SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 6-K
REPORT OF FOREIGN PRIVATE ISSUER
PURSUANT TO RULE 13a-16 OR 15d-16 OF
THE SECURITIES EXCHANGE ACT OF 1934
For the month of March, 2003
MARCONI PLC
MARCONI CORPORATION PLC
(Exact name of Registrant as specified in its Charter)
4th Floor, Regents Place
338 Euston Road
London NW1 3BT
United Kingdom
(Address of principal executive offices)
Indicate by check mark whether the registrant files or will file annual
reports under cover of Form 20-F or Form 40-F.
Form 20-F __X__ Form 40-F _____
Indicate by check mark whether the registrant by furnishing the information
contained in this Form is also thereby furnishing the information to the
Commission pursuant to rule 12g3-2(b) under the Securities Exchange Act of 1934.
Yes ____ No __X__
(If "Yes" is marked, indicate below the file number assigned to the
registrant in connection with Rule 12g3-2(b): 82-________.)
INCLUDED DOCUMENTS
Included in this report is a document entitled "Proposals in Relation to Schemes
of Arrangement" (the "SCHEME DOCUMENT"), which was sent by Marconi plc ("PLC")
and Marconi Corporation plc ("CORP") to certain of their creditors on March 31,
2003, in connection with their proposed financial restructuring.
The proposed restructuring will be effected by means of two UK Schemes of
Arrangement, one each for Corp and plc. A Scheme of Arrangement is a
court-supervised procedure under English law through which a company may enter
into a compromise with its creditors to effect a restructuring of its financial
obligations.
The Scheme Document contains an Explanatory Statement required by Section 426 of
the UK Companies Act 1985, explaining and summarizing the terms, conditions and
mechanics of the Schemes of Arrangement. Copies of both Schemes of Arrangement,
appendixes setting forth various aspects of the proposed restructuring in
greater detail, and certain other information are also included in the Scheme
Document.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
MARCONI PLC
By: /s/ Mary Skelly
-----------------------------
Name: Mary Skelly
Date: 31 March 2003 Title: Secretary
MARCONI CORPORATION PLC
By: /s/ Mary Skelly
-----------------------------
Name: Mary Skelly
Date: 31 March 2003 Title: Secretary
THIS DOCUMENT IS IMPORTANT AND REQUIRES YOUR IMMEDIATE ATTENTION. IT IS BEING
SENT TO PERSONS BELIEVED TO BE SCHEME CREDITORS, BEING CERTAIN CREDITORS OF
MARCONI CORPORATION PLC AND CERTAIN CREDITORS OF MARCONI PLC, AND IS BEING MADE
AVAILABLE TO PERSONS WITH INTERESTS IN BONDS ISSUED BY MARCONI CORPORATION PLC
AND GUARANTEED BY MARCONI PLC. IF YOU HAVE ASSIGNED, SOLD, OR OTHERWISE
TRANSFERRED, OR ASSIGN, SELL OR OTHERWISE TRANSFER, YOUR INTERESTS AS A SCHEME
CREDITOR BEFORE THE RECORD DATE YOU MUST FORWARD A COPY OF THIS DOCUMENT TO THE
PERSON OR PERSONS TO WHOM YOU HAVE ASSIGNED, SOLD OR OTHERWISE TRANSFERRED, OR
ASSIGN, SELL OR OTHERWISE TRANSFER, YOUR INTERESTS AS A SCHEME CREDITOR. IF YOU
ARE IN ANY DOUBT AS TO ANY ASPECT OF THESE PROPOSALS AND/OR ABOUT THE ACTION YOU
SHOULD TAKE, YOU SHOULD CONSULT IMMEDIATELY YOUR STOCKBROKER, BANK MANAGER,
SOLICITOR, ACCOUNTANT OR OTHER PROFESSIONAL ADVISER AUTHORISED UNDER THE
FINANCIAL SERVICES AND MARKETS ACT 2000.
THIS DOCUMENT IS ACCOMPANIED BY VOTING INSTRUCTIONS. IT IS IMPORTANT THAT YOU
READ THIS DOCUMENT CAREFULLY FOR INFORMATION ABOUT THE RESTRUCTURING AND THAT
YOU COMPLETE AND RETURN THE VOTING INSTRUCTIONS ENCLOSED WITH THIS DOCUMENT.
FURTHER COPIES OF THIS DOCUMENT CAN BE OBTAINED FROM KPMG IN LONDON (REFERENCE:
987/SRB/GTE, PHILIP WALLACE) AND FROM BONDHOLDER COMMUNICATIONS IN LONDON AND
NEW YORK.
APPLICATION HAS BEEN MADE TO THE UKLA FOR THE NEW SHARES, THE NEW NOTES AND THE
WARRANTS TO BE ADMITTED TO THE OFFICIAL LIST OF THE UKLA, AND TO THE LONDON
STOCK EXCHANGE FOR THE NEW SHARES, THE NEW NOTES AND THE WARRANTS TO BE ADMITTED
TO TRADING ON THE LONDON STOCK EXCHANGE'S MARKET FOR LISTED SECURITIES. LISTING
IS CONDITIONAL UPON THE CORP SCHEME BECOMING EFFECTIVE. IT IS EXPECTED THAT
ADMISSION TO LISTING AND TRADING WILL BECOME EFFECTIVE AND DEALINGS IN THE NEW
SHARES, THE NEW NOTES AND THE WARRANTS WILL COMMENCE AT 8.00 A.M. LONDON TIME ON
19 MAY 2003.
A DOCUMENT COMPRISING A PROSPECTUS RELATING TO MARCONI CORPORATION PLC HAS BEEN
PREPARED IN ACCORDANCE WITH THE LISTING RULES MADE UNDER SECTION 74 OF THE
FINANCIAL SERVICES AND MARKETS ACT 2000 AND A COPY OF IT WILL BE DELIVERED FOR
REGISTRATION TO THE REGISTRAR OF COMPANIES IN ENGLAND AND WALES PURSUANT TO
SECTION 83 OF THAT ACT.
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PROPOSALS IN RELATION TO
SCHEMES OF ARRANGEMENT
UNDER SECTION 425 OF THE COMPANIES ACT 1985
BETWEEN
MARCONI CORPORATION PLC
and its
SCHEME CREDITORS
(AS DEFINED IN THIS DOCUMENT)
and between
MARCONI PLC
and its
SCHEME CREDITORS
(AS DEFINED IN THIS DOCUMENT)
--------------------------------------------------------------------------------
Meetings of Scheme Creditors to consider separately the Scheme relating to Corp
and the Scheme relating to plc will be held on 25 April 2003 commencing at 10.00
a.m. The notices of the Scheme Meetings are set out in part VI of this document.
Instructions about actions to be taken by Scheme Creditors preceding the Scheme
Meetings are set out in Appendix 27 and summarised on pages 13 and 14. Whether
or not Scheme Creditors intend to attend the meetings of Scheme Creditors, they
are requested to complete, execute and return the appropriate Form(s) of Proxy
and Claim Form(s) sent with this document in accordance with these instructions
as soon as possible. Instructions about actions to be taken by persons with
interests in Bonds are set out in Appendix 28 and summarised on pages 14 and 15.
31 March 2003
The statements contained in this document are made as at the date of this
document, unless another time is specified in relation to them, and delivery of
this document shall not give rise to any implication that there has been no
change in the facts set forth in this document since that date.
Nothing contained in this document shall constitute a warranty or guarantee of
any kind, express or implied, and nothing contained in this document shall
constitute any admission of any fact or liability on the part of Corp or plc or
any Affiliate of Corp or plc with respect to any asset to which it or they may
be entitled or any claim against it or them. Without prejudice to the generality
of the foregoing, nothing in the Schemes or the Explanatory Statement or the
distribution thereof evidences to any person, or constitutes any admission by
Corp, plc, the Prospective Supervisors or KPMG, that a liability is owed to any
person in respect of any claim or that any person is or may be a Scheme Creditor
of Corp or plc. The failure to distribute this document to any Scheme Creditor
shall not constitute an admission by Corp, plc, the Prospective Supervisors or
KPMG that such person is not a Scheme Creditor or that any liability owed to
such person is an Excluded Claim.
No person has been authorised by Corp or plc to make any representations
concerning the Schemes which are inconsistent with the statements contained in
this document and, if made, such representations may not be relied upon as
having been so authorised. This document is issued solely in connection with the
Schemes.
If both the Corp Scheme and the plc Scheme are, or just the Corp Scheme is,
approved by the relevant Scheme Creditors, a fairness hearing before the Court
is necessary in order to sanction the approved Scheme or Schemes. All Scheme
Creditors are entitled to attend the Court hearing in person or through counsel
to support or oppose the sanctioning of the relevant Scheme or Schemes. It is
expected that the Court hearing will be held on 12 to 13 May 2003 at the Royal
Courts of Justice, Strand, London WC2A 2LL. Notice of the fairness hearing will
be published, following approval of the Corp Scheme or both Schemes by relevant
Scheme Creditors, in The Times and the international editions of the Wall Street
Journal, the Financial Times and the International Herald Tribune.
Lazard and Morgan Stanley are advising Corp and plc and no one else in
connection with aspects of the Restructuring and will not be responsible to
anyone other than Corp or plc for providing the protections afforded to their
clients or for providing advice in connection with the Restructuring.
Application has been made to the UKLA for the New Shares, the New Notes and the
Warrants to be admitted to the Official List of the UKLA, and to the London
Stock Exchange for the New Shares, the New Notes and the Warrants to be admitted
to trading on the London Stock Exchange's market for listed securities. It is
expected that admission to listing and trading will become effective and
dealings in the New Shares, the New Notes and the Warrants will commence at 8.00
a.m. London time on 19 May 2003. However, see part I, Section 2, Part F.2: Risk
Factors.
The New Shares, the New Notes and the Warrants to be issued pursuant to the
Schemes will be issued pursuant to exemptions from, or in transactions not
subject to, the registration requirements of the Securities Act, including the
exemption provided by Section 3(a)(10) thereof, and have not been and will not
be registered under the Securities Act or the securities laws of any state of
the United States. The issue of New Shares and New Notes to persons resident in
the states of Arizona, California, Colorado, Connecticut, Illinois, Ohio and
Vermont will be subject to the limitations described in part I, Section 2, Parts
C.9 and D.16.
This document does not constitute an offer to sell or the solicitation of an
offer to buy nor will there be any sale or distribution of the New Shares, the
New Notes and the Warrants to be issued pursuant to the Schemes in any
jurisdiction in which such offer or sale is not permitted.
Further important information is set out under "Important Notice" on pages 1 to
4.
HELPLINES
If you are (or think you may be) a Scheme Creditor and you have any questions
relating to this document or the completion of the Form(s) of Proxy and Claim
Form(s), please contact KPMG on telephone number +44 (0)20 7694 3007. You will
be able to leave a message outside normal working hours or if the relevant staff
are all occupied. Alternatively, please email your question to
marconischeme@kpmg.co.uk
If you are a person with an interest in Bonds and you have any questions
relating to this document or the completion of an Account Holder Letter, please
contact Donna Martini of Bondholder Communications in London on
+44 (0)20 7236 0788 or in New York on +1 212 809 2663. Alternatively, please
email your question to dmartini@bondcom.com. Bondholder Communications has been
appointed by plc and Corp to facilitate communications with persons with
interests in Bonds.
ARE YOU A SCHEME CREDITOR OR A PERSON WITH AN INTEREST IN BONDS?
Please see Appendix 27 for a detailed description of the action to be taken by
Scheme Creditors and Appendix 28 for a detailed description of the action to be
taken by persons with an interest in Bonds.
THE FOLLOWING PERSONS ARE SCHEME CREDITORS FOR THE PURPOSE OF FILING A CLAIM
FORM:
CORP SCHEME
1. Each of the Known Creditors listed in Schedule 3 to the Corp Scheme set
out in part II of this document (this includes The Bank of New York and
The Law Debenture Trust Corporation p.l.c. in respect of the Bonds but
does not include any other person with an interest in Bonds); and
2. Each other person who had a Scheme Claim in the Corp Scheme at the Record
Date.
PLC SCHEME
1. Each of the Known Creditors listed in Schedule 3 to the plc Scheme set
out in part III of this document (this includes The Bank of New York and
The Law Debenture Trust Corporation p.l.c. in respect of the Bonds but
does not include any other person with an interest in Bonds); and
2. Each other person who had a Scheme Claim in the plc Scheme at the Record
Date.
THE FOLLOWING PERSONS MAY BE SCHEME CREDITORS FOR THE PURPOSE OF VOTING AT
SCHEME MEETINGS:
CORP SCHEME
1. Each of the Known Creditors listed in Schedule 3 to the Corp Scheme set
out in part II of this document except that, in relation to the Bonds,
The Bank of New York and The Law Debenture Trust Corporation p.l.c. are
not Scheme Creditors for this purpose and instead each Definitive Holder
(see below) will be a Scheme Creditor; and
2. Each other person who had a Scheme Claim in the Corp Scheme at the Record
Date.
PLC SCHEME
1. Each of the Known Creditors listed in Schedule 3 to the plc Scheme set
out in part III of this document except that, in relation to the Bonds,
The Bank of New York and The Law Debenture Trust Corporation p.l.c. are
not Scheme Creditors for this purpose and instead each Definitive Holder
(see below) will be a Scheme Creditor; and
2. Each other person who had a Scheme Claim in the plc Scheme at the Record
Date.
THE FOLLOWING PERSONS HAVE AN INTEREST IN BONDS:
1. Account Holders;
2. Intermediaries;
3. Bondholders;
4. Definitive Holders;
5. Designated Recipients; and
6. Certain other persons including the Trustees, the Book-Entry Depositary,
DTC, Euroclear and Clearstream, Luxembourg and any depositary for them.
The following diagram illustrates the relationship between certain persons with
interests in Bonds:
(FLOWCHART)
CONTENTS
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Page
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I. EXPLANATORY STATEMENT 1
Important Notice 1
Expected timetable of principal events 5
Scheme Creditors and persons with interests in Bonds 8
Definitions and interpretation 12
Summary of action to be taken 13
Section 1 Letter from the Chairman of plc and of Corp 16
Section 2 Further explanation of the Restructuring 33
A. Business Overview 33
A.1 Background 33
A.2 History of the Marconi Group and the
Restructuring 33
A.3 Market environment and business strategy 38
A.4 Group's principal activities 39
A.5 Intellectual property 51
A.6 Dividend policy 53
A.7 Financial objectives 53
A.8 Current application of critical accounting
policies 57
A.9 Current trading and prospects 59
A.10 Directors, senior management and employees 60
A.11 Financial information and Corp's discussion and
analysis of its financial condition and results
of operations 65
B. Background to and reasons for the Restructuring 66
C. Proposed Restructuring 69
C.1 Overview 69
C.2 Terms of the Restructuring 69
C.3 Terms of the New Senior Notes and the New
Junior Notes 71
C.4 Summary of key actual and contingent claims 76
C.5 Completion of the Restructuring 77
C.6 Mechanics of the Restructuring 79
C.7 Scheme Claims and distribution mechanics 82
C.8 Meetings, final termination, release and
governing law 94
C.9 Effect of securities law restrictions under the
Schemes 95
C.10 Insolvency analysis 99
D. General matters relating to the Restructuring 101
D.1 Lockbox Account and interim security
arrangements 101
D.2 Arrangements with ESOP Derivative Banks 103
D.3 Arrangements to preserve rights at plc level 106
D.4 Working capital 107
D.5 Scheme Implementation Deed 111
D.6 Statement and waiver of inter-company balances 112
D.7 Recapitalisation of Guarantors 113
D.8 Waiver of plc Shareholder vote 113
D.9 Capital Reduction 113
D.10 Share incentive plans 114
D.11 Pensions 129
D.12 Listing and dealing 133
D.13 Reporting requirements and entitlement to
information 133
D.14 Memorandum and Articles 134
D.15 American Depositary Receipts 134
D.16 US securities law considerations 135
D.17 Securities law restrictions in France, Italy
and Malaysia 139
D.18 Certain securities law disclosures 141
D.19 Material contracts 142
D.20 Litigation 142
D.21 Corp working capital statement 142
D.22 Costs of the Restructuring 142
D.23 Principal Subsidiary and associated
undertakings 143
D.24 Principal establishments 144
D.25 Corp Group indebtedness statement 150
CONTENTS
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Page
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D.26 No significant change 151
D.27 Corp incorporation and registered office 151
D.28 Corp share capital 151
D.29 Material shareholdings in Corp 151
D.30 Tax 152
D.31 Insurance 152
D.32 Environmental and other regulations 152
D.33 No waiver of dividends 153
D.34 Documents available for inspection 154
E. Material interests of Directors and Trustees 155
E.1 Directors 155
E.2 Trustees of the Bonds 169
F. Risk Factors 170
F.1 Risks related to a failure to implement or a
delay in implementing the Restructuring 170
F.2 Risks arising from implementation of the
Restructuring 174
F.3 Operating risks 176
F.4 Risks related to ownership of the New Shares,
the New Notes and the Warrants 181
II. THE CORP SCHEME 186
Part I Preliminary 187
Part II The Scheme 202
Part III Determination of Scheme Claims and procedure
for Distributions 204
Part IV Further provisions regarding the issue of New
Shares and Warrants 218
Part V Escrow and distribution arrangements 220
Part VI Independent adjudication 221
Part VII The Supervisors 222
Part VIII Creditors' Committee 226
Part IX Meetings of Scheme Creditors 233
Part X Termination 236
Part XI General Scheme provisions 237
Schedule 1 Determination of claims and payment of
dividends 241
Schedule 2 Extract from the plc Scheme 242
Schedule 3 Known Claims 245
Schedule 4 Persons eligible to receive securities pursuant
to applicable exemptions under US state
securities laws 250
III. THE PLC SCHEME 253
Part I Preliminary 254
Part II The Scheme 268
Part III Determination of Scheme Claims and procedure
for Distributions 271
Part IV Escrow and distribution arrangements 285
Part V Independent adjudication 286
Part VI The Supervisors 287
Part VII Creditors' Committee 291
Part VIII Meetings of Scheme Creditors 298
Part IX Termination 301
Part X General Scheme provisions 302
Schedule 1 Determination of claims and payment of
dividends 305
Schedule 2 Extract from the Corp Scheme 306
Schedule 3 Known Claims 310
Schedule 4 Persons eligible to receive securities pursuant
to applicable exemptions under US state
securities laws 315
IV. APPENDICES TO THE EXPLANATORY STATEMENT 318
1. Corp historical information to 30 September 2002 318
2. Corp unaudited pro forma consolidated balance sheet 408
3. plc financial information to 30 September 2002 413
4. plc quarterly report to 31 December 2002 and updated
financial information 529
5. Corp's discussion and analysis of its financial
condition and results of operations 585
6. Insolvency analysis 622
CONTENTS
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Page
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7. Escrow and Distribution Agreement 633
8. Summary of the terms of the New Senior Notes and the
New Junior Notes 672
9. Excluded Claims 761
10. Security and Intercreditor Arrangements 797
11. ESOP facilities 818
12. Conditions of the Warrants 819
13. Corp share capital 831
14. Summary of certain provisions of the Memorandum and
Articles of Corp 835
15. Rights and restrictions attaching to the Non-Voting
Deferred Shares 842
16. Description of American Depositary Receipts 843
17. Tax 851
18. Particulars of the Scheme Implementation Deed 872
19. Material contracts 877
20. Litigation 910
21. Summary of the proposed permanent injunction orders
under Section 304 of the United States Bankruptcy
Code 916
22. Co-ordination Committee and Informal Committee of
Bondholders 919
23. Contact details, material interests and curricula
vitae of the Supervisors 920
24. Summary of terms of appointment and scope of
engagement of the Prospective Supervisors and the
Supervisors 922
25. Form of Confirmation Resolution and form of Scheme
Company Confirmation 927
26. Form of letter of confirmation to be given by the
Prospective Supervisors 930
27. Instructions to Scheme Creditors 931
28. Instructions to persons with interests in Bonds 935
29. Form of Proxy for Scheme Creditors 974
30. Form of Claim Form for Scheme Creditors 980
V. DEFINITIONS AND GLOSSARY 995
VI. NOTICES 1016
A. Notice of Corp Scheme Meeting 1016
B. Notice of plc Scheme Meeting 1017
I. EXPLANATORY STATEMENT
(IN COMPLIANCE WITH SECTION 426 OF THE COMPANIES ACT 1985)
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IMPORTANT NOTICE
A. INFORMATION
An explanation to assist you in determining if you are a Scheme Creditor, a
Bondholder or another person with an interest in Bonds is set out in the section
headed "Scheme Creditors and persons with interests in Bonds" on pages 8 to 11
of this document.
Nothing in this document or any other document issued with or appended to it
should be relied on for any purpose other than to make a decision on the
Schemes. In particular and without limitation, nothing in this document or any
other document issued with or appended to it should be relied on in connection
with the purchase of any shares, warrants, bonds, notes or assets of Corp or
plc. This document has been prepared in connection with proposals in relation to
schemes of arrangement pursuant to section 425 of the Act between Corp and the
Corp Scheme Creditors and plc and the plc Scheme Creditors.
The information contained in this document concerning:
(a) Corp only has been prepared by Corp;
(b) plc only has been prepared by plc; and
(c) both Corp and plc has been prepared by Corp and plc;
and, in each case, that information has been prepared based upon information
available to the relevant company. To the best of Corp's and plc's knowledge,
information and belief, the information contained in this document is in
accordance with the facts and does not omit anything likely to affect the import
of such information. The financial statements have been prepared in accordance
with UK GAAP. There may be differences between the way in which they are
presented and the presentation of financial statements in public filings in
other jurisdictions. Corp and plc have taken all reasonable steps to ensure that
this document contains the information reasonably necessary to enable Scheme
Creditors to make an informed decision about the effect of the relevant Schemes
on them.
The members of the Informal Committee of Bondholders and the Co-ordination
Committee agreed, at an early stage of the Restructuring discussions, to enter
into confidentiality agreements which, inter alia, acknowledged that Corp and
plc would supply the Informal Committee of Bondholders and the Co-ordination
Committee with certain material non-public information which could potentially
make them "insiders" within the meaning of section 52 of the Criminal Justice
Act 1993 and for the purposes of laws governing the trading of securities in
England and Wales and other jurisdictions. Corp and plc have been required by
the members of the Informal Committee of Bondholders pursuant to their
confidentiality agreements to make public in this document all insider
information, material non-public information or information that is price
sensitive which has been supplied to the members of the Informal Committee of
Bondholders by Corp or plc. Corp and plc believe that they have performed this
obligation and that the members of the Informal Committee of Bondholders have no
insider information, material non-public information or information that is
price sensitive which has been supplied to them by Corp or plc.
Certain information supplied to the Informal Committee of Bondholders and the
Co-ordination Committee is not included in this document either because such
information is of a commercially sensitive nature and public disclosure may
affect Corp's, plc's or the Group's business or because such information was
provided for illustrative purposes only, and in each case Corp and plc do not
believe that the information is reasonably necessary to enable Scheme Creditors
to make an informed decision on the Schemes nor, in the case of information
supplied to the Informal Committee of Bondholders, do they believe such
information is price sensitive.
None of Corp's and plc's financial and legal advisers, the Prospective
Supervisors, the members of the Informal Committee of Bondholders and the
Co-ordination Committee and their respective financial and legal advisers, the
Eurobond Trustee and the Yankee Bond Trustee and their respective advisers, who
engaged in discussions or consulted with Corp and plc and their advisers
concerning the Restructuring and/or who assisted with the distribution of
documentation relating to the Schemes, the submission of claims and/or the
voting procedures in respect of the Schemes, has verified that the information
contained in this document is in accordance with the facts and does not omit
anything likely to affect the import of such information and each of these
persons expressly disclaims responsibility for such information.
1
I. EXPLANATORY STATEMENT
(IN COMPLIANCE WITH SECTION 426 OF THE COMPANIES ACT 1985)
IMPORTANT NOTICE
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In accordance with normal practice, none of the Prospective Supervisors, the
members of the Informal Committee of Bondholders and the Co-ordination
Committee, the Eurobond Trustee and the Yankee Bond Trustee expresses any
opinion as to the merits of the Schemes. Although the Prospective Supervisors
have been involved in certain of the arrangements for formulating the Schemes,
they make no recommendation as to how to vote in relation to the Schemes. The
Prospective Supervisors, the members of the Informal Committee of Bondholders
and the Co-ordination Committee, the Eurobond Trustee and the Yankee Bond
Trustee recommend that Scheme Creditors who are in any doubt as to the impact on
them of the Schemes (or either of them) seek their own financial, taxation and
legal advice. The Prospective Supervisors, the members of the Informal Committee
of Bondholders and the Co-ordination Committee, the Eurobond Trustee and the
Yankee Bond Trustee express no opinion with respect to the effect of the Schemes
on the rights or remedies afforded to Scheme Creditors under the US Trust
Indenture Act of 1939 or otherwise.
Nothing contained in this document shall be deemed to be a forecast, projection
or estimate of plc's, Corp's or the Group's future financial performance except
where otherwise specifically stated.
This document contains certain statements, statistics and projections that are
or may be forward-looking. The accuracy and completeness of all such statements,
including, without limitation, statements regarding the Group's (or any
Affiliate's, including Corp's or plc's) future financial position, strategy,
projected costs, plans and objectives for the management of future operations,
is not warranted or guaranteed. These statements typically contain words such as
"intends", "expects", "anticipates", "estimates" and words of similar import. By
their nature, forward-looking statements involve risk and uncertainty because
they relate to events and depend on circumstances that will occur in the future.
Although Corp and plc believe that the expectations reflected in such statements
are reasonable, no assurance can be given that such expectations will prove to
be correct. There are a number of factors which could cause actual results and
developments to differ materially from those expressed or implied by such
forward-looking statements. These factors include, but are not limited to,
factors identified in part I, Section 2, Part F, Risk Factors or elsewhere in
this document as well as: future revenues being lower than expected; increasing
competitive pressures in the industry; general economic conditions or conditions
affecting the relevant industries, both domestically and internationally, being
less favourable than expected; and/or conditions in the securities markets being
less favourable than expected.
In announcing the conclusion of the Heads of Terms in respect of the
Restructuring on 29 August 2002, and an addendum to the Heads of Terms on 16
December 2002, the Group published certain financial projections with respect to
the years ending 31 March 2004 to 31 March 2007. In announcing further
information about the Restructuring on 18 March 2003, the Group published an
illustrative financial analysis with respect to the year ending 31 March 2005.
In the announcements the Group explained that the projections and analysis were
prepared for internal purposes only and not with a view to public disclosure. In
order to facilitate the Restructuring discussions, however, the Group furnished
these projections and this analysis to representatives of the Syndicate Banks
and members of the Informal Committee of Bondholders involved in the
discussions. The projections and analysis were made public pursuant to the
express terms of Corp's and plc's confidentiality agreements with the members of
the Informal Committee of Bondholders. As indicated at the time of their
publication, no reliance should be placed on these projections or this analysis
and neither Corp nor plc will be publishing any updates in relation to them. No
opinion is expressed as to the reasonableness of the assumptions on which the
projections or analysis were prepared nor is any assurance given as to the
occurrence, timing or extent of any market recovery. Accordingly, Corp and plc
do not accept any responsibility for these projections or this analysis.
In this document, references to "sterling", "L", "pence" or "p" are to the
lawful currency of the United Kingdom, references to "dollars", US dollars",
"cents", "US$" or "$" are to the lawful currency of the United States and
references to "euro", "Euro" or "E" are to the currency introduced at the start
of the third stage of the European economic and monetary union pursuant to the
Treaty of Rome establishing the European Union, as amended.
The summary of the principal provisions of the Schemes contained in this
document is qualified in its entirety by reference to the Schemes themselves,
the full texts of which are set out at parts II and III of this document. Each
Scheme Creditor and each person with an interest in Bonds, is advised to read
and consider carefully the texts of
2
I. EXPLANATORY STATEMENT
(IN COMPLIANCE WITH SECTION 426 OF THE COMPANIES ACT 1985)
IMPORTANT NOTICE
--------------------------------------------------------------------------------
the Schemes themselves. This is because this document and, in particular, the
Explanatory Statement have been prepared solely to assist Scheme Creditors in
respect of voting on the Schemes.
Scheme Creditors and persons with interests in Bonds should not construe the
contents of this document as legal, tax, financial or other advice, and should
consult with their own professional advisers as to the matters described in this
document.
B. SECURITIES LAW CONSIDERATIONS
If the Corp Scheme becomes effective, New Shares and New Notes will be issued by
Corp to the Escrow Trustee for distribution to Scheme Creditors, Designated
Recipients and plc Shareholders, and Warrants will be issued by Corp to the
Registrars for distribution to plc Shareholders, all in accordance with the Corp
Scheme. If the plc Scheme also becomes effective, New Shares and New Notes which
plc is entitled to receive by virtue of any of its Subsidiaries being a Scheme
Creditor in the Corp Scheme are expected to form part of the plc Scheme
Consideration which will be distributed to plc Scheme Creditors and Designated
Recipients in accordance with the plc Scheme.
The distribution of this document, New Shares, New Notes or Warrants may be
restricted by law in certain jurisdictions. No action has been taken by Corp or
plc that would permit an offer or distribution of New Shares, New Notes or
Warrants or possession or distribution of this document or any offer or
publicity material in any jurisdiction where action for that purpose is
required, other than in the United Kingdom and in certain other jurisdictions
referred to in part I, Section 2, Part D.18. Scheme Creditors, persons with
interests in Bonds, Designated Recipients and plc Shareholders are strongly
advised to consult their professional advisers as to whether any laws or
regulations which may be applicable to them may give rise to any liability or
penalty, or require them to obtain any government or other consents or to pay
any taxes or duties, as a result of the implementation of the Schemes. None of
Corp, plc, the Escrow Trustee, the Distribution Agent, the Supervisors,
Bondholder Communications, the Registrars, the Informal Committee of
Bondholders, the Co-ordination Committee, their respective directors or any
other parties involved in the Restructuring accept any responsibility for any
liabilities (including but not limited to consequential liabilities) incurred by
Scheme Creditors, Definitive Holders, Designated Recipients and other persons
with interests in Bonds or plc Shareholders as a result of the implementation of
the Schemes in respect of laws or regulations applicable to them (except that UK
stamp duty or SDRT payable in connection with the issuance of ADRs will be met
by Corp to the extent described herein).
Securities will not be distributed pursuant to the Schemes to or to the order,
or for the account or benefit, of any person where such distribution would be
prohibited by any applicable law or regulation, or so prohibited except after
compliance with conditions or requirements that are unduly onerous. To the
extent that such a prohibition applies, securities that would otherwise have
been distributed to any relevant person pursuant to the Schemes will be sold and
the net cash proceeds of such sale (after deduction of all applicable expenses
and currency conversion costs) paid to that person in sterling in full
satisfaction of his rights in respect of such securities under the relevant
Scheme (provided that if the securities are not listed on a securities exchange
Scheme Creditors and Bondholders will be entitled to receive a sum in cash in
sterling that is substantially equivalent in value to such securities). For
further information, please see part I, Section 2, Part C.9.
Corp and plc have determined that no such legal or regulatory prohibitions
currently apply in connection with the Schemes with respect to the laws of the
United Kingdom and certain other jurisdictions identified in part I, Section 2,
Part C.9, but that such prohibitions do apply with respect to the laws of
certain "Restricted Jurisdictions" (namely France, Italy, Malaysia and the US
states of Arizona, California, Colorado, Connecticut, Illinois, Ohio and
Vermont). In connection with these restrictions and in order to permit
securities to be distributed to persons located in Restricted Jurisdictions, the
Claim Form will require each person completing it (other than the Trustees), and
the Account Holder Letter will require each relevant Account Holder, to confirm
certain facts. Except as otherwise described herein, if the required
confirmations are not given in the form requested in a Claim Form or Account
Holder Letter, then New Shares and New Notes will not be distributed in respect
of such Claim Form or Account Holder Letter, in which case the relevant person
or persons will receive cash instead as described above.
Scheme Creditors, Definitive Holders, Designated Recipients and other persons
with interests in Bonds -- in particular, those located in the Restricted
Jurisdictions named above -- should carefully consider the provisions
3
I. EXPLANATORY STATEMENT
(IN COMPLIANCE WITH SECTION 426 OF THE COMPANIES ACT 1985)
IMPORTANT NOTICE
--------------------------------------------------------------------------------
of the Schemes with respect to legal and regulatory restrictions generally and
the contents of the confirmations to be included in the Claim Form and Account
Holder Letter as described in part I, Section 2, Part C.9. Information with
respect to the categories of persons in certain Restricted Jurisdictions who may
be eligible to receive securities pursuant to the Schemes in reliance on
exemptions under applicable law is set out (with respect to persons located in
France and Italy) in part I, Section 2, Part D.17 and (with respect to persons
located in Arizona, California, Colorado, Connecticut, Illinois, Ohio and
Vermont) in part I, Section 2, Part D.16. Any persons who are in doubt as to how
legal or regulatory restrictions may affect them in relation to the Schemes are
strongly advised to consult their professional advisers.
NOTICE TO NEW HAMPSHIRE RESIDENTS
NEITHER THE FACT THAT A REGISTRATION STATEMENT OR AN APPLICATION FOR A LICENCE
HAS BEEN FILED UNDER CHAPTER 421-B OF THE NEW HAMPSHIRE REVISED STATUTES WITH
THE STATE OF NEW HAMPSHIRE NOR THE FACT THAT A SECURITY IS EFFECTIVELY
REGISTERED OR A PERSON IS LICENSED IN THE STATE OF NEW HAMPSHIRE CONSTITUTES A
FINDING BY THE SECRETARY OF STATE THAT ANY DOCUMENT FILED UNDER RSA 421-B IS
TRUE, COMPLETE AND NOT MISLEADING. NEITHER ANY SUCH FACT NOR THE FACT THAT AN
EXEMPTION OR EXCEPTION IS AVAILABLE FOR A SECURITY OR A TRANSACTION MEANS THAT
THE SECRETARY OF STATE HAS PASSED IN ANY WAY UPON THE MERITS OR QUALIFICATIONS
OF OR RECOMMENDED OR GIVEN APPROVAL TO, ANY PERSON, SECURITY OR TRANSACTION. IT
IS UNLAWFUL TO MAKE, OR CAUSE TO BE MADE, TO ANY PROSPECTIVE PURCHASER,
CUSTOMER, OR CLIENT ANY REPRESENTATION INCONSISTENT WITH THE PROVISIONS OF THIS
PARAGRAPH.
4
I. EXPLANATORY STATEMENT
(IN COMPLIANCE WITH SECTION 426 OF THE COMPANIES ACT 1985)
--------------------------------------------------------------------------------
EXPECTED TIMETABLE OF PRINCIPAL EVENTS(1)(2)
PERSONS WITH INTERESTS IN BONDS SHOULD OBSERVE ANY DEADLINES SET BY ANY
INSTITUTION OR SETTLEMENT
SYSTEM THROUGH WHICH THEY HOLD ANY BONDS TO ENSURE ANY VOTING INSTRUCTIONS GIVEN
BY THEM ARE ACTED UPON AT THE RELEVANT SCHEME MEETING
ITEM DEADLINE
---- --------
Record Date(3) 5.00 p.m. on 27 March 2003
Date of publication of the Prospectus 31 March 2003
Latest time and date for delivery of Claim Forms to KPMG 5.00 p.m. on 17 April 2003
in order for Scheme Creditors to participate in the First
Initial Distribution of Scheme Consideration(4)
Latest time and date for delivery of Account Holder 5.00 p.m. (New York City time) on
Letters to Bondholder Communications in order for 17 April 2003
Designated Recipients to participate in the First Initial
Distribution of Scheme Consideration and latest
recommended time and date for such delivery in order for
Definitive Holders to vote at the Scheme Meetings(5)(6)
Latest recommended time and date by which KPMG should 5.00 p.m. on 17 April 2003
receive Forms of Proxy for voting at the Scheme
Meetings(7)
Last time and date by which KPMG should receive Forms of 12 noon on 24 April 2003
Proxy for voting at the Scheme Meetings(7)
Date of exchange of global Eurobonds for individual global on or before 24 April 2003
Eurobonds(8)
Date of exchange of global Yankee Bonds for definitive on or before 24 April 2003
registered Yankee Bonds(8)
Release Date(9) 24 April 2003
Meeting of Corp Scheme Creditors(10) 10.00 a.m. on 25 April 2003
Meeting of plc Scheme Creditors(10) 10.15 a.m. on 25 April 2003
Latest time and date for approval by the Prospective 8.00 a.m. on 12 May 2003
Supervisors of Scheme Claims in order for Scheme Creditors
or Designated Recipients in respect of those Scheme Claims
to participate in the First Initial Distribution of Scheme
Consideration(15)(16)
Court hearing to sanction the Schemes(11) 12 to 13 May 2003
US Bankruptcy Court hearing for Section 304 US Bankruptcy 14 May 2003
Code permanent injunction orders(12)
Last day of dealing in shares in plc 16 May 2003
Latest time and date for Scheme Creditors to propose 5.00 p.m. on 16 May 2003
themselves to act as members of the Creditors'
Committee(13)
Effective Date of the Schemes 19 May 2003
Listing of New Shares, New Notes and Warrants(14) 8.00 a.m. on 19 May 2003
First Initial Distribution of Corp Scheme 19 May 2003
Consideration(15)
First Initial Distribution of plc Scheme Consideration(16) 19 May 2003
Court hearing to sanction the Capital Reduction(17) 21 May 2003
Date on which the Capital Reduction becomes effective(17) 22 May 2003
Notes:
(1) All references to time in this timetable are to London time unless
otherwise stated.
(2) The dates in this timetable and mentioned throughout this document assume
that neither of the Scheme Meetings is adjourned. It is therefore not
possible to be specific about these dates. It is also possible that the
drawing up of the order
5
I. EXPLANATORY STATEMENT
(IN COMPLIANCE WITH SECTION 426 OF THE COMPANIES ACT 1985)
EXPECTED TIMETABLE OF PRINCIPAL EVENTS
--------------------------------------------------------------------------------
or orders of the Court sanctioning one or both of the Schemes may be
delayed if any person appeals the relevant order or orders.
(3) All Scheme Claims are determined as at the Record Date. The Supervisors
will be entitled to exercise discretion as to whether they recognise any
assignment or transfer of Scheme Claims after the Record Date. Bonds may
continue to be traded after the Record Date until the date on which they
are blocked in the clearing systems.
(4) A brief description of the claim against the relevant Scheme Company and
other information must be provided in the Claim Form in respect of each
Scheme Claim. Claim Forms are to be submitted to KPMG (Philip Wallace and
Richard Heis, both partners in KPMG, are the Prospective Supervisors of
both Schemes). Scheme Consideration will be distributed to Admitted Scheme
Creditors by the Distribution Agent acting upon instructions received from
the Escrow Trustee and the Supervisors. Scheme Creditors are urged to
return their Claim Forms as soon as possible to allow as long as possible
for them to be processed and checked by KPMG, thereby increasing the
likelihood of Scheme Claims being Admitted (if appropriate) in time for
Scheme Creditors to participate in the First Initial Distribution. KPMG
will acknowledge receipt of each Claim Form received. Scheme Creditors
requiring any assistance in completing Claim Forms should contact the
HELPLINE on +44(0) 20 7694 3007.
(5) No Scheme Consideration will be distributed by the Distribution Agent in
relation to the Bonds except to Designated Recipients in respect of the
relevant Scheme Claim identified in duly completed Account Holder Letters.
Provided that the relevant Trustee has submitted a Claim Form which has
been Admitted in time for the First Initial Distribution of Scheme
Consideration to be made to Designated Recipients, for a Designated
Recipient to receive the First Initial Distribution a copy of a duly
completed Account Holder Letter relating to that Designated Recipient must
be delivered in accordance with the instructions set out in Appendix 28
and must be received by Bondholder Communications by 5.00 p.m. (New York
City time) on 17 April 2003. Holders of Eurobonds will receive the cash
forming part of the First Initial Distribution whether or not an Account
Holder Letter has been delivered by this date.
(6) Each Definitive Holder identified in a duly completed Account Holder
Letter is entitled to vote at the Scheme Meetings. The procedures in this
respect are described in detail in Appendix 28.
(7) KPMG will acknowledge receipt of each Form of Proxy received. Scheme
Creditors (other than Definitive Holders, to whom this note is not
applicable) requiring any assistance completing Forms of Proxy should
contact the HELPLINE on +44(0) 20 7694 3007. Forms of Proxy may be handed
in at the registration desk for the Scheme Meetings no later than one hour
before the scheduled time of the relevant Scheme Meeting. Thereafter,
Forms of Proxy may be handed to the chairman of the relevant Scheme
Meeting at that meeting. All Scheme Creditors are recommended to return
the relevant Form of Proxy on or before 5.00 p.m. on 17 April 2003 to
minimise administrative delays. The latest time and date by which KPMG
should receive Forms of Proxy is 12 noon on 24 April 2003. Faxed Forms of
Proxy are acceptable if faxed to +44 (0)20 7694 3011. Faxes should be
marked for the attention of Philip Wallace and Richard Heis. Scheme
Creditors whose claims have been admitted and valued as described in note
(10) below are entitled to attend and vote at the Scheme Meetings in
person even if they have previously submitted a Form of Proxy.
(8) The exchanges of Bonds are expected to be made shortly before the release
of the interim security.
(9) This is the date on which it is expected that the interim security
(described in part I, Section 2, Part D.1) will be released.
(10) The Corp Scheme Meeting will commence at the time stated and the plc Scheme
Meeting will commence at the later of the time stated and the conclusion or
adjournment of the Corp Scheme Meeting. The chairman of the relevant Scheme
Meeting will admit and value claims of Scheme Creditors (including
Definitive Holders) only for the purpose of voting at that Scheme Meeting
and not for the purposes of determining whether a Scheme Claim should be
Admitted. More detail concerning valuation of claims for the purposes of
voting, admission of claims for the purposes of Scheme Meetings, and
disputes as to such valuation or admission, is set out in paragraphs 15 to
17 of Appendix 27 and paragraphs 52 and 54 of Appendix 28. Only those
Scheme Creditors whose claims have been so admitted and valued by the
chairman of the relevant Scheme Meeting can vote at that Scheme Meeting.
If, for this purpose only, a claim is rejected or reduced, the chairman
will inform the relevant creditor of such rejection or reduction and report
all such rejections or reductions of claims (with reasons therefor) to the
Court at the hearing to sanction the relevant Scheme.
(11) The Court will be requested to hear the petitions to sanction the Schemes
together at a single hearing if both Schemes are approved by the relevant
Scheme Creditors. The date for that hearing has not yet been settled,
although it is expected to take place on or about 12 to 13 May 2003. If
this date changes, the dates of all subsequent steps, including the
Effective Date, will be affected. In this event, the date of the hearing
will be published in The Times and the international editions of the Wall
Street Journal, the Financial Times and the International Herald Tribune
and also announced at each of the Scheme Meetings, to the extent then
known.
(12) The date of the US Bankruptcy Court hearing has not yet been determined.
(13) If a Scheme Creditor (including a Definitive Holder) wishes to propose
itself to act as a member of the Creditors' Committee, it should ensure
that the appropriate box on its Claim Form or Account Holder Letter is
ticked. On the Effective Date, the Supervisors will, to the extent
possible, appoint up to seven members of the Creditors' Committee
6
I. EXPLANATORY STATEMENT
(IN COMPLIANCE WITH SECTION 426 OF THE COMPANIES ACT 1985)
EXPECTED TIMETABLE OF PRINCIPAL EVENTS
--------------------------------------------------------------------------------
selected from those Scheme Creditors and Definitive Holders who have
proposed themselves to act, representing a proper balance of the interests
of Scheme Creditors as a whole. If fewer than three Scheme Creditors and
Definitive Holders propose themselves to act as members of the Creditors'
Committee, then on and from the Effective Date the Creditors' Committee
will consist of as many members as have proposed themselves to act. In
accordance with the terms of the Scheme those members, if any, will
endeavour to fill the vacancy/vacancies to ensure that the Creditors'
Committee has a minimum of three members within 28 days of the Effective
Date. If those members do not succeed in appointing the necessary number of
further members of the Creditors' Committee, resulting in a Creditors'
Committee consisting of fewer than three members within 28 days of the
Effective Date, the Supervisors will thereafter use reasonable endeavours
to appoint the necessary number of further members within the following 14
days as interim committee members to serve on the Creditors' Committee
until the necessary number of further permanent members are appointed.
(14) Elections may be made in Claim Forms and Account Holder Letters to have all
or any portion of the New Shares deliverable pursuant to the Schemes
delivered in the form of ADRs. Corp will apply to list the ADRs on NASDAQ
and will use its reasonable endeavours to effect this NASDAQ listing as
soon as practicable following the Effective Date of the Corp Scheme. It is
currently expected that the NASDAQ listing will become effective during the
third calendar quarter of 2003. For further information, see part I,
Section 2, Parts C.2 and D.15.
(15) To receive Corp Scheme Consideration by way of the First Initial
Distribution, a Corp Scheme Creditor's Scheme Claim must be approved by the
Prospective Supervisors on or prior to 8.00 a.m. on the first day of the
Court sanction hearing and the Claim Form in respect of that Scheme Claim
must have been duly submitted by 5.00 p.m. on 17 April 2003. Corp Scheme
Creditors are encouraged to return their Claim Forms as soon as possible,
to allow as many Claim Forms as possible to be processed by KPMG in advance
of 8.00 a.m. on the first day of the Court sanction hearing. This will
allow as many Scheme Claims as possible, where appropriate, to be Admitted
on the Effective Date and listed in the First Initial Distribution Notice
pursuant to the terms of the Corp Scheme. Account Holders are encouraged to
obtain whatever information or instructions they may require from
Bondholders in sufficient time to enable them to return Account Holder
Letters to Bondholder Communications as soon as possible and in any event
prior to 5.00 p.m. (New York City time) on 17 April 2003.
(16) To receive plc Scheme Consideration by way of the First Initial
Distribution, a plc Scheme Creditor's Scheme Claim must be approved by the
Prospective Supervisors on or prior to 8.00 a.m. on the first day of the
Court sanction hearing and the Claim Form in respect of that Scheme Claim
must have been duly submitted by 5.00 p.m. on 17 April 2003. plc Scheme
Creditors are encouraged to return their Claim Forms as soon as possible,
to allow as many Claim Forms as possible to be processed by KPMG in advance
of 8.00 a.m. on the first day of the Court sanction hearing. This will
allow as many Scheme Claims as possible, where appropriate, to be Admitted
on the Effective Date and listed in the First Initial Distribution Notice
pursuant to the terms of the plc Scheme. Account Holders are encouraged to
obtain whatever information or instructions they may require from
Bondholders in sufficient time to enable them to return Account Holder
Letters to Bondholder Communications as soon as possible and in any event
prior to 5.00 p.m. (New York City time) on 17 April 2003.
(17) The Corp Capital Reduction (as more fully described in part I, Section 2,
Part D.9) requires the sanction of the Court and the Court order confirming
the Capital Reduction to be filed with the Registrar of Companies and
registered by him. It is anticipated that these steps will take place on
the dates indicated.
7
I. EXPLANATORY STATEMENT
(IN COMPLIANCE WITH SECTION 426 OF THE COMPANIES ACT 1985)
--------------------------------------------------------------------------------
SCHEME CREDITORS AND PERSONS WITH INTERESTS IN BONDS
INTRODUCTION
1. For the purposes of this document, Scheme Creditors under the Corp and
plc Schemes include bank creditors and certain other creditors of Corp
and plc, respectively, at the Record Date (being 5.00 p.m. (London time)
on 27 March 2003). Special provisions apply to the Yankee Bonds and
Eurobonds as described below. A list of the Known Creditors of the Corp
Scheme is set out in Schedule 3 to the Corp Scheme in part II of this
document and a list of the Known Creditors of the plc Scheme is set out
in Schedule 3 to the plc Scheme in part III of this document.
YANKEE BONDS
2. The following Bonds issued by Corp and guaranteed by plc are Yankee
Bonds:
US$900,000,000 7 3/4 per cent. Bonds due 2010; and
US$900,000,000 8 3/8 per cent. Bonds due 2030.
The Yankee Bond Trustee and Book-Entry Depositary for both Yankee Bond
issues is The Bank of New York.
3. For so long as each series of the Yankee Bonds remains in global form,
The Bank of New York, as the bearer of the respective global Yankee
Bonds, will be the Corp Scheme Creditor in respect of such Bonds. The
Bank of New York, as Yankee Bond Trustee, is also a Corp Scheme Creditor
in accordance with the terms of the Indenture. In these circumstances,
none of the Account Holders, Intermediaries or Bondholders will be Corp
Scheme Creditors and thus none of them will be entitled to attend or vote
at the Corp Scheme Meeting. The Indenture permits the exchange of the
global Yankee Bonds for definitive registered Yankee Bonds at Corp's
discretion. At the request of certain creditors, Corp has agreed to
exchange the global Yankee Bonds for definitive Yankee Bonds with a view
to ensuring that Definitive Holders (being, in the case of the Yankee
Bonds, the persons in whose names the Yankee Bonds in definitive form
will be registered) can attend and vote in respect of such Bonds at the
Corp Scheme Meeting.
4. The Bank of New York, as Yankee Bond Trustee, is also a plc Scheme
Creditor by virtue of the guarantee given in its favour in the Indenture.
At the request of certain creditors of plc, plc has agreed to extend the
benefit of its guarantee of the Yankee Bonds to the Definitive Holders of
Yankee Bonds with a view to ensuring that they can attend and vote at the
plc Scheme Meeting in respect of such Bonds.
5. Under the Indenture, The Bank of New York, as the Yankee Bond Trustee, is
entitled to, and will, file a Claim Form under each Scheme in respect of
all of the Yankee Bonds. As a result, holders of Yankee Bonds should not
file Claim Forms (except in respect of any non-Bond debt which is owed to
such Bondholders by Corp or plc), but Account Holders who hold Yankee
Bonds will need to file Account Holder Letters as described in paragraph
16 below in order for the nominated Definitive Holders to vote at the
Scheme Meetings and the nominated Designated Recipients to receive Scheme
Consideration in respect of each Scheme.
6. The procedures for filing a Claim Form, delivering an Account Holder
Letter and attending and/or giving voting instructions in relation to the
Scheme Meetings in relation to the Yankee Bonds are described in more
detail in paragraph 16 below and in Appendix 28.
EUROBONDS
7. The following Bonds issued by Corp and guaranteed by plc are Eurobonds:
E500,000,000 5.625 per cent. Bonds due 2005; and
E1,000,000,000 6.375 per cent. Bonds due 2010.
The Eurobond Trustee for both Eurobond issues is The Law Debenture Trust
Corporation p.l.c.
8. The Eurobond Trustee is a Corp Scheme Creditor in accordance with the
terms of the Trust Deeds. For so long as each series of the Eurobonds
remains in permanent global form, the common depositary for Euroclear and
Clearstream, Luxembourg, as the bearer of the respective permanent global
Eurobonds, will
8
I. EXPLANATORY STATEMENT
(IN COMPLIANCE WITH SECTION 426 OF THE COMPANIES ACT 1985)
SCHEME CREDITORS AND PERSONS WITH INTERESTS IN BONDS
--------------------------------------------------------------------------------
also be a Corp Scheme Creditor in respect of such Bonds. In these
circumstances, none of the Account Holders, Intermediaries or Bondholders
will be Corp Scheme Creditors and thus none of them will be entitled to
attend or vote at the Corp Scheme Meeting. The terms of the existing
permanent global Eurobonds do not permit their exchange for Eurobonds in
definitive bearer form unless and until an event of default under the
conditions of the Eurobonds or certain other limited events have
occurred. However, at the request of certain creditors, Corp has agreed
to exchange the permanent global Eurobonds for individual global
Eurobonds with a view to ensuring that Definitive Holders (being, in the
case of the Eurobonds, those persons who are bearers by attornment of the
individual global Eurobonds) can attend and vote at the Corp Scheme
Meeting in respect of such Bonds. Further details of the attornment
process and the individual global Eurobonds are set out in paragraph 22
of Appendix 28. Corp has requested the Eurobond Trustee to agree that the
terms of the global Eurobonds should be amended to permit the issuance of
individual global Eurobonds at the discretion of Corp and the Eurobond
Trustee has agreed to this request. Corp and the Eurobond Trustee have
agreed the necessary amendments to the terms of the Trust Deeds to allow
for the issue of individual global Eurobonds.
9. The Eurobond Trustee is also a plc Scheme Creditor by virtue of the
guarantee given in its favour in the Trust Deeds. At the request of
certain creditors of plc, plc has agreed to extend the benefit of its
guarantee of the Eurobonds to the Definitive Holders of Eurobonds with a
view to ensuring that they can attend and vote at the plc Scheme Meeting
in respect of such Bonds.
10. The Eurobond Trustee, in its capacities as a Corp Scheme Creditor and a
plc Scheme Creditor, is entitled to, and will, file a Claim Form under
each Scheme in respect of all of the Eurobonds. As a result, holders of
Eurobonds should not file Claim Forms (except in respect of any non-Bond
debt which is owed to such Bondholders by Corp or plc) but Account
Holders who hold Eurobonds will need to file Account Holder Letters as
described in paragraph 17 below in order for the nominated Definitive
Holders to vote at the Scheme Meetings and the nominated Designated
Recipients to receive Scheme Consideration in respect of each Scheme.
11. The procedures for filing a Claim Form, delivering an Account Holder
Letter and attending and/or giving voting instructions in relation to the
Scheme Meetings in relation to the Eurobonds are described in more detail
in paragraph 17 below and in Appendix 28.
SCHEME CREDITORS
12. You are a Scheme Creditor if you have a Scheme Claim. For the purposes of
this document, Corp Scheme Creditors include the Eurobond Trustee (in
respect of the Eurobonds) and The Bank of New York (in respect of the
Yankee Bonds), but do not include Bondholders (unless and until they
become Definitive Holders), Account Holders or Intermediaries. In
addition, plc Scheme Creditors include the Yankee Bond Trustee and the
Eurobond Trustee but do not include Bondholders (unless and until they
become Definitive Holders), Account Holders or Intermediaries.
13. The term "SCHEME CREDITOR" is used in this document in a number of
different contexts and, in each context, has a different meaning in so
far as the Bonds are concerned. In relation to the Bonds:
- in the context of submitting Scheme Claims (and therefore completing
Claim Forms) under both Schemes, the term "SCHEME CREDITOR" means
only the Eurobond Trustee and the Yankee Bond Trustee; and
- in the context of voting at Scheme Meetings and the right to attend
Scheme Meetings and to be nominated to the Creditors' Committee
under both Schemes, the term "SCHEME CREDITOR" means only the
Definitive Holders.
In the context of entitlement to receive Scheme Consideration under both
Schemes, the term "SCHEME CREDITOR" is only used to mean those persons who
have submitted a Scheme Claim which has been Admitted. Each Trustee is
expected to submit a Scheme Claim and each such Scheme Claim is expected
to be Admitted. However, as each Trustee will, in the Escrow and
Distribution Agreement, direct that any Scheme Consideration to which it
becomes entitled shall be distributed to Designated Recipients, in this
9
I. EXPLANATORY STATEMENT
(IN COMPLIANCE WITH SECTION 426 OF THE COMPANIES ACT 1985)
SCHEME CREDITORS AND PERSONS WITH INTERESTS IN BONDS
--------------------------------------------------------------------------------
context reference is generally made to Scheme Consideration being
distributed to Scheme Creditors (other than the Trustees) and to
Designated Recipients.
PERSONS WITH INTERESTS IN BONDS
14. Persons with interests in Bonds include Account Holders, Intermediaries,
Bondholders, Definitive Holders and Designated Recipients. The common
depositary for Euroclear and Clearstream, Luxembourg has an interest in
the Eurobonds by virtue of being the bearer of the global Eurobonds and
The Bank of New York, in its capacity as Book-Entry Depositary, has an
interest in the Yankee Bonds by virtue of being the holder of the global
Yankee Bonds, in each case for so long as the Eurobonds or the Yankee
Bonds, as the case may be, are represented by one or more global
Eurobonds or global Yankee Bonds, respectively. You are:
- an Account Holder if you are recorded directly in the books of
Euroclear or Clearstream, Luxembourg as holding an interest in
Eurobonds or Yankee Bonds or in the books of Euroclear, Clearstream,
Luxembourg or DTC as holding an interest in Yankee Bonds, in each
case in an account with the relevant clearing system;
- an Intermediary if you hold an interest in Eurobonds or Yankee Bonds
on behalf of another person or persons and you do not hold that
interest as an Account Holder;
- a Bondholder if you have the ultimate economic interest in the
relevant Bonds;
- a Definitive Holder if you are the registered holder of a Yankee
Bond in definitive form or the bearer by attornment of an individual
global Eurobond; and
- a Designated Recipient if you are specified in an Account Holder
Letter as being the recipient of cash and/or New Notes and/or New
Shares in any distribution of Scheme Consideration in respect of a
particular principal amount of Bonds. For the avoidance of doubt, a
Bondholder may be the same person as the Designated Recipient and/or
Definitive Holder of the Bonds relating to that Account Holder
Letter.
