Telkom SA limited

Issued by Telkom
Johannesburg, 05 Jul 2001

Announcement of audited financial results for the year ended 31st March 2001

Telkom, the South African full service telecommunications provider with an exclusive wire-line licence, and which also has a 50% holding in the country`s largest mobile operator, Vodacom, announces a significant increase in Group revenues and EBITDA for the year ended 31 March and major progress in its ongoing efficiency progamme.

. Group revenue up by 15% to R32.0 billion
. Company revenue per line up 22% to R5,335
. Group EBITDA up 18 % to R10.1 billion
. Group headline earnings up by 6%
. Group operating costs increased by 14% to R27.3 billion
. Company operating expenses, excluding depreciation increased by 5% only.
. Group capital expenditure of R9.7 billion including R8.2 billion on wireline rollout and modernisation programme
. Ahead on cumulative wireline rollout licence targets
. Wireless activities continue to grow through growth in pre-paid customers
. New technology deployment continues
. Telkom ready for competition

Sizwe Nxasana, Chief Executive Officer, commented:

"The past year saw a continuation of our dual strategy: namely, to become even better at what we do whilst limiting the growth in operating costs. The benefits of our efficiency initiatives, which have been fully embraced by our staff, are being seen across the Group. The result is a transformed Telkom, one that is undoubtedly ready to meet the competitive challenges that lie ahead."

3rd July 2001
Enquiries:

Media (012) 311 5466
Amanda Singleton

Analysts / Investors (012) 311 1046
Mark Garraway

Chairman`s Statement

The past year has been one of intense preparation and improvement for the Group. Preparation for a new period of liberalisation and improvement in our products, service provision, marketing and overall productivity and efficiency. We have also exceeded our aggressive cumulative licence targets for rollout and modernisation of our network in this final phase of our exclusive licence period.

An Improving Economic Background

South Africa continues to successfully address many challenges in overcoming differences in levels of economic development among its population. While the country has a highly developed, sophisticated first world infrastructure at the core of its economy, a large proportion of the population still lacks many basic amenities.

The South African economy has been growing at a relatively slow rate. In 2000, GDP growth was 3% and inflation was 6.9%. The continued depreciation of the Rand against the US dollar and other major currencies negatively impacted economic growth. Despite these factors, the decline in prime domestic interest rates stabilised at 14.5%.

The Government has indicated its commitment to creating a stable free market economy, including the phasing out of exchange controls. After a number of years of tight economic management, an upbeat budget was presented for the current fiscal period. The Government encouragingly showed that it is now in a position to increase spending, reduce debt and lower taxation.

Financial Reporting

The group`s primary basis of reporting for the year under review was South African Generally Accepted Accounting Practice (SA GAAP), and the statutory financial statements have been prepared on that basis.

Telkom is in the process of moving its accounting basis from SA GAAP to International Accounting Standards (IAS). In this process, IAS is being analysed to modify, where possible, differences that might otherwise require detailed and quantified reconciliation in a public filing.

A Year of Achievement

The results show that the Group is performing well with steady operating revenue performance, up 15% to R32.0 billion. EBITDA grew 18% to R10.1 billion and the EBITDA margin was 32%. Growth in wireline revenues remains strong despite migration to mobile and tariff re-balancing. Wireless revenues, through our 50% holding in Vodacom, increased an impressive 45% in the year and contributed 16% of the total Group revenue figure.

The capital investment programme this year saw the investment of R9.7 billion primarily in network expansion and modernisation. The Group has continuously met strenuous cumulative licence targets for the first four years of exclusivity. The Group has now invested R39.1 billion over the four years since Telkom embarked on its extensive expansion and modernisation programme to meet service quality and installation performance targets.

As of March 31, 2001, 99.6% of our telephone lines had been digitised. This compares with 74% at March 31, 1997. Significantly more South Africans now have access to a telephone. Since April 1996, the number of access lines has increased by 959,563 lines from 4,002,180 lines then to 4,961,743 lines at the 2001 year end.

