is as follows:
As reported under IFRS
that the future taxable profit will allow the deferred taxation asset to be recovered.
is more likely than not that the asset will not be recovered. For US GAAP purposes, an additional deferred taxation asset and a
corresponding valuation adjustment allowance of R109.3 million (2004: R24.8 million; 2003: R nil) have no effect on the net
shareholders’ equity for the current year.
Under IFRS, interest cost incurred during the construction period is expensed as incurred.
to the condition and location necessary for its intended use) is capitalised. The capitalised interest is recorded as part of the asset to
which it relates and is amortised over the asset’s estimated useful life. Capitalised interest was nil for the years ended March 31,
2005, 2004 and 2003 as the effect of capitalising interest, as compared with the effect of expensing interest, was not material.
Under IFRS, investments qualifying as joint ventures are accounted for under the proportionate consolidation method of
accounting. Under the proportionate consolidation method, the venturer records its share of each of the assets, liabilities,
income and expenses of the jointly controlled entity on a line-by-line basis with similar items in the venturer’s financial
statements. The venturer continues to record its share of losses in excess of its net investment of the joint venture.
investment in a joint venture is shown in the balance sheet of an investor as a single amount. Likewise, an investor’s share
of earnings or losses from its investment is ordinarily shown in its income statement as a single amount. Typically an investor
discontinues applying the equity method when its net investment (including net advances) is reduced to zero, unless the investor
has guaranteed obligations of the investee or is otherwise committed to provide further financial support from the investee.
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In 2004 and 2003, the Group also proportionately consolidated Vodacom Congo (RDC) s.p.r.l. The summarised financial
statement information for Vodacom Congo (RDC) s.p.r.l. relating to the Group’s pro rata interest is set out in Note 44. Under
US GAAP, the Group’s share of losses of Vodacom Congo (RDC) s.p.r.l. does not exceed the carrying amount of the investment
in the joint venture.
dividends received
accounted for as a 51% owned subsidiary (Note 30). Accordingly Vodacom Congo (RDC) s.p.r.l. is consolidated under both
IFRS and US GAAP.
The Group adopted IAS 27: Consolidated and Separate Financial Statements (“IAS 27”), from April 1, 2004. In accordance
with the guidance, the Group has reclassified its minority interest in the balance sheet from a liability into equity. The Group
applied this reclassification retroactively.
the end of each fiscal year in the shareholders’ equity reconciliation.
were effectively long-term investments, to a non-interest bearing loan due to Vodacom Tanzania Limited securing external debt.
The change in the interest rate applicable to the loan changed the fair value of the loan on that date that the loan became
interest free. The loan was remeasured to amortised cost and the difference between the nominal amount of the loan and the
fair value on remeasurement date was recorded as a gain in earnings. Under both IFRS and US GAAP, upon consolidation the
Group’s portion of the loan to Vodacom Tanzania Limited was eliminated. Under the revised IFRS accounting in terms of IAS 27,
the remaining portion related to the remeasurement of the loan advanced by the minority shareholders of Vodacom Tanzania
Limited was recorded as a capital contribut ion by the minority interest in equity. Under US GAAP, the Group recorded the gain
on remeasurement of the minority interest of the loan in “minority interest” and recognised in earnings.
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Upon the adoption of IAS 21: The Effects of Changes in Foreign Exchange Rates, the Group has reclassified the foreign
exchange gains or losses of the monetary item that forms part of the net investment in foreign operations which is denominated
in a currency other than the functional currency of either the parent company or the foreign operation through earnings and not
as a separate component of equity.
monetary item that forms part of the net investment in foreign operations are recognised upon consolidation as a component
of equity in other comprehensive income.
comprehensive income balances under US GAAP are summarised
as follows:
The excess of the cost of an acquired entity over the net of the amounts assigned to assets acquired and liabilities assumed
should be recognised as an asset referred to as goodwill.
minority interests. Similar to IFRS, the excess of the cost of an acquired entity over the net of the amounts assigned to assets
acquired and liabilities assumed should be recognised as an asset referred to as goodwill. As a result, the carrying amount of
the goodwill for US GAAP purposes is adjusted to reflect the different values assigned to the intangibles.
the subsidiary entity. In 2004, the minority interest allocation was a net profit under US GAAP, and a net loss under IFRS (due
to the additional amortisation expense). Therefore, there was no minority interest allocation under IFRS, and thus there was a
GAAP difference effecting net income. In 2005, the minority interest allocation under both IFRS and US GAAP was a net profit.