15. IF YOU ARE A PERSON WITH AN INTEREST IN BONDS YOU SHOULD READ THIS
DOCUMENT CAREFULLY AND TAKE THE APPROPRIATE ACTION DESCRIBED IN APPENDIX
28 IN ORDER FOR VOTING INSTRUCTIONS IN RELATION TO THE SCHEME MEETINGS TO
BE GIVEN AND FOR DETAILS FOR THE PURPOSE OF RECEIVING SCHEME
CONSIDERATION TO BE REGISTERED.
16. PERSONS WITH INTERESTS IN YANKEE BONDS SHOULD NOTE THAT:
a. no Claim Form is required to be submitted by them as this will be
done on their behalf by the Yankee Bond Trustee;
b. Account Holders with interests in Yankee Bonds are recommended to
deliver to Bondholder Communications (preferably on-line through
www.bondcom.com/marconi) duly completed Account Holder Letters
(in the form set out as the Annex to Appendix 28) on or before
5.00 p.m. (New York City time) on 17 April 2003 and, in order for
this to be achieved, blocking instructions must be given by no
later than 5.00 p.m. (in the place of the relevant clearing
system) on the day before the Account Holder Letter is delivered
to Bondholder Communications;
c. delivery of a duly completed Account Holder Letter by the time
and date specified in b. above will entitle Definitive Holders of
Yankee Bonds to attend and/or vote at the Scheme Meetings and the
Designated Recipients named in the applicable Account Holder
Letter to receive the First Initial Distribution of Corp and plc
Scheme Consideration and further distributions of Corp and plc
Scheme Consideration (if any);
d. failure to deliver an Account Holder Letter to Bondholder
Communications by the time and date specified in b. above will
not preclude the relevant Definitive Holder from voting at the
Scheme Meetings provided that the Definitive Holder or his proxy
can establish his entitlement
10
I. EXPLANATORY STATEMENT
(IN COMPLIANCE WITH SECTION 426 OF THE COMPANIES ACT 1985)
SCHEME CREDITORS AND PERSONS WITH INTERESTS IN BONDS
--------------------------------------------------------------------------------
by producing a copy of the duly completed Account Holder Letter
or form of proxy, as the case may be;
e. Definitive Holders of Yankee Bonds who wish to attend and vote in
person at the Scheme Meetings must ensure that this is specified
in the applicable Account Holder Letter. Definitive Holders of
Yankee Bonds who wish only to have their vote recorded at the
Scheme Meetings must ensure that authority is given to Bondholder
Communications in the Account Holder Letter for the appointment
of a proxy to vote on their behalf at the Scheme Meetings; and
f. Account Holders who hold Yankee Bonds with ISIN US566306AA41 or
ISIN US566306AB24 have received on 17 March 2003 an amount for
distribution to Bondholders in respect of such Yankee Bonds
representing interest accrued from and including 15 September
2002 to but excluding 15 October 2002 from the Yankee Bond
Trustee which has been holding such amount on trust for the
Bondholders of such Yankee Bonds. Amounts representing interest
accrued to 15 October 2002 were paid to all other financial
creditors of Corp on or about that date.
17. PERSONS WITH INTERESTS IN EUROBONDS SHOULD NOTE THAT:
a. no Claim Form is required to be submitted by them as this will be
done on their behalf by the Eurobond Trustee;
b. Account Holders with interests in Eurobonds are recommended to
deliver to Bondholder Communications duly completed Account
Holder Letters (in the form set out in the Annex to Appendix 28)
on or before 5.00 p.m. (New York City time) on 17 April 2003 and,
in order for this to be achieved, blocking instructions must be
given by no later than 5.00 p.m. (in the place of the relevant
clearing system) on the day before the Account Holder Letter is
delivered to Bondholder Communications;
c. delivery of a duly completed Account Holder Letter by the time
and date specified in b. above will entitle Definitive Holders of
Eurobonds to attend and/or vote at the Scheme Meetings and the
Designated Recipients named in the applicable Account Holder
Letter to receive the First Initial Distribution of Corp and plc
Scheme Consideration and further distributions of Corp and plc
Scheme Consideration (if any). Account Holders will receive the
cash forming part of the First Initial Distribution whether or
not an Account Holder Letter is delivered;
d. failure to deliver an Account Holder Letter to Bondholder
Communications by the time and date specified in b. above will
not preclude the relevant Definitive Holder from voting at the
Scheme Meetings provided that the Definitive Holder or his proxy
can establish his entitlement by producing a copy of the duly
completed Account Holder Letter or form of proxy, as the case may
be; and
e. Definitive Holders of Eurobonds who wish to attend and vote in
person at the Scheme Meetings must ensure that this is specified
in the applicable Account Holder Letter. Definitive Holders of
Eurobonds who wish only to have their vote recorded at the Scheme
Meetings must ensure that authority is given to Bondholder
Communications in the Account Holder Letter for the appointment
of a proxy to vote on their behalf at the Scheme Meetings.
GENERAL
18. IF YOU ARE A SCHEME CREDITOR, PLEASE READ THIS DOCUMENT CAREFULLY AND TAKE
THE APPROPRIATE ACTION DESCRIBED IN APPENDIX 27. IF YOU ARE A PERSON WITH
AN INTEREST IN BONDS, YOU SHOULD ALSO READ THIS DOCUMENT CAREFULLY AND
BONDHOLDERS SHOULD CONTACT THEIR ACCOUNT HOLDERS (THROUGH ANY
INTERMEDIARIES, IF APPROPRIATE) TO ENSURE THEY TAKE THE APPROPRIATE ACTION
AS DESCRIBED IN APPENDIX 28.
11
I. EXPLANATORY STATEMENT
(IN COMPLIANCE WITH SECTION 426 OF THE COMPANIES ACT 1985)
--------------------------------------------------------------------------------
DEFINITIONS AND INTERPRETATION
In this document, each Claim Form, each Account Holder Letter and each Form of
Proxy, unless the context otherwise requires or otherwise expressly provides:
a. words and expressions defined in part V on pages 995 to 1009 shall
have the same meaning when used elsewhere in this document (other
than in the Schemes set out in parts II and III of this document and
the Schedules to them, the Escrow and Distribution Agreement set out
in Appendix 7, the summary of the terms of the New Senior Notes and
the New Junior Notes set out in Appendix 8, the security and
intercreditor arrangements set out in Appendix 10 and the conditions
of the Warrants set out in Appendix 12) and derivative terms shall
be construed accordingly;
b. references to Sections and Parts are references to the Sections and
Parts of the Explanatory Statement as set out in part I of this
document and references to Appendices are to the Appendices to the
Explanatory Statement as set out in part IV of this document;
c. references to a "person" include references to an individual, firm,
partnership, company, corporation, unincorporated body of persons or
any state or state agency;
d. references to a statute or a statutory provision include the same as
subsequently modified, amended or re-enacted from time to time;
e. the singular includes the plural and vice versa and words importing
one gender shall include all genders; and
f. headings to parts, Sections, Parts and Appendices are for ease of
reference only and shall not affect the interpretation of this
document.
The term "SCHEME CREDITOR" is used in this document in a number of different
contexts and, in each context, has a different meaning in so far as the Bonds
are concerned. In relation to the Bonds:
a. in the context of submitting Scheme Claims under both Schemes, the
term "SCHEME CREDITOR" means the Eurobond Trustee and the Yankee
Bond Trustee; and
b. in the context of voting at Scheme Meetings and the right to attend
Creditors' Meetings and to be nominated to the Creditors' Committee
under both Schemes, the term "SCHEME CREDITOR" means the Definitive
Holders.
In the context of entitlement to receive Scheme Consideration under both
Schemes, the term "SCHEME CREDITOR" is only used to mean those persons who have
submitted a Scheme Claim which has been Admitted. Each Trustee is expected to
submit a Scheme Claim and each such Scheme Claim is expected to be Admitted.
However, as each Trustee will, in the Escrow and Distribution Agreement, direct
that any Scheme Consideration to which it becomes entitled shall be distributed
to Designated Recipients, in this context reference is generally made to Scheme
Consideration being distributed to Scheme Creditors (other than the Trustees)
and to Designated Recipients.
12
I. EXPLANATORY STATEMENT
(IN COMPLIANCE WITH SECTION 426 OF THE COMPANIES ACT 1985)
--------------------------------------------------------------------------------
SUMMARY OF ACTION TO BE TAKEN
Scheme Creditors to whom Corp and/or plc owes a Liability at the Record Date
(other than those Liabilities defined in the relevant Schemes as Excluded
Claims) are referred to Appendix 27 for more detailed instructions as to the
action to be taken by them. Persons with interests in Bonds are referred to
Appendix 28 for more detailed instructions as to the action to be taken by them.
SCHEME CREDITORS
Persons who are Scheme Creditors solely by virtue of having an interest in Bonds
need not read paragraphs 1 to 3 below and should instead refer to paragraphs 4
to 7 below.
1. SCHEME MEETINGS
Before the Schemes can become effective and binding on the Scheme Companies and
their respective Scheme Creditors, resolutions to approve them must be passed by
the statutory majority required by section 425 of the Act. This statutory
majority is a majority in number representing three-fourths in value of the
Scheme Claims of Scheme Creditors of Corp or, as the case may be, plc who, being
so entitled, are present in person (or, if a corporation, by a duly authorised
representative) or by proxy and vote at the relevant Scheme Meeting. THE SCHEME
MEETINGS HAVE BEEN ORDERED TO BE SUMMONED BY THE COURT TO TAKE PLACE ON 25 APRIL
2003 WITH THE FIRST MEETING COMMENCING AT 10.00 A.M. AT THE INSTITUTE OF CIVIL
ENGINEERS, 1 GREAT GEORGE STREET, LONDON SW1. Formal notices of the Scheme
Meetings are enclosed with this document. Each Scheme Creditor or his proxy who
wishes to attend the relevant Scheme Meeting in person will be required to
register his attendance by presenting himself, together with the duplicate copy
of his Form of Proxy, where possible, at the registration desk prior to the
commencement of the relevant Scheme Meeting. Forms of Proxy should be received
by the Prospective Supervisors by 12 noon (London time) on 24 April 2003.
However, a Scheme Creditor who wishes to attend the relevant Scheme Meeting in
person is encouraged to complete section B(ii) in the relevant Form of Proxy and
either return it to the Prospective Supervisors prior to 5.00 p.m. (London time)
on 17 April 2003. Forms of Proxy can also be brought along in person to the
relevant Scheme Meeting and handed in at the registration desk no later than one
hour before the scheduled time for the relevant Scheme Meeting. Thereafter a
Scheme Creditor may lodge completed Forms of Proxy with the chairman of the
relevant Scheme Meeting at that Scheme Meeting. A Scheme Creditor who attends a
Scheme Meeting in person (but has not provided a Form of Proxy) will also need
to provide evidence of his personal identity (for example, passport or other
picture identification) and an individual attending on behalf of a body
corporate should provide evidence of his authorisation to represent that body
corporate (for example a valid power of attorney and/or board minutes).
Admittance of a Scheme Creditor (or his proxy) to the relevant Scheme Meeting
will be permitted on production by the Scheme Creditor (or his proxy) of the
duplicate copy of his Form of Proxy. Where the duplicate copy of the relevant
Form of Proxy is not produced, admittance to the relevant Scheme Meeting will be
permitted to a Scheme Creditor or his proxy on the production of proof of
personal identity (for example, passport or other picture identification).
Please see Appendix 27 for more information in this regard.
2. COMPLETION OF FORMS OF PROXY AND CLAIM FORMS
Enclosed with this document are Form(s) of Proxy and Claim Form(s). The Forms of
Proxy and Claim Forms are printed on the colours of paper indicated below:
Form of Proxy for Corp Scheme Creditors.................... yellow;
Form of Proxy for plc Scheme Creditors..................... green;
Claim Form for Corp Scheme Creditors....................... blue; and
Claim Form for plc Scheme Creditors........................ pink.
Each Scheme Creditor or its duly authorised representative (as the case may be)
should complete the relevant Form(s) of Proxy and Claim Form(s) in accordance
with the instructions printed on them. The forms of the Forms of Proxy and Claim
Forms (together with guidance as to their completion) are set out in Appendices
29 and 30 respectively. Scheme Creditors are encouraged to complete and return a
Form of Proxy whether or not they intend to be present at the relevant Scheme
Meeting in case, for any reason, that Scheme Creditor is unable to attend that
meeting.
13
I. EXPLANATORY STATEMENT
(IN COMPLIANCE WITH SECTION 426 OF THE COMPANIES ACT 1985)
SUMMARY OF ACTION TO BE TAKEN
--------------------------------------------------------------------------------
3. RETURN OF FORMS OF PROXY AND CLAIM FORMS
DULY COMPLETED CLAIM FORMS SHOULD BE RETURNED BY SCHEME CREDITORS TO KPMG LLP, 8
SALISBURY SQUARE, LONDON EC4Y 8BB, ENGLAND, FOR THE ATTENTION OF PHILIP WALLACE,
AS SOON AS POSSIBLE. COMPLETED CLAIM FORMS MUST BE RETURNED BY 5.00 P.M. (LONDON
TIME) ON 17 APRIL 2003 AND SCHEME CLAIMS WILL NEED TO BE APPROVED BY THE
PROSPECTIVE SUPERVISORS BY 8.00 A.M. (LONDON TIME) ON THE FIRST DAY OF THE COURT
SANCTION HEARING (WHICH IS ANTICIPATED TO BE 12 MAY 2003) IN ORDER FOR SCHEME
CREDITORS TO PARTICIPATE IN THE FIRST INITIAL DISTRIBUTION IN ACCORDANCE WITH
THE TERMS OF THE RELEVANT SCHEME. IT IS ANTICIPATED THAT THE FIRST INITIAL
DISTRIBUTION, IN THE CASE OF THE CORP SCHEME AND THE PLC SCHEME, WILL OCCUR ON
THE EFFECTIVE DATE.
Duly completed Forms of Proxy should be returned by Scheme Creditors to KPMG
LLP, 8 Salisbury Square, London EC4Y 8BB, England, for the attention of Philip
Wallace, as soon as possible. The last time and date for this is 12 noon (London
time) on 24 April 2003 (although it is recommended that they be received by 5.00
p.m. (London time) on 17 April 2003). After this time and date completed Forms
of Proxy may be presented to the registration desk at the relevant Scheme
Meeting up to one hour before the scheduled time of the relevant Scheme Meeting.
Thereafter Scheme Creditors may lodge completed Forms of Proxy with the chairman
of the relevant Scheme Meeting at that Scheme Meeting.
PERSONS WITH INTERESTS IN BONDS
Scheme Creditors who are not also persons with interests in Bonds need not read
paragraphs 4 to 7 below and should instead refer only to paragraphs 1 to 3
above.
4. BONDHOLDERS
Bondholders should immediately contact their Account Holders (through any
Intermediaries, if appropriate) to ensure that an Account Holder Letter is
submitted in respect of the Bonds to which they are entitled. It is important
that Account Holder Letters are submitted before 5.00 p.m. (New York City time)
on 17 April 2003 and accordingly Bondholders should ensure that their Account
Holders have all necessary information to enable them to meet this recommended
deadline well before it occurs. Each Bondholder will need to identify a person
as the Definitive Holder and one or more persons as Designated Recipient(s) in
respect of the Bonds to which it is entitled. It is expected that in most cases
the Bondholder will also be the Definitive Holder and Designated Recipient. Each
Bondholder will also need to give his Account Holder instructions as to voting
and the delivery of Scheme Consideration and will need to confirm certain
matters in relation to applicable securities law, all as described in detail in
Appendix 28.
5. ACCOUNT HOLDERS
Duly completed Account Holder Letters should be delivered by each Account Holder
to Bondholder Communications on line through www.bondcom.com/marconi, by post or
personal delivery to Bondholder Communications at 30 Broad Street, 46th Floor,
New York, N.Y. 10004, USA, attention Donna Martini, or to Bondholder
Communications at 64 Queen Street, 3rd Floor, London EC4R 1AD, attention Donna
Martini or by facsimile (Fax No: +1 212 422 0790 or + 44 207 236 0779, attention
Donna Martini), as soon as possible. Duly completed Account Holder Letters must
be delivered at or before 5.00 p.m. (New York City time) on 17 April 2003 in
order for the Designated Recipients named in them to receive the First Initial
Distribution of Scheme Consideration in the Corp and plc Schemes.
Notwithstanding the foregoing, any cash forming part of the First Initial
Distribution will be paid to Bondholders in respect of Eurobonds through
Euroclear and Clearstream, Luxembourg regardless of whether an Account Holder
Letter has been delivered or not. Duly completed Account Holder Letters
delivered after 5.00 p.m. (New York City time) on 17 April 2003 will entitle the
Designated Recipients to receipt of the Scheme Consideration in the Initial
Distribution (excluding any cash already paid to them through Euroclear or
Clearstream, Luxembourg) on the later of (1) as soon as is reasonably
practicable following the date that the Account Holder Letter is delivered to
Bondholder Communications and (2) the date of the First Initial Distribution.
Please see Appendix 28 for more information in this regard.
14
I. EXPLANATORY STATEMENT
(IN COMPLIANCE WITH SECTION 426 OF THE COMPANIES ACT 1985)
SUMMARY OF ACTION TO BE TAKEN
--------------------------------------------------------------------------------
6. SCHEME MEETINGS
Definitive Holders are Scheme Creditors and therefore are entitled to vote at
the Scheme Meetings. Definitive Holders who wish to attend and/or vote at the
Scheme Meetings in person or by proxy must ensure that this is specified in the
Account Holder Letter delivered by their Account Holder. Account Holders are
recommended to deliver their Account Holder Letters to Bondholder Communications
by 5.00 p.m. (New York City time) on 17 April 2003 in order to ensure that the
Definitive Holder or his proxy can attend and vote at the Scheme Meetings.
Delivery of Account Holder Letters after this time and date will not preclude
the relevant Definitive Holder from voting at the Scheme Meetings provided that
the Definitive Holder or his proxy can establish his entitlement in the manner
described below and in Appendix 28. Each Definitive Holder who wishes to attend
a Scheme Meeting in person will be required to register his attendance by
presenting himself, together with a copy of the relevant Account Holder Letter,
where possible, at the registration desk prior to the commencement of the
relevant Scheme Meeting and, where an individual is attending on behalf of a
body corporate and is not the authorised employee named in the Account Holder
Letter, evidence of authorisation to represent that body corporate (for example
a valid power of attorney and/or board minutes). A proxy (other than the
chairman of the relevant meeting) for a Definitive Holder who attends a Scheme
Meeting will need to provide a copy of his form of proxy and evidence of his
personal identity (for example passport or other picture identification). Please
see Appendix 28 for more information in this regard.
7. FORMS OF PROXY, CLAIM FORMS, ACCOUNT HOLDER LETTERS
Persons with interests in Bonds should not complete a Claim Form or a Form of
Proxy in the forms circulated with this document. Account Holders should deliver
Account Holder Letters as described in paragraph 4 above.
Account Holders with Bonds credited to their accounts at any of DTC, Euroclear
or Clearstream, Luxembourg must obtain whatever information or instructions they
may require to enable them to deliver an Account Holder Letter on behalf of the
Bondholder in respect of those Bonds and Bondholders (through any
Intermediaries, if appropriate) should ensure that they assist their Account
Holder by providing him with all necessary information to enable him to do so.
Definitive Holders who wish to attend and vote at the Scheme Meetings in person
should receive a copy of the Account Holder Letter in which they are named as
the Definitive Holder from the Account Holder with which they hold their Bonds.
Definitive Holders who wish to attend and vote at the Scheme Meetings by proxy
should request (and ensure that they receive) a copy of the relevant form of
proxy from Bondholder Communications. It is the responsibility of each
Bondholder and Definitive Holder to ensure that all necessary instructions are
given to Bondholder Communications and the relevant Account Holder to facilitate
receipt of these documents in time for the Definitive Holder or his proxy to
attend and vote at the Scheme Meetings.
15
I. EXPLANATORY STATEMENT
(IN COMPLIANCE WITH SECTION 426 OF THE COMPANIES ACT 1985)
--------------------------------------------------------------------------------
SECTION 1
LETTER FROM THE CHAIRMAN OF PLC
AND OF CORP
(MARCONI LOGO)
MARCONI PLC MARCONI CORPORATION PLC
New Century Park New Century Park
P.O. Box 53 P.O. Box 53
Coventry Coventry
Warwickshire Warwickshire
CV3 1HJ CV3 1HJ
(Registered in England with (Registered in England with
registered number 3846429) registered number 67307)
31 March 2003
Dear Scheme Creditor or Bondholder,
PROPOSED RESTRUCTURING OF CORP AND PLC (THE "RESTRUCTURING")
On 29 August 2002 we announced that Corp and plc had concluded non-binding
indicative Heads of Terms with the Co-ordination Committee and the Informal
Committee of Bondholders, which set out the principles for the proposed
Restructuring of Corp and plc. On 16 December 2002 we announced that we had
concluded modifications to the non-binding indicative Heads of Terms by way of
an addendum. On 7 February 2003 we announced that Corp and plc had reached
agreement in principle with the Group's ESOP Derivative Banks for a settlement
of their ESOP derivative related claims against the Group. On 18 March 2003 we
announced that documentation in relation to the proposed Restructuring had been
filed with the Court and provided an update on certain aspects of the
Restructuring. Following our receipt on 26 March 2003 and 24 March 2003
respectively of the required consents to certain pre-completion steps for the
Restructuring from the requisite majorities of the Syndicate Banks and the
members of the Informal Committee of Bondholders, we are now writing to set out
the terms of the Restructuring.
This letter is part of an Explanatory Statement distributed to you for the
reasons set out below and is qualified in its entirety by the more detailed
information contained in the remainder of the Explanatory Statement.
PURPOSE OF THE EXPLANATORY STATEMENT
The Explanatory Statement, which is provided pursuant to section 426 of the Act,
is distributed for the purpose of providing you with sufficient information to
make an informed decision on whether or not to approve the Schemes. An
explanation of the nature of the proposed Schemes is included below, as part of
this letter.
The main body of the Explanatory Statement (which follows this letter) is in six
parts, containing information on the following matters:
a. Business Overview;
b. Background to and reasons for the Restructuring;
c. Proposed Restructuring;
d. General matters relating to the Restructuring;
e. Material interests of Directors and Trustees; and
f. Risk Factors.
The Schemes will apply to all Corp Scheme Creditors and all plc Scheme
Creditors, being those creditors of Corp and plc respectively whose claims the
Corp Scheme and the plc Scheme will, if they become effective, compromise in
accordance with their terms. The Corp Scheme is not conditional on the plc
Scheme becoming effective. The plc Scheme will not become effective unless the
Corp Scheme becomes effective.
16
I. EXPLANATORY STATEMENT
(IN COMPLIANCE WITH SECTION 426 OF THE COMPANIES ACT 1985)
SECTION 1: LETTER FROM THE CHAIRMAN OF PLC AND OF CORP
--------------------------------------------------------------------------------
The claims of Corp Scheme Creditors will be compromised in consideration for a
distribution (pro rata to their Admitted Scheme Claims) of a package of cash,
new equity and new debt securities of Corp. The liability of Corp in respect of
those claims will be extinguished. The claims of plc Scheme Creditors will be
compromised in consideration for a distribution in specie (pro rata to their
Admitted Scheme Claims) of all of plc's assets net of a reserve in respect of
plc's Ongoing Costs. plc's assets will principally comprise the package of cash,
new equity and new debt securities of Corp which plc will receive as a result of
the Corp Scheme from Bonds held by its subsidiary, Ancrane, and monies owed by
Corp to Ancrane (as described further below). The liability of plc in respect of
the claims of plc Scheme Creditors will be extinguished.
You are being sent this document, including the Schemes, because the Scheme
Companies believe that you may be either a Scheme Creditor under one or both of
the Schemes or a person with an interest in Bonds. Pages 8 to 11 of this
document will help you identify whether you are a Scheme Creditor or a person
with an interest in Bonds. Scheme Creditors should direct any enquiries to the
Prospective Supervisors, whose details are set out in Appendix 23. To facilitate
communications with persons with an interest in Bonds, Corp and plc have
appointed Bondholder Communications Group ("BONDHOLDER COMMUNICATIONS") to
ensure Bondholders receive a copy of this document. Bondholder Communications
will also be able to facilitate the completion of Account Holder Letters which
need to be completed to enable most elements of Scheme Consideration to be
distributed to Bondholders (see Appendix 28). Bondholder Communications's
details are set out in Appendix 28. Each of the Scheme Companies strongly
recommends that Scheme Creditors and persons with an interest in Bonds consider
the Restructuring proposal carefully.
This document contains details of the proposed Restructuring, including the Corp
Scheme and the plc Scheme, which are to be voted on at meetings of Corp Scheme
Creditors and plc Scheme Creditors, respectively, to take place on 25 April 2003
at 10.00 a.m. (London time) for Corp Scheme Creditors, and 10.15 a.m. (London
time) for plc Scheme Creditors (or as soon as possible thereafter following the
conclusion or adjournment of the first meeting). This document also explains why
Corp and plc consider the proposed Restructuring to be in the best commercial
interests of the Corp Scheme Creditors and the plc Scheme Creditors
respectively, as well as in the wider interests of the Group, its employees and
customers and plc Shareholders.
FOR THE REASONS GIVEN IN THIS DOCUMENT, EACH OF CORP AND PLC RECOMMENDS THAT THE
RELEVANT SCHEME CREDITORS VOTE IN FAVOUR OF ITS SCHEME AT THE RELEVANT SCHEME
MEETING.
AGREEMENT OF ANCRANE AND CORP NOT TO VOTE
Ancrane, a wholly-owned subsidiary of plc, is a Bondholder in respect of
E324,603,000 in principal amount of Eurobonds and US$261,101,000 in principal
amount of Yankee Bonds, both of which are guaranteed by plc. Ancrane is also
owed by Corp the sums of L363,308,102 under an intra-group loan and L14,635,059
under a reimbursement obligation in respect of Restructuring fees paid by
Ancrane on behalf of Corp. Ancrane has undertaken not to attend or vote at the
Scheme Meetings, not to take any steps to enable a vote to be cast on its behalf
at the Scheme Meetings and to support the Restructuring by agreeing not to take
any action to hinder or oppose the Schemes.
Corp has a claim of L146,587,439 against plc. Corp has undertaken not to attend
or vote at the plc Scheme Meeting and not to take any steps to enable a vote to
be cast on its behalf at the plc Scheme Meeting.
Neither Corp nor Ancrane nor any other member of the Group will vote at either
of the Scheme Meetings. This is because Corp and plc believe that should the
Scheme Meetings approve either of the Schemes by a small margin, including votes
cast in respect of claims of members of the Group, the result could be unfair to
any dissenting Scheme Creditors entitled to vote at the Scheme Meetings.
BACKGROUND TO AND REASONS FOR THE PROPOSED RESTRUCTURING
The Group has faced difficult trading conditions for some time. The impact of a
period of rapid and unprecedented deterioration in the global telecommunications
market has been compounded for the Group by the cost of a number of acquisitions
made since 1998. These acquisitions, which were primarily for cash
consideration, resulted in a substantial part of the debt burden being carried
by the Group and, in the light of
17
I. EXPLANATORY STATEMENT
(IN COMPLIANCE WITH SECTION 426 OF THE COMPANIES ACT 1985)
SECTION 1: LETTER FROM THE CHAIRMAN OF PLC AND OF CORP
--------------------------------------------------------------------------------
reduced market demand for the Group's products and services, the trading and
cash flow performances of these acquired businesses have been running at levels
well below those that were anticipated at the time of acquisition.
The Board of plc announced its intention, at its Annual General Meeting in July
2001, to initiate an operational review of the Group's business. The results of
this review were announced in September 2001, along with the appointments of
Michael Parton as Chief Executive Officer of plc, Derek Bonham as Interim
Chairman of plc and Michael Donovan as Chief Operating Officer of plc as well as
the management appointments of Neil Sutcliffe as chief executive officer of
Marconi Capital and Geoffrey Doy as chief executive officer of sales and
marketing of plc.
Against a background of further market deterioration early in 2002, plc
announced on 22 March 2002 that Corp and plc had decided not to enter into new
banking facilities to refinance Corp's then existing syndicated bank facilities.
Following this decision, Corp and plc agreed to cancel the undrawn commitments
under the existing facilities and agreed that the drawn portion under the Bank
Facility (which was due for repayment on 25 March 2003) would be repayable on
demand.
Following the decision not to refinance the then existing syndicated bank
facilities the Business Plan was developed. This Business Plan was presented to
the Co-ordination Committee and the Informal Committee of Bondholders and was
used by Corp and plc as a basis for formulating the Heads of Terms for the
Restructuring. The Business Plan assumed that recovery in the Group's market
would not commence until the end of the calendar year 2003. A set of
sensitivities were applied to reflect the scenario of more difficult market
conditions, and in particular a delay in market recovery beyond the end of 2003.
Given continuing uncertainty in market conditions, further revisions have been
made to the Business Plan. In proposing the Restructuring, Corp and plc have
assessed the proposed capital structure of Corp against the scenario of a delay
in market recovery and are confident that the proposed capital structure of Corp
is appropriate in circumstances where such a delay occurs. However, the Group
cannot predict with any level of certainty the occurrence, timing or extent of
any market recovery.
WHY THE PROPOSED RESTRUCTURING NOW?
The Group has for some time been in severe financial difficulty. In particular,
Corp is the principal obligor under the Bank Facility, which was due for
repayment on 25 March 2003, and is the issuer of the Bonds. Interest on the
Yankee Bonds fell due on 17 March 2003 and interest on the Eurobonds will fall
due on 31 March 2003. For both the Yankee Bonds and the Eurobonds acceleration
of the principal amount is permitted following non-payment of interest 14 days
after the respective interest due dates. plc is a guarantor of the Bank Facility
and the Bonds. Corp and plc believe they must effect a restructuring of their
financial obligations, including their obligations under the Bank Facility and
the Bonds, to avoid a demand being made for repayment of sums owing under the
Bank Facility or an acceleration of sums owing under the Bonds, which would
inevitably lead to Corp and plc being placed into insolvency proceedings.
The Corp Group's ability to continue to operate as a going concern following the
Restructuring is subject to certain operating and other risks. You should
carefully consider, together with the other information contained in this
document, certain risks related to a failure or delay in implementing the
Restructuring, risks arising from implementation of the Restructuring, operating
risks and risks related to ownership of the New Shares, the New Notes and the
Warrants, set out in Section 2, Part F: Risk Factors. All statements in this
document (other than parts II and III) are to be read subject to, and are
qualified in their entirety by, the matters referred to in Section 2, Part F:
Risk Factors.
THE SCHEMES
CORP SCHEME
Corp proposes to enter into a scheme of arrangement with the Corp Scheme
Creditors pursuant to section 425 of the Act. The Corp Scheme takes effect as a
compromise or arrangement between Corp and the Corp Scheme Creditors and will
not directly affect any other creditors of Corp (described below in the section
headed "Corp stakeholders"). Alongside the Corp Scheme, it is proposed to make
changes to Corp's capital structure by way of the Capital Reduction, involving
the cancellation of its current called up share capital and its share premium
18
I. EXPLANATORY STATEMENT
(IN COMPLIANCE WITH SECTION 426 OF THE COMPANIES ACT 1985)
SECTION 1: LETTER FROM THE CHAIRMAN OF PLC AND OF CORP
--------------------------------------------------------------------------------
account. It is expected that the reserve arising on the Capital Reduction will
eliminate the deficit on the profit and loss account that would otherwise be
shown on Corp's balance sheet as at 31 March 2003. Further details of the
Capital Reduction are set out in Section 2, Part D.9. The Corp Scheme is set out
in part II of this document.
The Corp Scheme will become effective and legally binding on Corp and all Corp
Scheme Creditors in accordance with its terms if: (i) at the meeting of the Corp
Scheme Creditors a majority in number representing three-fourths in value of
Corp Scheme Creditors present and voting either in person or by proxy approves
the Corp Scheme (for the purposes of voting at the meeting of Corp Scheme
Creditors, a Form of Proxy is enclosed with this document); (ii) the Court
subsequently makes an order sanctioning the Corp Scheme; and (iii) the Court's
order sanctioning the Corp Scheme is sealed and a copy of it is delivered for
registration to the Registrar of Companies in England and Wales.
Corp will not take the necessary steps to make the Scheme effective unless and
until: (a) Corp has, following the passing of a unanimous Board resolution to
approve the same, provided confirmation in writing to the Prospective
Supervisors (for the sole benefit of the Prospective Supervisors) prior to each
of (i) the release of the interim security granted by Corp through its special
purpose subsidiary Highrose Limited, (ii) the Corp Scheme Meeting, (iii) the
hearing to sanction the Corp Scheme and (iv) the Effective Date, to the effect
that Corp remains satisfied that the reserves built into the Corp Scheme are
sufficient to meet distributions due to be made to all Corp Scheme Creditors and
that Corp remains of the opinion that its statement as to the Corp Group's
working capital contained in Section 2, Part D.21 remains valid; (b) the
Prospective Supervisors of the Corp Scheme have provided confirmation in writing
to Corp (for Corp's sole benefit) on the day of, but prior to, each of events
(i) to (iv) above to the effect that they have no reason to disagree with Corp's
view that the reserves built into the Corp Scheme are sufficient to meet
distributions due to be made to all Corp Scheme Creditors; (c) a permanent
injunction order of the US Bankruptcy Court under Section 304 of Title 11 of the
United States Code is granted in respect of the Corp Scheme; and (d) all
conditions precedent (other than those relating to the Corp Scheme becoming
effective) set out in the Working Capital Facility and the Performance Bonding
Facility are satisfied or waived by the facility agents.
If the English Court makes an order sanctioning the Corp Scheme, Corp
anticipates that the order of the US Bankruptcy Court will be granted. Corp will
not pursue a permanent injunction order of the US Bankruptcy Court unless the
English Court makes an order sanctioning the Corp Scheme. If all of the above
conditions are not satisfied by 19 June 2003 the Corp Scheme will be withdrawn.
Corp will undertake to the Court to file the Court order approving the Corp
Scheme with the Registrar of Companies as soon as the conditions set out above
are satisfied provided such conditions are satisfied on or before 19 June 2003.
The hearing to sanction the Corp Scheme will qualify as a fairness hearing of
the kind contemplated by Section 3(a)(10) of the Securities Act. All Corp Scheme
Creditors and Bondholders are entitled to attend the hearing in person or
through counsel to support or oppose the sanctioning of the Corp Scheme.
The Corp Scheme is not conditional on Listing of the New Shares, the New Notes
and/or the Warrants. However, it is expected that the New Shares, the New Notes
and the Warrants will be listed on the Effective Date of the Corp Scheme. Corp
will use its reasonable endeavours to effect the Listing of the New Shares, the
New Notes and the Warrants as soon as possible on or after the Effective Date of
the Corp Scheme.
PLC SCHEME
plc proposes to enter into a scheme of arrangement with the plc Scheme Creditors
pursuant to section 425 of the Act. The plc Scheme takes effect as a compromise
or arrangement between plc and the plc Scheme Creditors and will not directly
affect any other creditors of plc (described below in the section headed "plc
stakeholders").
The plc Scheme will become effective and legally binding on plc and all plc
Scheme Creditors in accordance with its terms if: (i) at the meeting of the plc
Scheme Creditors a majority in number representing three-fourths in value of plc
Scheme Creditors present and voting either in person or by proxy approve the plc
Scheme (for the purposes of voting at the meeting of plc Scheme Creditors, a
Form of Proxy is enclosed with this document); (ii) the Court subsequently makes
an order sanctioning the plc Scheme; and (iii) the Court's order sanctioning the
plc Scheme is sealed and a copy of it is delivered for registration to the
Registrar of Companies in England and Wales.
19
I. EXPLANATORY STATEMENT
(IN COMPLIANCE WITH SECTION 426 OF THE COMPANIES ACT 1985)
SECTION 1: LETTER FROM THE CHAIRMAN OF PLC AND OF CORP
--------------------------------------------------------------------------------
plc will not take the necessary steps to make the Scheme effective unless and
until: (a) plc has, following the passing of a unanimous Board resolution to
approve the same, provided confirmation in writing to the Prospective
Supervisors (for the sole benefit of the Prospective Supervisors) prior to each
of (i) the release of the interim security granted by Corp through its special
purpose subsidiary Highrose Limited, (ii) the plc Scheme Meeting, (iii) the
hearing to sanction the plc Scheme and (iv) the Effective Date, to the effect
that plc remains satisfied that the reserves built into the plc Scheme are
sufficient to meet distributions due to be made to all plc Scheme Creditors; (b)
the Prospective Supervisors of the plc Scheme have provided confirmation in
writing to plc (for plc's sole benefit) on the day of, but prior to, each of
events (i) to (iv) above to the effect that they have no reason to disagree with
plc's view that the reserves built into the plc Scheme are sufficient to meet
distributions due to be made to all plc Scheme Creditors; (c) a permanent
injunction order of the US Bankruptcy Court under Section 304 of Title 11 of the
United States Code is granted in respect of the plc Scheme; and (d) a copy of
the Court's order sanctioning the Corp Scheme is delivered for registration to
the Registrar of Companies in England and Wales.
If the English Court makes an order sanctioning the plc Scheme, plc anticipates
that the order of the US Bankruptcy Court will be granted. plc will not pursue a
permanent injunction order of the US Bankruptcy Court unless the English Court
makes an orders sanctioning both the Corp Scheme and the plc Scheme. If all of
the above conditions are not satisfied by 19 June 2003 the plc Scheme will be
withdrawn. plc will undertake to the Court to file the Court order approving the
plc Scheme with the Registrar of Companies as soon as the conditions set out
above are satisfied provided such conditions are satisfied on or before 19 June
2003.
The hearing to sanction the plc Scheme will qualify as a fairness hearing of the
kind contemplated by Section 3(a)(10) of the Securities Act. All plc Scheme
Creditors and Bondholders are entitled to attend the hearing in person or
through counsel to support or oppose the sanctioning of the plc Scheme.
WHO WILL BE AFFECTED BY THE SCHEMES?
CORP STAKEHOLDERS
The Corp Scheme will take effect as a compromise of all creditors' claims
against Corp at the Record Date, other than certain Excluded Claims, in
consideration (pro rata to each Corp Scheme Creditor's Admitted Scheme Claim) of
a distribution of cash, new equity and new debt securities of Corp. Claims that
are denominated in a currency other than sterling will be converted into
sterling: (a) for the purpose of calculating voting entitlements at the Corp
Scheme Meeting, at the Voting Rate; and (b) for all other purposes, at the
Scheme Rate.
Details of the categories of Excluded Claims and the basis upon which they have
been excluded are set out in Section 2, Part C.7 and in Appendix 9.
The claims of creditors of Corp excluded from the Corp Scheme will not be
directly affected by either the Corp Scheme or the plc Scheme and are expected
to be satisfied in the ordinary course subject to the risk factors affecting the
business of the Group detailed in Section 2, Part F: Risk Factors.
Corp's existing shareholders have agreed, conditionally on the allotment and
issue of the New Shares pursuant to the Corp Scheme, to the conversion of all of
the existing ordinary shares in the capital of Corp into Non-Voting Deferred
Shares. Therefore, Corp's existing shareholders will have no ordinary shares in
Corp following the implementation of the Restructuring. The Non-Voting Deferred
Shares are expected to be cancelled as part of the Capital Reduction a few days
after the Effective Date.
As a result of the Corp Scheme, plc Shareholders will receive (proportionate to
their existing holdings in plc but subject to a minimum of one share per plc
Shareholder), with no price payable, in aggregate 0.5 per cent. of Corp's issued
ordinary share capital immediately following the Restructuring and up to 50
million Warrants exercisable at any time up to four years after the date of the
Restructuring allowing for the subscription of additional ordinary shares equal
to an aggregate of up to 5 per cent. of Corp's issued ordinary share capital
immediately following the Restructuring. The Warrants, each of which will give
the right to subscribe for one share (subject to adjustment to protect against
dilution in the event of certain corporate actions), will have an exercise price
per underlying ordinary share of 150p (again subject to adjustment to protect
against dilution in the event of certain corporate actions). An ordinary share
price of 150p implies a post Restructuring market capitalisation of Corp of L1.5
billion.
20
I. EXPLANATORY STATEMENT
(IN COMPLIANCE WITH SECTION 426 OF THE COMPANIES ACT 1985)
SECTION 1: LETTER FROM THE CHAIRMAN OF PLC AND OF CORP
--------------------------------------------------------------------------------
Further details of the changes to Corp's capital structure are set out below
under the heading "Equity Dilution". Details of certain share incentive plans
that will operate post Restructuring are set out in Section 2, Part D.10.
PLC STAKEHOLDERS
The plc Scheme will take effect as a compromise of all creditors' claims against
plc at the Record Date, other than certain Excluded Claims, in consideration for
a distribution (pro rata to each plc Scheme Creditor's Admitted Scheme Claim) of
plc's assets available for distribution to Scheme Creditors (which, at the
Effective Date of the plc Scheme, will comprise all of plc's assets less a
reserve comprising cash of approximately L9,300,000 in respect of plc's Ongoing
Costs). Claims that are denominated in a currency other than sterling will be
converted into sterling: (a) for the purpose of calculating voting entitlements
at the plc Scheme Meeting, at the Voting Rate; and (b) for all other purposes,
at the Scheme Rate.
Details of the categories of Excluded Claims and the basis upon which they have
been excluded are set out in Section 2, Part C.7 and in Appendix 9.
plc's Excluded Claims include, amongst other things, claims in respect of
unclaimed dividends, the gross amount of which is no more than L278,451. In an
insolvent liquidation of plc the claims of creditors in respect of unclaimed
dividends ("dividend creditors") would be subordinated to the claims of all
other creditors. They are therefore in a different class from the other
creditors of plc. There are three ways in which they could be treated: they
could be included in the plc Scheme and treated in the same manner as other
creditors; they could be excluded from the Scheme and left unpaid on the ground
that with their subordinated status they have no real economic interest in plc's
assets; or they could be excluded from the plc Scheme and paid if and when a
valid claim is made.
The first way of treating such claims would involve a separate class meeting of
dividend creditors. This has been rejected because it would be excessively
expensive to identify them, to send this document to each of them and, in the
event that the recipients of this document did make claims, to administer their
claims and distribute plc Scheme Consideration to them. As a practical matter it
would be necessary to provide that the plc Scheme could take effect even if, at
the separate class meeting of creditors in this category, the statutory majority
(or a sufficient representative turnout) was not obtained, and this would remove
any incentive for the class to vote in favour of the plc Scheme. The second way
would leave them with unpaid claims against plc in their capacity as creditors
and could therefore result in an insolvent liquidation of plc. This approach has
been rejected because if this were to occur in the early stages of the
implementation of the Schemes, it may have implications for the reputation of
the Marconi name and accordingly may impact upon the trust of third parties to
deal with members of the Corp Group going forward. In addition, given the fact
that almost all claims would in any event be excluded as de minimis, the
decision was taken to exclude whatever other claims of this nature remain
outstanding. It is therefore proposed that they will be excluded from the plc
Scheme and paid if and when a valid claim is made. Accordingly, an amount of
L278,451 will be set aside for the purposes of paying any claims in respect of
previously unclaimed dividends on plc Shares. Upon termination of the plc
Scheme, arrangements will be put in place to ensure that this amount is set
aside to pay such claims as and when a claim is made.
Save as regards the treatment of the unclaimed dividends, which would otherwise
be subordinated to the general body of unsecured creditors, the rights and
ranking afforded to plc's creditors under the plc Scheme is intended to reflect
the rights and ranking that those creditors would have had in a liquidation of
plc.
The following obligations of plc have been novated to Corp (conditionally upon
the Corp Scheme becoming effective) and will be excluded from the Corp Scheme:
a. a guarantee provided to Finmeccanica SpA as the purchaser of certain
Italian subsidiaries sold by the Group in 2002;
b. certain agreements between plc and BAE in respect of the merger of
the Group's former defence business with BAE; and
c. a licence agreement dated 1 December 1999 between Lemelson Medical,
Education and Research Foundation, Limited Partnership and plc.
21
I. EXPLANATORY STATEMENT
(IN COMPLIANCE WITH SECTION 426 OF THE COMPANIES ACT 1985)
SECTION 1: LETTER FROM THE CHAIRMAN OF PLC AND OF CORP
--------------------------------------------------------------------------------
In addition, the service contracts and letters relating to retirement benefits
(including FURBS) of Michael Parton and Michael Donovan have been novated to
Corp unconditionally.
The obligations listed above have (or will if the Corp Scheme becomes effective)
become obligations of Corp and therefore will be unaffected by the plc Scheme.
These obligations will also be excluded from the compromise to be effected by
the Corp Scheme and will therefore be unaffected by the Corp Scheme.
plc Scheme Creditors include creditors with contingent claims against plc, for
example under guarantees. The Syndicate Banks, the Eurobond Trustee and the
Yankee Bond Trustee are all plc Scheme Creditors because plc has guaranteed the
Bank Facility, the Eurobonds and the Yankee Bonds. Each of the Trust Deeds and
the Indenture contains a clause which provides that the guarantee given by plc
in respect of the Bonds will terminate on certification by Corp to the Eurobond
Trustee or the Yankee Bond Trustee, as the case may be, that plc has been
unconditionally and irrevocably released from its obligations in respect of the
Bank Facility (in the case of the Eurobonds) or that plc has been
unconditionally and irrevocably released from its obligations in respect of the
Bank Facility and the Eurobonds (in the case of the Yankee Bonds). This would
not be the case if plc was wound up, but would be the case if these obligations
were released under the plc Scheme.
Various concerns were raised by either or both of the Informal Committee of
Bondholders and the Co-ordination Committee during the course of the
Restructuring discussions concerning the maintenance of guarantee claims against
plc, including the potential lapse of the plc guarantee in respect of the Bonds,
and arrangements were put in place in order to deal with these concerns. In
making its decision to approve these arrangements, plc took into consideration
that it was correct in principle that the rights should be preserved, in order
to put the creditors concerned in the same position as if both Scheme Companies
had been wound up.
The arrangements are as follows:
a. the Corp Scheme will provide that no Scheme Claim under the Corp
Scheme will be reduced, or in any way affected, by the compromise of
any claims of the relevant Scheme Creditor against plc pursuant to
the terms of the plc Scheme, and vice versa;
b. the execution by plc of a deed poll which provides that in the event
that a Scheme Creditor who has the benefit of a guarantee in respect
of a Corp Scheme Claim is required to give credit to plc in a
liquidation for any recoveries made under the Corp Scheme, plc will
pay to that creditor a further sum equal to the amount of the
distribution that the creditor received in the Corp Scheme; and
c. the entry by Corp and plc into a bondholder confirmation letter, to
ensure that the guarantee in respect of the Bonds does not fall away
before the relevant Trustees become entitled to claim under the plc
Scheme on behalf of the Bondholders and that the plc guarantee is
extended to Definitive Holders.
By the Termination Date (as defined in the plc Scheme) all the assets of plc
will have been distributed, in accordance with the plc Scheme, to the plc Scheme
Creditors. It is envisaged that at that date there will be no further claims
against, or assets held by, plc. It is intended that, following that date, plc
will be liquidated or dissolved.
plc has been granted a waiver by the UKLA from the requirement to obtain
approval for the Restructuring from plc Shareholders.
EQUITY DILUTION
The entire issued ordinary share capital of Corp is currently owned by plc and
its nominee. Immediately following completion of the Restructuring, Scheme
Creditors and the Escrow Trustee (in its capacity as trustee of the Scheme
Consideration for the benefit of the Scheme Creditors) or its nominee will
collectively own 99.5 per cent. of the entire issued ordinary share capital of
Corp and plc Shareholders will collectively own the remaining 0.5 per cent. of
the entire issued ordinary share capital of Corp. The existing ordinary shares
of Corp will be redesignated and converted into Non-Voting Deferred Shares upon
allotment of the New Shares under the Corp Scheme. It is intended that those
Non-Voting Deferred Shares will be cancelled as part of the Capital Reduction
within a few days after the Effective Date of the Corp Scheme. The rights and
restrictions attaching to the
22
I. EXPLANATORY STATEMENT
(IN COMPLIANCE WITH SECTION 426 OF THE COMPANIES ACT 1985)
SECTION 1: LETTER FROM THE CHAIRMAN OF PLC AND OF CORP
--------------------------------------------------------------------------------
Non-Voting Deferred Shares are described in Appendix 15. The ordinary share
capital of Corp following the Restructuring will, however, be subject to
dilution resulting from the future exercise of the Warrants referred to above
and of options granted under the share incentive plans (details of which are
contained in Section 2, Part D.10).
Save as referred to above, no other entitlements have been granted for
participation in the share capital of Corp as from implementation of the
Restructuring.
SUMMARY OF THE PRINCIPAL TERMS OF THE SCHEMES
CORP SCHEME
If the Corp Scheme becomes effective, all Corp Scheme Creditors will be bound by
its terms. Corp will be fully and completely released by the Corp Scheme
Creditors from all obligations of Corp to the Corp Scheme Creditors in
connection with their Scheme Claims against Corp with effect from the earlier of
the date on which their Scheme Claim is Admitted and is the subject of a
Distribution Notice, the Final Distribution Date under the Corp Scheme, and the
issue of a Termination Notice under the Corp Scheme. In consideration for such
cancellation and release, Corp Scheme Creditors will receive a distribution, pro
rata to their Admitted Scheme Claims, of:
a. L340 million cash;
b. the euro equivalent (calculated at the Currency Rate) of L450
million in aggregate principal amount of new guaranteed senior
secured notes due April 2008 to be issued by Corp denominated in
euro and/or US dollars, subject to elections made in Claim Forms and
Account Holder Letters, with interest payable quarterly in cash at a
rate of 8 per cent. per annum;
c. the sum of US$300 million plus the US dollar equivalent (calculated
at the Currency Rate) of L117.27 million in aggregate principal
amount of new guaranteed junior secured notes due October 2008 to be
issued by Corp denominated in US dollars with interest payable
quarterly in cash at a rate of 10 per cent. per annum or, at Corp's
option, in kind (by issuing additional new junior secured notes) at
a rate of 12 per cent. per annum; and
d. 995,000,000 ordinary shares, representing 99.5 per cent. of the
issued ordinary share capital of Corp immediately following the
implementation of the Restructuring.
The cash element of the distribution will be increased by the net proceeds of
any asset disposals, other than L82 million of excluded asset disposal proceeds,
received on or after 1 December 2002 and before 1 May 2003, and the aggregate
principal amount of the New Junior Notes will be decreased by 10/11ths of the
sterling amount by which the cash element is increased (such calculation to
reduce the L117.27 million figure referred to in c. above). Such net proceeds
received on or after 1 May 2003 will be dealt with in accordance with the terms
of the New Notes.
The cash, New Shares, New Senior Notes and New Junior Notes comprise the Corp
Scheme Consideration. Further details of the terms of the New Senior Notes and
New Junior Notes are contained in Section 2, Part C.3 and Appendix 8 of this
document. Details of the guarantee and security arrangements in respect of the
New Notes are contained in Appendix 10.
Corp will establish an ADR programme and, accordingly, elections may be made in
Claim Forms and Account Holder Letters to receive all or a portion of the New
Shares in the form of ADRs.
It is expected that the New Shares, New Notes and Warrants will be listed on the
Official List and admitted to trading on the London Stock Exchange's market for
listed securities on the Effective Date of the Corp Scheme. Corp has applied to
list the New Shares, New Notes and Warrants and will use its reasonable
endeavours to effect the Listing as soon as possible on or after the Effective
Date of the Corp Scheme. The Corp Scheme is not, however, conditional on this
Listing (see details of risks arising from implementation of the Restructuring
in Section 2, Part F.2). Corp will apply to list its ADRs on NASDAQ and will use
its reasonable endeavours to effect this NASDAQ listing as soon as practicable
following the Effective Date of the Corp Scheme. It is currently expected that
the NASDAQ listing will become effective during the third calendar quarter of
2003.
23
I. EXPLANATORY STATEMENT
(IN COMPLIANCE WITH SECTION 426 OF THE COMPANIES ACT 1985)
SECTION 1: LETTER FROM THE CHAIRMAN OF PLC AND OF CORP
--------------------------------------------------------------------------------
If the Corp Scheme becomes effective, plc Shareholders will receive New Shares
and Warrants as referred to above.
First Initial Distribution
The mechanism for calculating and distributing a Corp Scheme Creditor's
entitlement to receive Corp Scheme Consideration is detailed in the Corp Scheme
set out in part II and is also described in more detail in Section 2, Part C.7.
Both these sections should be read carefully.
The Corp Scheme provides that a First Initial Distribution will take place on
the Effective Date of the Corp Scheme. At the Court hearing to sanction the Corp
Scheme, Corp will present to the Court a schedule of Scheme Claims compiled by
the Prospective Supervisors which will set out the details of the Scheme
Creditors with Known Claims which are proposed to be Admitted by the Supervisors
on the Effective Date and that, in accordance with the terms of the Corp Scheme,
will receive their Initial Distribution through the First Initial Distribution.
In summary, each Corp Scheme Creditor that participates in the First Initial
Distribution will be entitled to receive (assuming no increase in the cash
element but that the plc Scheme becomes effective on the same day as the Corp
Scheme), for each L1,000,000 of Admitted Scheme Claim, an Initial Distribution
of cash, New Notes and New Shares of approximately:
L64,196 cash;
L85,022 equivalent in aggregate principal amount of New Senior Notes
(which will be denominated in euro and/or US dollars, subject to elections
made in Claim Forms and Account Holder Letters);
L58,177 equivalent in aggregate principal amount of New Junior Notes
(which will be denominated in US dollars); and
187,993 New Shares.
If the plc Scheme does not become effective on the same day as the Corp Scheme
(or at all) the Corp/plc distribution model described in Section 2, Part C.7
under the heading "Circulation of Scheme Consideration and payments on a
modelled basis" will not have been applied, and accordingly each of the numbers
set out above will be reduced by between approximately 0.41 per cent. and 0.47
per cent.
For the purposes of the above calculations, Known Claims that are denominated in
a currency other than sterling and New Junior Notes that will be issued by
reference to a US dollar amount have been converted at the Voting Rate. The
final calculations as to Known Claims will be made at the Scheme Rate (which
will be set five Business Days before the Effective Date). The final
calculations as to the principal amounts of the New Senior Notes and the New
Junior Notes to be received by a Scheme Creditor on the First Initial
Distribution will be made at the Currency Rate (which will be set the Business
Day before the Corp Scheme Meeting).
The Corp Scheme provides that a portion of the Corp Scheme Consideration will
initially be used to meet Known Claims that have been identified prior to the
Record Date. On such a Known Claim becoming Admitted in the Corp Scheme, the
Corp Scheme Creditor with that Known Claim will be entitled to receive the
portion of the Corp Scheme Consideration designated to meet that Known Claim.
Corp has undertaken extensive due diligence and advertised in newspapers in the
UK, the US and elsewhere in order to identify its creditors and ensure that all
Corp Scheme Creditors are included in the schedule of Known Claims. Corp has
also written to its Known Creditors that will be affected by the Corp Scheme
with the exception of certain financial creditors with Known Claims who have
been represented in negotiations with Corp and plc regarding the development of
the Restructuring proposals of Corp and plc, creditors for unclaimed interest
and redemptions on loan notes issued by Corp whose potential claims are easily
quantified and are provided for in full, and those whose addresses Corp has been
unable to ascertain. With the exception of two claims (one apparently against
Corp) which were clearly frivolous, the advertising process identified no claims
which had not previously been identified by Corp's due diligence. In addition to
the Known Claims that have been identified, the Corp Scheme includes a reserve
of Scheme Consideration that would be able to meet the payment of an Initial
Distribution in respect of Scheme Claims which are Admitted for up to L125
million, which Corp is satisfied will
24
I. EXPLANATORY STATEMENT
(IN COMPLIANCE WITH SECTION 426 OF THE COMPANIES ACT 1985)
SECTION 1: LETTER FROM THE CHAIRMAN OF PLC AND OF CORP
--------------------------------------------------------------------------------
be sufficient to cover any other Scheme Claims that had not been identified by
the Record Date. The Prospective Supervisors have confirmed that they have no
reason to disagree with Corp's view that the reserve is sufficient.