Vodacom, one of the two cellular networks in South Africa, had approximately 59% share of the mobile market in South Africa at 31 March 2001, 79% of whom are pre-paid and saw subscriber growth of 69% to 5.2 million subscribers.

As we continue to transform from a parastatal entity to a publicly listed and profit-focused operation, we have made changes throughout the business. Already Telkom has reorganised itself along centralised functional lines, changed corporate culture, reduced operating expenses and improved profitability. We are actively managing the transition to market competition as the end of our exclusivity draws near.

We have made further progress in improving efficiencies and focussing on our core business through outsourcing non-core businesses and reducing our workforce. In the year under review, the Group reduced its staff numbers by approximately 4800. These reductions were accompanied by the implementation of early retirement packages and a structured outsourcing programme.

A New Era in Telecommunications

The South African Government has stated its intention to liberalise the fixed line telecommunications market in South Africa, beginning in May 2002 through the issue of a licence to a Second Network Operator ("SNO"). The services to be provided by the SNO have yet to be finalised and although Telkom will lose some market share, the Group is well prepared for competition.

The Government set out in the Green and White Papers of 1996 and 1997 respectively a clear route map for this transition from exclusivity through a duopoly towards full liberalisation. The prime rationale was to ensure that in return for a period of exclusivity, Telkom would embark on stringent roll-out and service obligations programme to improve teledensity and accessibility in South Africa. Telkom is required to comply with a number of conditions and obligations relating to milestone targets. These include the construction of new telephone lines in underserviced areas, installation of new public payphones and other targets relating to the provision of first-time services to villages, line digitisation, and clearing the time taken to repair and install new and existing services.

Preparing for a duopolistic market has been Telkom`s biggest priority. We have been taking appropriate measures such as improving infrastructure technology re-balancing tariffs, improving product ranges and re-training customer service employees. We believe that we are sufficiently prepared for competition and we have made the decision not to apply for an additional year of exclusivity under our licence conditions.

The South African market is already under intense domestic and international competitive pressure. The entry of many multinational corporations into South Africa is a further incentive for global communications operators abroad to establish or enhance their presence in South Africa. However, during our current period of exclusivity, Telkom is a quality partner for international companies looking to enter the South African or African market. This has allowed us to selectively choose alliances with partners whose products and services best complement ours. A prime example of this is the SAT3/WASC cable, which we are building in partnership with forty leading telecommunications operators. The cable will give African countries direct access to each other and to global markets. We continue to investigate further partnership opportunities.

The third mobile licence has been awarded to Cell-C recently. Competition is likely to intensify further when the regulatory authorities issue licences for the 1800Mhz radio frequency spectrum and third generation mobile communications technologies and we will meet those challenges aggressively. The Group expects to maintain its leadership in the telecommunications market during liberalisation as it expects competition to stimulate increased market demand for, and promote the development of, new communications products and services.

A New Strategy For a New Era

Our strategic objectives are to increase shareholder value and position Telkom for competition. We will do this through maintaining our dominant position in the South African communications market. We have a head start with world-class assets, a stable financial position, specialised management skills and a high-tech network from which to develop and grow the Group.

To leverage our position to full advantage, our focus must remain on, among other things, improving customer satisfaction through providing the best products and services at affordable prices to defend and grow our core markets. To achieve this, we had seven priorities in the past year:

. Increase shareholder value through operating, capital and staffing efficiencies
. Position Telkom for competition
. Improve customer satisfaction by bringing service provision levels to internationally competitive standards and strengthening our marketing efforts.
. Modernise and upgrade the network
. Embark on strategic employee initiatives through skills development
. Improve the company`s strategic enablers through Economic Empowerment initiatives.
. Installation of 665 000 new lines (as per licence target definition)

Initial Public Offering ("IPO")

Telkom was the first major South African state-owned enterprise to be selected for a public listing. The Government`s decision to list a portion of its majority equity stake in Telkom represents a strong vote of confidence in the progress we have made since the Government sold a 30% equity share in Telkom to strategic equity partners in 1997.

The IPO presents both major challenges and opportunities for Telkom. We are meeting the former with determination and look forward to the latter with enthusiasm.