Therefore, in accordance with IAS 27, the IFRS allocation to minority interest was net of the loss not allocated to the minority in
2004. No difference in shareholders’ equity exists at the end of 2005.
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Under IFRS, fees received by the Group from issuing guarantees are recognised in income as earned. A liability in respect of
the guarantee is not recognised until such time as the contingent liability is thought likely to realise.
“Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees and Indebtedness of
Others (an interpretation of FASB Statements No. 5, 57 and 107 and Rescission of Interpretation No. 34)” (“FIN 45”) in fiscal
year 2005. This interpretation clarifies that a guarantor is required to recognise, at the inception of a guarantee entered into
after December 15, 2003, a liability for the fair value of the obligation undertaken in issuing the guarantee. This interpretation
does not prescribe a specific approach for subsequently measuring the guarantor’s recognised liability over the term of the
related guarantee.
purposes. On the adoption of FIN 45, all guarantees issued during fiscal year 2005 related to Vodacom Congo (RDC) s.p.r.l.
was initially recorded at fair value at the balance sheet and subsequently amortised into income statements as the premiums are
earned.
In December 2004, the FASB issued SFAS 123 (revised 2004): Share-Based Payments (“SFAS 123R”). This statement eliminates
the option to apply the intrinsic value measurement provisions of APB 25: “Accounting for Stock Issued to Employees” to stock
compensation awards issued to employees. Rather, SFAS 123R requires companies to measure the cost of employee services
received in exchange for an award of equity instruments based on the grant-date fair value of the award. That cost will be
recognised over the period during which an employee is required to provide services in exchange for the award the requisite
service period (usually the vesting period). SFAS 123R applies to all awards granted after the required effective date and to
awards modified, repurchased, or cancelled after that date. For public entities that do not file as small business issue rs,
standard is effective for the first annual reporting period that begins after June 15, 2005. The Group is currently evaluating the
impact of SFAS 123R on its results of operations, financial position and cash flows.
The amendments made by SFAS 151 clarify that “abnormal” amounts of idle facility expense, freight, handling costs and
wasted materials (spoilage) should be recognised as current-period charges and require the allocation of fixed production
overheads to inventory, based on the normal capacity of the production facilities. SFAS 151 is the result of a broader effort by
the FASB to improve the comparability of cross-border financial reporting by working with the International Accounting
Standards Board (“IASB”) towards development of a single set of high-quality accounting standards. The FASB and the IASB
noted that ARB 43, Chapter 4 and IAS 2, Inventories, are both based on the principle that the primary basis of accounting for
inventory is cost. Both of these ac counting standards also require that “abnormal” amounts of idle freight, handling costs, and
wasted materials be recognised as period costs; however, the boards noted that differences in the wording of the two standards
could have led to the inconsistent application of those similar requirements. The FASB concluded that clarifying the existing
requirements in ARB 43 by adopting language similar to that used in IAS 2 is consistent with its goals of improving financial
reporting in the United States and promoting convergence of accounting standards internationally. The guidance is effective for
inventory costs incurred during fiscal years beginning after June 15, 2005. Earlier application is permitted for inventory costs
incurred during fiscal years beginning after November 23, 2004. The Group is currently evaluating the impact of SFAS 151 on
its results of operations, financial position and cash flows.
(“SFAS 153”), which amends APB 29: Accounting for Non-monetary Transactions to eliminate the exception for non-monetary
exchanges of similar productive assets and replaces it with a general exception for exchanges of non-monetary assets that do
not have commercial substance. SFAS 153 is effective for non-monetary asset exchanges occurring in fiscal periods beginning
after June 15, 2005. The Group is currently evaluating the impact of SFAS 153 on its results of operations, financial position
and cash flows.
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The Group adopted the following revised and new International Financial Reporting Standards prior to their effective dates in
the current financial year:
dates during the current financial year:
During December 2003, the International Accounting Standards Board (“IASB”) issued the Improvements Project to current
International Accounting Standards (“The Improvements Project”). The Group has not adopted the following standards included
in the Improvements Project:
and equipment as a combination of various units of measure with separate useful lives or consumption patterns. These separate
lives are used to calculate depreciation, test for derecognition and for the treatment of expenditure to replace or renew the
component of that item of property, plant and equipment. It further confirms that the cost of an item of property, plant and
equipment should include not only the initial estimate of the costs relating to dismantlement, removal or restoration of the
property, plant and equipment at the time of installing the item, but also during the period of use for purposes other than
producing inventory. The residual value and useful life of an asset must be reviewed annually. Residual values should not include
future inflation. There i s no cessation of depreciation when assets are idle.
and a separate lease of the buildings. All initial direct costs incurred by a lessor in negotiating a finance lease have to be
included in the initial measurement of the finance lease receivables. Initial direct cost incurred by lessors in negotiating an
operating lease are added to the income carrying amount of the leased asset and recognised over the lease term on the same
basis as the lease income. This standard provides special transitional provisions.