However, a mechanism has been put in place to ensure that Corp will not proceed
with the Corp Scheme and will withdraw the Scheme if, prior to the Effective
Date of the Corp Scheme, it becomes apparent that there may be Scheme Claims
against Corp which are not Known Claims and Corp is not satisfied that the
reserve will be sufficient to meet distributions due to be made out of it or if
the Prospective Supervisors do not confirm that they have no reason to disagree
with Corp's view that the reserve is sufficient. Details of this mechanism are
set out in Section 2, Part C.7. If the Corp Scheme is withdrawn then the plc
Scheme will also be withdrawn.
If at any time after the issue of the First Initial Distribution Notice, which
will occur on the Effective Date, the Supervisors are not satisfied that the
reserve will be sufficient to meet distributions due to be made out of it, then
the remaining Scheme Consideration set aside to meet Known Claims and the
remaining reserve will be aggregated and all Further Distributions under the
Corp Scheme will be made out of the remaining Scheme Consideration, on a
strictly pari passu basis.
PLC SCHEME
The plc Admitted Scheme Creditors will be entitled to receive a distribution pro
rata to their Scheme Claims out of plc's assets which are available for
distribution to plc Admitted Scheme Creditors.
Assuming the Corp Scheme becomes effective, plc's assets will principally
comprise the cash, New Shares and New Notes that plc receives under the Corp
Scheme from Bonds held by Ancrane and from monies owed by Corp to Ancrane (as
described above). plc's entitlement to this Scheme Consideration will arise from
a repayment of capital in specie by Ancrane to plc of all of its assets other
than L100. The plc Scheme provides that plc will set aside the sum of L7,000,000
from the cash element of Corp Scheme Consideration it receives via Ancrane
which, together with plc's cash of approximately L2,300,000, interest on the
aggregate of these two cash amounts and L2,000,000 available to be drawn (at
Corp's request) under a letter of credit to be provided in favour of the plc
Scheme Supervisors from time to time by HSBC Bank plc pursuant to the
Performance Bonding Facility described below, will be available to meet plc's
Ongoing Costs.
plc's Ongoing Costs are estimated to be a maximum of L11,300,000 plus an amount
which will be covered by the interest referred to above, and will include:
a. the costs of plc, the Supervisors, the Escrow Trustee, the
Distribution Agent and their respective advisers in implementing the
Restructuring and administering the plc Scheme;
b. any costs plc or the Supervisors incur in continuing to defend
Allowed Proceedings (including any adverse costs orders);
c. the payment of any claims which are to be excluded from the plc
Scheme and which have not been novated to Corp which represent all
claims as at the Record Date which would have been preferential in a
liquidation and claims in respect of unpaid dividends which in a
liquidation would have been subordinated; and
d. any ongoing administrative costs of plc, including the preparation
and filing of accounts, the holding of any annual general meetings
that are required to be held under the Act and the costs of plc's
eventual dissolution or liquidation.
Any monies remaining following the payment of plc's Ongoing Costs will be
distributed to all plc's Admitted Scheme Creditors in the Final Distribution
under the plc Scheme.
Subject to any limitations under applicable securities laws, the assets plc
receives from Ancrane will be distributed to the plc Scheme Creditors in specie
(i.e. in the form in which they are held, and not realised for cash prior to
distribution). Any other assets of plc are expected to be converted into cash
before distribution.
25
I. EXPLANATORY STATEMENT
(IN COMPLIANCE WITH SECTION 426 OF THE COMPANIES ACT 1985)
SECTION 1: LETTER FROM THE CHAIRMAN OF PLC AND OF CORP
--------------------------------------------------------------------------------
First Initial Distribution
The mechanism for calculating and distributing a plc Scheme Creditor's
entitlement to receive plc Scheme Consideration is detailed in the plc Scheme
set out in part III and is also described in more detail in Section 2, Part C.7.
Both these sections should be read carefully.
The plc Scheme provides that a First Initial Distribution will take place on the
Effective Date of the plc Scheme, at the same time as the First Initial
Distribution under the Corp Scheme. At the Court hearing to sanction the plc
Scheme, plc will present to the Court a schedule of Scheme Claims compiled by
the Prospective Supervisors which will set out details of the Scheme Creditors
with Known Claims which are proposed to be Admitted by the Supervisors on the
Effective Date and that, in accordance with the terms of the plc Scheme, will
receive their Initial Distribution through the First Initial Distribution. The
Initial Distribution available to all plc Scheme Creditors will comprise all the
Scheme Consideration received by plc via Ancrane as a result of Ancrane's
entitlement to an Initial Distribution in the Corp Scheme (net of the sum of
L7,000,000 set aside on account of plc's Ongoing Costs). Scheme Claims that have
been Admitted by the Effective Date will receive their Initial Distribution
through the First Initial Distribution.
Corp has the benefit of a Scheme Claim of L146,587,439 against plc. If this
Known Claim is Admitted in the plc Scheme in full (which Corp expects to be the
case) Corp will become entitled to receive its pro rata entitlement in respect
of its Admitted Scheme Claim in the First Initial Distribution under the plc
Scheme. Both Corp and plc have agreed to distribute any Scheme Consideration
they receive as a result of this claim to their respective Scheme Creditors by
way of Additional Scheme Consideration. Further details of these payments are
set out in Section 2, Part C.7 below under the heading "Circulation of Scheme
Consideration and payments on a modelled basis".
In summary, each plc Scheme Creditor that participates in the First Initial
Distribution in the plc Scheme will be entitled to receive (assuming no increase
in the cash element of the Corp Scheme Consideration but that the plc Scheme
becomes effective on the same day as the Corp Scheme), for each L1,000,000 of
Admitted Scheme Claim an Initial Distribution of cash, New Notes and New Shares
of approximately:
L9,446 cash;
L14,554 equivalent in aggregate principal amount of New Senior Notes
(which will be denominated in euro and/or US dollars, subject to elections
made in Claim Forms and Account Holder Letters);
L9,959 equivalent in aggregate principal amount of New Junior Notes (which
will be denominated in US dollars); and
32,182 New Shares.
If the plc Scheme does not become effective on the same day as the Corp Scheme
the Corp/plc distribution model described in Section 2, Part C.7 under the
heading "Circulation of Scheme Consideration and payments on a modelled basis"
will not have been applied, and accordingly each of the numbers set out above
will be reduced by approximately 8.51 per cent.
For the purposes of the above calculations, Known Claims that are denominated in
a currency other than sterling and New Junior Notes that will be issued by
reference to a US dollar amount have been converted at the Voting Rate. The
final calculations as to Known Claims will be made at the Scheme Rate (which
will be set five Business Days before the Effective Date). The final
calculations as to the principal amounts of the New Senior Notes and the New
Junior Notes to be received by a Scheme Creditor on the First Initial
Distribution will be made at the Currency Rate (which will be set the Business
Day before the Corp Scheme Meeting).
The plc Scheme provides that a portion of plc's assets available for
distribution will be used to meet Known Claims that have been identified prior
to the Record Date. On such Known Claim becoming Admitted in the plc Scheme, the
plc Scheme Creditor with that plc Scheme Claim will be entitled to receive the
portion of the plc Scheme Consideration designated to meet that Known Claim.
plc has undertaken extensive due diligence and advertised in newspapers in the
UK, the US and elsewhere in order to identify its creditors and ensure that all
plc Scheme Creditors are included in the Schedule of Known
26
I. EXPLANATORY STATEMENT
(IN COMPLIANCE WITH SECTION 426 OF THE COMPANIES ACT 1985)
SECTION 1: LETTER FROM THE CHAIRMAN OF PLC AND OF CORP
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Claims. plc has also written to all of its Known Creditors that will be affected
by the plc Scheme with the exception of certain financial creditors with Known
Claims who have been represented in negotiations with Corp and plc regarding the
development of the Restructuring proposals of Corp and plc, and those whose
addresses plc has been unable to ascertain. With the exception of one claim
(which is disputed by plc, but is provided for in full in the plc Scheme), the
advertising process identified no claims which had not been previously
identified by plc's due diligence. In addition to the claims that have been
identified, the plc Scheme includes a reserve of Scheme Consideration that would
be able to meet the payment of an Initial Distribution in respect of Scheme
Claims which are Admitted for up to L250 million, which plc is satisfied will be
sufficient to cover any other Scheme Claims that have not been identified by the
Record Date. The Prospective Supervisors have confirmed that they have no reason
to disagree with plc's view that the reserve is sufficient.
However, a mechanism has been put in place to ensure that plc will not proceed
with the plc Scheme and will withdraw the Scheme if prior to the Effective Date
of the plc Scheme it becomes apparent that there may be Scheme Claims against
plc which are not Known Claims and plc is not satisfied that the reserve will be
sufficient to meet distributions due to be made out of it or if the Prospective
Supervisors do not confirm that they have no reason to disagree with plc's view
that the reserve is sufficient. Details of this mechanism are set out in Section
2, Part C.7. In any event, if the Corp Scheme is withdrawn then the plc Scheme
will also be withdrawn, but the Corp Scheme will not be withdrawn only because
the plc Scheme is withdrawn.
If at any time after the issue of the First Initial Distribution Notice, which
will occur on the Effective Date, the Supervisors are not satisfied that the
reserve will be sufficient to meet distributions due to be made out of it, then
the remaining Scheme Consideration set aside to meet Known Claims and in the
reserve will be aggregated and all Further Distributions under the plc Scheme
will be made out of the remaining Scheme Consideration, on a strictly pari passu
basis.
AGGREGATE FIRST INITIAL DISTRIBUTIONS FROM BOTH SCHEMES
If a Scheme Creditor has an Admitted Scheme Claim in the Corp Scheme, which is
guaranteed by plc, and the claim under the guarantee is Admitted in the plc
Scheme, or vice versa, and that Scheme Creditor participates in the First
Initial Distributions in both the Corp and plc Schemes, then that Scheme
Creditor will be entitled to receive (assuming no increase in the cash element
of the Corp Scheme Consideration but that the two Schemes become effective on
the same day) for each L1,000,000 of Admitted Scheme Claims an aggregate Initial
Distribution of cash, New Notes and New Shares of approximately:
L73,642 cash;
L99,576 equivalent in aggregate principal amount of New Senior Notes
(which will be denominated in euro and/or US dollars, subject to elections
made in Claim Forms and Account Holder Letters);
L68,136 equivalent in aggregate principal amount of New Junior Notes
(which will be denominated in US dollars); and
220,175 New Shares.
If the plc Scheme does not become effective on the same day as the Corp Scheme
the Corp/plc distribution model described in Section 2, Part C.7 under the
heading "Circulation of Scheme Consideration and payments on a modelled basis"
will not have been applied, and accordingly each of the numbers set out above
will be reduced by between approximately 1.45 per cent. and 1.65 per cent.
For the purposes of the above calculations, Known Claims that are denominated in
a currency other than sterling and New Junior Notes that will be issued by
reference to a US dollar amount have been converted at the Voting Rate. The
final calculations as to Known Claims will be made at the Scheme Rate (which
will be set five Business Days before the Effective Date). The final
calculations as to the principal amounts of the New Senior Notes and the New
Junior Notes to be received by a Scheme Creditor on the First Initial
Distribution will be made at the Currency Rate (which will be set the Business
Day before the Corp Scheme Meeting).
27
I. EXPLANATORY STATEMENT
(IN COMPLIANCE WITH SECTION 426 OF THE COMPANIES ACT 1985)
SECTION 1: LETTER FROM THE CHAIRMAN OF PLC AND OF CORP
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LEGAL RESTRICTIONS ON DISTRIBUTION OF SECURITIES
Securities will not be distributed pursuant to the Schemes where this would be
prohibited by any applicable law or regulation, or so prohibited except after
compliance with conditions or requirements that are unduly onerous. To the
extent that such a prohibition applies, securities that would otherwise have
been distributed to any relevant person pursuant to the Schemes will be sold and
the net cash proceeds of such sale (after deduction of all applicable expenses
and currency conversion costs) will be paid to that person in full satisfaction
of his rights in respect of these securities under the relevant Scheme (provided
that if the securities are not listed on a securities exchange Scheme Creditors
and Bondholders will be entitled to receive a sum in cash that is substantially
equivalent in value to such securities). In order to permit the distribution of
securities pursuant to the Schemes, the Claim Form will require persons
completing it (other than the Trustees), and the Account Holder Letter will
require Account Holders, to confirm certain facts. For further information, see
Section 2, Part C.9. Any persons who are in doubt as to how legal or regulatory
restrictions may affect them in relation to the Schemes are strongly advised to
consult their professional advisers.
POST RESTRUCTURING WORKING CAPITAL
In order to support the Group's working capital requirements following the
Restructuring, Corp and Marconi Bonding Limited have entered into the
Performance Bonding Facility (a L50 million committed performance bonding
facility provided by HSBC Bank plc and JPMorgan Chase Bank) and Marconi
Communications, Inc. has entered into the Working Capital Facility (a US$22.5
million revolving facility provided by Liberty Funding, L.L.C.). The Performance
Bonding Facility is conditional on the Corp Scheme becoming effective. Further
details of each of these facilities are set out in Section 2, Part D.4.
Information on the Corp Group's financial objectives is set out in Section 2,
Part A.7.
INTERIM SECURITY AND SUPPORT FOR THE RESTRUCTURING
As part of the arrangements to effect the Restructuring, Corp agreed to provide
interim security to its principal lenders, being the Syndicate Banks (in their
capacities as Syndicate Banks, bilateral lenders to Corp and beneficiaries of
guarantees from Corp (in such capacities, "BANK CREDITORS")), the holders of the
Bonds from time to time (apart from plc's wholly owned subsidiary Ancrane) and
the Trustees (together, the "SECURED BONDHOLDERS") and Barclays Bank PLC (as the
only ESOP Derivative Bank which committed to support the Restructuring prior to
15 October 2002). The interim security was taken over cash held by Highrose
Limited, a special purpose subsidiary of Corp and plc, in accounts held with
third party banks (the "LOCKBOX ACCOUNTS"). These interim security arrangements
took effect on 13 September 2002, on which date the balance held in the Lockbox
Accounts was approximately L866,000,000. The interim security arrangements were
amended on 13 December 2002 and were further amended on 28 March 2003. As at 27
March 2003, the balance held in the Lockbox Accounts was approximately
L770,700,000.
Without this interim security, the Syndicate Banks (as comprised at the time)
and the Informal Committee of Bondholders would not have been prepared to
continue to support the Restructuring, and insolvency proceedings would have
been the only practicable alternative.
On 26 March 2003 and 24 March 2003 respectively the requisite majorities of the
Syndicate Banks and the members of the Informal Committee of Bondholders agreed
an extension of time in which to complete the Restructuring and a waiver of
enforcement events which may then have existed in relation to the interim
security. In addition, the requisite majorities of the Syndicate Banks and the
members of the Informal Committee of Bondholders, in contemplation of the
Restructuring: (a) consented, for the purposes of the undertakings given in
favour of the Syndicate Banks and the Informal Committee of Bondholders, to the
entry by Corp, plc and other Group companies into certain transactions
(including those contemplated under the Scheme Implementation Deed) necessary to
facilitate the Restructuring; and (b) agreed a number of additional carve-outs
to those undertakings to permit Corp, plc and other Group Companies to enter
into transactions contemplated in this document (provided that, subject to some
exceptions, such transactions do not take effect until the Effective Date of the
Corp Scheme).
28
I. EXPLANATORY STATEMENT
(IN COMPLIANCE WITH SECTION 426 OF THE COMPANIES ACT 1985)
SECTION 1: LETTER FROM THE CHAIRMAN OF PLC AND OF CORP
--------------------------------------------------------------------------------
In addition, in connection with the ESOP Settlement Agreement referred to below,
UBS AG, Citibank, N.A. and Barclays Bank PLC have each provided a voting
undertaking in relation to the Corp Scheme and the plc Scheme (further details
of which are set out in part I, Section 2, Part D.2).
Provision has been made for the interim security to be released prior to the
Corp Scheme Meeting in circumstances tied to the prospects of the Corp Scheme
being successfully implemented (as described more fully in Section 2, Part D.1).
If the interim security has not been released prior to the Corp Scheme Meeting
neither Corp nor plc will proceed with their respective Schemes, and the interim
security will remain in place in any subsequent insolvency proceedings, meaning
that the Bank Creditors, Secured Bondholders and Barclays Bank PLC would rank
ahead of all unsecured creditors of Corp with respect to the cash held in the
Lockbox Accounts. If the interim security is released and the Corp Scheme
Meeting proceeds, the choice facing all Corp Scheme Creditors will be the same;
either the Corp Scheme will be approved and implemented, or the Corp Scheme will
be rejected and in the inevitable insolvency proceeding which would follow such
rejection the interim security would no longer be in place.
The Syndicate Banks and the Informal Committee of Bondholders have indicated
that they will not be prepared to release the interim security prior to the Corp
Scheme Meeting unless, immediately before such release, Corp has confirmed to
the Prospective Supervisors that Corp remains satisfied that the reserves built
into the Corp Scheme are sufficient to meet distributions to all Corp Scheme
Creditors and that Corp remains of the opinion that its statement as to the Corp
Group's working capital contained in Section 2, Part D.21 remains valid, and the
Prospective Supervisors have confirmed to Corp that they have no reason to
disagree with Corp's view that the reserves built into the Corp Scheme are
sufficient to meet distributions due to be made to all Corp Scheme Creditors.
SETTLEMENT OF ESOP DERIVATIVE CLAIMS
On 26 March 2003, Corp and plc entered into a definitive agreement with the
Group's ESOP Derivative Banks for a settlement of their ESOP derivative related
claims against the Group. Under the terms of the settlement, which is
conditional upon the Corp Scheme becoming effective, Corp will pay a total of
L35 million to the ESOP Derivative Banks in full and final settlement of their
ESOP related claims against the Group. This settlement amount will be paid from
a fund of up to L170 million which was to have been set aside by Corp, as part
of the Restructuring, pending resolution of potential liabilities of Group
companies to Barclays Bank PLC, Salomon Brothers International Limited and UBS
AG in relation to the Group's ESOP derivative arrangements. The settlement has
made available approximately L135 million in cash which forms part of the L340
million comprising the cash element of the Corp Scheme Consideration. Without
the ESOP settlement, the L135 million sum would not have formed part of the Corp
Scheme Consideration.
The Boards of Corp and plc believe that the ESOP settlement is in the best
interests of Corp and plc and their respective stakeholders as a whole. In
reaching this conclusion, the Boards of Corp and plc have taken appropriate
legal advice from leading counsel and considered a number of relevant factors,
including the merits of the claims of the ESOP Derivative Banks, the desire to
reduce the cost and expense of continuing litigation, the potential saving in
the interest burden from which the Group will benefit by settling the ESOP
derivative dispute, the benefits for the Schemes and certainty as to the amount
of the Corp Scheme cash distribution that such a settlement brings.
RISKS ASSOCIATED WITH THE TIMING OF THE RESTRUCTURING
When the Heads of Terms were announced in August 2002, plc indicated that the
Restructuring was scheduled to be completed by 31 January 2003. This date was
extended to 15 March 2003 in December 2002. As a result of the complexity of the
Restructuring the Effective Date of the Schemes is now expected to be on or
around 19 May 2003. The change to the timing of the Restructuring introduces
risks associated with certain financial debt falling due in March 2003. In
particular, the Bank Facility was due for repayment on 25 March 2003 and remains
unpaid, an interest payment was due on the Yankee Bonds on 17 March 2003 and
remains unpaid and an interest payment is due on the Eurobonds on 31 March 2003.
In common with Corp's and plc's approach to other Scheme Claims, pending the
outcome of the Schemes neither Corp nor plc intends to make payment in respect
of such obligations, in whole or in part. Under the terms of the Bank Facility,
unpaid amounts accrue interest at the
29
I. EXPLANATORY STATEMENT
(IN COMPLIANCE WITH SECTION 426 OF THE COMPANIES ACT 1985)
SECTION 1: LETTER FROM THE CHAIRMAN OF PLC AND OF CORP
--------------------------------------------------------------------------------
default rates set out therein; namely LIBOR plus 3.25 per cent. per annum. For
the purposes of participation in the Schemes, no such interest will accrue
beyond the Record Date.
The fact of the above mentioned payments falling due represents a risk to the
Restructuring, due to consequential legal action which Syndicate Banks or
Bondholders who are not supportive of the Restructuring process could take
against Corp or plc. However, Corp and plc are of the view that, given the
timing associated with any such legal action as well as the likely attitude of
the English and New York Courts to a creditor seeking to frustrate the
Restructuring (which is intended to be for the benefit of all Scheme Creditors),
these risks should be manageable. This issue is discussed in more detail in
Section 2, Part F: Risk Factors.
WHAT HAPPENS IF EITHER OR BOTH OF THE SCHEMES DO NOT BECOME EFFECTIVE?
The plc Scheme will not become effective unless the Corp Scheme becomes
effective. Following the Corp Scheme being implemented, plc's assets available
for distribution under the plc Scheme to the plc Scheme Creditors will
principally comprise the assets received by it as a result of the repayment of
capital by Ancrane. Ancrane, as a holder of Bonds issued by Corp and guaranteed
by plc and pursuant to intra-group arrangements, will be entitled to its pro
rata share of the Corp Scheme Consideration and the plc Scheme Consideration.
Ancrane has been re-registered as an unlimited liability company to facilitate
the transfer of its assets to plc by the repayment of capital in specie for
distribution to plc Scheme Creditors under the plc Scheme. If the Corp Scheme
does not become effective, the plc Scheme Consideration would be so
significantly diminished that plc would not implement the plc Scheme and would
be forced to commence an insolvency proceeding. If plc were subject to an
insolvency proceeding, for the reasons set out under the heading "The
alternative" below it is likely that there would be a lower rate of return for
the plc Scheme Creditors as compared to their return if the plc Scheme became
effective. Also, any return to plc creditors from an insolvency proceeding would
be likely to be significantly delayed.
The Corp Scheme is not conditional upon the plc Scheme becoming effective and
Corp is satisfied that it will be able to implement the Corp Scheme whether or
not the plc Scheme becomes effective. Corp is satisfied that, if the Corp Scheme
is implemented, the Corp Group will be sufficiently ringfenced from plc that the
Corp Group will be able to operate effectively, even if plc has been forced to
commence an insolvency proceeding.
THE ALTERNATIVE
If the Corp Scheme becomes effective but the plc Scheme does not become
effective, then plc would inevitably have to enter into some form of insolvency
proceeding. If both of the Schemes do not become effective or are terminated
before the First Initial Distribution, it is likely that Corp and plc would have
to enter some form of insolvency proceedings. This is because, given the
severity of the Group's financial position (including the fact that the Bank
Facility was due for repayment on 25 March 2003 and remains unpaid, that an
interest payment was due on the Yankee Bonds on 17 March 2003 and remains
unpaid, and that an interest payment is due on the Eurobonds on 31 March 2003),
the Board of the relevant Scheme Company would be likely to conclude that there
was no reasonable prospect of avoiding an insolvency proceeding. The instigation
of an insolvency proceeding in relation to Corp or both Corp and plc before
either Scheme has become effective would be likely to result in insolvency
proceedings for other principal Group companies.
As referred to above, if the interim security has not been released prior to the
Corp Scheme Meeting neither Corp nor plc will proceed with their respective
Schemes. If the interim security is released and the Corp Scheme Meeting
proceeds, the choice facing all Corp Scheme Creditors will be the same: either
the Corp Scheme will be approved and implemented or the Corp Scheme will be
rejected and in the inevitable insolvency proceeding which would follow such a
rejection the interim security would no longer be in place.
A detailed analysis of the position of Corp and plc should they be subject to
insolvency proceedings (and the assumptions, caveats, limitations and
uncertainties on which such analysis is based) is set out at Appendix 6. This
analysis should be read carefully, including the caveats, limitations and
uncertainties.
Corp and plc believe that the Schemes are more beneficial to Scheme Creditors
than insolvency proceedings or the enforcement of security and should result in
a better return, greater certainty and an immediate day one distribution to
Scheme Creditors. None of these benefits would be possible under the insolvency
alternatives.
30
I. EXPLANATORY STATEMENT
(IN COMPLIANCE WITH SECTION 426 OF THE COMPANIES ACT 1985)
SECTION 1: LETTER FROM THE CHAIRMAN OF PLC AND OF CORP
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BOARD COMPOSITION
With the exception of Derek Bonham, membership of the Boards of Corp and plc is
identical.
On 16 December 2002, I was appointed Chairman of plc's Board, in place of Derek
Bonham, who will continue as a non-executive director of plc and chairman of its
remuneration committee until implementation of the Restructuring, for continuity
purposes. I chair plc's nomination committee. On the same date, Kent Atkinson
and Werner Koepf were appointed as non-executive directors of plc. Kent Atkinson
is chairman of plc's audit committee. The executive directors of plc are Michael
Parton (Chief Executive Officer), Michael Donovan (Chief Operating Officer) and
Christopher Holden (Interim Chief Financial Officer).
Michael Parton (Chief Executive Officer), Michael Donovan (Chief Operating
Officer) and Christopher Holden (Interim Chief Financial Officer) will continue
as the executive directors of Corp. On 16 December 2002, I was appointed
Chairman of the Corp Board and subsequently became chairman of Corp's nomination
committee. On the same date, Kent Atkinson and Werner Koepf were appointed as
non-executive directors of Corp. Mr. Atkinson chairs Corp's audit committee. On
14 March 2003, we announced that Kathleen Flaherty and Ian Clubb have agreed to
join the Corp Board as non-executive directors with effect from Listing of the
New Shares, the New Notes and the Warrants. Mr. Clubb will chair Corp's
remuneration committee.
Allen Thomas resigned from the Boards of plc and Corp on 14 March 2003.
ACTION TO BE TAKEN
SCHEME CREDITORS (OTHER THAN PERSONS WITH INTERESTS IN BONDS)
If you are a Scheme Creditor, I urge you to complete and return the Claim Form
and Form of Proxy to KPMG as soon as possible and before the recommended
deadline set out below. To help you in completing these documents detailed
instructions have been included in Appendix 27 and each document contains
further guidance. If you have any queries in connection with the Claim Form or
Form of Proxy, please contact KPMG using the Helpline described at the front of
this document.
BONDHOLDERS
If you are a Bondholder, I urge you to contact your Account Holder (through any
Intermediaries, if appropriate) to ensure that an Account Holder Letter is
submitted in respect of your Bonds before the recommended deadline set out
below. In order to vote at the Scheme Meetings, Bondholders will need to
nominate a Definitive Holder (who may or may not be the Bondholder). This
nomination must be made in the relevant Account Holder Letter. In order to do
this your Account Holder will need instructions from you in relation to voting
and the delivery of Scheme Consideration and will require certain securities
laws confirmations. To help you in giving these instructions detailed guidance
as to the various elections to be made and confirmations to be given has been
included in Appendix 28. If you have any queries in this connection, please
contact Bondholder Communications using the Helpline described at the front of
this document.
ACCOUNT HOLDERS
If you are an Account Holder, I urge you to immediately contact your Bondholders
(through any Intermediaries, if appropriate) for instructions to enable you to
complete and return the Account Holder Letter to Bondholder Communications as
soon as possible and before the recommended deadline set out below. Where
possible, I urge you to complete this document on-line as this will minimise
clerical errors. To help you in completing these documents detailed instructions
have been included in Appendix 28. If you have any queries in connection with
the Account Holder Letter, please contact Bondholder Communications using the
Helpline described at the front of this document.
RECOMMENDED DEADLINE FOR ACTION TO BE TAKEN
It is recommended that Claim Forms and Forms of Proxy are submitted to KPMG
before 5.00 p.m. (London time) on 17 April 2003 and that Account Holder Letters
are submitted to Bondholder Communications before 5.00 p.m. (New York City time)
on 17 April 2003. Forms of Proxy may be submitted to KPMG before 12 noon
31
I. EXPLANATORY STATEMENT
(IN COMPLIANCE WITH SECTION 426 OF THE COMPANIES ACT 1985)
SECTION 1: LETTER FROM THE CHAIRMAN OF PLC AND OF CORP
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(London time) on 24 April 2003. The Prospective Supervisors will undertake a
review of all Claim Forms submitted prior to the Effective Date to determine
whether the relevant Scheme Claims can be properly Admitted. No Scheme Claims
submitted after the specified time on 17 April 2003 will be included in the
First Initial Distribution Notice. Assuming that the Scheme Claims of the two
Trustees are included in the First Initial Distribution Notice (which Corp and
plc expect to be the case), no Designated Recipient named in an Account Holder
Letter submitted after this date will receive the First Initial Distribution of
Scheme Consideration.
Submission of Forms of Proxy and Account Holder Letters after the recommended
deadline on 17 April 2003 will not preclude a Scheme Creditor (including any
Definitive Holder) from voting at the Scheme Meetings provided that the Scheme
Creditor or his proxy is able to establish his identity and entitlement to vote
at the relevant Scheme Meeting.
RECOMMENDATION
Corp and plc believe that, given the Group's financial position, the proposed
Restructuring is in the best interests of all stakeholders, including Scheme
Creditors, Bondholders and plc Shareholders. If the Restructuring is not
approved, the severity of the Group's financial position is such that Corp and
plc would have no reasonable prospect of avoiding insolvency proceedings which
would mean that there would be a lower return to Scheme Creditors, accompanied
by uncertainty and delay, and no return whatsoever to plc Shareholders.
ACCORDINGLY, CORP RECOMMENDS THAT CORP SCHEME CREDITORS (INCLUDING DEFINITIVE
HOLDERS) VOTE IN FAVOUR OF THE CORP SCHEME AT THE CORP SCHEME MEETING AND PLC
RECOMMENDS THAT PLC SCHEME CREDITORS (INCLUDING DEFINITIVE HOLDERS) VOTE IN
FAVOUR OF THE PLC SCHEME AT THE PLC SCHEME MEETING.
Yours sincerely,
(-s- John Devaney)
JOHN DEVANEY
CHAIRMAN
FOR AND ON BEHALF OF
MARCONI PLC AND MARCONI CORPORATION PLC
32
I. EXPLANATORY STATEMENT
(IN COMPLIANCE WITH SECTION 426 OF THE COMPANIES ACT 1985)
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SECTION 2
FURTHER EXPLANATION OF THE RESTRUCTURING
A. BUSINESS OVERVIEW
A.1 BACKGROUND
The Group is a global vendor of telecommunications equipment and services. The
Group's customers include many of the leading telecommunications operators
throughout the world, with whom it has a large base of installed equipment.
This document sets out proposals which, if implemented, will result in Corp
becoming the new holding company of the Group. It is intended that all of plc's
assets (which derive principally from the claim of plc's subsidiary Ancrane in
the Corp Scheme in respect of its holding of Bonds and monies owed to it by
Corp), net of a reserve in respect of plc's Ongoing Costs, will be distributed
over time to the creditors of plc in accordance with the plc Scheme, following
which it is intended that plc will be liquidated or dissolved. It is intended
that, between the time of the Corp Scheme becoming effective and the listing of
the New Shares, the New Notes and the Warrants, the plc Shares will be delisted
from the Official List and cease trading on the London Stock Exchange's market
for listed securities. Unless the context otherwise requires, this Part A
assumes that the Schemes will be implemented in accordance with their terms and
that the Group is the Corp Group.
A.2 HISTORY OF THE MARCONI GROUP AND THE RESTRUCTURING
EARLY HISTORY
Corp, previously called the General Electric Company, p.l.c. ("GEC") and which
is currently (but, on the implementation of the Corp Scheme, will cease to be) a
wholly-owned subsidiary of plc, was incorporated as a private limited company in
England in 1900 under the name The General Electric Company (1900) Limited and
can trace its origins back to 1886. GEC originally operated in the electrical
industry. The more significant events in the development of the Group are as
follows:
a. 1960s: significant expansion in the electrical industry through
acquisitions
b. 1970s and 1980s: acquisition of Videojet Systems International Inc.
(data systems business), Picker International Holdings Inc. (medical
systems business) and Gilbarco Inc. (commerce systems business);
formation of GEC Plessey Telecommunications Holdings Limited
("GPT"), a 50 per cent. joint venture with The Plessey Company plc,
subsequently increasing its stake to 60 per cent.; formation of two
50 per cent. joint ventures, GEC Alsthom N.V. with Alcatel S.A., and
General Domestic Appliances Ltd (now known as General Domestic
Appliances Holdings Ltd) with the General Electric Company of the
United States; and
c. 1990s: reduction of the stake in the GEC Alsthom joint venture to a
24 per cent. shareholding in Alstom S.A.; acquisition of the
minority 40 per cent. stake in GPT and formation of Marconi
Communications, combining the GPT business with the Marconi
telecommunications operations in Italy, Hong Kong and South Africa
under the same management structure.
d. 1999: GEC separated the Marconi Electronic Systems business ("MES"),
its international aerospace, naval shipbuilding, defence electronics
and defence systems business, which merged with British Aerospace
plc (now known as BAE SYSTEMS plc ("BAE")). GEC's remaining
businesses were reorganised under plc, with GEC becoming a
wholly-owned subsidiary of plc. Shareholders of GEC became
shareholders in plc.
MODERN HISTORY
Following the separation of MES, the Group focused its strategy on
communications technology and services. From 1999 through to 30 September 2002,
the more significant events in the Group's history include:
a. Year ended 31 March 2000: acquisition of RELTEC Corporation, FORE
Systems, the business of RDC Communications Ltd, Nokia's
transmission equipment business, the public networks business of
Bosch, the Australian communications solutions business of Scitec
and acquisition of
33
I. EXPLANATORY STATEMENT
(IN COMPLIANCE WITH SECTION 426 OF THE COMPANIES ACT 1985)
SECTION 2: FURTHER EXPLANATION OF THE RESTRUCTURING -- PART A
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27 per cent. of Atlantic Telecom (which was diluted in June 2000 to
a 19.7 per cent. interest as a result of Atlantic Telecom's
acquisition of First Telecom. Atlantic Telecom is now in
liquidation);
b. Year ended 31 March 2001: acquisition of Metapath Software
International Inc. ("MSI"), Systems Management Specialist, Inc.,
Albany Partnership Limited and Mariposa Technology, Inc;
c. Year ended 31 March 2002: acquisition of a 71.9 per cent. economic
interest (49.9 per cent. of voting share capital) in Easynet Group
plc ("Easynet") and disposal of its 92 per cent. interest in ipsaris
Limited as part of the same transaction in July 2001; disposals of
the remaining 24 per cent. interest in Alstom S.A. in February and
June 2001, the remaining 1.49 per cent. interest in Lagardere SCA in
September 2001, Marconi Medical Systems Group in October 2001, a 6.5
per cent. interest in Lottomatica SpA in November 2001 and February
2002, Marconi Commerce Systems Group in February 2002, the Marconi
Optical Components business in exchange for a 9 per cent. interest
in Bookham Technology p.l.c. in February 2002 (pursuant to a
subsequent agreement between Bookham Technology p.l.c. and Nortel
Networks Corporation, Corp now owns approximately 6 per cent. of
Bookham Technology p.l.c.), Marconi Data Systems Group in February
2002 and the 50 per cent. interest in General Domestic Appliances
Holdings Limited in March 2002; and
d. Six months ended 30 September 2002: disposal of the Group's Applied
Technologies division in July 2002 and the Group's strategic
communications business (Mobile) in August 2002.
RECENT DEVELOPMENTS
On 19 December 2002, plc announced that Corp had reached agreement with RT Group
plc (in members' voluntary liquidation) and its subsidiary RT Group Telecom
Services Limited ("RTSL"), on a return of capital from Ultramast Limited
("Ultramast"), a joint venture set up in December 2000. The agreement provides
for Corp and RTSL to waive all outstanding litigation relating to Ultramast. The
Court approved this reduction of capital and accordingly RTSL has assumed full
control of Ultramast. The Group has received approximately L41 million in cash,
which includes approximately L19 million which was paid into Court by Corp
pending the outcome of a lawsuit between the parties in August 2002.
On 5 March 2003, plc announced that it had completed the disposal of two
businesses from its Capital portfolio. The Group sold OTE SpA (its private
mobile networks division, also known as TETRA) to Finmeccanica SpA for L2
million in cash, L4.8 million in assumed financial debt, and L8.2 million in
assumed OTE debt to suppliers. Finmeccanica SpA has also agreed to release
approximately L2.5 million to the Group from escrow relating to the August 2002
sale of Mobile (the Group's strategic communications business). On the same
date, plc announced that it had completed the sale of Marconi Online to Coca
Cola Amatil (N.Z.) Limited for NZ$2.95 million (over L1 million).
On 26 March 2003, Corp and plc entered into a definitive agreement with the
Group's ESOP Derivative Banks for a settlement of their ESOP derivative related
claims against the Group. Under the terms of the settlement, which is
conditional upon the Corp Scheme becoming effective, Corp will pay a total of
L35 million to the ESOP Derivative Banks in full and final settlement of their
ESOP related claims against the Group. This settlement amount will be paid from
the fund of up to L170 million which was to have been set aside by Corp, as part
of the Restructuring, pending resolution of potential liabilities of Group
companies to Barclays Bank PLC, Salomon Brothers International Limited and UBS
AG in relation to the Group's ESOP derivative arrangements. The settlement has
made available approximately L135 million in cash which forms part of the L340
million comprising the cash element of the Corp Scheme Consideration. Without
the ESOP settlement, the L135 million sum would not have formed part of the Corp
Scheme Consideration.
Further information relating to "Modern history" and "Recent developments" is
set out in Appendix 5.
BUSINESS REORGANISATION
Following a profits warning announced on 4 July 2001, the Group undertook an
operational review of its activities. The results of the operational review were
announced in September 2001 and included a change of
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management with the appointment of a new Chief Executive Officer and an interim
Chairman. It also covered the Group's markets, its operations and scope of
business and focused on adapting the Group to the changed circumstances of the
telecommunications market during the substantial decline in market demand for
the Group's products and services. As a consequence of the review, the Group
streamlined its activities and disposed of a number of businesses during the
period ended 30 September 2002 (as further described under "Modern history"
above). For the purposes of financial reporting, with effect from 1 April 2002,
the Group divided its continuing operations into two segments: Core and Capital.
The Group divides its Core activities (for the purposes of financial reporting)
into two main business types: Network Equipment, comprising Optical Networks,
Broadband Routing and Switching ("BBRS"), European Access, North American
Access, Outside Plant and Power ("OPP") and Other Network Equipment; and Network
Services, comprising Installation, Commissioning and Maintenance ("IC&M") and
Value Added Services ("VAS").
The Group's Capital activities comprise certain non-core businesses that the
Group manages for value and ultimately for disposal. Activities in Capital
include the Group's holding in Easynet Group Plc as well as a number of minor
activities, assets and investments.
Following the Restructuring, it is intended that the Group will segment its
business along geographic lines and report its US Businesses separately from its
businesses based in Europe and the rest of the world. The US Businesses will
comprise the BBRS, OPP and North American Access Businesses and related Network
Services activities. European and the rest of the world based businesses will
comprise the Optical Networks, European Access, Other Network Equipment and the
rest of the Network Services activities.
BACKGROUND TO THE RESTRUCTURING
The Group has faced difficult trading conditions for some time. The impact of a
period of rapid and unprecedented deterioration in the global telecommunications
market has been compounded for the Group by the costs of a number of
acquisitions made since 1998. These acquisitions, which were primarily for cash
consideration, resulted in a substantial part of the debt burden being carried
by the Group and, in the light of reduced market demand for the Group's products
and services, the trading and cash flow performances of the acquired businesses
have been running at levels well below those that were anticipated at the time
of acquisition.
The Board of plc announced its intention, at its Annual General Meeting in July
2001, to initiate an operational review of the Group's business. The results of
this review were announced in September 2001, along with the appointments of
Michael Parton as Chief Executive Officer of plc, Derek Bonham as Interim
Chairman of plc, Michael Donovan as Chief Operating Officer of plc as well as
the management appointments of Neil Sutcliffe as chief executive officer of
Marconi Capital and Geoffrey Doy as chief executive officer of sales and
marketing of plc.
Against a background of further market deterioration early in 2002, plc
announced on 22 March 2002 that Corp and plc had decided not to enter into new
banking facilities to refinance Corp's then existing syndicated bank facilities.
Following this decision, Corp and plc agreed to cancel the undrawn commitments
under the existing facilities and agreed that the drawn portion under the Bank
Facility (which was due for repayment on 25 March 2003) would be repayable on
demand.
Following the decision not to refinance the then existing syndicated bank
facilities the Business Plan was prepared. This Business Plan was presented to
the Co-ordination Committee and the Informal Committee of Bondholders and was
used by Corp and plc as a basis for formulating the Heads of Terms for the
Restructuring. The Business Plan assumed that recovery in the Group's markets
would not commence until the end of the calendar year 2003. A set of
sensitivities were applied to reflect the scenario of more difficult market
conditions, and in particular a delay in market recovery beyond the end of 2003.
Given continuing uncertainty in market conditions, further revisions have been
made to the Business Plan. In proposing the Restructuring, Corp and plc have
assessed the proposed capital structure of Corp against the scenario of a delay
in market recovery and are confident that the proposed capital structure of Corp
is appropriate in circumstances where such a delay occurs. However, the Group
cannot predict with any level of certainty the occurrence, timing or extent of
any market recovery.
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On 29 August 2002, plc announced that Corp and plc had concluded Heads of Terms
with the Co-ordination Committee and the Informal Committee of Bondholders for
the financial restructuring of the Group.
On 13 September 2002, the Group announced that, in accordance with the Heads of
Terms, interim security over the balance of the Lockbox Accounts established in
April 2002 had been granted in favour of the Bank Creditors, the Secured
Bondholders and Barclays Bank PLC (as the only ESOP Derivative Bank which
committed to support the Restructuring prior to 15 October 2002). On 16 December
2002, the Group announced amendments to the terms of that interim security.
Further details are set out in Parts D.1 and D.2.
On 16 December 2002, plc also announced modifications to the Heads of Terms by
way of an addendum. On 7 February 2003, plc announced that Corp and plc had
reached agreement in principle with the Group's ESOP Derivative Banks for a
settlement of their ESOP derivative related claims against the Group. On 18
March 2003 plc announced that documentation in relation to the proposed
Restructuring had been filed with the Court and provided an update on certain
aspects of the proposed Restructuring. On 26 March 2003 and 24 March 2003
respectively the required consents were received to certain pre-completion steps
for the Restructuring from the requisite majorities of the Syndicate Banks and
the members of the Informal Committee of Bondholders.
Corp and plc do not currently anticipate that the Corp Group's day to day
operations, in particular supplies to customers and the payment of suppliers and
employees, will be significantly affected by the proposed capital structure of
Corp following the Restructuring.
Further information relating to the Restructuring is set out in Part C of this
Section and a discussion of the risk factors arising from implementation of the
Restructuring is set out in Part F.2 of this Section.
RESTRUCTURING
Taking into account the cash to be distributed as part of the Restructuring and
approximately L40 million of subsidiary-level bilateral loans and finance
leases, the net indebtedness of the Corp Group immediately following the Corp
Scheme becoming effective is expected to be approximately L117 million. The Corp
Group is expected to retain approximately L602 million of cash immediately
following the Corp Scheme becoming effective, of which approximately L167
million is expected to be restricted cash (see Part D.4 of this Section for
further information about retained cash). These estimates assume that the Corp
Scheme becomes effective on or around 19 May 2003 and that there is no increase
in the cash element of the Corp Scheme Consideration (and consequential decrease
in the amount of Junior Notes issued) as a result of any asset disposal prior to
1 May 2003.
Assuming the Corp Scheme is implemented in accordance with its terms, Corp
Scheme Creditors will receive in aggregate:
a. CASH: L340 million cash;
b. NEW SENIOR NOTES: the euro equivalent (calculated at the Currency
Rate) of L450 million in aggregate principal amount of new
guaranteed senior secured notes due April 2008 to be issued by Corp
denominated in euro and/or US dollars, subject to elections made in
Claim Forms and Account Holder Letters, with interest payable
quarterly in cash at a rate of 8 per cent. per annum;
c. NEW JUNIOR NOTES: the sum of US$300 million plus the US dollar
equivalent (calculated at the Currency Rate) of L117.27 million in
aggregate principal amount of new guaranteed junior secured notes
due October 2008 to be issued by Corp denominated in US dollars with
interest payable quarterly in cash at a rate of 10 per cent. per
annum or, at Corp's option, in kind (by issuing additional New
Junior Notes) at a rate of 12 per cent. per annum; and
d. NEW SHARES: 995,000,000 ordinary shares, representing 99.5 per cent.
of the issued ordinary share capital of Corp immediately following
the implementation of the Restructuring.
The cash element of the distribution will be increased by the net proceeds of
any asset disposals, other than L82 million of excluded asset disposal proceeds,
received on or after 1 December 2002 and before 1 May 2003, and the aggregate
principal amount of the New Junior Notes will be decreased by 10/11ths of the
sterling amount
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by which the cash element is increased (such calculation to reduce the L117.27
million figure referred to in c. above).
The New Notes may be redeemed at Corp's option in whole, but not in part, at any
time at a redemption price equal to the greater of (i) 110 per cent. of their
principal amount, and (ii) a make-whole amount equal to the sum of the present
values of remaining scheduled payments of principal and interest, using a
discount rate that is 50 basis points above the yield on US treasuries of
similar maturity to the New Senior Notes and New Junior Notes, as applicable,
plus, in each case, accrued interest. Under the terms of the New Notes, Net
Proceeds of non-exempt asset disposals must be applied to redeem first the New
Junior Notes and then, under certain circumstances, the New Senior Notes. For
further information, see Part C.3 of this Section and Appendix 8.
In order to support the Group's working capital requirements following the
Restructuring, Corp and Marconi Bonding Limited have entered into the
Performance Bonding Facility (a L50 million committed performance bonding
facility provided by HSBC Bank plc and JPMorgan Chase Bank) and Marconi
Communications, Inc. has entered into the Working Capital Facility (a US$22.5
million revolving facility provided by Liberty Funding L.L.C.). The Performance
Bonding Facility is conditional on the Corp Scheme becoming effective.
A brief description of the terms and conditions of the Performance Bonding
Facility and the Working Capital Facility is set out in Part D.4 of this
Section. Certain risks associated with working capital are set out in Part F of
this Section.
The Corp Scheme is not conditional upon the plc Scheme becoming effective and
Corp is satisfied that it will be able to implement the Corp Scheme whether or
not the plc Scheme becomes effective. Corp is satisfied that, if the Corp Scheme
is implemented, the Corp Group will be sufficiently ringfenced from plc that the
Corp Group will be able to operate effectively, even if plc has been forced to
commence an insolvency proceeding.
RINGFENCING OF US ASSETS
As part of the Restructuring, it is proposed that Corp's US Businesses, namely
the North American Access Business, BBRS Business and OPP Business, be
contractually separated or ringfenced from the rest of the Group (the "US
RINGFENCING").
Specific details of the US Ringfencing include:
a. Marconi Communications, Inc. and its subsidiaries which contain the
North American Access Business, BBRS Business and OPP Business will
constitute the Ringfenced Entities that are contractually separated
from the Non-Ringfenced Entities. While the business units involved
are located predominantly in the United States, the Ringfenced
Entities will not be limited to subsidiaries that are organised or
incorporated under the laws of the United States, the states thereof
or the District of Columbia and will also include subsidiaries owned
by Marconi Communications, Inc. that are organised and incorporated
under the laws of other jurisdictions including Ireland, Mexico and
Switzerland;
b. the covenants in the indentures governing the New Notes will
significantly restrict the type of financial, operational and other
dealings that the Non-Ringfenced Entities can have with the
Ringfenced Entities. The covenants in the New Notes will also
require Corp to separate the North American Access Business, BBRS
Business and OPP Business into separate subsidiaries (or groups of
subsidiaries) within the US Ringfencing no later than the second
anniversary of the issue date of the New Notes. Moreover, the
Non-Ringfenced Entities will generally be prohibited from providing
funding for any of the Ringfenced Entities and, following the
separation of the three principal businesses within the US
Ringfencing, the North American Access Business, BBRS Business and
OPP Business will generally be prohibited from providing funding to
each other;
c. the Ringfenced Entities will enter into various agreements with the
Non-Ringfenced Entities necessary to ensure that from the Effective
Date those dealings that are permitted with each other will be
provided in the ordinary course of business on an arm's length basis
or otherwise as required or permitted by the covenants in the
indentures governing the New Notes.
A discussion of risk factors associated with the US Ringfencing is set out in
Part F of this Section.
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A.3 MARKET ENVIRONMENT AND BUSINESS STRATEGY
MARKET ENVIRONMENT
The late 1990s saw unprecedented growth in capital expenditure on
telecommunications equipment as established and new operators invested in
increased capacity to meet expected growth in both data and mobile traffic.
Although data and mobile traffic has grown it has not grown as strongly as
expected and operators' turnover has not matched the investment in capacity;
both new and incumbent carriers have become overextended financially and capital
spending has been dramatically curtailed. In this environment,
telecommunications equipment vendors, like the Group, have experienced
substantial declines in turnover. The speed of this decline has been far greater
than anticipated and, in this environment, the Group, along with its major
competitors, has been unable to reduce the cost base of the business at the same
rate and consequently has experienced a significant decline in business
performance.
Corp and plc consider that the slowdown in network equipment sales has been
driven primarily by oversupply rather than reduced demand in the end-user
telecommunications services markets. Underlying data and mobile traffic growth,
driven by broadband, data and mobile services, remains quite strong and, as this
absorbs installed over-capacity, Corp and plc believe carriers will invest in
additional infrastructure.
BUSINESS STRATEGY
As a provider of networking technology and services that enables
telecommunications operators to evolve narrowband networks to next generation
broadband and mobile networks, the Group is now focusing its strategy around:
a. nurturing pre-existing relationships with its customers in current
generation technologies (for example Synchronous Digital Hierarchy
("SDH") and then evolving these customer networks over time to the
next generation Dense Wavelength Division Multiplexing ("DWDM")
optical networks);
b. development and effective marketing of genuine "best in class"
solutions; and
c. developing and enhancing the services offered to existing and new
customers.
The Group has taken extensive action to reduce the scope of its activities and
to rationalise or curtail non-core areas. The Group's near-term objective is to
restore its Core businesses to operating profitability (before goodwill,
amortisation and exceptional items) and generate positive operating cashflow
(before exceptional cash costs). In the longer term, the Group aims to develop
and expand its product portfolio and markets on a basis that is consistent with
its business strategy.
The Group considers that partnerships, where research and development and routes
to the market are shared for mutual benefit, will be an increasingly important
factor in the industry and expects the Group to be an active participant in such
partnerships.
Business positioning
Development of the Optical Networks business is a strategic priority for the
Group. The Group's objective is to maintain a leading position in the European
optical networking markets and to build market share in Central and Latin
America as well as the Asia Pacific region. Development of the Network Services
businesses is the Group's other key strategic objective with the aim of
increasing its turnover derived from such services activities.
The Group is also seeking to increase market share in selected product and
geographic markets where it has strong customer relationships. Accordingly, the
Group will deploy resources in developing its portfolio of fixed wireless
transmission and access products as well as its Access Hub multi-service access
node.
The Group believes that it has a number of developing or newly developed
products which are potentially "best in class" where it has yet to penetrate
major new telecommunications company customers. In particular, the
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Group is focused on developing the North American market for its leading-edge
range of multi-service switches and the UK market for its unique class 5
Softswitch solution.
The Group's OPP and North American Access Businesses are being managed for value
and ultimately for disposal. The proceeds of these disposals will be used to
repay part of the New Junior Notes. The North American Access Business may be
sold prior to 1 May 2003, in which event the net proceeds of the disposal will
be applied to increase the cash element of the Corp Scheme Consideration (and
the aggregate principal amount of the New Junior Notes will be decreased by
10/11ths of that amount).
Organisational efficiency and effectiveness
Since September 2001, the Group has embarked on a sequence of substantial cost
reduction programmes to reduce sales and marketing, general and administrative
and research and development overheads. These programmes remain in place and
continue to deliver cost reductions.
Organisationally, extensive rationalisation will continue to be an important
part of the Group's strategy in order to reduce costs in all areas of production
and overhead. In particular, the supply chain will continue to be restructured
to remove excess capacity and reduce break-even points.
As part of this strategy, the Group will retain control of functions only where
it possesses key competencies. Other functions, such as the manufacturing of
non-complex products, will continue to be outsourced and the supply chain cost
base will be rationalised to a level more in line with expected sales volumes.
A.4 GROUP'S PRINCIPAL ACTIVITIES
plc is the holding company of the Group, and was incorporated as a public
limited company in England in 1999. It conducts its commercial activities
primarily through Corp and Corp's subsidiaries.
Both Corp and plc are subject to the requirements of the Act and the Companies
Act 1989.
The Group is headquartered in London with principal operating sites in Coventry,
Beeston, Chorley, Camberley, Liverpool, London, Stafford and Wellingborough
(UK); Florida, Pennsylvania, Ontario, Georgia, Mississippi, North Carolina,
Illinois, Texas and Montreal (US and Canada); Genoa, Marcianise and Pisa
(Italy); Backnang, Offenburg, Frankfurt and Radeberg (Germany); Madrid (Spain);
Melbourne and Sydney (Australia); Beijing, Guilin and Hong Kong (China); Darulam
and Kuala Lumpur (Malaysia); Auckland (New Zealand); New Delhi (India); Riyadh
(Saudi Arabia); Dubai (United Arab Emirates); Springs (South Africa); Sao Paulo
and Votorantim (Brazil); and Naucalpan de Juarez and Huixquilucan Edo de Mexico
(Mexico).
For the purposes of financial reporting, with effect from 31 March 2002, the
Group divides its continuing operations into two segments: Core and Capital.
CORE BUSINESSES
For the purposes of financial reporting, the Group divides its Core activities
into two main business types: Network Equipment, comprising Optical Networks,
BBRS, European Access, North American Access, OPP and other Network Equipment;
and Network Services, comprising IC&M and VAS.
The Group's customer base includes telecommunications companies and providers of
internet services for their public networks, and certain large corporations,
government departments and agencies, utilities and educational institutions for
their private networks.
Sales, marketing and distribution
The Group sells its network equipment and network services using its direct
sales force as well as indirect channels such as local partners and distribution
partners. The Group's sales activities include sales and marketing organisations
in all major geographic regions. There are specialised product marketing groups
which support these organisations internally and a central marketing staff which
provides strategic direction and customer and market communications support for
these organisations externally. Each of these regional organisations has
responsibility for account management, sales, technical support and contract
negotiation.
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The Group's distribution partners include Ericsson, Italtel, Nokia and Siemens.
A seven-year agreement with Ericsson was signed in July 1999 that allows
Ericsson to market the full range of the Group's SDH equipment throughout the
world. In June 2002, the Group announced an additional seven-year agreement
enabling Ericsson to source its range of next-generation DWDM optical networking
equipment as well as encompassing the existing 1999 agreement on SDH equipment.
The Group also entered into a five-year agreement with Nokia in November 1999 to
market the Group's SDH and DWDM systems.
Customers
The Group benefits from the continued support of its strong customer base which
comprises mainly well-established incumbent telecommunications operators and
government agencies.
The main customers of the Group's network equipment and services include BT, the
Metro City Carriers in Germany, Telecom Italia, the UK Government and Vodafone
Group in Europe; BellSouth, Qwest, SBC, the US Federal Government and Verizon in
the United States; China Railcom, China Telecom, China Unicom, Telkom Malaysia
and Telstra in the Asia-Pacific region; and Brasil Telecom, Telecentro Oeste,
Telcel, Telefonica and Telmex in Central and Latin America. These customers
accounted for 51 per cent. of the turnover of the Core businesses during the six
months ended 30 September 2002.
Customers of the Group's Optical Networks and European Access Businesses are
predominantly based in Europe as well as in Asia-Pacific and Central and Latin
America. Customers of the Group's BBRS, OPP and North American Access Businesses
products and services are predominantly based in the Americas. In addition, the
Group provides network services to a number of customers in the transportation
and utility sectors, mainly in Europe.
Except for BT, each of the Group's customers accounted for less than 5 per cent.
of the Group's total turnover and Core turnover for the financial year ended 31
March 2002. For the same period, BT accounted for approximately 9 per cent. of
the Group's total turnover and 14 per cent. of the turnover of its Core
businesses. During the six months ended 30 September 2002, BT accounted for 15
per cent. of the Group's total turnover and 17 per cent. of the turnover of its
Core business. A discussion of certain risks associated with the Group's
reliance on a relatively small number of customers is set out in Part F of this
Section.