Empowering Tomorrow`s Leadership

One of the key objectives of Telkom`s five-year Strategic Plan was to develop a new management team to take the business forward.

We have been successful in this regard. Our "Deputies" programme has resulted in ten deputy positions being created in critical business areas such as information technology, finance, marketing and strategic planning. Those individuals who completed the programme successfully have been promoted to key positions. This has been an empowering experience and Telkom can be confident that it has the best team in place to lead it into the future.

As the Chief Executive Officer records in his statement, we continue to invest heavily in developing our technological and management skills.

Telkom`s social, employment and procurement policies attach great importance to reaching targets for skills transfer, black economic empowerment and employment equity for the benefit of all our employees.

Ucingo

I am delighted to welcome a new shareholder to Telkom, Ucingo Investments (Pty) Ltd. As part of its commitments to economic empowerment and developing a shareholder culture, the Government set aside a 3% holding in Telkom, at the time of the Strategic Equity Partners transaction in 1997, for a qualified black empowerment grouping. Ucingo is a broad based investment company representing more than twenty empowerment groups represented in all nine provinces of South Africa. There are over two million beneficiaries in Ucingo including women groups, black professionals bodies, community trusts and black-owned technology companies.

The Future

I recently announced that I will be stepping down from the Board with effect from July 31, 2001. It was a decision that I could only take in the knowledge that I will be leaving a strong Group led by an excellent team. Eric Molobi will be taking over as Chairman in the interim with effect from August 31, 2001.

The Telkom I will be leaving is a transformed Telkom. The transformation is the result of many peoples` efforts. Management, employees, Government, the Strategic Equity Partners, and many other stakeholders all share in the credit for what has been achieved.

Telkom can face the future with certainty and a belief in itself as it enters a challenging future.

Chief executive officer`s review

The last year saw a great deal of progress across a number of fronts as Telkom continued its transformation process.

From our customers` perspective, the advances made by Telkom are best illustrated by the range of products and quality of service now available to our customers, be they residential, business or corporate. There is not a communications technology in the world, which is not available or being tested by Telkom for commercial use.

We have also made great strides in making our services more affordable. In fact, our focus on tariffs has ensured that South Africa now has some of the lowest wireline service costs in the world.

In some respects, this year was the second phase of a programme implemented last year, which was designed to fundamentally reorganise our operations. The restructuring of Telkom`s business along functional lines is now complete and is already reaping enormous benefits. Group staff expenses represented 22% of operating costs this year against 27% last year.

To me, one of our greatest achievements over the last four years has been, with the implementation of over 4.9 million lines, the dramatic increase in the number of South Africans with access to a telephone.

While we do not yet know the full detail of the new regulatory environment we will face going forward, Telkom will be ready to meet competition. Indeed, we welcome the prospect of competition as it can only stimulate the development of the South African communications industry and the economy itself.

In preparation for increasing competition, we remain focused on improving efficiencies and on outsourcing non-core operations. As we complete our five-year licence obligations and as we enter into a more liberalised environment, we expect our capital expenditure to decline. We shall continue to invest in the expansion and modernisation of our network and in new technology development and deployment.

Performance

Revenues

Group operating revenue grew 15% for the year to R32.0 billion.

Wireline, or fixed-line telephone services, comprising local, long-distance, international, data, subscriptions and directory services constitute our principal business activity. Growth in wireline-related operating revenue was 10% and accounted for 9% of Group revenue despite tariff rebalancing, traffic migration to mobile networks and increased disconnections. There are four contributors to this revenue increase: subscriptions, data services, interconnection and international.

It is clear that our focus on only profitable customers has hurt our revenue growth and we were forced to disconnect a significant number of customers in the under-serviced areas.

A complete review of non-paying customers and a crackdown on commercial fraud resulted in a disproportionate number of fixed lines being disconnected over the past year. This resulted in a decline in the number of net customer lines to 4,961,743 at March 31, 2001 from 5,492,838 at March 31, 2000. However, Company revenue per line improved 22% to R5,335 compared to R4,378 last year.