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(continued)
Accounting pronouncements not adopted at March 31, 2005 (continued)
The revised IAS 40: Investment Property (“IAS 40”) has included new requirements for property interests. A property interest
that is held by a lessee under an operating lease that meets the definition of investment property may be treated as investment
property if the operating lease is accounted for as if it were a finance lease in accordance with IAS 17, and the lessee uses the
fair value model in terms of IAS 40.
effective for annual periods commencing on or after January 1, 2006. The revisions to the standard have made available an
additional option for the recognition of actuarial gains and losses on post-employment defined benefit plans. Actuarial gains
and losses on post-employment defined benefit plans may be recognised in full in retained income within the statement of
recognised income and expense when they arise.
that an entity issues or to all reinsurance contracts that it holds. IFRS 4 is the first guidance by the IASB on the recognition,
measurement and disclosure of insurance contracts. The standard is effective for annual periods commencing on or after
January 1, 2005. An insurer need not apply some aspects of the IFRS to comparative information that relates to annual periods
beginning before January 1, 2005.
effective for annual periods commencing on or after January 1, 2006. The standard prescribes financial reporting for
exploration and evaluation of mineral resources, but permits an entity to develop its own accounting policy for such transactions.
The standard includes additional impairment indicators specific to exploration and evaluation of mineral resources activities
and prescribes an impairment test in accordance with IAS 36: Impairment of Assets, where an indicator that the asset may be
impaired, exists.
any effect.
(“IFRIC 1”). The interpretation is effective for annual periods beginning on or after September 1, 2004. IFRIC 1 contains
guidance on accounting for the changes in decommissioning, restoration and similar liabilities that have previously been
recognised both as part of the cost of an item of property, plant and equipment and as a provision (liability). The interpretation
addresses subsequent changes to the amount of the liability that may arise from (a) a revision in the timing or amount of the
estimated decommissioning or restoration costs or from (b) a change in the current market-based discount rate.
interpretation is effective for annual periods commencing on or after January 1, 2005. The interpretation applies the principles
for the classification of financial instruments as financial liabilities or equity established in IAS 32: Financial Instruments:
Disclosure and Presentation to co-operative and similar entities.
commencing on or after March 1, 2005. This interpretation deals with the accounting treatment of “cap and trade” emission right
schemes that are operational. The interpretation specifies that the emission allowance should be recorded as an intangible asset at
fair value. The obligation to deliver the allowances should be recorded as a liability, based on the actual emissions of the entity.
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(continued)
Accounting pronouncements not adopted at March 31, 2005 (continued)
The Group will adopt IFRIC 3 during the 2006 financial year and does not believe that the adoption of the interpretation will
have any effect.
interpretation is effective for annual periods beginning on or after January 1, 2006. This interpretation prescribes that where the
entity enters into an arrangement that depends on the use of a specific asset and conveys the right to control this specific asset,
this arrangement should be treated as a lease under IAS 17. The arrangements that are in substance leases, should be assessed
against the criteria included in IAS 17 to determine if the arrangements should be accounted for as finance leases or operating
leases. The transitional provisions require the Group to assess all existing arrangements at the beginning of the comparative
period of the first period in which the interpretation is adopted. The assessment should be performed based on the information
available at the adoption da te.
Rehabilitation Funds (“IFRIC 5”). The interpretation is effective for annual periods beginning on or after January 1, 2006. The
scope of this interpretation is restricted to Funds with separately administered assets where the contributor’s right to access is
restricted. It requires the Group to assess the nature of the relationship with the Fund and account for it in accordance with
IAS 27: Consolidated and Separate Financial Statements if the Group controls the Fund.
liability separate from the interest in the Fund. Where the Group has a right to possible reimbursement, this right should be
recorded as a contingent asset in accordance with IAS 37: Provisions, Contingent Liabilities and Contingent Assets.