The Group has entered into frame contracts with most of its major customers.
While the terms of the frame contracts vary from customer to customer, such
contracts generally set out the terms and conditions (including pricing) on
which the Group will supply a customer with products and services. The length of
frame contracts varies from customer to customer and can range from 12 months to
five years. Some of the frame contracts establish price and volume expectations
which provide the Group with some visibility of expected sales during the terms
of the contracts. However the frame contracts do not typically guarantee the
volume or value of products or services actually supplied by the Group, which
remain at the discretion of the relevant customer. Near the end of their term,
some frame contracts impose an obligation on the parties to negotiate in good
faith to agree an extension of the contract.
In some cases, frame contracts contain change of control clauses which may give
rise to a termination right as a result of the Restructuring. In any event,
customers are not normally contractually bound under their frame contracts to
purchase products or services solely from the Group. Customers also often have
the right to terminate a frame contract after a specified notice period.
Notwithstanding the flexibility customers have in terms of the volume and value
of the orders they place and whether they place those orders with the Group or
one of its competitors, customers will often have a commercial incentive to
continue to purchase all of their requirements for certain types of products and
services from (and to have those parts of their networks serviced by) the Group.
A discussion of certain risks associated with termination rights triggered as a
result of the Restructuring is set out in Part F of this Section.
NETWORK EQUIPMENT
The Group designs and supplies communications systems that transmit and switch
voice, data and video traffic predominantly in public networks. The Group's
Network Equipment products include optical networking
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systems, broadband and narrowband switches, routers and aggregation devices,
wireless transmission systems and software management systems. In addition, the
Group sells outside plant and power products for use in communications networks.
Aggregate sales for the Group's Network Equipment businesses for the financial
year ended 31 March 2002 were L1,804 million (39.5 per cent. of total Group
sales) compared to L3,359 million (48.4 per cent. of total Group sales) in the
year ended 31 March 2001 and L2,583 million (45.1 per cent. of total Group
sales) in the year ended 31 March 2000. Aggregate sales for the Group's Network
Equipment businesses for the six months ended 30 September 2002 were L600
million (54.2 per cent. of total Group sales).
Overview of the public network market
Historically, government-owned or government-regulated monopolies have operated
public networks, which traditionally transmitted voice calls between users.
Privatisation and deregulation of public networks contributed to the entry of a
large number of new companies into the public network market, offering new
voice, data and video services.
The public network markets in which the Group operates are highly competitive.
The Group's principal competitors include Alcatel, Cisco Systems, Ericsson,
Fujitsu, Lucent Technologies, Nortel Networks and Siemens. The primary method of
competition in the public network market is the widespread use of open bids for
equipment purchases. Buyers use a combination of factors to evaluate bids,
including price, technical compliance, ability to deliver in the required
timescale and provide after-sales support, financial stability and long-term
viability. A number of competitors have substantial technological and financial
resources (including research and development resources) and operate in all
significant market segments of the industry. As the public network and private
network markets converge, other specialist companies in the information
technology sector may also emerge as strong competitors. In addition,
competitors may emerge in rapidly developing telecommunications markets such as
China. A description of risk factors relating to the Group's ability to remain
competitive through R&D investment is set out in Part F of this section.
A typical public network can be portrayed as comprising three high level layers.
These are the service, switching and transport layers. Traffic in the network is
moved around the network by equipment in the transport layer and routed to
different points in the network by equipment in the switching layer. Equipment
in the services layer defines and makes available the service associated with
each particular class of network traffic, for example voice, data or video
services. Public networks, which comprise the three layers above, can typically
be either access, metro or core networks, depending on the connections they
establish. The access network typically connects an end user of a service to a
network operator's local exchange (where switches are located). The core network
usually connects an operator's major points of presence, for example, the routes
between two cities. The metro network typically provides connections between the
access and core networks - for example, between a major city and the various
local exchanges or points of presence within a particular geographic region.
The Group's equipment can be found in most parts of the typical public network
with its optical products predominantly operating in the transport layer, its
multi-service switches and Softswitch in the switching layer and its range of
access products found in most layers of the access network.
Optical Networks
Communications service providers primarily use three technology standards, SDH,
SONET and DWDM, to transmit voice, data and video traffic over fibre optic
communications networks. DWDM is a relatively new transmission standard that is
used worldwide. SDH is the digital transmission standard that is used in most
regions except North America and Japan, where SONET is the predominant standard
that is used. In June 2002, the Group announced that it was ceasing development
of its SONET products because of continuing weak market conditions. The Group
has not made material sales of SONET products. The Group's Optical Networks
products contributed 16.1 per cent. of total Group sales in the year ended 31
March 2002 and 21.9 per cent. in the six months ended 30 September 2002. During
the latter period, sales were predominantly in Europe and Asia, with the
remainder from the Americas.
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The Group has focused its development on a comprehensive range of optical
transmission equipment based on SDH and, more recently, DWDM. A discussion of
the risks associated with the telecommunications market is set out in Part F of
this Section.
a. Synchronous Digital Hierarchy: The Group was a pioneer of SDH
technology following its introduction in the early 1990s, and has
continued to introduce next generation SDH products. The Group is a
leading supplier of SDH transmission equipment within Europe and has
a tenable position in other markets including the Asia-Pacific
market. SDH contributed approximately 85 per cent. of the Optical
Networks Business's sales in the year ended 31 March 2002 and
approximately 80 per cent. in the six months ended 30 September
2002.
The Group's add-drop multiplexers transport voice, data and video
traffic streams over ring-based optical fibre networks to provide
protection against network failures. The Group's line systems
transport high-capacity voice, data and video traffic streams
between major traffic centres. The Group also supplies
cross-connects to provide points of flexibility and restoration
within an SDH network and to switch traffic streams from one
transmission line to another. Over the next twelve months, the Group
intends to launch a number of more cost effective next generation
SDH products with greater functionality, for use both in core
networks and for connecting residential and business customers to
the core network, such as its SMA Series 4 range of add-drop
multiplexers and the MSH range of cross-connects announced in
September 2002.
b. Dense Wavelength-Division Multiplexing: DWDM is the transmission of
closely spaced signals through a single optical fibre using
wavelengths, each of which functions as a separate, independent
signal, and allows the capacity of installed optical fibre to be
increased substantially to meet future growth in demand for voice,
data and video traffic capacity. The Group's DWDM equipment is
complementary to the Group's SDH equipment and enables service
providers to increase significantly the bandwidth of installed fibre
optic cabling and still use the existing network infrastructure.
Over the past few years, the Group's share of the next generation
DWDM market in Europe has grown significantly.
The Group has already established a tenable market position with its
photonic line system ("PLx"). The Group has recently launched a
soliton-based, ultra-long-haul photonic line system ("UPLx") that
extends the distance that traffic can be transported before
regeneration of the signal is required. The Group is developing this
product specifically for ultra and extended long-haul DWDM networks
which will have much higher per fibre capacity than SDH or SONET
networks. The Group has announced its first order for this product
in Australia. In 2000 the Group launched a remotely re-configurable
photonic add-drop multiplexer ("PMA"). This product allows traffic
streams to be inserted and removed from a transmission ring without
disturbing other traffic streams. The Group has also developed a
range of point-to-point and ring-based Metro products ("PMM"). DWDM
contributed approximately 15 per cent. of the Optical Networks
Business's sales in the year ended 31 March 2002, and approximately
15 per cent. in the six months ended 30 September 2002.
The Group's DWDM equipment is complementary to the Group's SDH
equipment and the Group intends to take advantage of its positions
in the SDH markets of Europe, Central and Latin America and Asia
Pacific to sell its DWDM products to its existing SDH customer base
as well as to new customers wishing to make a cost effective and
simple increase in their available bandwidth.
The Group's transmission equipment is managed by its network management system
(ServiceOn). ServiceOn provides a broad range of management functions required
by a network operator. It can be used by service providers to remotely
re-configure their networks in accordance with changing traffic patterns.
ServiceOn also provides network performance information and has fault detection
capability to support the day-to-day operation of the network.
The Group's broad portfolio of Optical Networks products, coupled with
scalability and ease of upgrade, enables it to sell optical networks to its
customers which optimise network design and cost for those customers. The
Group's focus on overall optical networks solutions, rather than single product
solutions, enables it to design
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more cost effective networks and to integrate future product offerings over the
life of frame contracts. The Group believes that its installed base of SDH
equipment, deep customer relationships, superior knowledge of the incumbent
network design, and interoperability of its products with that installed base of
SDH equipment, are an important competitive advantage for both the existing and
new SDH and DWDM product ranges.
The Group's objective is to maintain a leading position in the European optical
networking markets and to build market share in the Asia Pacific region as well
as Central and Latin America.
Broadband Routing and Switching
In 2001, the Group refocused its technical and commercial resources in the BBRS
Business towards customers requiring more resilient networking platforms of the
sort found in carrier class networks, namely government and military agencies,
selected telecommunications service providers and other large corporations. BBRS
also continues to provide support services to its approximately 1,000 US Federal
Government service provider and enterprise customers. The Group's single largest
customer of BBRS products is the US Federal Government with whom the Group has
enjoyed a long relationship. To date, this has resulted in an installed base of
BBRS products in US Federal Government communications networks of approximately
US$1.3 billion in value.
The BBRS Business contributed 4.6 per cent. to the Group's sales in the year
ended 31 March 2002 and 6.6 per cent. in the six months ended 30 September 2002.
The BBRS Business' sales are made predominantly in the North American market and
these sales accounted for 4.3 per cent. of total Group sales in the latter
period.
The Group's products address the three principal packet-oriented protocols in
use today: asynchronous transfer mode ("ATM"); internet protocol ("IP"), and
multi-protocol label switching ("MPLS"), an emerging standard which provides
greater predictability, Quality of Service ("QoS") and differentiated service
levels for IP-based data, voice and video communications when compared with
services available over traditional, connectionless IP networks.
The Group's principal products comprise a range of multi-service switch-router
devices that both establish the physical communication links between end points,
as well as determine the optimal route across the network. In addition, the
Group also develops and sells a range of integrated access devices ("IADs")
which are cost-effective solutions supporting converged voice, data and video
transmissions over a single circuit. The Group has focused on the sale and
support of its ASX-200BX, ASX-1000 and ASX-4000 range of multi-service switches,
while continuing the development of its recently-launched next generation
BXR-48000, which the Group believes provides the highest capacity of any
multi-service switch currently available in the telecommunications industry.
The Group's switch-router product platforms, such as the ASX-4000 and BXR-48000
are designed to support communications traffic transmitted by ATM, IP and MPLS
protocols. They are designed to enable operators to build on their existing
switching and routing infrastructure to continue to support their legacy
services while offering the flexibility and scalability to roll-out next
generation IP, wireless and packet voice services. They are also designed to
enable operators to reduce their capital investment and operating costs.
The ASX-4000 can switch at transmission speeds ranging from 10 to 40 gigabits
per second ("Gbps") and can be positioned either within the core, or at the
edge, of service provider networks or high-capacity private networks. Recent
developments of the ASX-4000 switch include applications to allow service
providers to transport voice traffic over packet switched infrastructures such
as ATM ("VoA") or IP ("VoIP").
The BXR-48000 can operate at transmission speeds ranging from 40 Gbps to 480
Gbps. It can be configured as a very high capacity router or a very high
capacity switch. Routers function in the IP ("packet") networking domain, while
switches typically operate in the traditional voice, Frame Relay and ATM
domains. In March 2002, following technical trials on the first BXR-48000 unit,
the US Department of Defense's Naval Research Laboratory ("NRL") demonstrated
the high performance, high security, speed, reliability and functionality of
this product and subsequently, in September 2002, the US Department of Defense
placed a firm order for the product. The military-grade capabilities
demonstrated by the BXR-48000 are equally applicable for the voice, video, data
and multiservice networks of service providers and large non-military
institutions. In December 2002, the Group announced a further sale of the
BXR-48000 to a leading European financial institution.
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The Group also provides support services to customers of its BBRS products. The
Group reports these revenues within its Network Services segment. The BBRS
Business service offerings range from routine technical support and assistance
for its switch-routers, to dedicated, on-site project and programme support for
complex network environments.
Within the broadband switching and routing market, the Group believes that the
IP router market will be a significant source of potential growth in the longer
term due to the continued growth in IP traffic and the launch of new services
such as VoIP. It should be noted, however, that the introduction of these new
services is dependent on the development of technologies that permit the
"toll-grade" transmission, over IP, of voice and real-time multimedia services.
In the meantime, concern from carriers and security sensitive private network
operators over the security and reliability of their networks are expected to
lead to continued growth in the ATM market.
Consequently, the Group intends to continue to focus its research and
development on the further development of its multi-service products which
support ATM, IP and MPLS protocols. In particular, the Group's BBRS equipment is
designed to enable carrier operators to address the divergent demands of today's
difficult market environment. The market demands continued support for the ATM
networks that transport today's services as well as providing a safe and viable
migration path for the convergence of these networks with data oriented IP
networks. The BXR-48000 is a key strategic platform through which the Group aims
to deploy further its range of BBRS products into the networks of large
telecommunications providers.
As part of the Restructuring, it is proposed that the BBRS Business be
contractually separated or ringfenced from the rest of the Group.
European Access
Access equipment connects the end user to a service provider's switch or local
exchange across what has been traditionally known as the "last mile" or "local
loop". This is the physical wire, fibre or wireless link that runs from a
subscriber's telephone set or other communications device to the service
provider's local exchange. The Group designs, manufactures, sells and supports a
range of access equipment which maximises the capabilities of physical transport
media, including copper telephone lines, fibre optics, and both licensed and
unlicensed wireless spectra. The Group's access systems activities have
undergone significant rationalisation and are now focused on leveraging the
Group's reputation and relationships in Europe to continue penetration of key
customers with fixed wireless, Access Hub and voice software systems. The
European Access Business contributed 8.4 per cent. of total Group sales in the
year ended 31 March 2002 and 11.6 per cent. in the six months ended 30 September
2002. During the latter period, approximately 85 per cent. of the European
Access Business sales were in Europe, 12 per cent. in Asia Pacific, with the
remainder in Central and Latin America.
The principal access systems products are:
a. Digital Subscriber Line Access Multiplexers ("DSLAMs"): These
products are typically located within an operator's local exchange
on one end of the subscriber loop providing broadband internet/DSL
data services. The Group's Access Hub, which can be configured as an
advanced high density DSLAM also incorporates integrated ATM edge
switching and IP multi-casting functionality, enabling it to perform
as a broadband aggregator for multiple applications including voice,
video and data services as well as providing conventional DSLAM
functionality, such as asymmetric digital subscriber line (ADSL)
capabilities. This next generation product offers one of the highest
port densities available in the industry and is optimised for ease
of configuration and management. The Group launched its Access Hub
platform in 2001 and has already won two major frame contracts with
Telecom Italia and Telkom (South Africa). Other customers include
Wind (Italy).
b. Fixed Wireless: The Group's Skyband MDRS product family encompasses
the Group's point-to-point ("PtP") portfolio which offers long and
short haul SDH transmission for services ranging from trunk
networking, local access bypass and mobile network feeder
applications. The Group's Skyband MDMS point-to-multi-point ("PtMP")
portfolio offers cost-effective broadband wireless solutions ranging
from 2.4 Ghz to 32 Ghz, depending on the country's frequency
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allocation, and supports subscriber voice and broadband data, using
both standards-based and optimised techniques. The Group's radio
planning and installation services enhance the Group's ability to
offer customised, cost-effective solutions for network operators and
service providers. The main customers of the Group's range of fixed
wireless access products include mmO(2) (Germany), and E-plus
(Germany).
c. Voice Systems: The Group provides switching hardware and software
to telecommunications and media carriers in both legacy narrowband
and next generation networks. The three main activities are:
(i) Narrowband Switch Support: The Group continues to supply
upgrades and extensions to its significant installed base of
narrowband voice telephony systems (System X). The majority of
this installed base is in the UK. Upgrades and extensions have
been driven by the need for operators to adapt their networks
to changing traffic patterns, predominantly caused by the
growth in Internet traffic.
(ii) Softswitch: This next generation product is a system which
builds on many of the features of the narrowband switch
allowing network operators to combine their traditional
telephony services with broadband multimedia and high-speed
data services across a single broadband packet switched
network. The Group's Softswitch is currently one of only a
limited number of products, offering full class 5 capability
available in the market. It can therefore address both public
and private network applications and has been designed to
allow customers significantly to reduce the cost of operating
their networks. The Group's Softswitch has been installed in
the Dubai Marina project where it is currently delivering
voice and multimedia services and is undergoing trials with a
number of customers in the United Kingdom. In December 2002,
the Group announced the sale of its Softswitch system to
support Jersey Telecom's roll out of a suite of commercial and
residential broadband services.
(iii) Intelligent Networks: As legacy narrowband services have
evolved, operators have experienced an increasing need to
provide additional value added services that can be billed to
individual subscribers. Corp and plc believe that the Group's
Intelligent Networks products are amongst the leading products
in the UK market in the provision of hardware and software for
fixed networks that allows carriers to offer a range of
enhanced voice services, beyond those contained in existing
narrowband switching products. These services, such as 0800
numbers, voicemail, call waiting and ringback, can be
controlled from a small number of service points where data
and applications can be stored and updated centrally.
Intelligent Network products also work with switches from
other manufacturers, increasing their attractiveness to
operators whose systems contain a range of products.
The services offered by these products provide differentiating
capability for the Group's customers. The Group therefore undertakes
directly customer funded developments as well as Group-funded
research and development. The Voice Systems activities' primary
geographical market is the UK where the Group has a strong position
in the UK circuit switching market, and the Group is an equipment
supplier to customers such as BT, Cable and Wireless, NTL and
Telewest, each of whom relies on the Group for upgrades and care and
maintenance of installed equipment. The Group's narrowband switching
products are deployed in approximately 70 per cent. of BT's local
telephone exchanges and are central to the UK public service
telephone network ("PSTN"). The Group's initial market entry for its
new Softswitch product is seen as the confluence of the growth in IP
Voice, IP managed VPN, and the growth of DSL. This creates an
opportunity to develop a new range of cost-effective services for
corporations, by extending the reach of their private networks to
smaller locations and, through DSL connectivity, uniquely to home
workers.
Initially, establishing the Softswitch as a major supplier in this
sector will provide the foundation for further expansion into small
to medium sized enterprises and then pure residential services (as
opposed to corporate home worker).
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d. Other Access Products: The Group has a range of other access
products that are deployed in its customers' networks, including its
Deep Fiber DMP product. This product brings the high bandwidth of
the core fibre network into the access network.
North American Access
The Group designs, sells and supports a range of copper and fibre based access
platforms for markets that use North American communications standards. The
Group's largest customers are BellSouth and Sprint and the Group is one of the
main suppliers of digital loop carrier systems by market share in North America.
The North American Access Business contributed approximately 5 per cent. of
total Group sales in the six months ended 30 September 2002.
The Dutch Link Control (DLC) DISC*S(R) family of products provide copper based
access for voice and data services. The Group has provided over ten million
lines of digital local loop equipment based on the DISC*S(R) platform throughout
the United States, and has recently introduced a smaller footprint broadband
high density version of the platform.
The Group's fibre to the curb solutions support a mix of voice, broadband data
and video services to each customer. They deploy fibre all the way to a curbside
pedestal and utilise copper or coax cables only for the short final drop to the
customer's premises.
As part of Restructuring, it is proposed that the North American Access Business
be contractually separated or ringfenced from the rest of the Group. The North
American Access Business has undergone significant rationalisation and is being
managed for value and ultimately for disposal. The proceeds of this disposal
will be used to repay part of the New Junior Notes. The North American Access
Business may be sold prior to 1 May 2003, in which event the net proceeds of the
disposal will be applied to increase the cash element of the Corp Scheme
Consideration (and the aggregate principal amount of the New Junior Notes will
be decreased by 10/11ths of that amount).
Outside Plant and Power
The Group is one of the major providers of OPP products and services in North
America. The Group is one of the major suppliers to Qwest, Verizon, BellSouth,
SBC, Sprint, AT&T and WorldCom. In addition, the Group is a supplier to AT&T,
Verizon, Cingular, Telcel and US Cellular. The Group currently has contracts to
provide services to Bechtel in the building of wireless networks for AT&T and
Cingular. The OPP Business contributed 5.4 per cent. of total Group sales in the
year ended 31 March 2002, and 7.2 per cent. in the six months ended 30 September
2002.
The OPP Business has three primary product lines:
a. Outside Plant supplies connection, protection and enclosure products
for the local loop, and is a supplier in enclosure design such as
thermal management and analysis, water and dust intrusion, equipment
packaging techniques and corrosion resistance. Although these are
primarily passive hardware products, the trend of placing sensitive
electronics outside the local exchange and closer to the subscriber
requires increasingly sophisticated enclosures and static
protection. The connection and protection products include
distribution pedestals, building entrance terminals, cross connect
terminals, cable television enclosure products, fibre optic splice
enclosures, large electronic configuration cabinets, central office
main distribution frames, heat management systems, power surge
protection devices and connection blocks and terminals. The
enclosure products are metal and plastic cabinets that house
equipment such as power supplies, connection products, and digital
and wireless transmission equipment.
b. Power supplies power systems to service providers and
telecommunications equipment manufacturers for the local loop, local
exchange switching, wireless sites and other customer equipment such
as computer networks. The Group's power products and systems include
large power systems for local exchange applications, smaller cabinet
power systems with "plug and play" flexibility, modular power
systems, custom power subsystems sold to OEMs, DC distribution
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and DC-DC conversion systems and traditional ringing and signalling
equipment. The Group's family of power products is marketed under
Vortex(R), Lorain(R) and other brand names and is based on a single
integrated platform suitable for multiple wireline and wireless
applications. This microprocessor-based "plug and play" architecture
allows for software-based configuration, management, monitoring and
local and remote power system access that is easily expanded for
system configuration and control.
c. Services provides customers with software that allows for remote
monitoring and control of power systems as well as complete
programme management support for communications systems deployment.
Additionally, the Group provides a range of customer services,
including site contract maintenance and breakdown service, spare
parts provisioning, equipment depot repair, and training.
The OPP Business' principal geographic markets are in North America and Central
and Latin America.
As part of the Restructuring, it is proposed that the OPP Business be
contractually separated or ringfenced from the rest of the Group. OPP is being
managed for value and ultimately for disposal. The proceeds of this disposal
will be used to repay part of the New Junior Notes.
Other Network Equipment businesses
Other Network Equipment businesses contributed 2.6 per cent. of total Group
sales in the year ended 31 March 2002, and 2.6 per cent. in the six months ended
30 September 2002. These comprise mainly the following businesses:
a. Marconi Interactive Systems ("MIS"): MIS manufactures payphones and
multimedia terminals which range from an indoor "desk top" phone
through to sophisticated street multimedia terminals which have
voice telephony and internet access capability. The business is
predominantly UK-based and sells primarily to the major public
network customers such as BT, Telecom Italia, Singtel, Telenor,
Teledanmark and, through Loxley Business Information Technology
Company Limited, TelecomAsia.
b. Network Equipment -- South Africa: The Group's operations in South
Africa include the design, manufacture and supply of a range of
terminal products including telephones, PABX key-systems and public
payphones. On 23 December 2002, the Group disposed of its 51 per
cent. interest in its optic fibre cable and copper cable business
(ATC (Proprietary) Limited).
NETWORK SERVICES
The Group's Network Services activities comprise a broad range of support
services to telecommunications operators and other providers of communication
networks. The Group supports both its own products as well as those of other
vendors of network equipment.
Aggregate sales of all Network Services activities for the financial year ended
31 March 2002 were L969 million, (21.2 per cent. of total Group sales), compared
to L1,016 million (14.6 per cent. of total Group sales) in the year ended 31
March 2001 and L543 million (9.5 per cent. of total Group sales) in the year
ended 31 March 2000. Aggregate sales in the six months ended 30 September 2002
were L392 million (35.4 per cent. of total Group sales).
Overview of the Network Services market
The substantial reduction in sales of network equipment has led to corresponding
reductions in the network planning, installation and commissioning services
associated with the sales of new products. However, as network operators have
sought to reduce expenditures to cope with excess capacity, the requirements for
maintenance and support have continued and in some cases new opportunities have
emerged as operators have sought to consolidate vendors and outsource additional
services. Corp and plc believe this is a trend that is expected to continue and
to mitigate, to some extent, the decline in sales of services related to new
products sales.
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The fragmented nature of the network support services market means there are no
dominant competitors in the provision of services to the public network market.
However, major telecommunications vendors, such as Alcatel, Cisco Systems,
Ericsson and Lucent Technologies are extending their service capabilities to
offer total solutions in direct competition to the Group. Major information
technology and systems integrators, such as CSC, EDS and IBM, are now offering
telecommunications solutions to their customers. Furthermore, independent
service and support organisations such as Dimension Data and Telindus offer a
broad portfolio of services.
The principal method of competition in this market is through open bidding.
Services may also be sold as a part of, or linked to, equipment sales.
Service offerings
The Group provides plan, build and operate support services to both fixed line
and wireless network operators in many countries around the world. The Group
targets customers in the service provider, large scale "carrier class" markets
and in the government, transport and utilities sector. The services segment has
two main sub-groupings:
Installation, Commissioning and Maintenance comprises the following activities:
a. Customer Fulfilment provides project management, installation and
commissioning, field engineering support and customer training. The
main markets are the UK, North America, Germany and Italy. The North
American activities are associated with the OPP Business and will be
included in the Ringfenced Entities post-Restructuring.
b. Managed Services supports the installed base of the Group's
equipment worldwide through technical support, on-site maintenance
and spares & repairs management. Managed Services also remotely
monitors, manages and supports customers' live networks. Services
are provided from a global network of technical assistance centres
("TACs"), stock hubs and network operation centres ("NOCs"). The
Group operates thirteen TACs (five in the US, two in the UK, two in
the rest of Europe, two in Canada and one in each of Japan and
Australia) offering around-the-clock telephone assistance to
customers. It also has five NOCs (one in each of Australia, Germany,
Italy, the UK and the US) for remote monitoring, fault diagnosis and
network repair. The Group can support its own product range as well
as products supplied by other communication equipment companies.
c. Operational Support Systems provides the software systems and
systems integration services that enable operators to maximise the
efficiency of their networks and the quality of the services they
provide to customers.
The bulk of these services are related to the sale of the Group's products,
although there is also considerable experience of working with equipment from
other vendors.
Value-Added Services comprise the following activities:
a. Integrated Systems provides plan, build and operate services on
major complex projects for non-telecommunications businesses in
market sectors such as transportation and government. The projects
involve planning, building, operating and supporting carrier class
telecommunications infrastructure and are generally long-term. The
principal geographical markets are the UK, Germany and the Middle
East.
b. Wireless Services provides radio frequency consulting services to
both wireless and wireline network operators. These are primarily
consulting and contractual services for site acquisition, mast
design and construction, radio frequency cell site planning and
network optimisation. The Group's radio planning and installation
services enhance the Group's ability to offer customised, cost-
effective solutions for network operators and service providers. In
North America the primary focus is on radio cell site planning and
network optimisation. In Europe, the Middle East and Africa (EMEA),
the principal geographical markets are the UK, Saudi Arabia, the
Netherlands and Germany.
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c. Managed Services provides customer support services associated with
the Group's BBRS equipment. These will be included in the Ringfenced
Entities post-Restructuring.
The services businesses have developed within the Group over a number of years.
In EMEA, installation and commissioning services were necessary to support
equipment sales to service providers. In North America, the business developed
through supporting the data networking and power markets. The Integrated Systems
activities have developed organically to support complex mission critical
network projects for large enterprises. Wireless Services evolved from the
acquisition of APT in the UK, TI Projekts in Germany and MSI.
The Group intends to continue to drive process and efficiency improvements
throughout Network Services' operations to reduce costs, improve customer
satisfaction and increase both revenues and margins. In addition, the Group
intends to increase the proportion of equipment sales that include support
contracts and more cross-selling of existing services across markets and
customers.
Within Integrated Systems, the key initiative is to expand out of the strong UK
base into carefully selected overseas markets (primarily Germany and Austria)
through a combination of skills transfers and working with selected partners.
The Group intends to grow the Wireless Services business by targeting mobile
network operators operating 2G networks and planning 3G networks and equipment
vendors providing turnkey projects to the mobile network operators who require
service partners.
CAPITAL BUSINESSES
The Group's Capital Businesses comprise certain non-core businesses that the
Group manages to create value and ultimately for disposal. Activities in Capital
include the Group's holdings in:
a. Easynet Group Plc: On 26 July 2001, the Group merged its 92 per
cent. interest in ipsaris Limited into Easynet Group Plc
("Easynet"), a UK registered company listed on the London Stock
Exchange, acquiring 71.9 per cent. of the issued share capital of
Easynet and control of 49.9 per cent. of Easynet's issued voting
capital. Easynet's share capital comprises voting ordinary shares
and non-voting convertible shares. The closing of the Ultramast
Limited capital reduction on 24 February 2003 and the settlement of
the litigation associated with Ultramast Limited provided for the
Group to acquire approximately a further 1.3 million ordinary shares
in Easynet; certain of these shares will convert into convertible
ordinary shares so that the Group will not own more than 49.9 per
cent. of the voting ordinary shares. Easynet operates an internet
network and data centre infrastructures. In the UK, Easynet has a
national broadband network. Easynet is accounted for as an associate
in the Group's consolidated accounts.
b. Bookham Technology plc: On 17 December 2001, the Group sold its
optical components business to Bookham Technology plc ("Bookham") in
exchange for 9 per cent. of the issued ordinary shares of Bookham.
Bookham is a provider of optical components to the Group and other
network equipment vendors. Pursuant to a subsequent agreement
between Bookham and Nortel Networks Corporation, Corp now owns
approximately 6 per cent. of Bookham.
c. Capital also includes the Group's Italian-based Public Mobile Radio
Networks business, which develops base stations and controllers for
3G networks.
Other activities in Capital include a number of minor activities, investments
and assets.
RESEARCH AND DEVELOPMENT
The Group expended approximately L486 million, or 17.7 per cent. of total Core
sales, on research and development ("R&D") in its Core businesses in the
financial year ended 31 March 2002 (year ended 31 March 2001: L469 million). All
of this amount was funded by the Group. During the six months ended 30 September
2002, the Group expended approximately L163 million, or 16.4 per cent. of total
Core sales on R&D in its Core businesses.
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The Group intends to continue to provide a competitive product portfolio
building on existing market leading characteristics across its core product
areas despite this reduction in expenditure. As revenues stabilise, the Group
intends that R&D expenditure will amount to approximately 10 per cent. of
expected Core sales.
Optical Networks accounts for the Group's largest product portfolio and
generates the largest revenue base. Optical Networks R&D expenditure reflects
this representation and accounted for almost 40 per cent. of the total R&D
expenditure in the Group's Core businesses during the six months ended 30
September 2002 (six months ended 30 September 2001: 30 per cent.). The current
R&D projects have been selected on the basis that they are expected to yield a
higher overall return for the Group. The Group is maintaining continued
investment in next generation SDH products, in particular its recently launched
Series 4 product range which has been designed to be more cost effective and
offer service providers greater functionality than previous generations of the
product. It is also focusing on the development of its next generation optical
cross connect, the MSH range, its Metro product range, which is designed for
metropolitan applications, as well as its long-haul DWDM products and further
upgrades to the Group's network management software with the creation of
elements to allow new product network integration and the development of a
network control layer. Investment in network management should ensure that the
Group's customers will retain a full optical network solution, which evolves
along with individual product developments.
The BBRS Business accounted for 23 per cent. of R&D expenditure in the Group's
Core businesses in the six months ended 30 September 2002 (six months ended 30
September 2001: 21 per cent.). Over half of this expenditure was focused on the
development of the Group's new multi-service core switch, the BXR-48000. In
November 2002, the Group demonstrated its ability to support the transport of
encrypted high speed data and high definition videos streams over the BXR-48000
using its newly developed 10 Gbps OC-192c ATM interface card. Ongoing
initiatives on the BXR-48000 are focused on enhancing the product's IP
functionality. Other ongoing programmes include the further development of the
ASX-4000 switch to incorporate applications which will allow customers to
transport voice traffic over ATM and IP infrastructures.
R&D expenditure across the Group's European Access and North America Access
Businesses combined, accounted for 25 per cent. of total R&D in the Group's Core
businesses in the six months ended 30 September 2002 (six months ended 30
September 2001: 35 per cent.). During the first calendar quarter of 2002, the
Group carried out an in-depth review of its complete portfolio of access
solutions. This review was based on an evaluation of the forecast levels and
timing of returns on investment and the cash generation potential of each
product line. Following the review, the Group streamlined its portfolio of
access technologies and refocused its R&D expenditure. In Europe, investment now
only occurs in products that meet European Technology Standard Institute (ETSI)
requirements and that will build on current market and customer positions.
Consequently, R&D is being targeted on three key product ranges: the Access Hub
platform, the Skyband fixed wireless access products and the Softswitch. Planned
future developments of these products include the ability to aggregate traffic
from 3G mobile base stations into the Access Hub, the addition of further
frequency bands and voice and video functionality in the design of the fixed
wireless products and the addition of further features and functionality to the
Softswitch. R&D investment in North American access products has been
significantly reduced and the Group has announced that while continuing to
pursue sales opportunities and offer full support, care and maintenance for its
existing copper and first generation fibre access products, it will not
undertake further investment to develop next generation upgrades. In particular,
the Group has discontinued investment in its next generation Fiber-to-the-Home
solutions. Ongoing R&D efforts are focused on reducing the costs of existing
products.
The remaining R&D investment in the six months ended 30 September 2002 related
mainly to outside plant and power products and wireless software. The Group is
currently focusing its R&D efforts in the OPP Business towards the completion of
its next generation power platform and web-based monitoring system. Smaller
projects are also under way to develop customer specific products as well as
redesigning the current product portfolio to reduce costs. The Group's wireless
R&D efforts are focused on two product streams, OSS solutions and Wireless
Network Planning solutions.
A discussion of certain risks associated with the Group's R&D is set out in Part
F of this section.
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A.5 INTELLECTUAL PROPERTY
BACKGROUND
The Group owns a number of Intellectual Property rights including Patents, trade
marks and registered designs throughout the world. The Group has a number of
patent and know-how (and other) licences from third parties relating to products
and methods of manufacturing products. The Group has also granted Patent,
software, know-how and other licences to third parties.
Because the Group has previously developed some of its technologies through
customer-funded research, it may not always retain proprietary rights to the
products it develops.
The Group relies on Patents, trade marks, trade secrets, design rights,
copyrights, confidentiality provisions and licensing agreements to establish and
protect its proprietary technology and to protect against claims from others.
Infringement claims have been and may continue to be asserted against the Group
or against its customers in connection with their use of the Group's systems and
products. The Group cannot ensure the outcome of any such claims and, should
litigation arise, such litigation could be costly and time-consuming to resolve
and could result in the suspension of the manufacture of the products utilising
the relevant Intellectual Property. In each case, the Group's operating results
and financial condition could be materially affected. See Appendix 20 for a
discussion of significant legal proceedings.
The "Marconi" trade mark used by many of the Group's businesses is identified
with and important to the sale of the Group's products and services. It is
either registered or the subject of an application for registration in
approximately 120 territories, including all of those territories which the
Group currently views as being its major trading territories.
A discussion of certain risks associated with Intellectual Property rights is
set out in Part F of this Section.
PATENTS OWNED BY UK IP OPCOS AND US IP OPCOS
As part of the security arrangements in relation to the New Notes to be
implemented as part of the Restructuring all legal and beneficial title to
Patents owned by the UK IP Opcos and US IP Opcos will be assigned to three SPVs,
UK IPR Co, Ringfenced IPR Co and US IPR Co, which have been formed for the
purpose of owning, maintaining and licensing the Patents assigned to them and
all future Patent rights of Corp Group companies in the UK and US. UK IPR Co
will be incorporated in England and Wales and Ringfenced IPR Co and US IPR Co
will be incorporated in the State of Delaware, USA. US IP Opcos will grant
security over all Intellectual Property prior to executing the assignments
referred to in this paragraph. Further details are set out in Appendix 10.
Ringfenced IPR Co will be a wholly-owned subsidiary of Marconi Communications,
Inc. US IPR Co will be a wholly-owned subsidiary of Marconi Inc. UK IPR Co will
be a wholly-owned subsidiary of Marconi Communications Limited.
Ringfenced IPR Co will have assigned to it the Patents relating to the North
American Access, BBRS and OPP Businesses operated by US IP Opcos. US IPR Co will
have assigned to it the Patents owned by US IP Opcos that do not relate to North
American Access, BBRS and OPP Businesses. UK IPR Co will have assigned to it the
Patents owned by UK IP Opcos.
Assignment to each SPV will be effected under an umbrella assignment. Each UK IP
Opco and US IP Opco will be a party to the relevant assignment.
The SPVs will not transfer, dispose of or grant any exclusive licence under any
Patent, whether to another Corp Group company or a third party, other than:
a. to another Corp Group company in the context of infringement
proceedings against a third party where, absent such assignment,
substantial damages would be irrecoverable (and in which case the
Patent or Patents shall be reassigned to the relevant SPV as soon as
such condition no longer prevails);
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b. to a third party or a subsidiary of Corp, in each case in connection
with any disposal (which is otherwise permitted by the applicable
indenture pursuant to which the New Notes will be issued) of a Corp
Group company or of all or substantially all of its assets, property
or rights; or
c. to a customer of Corp or any of its subsidiaries where the
technology has been commissioned by that customer and developed by a
Corp Group company (whether alone or jointly with the customer) for
such customer's exclusive use pursuant to a development agreement.
UK IPR Co will grant a non-exclusive licence to Marconi Communications Limited
of all Patents assigned to it by UK IP Opcos. Ringfenced IPR Co will grant a
non-exclusive licence to Marconi Communications, Inc. of all Patents assigned to
it by US IP Opcos. US IPR Co will grant a non-exclusive licence to Marconi Inc.
of all Patents assigned to it by US IP Opcos. All the licences will permit
sub-licences to be granted subject to the provisions on Important Transactions
described below.
The management and maintenance of the UK and US owned Patents respectively will
remain primarily with Marconi Communications Limited, Marconi Inc. and Marconi
Communications, Inc. However, Important Transactions will require SPV approval.
There will be three special categories of Important Transactions:
a. granting sub-licences to third parties;
b. pursuing/abandoning patent applications; and
c. pursuing infringers.
All Important Transactions will require the approval of the SPV but the SPV
shall delegate that consent authority to Corp (which will act through Marconi
Intellectual Property (divisional group)). This will ensure that the decisions
regarding any Important Transaction are made with the interests of the entire
Corp Group in mind (or at a minimum for any Patent, the interests of every other
licensee within the Corp Group). At the same time, the decision could be taken
expeditiously because it would be exercised by Corp and not a non-operating SPV.
The approval requirements may not be waived or amended.
New applications for Patents will be filed in the name of Marconi
Communications, Inc., Marconi Inc. or Marconi Communications Limited (as
appropriate) and assigned to the respective SPV. This will be achieved via a
covenant in the indentures governing the New Notes on Corp to procure the
assignment by Corp or a subsidiary of Corp organised in the UK or under US law
of the Patent application from Marconi Communications, Inc., Marconi Inc. or
Marconi Communications Limited to the relevant SPV. In the UK the application
may be filed in the name of UK IPR Co at the outset.
Each of the SPVs will grant security over its assets in favour of the Security
Trustee, and the shares in the SPVs will be charged or pledged, as applicable,
in favour of the Security Trustee on behalf of the holders of the New Notes and
the banks providing the Performance Bonding Facility. Further details are set
out in Appendix 10.
In those cases (as set out in Appendix 10) where Guarantors grant floating
charges (or equivalent security over all their assets) this will include such
Intellectual Property as those Guarantors own.
In some cases the Guarantors are required to grant a fixed charge or equivalent
security over specified Intellectual Property in the future so far as such
Intellectual Property is material and the security is legally permissible.
OTHER INTELLECTUAL PROPERTY OF THE GUARANTORS
As part of the security arrangements in relation to the New Notes, Intellectual
Property owned by or registered in the name of Marconi Communications GmbH will
be assigned to a Bank Trustee Company in Germany by way of security. The Bank
Trustee Company will grant a licence to Marconi Communications GmbH.
OTHER INTRA-GROUP LICENCES
In consideration of the Parties sharing the costs incurred for research and
development under the existing Research and Development Cost Sharing Agreement
(RDCSA), each Party grants to the other Parties a royalty-free licence of
Patents and technology developed by a Party under the RDCSA. Subject to the
following
52
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amendments listed below (and any further consequent changes that may be required
as a result of the arrangements set out herein), the existing RDCSA will remain
in force:
a. the RDCSA will be varied/amended to allow Parties to sub-license Patents,
subject to the procedure concerning Important Transactions described above;
b. Marconi Communications, Inc. will withdraw from the RDCSA. This is because
Marconi Communications, Inc. remains potentially liable for cost sharing
under the RDCSA but accrues no commercial benefit through use of other
Parties' Intellectual Property;
c. the RDCSA will also be amended to confirm that the Parties to the RDCSA
contract on behalf of themselves and their subsidiaries and related companies
within their territory. Such subsidiaries and related companies will be
entitled to claim the benefit of the provisions of the amended RDCSA; and
d. the termination provisions of the RDCSA will be amended to state that the
insolvency of any Party or its related companies and subsidiaries will not
affect the rights enjoyed by those entities benefiting under a licence
granted pursuant to the RDCSA.
The SPVs will not be parties to the RDCSA.
All Corp Group companies will enter into a Group Licence Agreement which will
provide that each company grants a non-exclusive licence to the operating
companies in the Corp Group of any Intellectual Property (other than trade marks
and service marks) used in such other company's business to the extent that such
use is not already authorised by the RDCSA or otherwise formally authorised in a
written licence agreement. This Group Licence Agreement will only govern actual
use by one Corp Group company of another Corp Group company's Intellectual
Property. Each licensee Corp Group company shall pay a royalty (determined on an
arm's length basis) to the licensor Corp Group company. The payment of that
royalty shall become effective on a declaration of use by either the licensee or
licensor and all royalties due from the date of the Group Licence Agreement
shall immediately be payable by the licensee on the declaration of use being
given or received, as the case may be. The Group Licence Agreement will have
full effect to the extent that any operating company in the Corp Group lacks
sufficient authorisation under the RDCSA. To the extent required, a licensee
under the Group Licence Agreement will be permitted to grant sub-licences
(subject, insofar as is necessary, to the provisions on Important Transactions
described above). The Group Licence Agreement may not be varied or terminated so
as to deprive a Corp Group company of the benefit enjoyed under such licence so
long as it remains a part of the Corp Group.
All future intra-Corp Group use of Intellectual Property (other than trade marks
or service marks) which is not otherwise governed by the RDCSA or the Group
Licence Agreement will be recorded in a written licence agreement. This will be
achieved via a covenant in the indentures governing the New Notes on Corp to
procure the execution of such agreements between the relevant operating
companies in the Corp Group.
A.6 DIVIDEND POLICY
Under English law a company may only pay dividends out of profits available for
distribution. Corp intends to apply to court to cancel its Non-Voting Deferred
Shares and its share premium account (including the share premium account
arising on the issue of the New Shares to be allotted pursuant to the Corp
Scheme) to create a reserve which will be applied in writing off accumulated
losses on its profit and loss reserve. It is anticipated that this Capital
Reduction will become effective shortly after the Effective Date of the Corp
Scheme, although no assurance can be given that the application will be
successful. Further information concerning the Capital Reduction is set out in
Part D.9 of this Section. Although the future ability of Corp to pay a dividend
will be facilitated if the Capital Reduction is effected, Corp will be
restricted from paying dividends under the terms of the indentures governing the
New Notes (see Part C.3 of this Section and Appendix 8). Accordingly, Corp does
not expect to pay a dividend in the foreseeable future. A discussion of certain
risks associated with the dividend policy is set out in Part F: Risk Factors.
A.7 FINANCIAL OBJECTIVES
Upon completion of the Restructuring, the Group expects to be better positioned
to compete effectively in the areas of the telecommunications market on which it
has chosen to focus. Although the Group's principal markets
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I. EXPLANATORY STATEMENT
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remain difficult, they are expected, at some stage, to recover as customers
continue to evolve existing narrowband networks to broadband data and next
generation mobile networks. In due course, this should allow the Group once
again to grow profitably, assuming the telecommunications market improves.
In the near-term the Group's financial strategy is to continue to reduce its
total costs base to levels at which it can generate operating profit (before
goodwill, amortisation and exceptional items) and to manage its capital
expenditure and working capital in order to convert operating profit to positive
operating cash inflows (before exceptional cash costs).
The Group does not expect to rely on market recovery in order to achieve its
target gross margin during the financial year ending 31 March 2004. The
achievement of the Group's longer-term objectives is, however, dependent on an
increase in sales following the expected improvement in the market for the
Group's products and services.
Further information in relation to the Group's financial objectives is contained
in Appendix 5. A discussion of certain risk factors that could affect the
Group's expectations with respect to the Group's return to operating
profitability and ability to generate positive operating cash flow is set out in
Part F of this Section.
GROSS MARGIN IMPROVEMENT
The Group expects to achieve a gross margin run-rate in the range of 24 to 27
per cent. of sales in the Core businesses during the financial year ending 31
March 2004. Of this, the Group expects that the Group's US businesses would
contribute a gross margin run-rate in the range of 33 to 35 per cent. of sales
while its businesses in Europe and the rest of the world would contribute a
gross margin run-rate in the range of 23 to 26 per cent. of sales. The run-rate
for the US Businesses has not been adjusted to take into account the disposal of
any of the US Businesses.
The Group aims to drive future gross margin improvement through focusing on
sales of higher margin products and services, further supply chain
rationalisation and additional planned product cost reductions (being materials
and engineering cost reductions).
In the longer-term, assuming the market recovers, a gross margin run-rate in
excess of 30 per cent. is expected to be achievable. The Group will need to
benefit from increased sales volumes over time in order to achieve this level of
gross margin. When setting this longer-term target, the Group has assumed it
will continue to be able to achieve annual product cost savings at least equal
to the level of expected annual price reductions.
OPERATING COST REDUCTION
The Group's aim is to reduce operating overheads, comprising research and
development, sales, marketing, general and administrative costs but excluding
goodwill amortisation and exceptional items for the Core businesses, including
OPP and North American Access to a run-rate of below L450 million during the
financial year ending 31 March 2004.
The Group aims to achieve an operating expenditure run-rate for the Core
businesses in the range of 21 to 24 per cent. of sales during the financial year
ending 31 March 2004. Of this, the Group expects that its US businesses would
contribute an operating expenditure run-rate in the range of 29 to 33 per cent.
of sales, while its businesses in Europe and the rest of the world would
contribute an operating expenditure run-rate in the range of 20 to 23 per cent.
of sales. The run-rate for the US Businesses has not been adjusted to take into
account the disposal of any of the US Businesses.
Once the Core businesses' operating expenditure target is achieved, the level of
the Core businesses' sales at which the Group expects to be able to break even
at an operating profit/(loss) level will be reduced to below L1.7 billion per
annum.
The Group expects the main driver of these targeted operating cost savings to be
further planned reductions in its workforce resulting from further
rationalisation of its activities, as well as natural attrition. Reduced
spending on marketing initiatives and professional fees are also expected to
contribute to operating cost savings.
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Headcount in the Core businesses has been reduced by approximately 3,000 since
the end of September 2002 and at the end of December 2002, was approximately
16,000. At that time, a further 1,400 leavers had been identified and
announcements made in this respect, giving an identified headcount target for
the Core businesses of around 14,600. Once the L450 million operating cost
target has been achieved and the Group's headcount reduction plans have been
completed, the Group expects to employ approximately 14,000 employees in its
Core businesses.
CASH
Cash generation will continue to be one of the Group's key business priorities
post-Restructuring. In particular, the Group is targeting (i) to reach operating
cash breakeven before exceptional cash costs during the financial year ending 31
March 2004, and (ii) to generate sufficient total cash in order to pay down 30
per cent. of the New Junior Notes within 12 to 24 months following
implementation of the Restructuring, to pay down 50 per cent. of the New Junior
Notes within 15 to 27 months following implementation of the Restructuring and
to pay down 100 per cent. of the New Junior Notes within 18 to 30 months
following implementation of the Restructuring.
The Group expects to retain a total cash balance of approximately L602 million
upon completion of the Restructuring. Of this amount, approximately L96 million
will represent net cash outflows to break even, approximately L112 million will
be trapped cash, approximately L197 million is expected to be available to the
Group to fund its normal working capital needs, approximately L30 million will
represent cash in transit and approximately L167 million is expected to be
retained for the cash collateralisation of performance bonds. See Part D.4 of
this Section for more details on post-Restructuring retained cash.
Cash to Breakeven and Operating Cash Flow
The funds expected to be available to the Group include an amount derived from
the approximately L96 million projected net cash outflow to allow the Group to
fund the business to the point at which it reaches operating cash breakeven
before exceptional cash costs. This net outflow includes approximately L27
million of cash which the Group expects to generate from disposals of certain
non-core assets. Approximately L55 million has already been received by the
Group (including proceeds from Ultramast Limited (L41 million), the sale of the
Group's Italian-based private mobile network business, OTE SpA, also known as
TETRA (L2 million) and other disposals totalling L12 million) which, under the
terms of the Corp Scheme and the New Notes, will be available to fund its
working capital requirements.
The Group also intends to continue to improve management of the working capital
cycle. Specific programmes are already in place to minimise the time during
which cash is tied up in work in progress, to improve utilisation of inventory
by better aligning the purchase of new inventory with forecast sales demand and
to focus on debtor collection and overdue debts.
Once the Group completes its on-going operational restructuring initiatives,
including its headcount reduction plans, the Group expects the level of
exceptional restructuring cash costs to reduce significantly.
Paydown of New Junior Notes
The Group expects to generate cash to pay down the New Junior Notes primarily
from the proceeds of the disposal of OPP and North American Access, and other
asset disposals not allocated to working capital requirements, as described
above, as well as from the release of restricted cash balances relating to
performance bonding.
The North American Access Business may be sold prior to 1 May 2003, in which
event, the net proceeds of the disposal will be applied to increase the cash
element of the Corp Scheme Consideration (and the aggregate principal amount of
the New Junior Notes will be decreased by 10/11ths of that amount).
SITE RATIONALISATION AND CLOSURES
Since March 2002, the Group has further rationalised its remaining supply chain
facilities in the UK, US, Germany and Italy.
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It has also closed its outsourced printed circuit board (PCB) assembly and
manufacturing facility in Liverpool and merged these activities with the
facility managed by Jabil Circuit, Inc. (Jabil) in Coventry, and closed its
facility in Ireland and transferred these manufacturing operations to Pittsburgh
(US).
In addition, Marconi has closed its SONET manufacturing facility in Montreal
(Canada) as a result of the Group's decision to cease further development of
this technology, and has reduced the number of production facilities for its
outside plant and power equipment from nine to seven with the closure of two
plants in Wisconsin and Illinois (US).
In total, these site rationalisations and closures have resulted in a total
reduction of 6,305 employees from the Core businesses between April and November
2002 as the businesses have been reduced/adjusted to align cost with the current
and expected business volumes.
Today, the Group's principal operating sites are Coventry, Beeston, Chorley,
Camberley, Liverpool, London, Stafford and Wellingborough (UK); Florida,
Pennsylvania, Ontario, Georgia, Mississippi, North Carolina, Illinois, Texas and
Montreal (US & Canada); Genoa, Marcianise and Pisa (Italy); Backnang, Offenburg,
Frankfurt and Radeberg (Germany); Madrid (Spain); Melbourne and Sydney
(Australia); Beijing, Guilin and Hong Kong (China); Darulam and Kuala Lumpur
(Malaysia); Auckland (New Zealand); New Delhi (India); Riyadh (Saudi Arabia);
Dubai (United Arab Emirates); Springs (South Africa); Sao Paulo and Votorantim
(Brazil); and Naucalpan de Juarez and Huixquilucan Edo de Mexico (Mexico).
OUTSOURCING
Marconi Communications and Jabil Circuit, Inc. (Jabil) entered into an agreement
on 11 January 2001 to transfer certain manufacturing operations to Jabil. The
transfer was completed in the UK, Italy and the US during 2001. The planned
transfer of the Group's facility in Offenburg (Germany) did not proceed. Under
the terms of the agreement, approximately 1,800 Group employees in Bedford,
Texas (US), Liverpool and Coventry (UK) and Marcianise (Italy) transferred to
Jabil. Following the business transfers, Jabil and its subsidiaries entered into
agreements with Marconi Communications and other members of the Group to provide
electronics manufacturing and repairs services until June 2005 on an exclusive
basis.
The operations outsourced under this agreement comprise the assembly and
manufacture of PCBs used in the production of the Group's optical networking and
broadband access equipment. The Group continues to perform the final assembly
stages where the optical layer and power supply are applied to the PCBs. It also
configures and tests the products according to the customers' specification and
then packages and delivers the products to customers.
The majority of the Group's PCB assembly and manufacture for its broadband
switching and routing equipment is already outsourced to Jabil (Florida) and
Solectron (Texas). The Group has retained control of the manufacture of its
fixed wireless access equipment in Germany.
Since the outsourcing to Jabil was implemented, Marconi Communications and Jabil
have regularly reviewed their arrangements with a view to improving the
efficiency of their respective operations. For example, the transferred plant at
Bedford, Texas (US) was closed during 2002. On 22 January 2003, Marconi
Communications and Jabil agreed to a further rationalisation of Jabil's UK
operations which is intended to deliver improved pricing for the Group. The
Group will contribute towards the costs of securing these improvements. As part
of these arrangements, Marconi Communications and Jabil have entered into new
agreements governing the provision of electronics manufacturing and repair
services by Jabil, which will provide for more flexible and competitive pricing
and are currently expected to take effect from June 2003. Under these new
agreements, Jabil will continue to provide services to the Group until at least
June 2005 (the expiry date of the original service agreements), and to June 2007
for certain repair services. Jabil will continue, subject to meeting certain
performance and capacity requirements, as the exclusive supplier for products
and services covered by the agreements.
Marconi Communications and Jabil will continue to review their arrangements from
time to time and, where further improvement plans are agreed, Marconi
Communications may contribute to the costs of securing those improvements.
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In addition to the arrangements with Jabil, Marconi Communications has
established strategic relationships with a number of contract electronic
manufacturers (CEMs), OEMs and component commodity suppliers. Examples of CEMs
with whom Marconi Communications has established strategic relationships include
Solectron Corporation, Sanmina/SCI and Teradyne. Examples of the OEMs include
Hewlett-Packard, Siemens, Paradyne Corporation and Avaya. Finally, examples of
component commodity suppliers include Bookham Technology, Corning Incorporated,
Highwave, Intel Corporation, Molex, Motorola, NEC Electronics and Toshiba.
As part of the Group's overall manufacturing strategy, the Group is currently
considering further potential outsourcing opportunities in its supply chain,
logistics organisations and in the field of information technology. The Group
intends to retain control of functions only where it possesses key competencies.
Other functions, such as the manufacturing of non-complex products, will
continue to be outsourced where suitable partners can be identified.
A discussion of certain risks associated with outsourcing is set out in Part F
of this document.
A.8 CURRENT APPLICATION OF CRITICAL ACCOUNTING POLICIES
Corp and plc prepare their financial statements and accompanying notes in
accordance with UK GAAP. One of the notes to the financial statements included
in this document describes the significant accounting policies used in their
preparation. The preparation of such financial statements requires Corp and plc
to make estimates, judgements, and assumptions that affect the reported amounts
of assets, liabilities, revenues and expenses and related disclosure of
contingent assets and liabilities. Corp and plc base their estimates on
historical experience and various other assumptions that they believe are
reasonable under the circumstances, the results of which form the basis for
making judgements about the carrying value of assets and liabilities that are
not readily apparent from other sources. Actual results may differ from these
estimates under different assumptions or conditions. Corp and plc believe that
the following are some of the more critical judgement areas in the application
of their accounting policies that currently affect their financial position and
results of operations.
The development and selection of these critical accounting estimates has been
discussed with Corp's and plc's audit committees.
REVENUE RECOGNITION
Revenue is recognised when all of the following conditions are satisfied: (i)
there is persuasive evidence that an arrangement exists; (ii) delivery has
occurred or services have been rendered; (iii) the fee is fixed or determinable;
and (iv) it is probable that the debtor will be converted into cash.