As of March 31, 2001, 56% of our access lines served residential customers and 40% served business, corporate and government customers and 4% were connected to public payphones.

With increased digitisation, we have been able to offer more packaged, value added voice services such as Identicall, CallCatcher and MultiPIN. We have also marketed our PrePaid product more actively to ensure customers are offered expanded payment options to reduce credit exposure. Prepaid customers grew from 380,955 to 479,935 for the year ended March 31 2001.

Telkom has cut the price of calls to most key international destinations. For example, prices of calls to Germany have halved and the UK have dropped by 27%. All international calls to and from South Africa are currently routed through Telkom`s fixed line network and Telkom provides direct dialing access to 234 destinations in 75 countries.

ISDN subscription growth was 50%, contributing to data revenue growth of 17%.

Payphone revenue growth was 16%. Approximately 48% of payphones were coin operated and the remainder card operated phones. We are continuing to install payphones in areas defined in our licence, including underserviced communities, schools, hospitals, and as well as to mass transport routes such as taxi ranks, train stations and airports.

Our directories services (including Yellow Pages and White Pages) are generating increased traffic for our network. The directory information call centre received over 143 million calls over the year, up from 104 million last year.

The net contribution from Vodacom to Telkom Group operating revenue grew 45% to R5.2 billion, representing 16% of total Group revenue. The growth in the cellular market has been remarkable with Vodacom`s total subscriber numbers increasing by 69% to 5.2 million (2000: 3.1 million), of which 79% are prepaid and 21% contract. Some 63% of Vodacom`s subscribers are considered active.

Costs

A key achievement in the year has been the improved management of costs. As a result of Telkom`s efficiency drive, Company-related operating cost growth was restrained and grew only by 5% excluding depreciation and amortisation charges. Group operating costs including depreciation grew 14% as Vodacom spent more to maintain its market position in an increasingly competitive market. In particular, cost savings were made on material costs, which dropped 19% for the Group to R2.3 billion and on employee-related costs, which dropped 7% to R7.0 billion.

Last year Telkom committed itself to managing its debtor book through increased connection fees for customers with a poor credit history and active marketing of prepaid services and by reducing average rental charges on prepaid services. We have identified a number of areas where commercial fraud resulted in a superficial increase in bad debts. Total bad debt write-offs for the year increased by 16% to R945 million, including subscription and clip-on fraud of R274 million.

Telkom is a founding member of the South African Fraud Prevention Service (`SAFPS`), which was set up to combat fraud pro-actively.

Profitability

At a Group level, earnings before interest, taxation depreciation and amortisation (EBITDA) increased 18% to R10.1 billion. This performance was driven by efficiency gains in our key operating areas.

Group depreciation charges were R5.0 billion. Operating profits were further eroded by R3.0 billion finance charges which have increased 28% since last year mainly due to the additional Eurobond issue of R3.7 billion.

The decline of group earnings was a result of the growth in operating revenue not being enough to cover the added finance charges this year. This is mainly due to the time lag between the capital spent on expanding the network and the revenue generated by it.

Although net profits for the Group were down by 16%, headline earnings increased by 6% after adjustment for abnormal items.

Balance Sheet

Total assets for the Group grew 14% to R51.8 billion including tangible fixed assets which grew 14% to R37.7 billion in the year. Capital expenditure for the year on the wireline business was R8.2 billion, of which R4.7 billion was spent on baseline rollout including to underserviced areas as required by our licence obligations. The balance was spent on modernising and developing the core network, on new product development and support services. Vodacom spent R3.2 billion for the financial year ended March 31, 2001, of which R2.7bn was for network expansion.

For the year ended March 31, 2001, the Group capital expenditure to sales ratio was 30%. This is at the top end of its peer group, but is in line with most emerging market operators who are undergoing expansion and modernisation. In the long run, we expect this ratio to decline.

Telkom funded its capital requirements through international and local bonds. As at March 31, 2001, 38% of the company`s outstanding debt was foreign denominated against 24% last year.