It is common for the Group's sales agreements to cover the delivery of several
products and/or services. These range from arrangements where a contract covers
the delivery and installation of equipment to more complex arrangements, which
also include training of customer personnel, sale of software and other support
services. Revenue from contracts with multiple element arrangements, such as
those including installation and commissioning services, is recognised as each
element is earned based on objective evidence of the relative fair values of
each element and when there are no undelivered elements that are essential to
the functionality of the delivered elements.
Revenues and estimated profits on long-term contracts are recognised under the
percentage-of-completion method of accounting using a cost-to-cost methodology.
Significant judgement is required in determining progress toward completion and
in estimating revenues and costs. Profit estimates are revised periodically
based on changes in facts in the underlying contract. When estimates of total
contract revenues and costs indicate a loss, a provision for the entire amount
of the contract loss is recognised in the period in which the loss becomes
foreseeable. Advance payments received from contracts are recorded as a
liability unless there is a right of set-off against the value of work
undertaken.
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IMPAIRMENT OF LONG-LIVED ASSETS
The Group reviews the carrying value of other fixed assets and assets to be
disposed of, including other intangible assets, whenever indicators of
impairment exist. Indicators of impairment include (but are not limited to):
a. a significant adverse change in the extent or manner in which a
long-lived asset or asset group is being used or in its physical
condition;
b. a current-period operating or cash flow loss combined with a history
of operating or cash flow losses or a projection or forecast that
demonstrates continuing losses associated with the use of a
long-lived asset or asset group; and
c. a current expectation that, more likely than not, a long-lived asset
or asset group will be sold or otherwise disposed of significantly
before the end of its previously estimated useful life.
These tests for impairment require significant judgements in determining
estimates of future cash flows and the resulting value in use of the relevant
fixed asset. Estimations of the present value of future cash flows contain
inherent uncertainty and include estimates of market size and market share
information, growth rates, product demand and technological development, costs
of labour and supplier purchases, working capital requirements, and discount
rates to be applied to future cash flows.
If the carrying value of a fixed asset is considered impaired, an impairment
charge is recorded for the amount by which the carrying value of the fixed asset
exceeds the higher of its net realisable value or its value-in-use. Changes in
estimates of future cash flows can affect the determination of the net
realisable value or its value-in-use of the relevant fixed asset.
CONTINGENT LIABILITIES
Corp and plc are subject to legal proceedings and other claims arising in the
ordinary course of business. Various claims and proceedings have been or may be
instituted or asserted against Corp and plc relating to class shareholder
actions and the conduct of their businesses, including those pertaining to
patents, environmental, safety and health, employment and contract matters. Corp
and plc are required to assess the likelihood of any adverse judgements or
outcomes to these matters, as well as potential ranges of probable losses. A
determination of the amount of reserves required, if any, for these
contingencies is based on a careful analysis of each individual issue with,
where appropriate, the assistance of outside legal counsel to formulate best
estimates of the expected outcome and settlement. The outcome of litigation
cannot be predicted with certainty and some lawsuits, claims or proceedings may
be disposed of unfavourably compared to the amounts estimated.
PENSION AND OTHER POST-RETIREMENT BENEFITS
Pension and other post-retirement benefits' costs and obligations are dependent
on actuarial assumptions used in calculating such amounts. These assumptions
include discount rates, health care cost trend rates, benefits earned, interest
cost, expected return on plan assets, mortality rates, and other factors. While
Corp and plc believe that the assumptions used are appropriate, the assumptions
used may differ materially from actual results due to changing market and
economic conditions, higher or lower withdrawal rates or longer or shorter life
spans of participants. These differences may result in a significant impact on
the amount of future pension or post retirement benefits expense and the
resulting liability.
PRODUCT WARRANTIES
Provisions for estimated expenses related to product warranties are made at the
time products are sold. These estimates are established using historical
information on the nature, frequency, and average cost of warranty claims. The
Group actively studies trends of warranty claims and takes action to improve
equipment quality and minimise warranty claims. Actual claims incurred could
differ from the original estimates, requiring adjustments to the reserve. If
Corp and plc were to experience an increase in warranty claims compared with
their historical experience, or if costs of servicing warranty claims were
greater than the expectations on which the accrual had been based, the Groups'
gross margins could be adversely affected.
58
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A.9 CURRENT TRADING AND PROSPECTS
CURRENT TRADING
Overall conditions in the telecommunications market remained tough during the
third quarter of the financial year ending 31 March 2003. Trading levels in EMEA
in the third quarter remained stable despite the continuing difficult market
environment. The Group is now beginning to observe some slowing of business in
the Middle East as a result of the current political environment. The North
American market continues to be characterised by further tightening of capital
expenditure by a number of large telecommunications operators, particularly
towards the end of their financial years in December 2002. In Central and Latin
America (CALA), the market was relatively stable during the quarter although
capital expenditure amongst major operators in the region remained at a low
level. In Asia-Pacific (APAC), while the market remains buoyant in Australia,
conditions in the Chinese market are more difficult as a result of delays in
capital expenditure due to the reorganisation of key customers, delay to the
roll-out of certain network build projects and increased pricing pressure on new
business.
Despite the difficult market environment, the Group continued to make
significant progress during the third quarter of the financial year ending 31
March 2003 towards its targets to improve operating performance in the Core
business. In particular compared to the previous quarter, further cost savings
achieved during the period led to an approximate 0.5 percentage point increase
in Core gross margin (before exceptional items) to 22.1 per cent. and an
approximate L85 million deduction in Core operating cost run-rate (before
goodwill amortisation and exceptional items) to around L550 million at 31
December 2002. Headcount reductions are a major driver of the Group's cost
reduction initiatives. At 31 December 2002, the Group had just over 16,000
employees in its Core business, down from just over 19,000 at 30 September 2002.
The Group's improved operating performance combined with further progress in all
areas of working capital management, led to a significant improvement in
adjusted operating cash flow, with the Group recording an operating cash inflow
(before exceptional items) of L72 million during the quarter. Non-operating and
exceptional cash outflows (excluding tax) of L88 million relating mainly to the
Group's ongoing operational and financial restructuring processes and interest
paid were partially offset by a net L45 million tax repayment received during
the period. In total during the third quarter, the Group generated cash of L29
million before use of liquid resources and financing.
The Group was awarded a number of important business wins during the period.
These included the first European sale of the Group's BXR-48000 multi-service
switch-router to a large financial institution and the first sale of the Group's
recently launched Softswitch to Jersey Telecom. In addition, since the beginning
of the new calendar year 2003, the Group has announced two major new business
wins from Telecom Italia: a euro 80 million (approximately L50 million) frame
contract for the supply of the Access Hub and a new 2-year frame contract
estimated at approximately euro 15 million (approximately L10 million) to build
an optical backbone network architecture based on the Group's next generation
digital cross-connect, the MSH2K.
PROSPECTS
Upon completion of the Restructuring, Corp and plc expect the Group to be
better-positioned to compete effectively in the areas of the broader
telecommunications equipment market on which it has chosen to focus.
The market for telecommunications equipment and services remains difficult.
During the first three quarters of the financial year ending 31 March 2003 the
annualised rate of Core sales has declined by around 10 per cent. from
approximately L2 billion in the first quarter to approximately L1.8 billion in
the third quarter. Corp and plc do not expect that the Group will benefit from a
seasonal uplift in Core sales during the fourth quarter of the financial year
compared to the level recorded in the third quarter (L456 million), contrary to
the seasonal pattern of customer demand in previous years. Despite this
difficult business environment Corp and plc believe that the previously
announced cost reduction initiatives currently being implemented will enable the
Group to make further progress during the final quarter of the financial year
ending 31 March 2003 towards its near term financial objectives to reduce costs
and to achieve operating cash breakeven before exceptional cash costs.
Furthermore, Corp and plc believe that market volumes are likely to contract
further during the financial year ending 31 March 2004 and do not expect to
benefit from significant market share gains. As a result, the Group
59
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believes that Core sales could decline by up to a further 5 per cent. during the
financial year ending 31 March 2004 compared to the annualised third quarter
trading levels (L1.8 billion).
In December 2002, the Group outlined its Core operating model and confirmed its
targets to achieve a gross margin run-rate in the range of at least 24 to 27 per
cent. of Core sales and an operating expenditure run-rate in the range of 21 to
24 per cent. of Core sales during the financial year ending 31 March 2004. The
Group now believes that it will be able to reduce the Core operating cost base
to an annual run rate below L450 million during the next financial year ending
31 March 2004 and thereby reduce its breakeven level of sales to below L1.7
billion per annum. An illustration of the effect of the Corp Scheme and the
Capital Reduction on the 30 September 2002 consolidated balance sheet of Corp is
contained in Appendix 2.
Although the Group's principal markets remain difficult, Corp and plc expect
them to recover, at some stage, as end customer demand for fixed or mobile
broadband services increases. While Corp and plc cannot predict with any level
of certainty the occurrence, timing or extent of any recovery, they believe that
the favourable longer-term dynamics of the telecommunications market should
enable the Group to improve margin and grow profitably.
A.10 DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES
DIRECTORS OF CORP
The current members of the Board are:
Name Position Age
---- -------- ---
John Francis Devaney Chairman 56
Michael William John Parton Chief Executive Officer 48
Michael John Donovan Chief Operating Officer 49
Christopher Charles Holden Interim Chief Financial Officer 54
Michael Kent Atkinson Non-Executive Director 57
Werner Karl Koepf Non-Executive Director 61
The following individuals have agreed to become members of the Board on Listing
of the New Shares, the New Notes and the Warrants:
Name Position Age
---- -------- ---
Ian McMaster Clubb Non-Executive Director 62
Kathleen Ruth Flaherty Non-Executive Director 51
DIRECTORS OF PLC
The current members of the Board are:
Name Position Age
---- -------- ---
John Francis Devaney Chairman 56
Michael William John Parton Chief Executive Officer 48
Michael John Donovan Chief Operating Officer 49
Christopher Charles Holden Interim Chief Financial Officer 54
Michael Kent Atkinson Non-Executive Director 57
Derek Charles Bonham Non-Executive Director 59
Werner Karl Koepf Non-Executive Director 61
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FURTHER PARTICULARS OF THE DIRECTORS OF CORP AND PLC AND OF THE INDIVIDUALS WHO
HAVE AGREED TO BECOME DIRECTORS OF CORP
John Francis Devaney was appointed Chairman of the board of directors of Corp
and plc on 16 December 2002. He is also chairman of the nomination committee. He
stepped down in September 2002 as chairman of EXEL plc, and was a non-executive
director of HSBC Bank plc from 1994 to 2000 and British Steel (now known as
Corus UK Limited) from 1998 to 1999. He was executive chairman of Eastern
Electricity Ltd (now known as Eastern Energy Management Ltd) until 1998 and
prior to that executive chairman of Kelsey-Hayes Corporation. Mr Devaney was
until recently, chairman of Liberata plc, and is founder and chairman of
BizzEnergy Ltd. He is also a director and past chairman of EA Technology
Limited.
Michael William John Parton was appointed to the board of directors of plc in
January 2000 and became a director of Corp in November 2001. Mr Parton was
appointed Chief Executive Officer of plc in September 2001. He has held a number
of finance appointments in ICL plc (1977 to 1980), GEC-Marconi Ltd (1980 to
1986) and STC Telecommunications Ltd (1986 to 1991). He joined GEC in 1991 as
Finance Director of GPT (now known as Marconi Communications Limited), GEC's
telecommunications joint venture with Siemens, and was appointed Managing
Director of GPT's public networks group in 1995, Managing Director of GEC's
industrial group in 1997 and Chief Executive Officer of Marconi Communications
in July 1998.
Michael John Donovan was appointed to the board of directors of plc in January
2000 and became a director of Corp in November 2001. Mr Donovan was Chief
Executive Officer of Marconi Systems and Marconi Capital and in September 2001
was appointed Chief Operating Officer of plc. He previously held a number of
executive management positions in the Rover Group (1976 to 1991), Vickers plc
(1991 to 1994) and British Aerospace Plc (now known as BAE SYSTEMS plc) (1994 to
1998). Mr Donovan became Chief Executive Officer of GEC's industrial electronics
group in 1998 and is based in the US.
Christopher Charles Holden was appointed to the board of plc and Corp in
November 2002. Mr Holden was appointed Group Financial Controller in the summer
of 2002 and as interim Chief Financial Officer of Corp and plc in November 2002.
He became a partner with Arthur Andersen's auditing practice in 1983, having
joined the firm in 1971. During his period with the firm, he held a number of
senior international roles. He holds a BSc (Eng) in Metallurgical Engineering
from Imperial College of Science and Technology, University of London, and is a
Fellow of the Institute of Chartered Accountants of England and Wales.
Michael Kent Atkinson was appointed non-executive director of Corp and plc in
December 2002. He is also chairman of the audit committee. Previously he served
as group finance director at Lloyds TSB Group plc between 1994 and June 2002,
and remains on that board as a non-executive director. Mr Atkinson spent his
early career in Latin America and the Middle East and held various senior
management roles internationally and in the UK for 24 years before becoming
Lloyds TSB Group plc's finance director. Mr Atkinson is also the senior non-
executive director of Coca-Cola HBC S.A. (Athens) and chairman of its audit
committee and will join the board of Cookson Group plc on 1 April 2003 as a
non-executive director and chairman of its audit committee.
Derek Charles Bonham was appointed to the Board of plc in April 2001. Mr Bonham
was appointed interim Chairman of plc in September 2001. He stood down from the
chairmanship of plc on 16 December 2002 and remains a non-executive director of
plc. He is currently chairman of Cadbury Schweppes plc, CamAxys Group Plc and
Imperial Tobacco Group plc and was chief executive (from 1992) and deputy
chairman (from 1993) of Hanson plc until 1997. He is a past member of the
Financial Accounting Standards Advisory Council (USA) and served on the
Accounting Standards Committee (UK).
Werner Karl Koepf was appointed as a non-executive director of Corp and plc in
December 2002. He was CEO of Compaq Computer Corporation for the EMEA region
until 2002 and is a director of PXP Software AG (formerly Pixelpark CEE Holding
AG) as well as an adviser to venture capital company Techno Venture Management
GmbH. He has held a range of senior management positions with some of the
world's leading technology companies, including Texas Instruments, Siemens and
European Silicon Structures S.A.
Ian McMaster Clubb has over 25 years experience in a range of senior financial
and management roles. He is chairman of First Choice plc, Shanks Group plc and
Platinum Investment Trust plc. He is also a non-executive director of oil
industry services company, Expro International plc. He was group finance
director at BOC Group
61
I. EXPLANATORY STATEMENT
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plc (1991-1994) and deputy chief executive and group finance director at British
Satellite Broadcasting Ltd (1989-1991).
Kathleen Ruth Flaherty is a US based global telecommunications executive with
over twenty years' experience in the communications industry. She has spent
seventeen years with MCI Communications Corporation, latterly as senior vice
president, global product architecture and engineering. Previously (1995-1997)
she spent two years on secondment from MCI to BT, during which time she was BT's
marketing director for National Business Communications. Between 1998 and 2001,
she was in Brussels and New York as president and chief operating officer of
Winstar International, a fixed wireless communications company.
SENIOR MANAGEMENT
In addition to the Executive Directors, the current members of the senior
executive management team are:
Name Position Age
---- -------- ---
David Clive Beck Director of Communications 40
Geoffrey William Doy Chief Executive Officer, Sales and 54
Marketing
Mary Angela Skelly Company Secretary and Head of Legal 42
Damian Hugh Reid Chief Strategy Officer 40
Neil David Sutcliffe Chief Human Resources Officer 41
Michael Francis Surrey EVP Finance, Operations and Group 36
Controller
Patricia Dooley EVP Product Engineering 32
All members of the senior executive management team are employees of Corp save
for Geoffrey Doy, who is employed by MCI.
David Clive Beck was appointed Director of Communications of plc in February
2002 having previously been Managing Director of Bell Pottinger Financial, part
of the Chime Communications Group, where he held a number of positions over 15
years.
Geoffrey William Doy was appointed Chief Executive Officer, Sales and Marketing
of plc in September 2001. He was appointed Chief Executive Officer of Marconi
Wireless in April 2001. He held a number of positions in the IT and
communications industries with Software Sciences Limited from 1983 to 1988,
Artemis International from 1988 to 1993 and Gemini Consulting Inc. from 1995 to
1998 before joining Metapath Software International Inc. in August 1998.
Mary Angela Skelly was appointed Company Secretary in July 2002. She was
formerly a director and group company secretary of The Albert Fisher Group plc
(in administrative receivership).
Damian Hugh Reid was appointed Chief Strategy Officer of plc in September 2001
having previously served as Senior Vice President, Corporate Finance of plc. He
joined GEC in 1998. Mr. Reid is a non-executive director of Atlantic Telecom
Group PLC (in liquidation).
Neil David Sutcliffe was appointed Chief Human Resources Officer of plc in March
2002, in addition to his appointment in September 2001 as Chief Executive
Officer of Marconi Capital. He was previously Chief Executive Officer of Marconi
Services and has held a number of senior appointments in Marconi Communications
and GPT Ltd. Prior to his joining GPT Ltd in 1992, he was a manufacturing
consultant at Coopers and Lybrand from 1988 to 1992 and a systems engineer with
British Aerospace plc (now known as BAE SYSTEMS plc) from 1984 to 1988.
Michael Francis Surrey was appointed EVP Finance -- Operations and Group
Controller for plc in November 2002 with responsibility for all aspects of the
Group's performance monitoring and management reporting systems. He joined GEC
in 1992 and has held a broad range of financial management positions with the
Group. Mr Surrey holds a degree in accounting and economics from the University
of Manchester and is a member of the Institute of Chartered Accountants of
England and Wales.
Patricia Dooley was appointed as EVP Product Engineering for Marconi's European
portfolio in October 2002 with responsibility for product line management,
technical product strategy and product development. The
62
I. EXPLANATORY STATEMENT
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portfolio covers Optical Networks, ETSI Access, Fixed Wireless and Voice
Switching products. She joined GEC in 1987 as an engineering apprentice and has
held a number of management and senior management positions in the Group. She
holds an Ordinary National Diploma and Higher National Diploma in
telecommunications and electrical engineering and post-graduate certificate in
software engineering.
EMPLOYEES
The table below sets out the average number of people (full time equivalents)
employed by the Group in the previous three financial years and the six months
ended 30 September 2002:
30 September
2000 2001 2002 2002
---- ---- ---- ------------
(in thousands)
Average number of employees
Employees by business
Network Equipment 20 24 19 13
Network Services 5 9 8 6
Other 1 1 -- --
---- ---- ---- ------------
26 34 27 19
Capital 11 3 3 3
---- ---- ---- ------------
Continuing operations 37 37 30 22
Discontinued operations 12 15 15 3
---- ---- ---- ------------
Group employees 49 52 45 25
Share of joint venture employees 4 4 3 --
---- ---- ---- ------------
Group and share of joint ventures 53 56 48 25
---- ---- ---- ------------
Employees by location
United Kingdom 20 22 17 8
The Americas 16 17 12 6
Rest of Europe 11 13 15 9
Africa, Asia and Australasia 6 4 4 2
---- ---- ---- ------------
53 56 48 25
==== ==== ==== ============
During the year and six months ended 30 September 2002, the Group took a number
of steps to reduce its workforce as the Group restructured its cost base in
response to the deterioration in trading conditions it experienced. At the end
of December 2002, the Group employed approximately 16,000 employees in its Core
business.
SHARE INCENTIVE PLANS
The Group currently operates various share incentive plans, providing
participants with the right to acquire shares in plc at specified prices or,
where certain objectives are achieved, at no cost (the latter are known as
nil-cost options). Certain options, including some of the nil-cost options are
already exercisable. The holders of such options can acquire plc Shares prior to
the plc Shareholders Record Time. As a result of the Restructuring, more of the
options will become exercisable. However, this will be after the plc
Shareholders Record Time, when plc Shares will have no value.
Due to plc's current share price the majority of options granted to participants
under the Plans are now underwater (that is, shares in plc are worth less than
participants would have to pay to acquire them under the Plans). It is therefore
assumed that holders of those options, which are currently exercisable, will not
exercise them. Of those options where the plc Shares subject to them are worth
more than the price that participants must pay for them, it is only those
optionholders who can and do exercise their options prior to the plc
Shareholders
63
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Record Time who will receive New Shares and Warrants. After the Restructuring,
all remaining options over plc Shares will be valueless. Details of the Group's
existing share incentive plans are contained in Part D.10 of this Section.
Conditionally on the later of the First Initial Distribution under the Corp
Scheme being initiated, and the Effective Date of the Corp Scheme, Corp has
adopted two employee share option plans, the Corp Senior Management Share Option
Plan and the Corp Employee Share Option Plan. Summaries of the plans are
contained in Part D.10 of this Section.
CORP CORPORATE GOVERNANCE
Corp supports high standards of corporate governance. Corp intends to comply
with the requirements of the Combined Code following the Restructuring.
Following Listing of the New Shares, the New Notes and the Warrants, Corp's
Board will comprise the Chairman, three Executive Directors (including the Chief
Executive Officer) and four Non-Executive Directors. Corp regards all
Non-Executive Directors as independent and free from any business or other
relationship which could materially interfere with the exercise of their
independent judgement. The Board has established audit, remuneration, nomination
and executive committees.
The audit committee will comprise a chairman and will have at least two other
members each of whom will be appointed by the Board and who will be
Non-Executive Directors of Corp. The audit committee will be chaired by Kent
Atkinson; its other members will be Ian Clubb and Werner Koepf. It will meet
formally at least twice a year. Its duties will include reviewing the scope,
plan and results of any audit. It will meet regularly with management, as well
as with internal and external auditors to review the effectiveness of internal
controls, as well as matters raised in regular reports to the committee. It will
review financial announcements and annual reports prior to their submission to
the Board. Corp's auditors will be able to attend meetings and have the
opportunity to raise matters or concerns in the absence of Executive Directors
and management.
The remuneration committee will comprise at least three Non-Executive Directors.
The remuneration committee will be chaired by Ian Clubb; its other members will
be Kent Atkinson, Kathleen Flaherty and Werner Koepf. The committee will meet
formally at least twice a year. The committee will make recommendations to the
Board on the broad policy to be adopted for executive remuneration, including
the remuneration of Executive Directors and the Chairman. It will determine the
total individual remuneration package for individual Executive Directors and
certain other senior executives including, where appropriate, bonuses, pensions
and incentive scheme entitlements and the terms of individual Executive
Directors' service agreements.
The nomination committee will comprise the Chairman and each of the
Non-Executive Directors. The nomination committee will be chaired by John
Devaney and its other members will be Kent Atkinson, Ian Clubb, Kathleen
Flaherty and Werner Koepf. The committee will meet to review Board structure,
size, composition and balance, to make recommendations to the Board on any
adjustments that are deemed necessary and to nominate candidates to fill board
vacancies.
Following the recent publication of the Higgs "Review of the Role and
Effectiveness of Non-Executive Directors" and the Smith Report "Audit Committees
-- Combined Code Guidance", Corp intends to review those areas of its corporate
governance which are impacted by the Review and the Report. This will include
the structures and terms of reference of its committees, in order to ensure the
Corp's continued future compliance with the requirements of the Combined Code.
In particular, Corp believes that it should move to a position where the
majority of its Board are independent Non-Executive Directors. Although Corp
does not envisage that any further non-executives will be appointed to the Board
before the Listing of the New Shares, the New Notes and the Warrants, Corp will
continue to look for suitable candidates to join the Board as independent
Non-Executive Directors, where they can bring appropriate experience or industry
knowledge. A process is already in place to identify further suitable
candidates. Following a further appointment which it expects will be made within
three months of the Effective Date, Corp will at all times strive to ensure that
it maintains a majority of independent Non-Executive Directors on its Board by
within
64
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SECTION 2: FURTHER EXPLANATION OF THE RESTRUCTURING -- PART A
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three months of ceasing to have such a majority, appointing additional
independent Non-Executive Directors or reducing the size of the Board.
Corp's executive committee comprises such Executive Directors and senior
executives of the Corp Group as the Chief Executive Officer recommends and the
Board approves. The committee normally meets monthly and is chaired by Michael
Parton. Its other members are Michael Donovan, Christopher Holden, David Beck,
Geoffrey Doy, Mary Skelly, Damian Reid, Neil Sutcliffe, Michael Surrey and
Patricia Dooley. The committee approves the Corp Group's business plan, budget
and strategies in areas including technology, people, information technology and
corporate communications prior to submission to the Board for approval. It also
approves day-to-day matters of a routine nature.
The business risk sub-committee of the executive committee comprises the members
of the executive committee and meets at least four times a year. It establishes
and monitors risk management goals and objectives, embeds a risk monitoring and
assessment process throughout the Corp Group and regularly reports on the same
to the Board. The sub-committee also liaises with the audit committee to ensure
a sound system of internal control and reports to the audit committee, at least
annually, with an update on the Corp Group's risk management system.
Corp will also be subject to applicable corporate governance requirements under
US law (including the Sarbanes-Oxley Act of 2002 and regulations adopted by the
SEC thereunder) and, after the listing of its ADRs becomes effective, NASDAQ
rules.
A.11 FINANCIAL INFORMATION AND CORP'S DISCUSSION AND ANALYSIS OF ITS FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Financial information for the three years and six months ended 30 September 2002
in relation to Corp is set out in Appendix 1.
An unaudited pro forma consolidated balance sheet in relation to Corp is set out
in Appendix 2, showing figures as at 30 September 2002 to illustrate the
position as if the Restructuring and the Capital Reduction had then taken place,
based on certain assumptions set out in that Appendix.
Financial information for the two years and six months ended 30 September 2002
in relation to plc is set out in Appendix 3.
plc's quarterly report for the three months ended 31 December 2002 was published
on 18 March 2003. That report, which is unaudited, is set out in Part A of
Appendix 4. An illustrative financial analysis with respect to the year ending
31 March 2005 and information on cash to be retained by the Group immediately
following the Restructuring were also published on 18 March 2003. These are set
out in Part B of Appendix 4.
A discussion of the Corp Group's financial condition and results of operations
for the three years and six months ended 30 September 2002 is at Appendix 5.
65
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B. BACKGROUND TO AND REASONS FOR THE RESTRUCTURING
The trading statement made by plc on 17 May 2001 in relation to the Group's
results for the year ended 31 March 2001 highlighted the fact that conditions in
the telecommunications equipment sector had experienced a downturn since the end
of 2000. On 4 July 2001, plc issued a profits warning noting that market
conditions during the three months to June 2001 had been much tougher than
expected, and that there had been a marked deterioration in the short-term
outlook for the Group (in particular, that sales were expected to be down by 15
per cent. and operating profit before exceptional items by 50 per cent. compared
with the previous financial year). Immediately prior to the announcement, plc
suspended trading in its shares for a day. On 6 July 2001, plc announced the
resignation of John Mayo as Deputy Chief Executive of plc.
An operational review of the Group was commenced shortly thereafter, the outcome
of which included sharper focus on the Core carrier-class network communications
business and a disposal programme in relation to certain non-Core businesses and
assets.
plc issued a second profits warning on 4 September 2001. The 4 September 2001
trading statement, which indicated that a first half operating loss of L227
million was expected, also announced a change in senior management (namely the
resignations of Sir Roger Hurn and Lord Simpson as Chairman and Chief Executive
respectively of plc, and the appointment of Derek Bonham as interim Chairman and
Michael Parton as Chief Executive), a decision to halt dividend payments for the
financial year ending 31 March 2002 and the implementation of further cost
reduction measures.
In October 2001, in view of the deterioration in the Group's financial condition
and the need to procure medium term financing for the Group, Corp and plc
entered into negotiations with the Syndicate Banks for the refinancing of Corp's
then existing E4.5 billion and (undrawn) E3 billion revolving credit facilities
(due to mature in March 2003 and May 2002 respectively) (referred to in this
Part B as the "EXISTING SYNDICATED FACILITIES"). By mid-March 2002, Corp and plc
had largely agreed the terms of a L1.95 billion facility agreement with the then
Syndicate Banks in order to refinance the existing syndicated facilities.
However, market conditions had continued to deteriorate and, following further
reviews of the Group's then business plan in the second half of March 2002, the
boards of Corp and plc reached the view that the refinancing proposal would no
longer provide the Group with an appropriate capital structure and, accordingly,
that they were unable to enter into the proposed new L1.95 billion facility. On
22 March 2002, plc made an announcement to this effect and announced also that
Corp and plc had agreed to cancel the undrawn commitments under the existing
syndicated facilities (as the E3 billion facility was undrawn, this resulted in
the complete cancellation of this facility) and to place on demand the drawn
portion of the E4.5 billion facility (approximately L2.2 billion).
Over subsequent weeks, the Group developed a revised Business Plan, which was
then presented to representatives of the Syndicate Banks and to the Informal
Committee of Bondholders. In parallel, Corp and plc commenced tripartite
discussions with those representatives with a view to Corp and plc formulating a
Restructuring proposal. As part of that negotiation process, in April/May 2002
Corp and plc agreed to certain restrictions on financial and corporate
activities during the Restructuring process, in the form of undertakings given
by Corp and plc (in relation to each member of the Group) in favour of the
Syndicate Banks and members of the Informal Committee of Bondholders
respectively. These undertakings, which were modified and renewed on 28 March
2003, are aimed at preservation of the "status quo" over the period of the
Restructuring negotiations and while the Schemes are pending. The undertakings
contain a number of carve outs designed to preserve operational (but not
strategic) flexibility and to facilitate the implementation of the
Restructuring. The undertakings will terminate automatically on the Effective
Date of the Corp Scheme.
With effect from 1 April 2002, and also as part of the undertakings, Corp agreed
to increase the margin above LIBOR on Corp's drawings under the Bank Facility to
2.25 per cent. per annum.
As part of the undertakings, Corp agreed to deposit L850 million of the Group's
cash balance into certain accounts held with banks independent of the Syndicate
Banks, and agreed to restrictions on withdrawals of cash from those accounts.
The Lockbox Accounts, into which the L850 million was deposited on 3 May 2002,
are held in the name of Highrose Limited, a special purpose subsidiary of Corp.
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On 29 August 2002, the Group announced that following good faith negotiations
with the Co-ordination Committee and the Informal Committee of Bondholders, it
had concluded non-binding indicative Heads of Terms setting out principles for
the Restructuring of Corp and plc.
On 13 September 2002, as detailed further in Part D.1 of this Section, the Group
announced the grant of interim security over the Lockbox Accounts, in favour of
the Group's Bank Creditors and Secured Bondholders and Barclays Bank PLC, as the
only ESOP Derivative Bank which committed to support the Restructuring prior to
15 October 2002. Although withdrawals from the Lockbox Accounts to fund the
Group's working capital requirements since May 2002 have reduced the balance of
the Lockbox Accounts, significant disposal proceeds have been paid into the
Lockbox Accounts, as required under the undertakings. At the date of the
granting of the interim security, the balance held in the Lockbox Accounts was
approximately L866 million. As at 27 March 2003, the balance held in the Lockbox
Accounts was approximately L770.7 million.
On 16 December 2002, plc announced modifications to the non-binding indicative
Heads of Terms and amendments to the interim security over the Lockbox Accounts.
The interim security was further amended on 28 March 2003 (see Part D.1 of this
Section).
Provision has been made for the interim security to be released prior to the
Corp Scheme Meeting (in circumstances tied to the prospects of the Corp Scheme
being successfully implemented (as described more fully in Part D.1 of this
Section)). If the interim security has not been released prior to the Corp
Scheme Meeting, neither Corp nor plc will proceed with their respective Schemes
and the interim security will remain in place in any subsequent insolvency
proceedings, meaning that the Bank Creditors, Secured Bondholders and Barclays
Bank PLC (as the only ESOP Derivative Bank that committed to support the
Restructuring prior to 15 October 2002) would rank ahead of all unsecured
creditors of Corp with respect to the cash held in the Lockbox Accounts. If the
interim security is released and the Corp Scheme Meeting proceeds, the choice
facing all Corp Scheme Creditors will be the same: either the Corp Scheme will
be approved and implemented, or the Corp Scheme will be rejected and in the
inevitable insolvency proceeding which would follow such rejection the interim
security would no longer be in place.
The Syndicate Banks and the Informal Committee of Bondholders have indicated
that they will not be prepared to release the interim security prior to the Corp
Scheme Meeting unless, immediately before such release, Corp has confirmed to
the Prospective Supervisors that Corp remains satisfied that the reserves built
into the Corp Scheme are sufficient to meet distributions to all Corp Scheme
Creditors and that Corp remains of the opinion that its statement as to the Corp
Group's working capital contained in Part D.21 of this Section remains valid,
and the Prospective Supervisors have confirmed to Corp that they have no reason
to disagree with Corp's view that the reserves built into the Corp Scheme are
sufficient to meet distributions due to be made to all Corp Scheme Creditors.
On 18 March 2003, plc announced that documentation in relation to the proposed
Restructuring had been filed with the Court and provided an update on certain
aspects of the Restructuring. On 26 March 2003 and 24 March 2003 respectively
the required consents were received to certain pre-completion steps for the
Restructuring from the requisite majorities of the Syndicate Banks and the
members of the Informal Committee of Bondholders.
On 26 March 2003, Corp and plc entered into a definitive agreement with the
Group's ESOP Derivative Banks for a settlement of their ESOP derivative related
claims against the Group. Under the terms of the settlement, which is
conditional upon the Corp Scheme becoming effective, Corp will pay a total of
L35 million to the ESOP Derivative Banks in full and final settlement of their
ESOP related claims against the Group.
On 28 March 2003, the undertakings agreed by Corp and plc in April and May 2002
were renewed and modified. As a result of that modification, on the release of
the interim security the "Lockbox" provisions of the undertakings will govern
withdrawals of cash from the Lockbox Accounts (see Part D.1 of this Section).
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Since August 2001, in view of the deterioration in the Group's financial
condition, there have been the following credit rating downgrades in respect of
the Group:
Standard & Poor's
6 August 2001, BBB+ to BBB-
5 September 2001, BBB- to BB
21 Jan 2002, BB to B+
22 March 2002, B+ to B-
4 April 2002, B- to CC
Moody's
10 August 2001, A3 to Baa2
7 September 2001, Baa2 to Ba1
15 October 2001, Ba1 to Ba3
15 January 2002, Ba3 to B1
26 March 2002, B1 to Caa3
Corp and plc believe that there are only two possible outcomes of the Group's
current financial difficulties, which are the reorganisation of their
liabilities through the proposed Schemes or the placing of the companies into
administration or liquidation. As discussed in Part C.10 of this Section,
Appendix 6 contains an insolvency analysis providing a detailed analysis of the
position of Corp and plc should they be subject to insolvency proceedings (and
the assumptions, caveats, limitations and uncertainties on which such analysis
is based).
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C. PROPOSED RESTRUCTURING
C.1 OVERVIEW
The Restructuring will be effected through two schemes of arrangement under the
Act. A scheme of arrangement is a court-supervised procedure under English law
through which a company may enter into a compromise or arrangement with its
creditors to effect a restructuring of its financial obligations.
The Corp scheme of arrangement will involve all creditors of Corp at the Record
Date, excluding certain categories of creditors, but including the Syndicate
Banks and Bondholders to whom the Group's primary financial indebtedness is
owed. The plc scheme of arrangement will involve all creditors of plc at the
Record Date, excluding certain categories of creditors, the liabilities to some
of which are to be novated to Corp (with effect from the Effective Date of the
Corp Scheme), but including the Syndicate Banks and Bondholders. Creditors whose
claims are to be compromised through the Schemes are referred to as "SCHEME
CREDITORS" (but see "Definitions and Interpretation" on page 12 for a further
explanation of this term) and the claims of these creditors are referred to as
"SCHEME CLAIMS". Assuming the English Court makes an order sanctioning the
Schemes, Corp and plc will apply, before the Schemes become effective, for
permanent injunction orders under Section 304 of the US Bankruptcy Code (the
"BANKRUPTCY CODE") to give effect to their respective Schemes.
Through the Restructuring, Corp will become the new parent holding company of
the Group. All of plc's assets (net of a reserve to meet plc's Ongoing Costs)
will be distributed to its creditors over time in accordance with the plc
Scheme, following which it is intended that plc will be liquidated or dissolved.
C.2 TERMS OF THE RESTRUCTURING
CORP SCHEME
The Corp Scheme will compromise approximately L4.0 billion of externally held
financial indebtedness, comprising principally the Bank Facility and the Bonds.
In addition, the Corp Scheme will compromise certain other claims and contingent
claims, including those discussed under "Summary of key actual and contingent
claims" below.
In exchange for the compromise of their Scheme Claims, Corp's Scheme Creditors
will receive a distribution, pro rata in proportion to their Admitted Scheme
Claims, of a package of cash and new equity and debt securities issued by Corp.
This package of cash and securities is referred to as the "SCHEME
CONSIDERATION". The Corp Scheme Consideration is to comprise the following:
a. CASH: L340 million cash;
b. NEW SENIOR NOTES: the euro equivalent (calculated at the Currency
Rate) of L450 million in aggregate principal amount of new
guaranteed senior secured notes due April 2008 to be issued by Corp
denominated in euro and/or US dollars, subject to elections made in
Claim Forms and Account Holder Letters, with interest payable
quarterly in cash at a rate of 8 per cent. per annum;
c. NEW JUNIOR NOTES: the sum of US$300 million plus the US dollar
equivalent (calculated at the Currency Rate) of L117.27 million in
aggregate principal amount of new guaranteed junior secured notes
due October 2008 to be issued by Corp denominated in US dollars,
with interest payable quarterly in cash at a rate of 10 per cent.
per annum or, at Corp's option, in kind (by issuing additional New
Junior Notes) at a rate of 12 per cent. per annum; and
d. NEW SHARES: 995,000,000 ordinary shares, representing 99.5 per cent.
of Corp's issued ordinary share capital immediately following
implementation of the Restructuring. Elections may be made in Claim
Forms and Account Holder Letters to have all or any portion of the
New Shares deliverable pursuant to the Schemes delivered in the form
of ADRs.
The cash element of the distribution to Corp's Scheme Creditors will be
increased by the net proceeds of any asset disposals, other than L82 million of
excluded asset disposal proceeds, received on or after 1 December 2002 and
before 1 May 2003, and the aggregate principal amount of the New Junior Notes
will be decreased by
69
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10/11ths of the sterling amount by which the cash element is increased (such
calculation to reduce the L117.27 figure referred to in c. above).
PLC SCHEME
The plc Scheme will compromise approximately L3.9 billion of externally held
liabilities of plc as guarantor in respect of financial indebtedness, comprising
principally the Bank Facility and the Bonds. In addition, the plc Scheme will
compromise other claims and contingent claims, including those discussed under
"Summary of key actual and contingent claims" below.
In exchange for the compromise of their Scheme Claims, plc's Scheme Creditors
will receive a distribution, pro rata to their Admitted Scheme Claims, of all
plc's assets (net of a reserve for plc's Ongoing Costs). These assets will
principally comprise a portion of the Scheme Consideration to be distributed by
Corp pursuant to the Corp Scheme, which plc will receive as a result of a
repayment of capital in specie by plc's wholly-owned subsidiary Ancrane, one of
the Scheme Creditors of Corp.
ELECTION TO RECEIVE AMERICAN DEPOSITARY RECEIPTS
Elections may be made in Claim Forms and Account Holder Letters to have all or
any portion of the New Shares deliverable pursuant to the Schemes delivered in
the form of ADRs. Any person who elects to receive New Shares in the form of
ADRs will receive all future distributions of New Shares to which such person
may be entitled pursuant to the Schemes in the form of ADRs. As described below,
no depositary fees will be payable at any time in connection with the initial
issuance of ADRs pursuant to the Schemes and any UK stamp duty or SDRT payable
in this respect will be met by Corp.
ADRs will be issued pursuant to the Schemes in reliance on the exemption from
Securities Act registration provided by Section 3(a)(10) thereof (or, in the
case of plc Shareholders, in transactions not subject to such registration).
Following their initial issuance, such ADRs may be sold in ordinary secondary
market transactions without restriction under the Securities Act (subject to the
restrictions applicable to "affiliates" described in Part D.16 of this Section).
In addition, a registration statement on Form F-6 will be filed with the SEC in
relation to the ADRs. It is currently expected that this registration statement
will be effective prior to the Effective Date of the Corp Scheme. Once this
registration statement is effective, outstanding Corp Shares may be deposited
into the ADR programme in exchange for ADRs. Such ADRs may then be sold in
ordinary secondary market transactions without restriction under the Securities
Act.
Corp will apply to list the ADRs on NASDAQ and will use its reasonable
endeavours to effect this NASDAQ listing as soon as practicable following the
Effective Date of the Corp Scheme. It is currently expected that the NASDAQ
listing will become effective during the third calendar quarter of 2003. Persons
who are considering making an election to receive New Shares in the form of ADRs
should note that, unless and until the NASDAQ listing becomes effective,
although ADRs will be free to trade over-the-counter, development of a liquid
trading market for the ADRs will be inhibited, which is likely to have a
material adverse effect on the value of the ADRs.
A summary of the material terms of the ADRs is set out in Appendix 16.
Information as to responsibility for fees and taxes in connection with ADRs is
contained in Part D.15 of this Section.
NEW SHARES AND WARRANTS TO BE ISSUED TO PLC SHAREHOLDERS
As part of the Restructuring, plc Shareholders on the register as at the plc
Shareholders Record Time will receive 5 million New Shares, representing 0.5 per
cent. of Corp's issued ordinary share capital immediately following
implementation of the Restructuring, along with up to 50 million Warrants to
subscribe for additional shares equal to an aggregate of up to 5 per cent. of
Corp's issued ordinary share capital at that date. Each existing plc Shareholder
will receive at least one New Share. Warrant entitlements will be rounded down
to the nearest whole Warrant and each Warrant will entitle its holder to
subscribe one Corp Share (subject to adjustment in the event of certain
corporate actions). The exercise price of the Warrants will be 150p per share
(again subject to adjustment in the event of certain corporate actions). An
ordinary share price of 150p implies a post Restructuring market capitalisation
of Corp of approximately L1.5 billion. The Warrants will expire four years
70
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SECTION 2: FURTHER EXPLANATION OF THE RESTRUCTURING -- PART C
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after the Restructuring becomes effective if not exercised. The conditions of
the Warrants are set out in Appendix 12.
New Shares and Warrants will be given to plc Shareholders under the Corp Scheme.
The New Shares are to be issued in return for the compromise and release of
Scheme Claims against Corp by the Corp Scheme Creditors. The New Shares and
Warrants to be given to plc Shareholders who hold their plc Shares in CREST will
be credited to the same CREST accounts. plc Shareholders who hold a plc share
certificate, are aged under 18 or have a registered address outside the UK,
Channel Islands, Isle of Man or Ireland will receive a certificate in respect of
their New Shares and, if applicable, Warrants. The New Shares and, if
applicable, Warrants to be given to plc Shareholders who hold a plc share
certificate, are aged under 18 or have a registered address outside the UK,
Channel Islands, Isle of Man or Ireland will be held in a nominee account on
their behalf operated by Corp's registrars.
Pursuant to the Corp Scheme, New Shares will be issued to The Bank of New York,
as depositary (the "PLC ADR DEPOSITARY") in respect of the existing American
depositary receipt programme relating to the plc Shares (the "PLC ADR
PROGRAMME"), in common with other plc Shareholders. In accordance with the
deposit agreement for the plc ADR programme, plc and the plc ADR Depositary have
consulted with respect to these New Shares, and have agreed that the plc ADR
Depositary will arrange for persons who hold plc Shares in the form of American
depositary receipts ("PLC ADRS") to receive their interest in respect of this
distribution in the form of ADRs representing Corp Shares. No depositary fees
will be payable in connection with the initial issuance of these ADRs. SDRT,
however, will be payable in this connection at a rate of 1.5 per cent. of the
market value of the New Shares deposited into the Corp ADR programme. The plc
ADR Depositary will, on behalf of the holders of plc ADRs, sell any New Shares
relating to their fractional ADR entitlements together with such number of
additional New Shares to which they would be entitled as may be necessary to
cover the amount of SDRT that is due. A summary of the material terms of the
ADRs is set out in Appendix 16.
Also pursuant to the Corp Scheme, Warrants will be issued to the plc ADR
Depositary in common with other plc Shareholders. In accordance with the deposit
agreement for the plc ADR programme, plc and the plc ADR Depositary have
consulted with respect to these Warrants, and have determined that it is
unlikely that a liquid market for Warrants will develop in the United States,
and that it would be unreasonably costly to seek to distribute Warrants directly
to holders of plc ADRs. Accordingly, at an appropriate time, the plc ADR
Depositary will sell any such Warrants it has received and will distribute the
net proceeds of such sale to holders of plc ADRs, all in accordance with the
deposit agreement for the plc ADR programme.
C.3 TERMS OF THE NEW SENIOR NOTES AND THE NEW JUNIOR NOTES
Set out below is a summary of the principal terms of the New Notes comprising
part of the Scheme Consideration. See Appendix 8 for the detailed terms of the
New Notes and for definitions of terms used in this Part C.3 that are not
otherwise defined in part V.
Principal Amount and
Currency The New Senior Notes will have an aggregate
principal amount of the equivalent (calculated at
the Currency Rate) of L450 million. Elections may
be made in Claim Forms delivered under each Scheme
and in Account Holder Letters to elect for all, but
not part of, the New Senior Notes to be received by
Scheme Creditors and Designated Recipients to be
denominated in euros or US dollars. No New Senior
Notes denominated in US dollars will be issued
unless, based on all Claim Forms received before
5:00 p.m. (London time) on 17 April 2003 and all
Account Holder Letters delivered before 5:00 p.m.
(New York City time) on 17 April 2003, elections
have been made which would, if both Schemes become
effective, result in an aggregate of at least the
US dollar equivalent (calculated at the Currency
Rate) of euro 250 million (less the Relevant
Deduction) of New Senior Notes denominated in US
dollars being required to be issued in the First
Initial Distribution under both Schemes. No New
Senior Notes denominated in euro will be issued
unless, based on all Claim Forms received before
5:00 p.m. (London time) on 17 April 2003 and all
Account
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Holder Letters delivered before 5:00 p.m. (New York
City time) on 17 April 2003, elections have been
made which would, if both Schemes become effective,
result in an aggregate of at least euro 250 million
(less the Relevant Deduction) of New Senior Notes
denominated in euro being required to be issued in
the First Initial Distribution under both Schemes.
The New Junior Notes will have an initial aggregate
principal amount equal to the sum of US$300 million
plus the US dollar equivalent (calculated at the
Currency Rate) of L117.27 million, unless the cash
element of the distribution to Corp Scheme
Creditors is increased by the net proceeds of any
asset disposals (in which event, the initial
aggregate principal amount of the New Junior Notes
will be decreased by 10/11ths of the sterling
amount by which the cash element is increased (such
calculation to reduce the L117.27 million figure
referred to above)). The New Junior Notes will be
denominated in US dollars.
Interest The New Senior Notes will bear interest from their
issue date at a per annum rate of 8 per cent.
payable quarterly in cash on each 15 January, 15
April, 15 July and 15 October, commencing 15 July
2003. On the first interest payment date for the
New Senior Notes, Corp will pay, in addition to
accrued interest on the outstanding principal
amount of the New Senior Notes, an amount per New
Senior Note equal to the amount of interest that
would have accrued on such New Senior Note if such
New Senior Note had been outstanding for the period
from 1 May 2003 to the issue date of the New Notes.
The New Junior Notes will bear interest from their
issue date at a per annum rate of 10 per cent.
payable quarterly in cash or, at Corp's option, at
a per annum rate of 12 per cent. payable quarterly
in kind (by issuing additional New Junior Notes to
the holders of New Junior Notes) on each 31
January, 30 April, 31 July and 31 October,
commencing 31 July 2003. On the first interest
payment date for the New Junior Notes, Corp will
pay, in addition to accrued interest on the
outstanding principal amount of the New Junior
Notes, an amount per New Junior Note equal to the
amount of interest that would have accrued on such
New Junior Note if such New Junior Note had been
outstanding for the period from 1 May 2003 to the
issue date of the New Notes.
Maturity The New Senior Notes will mature on 30 April 2008.
The New Junior Notes will mature on 31 October
2008.
Optional Redemption All of the outstanding New Notes may be redeemed at
Corp's option in whole, but not in part, at any
time at a redemption price in cash equal to the
greater of (i) 110 per cent. of their principal
amount, and (ii) a make-whole amount equal to the
sum of the present values of remaining scheduled
payments of principal and interest, using a
discount rate that is 50 basis points above the
yield on US treasuries of similar maturity to the
New Senior Notes and New Junior Notes, as
applicable, plus, in each case, accrued and unpaid
interest.
Mandatory Redemption The New Notes are subject to mandatory early
redemption in certain circumstances. The New Notes
must be redeemed prior to their stated maturity in
whole or in part using the proceeds from the
Mandatory Redemption Escrow Account, which is an
escrow account to be established for redemption of
the New Notes into which Corp will be required to
deposit, from time to time:
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I. EXPLANATORY STATEMENT
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SECTION 2: FURTHER EXPLANATION OF THE RESTRUCTURING -- PART C
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- releases to, or upon the order or instructions
of, Corp or its subsidiaries of certain cash
collateral security for performance bonding (as
described in more detail in Part D.4 of this
Section); and
- all net proceeds of asset sales received on or
after 1 May 2003, other than up to L82 million
of net proceeds from disposals of certain exempt
specified assets and, if there are no New Junior
Notes outstanding, proceeds reinvested in the
non-US core business within specified time
periods.
Corp will apply amounts in the Mandatory Redemption
Escrow Account to redeem first the New Junior Notes
and then, under certain circumstances, the New
Senior Notes, in each case at a redemption price in
cash of 110 per cent. of their principal amount
plus accrued and unpaid interest.
In addition, in the event of either a Change of
Control of Corp or the merger, consolidation or
sale of all or substantially all the assets of Corp
and its subsidiaries, taken as a whole, all of the
New Notes must be redeemed in whole, but not in
part, at a redemption price in cash equal to the
greater of (i) 110 per cent. of their principal
amount, and (ii) a make-whole amount equal to the
sum of the present values of remaining scheduled
payments of principal and interest, using a
discount rate that is 50 basis points above the
yield on US treasuries of similar maturity to the
New Senior Notes and New Junior Notes, as
applicable, plus, in each case, accrued and unpaid
interest.
Covenants The New Senior Notes and the New Junior Notes will
be issued under indentures that will contain
certain restrictive covenants. The restrictive
covenants will include, among other things:
- restrictions on indebtedness, guarantees, sale
and leaseback transactions and the issuance of
preferred stock;
- restrictions on dividends, distributions,
investments and other restricted payments;
- restrictions on acquisitions;
- restrictions on liens;
- restrictions on derivative transactions;
- restrictions on transactions with affiliates
(including Ringfenced Entities);
- restrictions on the issuance and sale of equity
interests in Corp's subsidiaries;
- restrictions on asset sales; and
- restrictions on mergers, consolidations and
sales of all or substantially all assets.
Each of the covenants will be subject to exceptions
and qualifications.
In addition, under the indenture governing the New
Senior Notes (but not the New Junior Notes),
beginning as of 30 September 2005 the Group will be
required to meet financial covenants with respect
to a minimum ratio of consolidated EBITDA to
consolidated finance charges and a maximum ratio of
consolidated indebtedness to consolidated EBITDA,
in each case
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calculated with respect to the consolidated Group
(but excluding the Ringfenced Entities if any New
Junior Notes are outstanding).
The indentures will provide for customary grace
periods and remedies. When the New Senior Notes and
the New Junior Notes are simultaneously
outstanding, however, the indentures will provide
for longer grace periods and require a larger
percentage of the noteholders to take enforcement
action in the case of certain non-payment covenant
defaults.
Purchase of New Notes The indentures governing the New Notes will provide
that Corp and its subsidiaries may purchase
outstanding New Notes only after the second
scheduled Senior Note Interest Payment Date or
Junior Note Interest Payment Date, as the case may
be, and then only if (a) no Default or Event of
Default under the New Senior Note indenture (in the
case of the New Senior Notes) or the New Junior
Note indenture (in the case of the New Junior
Notes) has occurred and is continuing; (b) interest
on the immediately two preceding Junior Note
Interest Payment Dates was paid in cash (rather
than in kind); and (c) Corp has not given notice of
an intention to pay interest on the next Junior
Note Interest Payment Date in kind.
US Ringfencing The covenants in the indentures governing the New
Notes will restrict the financial, operational and
other dealings that the Non-Ringfenced Entities can
have with the Ringfenced Entities. The covenants
for the New Notes will also require Corp to
separate the North American Access Business, BBRS
Business and OPP Business into separate
subsidiaries (or groups of subsidiaries) within the
US Ringfencing no later than the second anniversary
of the issue date of the New Notes. Moreover, the
Non-Ringfenced Entities will generally be
prohibited from providing funding for any of the
Ringfenced Entities and, following the separation
of the three principal businesses within the US
Ringfence, the North American Access Business, BBRS
Business and OPP Business will generally be
prohibited from providing funding to each other.
See Part A.2 of this Section for a description of
the US Ringfencing.
Guarantees and Security Corp's obligations under the New Notes will be
guaranteed by, inter alios, Corp's principal
operating subsidiaries. With limited exceptions,
the Guarantor coverage must include on an ongoing
basis (i) subsidiaries that together account for at
least 80 per cent. and (ii) each subsidiary that
individually accounts for more than 5 per cent., in
each case, of the total assets, total external
assets, total external sales and (commencing as of
31 March 2005) EBITDA of Corp and its subsidiaries.
Corp and the Guarantors will, with limited
exceptions, grant security over substantially all
of their respective assets to secure their
respective obligations under the New Notes and the
guarantees thereof as well as the Performance
Bonding Facility.
Payment Priorities Corp, the Guarantors and the trustees for the New
Notes, among others, will enter into a Security
Trust and Intercreditor Deed that will establish
the relative priorities among the New Senior Notes,
New Junior Notes, the Performance Bonding Facility
and certain intra-Group liabilities with respect to
the obligations of Corp and the Guarantors.
Following the occurrence of a payment Default
and/or an acceleration of the maturity of the New
Senior Notes, all proceeds from enforcement of the
security granted by Corp and the Guarantors (where
such Guarantors
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are providers of security) to secure their
respective obligations under the New Notes and the
guarantees thereof and the Performance Bonding
Facility will be applied as follows:
- first, to the fees and expenses of the trustees
and other agents;
- second, to the lenders providing the Performance
Bonding Facility;
- third, to the repayment of the New Senior Notes;
and
- fourth, to the repayment of the New Junior
Notes.
Payment and Security
Enforcement Blocks Under the terms of the Security Trust and
Intercreditor Deed and the indentures for the New
Notes, no payments may be made on the New Junior
Notes (other than payments of interest in kind) and
no redemptions of the New Junior Notes from amounts
contained in the Mandatory Redemption Escrow
Account may be made (subject to limited exceptions)
(i) upon the occurrence of a Default under the New
Senior Notes and the delivery of notice of such
Default by the Senior Note Trustee to the Security
Trustee for a period lasting until the earlier of
(a) the expiration of 179 days after the date of
such notice, (b) the date on which such Default is
no longer continuing, (c) the date on which the
holders of a majority of the principal amount of
the New Senior Notes consent, or (d) the payment in
full of all obligations under the New Senior Notes
and the New Senior Note indenture, or (ii) upon the
occurrence of a payment Default or acceleration of
the New Senior Notes following an Event of Default
under the New Senior Notes or the New Senior Note
indenture until the earlier of (a) the date on
which the payment Default has been remedied or
waived and, if the New Senior Notes have been
accelerated, the acceleration has been rescinded,
(b) the date on which the holders of a majority of
the principal amount of the New Senior Notes
consent, or (c) the payment in full of all
obligations under the New Senior Notes and the New
Senior Note indenture.
The Security Trust and Intercreditor Deed further
provides that in the event of a default under the
New Senior Notes, the holders of the New Junior
Notes may not accelerate the New Junior Notes
during the 179-day or shorter period referred to in
clause (i) of the previous sentence. In addition,
under the terms of the Security Trust and
Intercreditor Deed, the holders of the New Junior
Notes may not take enforcement action against any
security securing the New Junior Notes without the
consent of the holders of the New Senior Notes or
unless all liabilities arising under the New Senior
Notes have been discharged in full.
The Security Trust and Intercreditor Deed further
provides that if a payment default occurs under the
Performance Bonding Facility, the lenders
thereunder may require the obligors to provide full
cash collateral to cover all outstanding
liabilities but may not accelerate the liabilities
under the Performance Bonding Facility or take the
other enforcement action for 180 days unless the
New Senior Notes have been accelerated.
Security Numbers The CUSIP for the New Senior Notes denominated in
euro (if any are issued) will be G58129AB6.
The CUSIP for the New Senior Notes denominated in
US dollars (if any are issued) will be G58129AA8.
The CUSIP for the New Junior Notes will be
G58129AD2.
Further details of the security and intercreditor arrangements affecting the New
Notes are set out in Appendix 10.
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C.4 SUMMARY OF KEY ACTUAL AND CONTINGENT CLAIMS
Schedule 3 to the Corp Scheme in part II contains a list of Scheme Creditors who
may have a Scheme Claim. The aggregate amount (in sterling) of claims listed in
Schedule 3 in part II is approximately L5.193 billion. The fact that a claim is
listed in Schedule 3 at a certain amount does not mean that the particular claim
will be Admitted at that, or any other, amount. There are three principal areas
of actual and contingent claims listed in Schedule 3 to the Corp Scheme:
a. BANK FACILITY AND BOND DEBT: Corp is indebted as at the Record Date
to:
(i) the Syndicate Banks pursuant to the terms of the Bank Facility
in the principal sums of US$2,226,600,000 and L650,000,000,
together with accrued but unpaid interest of US$40,271,358 and
L18,199,947;
(ii) the relevant Bondholders pursuant to the terms of the 2005
Eurobonds in the principal sum of E500,000,000 together with
accrued but unpaid interest of E12,559,932;
(iii) the relevant Bondholders pursuant to the terms of the 2010
Eurobonds in the principal sum of E1,000,000,000 together with
accrued but unpaid interest of E28,469,178;
(iv) the relevant Bondholders pursuant to the terms of the 2010
Yankee Bonds in the principal sum of US$900,000,000 together
with accrued but unpaid interest of US$31,687,500; and
(v) the relevant Bondholders pursuant to the terms of the 2030
Yankee Bonds in the principal sum of US$900,000,000 together
with accrued but unpaid interest of US$34,218,750;
b. INDIRECT CLAIMS BY PLC: these comprise claims under inter-company
loan balances and through ownership (via Ancrane) of some of the
indebtedness listed in (ii) to (v) above (E324,603,000 and
US$261,101,000 of the principal sum is owed to Ancrane). Corp and
plc currently anticipate that these claims (inclusive of accrued but
unpaid interest) will amount to approximately L776 million in
aggregate; and
c. OTHER THIRD-PARTY AND ASSOCIATED COMPANY CLAIMS: these are expected
to include claims under various loans, guarantees, and a US class
action and other lawsuits, as well as other potential claims.
In light of the detailed due diligence that has been undertaken in relation to
its financial indebtedness, Corp acknowledges that the principal amount of the
claims of the Syndicate Banks and the claims in respect of the Bonds set out in
a. above are due and owing and anticipates that these claims, in each case
together with interest accruing pursuant to the terms of the Bank Facility or
the terms of the relevant Bonds, as appropriate, for the period up to, and
including, the Record Date, will be Admitted in the amounts set out in Schedule
3 to the Corp Scheme in part II.
Schedule 3 to the plc Scheme in part III contains a list of Scheme Creditors who
may have a Scheme Claim. The aggregate amount (in sterling) of claims listed in
Schedule 3 in part III is approximately L4.68 billion. The fact that a claim is
listed in Schedule 3 at a certain amount does not mean that the particular claim
will be Admitted at that, or any other, amount. There are two principal areas of
actual and contingent claims listed in Schedule 3 to the plc Scheme:
a. GUARANTEES OF CORP'S BANK FACILITY AND BOND DEBT: plc has guaranteed
the indebtedness of Corp listed in paragraph a. above; and
b. OTHER THIRD-PARTY CLAIMS: these are expected to include claims under
various loans, guarantees, and a US class action and other lawsuits,
as well as other potential claims.
In light of the detailed due diligence that has been undertaken in relation to
its financial indebtedness, plc acknowledges that the principal amount of the
claims of the Syndicate Banks and the claims in respect of the Bonds under the
guarantees referred to in a. above are due and owing and anticipates that these
claims, in each case together with interest accruing pursuant to the terms of
the Bank Facility or the terms of the relevant Bonds,
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as appropriate, for the period up to, and including, the Record Date, will be
Admitted in the amounts set out in Schedule 3 to the plc Scheme in part III.
Claims that would be barred by statute or claims that are otherwise
unenforceable in England and Wales or which arise under a contract which is void
or, being voidable, has duly been avoided, are not liabilities for the purposes
of the Schemes.
C.5 COMPLETION OF THE RESTRUCTURING
As discussed in more detail in Part B of this Section, if the interim security
is not released prior to the Corp Scheme Meeting, neither Corp nor plc will
proceed with its respective Scheme (see Part D.1 of this Section for further
detail on the circumstances in which the interim security is expected to be
released).
Each of the Schemes becoming effective will be dependent on, among other things,
securing the necessary support of the Scheme Creditors in the relevant Scheme
Meeting to be held as part of the scheme of arrangement process, as well as the
sanction of the English Court and the granting of a permanent injunction order
by the US Bankruptcy Court. No assurance can be given that Corp and plc will be
able to satisfy the conditions to completion of the Restructuring (described in
more detail below), or that circumstances will not arise that otherwise make it
impossible to proceed with the Restructuring. Certain risks related to a failure
to implement or a delay in implementing the Restructuring, risks arising from
implementation of the Restructuring, operating risks and risks related to
ownership of the New Shares, the New Notes and the Warrants are set out in Part
F of this Section, Risk Factors.
While the Corp Scheme will not be conditional upon the plc Scheme becoming
effective, the plc Scheme will be conditional on the Corp Scheme becoming
effective. Any order approving the plc Scheme will not be delivered to the
Registrar of Companies (which delivery would make the plc Scheme effective)
until an order approving the Corp Scheme has been similarly delivered.
The Schemes will not be conditional on the Listing of the New Shares, the New
Notes and/or the Warrants. However, it is expected that the New Shares, New
Notes and Warrants will be listed on the Effective Date of the Corp Scheme. Corp
will use its reasonable endeavours to effect the Listing of the New Shares, the
New Notes and the Warrants as soon as possible on or after the Effective Date of
the Corp Scheme. (See details of risks arising from implementation of the
Restructuring in Part F.2).
The Schemes will not be conditional on the approval of plc Shareholders. The
Co-ordination Committee and the Informal Committee of Bondholders with whom Corp
and plc negotiated the Heads of Terms indicated that they would not be prepared
to support a Restructuring that requires plc Shareholder approval on the grounds
that, considering the financial condition of the Group and the economic interest
of plc Shareholders, such a vote would be inappropriate. Corp and plc believe
that if the Syndicate Banks and the Informal Committee of Bondholders withdraw
their support for the Restructuring, Corp and plc will be forced to commence
insolvency proceedings. On this basis, Corp and plc approached the UKLA for a
waiver of the requirement to seek plc Shareholder approval in connection with
the Restructuring. The UKLA has granted this waiver.
The New Shares to be allotted pursuant to the Corp Scheme will be paid up by the
release of, or agreement not to commence or continue prohibited proceedings in
respect of, both liquidated and unliquidated Scheme Claims. The Act requires the
consideration for an allotment of shares partly paid up by the release of
liabilities for unliquidated sums to be independently valued prior to allotment,
and accordingly Corp has engaged BDO Stoy Hayward to prepare and deliver a
report complying with the provisions of the Act before the New Shares are
allotted.
CONDITIONS TO EFFECTIVENESS OF THE SCHEMES
In order to ensure that certain conditions are satisfied before the Schemes can
come into effect, Corp and plc will not deliver a copy of any Court order
sanctioning the Schemes for registration to the Registrar of Companies in
England and Wales until the relevant conditions are satisfied.
Corp will not take the necessary steps to make the Corp Scheme effective unless
and until: (a) Corp has, following the passing of a unanimous Board resolution
to approve the same, provided confirmation in writing to
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the Prospective Supervisors (for the sole benefit of the Prospective
Supervisors) prior to each of (i) the release of the interim security granted by
Corp through its special purpose subsidiary Highrose Limited, (ii) the Corp
Scheme Meeting, (iii) the hearing to sanction the Corp Scheme and (iv) the
Effective Date, to the effect that Corp remains satisfied that the reserves
built into the Corp scheme are sufficient to ensure the same level of
distribution will be made to all Corp Scheme Creditors and that Corp remains of
the opinion that its statement as to the Corp Group's working capital contained
in Part D.21 of this Section remains valid; (b) the Prospective Supervisors of
the Corp Scheme have provided confirmation in writing to Corp (for Corp's sole
benefit) on the day of, but prior to, each of events (i) to (iv) above to the
effect that they have no reason to disagree with Corp's view that the reserves
built into the Corp Scheme are sufficient to meet distributions due to be made
to all Corp Scheme Creditors; (c) a permanent injunction order of the US
Bankruptcy Court under Section 304 of the Bankruptcy Code has been granted in
respect of the Corp Scheme; and (d) all conditions precedent (other than those
relating to the Corp Scheme becoming effective) set out in the Working Capital
Facility and the Performance Bonding Facility are satisfied or waived by the
facility agents. Corp will undertake to the Court to file the Court order
approving the Corp Scheme with the Registrar of Companies as soon as the
conditions set out above are satisfied provided such conditions are satisfied on
or before 19 June 2003.
plc will not take the necessary steps to make the plc Scheme effective unless
and until: (a) plc has, following the passing of a unanimous Board resolution to
approve the same, provided confirmation in writing to the Prospective
Supervisors (for the sole benefit of the Prospective Supervisors) prior to each
of (i) the release of the interim security granted by Corp through its special
purpose subsidiary Highrose Limited, (ii) the plc Scheme Meeting, (iii) the
hearing to sanction the plc Scheme and (iv) the Effective Date, to the effect
that plc remains satisfied that the reserves built into the plc Scheme are
sufficient to ensure the same level of distribution will be made to all plc
Scheme Creditors; (b) the Prospective Supervisors of the plc Scheme have
provided confirmation in writing to plc (for plc's sole benefit) on the day of,
but prior to, each of events (i) to (iv) above to the effect that they have no
reason to disagree with plc's view that the reserves built into the plc Scheme
are sufficient to meet distributions due to be made to all plc Scheme Creditors;
(c) a permanent injunction order of the US Bankruptcy Court under Section 304 of
the Bankruptcy Code is granted in respect of the plc Scheme; and (d) a copy of
the Court's order sanctioning the Corp Scheme has been delivered for
registration to the Registrar of Companies in England and Wales. plc will
undertake to the Court to file the Court order approving the plc Scheme with the
Registrar of Companies as soon as the conditions set out above are satisfied
provided such conditions are satisfied on or before 19 June 2003.
Corp will not pursue a permanent injunction order of the US Bankruptcy Court
unless the English Court makes an order sanctioning the Corp Scheme. plc will
not pursue a permanent injunction order of the US Bankruptcy Court unless the
English Court makes orders sanctioning both the Corp Scheme and the plc Scheme.
If a Scheme has not been made effective on or before 19 June 2003, the Scheme
will be withdrawn and not made effective.
WITHDRAWAL OF SCHEMES
As a result of the extensive due diligence undertaken by Corp and plc and having
taken account of the results of the advertising process, Corp and plc are
satisfied that the Reserve Claims Segment in respect of each of the Corp and plc
Schemes will be sufficient to ensure the same level of distribution will be made
to all plc Scheme Creditors. In addition the Prospective Supervisors have
confirmed that they have no reason to disagree with that view.
In order for the Schemes to proceed the Scheme Companies must indicate that they
remain satisfied that the Reserve Claim Segment under each Scheme will be
sufficient to meet distributions due to be made in respect of Reserve Claims in
accordance with the terms of the Schemes. If each Scheme Company remains so
satisfied, each Scheme Company will give written confirmations on certain key
dates set out below.
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Board meetings of each Scheme Company will be held at 5.00 pm on the calendar
day before each of the following key dates:
a. the Release Date;
b. the date of the Scheme Meetings;
c. the date of the commencement of the Court sanction hearing; and
d. the Effective Date,
(each of a. to d. above being a "CONFIRMATION DATE").
The Board meetings will consider whether the Board can pass the Confirmatory
Resolution and whether the relevant Scheme Company is able to deliver the Scheme
Company Confirmation to the Prospective Supervisors confirming that the relevant
Scheme Company remains satisfied that the level of reserves built into each of
the Schemes will be sufficient to ensure the same level of distribution will be
made to all relevant Scheme Creditors and, in the case of Corp, that the
statement as to the Corp Group's working capital contained in Part D.21 of this
Section remains valid. On receipt of the Scheme Company Confirmation, the
Prospective Supervisors will be required to consider whether, based on the
information available to them at that time, they are able to confirm in writing
that they have no reason to disagree with the relevant Scheme Company's view
that the level of reserves built into each of the Schemes will be sufficient to
ensure the same level of distribution will be made to all relevant Scheme
Creditors by delivering the Supervisor's Confirmation to the relevant Scheme
Company by 7.00 a.m. on each Confirmation Date.
Unless the relevant Scheme Company receives the Prospective Supervisor's
Confirmation by 7.00 a.m. on each Confirmation Date, the relevant Scheme Company
will not proceed with the proposed Scheme and the relevant Scheme will be
withdrawn.
If the Corp Scheme is withdrawn then the plc Scheme will also be withdrawn, but
the Corp Scheme will not be withdrawn only because the plc Scheme is withdrawn.
C.6 MECHANICS OF THE RESTRUCTURING
OVERVIEW OF THE SCHEMES
As mentioned above, the Schemes are Court sanctioned compromises under section
425 of the Act between each of Corp and plc and their respective Scheme
Creditors. These creditors comprise all of the creditors of Corp and plc with
the exception of certain "Excluded Creditors" (the identity of the Excluded
Creditors and the basis upon which their claims are to be excluded are set out
in Appendix 9). No allotment and issue or transfer of securities (or the cash
proceeds of sale thereof) or cash will be made to any person where prohibited by
any applicable law or regulation.
The Court gave directions on 24 March 2003 for Scheme Meetings of Scheme
Creditors of Corp and plc to be convened respectively for 10.00 a.m. and 10.15
a.m. (or as soon as possible thereafter following the conclusion or adjournment
of the first meeting) on 25 April 2003. Notices convening the Scheme Meetings
for these times are set out in part VI, Sections A and B of this document. The
Scheme Meetings will take place at the Institute of Civil Engineers, 1 Great
George Street, London SW1.
To become effective, the Schemes must be approved by Scheme Creditors at a
Scheme Meeting. The Schemes each require the approval of a majority in number
representing three-fourths in value of the Scheme Creditors present and voting
(in person or by proxy) at each Scheme Meeting. The Schemes must then receive
the sanction of the Court. It is currently anticipated that the Court hearing to
sanction the Schemes will take place on 12 to 13 May 2003.
The Schemes are set out in full in parts II and III of this document.
VOTING ON THE SCHEMES
Scheme Creditors are entitled to attend and vote at the Scheme Meetings either
in person or by proxy. Although the Eurobond Trustee and The Bank of New York
are both Corp Scheme Creditors and the Eurobond Trustee and
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the Yankee Bond Trustee are both plc Scheme Creditors, none of them has any
economic interest in the Bonds in respect of which they are the trustee or the
depositary, as the case may be. Bondholders in respect of Eurobonds and Yankee
Bonds represented by a global Eurobond or a global Yankee Bond, as the case may
be, are not Scheme Creditors. Accordingly, certain creditors have requested Corp
to exchange the global Yankee Bonds for definitive Yankee Bonds and the global
Eurobonds for individual global Eurobonds, in each case with a view to ensuring
that Definitive Holders in whose names Yankee Bonds are registered or who become
the bearers by attornment of the Eurobonds after such exchange can attend and
vote at the Corp Scheme Meeting, and have requested plc to extend the benefit of
its guarantees of the Eurobonds and the Yankee Bonds to the Definitive Holders
of such Bonds with a view to ensuring that the Definitive Holders can attend and
vote at the plc Scheme Meeting in respect of such Bonds. Corp, plc and, in the
case of the request to exchange Eurobonds, the Eurobond Trustee, have each
agreed to these requests.
Definitive Holders of Bonds who wish to attend and/or vote at the Scheme
Meetings must ensure that this is specified in the Account Holder Letter
delivered by their Account Holder. Further instructions are set out in Appendix
28.
Only the votes of Scheme Creditors voting at the Scheme Meetings in person or by
proxy can be taken into account for the purpose of establishing whether the
requisite approval for the Schemes has been obtained.
In order to attend and vote at the Scheme Meetings Scheme Creditors (other than
Definitive Holders) must complete and lodge a Form of Proxy (as summarised
below). Further instructions are set out in Appendix 27.
Definitive Holders may arrange for forms of proxy to be completed on their
behalf by Bondholder Communications by ensuring that their Account Holder gives
appropriate instructions on their behalf in the Account Holder Letter. Further
instructions are set out in Appendix 28.
VOTING BY PROXY
Scheme Creditors (other than Definitive Holders)
Set out at Appendix 29 is a form of Form of Proxy for use by Scheme Creditors
(other than Definitive Holders) in voting on the Schemes. The relevant Form of
Proxy should be completed in accordance with the instructions set out on it,
indicating the value of the Scheme Claim, including interest accruing on it, if
any, for the period up to and including the Record Date. See below for an
explanation of the value of a Scheme Creditors' Claim for voting purposes.
Corp and plc may require details of any Scheme Creditors' entitlement to Scheme
Claims in order to establish their entitlement to vote. Instructions to this
effect are set out on the Forms of Proxy.
Scheme Creditors (other than Definitive Holders) are requested to complete the
relevant Form of Proxy in accordance with the instructions set out on it and
return it to KPMG LLP, 8 Salisbury Square, London EC4Y 8BB, England, UK, for the
attention of Philip Wallace, by 12 noon (London time) on 24 April 2003 (although
it is recommended that they be received by 5.00 p.m. (London time) on 17 April
2003). If for any reason this cannot be done, Forms of Proxy may be handed in at
the registration desk at the relevant Scheme Meeting and Scheme Creditors are
urged to do so no later than one hour before the scheduled time of the relevant
Scheme Meeting. Thereafter Scheme Creditors (other than Definitive Holders) may
lodge completed Forms of Proxy with the chairman of the relevant Scheme Meeting
at that Scheme Meeting. Forms of Proxy may be returned by fax (to fax number +44
(0)20 7694 3011 marked for the attention of Philip Wallace and Richard Heis).
The lodging of a Form of Proxy in advance of the Scheme Meeting does not prevent
a Scheme Creditor from revoking such proxy and delivering a new Form of Proxy on
the date of the Scheme Meeting or revoking such proxy and attending in person.
Please read the instructions on the Forms of Proxy carefully before completing
it. Failure to complete the Form of Proxy in accordance with those instructions
may result in your vote being disallowed.
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Definitive Holders
Each Definitive Holder who wishes authority to be given to Bondholder
Communications to appoint a proxy to attend a Scheme Meeting on his behalf will
be required to ensure that his Account Holder gives the appropriate instructions
in the Account Holder Letter on his behalf.
Account Holder Letters should be returned to Bondholder Communications by 5:00
p.m. (New York City time) on 17 April 2003. Failure to deliver an Account Holder
Letter to Bondholder Communications by the time and date specified above does
not preclude the relevant Definitive Holder from voting at the Scheme Meetings
provided that the Definitive Holder or his proxy can establish his entitlement
by producing a copy of the Account Holder Letter or form of proxy (which should
be obtained from Bondholder Communications), as the case may be, to the
registration desk or the chairman of the relevant Scheme Meeting.
Detailed instructions explaining the action to be taken by persons with
interests in Bonds are set out in Appendix 28 of this document.
SCHEME MEETINGS AND COURT HEARING
An opportunity will be given at the Scheme Meetings for Scheme Creditors
(including Definitive Holders) to ask any questions and to raise any issues they
may have in relation to the Schemes. Provided that the Schemes are approved by
the Scheme Creditors at the Scheme Meetings by the requisite statutory majority,
Scheme Creditors are also entitled to attend the hearing of the Scheme
Companies' applications to the Court to sanction the Schemes which is expected
to be heard on 12 to 13 May 2003. Scheme Creditors will be notified of the
precise dates of the subsequent steps at the Scheme Meetings to the extent they
are then known, and notice of the hearing will be published in certain national
daily newspapers, which are expected to be The Times and the international
editions of the Wall Street Journal, the Financial Times and the International
Herald Tribune. Scheme Creditors who wish to raise any issues in advance of the
Scheme Meetings or the Court hearing are encouraged to contact KPMG whose
details are set out in Appendix 23.
VALUE OF A SCHEME CREDITOR'S SCHEME CLAIM FOR VOTING PURPOSES
For the purpose of valuing a Scheme Claim for voting purposes, all Scheme Claims
will be converted to sterling at the Voting Rate (which should not be confused
with the Scheme Rate, which is used for valuing Scheme Claims to be Admitted
under the Schemes). The amount of the Scheme Claim admitted by the relevant
Scheme Company for voting purposes does not (of itself) constitute an admission
of the existence or amount of any liability of the relevant Scheme Company, and
will not bind the relevant Scheme Company, the Supervisors or Scheme Creditors.
The value of a Scheme Claim for voting purposes will be taken net of any
applicable set-off or cross-claim.
The chairman of each Scheme Meeting may, for voting purposes only, reject a
Scheme Claim in whole or in part if he considers that it does not constitute a
fair and reasonable assessment of the relevant sums owed to the relevant Scheme
Creditor by the relevant Scheme Company or if the relevant creditor has not
complied with the voting procedures described above. If a claim is for an
unliquidated amount or for an amount the quantum of which has not been
ascertained and the chairman is able to place a minimum value on a Scheme Claim
he will admit it at that value. If a Scheme Claim is disputed in its entirety,
whether it is liquidated or unliquidated, the chairman will not admit it. The
chairman's decision will be final. The chairman will, however, advise the
relevant Scheme Creditor of his decision to reject such Scheme Creditor's claim
for voting purposes before the Scheme Meeting if he considers it to be
practicable and, in any event, at or after the Scheme Meeting, and report his
decision to the Court.
The Corp Scheme Meeting will be chaired by Corp's Chairman, John Devaney. Corp's
Chief Executive Officer, Michael Parton, will act as his deputy chairman.
The plc Scheme Meeting will be chaired by plc's Chairman, John Devaney. plc's
Chief Executive Officer, Michael Parton, will act as his deputy chairman.
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C.7 SCHEME CLAIMS AND DISTRIBUTION MECHANICS
SCHEME CLAIMS
The Schemes will apply to all Liabilities of Corp and plc as at the Record Date
other than the Excluded Claims.
In the context of making Scheme Claims, the term "SCHEME CREDITOR" in so far as
the Bonds are concerned means only the Eurobond Trustee and the Yankee Bond
Trustee and does not include any other person with an interest in Bonds.
No assignment or transfer of a Scheme Claim (which, in this context in relation
to the Bonds, means the claims of the Eurobond Trustee and the Yankee Bond
Trustee only) after the Record Date will be recognised for the purposes of
determining entitlements under the Schemes, provided that where Corp or plc has
received from the relevant parties notice in writing of such assignment or
transfer the Supervisors, may, in their sole discretion and subject to the
production of such other evidence as they may require and to any other terms and
conditions which they may consider necessary or desirable, agree to recognise
such assignment or transfer for the purposes of determining entitlements under
the Schemes or attendance at any meeting of Scheme Creditors convened after the
Effective Date. No assignee or transferee of a Scheme Claim following the Record
Date will be entitled to vote at the Scheme Meetings or, save as described
above, participate in the relevant Scheme. This paragraph does not affect the
trading of Bonds which may be freely traded in the period prior to the date at
which Custody Instructions are issued in respect of the relevant Bonds (further
details of which are set out in Appendix 28).
Any assignor or transferor of a Scheme Claim should provide a copy of this
document and any other document issued with or appended to it to any assignee or
transferee before the relevant Scheme Claim is assigned or transferred to the
assignee or transferee.
Corp and plc placed advertisements in The Times and the international editions
of the Financial Times, the Wall Street Journal and the International Herald
Tribune on Thursday, 19 September 2002. These advertisements explained that Corp
and plc proposed to restructure their debt through schemes of arrangement under
section 425 of the Act and requested anyone who might have a claim against Corp
or plc (or both) to contact KPMG by no later than 5.00 p.m. London time on
Friday, 11 October 2002 with details of their claim (whether an actual claim or
a contingent one). These advertisements were repeated on 30 January 2003
requesting anyone who might have a claim against Corp or plc (or both) to
contact KPMG without delay with details of their claim (whether an actual claim
or a contingent one).
Corp and plc have written to those of their Known Creditors whose Scheme Claims
will be compromised by the proposed schemes of arrangement, with the exception
of certain financial creditors with Known Claims who have been represented in
negotiations with Corp and plc regarding the development of the Restructuring,
creditors for unclaimed interest and redemptions of loan notes issued by Corp
whose potential claims are easily quantified and are provided for in full, and
those whose addresses Corp and plc have been unable to ascertain. These letters
requested the recipients to respond to KPMG within 21 days of the date of the
letter submitting details of any claims (whether actual or contingent claims)
that they have against Corp or plc or both.
With the exception of two clearly frivolous claims, this process identified only
one claim against plc, and no claims against Corp, in each case which had not
previously been identified by the due diligence undertaken by Corp and plc. The
one claim identified is disputed by plc, but is provided for in full in the plc
Scheme.
EXCLUDED CREDITORS
The Schemes provide for certain types of creditor to be excluded from the
Schemes. These creditors will be unaffected by the Schemes and are expected to
be paid in the ordinary course.
FURTHER DETAILS OF THE TYPES OF CLAIMS BEING EXCLUDED FROM THE SCHEMES, AND THE
REASONS WHY SUCH CLAIMS ARE BEING EXCLUDED, ARE SET OUT IN APPENDIX 9.
The claims of certain creditors have been excluded from the Corp Scheme for a
variety of reasons, as follows:
a. that Corp will continue to carry on business as the holding company
of a very substantial group of companies, comprising some 300
subsidiaries, with an aggregate turnover, in the six months ended
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I. EXPLANATORY STATEMENT
(IN COMPLIANCE WITH SECTION 426 OF THE COMPANIES ACT 1985)
SECTION 2: FURTHER EXPLANATION OF THE RESTRUCTURING -- PART C
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31 December 2002, of approximately L1.5 billion and it is necessary
to exclude such claims to ensure the continuing viability of the
restructured Group -- those categories which are attributable (in
whole or in part) to the continuation of the restructured Group are
categories 1, 2, 3, 4, 5, 6, 7, 8, 11, 15 and 16;
b. that the only type of scheme which Corp's principal financial
creditors are prepared to support is a scheme which involves an
immediate distribution calculated by reference to specific reserves;
and an immediate distribution which consists of the whole amount to
which, when calculated by reference to those specific reserves, an
admitted scheme creditor is entitled -- the categories which are
attributable (in whole or in part) to the nature of the proposed
Scheme are categories 2, 3, 4, 5, 9, 17 and 18;
c. that certain claims would be preferential if Corp were to be wound
up -- the categories which are attributable (in whole or part) to
the preferential nature of the claims comprised in them are
categories 1, 2 and 10;
d. that certain claims would, or might, be incapable of being
compromised by means of a scheme -- the category which is
attributable (in whole or part) to the inability to compromise
obligations is category 2;
e. that certain claims would, unless excluded, form a separate class
which it would be impractical to consult on that basis -- the
categories which are attributable (in whole or in part) to
impractical class problems are categories 9 and 14;
f. that there are certain claims which it would be uneconomic to
include -- the categories which are attributable (in whole or in
part) to the costs of including them are categories 13 and 14; and
g. that certain claims relate to parties who are assisting in the
consideration, negotiation and/or implementation of the Corp Scheme
-- the category which is attributable (in whole or in part) to the
implementation of the Corp Scheme is category 12.
The plc Scheme seeks to exclude the following types of claim:
a. contracts that will be novated to Corp or claims that will be
settled -- the categories which are attributable (in whole or in
part) to this are categories 1 and 9;
b. claims that would be preferential if plc were to be wound up -- the
categories which are attributable (in whole or part) to the
preferential nature of the claims comprised in them are categories 2
and 3;
c. claims that would, or might, be incapable of being compromised by
means of a scheme -- the category which is in part attributable to
this being incapable of compromise is category 2;
d. claims that would, unless excluded, form a separate class which it
would be impractical to consult on that basis -- the category which
is attributable to impractical class problems is category 4;
e. claims which it would be uneconomic to include -- the category which
is attributable to the cost of including them is category 8; and
f. claims that relate to parties who are assisting in the
consideration, negotiation and/or implementation of the plc Scheme
-- the categories which are attributable (in whole or in part) to
assisting in the implementation of the plc Scheme are categories 5,
6, 7 and 9.
(Further explanation of the reasons for excluding these categories of claims is
set out in Appendix 9).
The following obligations of plc have been novated to Corp (conditionally upon
the Corp Scheme becoming effective) and will be excluded from the Corp Scheme:
a. a guarantee provided to Finmeccanica SpA as the purchaser of certain
Italian subsidiaries sold by the Group in 2002;
83
I. EXPLANATORY STATEMENT
(IN COMPLIANCE WITH SECTION 426 OF THE COMPANIES ACT 1985)
SECTION 2: FURTHER EXPLANATION OF THE RESTRUCTURING -- PART C
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b. certain agreements between plc and BAE in respect of the merger of
the Group's former defence business with BAE; and
c. a licence agreement dated 1 December 1999 between Lemelson Medical,
Education and Research Foundation, Limited Partnership and plc.
In addition, the service contracts and letters relating to retirement benefits
(including FURBS) of Michael Parton and Michael Donovan have been novated to
Corp unconditionally.
These obligations will also be excluded from the compromise to be effected by
the Corp Scheme and will therefore be unaffected by the Corp Scheme.
CLAIMS WHICH HAVE THE BENEFIT (IN WHOLE OR IN PART) OF INSURANCE
Corp Scheme
The Corp Scheme excludes liabilities of Corp to third parties which are covered
by a Corp Insurance Policy or which would be covered by a Corp Insurance Policy
but for:
a. any excess, deductible or limit of liability applicable under any
Corp Insurance Policy to any such liability; or
b. any insurer failing to satisfy any Corp Insurance Policy claim in
full when payable when the insurer is in liquidation or provisional
liquidation or administration under the Insolvency Act 1986 or
subject to any scheme of arrangement entered into by it under
section 425 of the Act (or any equivalent or analogous proceeding or
arrangement in any other jurisdiction, including any proceeding
under chapter 11 of the Bankruptcy Code); or
c. the Corp Insurance Policy or any claim under it being void or
avoided by any insurer,
being liabilities of Corp in respect of which the third party would have rights
against the insurer under that insurance by virtue of Section 1 of the 1930 Act
in the event that any of the events set out in section 1(1)(b) of the 1930 Act
occurred with respect to Corp.
For further details see Appendix 9.
ANY CREDITOR WHO IS IN ANY DOUBT AS TO WHETHER THEIR CLAIM MAY BE EXCLUDED UNDER
THIS CATEGORY SHOULD SUBMIT A CLAIM FORM IN THE CORP SCHEME WITHOUT DELAY.
plc Scheme
Liabilities of plc to third parties which are covered by any contract of
liability insurance will be treated as a Scheme Claim. However, in the
circumstances explained in the next paragraph, such a Scheme Claim may be
partially (or wholly) covered by a contract of liability insurance and plc may
recover sums from its insurers (or from a compensation scheme which makes a
payment to plc where the relevant insurer has become insolvent) in respect of
all or part of that claim. Any such sums recovered will be held on trust for the
relevant plc Scheme Creditor.
The right to receive such sums recovered by plc applies in circumstances in
which, and to the extent that, plc's rights against the insurer in respect of
the liability constituted by the Scheme Claim would be transferred to and vest
in the Insured Scheme Creditor pursuant to the 1930 Act in the event of a
winding up order against plc.
The rationale for treating these claims in this way is that the liabilities are
covered (in whole or in part) by a third party insurer in circumstances where
plc's rights against the insurer in respect of its liability to the third party
concerned would be transferred in whole or part to, and vest in, the third party
by virtue of the 1930 Act if plc were to enter into an insolvency proceeding
under the Insolvency Act 1986.
Rights equivalent to those which third parties would have under the 1930 Act are
provided in the Scheme in order to ensure that creditors who would be protected
by the 1930 Act would not be better off by plc entering into an insolvency
proceeding under the Insolvency Act 1986 and so constitute a separate class of
creditors.
84
I. EXPLANATORY STATEMENT
(IN COMPLIANCE WITH SECTION 426 OF THE COMPANIES ACT 1985)
SECTION 2: FURTHER EXPLANATION OF THE RESTRUCTURING -- PART C
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The only claim of which plc is currently aware and which is covered by insurance
in circumstances in which an additional payment might potentially become payable
would be any liability that plc may be held to have in respect of the Tri-Star
Claim.
If liability in respect of the relevant Scheme Claim is established and such
liability appears to the Supervisors to be wholly or partly covered by a plc
Insurance Policy, the Supervisors will:
a. notify the relevant Scheme Creditor of the extent to which it
appears that the claim is covered by a plc Insurance Policy (an
"Insured Scheme Claim"); and
b. at the expense of the relevant Scheme Creditor, use reasonable
endeavours to enforce for the benefit of the relevant Scheme
Creditor all rights of recovery against an insurer in relation to
that Insured Scheme Claim.
A Distribution of Scheme Consideration in respect of that Insured Scheme Claim
will only be payable once the outcome of such enforcement is known and only to
the extent that the net proceeds of enforcement against the insurer held on
trust for the relevant Scheme Creditor are less than the amount which appears to
the Supervisors to be an Insured Scheme Claim.
FOR THE AVOIDANCE OF DOUBT CREDITORS OF PLC WHO MAY HAVE RIGHTS UNDER THE 1930
ACT SHOULD SUBMIT A CLAIM FORM FOR THE FULL AMOUNT OF THEIR CLAIM WITHOUT DELAY.
KNOWN CLAIMS AND RESERVE CLAIMS
During the Restructuring negotiations it became clear that the principal
financial creditors of Corp and plc would only support schemes of arrangement
that established a first fixed dividend to be payable to all Scheme Creditors by
way of an Initial Distribution on the Effective Date of the Schemes.
In order to set the level of that Initial Distribution, Corp and plc have
undertaken extensive due diligence to identify all creditors of Corp and plc.
The advertising process undertaken by Corp and plc before launching the Schemes
sought to ensure that as far as possible all Scheme Creditors were identified
and have been included in the schedule of all Known Claims. The provisions set
out in the schedule of Known Claims have been set at 100 per cent. or, where the
extent of the liability is unclear, on an estimated worst-case scenario basis.
In addition to the Known Claims both Schemes include reserves that the Scheme
Companies are satisfied will cover any other Scheme Claims that had not been
identified by the Record Date (the "RESERVE CLAIMS") and the Prospective
Supervisors have confirmed that they have no reason to disagree with this view.
However, as outlined above, neither Scheme Company will proceed with its Scheme
if either:
a. the relevant Scheme Company does not deliver the Scheme Company
Confirmation to the Prospective Supervisors on the calendar day
prior to each Confirmation Date confirming that the relevant Scheme
Company remains satisfied that the level of reserves will be
sufficient to ensure the same level of distribution will be made to
all relevant Scheme Creditors and, in the case of Corp, that its
statement as to the Corp Group's working capital contained in Part
D.21 of this Section remains valid; or
b. the relevant Scheme Company does not receive the Prospective
Supervisor's Confirmation by 7:00 a.m. on each Confirmation Date.
The Known Claims against Corp and plc as at the Record Date are listed in
Schedule 3 to the Corp Scheme and Schedule 3 to the plc Scheme respectively, set
out in parts II and III of this document respectively. The fact that a claim has
been provided for in the list of Known Claims at a certain amount does not mean
that the particular claim will be Admitted as a Scheme Claim at that, or any
other, amount. In particular, where the claim is currently in dispute or the
subject of litigation proceedings, the amount included in the Schedules only
represents what the relevant Scheme Company considers to be the maximum amount
of the claim, which may be disputed in whole or in part and in no way
constitutes any admission by the Scheme Company, the Prospective Supervisors,
the Supervisors or KPMG that a person with such a claim is a Scheme Creditor or
that a liability is owed to any person in respect of any claim or right.
85
I. EXPLANATORY STATEMENT
(IN COMPLIANCE WITH SECTION 426 OF THE COMPANIES ACT 1985)
SECTION 2: FURTHER EXPLANATION OF THE RESTRUCTURING -- PART C
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At the Court hearing to sanction the relevant Scheme, the relevant Scheme
Company will present to the Court a schedule of Scheme Claims compiled by the
Prospective Supervisors which will set out the details of the Scheme Creditors
with Known Claims which are proposed to be Admitted by the Supervisors on the
Effective Date and which, in accordance with the terms of the relevant Scheme,
will receive their Initial Distribution through the First Initial Distribution.
THE KNOWN CLAIMS SEGMENT AND THE RESERVE CLAIMS SEGMENT
In relation to each of the Corp and plc Schemes a portion of the Scheme
Consideration (the "KNOWN CLAIMS SEGMENT") will initially be set aside to meet
the Initial Distribution payable to the Known Creditors in respect of Admitted
Known Claims. The remaining portion of the Scheme Consideration (the "RESERVE
CLAIMS SEGMENT") will initially be set aside to meet the Initial Distribution
payable to the Reserve Creditors in respect of Admitted Reserve Claims. Save as
set out below, Reserve Creditors will not be entitled to participate in the
distribution to be made out of the Known Claims Segment and will only be
entitled to be paid their entitlement to the Scheme Consideration out of the
Reserve Claims Segment.
The quantum of Reserve Claims that could be met out of the Reserve Claims
Segment in each of the Corp Scheme and the plc Scheme is greater than the actual
quantum of Known Claims that are expected to be Admitted in that Scheme after
deducting or discounting Known Claims in respect of:
a. financial creditors;
b. landlords;
c. intra-group creditors; and
d. one disputed claim for a large but unspecified amount that has
already been tried by a judge in the US and ruled against on all
counts, but is pending appeal.
Given the level of due diligence that has been undertaken, Corp and plc are
satisfied that they have identified the claims of all financial creditors,
landlords and intra-group claims and all disputed claims which have no merit.
Accordingly, the level of the reserves would be sufficient to cover more than a
100 per cent. increase in the level of other claims against each Scheme Company.
It is currently anticipated that the Known Claims Segment and the Reserve Claims
Segment for each of the Schemes will, at the Effective Date, comprise the
elements of Scheme Consideration as set out in the tables below (assuming no
increase in the cash element of the Corp Scheme Consideration but that the plc
Scheme becomes effective on the same day as the Corp Scheme). These figures,
which are for illustrative purposes only, assume that each of the Known Claims
is Admitted to the relevant Scheme in the full sterling amount listed in
Schedule 3 to the relevant Scheme, calculated by applying, where necessary for
currency conversion, the Voting Rate.
CORP SCHEME
Known Reserve
Claims Claims
Segment Segment
------------- -------------
Cash L 333,360,148 L 8,024,527
Principal amount of New Senior Notes (sterling equivalent) L 441,505,803 L 10,627,771
Principal amount of New Junior Notes (sterling equivalent) L 302,103,439 L 7,272,127
Number of New Shares available for Corp Scheme Creditors 976,218,386 23,499,184
86
I. EXPLANATORY STATEMENT
(IN COMPLIANCE WITH SECTION 426 OF THE COMPANIES ACT 1985)
SECTION 2: FURTHER EXPLANATION OF THE RESTRUCTURING -- PART C
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PLC SCHEME
Known Reserve
Claims Claims
Segment Segment
----------- -----------
Cash L44,235,292 L2,361,519
Principal amount of New Senior Notes (sterling equivalent) L68,159,845 L3,638,741
Principal amount of New Junior Notes (sterling equivalent) L46,638,851 L2,489,834
Number of New Shares available for plc Scheme Creditors 150,708,991 8,045,661
For the purposes of calculating the above table Known Claims that are
denominated in a currency other than sterling and New Junior Notes that will be
issued by reference to a US dollar amount have been converted at the Voting
Rate. The final calculations as to Known Claims will be made at the Scheme Rate
(which will be set five Business Days before the Effective Date). The final
calculations as to the principal amounts of the New Senior Notes and the New
Junior Notes will be made at the Currency Rate (which will be set the Business
Day before the Corp Scheme Meeting).
The calculation of the Known Claims Segment and the Reserve Claims Segment under
the plc Scheme is based upon Ancrane's aggregate claims under the Corp Scheme of
approximately L776 million being Admitted (which is expected to occur) and the
sum of L7,000,000 being set aside from the cash element of the Corp Scheme
Consideration received via Ancrane on account of plc's Ongoing Costs.
If a Known Claim is rejected or reduced by the Supervisors in either Scheme then
that portion of the Known Claims Segment that would have been used to satisfy
that Known Claim (or part thereof) had it been Admitted will be added to the
Reserve Claims Segment, unless (in the case of the Corp Scheme only) that Known
Claim (or part thereof) is greater than L250,000,000, in which case the relevant
portion of the Known Claims Segment will be distributed promptly to all Admitted
Scheme Creditors.
If a Known Claim is Admitted in an amount higher than the amount set out in
Schedule 3 to the Corp Scheme or the plc Scheme set out in parts II and III of
this document respectively, the excess over the amount set out in the Schedules
to the Corp Scheme and plc Scheme set out in parts II and III of this document
respectively will be treated as an Admitted Reserve Claim.
THE WAITING PERIOD
The segregation of the Known Claims Segment and the Reserve Claims Segment will
continue for a period of twelve months from the Effective Date or such shorter
period as the Supervisors may determine in accordance with the terms of the
Schemes, known as the "WAITING PERIOD". On the expiry of the Waiting Period, all
Scheme Consideration remaining in both the Known Claims Segment and the Reserve
Claims Segment that has not been distributed to satisfy Known Claims or Reserve
Claims (as the case may be) will be held by the Supervisors to meet any Scheme
Claims which have not been Admitted or to make Further Distributions to all
Scheme Creditors as described below. Accordingly, only Scheme Claims which are
Admitted during the Waiting Period will be met out of either the Known Claims
Segment or the Reserve Claims Segment (as the case may be).
If at any stage after the Effective Date the Supervisors receive notice of a
Reserve Claim which:
a. if it is immediately Admitted in whole or in part would result in
the Supervisors considering that the Reserve Claims Segment of the
relevant Scheme will not be sufficient to meet the distributions
that are likely to be payable to all Reserve Creditors in respect of
Admitted Reserve Claims of that Scheme; and
b. the Supervisors cannot immediately determine whether or not, or the
extent to which, that Reserve Claim should be Admitted,
the Supervisors may consider that Reserve Claim for a period of up to 30
Business Days from the date on which that claim is submitted. On, or prior to,
the expiry of this period, the Supervisors will confirm to the relevant Scheme
Company and the Creditors' Committee constituted under the terms of the relevant
Scheme whether or
87
I. EXPLANATORY STATEMENT
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SECTION 2: FURTHER EXPLANATION OF THE RESTRUCTURING -- PART C
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not they consider that the Reserve Claims Segment will not be sufficient to
ensure that all Reserve Creditors receive the same level of distribution as
those creditors participating in the First Initial Distribution in respect of
Admitted Reserve Claims of that Scheme. If, after such consideration, the
Supervisors are not satisfied that the Reserve Claims Segment will be sufficient
to meet distributions that are likely to be payable to all Reserve Creditors in
respect of Admitted Reserve Claims of that Scheme, the Supervisors will be
required to bring the Waiting Period to an end. No distributions will be made
under the relevant Scheme whilst such a Reserve Claim is being considered by the
Supervisors.
Following the expiry or termination of the Waiting Period all remaining Scheme
Consideration will be held by the Supervisors:
a. to make pro rata distributions in accordance with normal English
liquidation principles to all Admitted Scheme Creditors who had not
received their Initial Distribution at the time that the Waiting
Period terminated until they have received the same rateable
distribution which other Admitted Scheme Creditors have already
received; and
b. to make Further Distributions to all Scheme Creditors with Admitted
Scheme Claims in accordance with normal English liquidation
principles.
THE INITIAL DISTRIBUTION
In relation to each of the Schemes each Admitted Scheme Creditor will be
entitled to receive a proportion of the Scheme Consideration by way of an
Initial Distribution calculated in accordance with the following formula:
AC
--- X KCS where
KC
AC = the quantum of the relevant Scheme Creditors' Admitted Scheme Claim
in the relevant Scheme.
KC = the aggregate quantum of the Known Claims of the relevant Scheme.
KCS = the elements of Scheme Consideration forming the Known Claims
Segment of the relevant Scheme.
Subject to the expiry or earlier termination of the relevant Waiting Period,
Known Claims will be paid out of the Known Claims Segment and Reserve Claims
will be paid out of the Reserve Claims Segment of the relevant Scheme.
Any Scheme Claim which at the Record Date is not immediately due and payable but
would be legally due and payable on an insolvent liquidation of the relevant
Scheme Company shall be treated for the purposes of Distributions under the
Schemes as immediately due and payable as at the Record Date (and hence not a
debt payable at a future time).
Any Scheme Claim that is denominated in a currency other than sterling will be
converted into sterling at the Scheme Rate.
WORKED EXAMPLES
CORP SCHEME
Accordingly, a Scheme Creditor with an Admitted Scheme Claim of L1,000,000
against Corp would be entitled to receive (assuming no increase in the cash
element but that the plc Scheme becomes effective on the same day as the Corp
Scheme) an Initial Distribution out of the Known Claims Segment (or the Reserve
Claims Segment, as appropriate) in the Corp Scheme of approximately:
1,000,000
------------- X KCS
5,192,831,052
= 0.000192573 X KCS
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I. EXPLANATORY STATEMENT
(IN COMPLIANCE WITH SECTION 426 OF THE COMPANIES ACT 1985)
SECTION 2: FURTHER EXPLANATION OF THE RESTRUCTURING -- PART C
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Rounding down fractional entitlements, the Corp Scheme Creditor would be
entitled to receive:
0.000192573 X L333,360,148 cash = L64,196 cash
0.000192573 X L441,505,803* New Senior Notes = L85,022* New Senior Notes
0.000192573 X L302,103,439* New Junior Notes = L58,177* New Junior Notes
0.000192573 X 976,218,386 New Shares = 187,993 New Shares
* equivalent principal amount
If the plc Scheme does not become effective on the same day as the Corp Scheme
(or at all) the Corp/plc distribution model described under the Heading
"Circulation of Scheme Consideration and payments on a modelled basis" below
will not have been applied, and accordingly each of the numbers set out above
will be reduced by between approximately 0.41 per cent. and 0.47 per cent.
For the purposes of calculating the above table Known Claims that are
denominated in a currency other than sterling and New Junior Notes that will be
issued by reference to a US dollar amount have been converted at the Voting
Rate. The final calculations as to Known Claims will be made at the Scheme Rate
(which will be set five Business Days before the Effective Date). The final
calculations as to the principal amounts of the New Senior Notes and the New
Junior Notes will be made at the Currency Rate (which will be set the Business
Day before the Corp Scheme Meeting).
PLC SCHEME
Similarly, a Scheme Creditor with an Admitted Scheme Claim of L1,000,000 against
plc would be entitled to receive (assuming no increase in the cash element of
the Corp Scheme Consideration but that the plc Scheme becomes effective on the
same day as the Corp Scheme) an Initial Distribution out of the Known Claims
Segment (or the Reserve Claims Segment, as appropriate) in the plc Scheme of:
1,000,000
= ------------- X KCS
4,682,928,026
= 0.000213542 X KCS
Rounding down fractional entitlements, the plc Scheme Creditor would be entitled
to receive approximately:
0.000213542 X L44,235,292 cash = L9,446 cash
0.000213542 X L68,159,845* New Senior Notes = L14,554* New Senior Notes
0.000213542 X L46,638,851* New Junior Notes = L9,959* New Junior Notes
0.000213542 X 150,708,991 New Shares = 32,182 New Shares
---------------
* equivalent principal amount
If the plc Scheme does not become effective on the same day as the Corp Scheme
the Corp/plc distribution model described under the heading "Circulation of
Scheme Consideration and payments on a modelled basis" below will not have been
applied, and accordingly each of the numbers set out above will be reduced by
approximately 8.51 per cent.
For the purposes of the above calculations, Known Claims that are denominated in
a currency other than sterling and the New Junior Notes that will be issued by
reference to a US dollar amount, have been converted at the Voting Rate. The
final calculations as to Known Claims will be made at the Scheme Rate (which
will be set five Business Days before the Effective Date). The final
calculations as to the principal amounts of the New Senior Notes and the New
Junior Notes will be made at the Currency Rate (which will be set the Business
Day before the Corp Scheme Meeting).
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I. EXPLANATORY STATEMENT
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SECTION 2: FURTHER EXPLANATION OF THE RESTRUCTURING -- PART C
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The First Initial Distribution
The Corp Scheme provides for a First Initial Distribution to be made on the
Effective Date to all Scheme Creditors whose Scheme Claims have been submitted
to the Prospective Supervisors by the First Claim Date and whose claims have
been approved to be Admitted by the Prospective Supervisors by 8.00 a.m. on the
first day of the Court hearing to sanction the Corp Scheme.
At the time of making the First Initial Distribution in respect of Known Claims
the Supervisors will set aside from the Known Claims Segment the proportion of
the Scheme Consideration that would be payable to Known Creditors in respect of
which a Claim Form either has not been Submitted or where a Claim Form has been
Submitted but which has not been Admitted by the Supervisors by the date of the
First Initial Distribution. Similarly, at the time of making the First Initial
Distribution in respect of Reserve Claims the Supervisors will set aside from
the Reserve Claims Segment the proportion of the Scheme Consideration that would
be payable to Reserve Creditors in respect of which a Claim Form has been
Submitted but which has not been Admitted by the Supervisors by the date of the
First Initial Distribution. If such claims are subsequently Admitted, in whole
or in part, the relevant Scheme Creditors will receive the portion of the Scheme
Consideration held on account of their claims by way of an Initial Distribution
as soon as practicable after the Scheme Claim is Admitted. If a Known Claim is
rejected or reduced by the Supervisors in either Scheme then that portion of the
Known Claims Segment that would have been used to satisfy that Known Claim (or
part thereof) had it been Admitted will be added to the Reserve Claims Segment,
unless (in the case of the Corp Scheme only) that Known Claim (or part thereof)
is greater than L250,000,000, in which case the relevant portion of the Known
Claims Segment will be distributed to all Admitted Scheme Creditors pro rata to
their entitlements under the Corp Scheme, all in accordance with the terms of
the Corp Scheme.
SCHEME CREDITORS WILL NOT BE ENTITLED TO DISTURB ANY PREVIOUS DISTRIBUTION FOR
ANY REASON, INCLUDING BY REASON THAT SUCH SCHEME CREDITORS HAVE NOT PARTICIPATED
IN IT.
As mentioned above, if, contrary to expectations, at any time after the First
Initial Distribution the Supervisors are no longer satisfied that the Reserve
Claims Segment will be sufficient to meet the distributions to be made to all
Reserve Creditors, then the Waiting Period for that Scheme will be brought to an
end and all Further Distributions to Scheme Creditors will be made on a strictly
pari passu basis.
ADMISSION AND COMPROMISE OF SCHEME CLAIMS
In order to claim their entitlement to Scheme Consideration, Scheme Creditors
will be required to submit a duly completed Claim Form. A form of Claim Form is
set out in Appendix 30. The relevant Claim Form should be completed in
accordance with the instructions set out in Appendix 27. No person (other than
the Trustees) with an interest in Bonds is required to submit Claim Forms but
Account Holders will be required to deliver Account Holder Letters to Bondholder
Communications before 5.00 p.m. (New York City time) on 17 April 2003 in
accordance with the instructions set out in Appendix 28 so that Scheme
Consideration (other than cash comprised in the First Initial Distribution and
attributable to Bondholders in respect of Eurobonds) can be distributed to
Designated Recipients in the First Initial Distribution. The Claim Forms in
respect of the Bonds will be submitted by the respective Trustees.
Once completed the relevant Claim Form should be submitted to the Prospective
Supervisors, 8 Salisbury Square, London EC4Y 8BB, England, UK, for the attention
of Philip Wallace and Richard Heis, or, following the Effective Date, to the
Supervisors (at the address shown in Appendix 23).
Scheme Creditors are encouraged to submit their Claim Forms as soon as possible
(ideally, Claim Forms should be submitted at the same time as Forms of Proxy).
Once a Scheme Creditor has submitted a duly completed Claim Form the Claim Form
will be reviewed by the Prospective Supervisors and, subject to the relevant
Scheme becoming effective, its claim will be adjudicated by the Supervisors (see
"Procedure for the admission and rejection of claims" below).
Provided the relevant Scheme becomes effective all Scheme Claims will be fully
and completely released on the earlier of the date on which a Scheme Claim is
Admitted and is the subject of a Distribution Notice, the Final Distribution
Date and the Termination Date. In consideration of the release of its Scheme
Claim the relevant
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I. EXPLANATORY STATEMENT
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SECTION 2: FURTHER EXPLANATION OF THE RESTRUCTURING -- PART C
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Scheme Creditor will become entitled to be paid and issued with its entitlement
to Scheme Consideration in accordance with the terms of the relevant Scheme.
The claims of Bondholders will be dependent upon the relevant Trustee submitting
a Claim Form to the Supervisors in respect of the relevant Bond issue and the
Supervisors Admitting that Claim.
SUPERVISORS
The Schemes provide for the appointment of Supervisors who will be responsible
for evaluating the claims of Scheme Creditors and generally administering the
Schemes. The Supervisors must be individuals qualified to act as insolvency
practitioners within the meaning of the Insolvency Act 1986. The Supervisors are
entitled to exercise their functions and powers jointly and severally. In
carrying out their functions and exercising their powers, under the Schemes, the
Supervisors will be entitled to consult with the Creditors' Committee.
Prior to the Schemes becoming effective, the Prospective Supervisors have
undertaken to use reasonable endeavours to determine promptly whether and if so,
the extent to which, a Scheme Claim which has been submitted in a duly completed
Claim Form will be listed in the Prospective First Initial Distribution Notice.
On a Scheme becoming effective Scheme Claims listed in the Prospective First
Initial Distribution Notice for that Scheme will be Admitted by the Supervisors,
giving rise to an entitlement to a First Initial Distribution. More detail
concerning the procedure for admitting Scheme Claims is set out below under the
heading "Procedure for the admission and rejection of claims".
The Schemes require the Supervisors, on and from the Effective Date, to use
reasonable endeavours to determine promptly whether and if so, the extent to
which, a Submitted Scheme Claim will be Admitted and, if so, to promptly Admit
that Scheme Claim.
Corp and plc have entered into a letter agreement appointing Philip Wallace and
Richard Heis as the first Supervisors in accordance with the terms of the
Schemes. The curricula vitae of the Supervisors appear in Appendix 23. The terms
of the letter agreement are summarised in Appendix 24.
The material interests of the Supervisors are set out in Appendix 23.
PROCEDURE FOR THE ADMISSION AND REJECTION OF CLAIMS
The Supervisors will adjudicate Scheme Claims to decide whether or not they
should be Admitted. If and to the extent that the Supervisors are satisfied with
the information provided by a Scheme Creditor on a Claim Form the Supervisors
will admit the Scheme Claim as an Admitted Scheme Claim and notify the Scheme
Creditor accordingly. If the Supervisors are not satisfied with the information
provided by a Scheme Creditor on a Claim Form the Supervisors are entitled to
call for additional evidence to be provided in support of the Scheme Claim.
Creditors with disputed Scheme Claims will receive their entitlement to the
Scheme Consideration to the extent and in the amount that the dispute is
resolved in their favour and their Scheme Claim is Admitted.
If and to the extent that the Supervisors are not satisfied that the Scheme
Claim should be Admitted they will reject the Scheme Claim and notify the Scheme
Creditor accordingly. If a Scheme Creditor is dissatisfied with the decision of
the Supervisors with respect to its Scheme Claim it may either commence or
continue proceedings against the relevant Scheme Company to secure the
determination of the quantum of its Scheme Claim or elect by notice in writing
to the Supervisors that the existence or quantum of its Scheme Claim be referred
for adjudication to an independent third party. If such proceedings have not
previously been commenced, any proceedings to determine the amount of a Scheme
Claim must be commenced or a notice to elect for adjudication made within 40
Business Days following receipt by the Scheme Creditor of the notice of
rejection. If no such proceedings are commenced or election for adjudication
made within that 40 Business Day period, the relevant Scheme Company will be
released from all liability in relation to that Scheme Claim (or part thereof)
which has been rejected and no further proceedings in relation to that Scheme
Claim will be permitted.