Telkom`s debt structure remains of good quality and we continue to actively manage our debt profile. Having concluded the R500 million Eurobond issue in April 2000, we have restructured three major debt facilities, managing down borrowing rates from 12% for the 2000 financial year to 10% in the 2001 financial year. Telkom continues to receive favourable ratings from international credit agencies, providing powerful support to broaden the group`s investor base.

In line with budget, total interest bearing debt for the Group was R25 billion (R19% higher than last year) and gearing stands at 151%. Whilst this level is manageable, all parties are in agreement that there is a need for recapitalisation to take advantage of future growth opportunities. The extent and timing of recapitalistion are clearly issues linked to the forthcoming IPO and will be addressed accordingly.

Meeting South Africa`s Needs

In 1994, South Africa had an estimated per capita income of approximately R14,000 assuming a total GDP of R560 billion and a population then of around 40 million. The per capita figure, however, disguised the stark inequality on the ground as an estimated top-10% of the population earned in excess of half of the national income whilst the poorest 40% earned under 4%.

The economic inequality was reflected in fixed line telephony penetration. The upper percentile of the population benefited from 60% penetration and the other 90% of the population recorded just 1% penetration. Few would disagree that telephony penetration is a key ingredient in economic growth and development.

It was against this background that Government set some of its key priorities to dramatically increase the number of telephone lines in the country and ordinary South Africans` accessibility to basic telephony services.

The number of telephone access lines in service has grown at a compound annual rate of 7% over the five year period ended March 31, 2001, and have increased from 3.6 million access lines in service at March 31, 1995 to 5 million at March 31, 2001. The wireline penetration rate was around 8.5% at March 31, 2001.

Teledensity in South Africa varies substantially between urban and rural areas. Telkom is committed to an aggressive plan to expand the fixed line network with a target of adding approximately 2.7 million new lines to the network between March 1997 and March 2002.

Our standard fixed line telephone services provide our subscribers with local, domestic long-distance and international connections. All customers are able to access operator-assisted domestic and international calling and telegram services. With increased digitisation we have been able to offer our fixed line customers with additional value-added services such as Prepaid Fone and Identicall. We also offer a number of information services charged at local call rates, which are generating increased traffic on our network.

Telkom also provides all fixed links for the two cellular operators in South Africa.

Vodacom entered into a joint venture with World Online in 1999, in which Vodacom owns 40% and is called Vodacom World Online. This company had 115,835 subscribers at March 31 2001.

The End of the Beginning

Telkom`s five-year exclusivity period was accompanied by demanding rollout and service obligations. We are coming to the end of our exclusivity period and since 1997 have achieved a great deal in the "beginning" phase of Telkom`s new era.

Building the Network

It is extremely pleasing to report that Telkom has met or exceeded all line rollouts for the first four years of its licence. During this period, Telkom has installed over 2.1 million lines taking the total to 5 million. Of these, 1.4 million were installed in under-serviced areas. We have quite literally connected whole communities to the network with 2,692 villages "wired-up" and over 108,874 payphones installed.

Servicing the Network

It is also satisfying to record that over the same period, there have been marked improvements in the quality of service provision to both our business and residential customers. In focusing on reducing the number of faults on the network and the time it takes to repair these faults once reported, we have cut business and residential fault rates per 1000 lines by 34% and 16% respectively since 1998. We won`t be stopping there.

Making South Africa World Class

Telkom has made a priority of deploying leading-edge technology in order to provide enhanced value-added service that meet the increasing needs our customers. The availability of latest technology allows us to provide an innovative range of value-added e-business services.

Entering a Brave New World

Investing in the Future

The process started in 1997, by which Telkom has been transformed into a world-class communications company, ready to face increased competition in all our markets.

Concurrently with internal restructuring and a focus on efficiency improvements, we are implementing a strategy building on Telkom`s competitive strengths.

This will require us to continue investing in our business, especially if we are to remain competitive in the new environment we will face following the end of our period of exclusivity.

In a strategic drive to reinforce our position as the leading integrated communications company in South Africa, the Group continues to invest major amounts of capital in the expansion and modernisation of its network. We are also investing in new business areas beyond our traditional voice business and markets. These newer areas include evolving industries such as the Internet, wireless, data products and multimedia services. These investments will require substantial capital investments going forward. Telkom is committed to maintaining and upgrading the network going forward.

We estimate that, over the Group`s five-year exclusivity period, Telkom will have invested a total of R49.5 billion.

While Telkom has achieved its targets on the line expansion programme, putting it well beyond its licence targets, which includes infrastructure to reach deep rural areas. However, the future pattern of capital spending is then expected to reduce.

During the year thirteen new ATM switches were built into the network. We now have 1,196,000 km of optic fibre against just 272,000 km in March 1997. Our number of digital exchange units has increased by 95% from 1,993 in March 1997 to 3,894 in March 2001.

Business Imperatives

Implementing equal opportunities through Affirmative Action, Employment Equity and Economic Empowerment initiatives is an important part of our business imperatives.

Employment Equity

Telkom has always had a voluntary and proactive attitude towards social responsibility; long before it became a legal requirement to do so. In 1994, Telkom voluntarily initiated its own Affirmative Action Policy with the approval of its board and top management in response to the discriminations of the past. In 1997, in conjunction with the unions and with the Board`s approval, Telkom rewrote the Affirmative Action Directive to make it even stronger. Key components of this programme were the Deputies programme, the IDP programme and Employee referral programmes, Adult Basic Education and training and the provision of financial support for students studying technical qualifications.

The Employment Equity Act was passed in October 1998 and has two focuses. Firstly to promote equal employment opportunities by eliminating unfair practices. Secondly, to set numeric targets and to provide proactive employment programmes and reasonable accommodations to formerly disadvantaged staff. The Act aims to remove unfair discrimination and ensure that blacks, females and disabled people are equitably represented in all occupational categories and levels. Telkom is continuing its educational drive to promote the Act and the company`s employment equity plan.

Increased representation of women at managerial level is one of Telkom`s priorities. Emphasis has also been placed on increasing the number of women in the traditionally male-dominated technical and engineering fields as well as providing reasonable accommodation and access facilities for people with disabilities. These measures will enable disadvantaged employees to become more productive, to participate more fully in all areas of the company`s operations and to be equitably represented at all levels.

In 2001, 55% of the workforce was black compared with 54% in 1997. 82% of people recruited today are black compared with 60% in 1997. 26% of all employees are female and 36% of all personnel recruited this year have been women.

Black Economic Empowerment

Telkom is a pioneer in the field of economic empowerment and was one of the first companies to develop a `Black Economic Empowerment` policy. Telkom`s policy is considered a `best of breed` and is often used as a reference by other companies. Telkom defines Economic Empowerment as a deliberate, pro-active and on-going programme to ensure constructive participation of black, disabled and female South Africans in the economy. Telkom supports black suppliers, particularly black SMME suppliers with a view to helping them participate in the mainstream of the economy. It has also facilitated job creation and has put into place a support system for black SMMEs.

Total Black Economic Employment spend has increased 26% year-on-year to R3.9 billion. This represents 38% of the company`s total purchasing for the year.

Our People

Competition for qualified communications, information technology and marketing personnel in South Africa is intense, so we have placed a strong focus on our efforts to retain our employees, who are strategically important to our business.

To remain competitive in the transition to a market-orientated company, we have to hire and retain highly qualified employees possessing the technical skills. A major principle of our human resources policy is to ensure we continue to be viewed as an attractive and competitive employer as well as to establish value-added remuneration plans.

We seek continuously to improve the skills and development of our employees in each of our business areas. Our employees participate in a range of different training programmes developed by our training organisation. We place great emphasis on promoting an atmosphere geared towards learning and sharing of knowledge. We collaborate with colleges, universities and other educational and research institutions in South Africa and abroad.

This year we have spent over R486,000 on training bringing the total for the four years to R1.9m. Over 45% of this training is technical and 51% is managerial, customer care and life skills training.