The Schemes do not affect the right of a Scheme Creditor to bring proceedings
against Corp or plc only to establish the existence or amount of his Scheme
Claim, as appropriate, in the courts of any jurisdiction or according to any law
(subject to any other provisions determining governing law and jurisdiction,
whether contained in any contract between either Corp and/or plc and the Scheme
Creditor or otherwise) provided that the
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Scheme Creditor has first given the Supervisors five Business Days' prior notice
in writing of its intention to bring proceedings and, if the Scheme Creditor
wishes to bring proceedings upon receipt of a notice from the Supervisors
rejecting its Scheme Claim, those proceedings must be brought within 40 Business
Days following receipt by the Scheme Creditor of the notice of rejection. The
exercise of all other rights and remedies of Scheme Creditors against the
relevant Scheme Companies in respect of Scheme Claims are prohibited by the
Schemes.
The Prospective Supervisors will undertake a review of all Claim Forms submitted
prior to the Effective Date to determine whether the Scheme Claims can be
properly Admitted on the Effective Date and, provided the relevant Claim Form
was submitted prior to the First Claim Date, whether the relevant Scheme Claim
will be included in the First Initial Distribution.
THE ESCROW TRUSTEE AND THE DISTRIBUTION AGENT
The Schemes also provide for the appointment of an Escrow Trustee who will hold
the Scheme Consideration on trust for the Scheme Creditors and a Distribution
Agent who will be responsible for the distribution of the Scheme Consideration
to the Scheme Creditors with Admitted Scheme Claims. Corp and plc have entered
into an agreement appointing Corp SPV as the first Escrow Trustee and The Bank
of New York as the first Distribution Agent in accordance with the terms of the
Schemes and subject to the relevant Scheme becoming effective. A copy of the
agreement is set out in Appendix 7.
On the issue by the Supervisors of the notice in respect of the First Initial
Distribution, Corp will transfer, issue and allot the Scheme Consideration
together with the plc Shareholder Stock to or to the order of the Escrow Trustee
to be held on trust for the Corp Scheme Creditors and the plc Shareholders
respectively. The Distribution Agent will hold the New Notes and any cash
comprised in the Scheme Consideration as custodian for the Escrow Trustee. The
New Shares will be registered in the name of the Escrow Trustee or its nominee.
The Scheme Consideration (together with any income accrued on it in accordance
with the Escrow and Distribution Agreement) will be distributed by the
Distribution Agent (acting on the instructions of the Supervisors and the Escrow
Trustee) to, and at the direction of, the Scheme Creditors with Admitted Scheme
Claims (taking into consideration the cost of making the distribution and the
amount of Scheme Consideration to be distributed) as soon as practicable after
the relevant Scheme Claim has been Admitted, together with any interest accrued
and principal repaid on New Notes, any interest accrued on any cash balances and
dividends paid on New Shares in respect of that portion of Scheme Consideration.
The Escrow and Distribution Agreement contains a direction by the Eurobond
Trustee and the Yankee Bond Trustee to the effect that any Scheme Consideration
attributable to the Bonds should be distributed in accordance with the
directions contained in the Account Holder Letters to be submitted to Bondholder
Communications by Account Holders. To the extent that Account Holder Letters are
not received by 5.00 p.m. (New York City time) on 17 April 2003 and accordingly
any Scheme Consideration attributable to the Scheme Claims made by the Trustees
is not distributed in the First Initial Distribution, the Escrow Trustee will
continue to hold such undistributed Scheme Consideration in accordance with the
directions of the relevant Trustee. The Eurobond Trustee has directed that any
Scheme Consideration attributable to its Scheme Claim which has not been
distributed by the end of the Waiting Period should be held by the Escrow
Trustee pending the Eurobond Trustee obtaining instructions from the holders of
the relevant Eurobonds (by way of an Extraordinary Resolution) or, if
appropriate, directions from the Court.
The Escrow Trustee has undertaken not to exercise any voting rights attaching to
the New Shares or the New Notes while they are held in escrow as referred to
above.
The arrangements under which the Escrow Trustee holds the Scheme Consideration
on trust for Scheme Creditors are expected to constitute a bare trust, in which
case the Escrow Trustee will be required to deduct tax at the basic rate
(currently 22 per cent.) from any interest or dividends received in respect of
the Scheme Consideration before paying the remainder to Scheme Creditors as part
of their distribution. If the arrangements are, for any reason, held not to
constitute a bare trust, there may be additional taxes payable by the Escrow
Trustee in respect of the Scheme Consideration that does not form part of the
First Initial Distribution. Corp has agreed to set aside certain amounts to be
paid towards any tax liability of the Escrow Trustee. Any additional amounts
will, in the first instance, be met out of the Reserve Claims Segment or, after
the expiry of the Waiting
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Period, out of the combined Reserve Claims Segment and Known Claims Segment. If
the Supervisors terminate the Waiting Period on the grounds that the Reserve
Claims Segment may not be sufficient to meet the claims of all Reserve
Creditors, any tax costs will cease to be met out of the Reserve Claims Segment,
and any distributions made thereafter will be made subject to a withholding on
account of all taxes which would be payable by the Escrow Trustee in respect of
that distribution. Corp has agreed to indemnify the Escrow Trustee against any
tax liability which cannot be met as described above. The Escrow Trustee has
agreed to seek confirmation from the Inland Revenue (as soon as reasonably
practicable after the Effective Date of the Corp Scheme and, in any event,
before the end of the Waiting Period) that the arrangements will be taxed as a
bare trust. Pending any confirmation from the Inland Revenue to the contrary, or
any indication by the Inland Revenue that such confirmation will not be given
until a later date (such as the submission of a tax return by the Escrow
Trustee), the Escrow Trustee will operate the arrangements on the basis that
they constitute a bare trust.
CIRCULATION OF SCHEME CONSIDERATION AND PAYMENTS ON A MODELLED BASIS
Corp has the benefit of a Scheme Claim of L146,587,439 against plc. Accordingly,
Corp will submit a Claim Form pursuant to the plc Scheme and, if the plc Scheme
becomes effective and Corp's claim is Admitted (which Corp expects to be the
case), Corp will become entitled to receive its pro rata entitlement in respect
of its Admitted Scheme Claim in the First Initial Distribution under the plc
Scheme.
Corp has agreed to distribute its entitlement to receive Scheme Consideration
under the plc Scheme (or, should the plc Scheme not become effective, its
entitlement to any sum of money or property to which it becomes entitled to as a
result of its claim against plc) to Corp Scheme Creditors by way of additional
Corp Scheme Consideration. Similarly plc has agreed to distribute any of this
additional Scheme Consideration it would be entitled to receive from Corp via
Ancrane to all plc Scheme Creditors (which will in turn include Corp). To
prevent the continued circulation of an ever decreasing amount of additional
Scheme Consideration, Ancrane and the Prospective Supervisors of both Schemes
(in each case the same two persons) have agreed that, if both Schemes become
effective and, as anticipated, the First Initial Distributions under the Schemes
are payable on the same date, the Supervisors will agree a distribution model
(the "CORP/PLC MODEL") simulating successive distributions under the Corp Scheme
and the plc Scheme of amounts distributed to Corp out of the plc Scheme in order
to produce a net amount of additional Scheme Consideration available for
distribution to Admitted Scheme Creditors under the Corp Scheme and the plc
Scheme respectively. For this purpose, no Scheme Consideration will be paid from
Corp to Ancrane and arrangements will be made for all Bonds held by Ancrane to
be blocked.
It is currently anticipated that the amount of any additional Scheme
Consideration payable to Admitted Scheme Creditors as a result of this
circulation of Scheme Consideration will be paid to Admitted Scheme Creditors
when they receive their Initial Distribution.
Similar provisions may apply for any Further Distributions made at the same time
under each of the Schemes. For example, this may occur at the end of the Waiting
Period.
The ability of Ancrane to make a repayment of capital in specie to plc has been
facilitated by Ancrane having become an unlimited company on 25 March, 2003.
Pursuant to the terms of the Scheme Implementation Deed, prior to the Corp
Scheme Meeting, Ancrane will effect a reduction of its existing share capital
(including its share premium account) and will make a repayment of capital in
specie to plc of its assets (other than L100), including any receipt of, or
right that it may have to receive, any Corp Scheme Consideration and any plc
Scheme Consideration.
TREATMENT OF DE MINIMIS CLAIMS
The Schemes provide for the claims of all Scheme Creditors who are owed in
aggregate less than L5,000 to be excluded from the Schemes. Accordingly it is
expected that all such creditors will be paid in full if and when such claims
arise. As indicated above, in the context of submitting Scheme Claims the only
Scheme Creditors that will be recognised in relation to the Bonds are the two
Trustees. Accordingly Account Holders who hold less than L5,000 in principal
amount of the Bonds of any series for any Bondholder should still submit an
Account Holder Letter in respect of that holding.
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C.8 MEETINGS, FINAL TERMINATION, RELEASE AND GOVERNING LAW
CREDITORS' COMMITTEE AND FURTHER MEETINGS OF SCHEME CREDITORS
Each of the Schemes provides for a Creditors' Committee of representatives of
the Scheme Creditors (which expression, in this context, includes Definitive
Holders) to be appointed to monitor the implementation of the relevant Scheme,
the actions of the Supervisors and the calling of meetings of Scheme Creditors.
Each Creditors' Committee will comprise a minimum of three and a maximum of
seven members. The members of the Creditors' Committee will be appointed as
described below. The Creditors' Committee will meet at least once every 12
months during the continuation of the Schemes and will receive a report on the
progress of the relevant Scheme from the Supervisors.
A Scheme Creditor or Definitive Holder who is willing to act as a member of the
Creditors' Committee may propose itself to act as a member of the Creditors'
Committee by ensuring that the appropriate box on the Claim Form or Account
Holder Letter, as the case may be, is ticked. On the Effective Date, the
Supervisors will, to the extent possible, appoint up to seven members of the
Creditors' Committee selected from those Scheme Creditors and Definitive Holders
who have proposed themselves to act, representing a proper balance of interests
of Scheme Creditors as a whole. If fewer than three Scheme Creditors and
Definitive Holders propose themselves to act as a member of the Creditors'
Committee, then on and from the Effective Date the Creditors' Committee will
consist of as many members as have proposed themselves to act. In accordance
with the terms of the Scheme those members, if any, will endeavour to fill the
vacancy or vacancies to ensure that the Creditors' Committee has a minimum of
three members within 28 days of the Effective Date. If those members do not
succeed in appointing the necessary number of further members of the Creditors'
Committee, resulting in a Creditors' Committee consisting of fewer than three
members by 28 days after the Effective Date, the Supervisors will thereafter use
reasonable endeavours to appoint the necessary number of further members within
the following 14 days as interim committee members to serve on the Creditors'
Committee until the necessary number of further permanent members are appointed.
Meetings of Scheme Creditors will be held at least once every 12 months during
the continuation of the Schemes unless the Supervisors and the Creditors'
Committee otherwise agree. The Supervisors can call a meeting of Scheme
Creditors for any purpose they think necessary in order to keep Scheme Creditors
informed about the progress of the Schemes or to obtain their input as regards
the function of the Schemes. The Creditors' Committee may convene a meeting of
Scheme Creditors to remove or appoint either or both Supervisors or for any
other purpose they think fit. In addition, five Scheme Creditors with Scheme
Claims in aggregate in excess of fifteen per cent. of all Scheme Claims, or any
20 or more Scheme Creditors may convene a meeting of Scheme Creditors.
FINAL TERMINATION PROVISIONS
As soon as reasonably practical after the making of the final distributions
under each of the Schemes or the Supervisors' determination that any further
distribution of Scheme Consideration would be uneconomic (i.e. if the costs of
making the distribution would exceed the value of the Scheme Consideration to be
distributed (or the proceeds of sale of that Scheme Consideration)), the
relevant Supervisors will serve a termination notice on the relevant Scheme
Company and the members of the relevant Creditors' Committee.
With effect from the date of the termination notice,
a. Scheme Creditors, the Creditor's Committee, the relevant Scheme
Company, the Supervisors, the Eurobond Trustee, the Yankee Bond
Trustee, the Escrow Trustee, the Distribution Agent, the Registrars
and Bondholder Communications will have no further rights or
obligations under the Scheme except that the compromise of Scheme
Claims pursuant to the terms of the Scheme will continue to have
effect; and
b. the Supervisors (and any former Supervisors) and the members of the
Creditors' Committee (and any former members) will be discharged
from any liability for their respective acts, omissions and conduct
pursuant to or under the Schemes other than any liability arising
from their respective
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misfeasance, breach of duty or wilful default or, in the case of the
Supervisors, their negligence or that of a partner in or employee of
KPMG.
RELEASE OF CO-ORDINATION COMMITTEE AND THE INFORMAL COMMITTEE OF BONDHOLDERS
Under the Corp Scheme and the plc Scheme the Co-ordination Committee, the
Informal Committee of Bondholders and their past and present members and their
legal and financial advisers will be released from any Liability which they or
any of them may have to a Scheme Creditor, Corp, plc, the Supervisors, the
Escrow Trustee, the Distribution Agent, the Eurobond Trustee, the Yankee Bond
Trustee, Bondholder Communications and the ESOP Derivative Banks.
GOVERNING LAW AND JURISDICTION
The Schemes will be governed by and construed in accordance with English law.
The Court will have exclusive jurisdiction to hear and determine any suit,
action or proceeding and to settle any dispute which may arise out of the
Explanatory Statement or any provision of the Schemes, or any action taken or
omitted to be taken under the Schemes or in connection with the administration
of the Schemes. For such purposes, Scheme Creditors irrevocably submit to the
jurisdiction of the Court, subject to the proviso that in relation to the
determination of any Scheme Claim the validity of other provisions determining
governing law and jurisdiction as between either Corp and/or plc and any of its
Scheme Creditors, whether contained in any contract or otherwise, will not be
affected.
C.9 EFFECT OF SECURITIES LAW RESTRICTIONS UNDER THE SCHEMES
GENERAL PRINCIPLES OF THE SCHEMES
Securities will not be distributed pursuant to the Schemes to or to the order,
or for the account or benefit, of any person where such distribution would be
prohibited by any applicable law or regulation, or so prohibited except after
compliance with conditions or requirements that are unduly onerous. Where any
determination is (or has been) required as to whether any such conditions or
requirements are "unduly onerous", such determination will be (or has been) made
by Corp (in connection with distributions pursuant to the Corp Scheme) or plc
(in connection with distributions pursuant to the plc Scheme), as the case may
be, with the advice of legal counsel and having due regard for the number of
Scheme Creditors, Bondholders and/or plc Shareholders that are or may be located
in the relevant jurisdiction, the value of the securities to which such persons
are or may be entitled pursuant to the Schemes, the extent to which the
requirements of the laws and regulations of such jurisdiction as applied to the
Schemes are uncertain, the nature and extent of the risks or penalties
associated with any violation of those legal or regulatory requirements and the
costs, administrative burden and timing implications of taking such action (if
any) as might permit distributions of securities to be made in that jurisdiction
(including pursuant to any available exemptions) in accordance with applicable
legal and regulatory requirements. Any reference in the discussion that follows
to whether distribution of securities would be prohibited except after
compliance with conditions or requirements that are "unduly onerous" should be
construed accordingly.
To the extent that securities that would otherwise be deliverable pursuant to
the Schemes cannot be delivered because of a legal or regulatory prohibition
described above, the persons that would otherwise be entitled to receive such
securities will receive cash instead, as follows:
a. in the case of Scheme Creditors (other than the Trustees) and
Designated Recipients, the Distribution Agent will sell or procure
the sale of such securities on the best terms reasonably obtainable
at the time of sale and will pay the net cash proceeds of such sale
(after deduction of all applicable expenses including any currency
conversion costs) to the relevant person in full satisfaction of
such person's rights in respect of such securities under the
relevant Scheme. Any such sale will be deemed to have been
undertaken at the request of the relevant person, and none of Corp,
plc, the Escrow Trustee, the Distribution Agent, the Registrars, the
Supervisors or any other person will be responsible for any loss
arising from the terms or the timing of such sale. If the relevant
securities are not listed on a securities exchange, however, the
relevant person will receive a sum in cash which is substantially
equivalent in value to such securities, such sum to be
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determined by agreement between Corp or plc, as the case may be, and
the Supervisors or by adjudication in accordance with the provisions
of the relevant Scheme; and
b. in the case of plc Shareholders, the Registrars will use reasonable
endeavours to sell or procure the sale of such securities on the
best terms reasonably obtainable at the time of sale and will pay
the net cash proceeds of such sale (if any) to the relevant plc
Shareholder in sterling (after deduction of all applicable expenses
including any currency conversion costs) in full satisfaction of the
rights of such plc Shareholder in respect of such securities under
the Corp Scheme. Any such sale will be deemed to have been
undertaken at the request of the relevant person, and none of Corp,
plc, the Escrow Trustee, the Distribution Agent, the Registrars, the
Supervisors or any other person will be responsible for any loss
arising from the terms or the timing of such sale or any failure to
procure a purchaser for such securities.
Any determination made by Corp or plc with respect to legal or regulatory
prohibitions on the distribution of securities pursuant to the Schemes will be
(or has been) made solely with regard to such laws and regulations as are
generally applicable to persons located in the relevant jurisdiction. Such
determinations will not take account of any legal or regulatory restrictions
that may be applicable to a particular Scheme Creditor, Bondholder, Designated
Recipient or plc Shareholder by virtue of any business or other activity
conducted by such person in such jurisdiction, or the regulatory status or other
relevant legal attributes of such person. Scheme Creditors, Bondholders,
Designated Recipients and plc Shareholders are strongly advised to consult their
professional advisers as to whether any laws or regulations which may be
applicable to them may give rise to any liability or penalty, or require them to
obtain any government or other consents or to pay any taxes or duties, as a
result of the implementation of the Schemes. None of Corp, plc, the Escrow
Trustee, the Distribution Agent, the Supervisors, Bondholder Communications, the
Registrars, the Informal Committee of Bondholders, the Co-ordination Committee,
their respective directors or any other parties involved in the Restructuring
accept any responsibility for any liabilities (including but not limited to
consequential liabilities) incurred by Scheme Creditors, Bondholders, Designated
Recipients or plc Shareholders as a result of the implementation of the Schemes
in respect of laws or regulations applicable to them (except that UK stamp duty
or SDRT payable in connection with the issuance of ADRs will be met by Corp to
the extent described herein).
JURISDICTIONS IN WHICH DISTRIBUTION OF SECURITIES IS NOT RESTRICTED
Corp and plc have determined that the distribution of securities pursuant to the
Schemes in the following jurisdictions is not currently prohibited by any
applicable law or regulation requiring compliance with conditions or
requirements that are unduly onerous:
a. United Kingdom;
b. Bahamas;
c. British Virgin Islands;
d. Canada (provinces of Alberta, British Columbia, Ontario and Quebec);
e. Cayman Islands;
f. Guernsey;
g. Jersey;
h. Netherlands Antilles; and
i. United States (with respect to federal securities law and, except as
described below, with respect to state securities law).
The above-mentioned jurisdictions are sometimes referred to collectively in the
discussion that follows as "UNRESTRICTED JURISDICTIONS."
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The Schemes will provide that persons located in Unrestricted Jurisdictions will
not be prohibited from receiving distributions of securities pursuant to the
Schemes by virtue of any legal or regulatory prohibition of general application
under the laws or regulations of such jurisdictions.
Notwithstanding the foregoing, securities will not be distributed pursuant to
the Schemes to or to the order, or for the account or benefit, of any person in
any Unrestricted Jurisdiction if at any time there has been a change of law or
regulation since 27 March 2003 (the latest practicable date prior to the date of
this document) in such jurisdiction, such that distribution of securities
pursuant to the Schemes to a person in such jurisdiction would be prohibited, or
so prohibited except after compliance with conditions or requirements that are
unduly onerous.
JURISDICTIONS IN WHICH DISTRIBUTION OF SECURITIES IS RESTRICTED
Corp and plc have determined that the distribution of securities pursuant to the
Schemes in the following jurisdictions would be prohibited by applicable law or
regulation, or so prohibited except after compliance with conditions or
requirements that are unduly onerous, unless the conditions of one or more
applicable exemptions from such laws or regulations can be met:
a. France;
b. Italy; and
c. the US states of Arizona, California, Colorado, Connecticut,
Illinois, Ohio and Vermont.
Accordingly, the Schemes will provide that persons located in the above
jurisdictions will be prohibited from receiving distributions of securities
pursuant to the Schemes, and will receive cash instead as described above,
unless the conditions for reliance on an available exemption have been met.
Details with respect to certain relevant exemptions covering institutional or
professional investors and certain other persons are set out in Part D.16 and
Part D.17 of this Section.
In addition, Corp and plc have determined that any distribution of securities
pursuant to the Schemes to persons in Malaysia is currently prohibited by
applicable securities laws or regulations requiring compliance with conditions
or requirements that are unduly onerous, and that no exemption from this
prohibition will be available. Accordingly, persons located in Malaysia will be
prohibited from receiving distributions of securities pursuant to the Schemes,
and will receive cash instead as described above.
France, Italy, Malaysia and the above-mentioned US states are sometimes referred
to collectively in the discussion that follows as "RESTRICTED JURISDICTIONS."
Notwithstanding the foregoing, the restrictions on the distribution of
securities pursuant to the Schemes with respect to any Restricted Jurisdiction
will cease to apply if at any time there has been a change of law or regulation
since 27 March 2003 (the latest practicable date prior to the date of this
document) in such jurisdiction, such that delivery of securities pursuant to the
Schemes to a person in such jurisdiction would no longer be prohibited, or so
prohibited except after compliance with conditions or requirements that are
unduly onerous. Any such change will not affect the rights of any person that
has previously received cash instead of securities pursuant to the Schemes, as
described above.
In addition, notwithstanding the foregoing, distributions of New Shares and
Warrants to plc Shareholders in Restricted Jurisdictions will be restricted only
to the extent described below under "Treatment of plc Shareholders in Restricted
Jurisdictions."
OTHER JURISDICTIONS
With respect to any jurisdiction other than an Unrestricted Jurisdiction or a
Restricted Jurisdiction named above, the general principles of the Schemes will
apply as described above. Accordingly, securities will not be distributed
pursuant to the Schemes to or to the order, or for the account or benefit, of
any person located in a jurisdiction other than an Unrestricted Jurisdiction or
a Restricted Jurisdiction if it should come to the attention of Corp or plc (as
the case may be) that such distribution would be prohibited by any applicable
law or regulation, or so prohibited except after compliance with conditions or
requirements that are unduly onerous. Neither Corp
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nor plc is currently aware of any such prohibition in any jurisdiction (other
than as described above with respect to Restricted Jurisdictions).
SECURITIES LAW CONFIRMATIONS IN CLAIM FORM
In connection with the legal and regulatory restrictions referred to above and
in order to establish the conditions for reliance on certain relevant exemptions
from these restrictions, the Claim Form will require the person completing it
(other than the Trustees) to confirm that it is not submitting such Claim Form
on behalf of, or requesting delivery of any securities to or for the benefit of,
any person that is located in:
a. France (other than a "qualified investor" as defined in Article
L.411-2 of the French Monetary and Financial Code);
b. Italy (other than a "professional investor" as defined in the
Consolidated Financial Act Article 30, paragraph II and in CONSOB
Regulation 11522/1998 Article 31, paragraph II);
c. Malaysia;
d. the US states of Arizona, California, Colorado, Connecticut,
Illinois, Ohio or Vermont (other than a person that is eligible to
receive the securities under a relevant exemption as described in
Part D.16 of this Section).
Persons completing a Claim Form (other than the Trustees) should refer to Part
D.17 of this Section (with respect to France, Italy and Malaysia) and to Part
D.16 of this Section (with respect to Arizona, California, Colorado,
Connecticut, Illinois, Ohio and Vermont) for information as to the circumstances
under which they would be regarded as located in one of these jurisdictions for
these purposes, and for details with respect to the various categories of
eligible recipients in such jurisdictions under the exemptions referred to above
and other relevant information. Such persons should also carefully consider the
terms of the confirmations included in the Claim Form set out in Appendix 30.
SECURITIES LAW CONFIRMATIONS IN ACCOUNT HOLDER LETTER
In connection with the legal and regulatory restrictions referred to above and
in order to establish the conditions for reliance on certain relevant exemptions
from these restrictions, the Account Holder Letter will require each relevant
Account Holder to confirm that it is not submitting such Account Holder Letter
on behalf of, or requesting delivery of any securities to or for the benefit of,
any person that is located in:
a. France (other than a "qualified investor" as defined in Article
L.411-2 of the French Monetary and Financial Code);
b. Italy (other than, with respect to the plc Scheme, a "professional
investor" as defined in the Consolidated Financial Act Article 30,
paragraph II and in CONSOB Regulation 11522/1998 Article 31,
paragraph II);
c. Malaysia; or
d. the US states of Arizona, California, Colorado, Connecticut,
Illinois, Ohio and Vermont (other than a person that is eligible to
receive the securities under a relevant exemption as described in
Part D.16 of this Section).
Account Holders, Bondholders and Designated Recipients should refer to Part D.17
of this Section (with respect to France, Italy and Malaysia) and to Part D.16 of
this Section (with respect to Arizona, California, Colorado, Connecticut,
Illinois, Ohio and Vermont) for information as to the circumstances under which
they would be regarded as located in one of these jurisdictions for these
purposes, and for details with respect to the various categories of eligible
recipients in such jurisdictions under the exemptions referred to above and
other relevant information. Such persons should also carefully consider the
terms of the confirmations included in the Account Holder Letter set out in
Appendix 28.
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EFFECT OF SECURITIES LAW CONFIRMATIONS UNDER THE SCHEMES
The Schemes will provide that if the required confirmations are given in the
form requested in a Claim Form or Account Holder Letter then, except as
described below, distribution of the New Shares and New Notes to which such
Claim Form or Account Holder Letter (as the case may be) relates will not be
prohibited on the basis of any legal or regulatory prohibition of general
application under the laws or regulations of any Restricted Jurisdiction.
Notwithstanding the foregoing, if it appears from the relevant Claim Form or
Account Holder Letter that such confirmations have been given inappropriately
then, except as described below with respect to Italy, New Shares and New Notes
will not be distributed in respect of such Claim Form or Account Holder Letter,
in which case the relevant person or persons will receive cash instead as
described above. Confirmations will be deemed to have been given inappropriately
if (i) information provided in or in connection with the transmittal of the
Claim Form or Account Holder Letter indicates that such Claim Form has been
submitted by, or such Account Holder Letter has been delivered on behalf of, or
delivery of securities is being requested to or for the account or benefit of, a
person that is located in a Restricted Jurisdiction and that could not be
eligible to receive the securities under any relevant exemption described in
this document or (ii) Corp or plc (as the case may be) obtains actual knowledge
that such confirmations are false. Corp and plc reserve the right, in their sole
discretion, to investigate in relation to any Claim Form or Account Holder
Letter the facts relevant to the confirmations included therein. The
determination as to whether confirmations have been appropriately given will be
made by Corp (in connection with distributions pursuant to the Corp Scheme) or
plc (in connection with distributions pursuant to the plc Scheme), as the case
may be.
Except as described below with respect to Italy, if the required confirmations
are not given in the form requested in a Claim Form or Account Holder Letter,
then New Shares and New Notes will not be distributed in respect of such Claim
Form or Account Holder Letter, in which case the relevant person or persons will
receive cash instead as described above.
Notwithstanding the foregoing, to the extent that Corp or plc determines that
the exemptions applicable with respect to distributions of securities to limited
numbers of persons are available in Italy, securities will be distributed to the
relevant persons without regard to the confirmations given in any relevant Claim
Form or Account Holder Letter. Details with respect to this exemption are set
out in Part D.17 of this Section.
With respect to any jurisdiction other than an Unrestricted Jurisdiction or a
Restricted Jurisdiction, the general principles of the Schemes will apply (as
described under "Other jurisdictions" above) notwithstanding the confirmations
given in any relevant Claim Form or Account Holder Letter.
TREATMENT OF PLC SHAREHOLDERS IN RESTRICTED JURISDICTIONS
Corp has determined that distribution of securities to plc Shareholders pursuant
to the Corp Scheme is currently prohibited by applicable securities laws or
regulations requiring compliance with conditions or requirements that are unduly
onerous (i) in Malaysia (with respect to New Shares and Warrants) and (ii)
unless the exemption applicable with respect to distributions of securities to
limited numbers of persons is available, in Italy (with respect to Warrants).
plc Shareholders with registered addresses in Malaysia will be prohibited from
receiving distributions of New Shares and Warrants pursuant to the Corp Scheme,
and will receive cash instead as described above.
plc Shareholders with registered addresses in Italy will be prohibited from
receiving distributions of Warrants pursuant to the Corp Scheme, and will
receive cash instead as described above, unless Corp determines that the
above-mentioned exemption is available. Details with respect to this exemption
are set out in Part D.17 of this Section.
C.10 INSOLVENCY ANALYSIS
Corp and plc believe that there are only two possible outcomes of the Group's
current financial difficulties, which are the reorganisation of their
liabilities through the proposed Schemes or the placing of the companies into
administration or liquidation. Whilst Corp and plc believe that the Schemes are
more beneficial to Scheme
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Creditors than insolvency proceedings, Corp and plc believe that in the event of
insolvency a more advantageous realisation of Corp's and plc's assets would be
effected on an administration rather than a liquidation.
Appendix 6 sets out a comparison between the position under the proposed Schemes
and the hypothetical position that would be likely to face Scheme Creditors if
plc and Corp were to go into administration as at 30 April 2003. The purpose of
the insolvency analysis at Appendix 6 is to assist Scheme Creditors in
determining whether to accept the proposals set out in this document. Scheme
Creditors should read carefully the caveats, limitations and uncertainties set
out in the analysis.
Corp and plc believe that the Schemes give greater certainty overall and that
the certainty of the day one distribution of cash, New Notes and New Shares is a
major benefit to Scheme Creditors. This certainty would not be available under
insolvency proceedings or on the enforcement of security.
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D. GENERAL MATTERS RELATING TO THE RESTRUCTURING
D.1 LOCKBOX ACCOUNT AND INTERIM SECURITY ARRANGEMENTS
BACKGROUND
As part of the arrangements to effect the Restructuring, Corp agreed to provide
interim security (over the cash held by Highrose Limited (a special purpose
subsidiary of Corp) in the Lockbox Accounts) to the Group's Syndicate Banks (in
their capacities as Syndicate Banks, bilateral lenders to Corp and beneficiaries
of guarantees from Corp (in such capacities "BANK CREDITORS")), the holders of
the Bonds from time to time (apart from plc's wholly owned subsidiary Ancrane)
and the Trustees (together the "SECURED BONDHOLDERS") and Barclays, as the only
ESOP Derivative Bank which committed to support the Restructuring prior to 15
October 2002. These interim security arrangements took effect on 13 September
2002, on which date the balance in the Lockbox Accounts was approximately L866
million. The interim security arrangements were amended on 13 December 2002 and
were further amended on 28 March 2003. The interim security has been provided to
the Bank Creditors and Secured Bondholders on a pari passu basis, subject to the
arrangements in favour of the participating ESOP Derivative Banks (see further
details in Part D.2 of this Section). As at 27 March 2003, the balance held in
the Lockbox Accounts was approximately L770.7 million.
The 13 December 2002 amendments to the interim security, among other things:
- removed a provision requiring the interim security to be released if a
specified percentage of Bank Creditors and Secured Bondholders had not
entered into written agreements to vote in favour of the Schemes on or
before 15 business days after the date on which the originating
application for the Corp Scheme was filed with the Court; and
- released the undertakings which had been given on 13 September 2002 by
members of the Informal Committee of Bondholders to enter into such
written agreements.
These amendments were agreed in consideration of an extension of time (until 15
March 2003) to complete the Restructuring and the waiver by the Bank Creditors
and Informal Committee of Bondholders of any enforcement event which may have
then existed in relation to the interim security as a result of the probable
inability to complete the Restructuring by 31 January 2003.
At the same time and as part of the amendment of the interim security, each of
the then members of the Informal Committee of Bondholders and certain members of
the current Co-ordination Committee provided letters of current intention to
support the Restructuring and to vote in favour of the Schemes (which are
detailed in Appendix 19 and are among the documents available for inspection).
Corp and plc have not been notified of any changes in those intentions since
that date.
Further amendments were made to the interim security on 28 March 2003. These
amendments, among other things, removed the provision requiring the interim
security to be released at any time should any Bank Creditor (or any of its
affiliates) precipitate an insolvency event with respect to any material Group
Company. These amendments were agreed in consideration of an extension of time
(until 30 June 2003) to complete the Restructuring and the waiver by the
majority Bank Creditors and the majority members of the Informal Committee of
Bondholders of certain enforcement events that may then have existed in relation
to the interim security as a result, among other things, of the inability to
complete the Restructuring by 15 March 2003.
In addition to the extension of time to complete the Restructuring and waiver of
enforcement events discussed above, on 26 March 2003 and 24 March 2003
respectively the requisite majorities of the Syndicate Banks and the members of
the Informal Committee of Bondholders: (a) consented, for the purpose of the
undertakings given in favour of the Syndicate Banks and the Informal Committee
of Bondholders, to the entry by Corp, plc and other Group Companies into certain
transactions (including those contemplated under the Scheme Implementation Deed)
necessary to facilitate the Restructuring; and (b) agreed a number of additional
carve-outs to those undertakings to permit Corp, plc and other Group Companies
to enter into transactions contemplated in this document (provided that, subject
to some exceptions, such transactions do not take effect until on or after the
Effective Date of the Corp Scheme).
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ENFORCEMENT EVENTS
The interim security will become enforceable on the occurrence of an enforcement
event. These events include:
- material breach or termination of the undertakings described in Part B
of this Section;
- the commencement of formal insolvency proceedings in relation to a
material Group Company (as listed in the interim security);
- failure to achieve the Restructuring on the basis stated in the Heads
of Terms (as varied in the manner announced on 18 March 2003) within
the proposed timetable (or the likelihood of the same becoming
evident);
- failure to meet the sensitised Business Plan, if such failure would
have a material and adverse effect on the interests of the
beneficiaries of the interim security (or the likelihood of the same
becoming evident);
- that the post-Restructuring balance sheet is likely to be materially
worse than contemplated by the sensitised Business Plan; or
- that the Group is unlikely to have sufficient working capital
post-Restructuring, if such event would have a material and adverse
effect on the interests of the beneficiaries of the interim security.
The occurrence of an enforcement event may materially prejudice the ability of
Corp and plc to complete the Restructuring successfully. If the interim security
were to be enforced, neither Corp nor plc would have any reasonable prospect of
avoiding an insolvency proceeding.
RELEASE OF INTERIM SECURITY
The interim security is due to be released on 24 April 2003 ("RELEASE DATE"),
being the date (as notified by HSBC, as trustee in respect of the interim
security) falling one business day prior to the date on which the Corp Scheme
Meeting will be held, unless on or within five business days prior to the
Release Date, the Co-ordination Committee certifies that Bank Creditors and
Secured Bondholders representing a majority in principal amount of the debt
outstanding under the Bank Facility, bilateral facilities provided by Bank
Creditors to Corp, bilateral guarantees given by Corp in favour of Bank
Creditors and the Bonds do not believe that the requisite majority (being a
majority in number representing 75 per cent. in value of Corp Scheme Creditors
present and voting either in person or by proxy at the Creditors' Meeting in
respect of the Corp Scheme) will approve the Restructuring. In light of
discussions with the Syndicate Banks and the Informal Committee of Bondholders
during the course of the Restructuring, Corp and plc currently believe that the
interim security will be released on the Release Date.
If the interim security has not been released prior to the Corp Scheme Meeting
neither Corp nor plc will proceed with their respective Schemes and the interim
security will remain in place in any subsequent insolvency proceedings, meaning
that the Bank Creditors, Secured Bondholders and Barclays Bank PLC (as the only
ESOP Derivative Bank which committed to support the Restructuring prior to 15
October 2002), would rank ahead of all unsecured creditors of Corp with respect
to the cash held in the Lockbox Accounts. If the interim security is released
and the Corp Scheme Meeting proceeds, the choice facing all Corp Scheme
Creditors will be the same: either the Corp Scheme will be approved and
implemented or the Corp Scheme will be rejected and in the inevitable insolvency
proceeding which would follow such rejection the interim security would no
longer be in place.
The Syndicate Banks and the Informal Committee of Bondholders have indicated
that they will not be prepared to release the interim security prior to the Corp
Scheme Meeting unless, immediately before such release, Corp has confirmed to
the Prospective Supervisors that Corp remains satisfied that the reserves built
into the Corp Scheme are sufficient to meet distributions to all Corp Scheme
Creditors and that Corp remains of the opinion that its statement as to the Corp
Group's working capital contained in Part D.21 of this Section remains valid,
and the Prospective Supervisors have confirmed to Corp that they have no reason
to disagree with Corp's view that the reserves built into the Corp Scheme are
sufficient to meet distributions due to be made to all Corp Scheme Creditors.
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WITHDRAWALS
Prior to release of the interim security (and in the absence of any enforcement
event), and after the release of the interim security (in accordance with the
lockbox arrangements set out in the undertakings in favour of the Syndicate
Banks and members of the Informal Committee of Bondholders (as modified and
renewed)), withdrawals from the Lockbox Accounts are to be approved, in order
for the Group to meet its cash flow requirements, in accordance with an agreed
cash flow forecast for the period from and including March 2003 to 30 June 2003.
D.2 ARRANGEMENTS WITH ESOP DERIVATIVE BANKS
BACKGROUND
As part of the demerger of the Group's defence business at the end of 1999
involving the listing of plc as the new parent company of the Group, it was
necessary to reorganise the incentive schemes to reflect the new Group
structure, and a number of employee share option plans (the "ESOPs") were put in
place (and detailed in the listing particulars of plc). The ESOPs entitle
participating employees of certain Group Companies ("Opcos") in certain
circumstances to call for shares in plc at specified exercise prices.
Marconi Employee Trust was established by a trust deed in 1999 as a vehicle for
acquiring and holding plc shares to be delivered when options were exercised
under the ESOPs. MET was managed by an independent trustee, Bedell Cristin
Trustees Limited. plc wrote to various Opcos whose employees were to participate
in the ESOPs requesting that each confirm that it would bear the costs
associated with the participation by its employees in the ESOPs (such letters,
"Funding Letters").
In order to hedge some of the potential cost of acquiring shares to satisfy the
Group's obligation under the ESOPs, BCTL entered into three ISDA master swap
agreements ("ESOP Agreements") with the ESOP Derivative Banks (Salomon Brothers
International Limited, Barclays Bank PLC and UBS AG) as counterparties. Under
the ESOP Agreements, BCTL entered into certain equity swaps (as detailed in
Appendix 11) which provided that in certain circumstances BCTL would be obliged
to purchase plc shares in the future at prices which were fixed at the date of
the contracts, and were in the region of 900 pence per share ("ESOP Derivative
Transactions"). The obligations of BCTL under the ESOP Derivative Transactions
were guaranteed by plc and were limited in recourse to the assets of MET held on
trust by BCTL.
As the market price of the Group's shares fell, certain of the ESOP Derivative
Banks exercised their rights to call for cash collateral under the ESOP
Derivative Transactions. BCTL needed to be put in funds in order to satisfy its
obligation to provide such cash collateral. At the request of plc, Corp made
available a credit facility (the "ESOP Collateral Loan") to BCTL for the purpose
of providing cash collateral to the relevant ESOP Derivative Banks.
The UBS ESOP Derivative Transaction has been terminated consensually. SBIL has
purported to terminate its ESOP Derivative Transaction. The Barclays ESOP
Derivative Transaction has not been terminated. plc's total current exposure
under the ESOP Derivative Transactions is approximately L389 million. However,
approximately L214 million, being the maximum amount of collateral payable under
the ESOP Derivative Transactions, has been paid. A remaining amount of
approximately L175 million remains due.
During the course of the Restructuring negotiations the ESOP Derivative Banks
asserted that they may have claims against the Opcos (in addition to plc) in
respect of the ESOP Derivative Transactions, such claims arising from the
Funding Letter arrangements.
MOBILE ESCROW
On 2 August 2002, Marconi Bruton Street Limited, a subsidiary of Corp, disposed
of its entire shareholding in Marconi Mobile Holdings S.p.A. to Finmeccanica
S.p.A. for approximately E571 million. The employees of Mobile and certain of
its subsidiaries had participated in the ESOPs and certain members of the Mobile
group ("Mobile Opcos") had countersigned Funding Letters.
In order to ensure that the sale of Mobile was not delayed whilst the efficacy
of the claims of the ESOP Derivative Banks was determined, approximately L25
million of the sale proceeds was placed in an escrow
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account subject to the terms of an escrow agreement between, inter alia, the
ESOP Derivative Banks, HSBC Bank plc, Corp and plc, pending resolution of the
dispute or a court order. That sum reflected the L18 million maximum estimated
potential liability of the Mobile Opcos (prior to the release of the relevant
Funding Letters required in order to implement the sale of Mobile) arising from
the participation of their employees in the ESOPs plus additional headroom.
Given that the investigations into the merits of the arguments were at an early
stage, the additional headroom was approximately L7 million.
ESOP TERM SHEET
The fact that the ESOP Derivative Banks asserted claims against Opcos made it
necessary to devise a mechanism so that the ESOP dispute was ringfenced and
could not jeopardise the Corp Group once the Restructuring contemplated by the
Corp Scheme had become effective. On 28 August 2002, as part of the negotiations
in connection with the Restructuring, a non-binding indicative ESOP Term Sheet
providing for the creation of escrow accounts pending determination of the
claims of the ESOP Derivative Banks was initialled by plc, Corp, representatives
of the Co-ordination Committee, the Informal Committee of Bondholders and
Barclays.
The ESOP Term Sheet set out the manner in which the ESOP Derivative Banks, in
exchange for agreeing prior to 15 October 2002 to support the Restructuring of
Corp and plc, could take the benefit of the interim security and certain pre and
post-Restructuring escrow arrangements. Up to L170 million (including the L25
million set aside under the Mobile Escrow Agreement) was to be set aside in
escrow, on the Effective Date of the Corp Scheme, pending determination of the
potential liabilities of Group companies to the participating ESOP Derivative
Banks (those who had undertaken to support the Schemes) in relation to the ESOP
Derivative Transactions. Only Barclays elected to participate in these
arrangements and on 13 September 2002 Barclays, Corp and plc entered into a
restructuring undertaking agreement under which Barclays undertook, subject to
certain termination events, to vote in favour of the Schemes. The terms of the
Barclays restructuring undertaking agreement are described in more detail in
Appendix 19.
ESOP ESCROW AGREEMENT
A definitive agreement implementing the terms of the ESOP Term Sheet was entered
into between plc, Corp, HSBC Bank plc and Barclays on 13 December 2002, the
principal terms of which are summarised below:
a. No Restructuring
(i) If, prior to the Effective Date of the Corp Scheme, the Bank
Creditors and Secured Bondholders appropriate the cash in the
secured Lockbox Accounts as a result of the enforcement of
the interim security, a proportionate part of the secured
cash will be placed into an escrow account. This proportion
will be calculated on the basis of ((83.49)/(100) X 145/850 X
the credit balance of the secured cash at the time of
enforcement).
(ii) In the event of an enforcement, Barclays will first have to
litigate with reasonable diligence against the Opcos to
determine its rights (if any) under the Funding Letters.
Barclays is then entitled to abandon or settle the litigation
and, following agreement or a determination by the court or
arbitral tribunal as to their rights against the secured
escrow cash under the terms of the ESOP Escrow Agreement,
recover such amounts from the secured escrow cash on that
basis.
b. Post-Restructuring
If any Opcos are sold prior to the Restructuring becoming effective
("Subsequently Sold Opcos"), an amount to cover potential claims of
Barclays against the Subsequently Sold Opcos will be paid into an
account subject to separate arrangements similar to the Mobile
Escrow Agreement. To date two such escrow agreements have been
entered into in relation to Subsequently Sold Opcos, the amount of
each being less than L1 million. The terms of the ESOP Escrow
Agreement will continue to apply until Corp pays the Settlement
Amount referred to below to the ESOP Derivative Banks and the
escrow cash held under the terms of the Mobile Escrow Agreement and
any Subsequently
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Sold Opco escrow agreements has been paid to Corp. Thus, the terms
of the ESOP Escrow Agreement relating to the escrow to be
established post-Restructuring are now in practical terms
superfluous. The terms relating to the charged escrow cash may be
relied upon if the Settlement Amount is not paid by Corp to the
ESOP Derivative Banks.
ESOP SETTLEMENT
On 26 March 2003, Corp and plc reached definitive agreement with all the ESOP
Derivative Banks to settle their ESOP derivative related claims against the
Group (the "ESOP Settlement Agreement"). Under the terms of the settlement,
which is conditional upon the Corp Scheme becoming effective, Corp will pay a
total of L35 million to the ESOP Derivative Banks in full and final settlement
of their respective ESOP related claims against the Group. The Settlement Amount
will be paid from the fund of up to L170 million which was to have been set
aside by Corp under the ESOP Escrow Agreement and the Mobile Escrow Agreement.
The settlement has made available approximately L135 million in cash which forms
part of the L340 million comprising the cash element of the Corp Scheme
Consideration. Without the ESOP settlement, the L135 million sum would not have
formed part of the Corp Scheme Consideration.
The Boards of Corp and plc believe that the ESOP settlement was in the best
interests of Corp and plc and their respective stakeholders as a whole. In
reaching this conclusion, the Boards of Corp and plc took appropriate legal
advice and considered a number of relevant factors, including the merits of the
claims of the ESOP Derivative Banks, the desire to reduce the cost and expense
of continuing litigation, the potential saving in the interest burden from which
the Group will benefit by settling the ESOP derivative dispute, the benefits for
the Schemes and certainty as to the amount of the Corp Scheme cash distribution
that such a settlement brings.
The principal terms of the ESOP Settlement Agreement are as follows:
- Corp will pay the Settlement Amount to the ESOP Derivative Banks (in
the agreed proportions) on the Effective Date of the Corp Scheme
(provided such date is on or before 31 December 2003);
- When each ESOP Derivative Bank has received its share of the Settlement
Amount:
-- plc will release and waive any and all claims against the Opco's
under or in relation to the Funding Letters;
-- each ESOP Derivative Bank will release and waive any and all claims
against BCTL, plc and each Opco (and their respective directors and
officers) under or in relation to the Funding Letters (including
releases by plc thereof), the ESOP Derivative Transactions and the
plc guarantee of the ESOP Derivative Transactions;
-- BCTL will release and waive any and all claims against each ESOP
Derivative Bank, plc and each Opco (and their respective directors
and officers) under or in relation to the Funding Letters (including
releases by plc thereof), the ESOP Derivative Transactions and the
plc guarantee of the ESOP Derivative Transactions; and
-- plc will release and waive any and all claims against any ESOP
Derivative Bank (and their respective directors and officers) under
or in relation to Funding Letters (including releases by plc
thereof), the ESOP Derivative Transactions and the plc guarantee of
the ESOP Derivative Transactions;
- The ESOP Escrow Agreement, the Mobile Escrow Agreement and any
Subsequently Sold Opcos escrow agreements shall terminate and the
escrow cash held under the terms of the Mobile Escrow Agreement and
Subsequently Sold Opco escrow agreements shall be paid to Corp;
- The current litigation by SBIL against plc in connection with the SBIL
ESOP Agreement will be discontinued with no order as to costs;
- Until the Effective Date of the Corp Scheme, the ESOP Derivative Banks
may not commence or further any claims or proceedings against BCTL, plc
or any Opco (or their respective directors and officers) under the
Funding Letters (including releases thereof), the ESOP Derivative
Transactions or
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the plc guarantee of the ESOP Derivative Transactions. This standstill
terminates on the occurrence of certain events set out in the ESOP
Settlement Agreement, including (a) the release of Funding Letters in
certain circumstances; (b) the enforcement of the interim security; (c)
the Corp Scheme not obtaining the requisite approval at the Corp Scheme
Meeting; (d) the Court sanction for the Corp Scheme not being obtained;
(e) a demand being made for the repayment of the Bank Facility; (f) an
insolvency event occurring in relation to Corp or, subject to certain
limitations, plc; or (g) the Effective Date for the Corp Scheme not
having occurred on or before 31 December 2003; and
- The ESOP Derivative Banks will not, subject to limited exceptions,
transfer, sell or assign their rights arising from plc's guarantee of
the ESOP Derivative Transactions.
If the Corp Scheme does not become effective, Corp will not be required to pay
the Settlement Amount and the ESOP Escrow Agreement, the Mobile Escrow
Agreements and the Subsequently Sold Opco escrow agreements will continue to
apply.
All claims of the ESOP Derivative Banks under the plc guarantee of the ESOP
Derivative Transactions are excluded from the plc Scheme and no distribution
from the plc Scheme will be made in respect of them.
On 26 March 2003, UBS and Citibank N.A. (as the Syndicate Bank affiliate of
SBIL) entered into undertakings to exercise in certain circumstances all votes
relating to certain debt claims against Corp and plc in favour of the Schemes
(as detailed further in Appendix 19). The non-ESOP related debt is transferrable
without restrictions. At the same time, the Barclays restructuring undertaking
agreement (dated 13 September 2003) was amended to bring the transferability
provisions into line with those applying to UBS and Citibank.
D.3 ARRANGEMENTS TO PRESERVE RIGHTS AT PLC LEVEL
Various concerns were raised by either or both of the Informal Committee of
Bondholders and the Co-ordination Committee during the course of the
Restructuring discussions concerning the maintenance of guarantee claims against
plc and arrangements were put in place in order to deal with these concerns.
Details of the concerns and the arrangements which were put in place are set
below.
In making its decision to approve these arrangements, plc took into
consideration that it was correct in principle that the rights should be
preserved, in order to put the creditors concerned in the same position as if
both companies had been wound up.
PRESERVING RIGHTS UNDER THE SCHEMES IN THE EVENT THAT BOTH SCHEMES ARE
SUCCESSFUL
plc has guaranteed the repayment of certain primary debt obligations of Corp. In
order to preserve the recoveries of creditors of Corp, who may also have the
benefit of a plc guarantee ("GUARANTEE CREDITORS"):
a. the Corp Scheme provides that no Scheme Claim under the Corp Scheme
would be reduced, or in any way affected, by the compromise of any
claims of that Scheme Creditor against plc pursuant to the terms of
the plc Scheme; and
b. a corresponding provision appears in the plc Scheme.
THESE PROVISIONS ARE OF GENERAL APPLICATION TO THE EXTENT THAT A CREDITOR OF ONE
COMPANY HAS A GUARANTEE CLAIM IN RESPECT OF THAT CLAIM AGAINST THE OTHER
COMPANY.
PRESERVING RIGHTS IN THE EVENT THAT THE CORP SCHEME IS SUCCESSFUL BUT THE PLC
SCHEME FAILS
In addition, the Informal Committee of Bondholders and the Co-ordination
Committee indicated that they were concerned to ensure that, even if the plc
Scheme failed but the Corp Scheme was successful, guarantee creditors could
maintain the ability to claim 100 per cent. of their claim in respect of the plc
guarantee against plc.
The concern arose because, if the plc Scheme were to fail, plc would be placed
into liquidation. In the event that a distribution was made under the Corp
Scheme before a proof of debt could be submitted in a subsequent liquidation of
plc, the guarantee creditors would have to give credit to the liquidator of plc
for their recoveries under the Corp Scheme.
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The Informal Committee of Bondholders and the Co-ordination Committee indicated
on a number of occasions that it was central to their support of the
Restructuring that guarantee creditors be entitled to prove for the full amount
of their debt in any subsequent liquidation of plc should the plc Scheme fail.
In order to preserve the ability of guarantee creditors to claim the full amount
of their claim against plc in these circumstances the Informal Committee of
Bondholders and the Co-ordination Committee required plc to enter into a deed
poll on terms proposed by the Informal Committee of Bondholders and the
Co-ordination Committee. It is open to any creditor with a guarantee claim to
have the benefit of the deed poll. The deed poll requires that in the event that
any guarantee creditor is required to give credit to plc in a liquidation for
any recoveries made under the Corp Scheme, plc will pay a further sum equal to
the amount of the distribution that the relevant creditor received in the Corp
scheme i.e. it is intended that a new debt obligation of plc will be created.
The deed poll does not have the effect of permitting a creditor to receive more
than a 100 per cent. recovery in respect of the underlying claim.
PRESERVATION OF THE BOND GUARANTEE
Clause 4.9 of the Trust Deed provides that the guarantee given by plc in respect
of the Eurobonds will terminate when Corp delivers to the Eurobond Trustee a
certificate to the effect that plc has been released from its guarantees in
respect of certain bank debt. Section 12.03 of the Yankee Bond Indenture states
that the plc guarantee will terminate on the date that plc is released from its
guarantees in respect of certain bank debt and the Eurobonds.
In order to preserve the guarantee claim of the Trustees, Corp and plc entered
into a Bondholder Confirmation Letter which provided that notwithstanding the
provisions of Clause 4.9 of the Trust Deed and Section 12.03 of the Yankee Bond
Indenture or the receipt of a Distribution under the Corp Scheme or the
cancellation of the Bonds, the guarantee of plc remains in full force and effect
and is extended for the benefit of all Definitive Holders.
D.4 WORKING CAPITAL
RETAINED CASH
The Group is expected to retain approximately L602 million of cash following the
Restructuring, comprising approximately:
a. L167 million of restricted cash;
b. L112 million of trapped cash;
c. L197 million retained for normal working capital needs;
d. L96 million representing net cash outflow to cash break even; and
e. L30 million representing cash in transit and therefore not available
for distribution.
"Restricted cash" is cash employed as collateral or available to be granted as
collateral in connection with performance bonding arrangements. Any cash
collateral releases from existing performance bonds, and any balance remaining
in the Existing Performance Bond Escrow Account on the first anniversary of the
Effective Date for the Corp Scheme, in an amount (when aggregated with cash
collateral releases made to the security trustee under the Performance Bonding
Facility between the Issue Date and the first anniversary of the Effective Date
of the Corp Scheme, together with interest thereon) not exceeding the lesser of
L25 million or 50 per cent. of the amount of the Performance Bonding Facility,
if Corp should cancel a portion of that facility, will be transferred to the
security trustee under the Performance Bonding Facility, to collateralise
performance bonds and similar instruments issued under that facility. Any excess
amount will be paid into the Mandatory Redemption Escrow Account to be applied
in redemption of the New Junior Notes and, once all New Junior Notes have been
repaid, the New Senior Notes. On the termination or cancellation of the
Performance Bonding Facility, all released collateral (other than that required
to support long-dated performance bonds) will be paid into the Mandatory
Redemption Escrow Account to be applied in redemption of the New Junior Notes
and, once all New
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Junior Notes have been repaid, the New Senior Notes (as described further
below). See Appendix 8 for further information on the circumstances in which
restricted cash will be released.
"Trapped cash" includes (a) cash held in relation to existing insurance
liabilities, (b) cash held as collateral under existing local bilateral debt
facilities, (c) part of the proceeds from the disposal of Mobile in August 2002
to be held in escrow until August 2004 and (d) cash held in accounts in various
jurisdictions to meet local working capital requirements (where such cash is
not, for local regulatory or other reasons, easily accessible to meet wider
Group working capital needs).
The "net cash outflows to cash break even" figure represents cash to be retained
by the Group (net of permitted remaining disposal proceeds) needed to fund the
Group through to cash break even.
WORKING CAPITAL FACILITIES
Performance Bonding Facility
In order to ensure that the Group has sufficient bonding facilities available to
it following the Effective Date of the Corp Scheme HSBC Bank plc and JP Morgan
Chase Bank have agreed to provide a L50 million committed revolving facility for
the issuance of Performance Bonds at the request of Marconi Bonding Limited, for
the purpose of supporting (directly or indirectly) obligations of members of the
Group to third parties incurred in the ordinary course of the Group's trade or
business. The Performance Bonding Facility is also available for the purpose of
supporting any financing facilities which have been provided to members of the
Group for the purpose of supporting directly obligations of members of the Group
incurred in the ordinary course of the Group's trade or business (other than
obligations in respect of financial indebtedness) (for example, in connection
with supporting a bonding facility in a foreign currency where bonds denominated
in such foreign currency are not available under the Performance Bonding
Facility). The Performance Bonding Facility will permit the issue, on behalf of
Corp, of a letter of credit (with a face value of up to L2 million) in favor of
the plc Scheme Supervisors from time to time to support plc's Ongoing Costs
(within the L50 million commitment).