Telkom`s productivity per employee has improved steadily in recent years but is still relatively low by international standards. Lines per employee have improved from 75 in 1997 to 113 in 2001. To enhance our competitiveness, we will continue our drive to improve productivity and reduce our workforce over the next few years. We have implemented a range of measures including early retirement and voluntary severance packages and a continuing outsourcing programme. As a result of these measures, more than 80% of departures were voluntary or were achieved through our outsourcing programme.

Telkom`s Development and Transformation

Social Responsibility is a priority for Telkom. The Group continues to actively plough back operational benefits to redress social imbalances experienced by previously disadvantaged groups. Telkom, as a responsible corporate citizen extends its support through training, developing and sponsoring employees and students across South Africa and through its Foundation, Telkom reaches disadvantaged communities by promoting education, job creation and childcare.

Centre for Learning

The Centre for Learning (CFL) is Telkom`s corporate learning facility aimed at developing a skilled workforce achieving optimum performance. Since 1997 / 98, the CFL has delivered more than 3.2 million training days to employees. The CFL also sponsors students through scholarships and bursaries. The range of training programmes is very broad and includes subjects such as leadership, customer service, information technology, human resources, call centres, networks, marketing, sales and basic education.

The CFL has also developed a Virtual Campus which offers 1,200 courses in line with Telkom`s needs. This has proven to be such a success that the CFL is now expanding its expertise and offering similar corporate learning programmes to other companies including Coca Cola, Eskom and Old Mutual. This year, the CFL has delivered 353,618 learning days, largely focused around management, customer care, technology and technical training.

Centres of Excellence

To underpin internal training and development programme, Telkom has launched its Centres of Excellence (COE) programme. This Telkom initiative has attracted some very high profile co-sponsors such as Siemens, Alcatel and Lucent Technologies as well as Governmental participation.

The objective of the COE programme is to improve telecommunications and general information technology skills across South Africa. Twelve COEs are mandated to develop skills in science, engineering and technology. Sixteen universities and eight technikons are an integral part of this programme, where historically disadvantaged institutions are partnered with historically advantaged institutions.

Individual Development Programme (IDP)

The IDP is a leadership development programme designed to develop employees into strategic positions and retain both critical specialists and value-adding employees.

Deputy`s Programme

The Deputy`s Programme is the first of its kind in South Africa, and is a high-level skills transfer mechanism. Ten deputy positions have been created in critical business areas such as information technology, finance, marketing and strategic planning. Individuals who have successfully completed the programme have been promoted to key positions.

Telkom Foundation

Telkom is committed to making an impact on the South African socio-economic environment and has contributed R100 million to disadvantaged communities over five years. The Foundation has three pillars to its investment programme: education, job creation and childcare. The Foundation sponsors a range of different projects annually. The Telkom Foundation is also looking to launch an employee-giving programme during 2001 to encourage employees to give to non-profit organisations or causes that are important to them.

Another push which has come from within Telkom is `adopt-a-project`. Telkom`s senior management has identified a project `dear to them` and ensured that an allocated budget is spent on this project.

Outlook

The last four years have been a period of dramatic change at Telkom. The Telkom of today is a transformed business as I believe our customers will testify. But in a sense, we have only reached the end of the beginning and a new phase in our development beckons.

A new, competitive but uncertain environment lies ahead. We will acquire new obligations and responsibilities both in a competitive market and as a listed company. We must be ready for it.

To meet these challenges, Telkom is focusing on strategies to increase shareholder value and position Telkom for competition:

. Defend our core fixed line business
. Continue improvements made in customer satisfaction levels
. Continue to improve operating performance
. Grow our data communications business
. Capitalise on the mobile communications market through our investment in Vodacom

I believe that we have already made a great deal of progress on these areas. While much remains to be done I am confident that Telkom will deliver on its aspiration and become a world-class investment opportunity.

. Proprietary
. High Priority

Telkom SA Limited

Announcement of audited financial results for the year ended 31st March 2001

. Group revenue up by 15% to R32.0 billion
. Company revenue per line up 22% to R5,335
. Group EBITDA up 18 % to R10.1 billion
. Group headline earnings up by 6%
. Group operating costs increased by 14% to R27.3 billion
. Company operating expenses, excluding depreciation increased by 5% only.
. Group capital expenditure of R9.7 billion including R8.2 billion on wireline rollout and modernisation programme
. Ahead on cumulative wireline rollout licence targets
. Wireless activities continue to grow through growth in pre-paid customers
. New technology deployment continues
. Telkom ready for competition

Sizwe Nxasana, Chief Executive Officer, commented:

3rd July 2001

Enquiries:

Media (012) 311 5466
Amanda Singleton

Analysts / Investors (012) 311 1046
Mark Garraway

Chairman`s Statement

An Improving Economic Background

Financial Reporting

A Year of Achievement

billion primarily in network expansion and modernisation. The Group has continuously met strenuous cumulative licence targets for the first four years of exclusivity. The Group has now invested R39.1 billion over the four years since Telkom embarked on its extensive expansion and modernisation programme to meet service quality and installation performance targets.

The capital investment programme this year saw the investment of R9.7

A New Era in Telecommunications

A New Strategy For a New Era

. Increase shareholder value through operating, capital and staffing efficiencies
. Position Telkom for competition
. Improve customer satisfaction by bringing service provision levels to internationally competitive standards and strengthening our marketing efforts.
. Modernise and upgrade the network
. Embark on strategic employee initiatives through skills development
. Improve the company`s strategic enablers through Economic Empowerment initiatives.
. Installation of 665 000 new lines (as per licence target definition)

Initial Public Offering ("IPO")

The IPO presents both major challenges and opportunities for Telkom. We are meeting the former with determination and look forward to the latter with enthusiasm.

Empowering Tomorrow`s Leadership

One of the key objectives of Telkom`s five-year Strategic Plan was to develop a new management team to take the business forward.

As the Chief Executive Officer records in his statement, we continue to invest heavily in developing our technological and management skills.

Ucingo

The Future

Telkom can face the future with certainty and a belief in itself as it enters a challenging future.

Chief Executive Officer`s Review

The last year saw a great deal of progress across a number of fronts as Telkom continued its transformation process.

We have also made great strides in making our services more affordable. In fact, our focus on tariffs has ensured that South Africa now has some of the lowest wireline service costs in the world.

Performance

Revenues

Group operating revenue grew 15% for the year to R32.0 billion.

It is clear that our focus on only profitable customers has hurt our revenue growth and we were forced to disconnect a significant number of customers in the under-serviced areas.

As of March 31, 2001, 56% of our access lines served residential customers and 40% served business, corporate and government customers and 4% were connected to public payphones.

ISDN subscription growth was 50%, contributing to data revenue growth of 17%.

Costs

Telkom is a founding member of the South African Fraud Prevention Service (`SAFPS`), which was set up to combat fraud pro-actively.

Profitability

At a Group level, earnings before interest, taxation depreciation and amortisation (EBITDA) increased 18% to R10.1 billion. This performance was driven by efficiency gains in our key operating areas.

Although net profits for the Group were down by 16%, headline earnings increased by 6% after adjustment for abnormal items.

Balance Sheet

Telkom funded its capital requirements through international and local bonds. As at March 31, 2001, 38% of the company`s outstanding debt was foreign denominated against 24% last year.

Meeting South Africa`s Needs

Our standard fixed line telephone services provide our subscribers with local, domestic long-distance and international connections. All customers are able to access operator-assisted domestic and international calling and telegram services. With increased digitisation we have been able to offer our fixed line customers with additional value-added services such as Prepaid Fone and Identicall.We also offer a number of information services charged at local call rates, which are generating increased traffic on our network.

Telkom also provides all fixed links for the two cellular operators in South Africa.

Vodacom entered into a joint venture with World Online in 1999, in which Vodacom owns 40% and is called Vodacom World Online. This company had 115,835 subscribers at March 31 2001.

The End of the Beginning

Telkom`s five-year exclusivity period was accompanied by demanding rollout and service obligations. We are coming to the end of our exclusivity period and since 1997 have ach

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