The Performance Bonding Facility may be utilised at any time during the period
from the Effective Date of the Corp Scheme to the date falling 18 months
thereafter. Marconi Bonding Limited has the right to request an extension to
such availability period (to a date falling no later than 30 months after the
Effective Date of the Corp Scheme (but without the participating banks having
any obligation to agree such extension)). Performance Bonds may be issued in
sterling, US dollars, Euro or (with the approval of the relevant issuing bank)
any other readily available currency freely convertible into sterling. The form
of the Performance Bond and identity of the beneficiary must be approved by the
relevant issuing bank (having regard to that issuing bank's formal internal
policies at the relevant time, and to all relevant legal and regulatory
restrictions). In the case of Performance Bonds with an expiry date falling
after 31 December 2010, the approval of the relevant issuing bank and the
approval of the relevant banks providing the Performance Bonding Facility is
required.
In addition to an issuance fee of L1,000 for each Performance Bond, a bonding
fee equal to 0.50 per cent. per annum of the outstanding amount of each
Performance Bond is payable quarterly in advance, for the account of the
participating banks. A fronting fee equal to 0.10 per cent. per annum of the
outstanding amount of each issued Performance Bond (less the issuing bank's own
proportion) is payable quarterly in advance, for the account of the relevant
issuing bank. An arrangement fee of L1,000,000 was payable on the date of the
Performance Bonding Facility to the facility agent for distribution to the banks
participating in the Performance Bonding Facility.
The obligations of each obligor under the Performance Bonding Facility are
irrevocably and unconditionally guaranteed by Corp. The Performance Bonding
Facility is secured by, inter alia, a charge over cash contained in certain
blocked deposit accounts (the "Secured Accounts") between Marconi Bonding
Limited and HSBC Bank plc as security trustee. Marconi Bonding Limited will be
required, on the date of issuance of a Performance Bond, to deposit (in the
currency of the relevant Performance Bond or, where such Performance Bond is
issued in a currency other than sterling or Euros, US dollars) an amount equal
to 50 per cent. of the maximum face value of such Performance Bond into such
Secured Accounts. As further security for the obligations of Marconi Bonding
Limited under the Performance Bonding Facility, Marconi Bonding Limited will
ensure that additional amounts are deposited into the Secured Accounts in
accordance with the terms of the New Notes. The Performance
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Bonding Facility contains certain events of default after the occurrence of
which the agent is permitted to cancel the total commitments under the
Performance Bonding Facility and/or to declare that full cash collateral in
respect of each Performance Bond is immediately due and payable (including
events of default relating to non-payment, failure to comply with security
undertakings, failure to comply with other obligations, misrepresentation, cross
default, insolvency, unlawfulness and repudiation of the Performance Bonding
Facility documents).
In accordance with the Security Trust and Intercreditor Deed, the banks
providing the Performance Bonding Facility will rank ahead of the Noteholders in
any enforcement of the Security. The Security Trust and Intercreditor Deed also
provides that the security trustee under the Performance Bond Facility and the
banks may not take action to enforce the obligations of the obligors under the
Performance Bonding Facility following a payment event of default thereunder
until the earlier of (i) 180 days after notice to the Security Trustee under the
Security Trust and Intercreditor Deed of the occurrence of such payment event of
default or (ii) the acceleration of the New Senior Notes (see Appendix 10 for
further details).
US Working Capital Facility
In order to ensure that Marconi Communications, Inc. has sufficient working
capital post-Restructuring, MCI has entered into a working capital facility
agreement with Liberty Funding, L.L.C., pursuant to which Liberty will provide a
US$22,500,000 revolving credit facility to MCI. The Working Capital Facility is
secured by a first mortgage lien on a parcel of MCI's real property (including
buildings, improvements, building materials and fixtures) located in Warrendale,
Pennsylvania, USA ("Property").
The Working Capital Facility is subject to a fixed interest rate of 15 per cent.
per annum (payable monthly) and will mature on 26 November 2004. It will be used
by MCI for working capital and general corporate purposes. Liberty's fees and
costs include an arrangement fee of 6 per cent. of the facility amount, an
unused commitment fee of 1 per cent. per annum on any undrawn portion, and a 5
per cent. late charge for payments overdue by more than ten days. In addition to
the mortgage over the Property, all of MCI's right, title and interest in and to
all leases of all or any part of the Property (including any rents) will be
assigned to Liberty, and MCI will provide assurances and indemnities to Liberty
relating to environmental matters affecting the Property, and financing
statements for perfecting security interest in the fixtures. A second mortgage
lien on the Property (and assignments of related leases and rents) will be
granted in favour of, inter alia, the providers of the Performance Bonding
Facility and the Noteholders and, consequently, an intercreditor agreement will
be entered into between Liberty and the Security Trustee. See Appendix 10 for
further details of this intercreditor agreement.
Covenants contained in the Working Capital Facility Agreement include
indemnification from MCI in favour of Liberty in relation to liabilities and
claims relating to the Property, MCI's pledge to keep the buildings, structures,
improvements and fixtures insured and MCI's covenant not to dissolve, merge or
consolidate with any other person (other than an affiliate of MCI) or dispose of
all or a substantial portion of its assets relating to its BBRS Business.
Although the obligations of MCI in respect of this facility are limited
recourse, there are exceptions for, inter alia, failure to maintain insurance
coverage, fees and costs incurred in enforcing/collecting sums due and MCI's
environmental indemnity obligations, for which MCI has full liability. The
Working Capital Facility Agreement contains certain events of default the
occurrence of which would permit Liberty to cease making further advances,
terminate its commitment and/or accelerate repayment of the Working Capital
Facility.
Intra-Group funding
There are currently a significant number of intra-Group lending arrangements in
place between members of the Wider Corp Group. These comprise loans from Corp to
its Affiliates, loans from Corp's Affiliates to Corp and loans between Corp's
Affiliates. Any intra-Group loan claims of Corp's Affiliates against Corp will
be Excluded Claims for the purposes of the Corp Scheme and will therefore remain
in place following the implementation of the Corp Scheme (See Part C.7 of this
Section and Appendix 9 for further details on Excluded Claims).
Following the Effective Date of the Corp Scheme, the Wider Corp Group will be
subject to the intra-Group lending restrictions contained in the indentures
governing the New Notes. The scope of those restrictions will depend on whether
the relevant debtor or creditor is a Guarantor or a non-Guarantor. The
restrictions are
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described more fully in Appendix 8. The Security Trust and Intercreditor Deed
also contains provisions regulating certain intra-Group loans and actions in
respect thereof, which are described more fully in Appendix 10.
COLLATERAL FOR EXISTING PERFORMANCE BONDS
General
On the Effective Date of the Corp Scheme, Corp will deposit approximately L43.5
million of the L167 million of restricted cash attributable to performance
bonding collateral into the Existing Performance Bond Escrow Account.
Withdrawals from that account will be made to satisfy valid and enforceable cash
collateral demands made by banks, insurance companies or other financial
institutions who have issued performance bonds ("Existing Performance Bonds") on
behalf of members of the Group prior to the Effective Date, upon certification
by Corp to the Escrow Trustee.
Cash collateral releases from Existing Performance Bonds, and any balance
remaining in the Existing Performance Bond Escrow Account on the first
anniversary of the Effective Date for the Corp Scheme in an amount (when
aggregated with cash collateral releases made to the security trustee under the
Performance Bonding Facility between the Issue Date and the first anniversary of
the Effective Date for the Corp Scheme, together with interest thereon) not
exceeding the lesser of L25 million or 50 per cent. of the amount of the
Performance Bonding Facility, if Corp should cancel a portion of that facility,
will be transferred to the security trustee under the Performance Bonding
Facility. Any excess amount will be deposited into the Mandatory Redemption
Escrow Account to be applied to redeem the New Junior Notes and, once all New
Junior Notes have been repaid, the New Senior Notes. On the termination or
cancellation of the Performance Bonding Facility, all released collateral (other
than that required to support long-dated performance bonds) will be paid into
the Mandatory Redemption Escrow Account to be applied to redeem the New Junior
Notes and, once all New Junior Notes have been repaid, the New Senior Notes (as
described further below).
Determination of bonding collateral requirements
As part of its determination of the post-Restructuring working capital
requirements of the Group, Corp sought to ascertain an appropriate level of
provision to be made for potential cash collateral calls in respect of Existing
Performance Bonds (other than those Existing Performance Bonds which are already
fully collateralised). That determination was made on the basis of Corp's
assessment of the risk of individual issuers of Existing Performance Bonds
calling for cash collateral against their outstanding exposure, based on an
analysis of the rights which such issuers may have to make cash collateral
calls. Specific provision has been made by Corp for all Existing Performance
Bonds where the issuers of such bonds have unconditional rights to call for cash
collateral at any time or have conditional rights to call for cash collateral
where those conditions will be triggered by the Restructuring. With respect to
issuers of Existing Performance Bonds that have conditional rights to call for
cash collateral (where such conditions will not be triggered by the
Restructuring per se), Corp has allocated a higher provision to those where it
considers the conditions have been, or are more likely to be, triggered and a
lower (or zero) provision where it considers that the conditions are unlikely to
be triggered. Corp has made no provision in respect of issuers which it
considers have no rights to call for cash collateral.
Under the Heads of Terms, it was agreed that Corp would place up to L55 million
in the Existing Performance Bond Escrow Account to be used for cash collateral
calls in respect of Existing Performance Bonds. Corp had previously assessed
that a provision of a higher amount would be an adequate provision in respect of
potential cash collateral calls for Existing Performance Bonds. In order to be
satisfied that the L55 million deposit which was permitted to be made into the
Existing Performance Bond Escrow Account by Corp on the Effective Date would be
an adequate reserve in respect of Existing Performance Bonds, Corp entered into
arrangements with certain (current and former) Syndicate Bank issuers of
Existing Performance Bonds during February and March 2003. Corp agreed to
provide each participating Syndicate Bank with collateral (in the form of a
cash-backed letter of credit) for 50 per cent. of the principal amount of the
outstanding uncollateralised Existing Performance Bonds issued by it. In return
for that provision of collateral, each of those Syndicate Banks agreed to waive
all of its rights to demand cash collateral in respect of Existing Performance
Bonds issued by it (except in the case of insolvency of Corp or the relevant
Subsidiary, a demand by the beneficiary under the relevant Existing
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Performance Bonds, or acceleration under the New Notes). Because this
arrangement was agreed with the Syndicate Banks on a collective basis (which
Corp considered to be necessary to preserve stability amongst the Syndicate
Banks), collateral (of approximately L1.13 million in aggregate) was provided to
two Syndicate Banks (whose Existing Performance Bonds exposure totals
approximately L2.27 million) in respect of which Corp would not otherwise have
made cash collateral provision (on the basis that Corp considers that those
issuers have no rights, ambiguous rights or conditional rights to call for cash
collateral which are unlikely to be triggered). However, as at 27 March 2003, on
a collective basis, arrangements had been entered into to provide approximately
L11.50 million of collateral in return for a waiver of rights to call for cash
collateral of approximately L19.03 million in respect of Existing Performance
Bonds with a face value of approximately L21.30 million. In the absence of this
arrangement Corp may have been required to make a cash collateral provision of
approximately L19.03 million in respect of such bonds. One of the participating
Syndicate Banks (in respect of which Corp would otherwise have been required to
make 100 per cent. cash collateral provision) was provided with collateral for
approximately 61 per cent. of the principal amount of the outstanding
uncollateralised Existing Performance Bonds issued by it. This resulted from
certain bonds issued by that Syndicate Bank expiring between the time that Corp
agreed the 50 per cent. collateral figure with that bank and the time at which
the arrangements with the Syndicate Bank issuers were implemented.
Similar arrangements may be entered into (in the period up to the date of the
Scheme Meeting in respect of the Corp Scheme) with other (current and former)
Syndicate Bank issuers of Existing Performance Bonds. Such arrangements, if
entered into, are expected to result in the provision of collateral with a value
of less than L3 million.
Prior to the Scheme Meeting in respect of the Corp Scheme, alternative
arrangements may be entered into with one other Syndicate Bank issuer of
uncollateralised Existing Performance Bonds which did not take part in the above
arrangements. Under such alternative arrangements, this bank would agree to
release collateral (in the form of a cash backed letter of credit) totalling
approximately E10.23 million which it already holds against certain liabilities
of a former Subsidiary of Corp (and which it is entitled to retain against such
liabilities) in consideration for the issue of a new cash-backed letter of
credit (with a face value of approximately E9.85 million) to collateralise
Existing Performance Bonds issued by it (totalling approximately E9.85 million).
D.5 SCHEME IMPLEMENTATION DEED
The Scheme Implementation Deed (the "DEED") was entered into between Corp, plc,
E-A Continental Limited, Ancrane, Marconi Nominees Limited, British Sealed Beams
Limited and various other Group companies on 27 March 2003. The primary purpose
of the Deed was to ensure that legally binding arrangements were in place to
govern the rights and obligations between, inter alia, Corp and plc in
implementing the Restructuring. Pursuant to the Deed, Corp, plc, E-A Continental
Limited, Ancrane, Marconi Nominees Limited, British Sealed Beams Limited and
various other Group companies have agreed to perform certain obligations and
undertaken not to do certain acts including, but not limited to, approving all
shareholder resolutions necessary or desirable to give effect to the Corp
Scheme, assigning or novating certain guarantee obligations and/or licence
agreements, providing all reasonable assistance and information and undertaking
all reasonable acts and deeds to give effect to the assignment of certain
Intellectual Property, making certain intra-group tax loss and group relief
surrenders and providing certain tax indemnities. Ancrane has agreed to make a
repayment of capital in specie to plc of all of its assets, other than L100.
Corp has also agreed to procure the issue of a letter of credit (under the
Performance Bonding Facility) in an amount of L2 million in favour of the plc
Scheme Supervisors from time to time for them to draw on in relation to plc's
Ongoing Costs. In the event that Corp is unable to procure the issue of such
letter of credit, it has undertaken to provide the sum of L2 million for the plc
Scheme Supervisors to draw on in relation to plc's Ongoing Costs on similar
terms to those set out in the Scheme Implementation Deed and the Performance
Bonding Facility Agreement in relation to the letter of credit. Certain
obligations and undertakings of the parties to the Deed (including Corp's
obligation to procure a letter of credit for plc's Ongoing Costs) are
conditional upon and subject to the Corp Scheme becoming effective and will, in
part, give effect to the implementation of the Corp Scheme upon it becoming
effective. Brief particulars of the Scheme Implementation Deed are contained in
Appendix 18.
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D.6 STATEMENT AND WAIVER OF INTER-COMPANY BALANCES
In order to facilitate the effective implementation of the Schemes, and in
particular to effect a clean up of existing inter-company claims owed to or by
Corp and plc, Corp and plc have entered into a statement and waiver of
intercompany balances agreement (the "Statement and Waiver Agreement") with
certain other Group companies.
The effect of the Statement and Waiver Agreement is to preserve all known and
stated claims existing between (A) Corp or plc and (B) the participating Group
companies, and to waive all other claims which arise by reference to
circumstances existing prior to the Effective Date of the Corp Scheme. In this
sense there will be more certainty as to the level of any claims owed to or by
Corp and plc after the Effective Date of the Corp Scheme. In so far as it
involves plc, the Statement and Waiver Agreement has limited effect in that all
known claims against plc will be schemed under the plc Scheme (and will receive
a distribution from the plc Scheme) and all known claims of plc against Corp and
its subsidiaries have been transferred to Corp prior to the Record Date (in
consideration for a reduction in the amount of the Corp's existing claim against
plc).
Under the Statement and Waiver Agreement the following intra-group claims will
be preserved as between (a) Corp and plc and (b) the participating Group
companies:
- disclosed intra-group loan balances in existence as at 31 December 2002
(plus interest accrued at such applicable commercial rate of interest
as agreed between the parties to the respective loan);
- any intra-group loan made on or after 1 January 2003 in the ordinary
and usual course of business or with certain previously agreed creditor
consent, including interest accrued at such applicable commercial rate
of interest as agreed between the parties to the respective loan;
- any trading and current account liabilities in existence as at 31 March
2002 (in the case of any participating Group company which is a trading
or an active non-trading company) or 30 September 2002 (in the case of
any dormant participating Group company). Such liabilities are
determined by reference to the management accounts upon which the
audited consolidated financial accounts of plc, as at 31 March 2002 or
30 September 2002 (as applicable) were prepared;
- any trading and current account liabilities incurred in the ordinary
and usual course of business after 31 March 2002 between (a) Corp
and/or plc, and (b) any participating Group company which is a trading
or an active non-trading company;
- any counter indemnity or equivalent reimbursement obligation (which is
written or is implied by law and whether or not contingent) arising
under any financial guarantee or indemnity (which is written or is
implied by law) and is: (a) in favour of any third party which is not a
member of the Group (including the issuer of any performance bond, bank
guarantee or similar instrument), and (b) in respect of any contractual
obligations of the provider of the counter indemnity or equivalent;
provided that where any payment has been made under such a guarantee or
indemnity on or before 31 March 2002, the resultant counter indemnity
shall not be preserved;
- any counter indemnity or equivalent reimbursement obligation (which is
written or is implied by law and whether or not contingent) arising
under any written non-financial guarantee or indemnity (which is
written or implied by law) and is: (a) in favour of any person which is
not a member of the Group, and (b) in respect of any contractual or
implied by law obligations of the provider of the counter indemnity or
equivalent and (c) disclosed in a schedule to the Statement and Waiver
Agreement; provided that where any payment has been made under such a
guarantee or indemnity on or before 31 March 2002, the resultant
counter indemnity shall not be preserved; and
- any other specified claims.
All other claims of Corp or plc against each participating Group company and all
other claims of each participating Group company against Corp or plc, will be
released with effect from the Effective Date of the Corp Scheme. The Statement
and Waiver Agreement does not affect claims which arise out of or in relation to
any matter or circumstance arising after the Effective Date of the Corp Scheme.
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A list of Group companies that have already agreed to participate in the
Statement and Waiver Agreement is contained at paragraph 2.2 of Appendix 19.
Other Group companies may be added prior to the Effective Date of the Corp
Scheme.
D.7 RECAPITALISATION OF GUARANTORS
In order to facilitate the giving of the Guarantees as part of the new security
package to support the New Notes (see Appendix 10 for further details), certain
of the Guarantors will need to be recapitalised. Most of these recapitalisations
are intended to be effected one or two Business Days prior to the Effective Date
of the Corp Scheme, although some may need to be effected before then. In
conjunction with the recapitalisations, it is also intended to unwind or
formalise certain intra-group financing arrangements.
The recapitalisations and ancillary transactions will involve the direct and
indirect parent companies of the relevant Guarantors, as well as certain other
Group companies or entities that owe or are owed intra-group balances by the
relevant Guarantors. Each recapitalisation is intended to be effected by a
number of sequential intra-group transactions which may include: the restatement
of terms of intra-group debt; injections of equity by parent companies into
subsidiaries; repayments, assignments, novation or release of existing
intra-group claims; and the issue of equity by subsidiary companies in return
for (a) assignments of intra-group claims or (b) reductions in intra-group
balances owed to their parent companies. For those transactions which require
actual cashflow, the relevant series of intra-group transactions will involve
the "round-tripping" of cash, commencing and ending in each case with Corp (as
the ultimate holding company of the Guarantors).
D.8 WAIVER OF PLC SHAREHOLDER VOTE
As referred to in Part C.5 of this Section, the UKLA has granted a waiver of the
provision in the Listing Rules which would otherwise require the consent of the
shareholders of plc to the issue of the New Shares pursuant to the Corp Scheme.
Accordingly, the effectiveness of the Schemes is not conditional on the approval
of the shareholders of plc.
D.9 CAPITAL REDUCTION
As part of the Restructuring, Corp will apply to the Court for the purpose of
implementing the Capital Reduction pursuant to section 135 of the Act. The
Capital Reduction will involve the cancellation of the Non-Voting Deferred
Shares arising on the conversion of the existing issued ordinary shares in the
capital of Corp held by plc and Marconi Nominees Limited and the cancellation of
Corp's share premium account (including that arising on the issue of New
Shares), to create a reserve which it is expected will eliminate the deficit on
the profit and loss account that would otherwise be shown on Corp's balance
sheet as at 31 March 2003.
As can be seen from note g. iii) to the Corp unaudited pro forma consolidated
balance sheet in Appendix 2, the unaudited deficit on Corp's profit and loss
account in its own unaudited balance sheet as at 30 September 2002 was
approximately L2,767 million. The cancellation of the Non-Voting Deferred Shares
and Corp's existing share premium account would reduce this by approximately
L843 million, but approximately L3,306 million of share premium account is
expected to arise on the issue of the New Shares so the reserve arising on the
Capital Reduction is expected to exceed the 30 September 2002 deficit on Corp's
profit and loss account by L1,382 million. The excess of the reserve over the 31
March 2003 deficit on Corp's profit and loss account will initially constitute
Corp's special reserve referred to below.
Prior to confirming the Capital Reduction, the Court will require Corp to give
an undertaking designed to protect persons who are creditors of Corp on the date
the Capital Reduction becomes effective. This undertaking will require the
maintenance by Corp and its subsidiaries of special reserves, which will not be
distributable to shareholders of Corp until the creditors of Corp to be
protected have been paid off or the Court has agreed otherwise.
It is anticipated that the Capital Reduction will become effective shortly after
the Effective Date of the Corp Scheme. Although Corp cannot guarantee that the
Capital Reduction will become effective, it will not affect the effectiveness of
the Schemes in any event.
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D.10 SHARE INCENTIVE PLANS
INTRODUCTION
The Group currently operates the share incentive plans set out in the table
below. The Plans were designed to incentivise participating Group employees,
directors and consultants as part of their remuneration arrangements. Under
these Plans, Participants were given rights to acquire plc Shares either at a
specified price or, where certain objectives were achieved, at no cost (the
latter are known as nil-cost options). Certain options, including some of the
nil-cost options are already exercisable. These optionholders can acquire plc
Shares prior to the plc Shareholders Record Time. As a result of the
Restructuring, more of the options will become exercisable. However, this will
be after the plc Shareholders Record Time when plc Shares will have no value.
Due to plc's current share price the majority of options granted to Participants
under the Plans are now underwater (that is, shares in plc are worth less than
the Participants would have to pay to acquire them). It is assumed that holders
of those options which are currently exercisable will not exercise them. Of
those options where the plc Shares subject to them are worth more than the price
that Participants must pay for them, it is only those optionholders who can and
do exercise their options prior to the plc Shareholder Record Time who will
receive New Shares and Warrants. After implementation of the Restructuring, all
remaining options will be valueless.
As at 28 February 2003, options over approximately 149.6 million plc Shares are
outstanding. This represents approximately 5.4 per cent. of plc's current total
issued share capital. plc has also granted 47.3 million phantom options in
respect of which, on exercise, Participants ordinarily receive cash rather than
shares (if a gain has been made).
Number of shares
over which options Range of
Name of plan are outstanding option prices
------------ ------------------ -------------
The GEC 1984 Managers' Share Option Scheme 671,044 183-266p
------------------ -------------
The GEC Employee 1992 Savings-related Share Option Scheme 1,985,076 203-273p
------------------ -------------
The GEC 1997 Executive Share Option Scheme 7,959,308 311-385p
------------------ -------------
The Marconi UK Sharesave Plan 2,297,688 538-748p
------------------ -------------
The Marconi International Sharesave Plan 1,342,615 737p
The Marconi Launch Share Plan 19,620,228 Nil-cost
The Marconi 1999 Stock Option Plan 98,449,888 35-1030p
The Metapath Software Corporation 1995 Stock Option Plan 144,164 3-274p
The Metapath Software International Inc. 1999 Stock Option
Plan 2,386,061 212-957p
The Mariposa Technology Inc. 1998 Employee Incentive Plan 320,684 9-56p
The Marconi Restricted Share Plan 1,795,184 Nil-cost-947p
The Marconi Welcome Plan 2,642,687 Nil-cost
The Marconi Long Term Incentive Plan 629,559 Nil-cost
The Northwood Technologies Inc. Share Option Plan 65,827 139-245p
The Mobile Systems International Share Option Plan 694,790 212p
Marconi and GEC Phantom Option Schemes (converted into
options over plc Shares) 8,595,663 17-1134p
In recent weeks, plc Shares have traded at around 1.5-2.5 pence per share. On
this basis it might appear that nil cost options are in the money. However,
except for those which are currently exercisable, this is not the case.
Some optionholders holding nil cost options which are not currently exercisable
will become entitled to exercise their options when the Restructuring takes
effect, because Corp will cease to be a subsidiary of plc, and other such
optionholders will become so entitled if plc goes into liquidation. However,
neither event will take place until after the Corp Scheme has become effective,
by which time plc Shares will have no value.
114
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SECTION 2: FURTHER EXPLANATION OF THE RESTRUCTURING -- PART D
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Optionholders currently entitled to exercise their nil cost options who do so in
time to receive plc Shares before the plc Shareholders Record Time will qualify
to receive New Shares and Warrants if the Corp Scheme becomes effective. Only
these options can be described as in the money.
The only two alternatives for plc are a restructuring under which all its assets
are distributed to its creditors or an insolvent administration or liquidation.
The reason why plc Shares are trading between 1.5-2.5 pence per share is that
only 0.5 per cent. of the New Shares that are to be issued (assuming the Corp
Scheme becomes effective and the First Initial Distribution takes place), are
being made available to the plc Shareholders as at the plc Shareholders Record
Time.
THE RETENTION AND EMERGENCE PLAN
In order to retain key employees during the restructuring of the Group, a
Retention and Emergence plan (the "R&E Plan") was implemented in May 2002 for
sixty-three employees. Corp was not a party to any of the documents. Of the
sixty-three individuals, Marconi Communications Limited is the responsible Group
company for thirty-seven, Marconi Communications, Inc. for seventeen, plc for
two (one in Australia and one in Hong Kong), Marconi Communications GmbH for
four and Marconi Communications SpA for three. The obligations of plc are to be
transferred to Marconi Communications Limited in relation to the two employees
whose promise refers to plc.
The R&E Plan promises four equal payments to the employees if they are still
employed and not working their notices on each payment date. Two of the payment
dates have passed and the remaining dates are (i) seven working days after plc
completes its refinancing negotiations (with a long stop date of 31 March 2003)
and (ii) three months after the third payment date. The aggregate of the
payments in each case is based on a percentage of the employee's salary, with
the range of percentages varying from 30 per cent. to 150 per cent., depending
on the employee's seniority.
Those employees who are signing new service agreements and who are in the
Management Plan (as defined below) are to waive the last payment due under the
R&E Plan.
IMPACT OF THE PROPOSED RESTRUCTURING:
Nil-cost Option Plans
The Marconi Launch Share
Plan Options were granted to Participants of this plan
as nil cost options. If not currently exercisable,
they will become exercisable on a solvent
liquidation of plc. At that time Participants will
be deemed to have exercised options to acquire the
number of plc Shares the plc Board determines. It
is anticipated that, due to the Group's financial
position, the plc Board will decide that no options
should become exercisable. These options will lapse
on the tenth anniversary of their date of grant.
The Marconi Welcome Plan Options were granted to Participants of this Plan
as nil cost options. If not currently exercisable,
they will become exercisable on a solvent
liquidation of plc. At that time Participants will
be deemed to have exercised options to acquire the
number of plc Shares the plc Board determines. It
is anticipated that, due to the Group's financial
position, the plc Board will decide that no options
should become exercisable. These options will lapse
on the tenth anniversary of their date of grant.
The Long Term Incentive
Plan
(the "LTIP") Nil-cost share options granted under the LTIP which
are not currently exercisable will become
exercisable when Corp ceases to be a subsidiary of
plc. The remuneration committee also has discretion
to decide to what extent grants of further nil-cost
options should be made at that point. It is
anticipated that, given the Group's financial
position, the remuneration committee will decide
that no further options should be granted. The
remuneration committee also has discretion to
decide when options, if not exercised, should
lapse.
115
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SECTION 2: FURTHER EXPLANATION OF THE RESTRUCTURING -- PART D
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The Restricted Share Plan
(the
"RSP") Participants may acquire plc Shares that will be
awarded to them when Corp ceases to be a subsidiary
of plc. Participants will have six months to call
for the shares before the awards lapse.
Under the "nil cost" plans, options are currently exercisable or may ordinarily
become exercisable before the plc Shareholders Record Time over the following
number of plc Shares:
Plan Approximate No. of plc Shares
---- -----------------------------
Launch Plan 0
Welcome Plan 0
LTIP 480,000
RSP 910,000
---------
1,390,000
=========
As pointed out above, by the time that the remaining outstanding "nil cost"
options become exercisable, the shares in plc will have ceased to be of any
value.
The MET currently holds in the region of 1,208,545 plc Shares and approximately
L4,544.58 in cash. The GEC Employee Share Trust currently holds in the region of
1,135,644 plc Shares and approximately L937.45 in cash.
Underwater Option Plans
The GEC Managers' 1984
Share
Option Scheme All outstanding options will become exercisable
when the court sanctions the plc Scheme and lapse
six months later.
The GEC Employee 1992
Savings
Related Share Option Scheme All outstanding options will become exercisable
when the court sanctions the plc Scheme and lapse
six months later.
The Marconi 1999 Stock
Option
Plan Option holders may exercise their options within a
period of six months from when Corp ceases to be a
Subsidiary of plc at the end of which time
unexercised options will lapse.
The Marconi UK Sharesave
Plan All outstanding options will become exercisable
when the court sanctions the plc Scheme and lapse
six months later.
The Marconi International
Sharesave Plan All outstanding options will become exercisable
when the court sanctions the plc Scheme and lapse
six months later.
The GEC 1997 Executive
Share
Option Scheme Option holders may exercise options within a period
of six months from when Corp ceases to be a
Subsidiary of plc at the end of which time
unexercised options will lapse.
The Mobile Systems
International
Share Option Plan All outstanding options will become exercisable
when the court sanctions the plc Scheme and lapse
six months later.
Metapath Software
Corporation
1995 Stock Option Plan Option holders may exercise their options to the
extent that performance criteria have been met when
the proposal for the solvent liquidation of plc is
adopted.
Metapath Software
International
Inc. 1999 Stock Option Plan Option holders may be given the opportunity to
exercise vested and non-vested options until five
days before a liquidation. All unexercised options
will lapse immediately before a liquidation.
Mariposa Technology Inc
1998
Employee Incentive Plan All outstanding options held by employees,
directors and consultants will become exercisable
before an event such as a liquidation and, if not
exercised will lapse before such an event.
Northwood Technologies Inc.
Share Option Plan All outstanding options will remain unaffected by
the plc Scheme and will lapse in due case.
116
I. EXPLANATORY STATEMENT
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SECTION 2: FURTHER EXPLANATION OF THE RESTRUCTURING -- PART D
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The Marconi Phantom Option
Scheme Options will lapse and cease to be exercisable when
Corp ceases to be a Subsidiary of plc.
The GEC Phantom Option
Scheme Options will lapse and cease to be exercisable when
Corp ceases to be a Subsidiary of plc.
The Marconi Employee Stock
Purchase Plan for Employees
in North America This plan has been suspended. There are no
outstanding options or awards under it.
EMPLOYEE INCENTIVE PLANS POST RESTRUCTURING
Conditionally on the later of the First Initial Distribution under the Corp
Scheme being initiated and the Effective Date (for the purpose of this Part
D.10, the "Plans Start Date"), Corp has adopted an option plan known as the Corp
Senior Management Share Option Plan (the "Management Plan") and a broadly based
employee share option plan known as the Corp Employee Share Option Plan (the
"Employee Plan"). The Plans are summarised below.
Other than the Group's existing bonus plan arrangements, which cover the
financial year to 31 March 2003, and the third payment under the R&E Plan
(described above), prior to the Plans Start Date, the Group will not establish
any bonus arrangement or scheme or any long term incentive scheme covering those
persons (other than those persons who are eligible to receive commission and/or
bonus payments that relate to sales) who have been invited to participate in the
Management Plan.
Further, as set out in Appendix 14, paragraph g (iv), Corp's Articles provide
that participants in the Management Plan (other than those who are eligible to
receive commission and/or bonus payments that relate to sales) will not be
eligible to participate in any bonus or other long-term incentive arrangement
until the date on which all the tranches in the initial grant under the
Management Plan have either lapsed or become capable of exercise.
The Corp Senior Management Share Option Plan
Administration
The Management Plan will be administered by the remuneration committee of Corp
in accordance with the terms set out below.
Eligibility
Participation in the Management Plan is open to those employees and executive
directors of Corp or any of its Subsidiaries selected by the remuneration
committee. The remuneration committee intends to grant options under the
Management Plan to up to 60 senior executives. Employees within two years of
their normal retirement date may not participate in the Management Plan.
Grant of options
Options to acquire Corp shares under the Management Plan may be granted at any
time prior to the Listing of the New Shares and, following Listing of the New
Shares, may be granted in the periods of 42 days commencing on the Plans Start
Date, the day immediately following announcement by Corp of its results for any
period, or a day on which the Board resolves that exceptional circumstances
exist which justify the grant.
Options will be granted by either Corp or the trustee of the proposed Corp
employee benefit trust (the "Trust") summarised below. Options may be satisfied
using newly issued or existing Corp Shares.
The initial options will be granted in five tranches, each of which will be
subject to different performance conditions as described below.
Participation in the Management Plan will not form part of or affect a
participant's right under the terms of his employment.
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I. EXPLANATORY STATEMENT
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Option exercise price
Options granted under the Management Plan will be exercisable for a nominal
payment, the amount of which will be determined by the remuneration committee.
It is currently envisaged that the total amount payable on the exercise of an
option, whether in whole or in part will be L1 per exercise irrespective of the
number of New Shares the subject of an option exercise.
Individual limit on participation
There is no limit under the Management Plan on the aggregate maximum value of
options which may be granted to a participant in any year or over the life of
the Management Plan.
Overall limit on Corp Shares to be made available under the Management Plan
The number of Corp Shares, issued or unissued, that may be committed under the
Management Plan is limited to 9 per cent. of the issued share capital of Corp
immediately following the Plans Start Date. Corp Shares over which options have
lapsed or been surrendered will not be included in calculating this limit. This
number of shares will be reduced by the number of Corp Shares that are committed
under the Employee Plan due to employees who would otherwise have been expected
to participate in the Management Plan participating in the Employee Plan rather
than the Management Plan because it is beneficial (for tax or similar reasons)
for them to do so.
Exercise of Options
Options granted under the Management Plan will only become exercisable (vest) to
the extent that the performance targets set out below have been satisfied. While
the performance targets for the initial grant of options will be the same, two
vesting schedules will apply; one schedule applicable to participants who have
released their rights under the R&E Plan (described above) and the other
schedule applicable to participants who did not have any rights under the R&E
Plan. For subsequent grants, for example, to new employees or as a result of
promotions or expanded roles or responsibilities, the remuneration committee
will set performance targets which are appropriate in the circumstances and at
least as challenging as those for the initial grant.
Percentage of shares subject
to option that vest (per cent.)
-----------------------------------------------
Participants who
released R&E Other
Tranche Condition Plan rights* Participants
------- ------------------------------------------ ---------------------- ----------------------
1. Repayment of 30 per cent. of the New 20 10
Junior Notes within 24 months after the
Plans Start Date. No vesting before 12
months after the Plans Start Date.
2. Repayment of 50 per cent. of the New 10 10
Junior Notes within 27 months after the
Plans Start Date. No vesting before 15
months after the Plans Start Date.
3. Repayment of 100 per cent. of the New 20 20
Junior Notes within 30 months after the
Plans Start Date. No vesting before 18
months after the Plans Start Date.
4. Corp achieving a market capitalisation of 20 30
L1 billion and repayment of 100 per cent.
of the New Junior Notes within 39 months
after the Plans Start Date. No vesting
before 27 months after the Plans Start
Date.
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Percentage of shares subject
to option that vest (per cent.)
-----------------------------------------------
Participants who
released R&E Other
Tranche Condition Plan rights* Participants
------- ------------------------------------------ ---------------------- ----------------------
5. Corp achieving a market capitalisation of (within 51 months (within 51 months
L1.5 billion and repayment of of the Plans Start of the Plans Start
100 per cent. of the New Junior Notes Date) Date)
within 63 months after the Plans Start 30 30
Date. No vesting before 39 months after
the Plans Start Date. (between 51 months and (between 51 months and
63 months of the Plans 63 months of the Plans
Start Date) Start Date)
20 20
* Participants in the R&E Plan will be required to waive the final payment under
the R&E Plan in order to participate in the Management Plan.
If any performance target is not satisfied within the stated period the tranche
of the option subject to that performance target will lapse and cease to be
capable of becoming exercisable.
If the New Junior Notes are refinanced (rather than repaid), the conditions set
out above will apply to the aggregate debt, representing what were the New
Junior Notes, following the refinancing.
In relation to tranches 4 and 5, the market capitalisation of Corp will be
measured using its daily volume weighted average share price determined from
prices quoted on the principal exchange on which Corp Shares are listed and the
number of Corp Shares outstanding immediately following the Plans Start Date. In
order to determine if the relevant condition is satisfied, the daily volume
weighted average share price will be obtained for each day of a rolling 90 day
period and the average price over that 90 day period will be determined. If that
average price when multiplied by the number of Corp Shares in issue on the Plans
Start Date exceeds the relevant target market capitalisation, the applicable
condition will have been satisfied.
Taxation
The exercise of an option may be made conditional on a participant agreeing to
comply with any arrangements specified by Corp for the payment of taxation,
social security contributions or any other deductions at source (including, as
is likely to be the case, in respect of at least part of the relevant employing
company's secondary class 1 National Insurance contributions liability arising
on exercise) required or permitted in respect of an option.
Termination of employment
If a participant ceases employment with a member of the Corp Group voluntarily
or he is dismissed for cause, his options will lapse on the date of cessation.
However, where a participant ceases employment with the Group due to death,
injury, disability, ill-health, redundancy, retirement or the sale of the
business or subsidiary for which the participant works, or termination of
employment by the employer without cause, his options will become vested to the
extent the financial performance conditions have been satisfied at the date of
cessation of employment (or, if terminated without full notice, to the extent
the financial performance conditions have been satisfied on the date the notice
would have expired) and will become exercisable at the time they would otherwise
have been exercisable as set out in the table above for a period of 6 months (12
months in the case of death). The remuneration committee may decide whether a
different proportion of an option should vest on the cessation of employment of
any participant due to the sale of a business or subsidiary that was a key
business or subsidiary. Following the expiry of the relevant period, all of a
participant's unexercised options will lapse.
119
I. EXPLANATORY STATEMENT
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Lapse of options
Options will lapse in any event on the tenth anniversary of their grant and will
lapse after a takeover or reconstruction when the specified time periods for
exercise have passed as described below. Options will also lapse on the
cessation of employment of a participant as described above. Options will also
lapse to the extent that they cease to be capable of becoming exercisable due to
failure to satisfy any of the performance targets within the specified time
periods.
Corp Shares over which options have lapsed or have been surrendered will be
available, within the overall limit referred to above, to form the subject of
further option grants to new participants in the Management Plan but not to
existing participants unless the participant has been promoted or his/her role
and/or responsibility has significantly expanded and the remuneration committee
determines that such a grant is merited.
Rights attaching to Corp Shares on the exercise of options
Corp Shares allotted under the Management Plan will carry the same rights as all
other issued Corp Shares. Application will be made for the Corp Shares to be
admitted to trading on the London Stock Exchange. Participants will not qualify
for any rights attaching to Corp Shares where the record date is before the date
on which the option is exercised.
Takeover, reconstruction or winding-up
If any person obtains control of Corp as a result of making an offer to acquire
the whole of the issued share capital of Corp (or, having such control, makes a
general offer to acquire all the shares other than those already owned by that
person) the first grant of options under the Management Plan will become
exercisable to the extent that the financial performance conditions have been
satisfied immediately prior to a change of control.
A proportion of the remainder of any Corp Shares which are the subject of
outstanding options under the initial grant will vest and become exercisable
according to the following formula:
market capitalisation on change of
control (as evidenced by the value of
the consideration paid by the acquirer
and the number of Corp Shares in issue
remainder of Corp Shares the subject of immediately following the Plans Start
outstanding options X Date)
----------------------------------------
L1.5 billion
The formula above assumes that a change of control occurs 63 months after the
Plans Start Date. If a change of control occurs sooner, to reflect the benefit
to shareholders of the early release of funds, the L1.5 billion figure will be
reduced by L25m for each complete quarter between the change of control and the
date which is 63 months after the Plans Start Date.
Participants will have six months within which to exercise their options to the
extent exercisable following the change of control (or general offer);
thereafter, the options will lapse. The remuneration committee will determine
the extent to which any subsequent options will vest in the event of a takeover,
having regard to the performance targets to which those options are subject. If
a person becomes bound or entitled to give notice to acquire Corp Shares under
sections 428 to 430F of the Act, a participant may exercise his options to the
extent exercisable as referred to above during the period that person remains so
bound or entitled; thereafter, they will lapse.
Participants may, in certain circumstances, be given the opportunity to exchange
their options for options over ordinary shares in an acquiring company.
If there is a reconstruction of Corp, the effect of which is that a person
obtains control of Corp, other than as a result of making an offer for its
issued share capital, the provisions relating to a change of control following
an offer (summarised above) shall apply. These provisions shall not apply if
there is a reconstruction, the purpose and effect of which is to create a new
holding company of Corp where such holding company has substantially the same
shareholders and proportionate shareholdings as those of Corp immediately before
the scheme of
120
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arrangement. On the occurrence of such a reconstruction, the remuneration
committee will use its best endeavours to ensure that any outstanding options
are rolled-over so that they continue over shares in the new holding company. If
there is no roll-over, options will continue unaffected by the scheme of
arrangement. If there is any other reconstruction of Corp or Corp is wound-up,
options will lapse on the reconstruction or winding-up taking effect.
Adjustments of options
If there is a variation in the share capital of Corp, including by way of a
capitalisation, rights issue, consolidation, sub-division, reduction or any
other variation or the implementation by Corp of a demerger or payment of a
super-dividend which would materially affect the value of options under the
Management Plan, the remuneration committee may (subject to the auditors'
approval) make the adjustments it considers appropriate to the number of Corp
shares under option.
Amending the Management Plan
The rules of the Management Plan can be amended at any time by the Board,
provided that no amendment to the Management Plan can be made without the prior
approval of Corp in a general meeting of shareholders if the amendment relates
to the provisions in the rules relating to eligibility, limits on the number of
Corp Shares available for issue under the Management Plan, the basis for
determining a participant's entitlement to Corp Shares and any adjustment in the
event of a variation in the share capital of Corp. In addition, no amendment
that would materially prejudice the interests of existing participants may be
made without the prior consent of participants holding three-quarters of the
aggregate number of shares subject to the outstanding options.
Participants in the United States
For participants in the United States, the Management Plan will be structured as
a conditional right to receive Corp Shares or ADRs (an "Award") rather than as
an option, for tax purposes. No price will be payable by participants on the
vesting of their Awards. Awards will not vest during a close or prohibited
period. Awards will be subject to the same performance conditions and other
terms set out above.
General
Participation in the Management Plan is not pensionable. Options granted under
it are not transferable and may only be exercised by the person to whom they
were granted or their personal representatives.
No options can be granted under the Management Plan more than five years after
the Plans Start Date.
Summary of the Corp Employee Share Option Plan
Administration
The Employee Plan will be administered by the remuneration committee of Corp in
accordance with the terms set out below.
Eligibility
Participation in the Employee Plan is open to those employees and executive
directors of Corp or any of its Subsidiaries selected by the remuneration
committee. Employees within two years of their normal retirement date may not
participate in the Employee Plan. Employees who participate in the Management
Plan cannot participate in the Employee Plan.
Grant of options
Options to acquire Corp Shares under the Employee Plan will be granted by either
Corp or the trustee of the Trust. Options may be satisfied using newly issued or
existing Corp Shares. Inland Revenue approved options and non-Inland Revenue
approved options ("Unapproved Options") may be granted under the Employee Plan.
121
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Following Listing of the New Shares options may be granted in the periods of 42
days commencing on the Plans Start Date, the day immediately following
announcement by Corp of its results for any period, or a day on which the Board
resolves that exceptional circumstances exist which justify the grants. The Corp
Board will not grant any options under the Employee Plan until 30 business days
after Listing of the New Shares. The exercise price for such initial grant of
options shall be the average middle market quotation of a Corp Share for the
five business days immediately prior to the date of grant.
The initial options will be granted in five tranches, each of which will be
subject to different performance conditions as described below.
Participation in the Employee Plan will not form part of or affect a
participant's rights under the terms of his employment.
The following is a summary of the provisions which apply equally to Approved
Options and Unapproved Options.
Option exercise price
The exercise price of options will be determined by the remuneration committee
but will not be less than the middle market quotation of a Corp share as derived
from the London Stock Exchange Daily Official List on a date (or dates in the
case of an average quotation) not more than 30 days prior to the date of grant
of the option (or such other period as the Inland Revenue may agree in relation
to Approved Options).
Where an option is to subscribe for Corp Shares, the exercise price will not be
less than the nominal value of a Corp Share.
Individual Limit on participation
There is no limit under the Employee Plan on the aggregate maximum value of
options which may be granted to a participant in any year or in the life of the
Employee Plan (subject, in the case of Approved Options, to the statutory limit
described below).
Overall limit on Corp Shares to be made available under the Employee Plan
The number of Corp Shares, issued or unissued, that may be committed under the
Employee Plan is limited to 5 per cent. of the issued share capital of Corp
immediately following the Plans Start Date. The limit does not include share
capital committed pursuant to any other employees' share plan previously adopted
by Corp. This number of shares will be increased, with a corresponding reduction
in the number of Corp Shares available to be committed under the Management
Plan, if any employee who would otherwise have been expected to participate in
the Management Plan participates in the Employee Plan rather than the Management
Plan because it is beneficial (for tax or similar reasons) for them to do so.
This 5 per cent. limit will only be available for use on the following basis:(i)
3 per cent. in the first 12 months following Listing of the New Shares; (ii) 1
per cent. in the second 12 months following Listing of the New Shares; and (iii)
1 per cent. in the third 12 months following Listing of the New Shares. Any
unused part of this limit may be utilised in subsequent years during the life of
the Employee Plan. Corp Shares over which options have lapsed or been
surrendered will not be included in calculating this limit.
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Exercise of Options
Options granted under the Employee Plan will only become exercisable to the
extent that the performance targets to which they are subject have been
satisfied. The performance targets for the first grant of options are set out
below. For subsequent grants, the remuneration committee will set performance
targets which are appropriate in the circumstances and at least as challenging
as those for the initial grant.
Performance targets
Percentage of shares subject
Tranche Condition to option that vest (per cent.)
------- ---------------------------------------- ----------------------------------------
1. Repayment of 30 per cent. of the New 10
Junior Notes within 24 months after the
Plans Start Date. No vesting before 12
months after the Plans Start Date.
2. Repayment of 50 per cent. of the New 10
Junior Notes within 27 months after the
Plans Start Date. No vesting before 15
months after the Plans Start Date.
3. Repayment of 100 per cent. of the New 20
Junior Notes within 30 months after the
Plans Start Date. No vesting before 18
months after the Plans Start Date.
4. Corp achieving a market capitalisation 30
of L1 billion and repayment of 100 per
cent. of the New Junior Notes within 39
months after the Plans Start Date. No
vesting before 27 months after the Plans
Start Date.
5. Corp achieving a market capitalisation (within 51 months of the Plans Start
of L1.5 billion and repayment of 100 per Date)
cent. of the New Junior Notes within 63 30
months after the Plans Start Date. No
vesting before 39 months after the Plans (between 51 months and 63 months of the
Start Date. Plans Start Date)
20
If any performance target is not satisfied within the stated period the tranche
of the option subject to that performance target will lapse and cease to be
capable of becoming exercisable.
If the New Junior Notes are refinanced (rather than repaid), the conditions set
out above will apply to the aggregate debt, representing what were the New
Junior Notes, following the refinancing.
In relation to tranches 4 and 5, the market capitalisation of Corp will be
measured using its daily volume weighted average share price determined from
prices quoted on the principal exchange on which Corp's Shares are listed and
the number of Corp Shares outstanding immediately following the Plans Start
Date. In order to determine if the relevant condition is satisfied, the daily
volume weighted average share price will be obtained for each day of a rolling
90 day period and the average price over that 90 day period will be determined.
If that average price when multiplied by the number of Corp Shares in issue on
the Plans Start Date exceeds the relevant target market capitalisation the
applicable condition will have been satisfied.
Taxation
The exercise of an Unapproved Option may be made conditional upon a participant
agreeing to comply with any arrangements specified by Corp for the payment of
taxation, social security contributions or any other deductions at source
(including, as is likely to be the case, in respect of at least part of the
relevant employing company's
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secondary class 1 National Insurance contributions liability arising on
exercise) required or permitted in respect of an option.
Termination of employment
If a participant ceases employment with a member of the Corp Group voluntarily
or he is dismissed for cause, his unvested options will lapse on the date of
cessation.
However, where a participant ceases employment with the Corp Group due to death,
injury, disability, ill-health, redundancy, retirement or the sale of the
business or subsidiary for which the participant works, or termination of
employment by the employer without cause, his options will become vested to the
extent the financial performance conditions have been satisfied at the date of
cessation of employment (or, if terminated without full notice, to the extent
the financial performance conditions have been satisfied on the date notice
would have expired) and will become exercisable at the time they would otherwise
have been exercisable as set out in the table above for a period of 6 months (12
months in the case of death). The remuneration committee may decide whether a
different proportion of an option should vest on the cessation of employment of
any participant due to the sale of a business or subsidiary that was a key
business or subsidiary. Following the expiry of the relevant period, all of a
participant's unexercised options will lapse.
Lapse of options
Options will lapse in any event on the tenth anniversary of their grant and will
lapse after a takeover or reconstruction when the specified time periods for
exercise have passed as described below. Options will also lapse on the
cessation of employment of a participant as described above. Options will also
lapse to the extent that they cease to be capable of becoming exercisable due to
the failure to satisfy any of the performance targets within the specified time
periods.
Rights attaching to Corp Shares on the exercise of options
Corp Shares allotted under the Employee Plan will carry the same rights as all
other issued Corp Shares. Application will be made for the Corp Shares to be
admitted to trading on the London Stock Exchange. Participants will not qualify
for any rights attaching to Corp Shares where the record date is before the date
on which the option is exercised.
Takeover, reconstruction or winding-up
If any person obtains control of Corp as a result of making an offer to acquire
the whole of the issued share capital of Corp (or, having such control, makes a
general offer to acquire all the shares other than those already owned by that
person) the first grant of options under the Employee Plan will become
exercisable to the extent that the financial performance conditions have been
satisfied immediately prior to a change of control. A proportion of the
remainder of any Corp Shares which are the subject of outstanding options will
vest and become exercisable according to the following formula:
market capitalisation on change of
control (as evidenced by the value of
the consideration paid by the acquirer
and the number of Corp Shares in issue
remainder of Corp Shares the subject of immediately following the Plans Start
outstanding options x Date)
----------------------------------------
L1.5 billion
The formula above assumes that a change of control occurs 63 months after the
Plans Start Date. If a change of control occurs sooner, to reflect the benefit
to shareholders of the early release of funds, the L1.5 billion figure will be
reduced by L25m for each complete quarter between the change of control and the
date which is 63 months after the Plans Start Date.
Participants will have six months within which to exercise their options to the
extent exercisable, following the change of control (or general offer);
thereafter, the options will lapse. The remuneration committee will
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determine the extent to which any subsequent options will vest in the event of a
takeover, having regard to the performance targets to which those options are
subject. If a person becomes bound or entitled to give notice to acquire Corp
Shares under sections 428 to 430F of the Act, a Participant may exercise his
options to the extent exercisable as referred to above during the period when
that person remains so bound or entitled; thereafter, they will lapse.
Participants may, in certain circumstances, be given the opportunity to exchange
their options for options over ordinary shares in an acquiring company.
If there is a reconstruction of Corp, the effect of which is that a person
obtains control of Corp, other than as a result of making an offer for its
issued share capital, the provisions relating to a change of control following
an offer (summarised above) shall apply. These provisions shall not apply if
there is a reconstruction, the purpose and effect of which is to create a new
holding company of Corp where such holding company has substantially the same
shareholders and proportionate shareholdings as those of Corp immediately before
the scheme of arrangement. On the occurrence of such a reconstruction, the
remuneration committee will use its best endeavours to ensure that any
outstanding options are rolled-over so that they continue over shares in the new
holding company. If there is no roll-over, options will continue unaffected by
the scheme of arrangement. If there is any other reconstruction of Corp or Corp
is wound-up, options will lapse on the reconstruction or winding-up taking
effect.
Adjustments of options
If there is a variation in the share capital of Corp, including by way of a
capitalisation, rights issue, consolidation, sub-division, reduction or any
other variation or the implementation by Corp of a demerger or payment of a
super-dividend which would materially affect the value of options under the
Employee Plan, the remuneration committee may (subject to the auditors' approval
and, in the case of Approved Options, to the approval of the Inland Revenue)
make the adjustments it considers appropriate to the number of Corp Shares under
option and the exercise price.
Amending the Employee Plan
The rules of the Employee Plan can be amended at any time by the Board, provided
that no amendment to the Employee Plan can be made without the prior approval of
Corp in a general meeting of shareholders if the amendment relates to the
provisions in the rules relating to eligibility, limits on the number of Corp
Shares available for issue under the Employee Plan, the basis for determining a
participant's entitlement to Corp Shares and any adjustment in the event of a
variation in the share capital of Corp. In addition, no amendment that would
materially prejudice the interests of existing participants may be made without
the prior consent of participants holding three-quarters of the aggregate number
of shares subject to outstanding options. For these purposes, the interests of
the holders of Approved Options and Unapproved Options are separate.
Participants in the United States
For participants in the United States, the Employee Plan will be structured as a
qualifying incentive stock option plan and a non-qualifying stock option plan
over Corp Shares or ADRs. Options will be granted on the same terms and will be
subject to the same performance conditions as described above, save any changes
necessary to take account of the relevant United States legislation.
General
Additional schedules to the rules of the Employee Plan can be established to
operate the Employee Plan in overseas countries. These schedules can vary the
rules of the Employee Plan to take account of any securities, exchange control,
or taxation laws or regulations for any participants or any company in the
Group. Any Corp Shares issued under such schedules will count towards overall
limits under the Employee Plan.
Participation in the Employee Plan is not pensionable. Options granted under it
are not transferable and may only be exercised by the persons to whom they were
granted or their personal representatives.
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No options can be granted under the Employee Plan more than five years after the
Plans Start Date.
Provisions relating to Approved Options
Approved Options are those options granted under the Employee Plan which satisfy
the requirements of Schedule 9 to ICTA 1988 (or any replacement legislation).
The main differences between Approved Options and Unapproved Options are that:
(a) No Approved Option can be granted to a participant who is ineligible
to participate in the Employee Plan by virtue of paragraph 8 of
Schedule 9 (material interest in a close company) ICTA 1988 (or any
replacement legislation).
(b) An employee cannot be granted an Approved Option which would, at the
time it is granted, enable the employee to acquire Corp shares under
option schemes approved under Schedule 9 ICTA 1988 (or any
replacement legislation) (which are not savings-related) having a
value (calculated on the relevant date of grant) exceeding the
Inland Revenue limit (currently L30,000).
(c) Any amendment to the rules of the approved part of the Employee Plan
requires the prior approval of the Inland Revenue.
(d) There are circumstances (principally where a participant's
employment ceases in compassionate circumstances) when the
remuneration committee can extend the period in which Approved
Options may be exercised in order that the Participant may qualify
for tax relief on exercise of the Approved Option.
Application will be made to the Inland Revenue for approval of that part of the
Employee Plan under which Approved Options may be granted.
Proposed Sharesave Plan
Subject to obtaining the prior approval of Corp's shareholders, Corp intends to
establish a sharesave plan (or a similar plan, taking into account any changes
in market practice and the relevant legislation) at a later date. Such a plan
will be varied for overseas participants to take account of local legislation.
In the United States, the plan will be an approved stock purchase plan (or a
similar plan, taking into account any changes in market practice and the
relevant US legislation).
The Trust
The Trust will be established by a trust deed entered into between Corp and an
independent trustee resident in Jersey. The Trust will be a discretionary trust
for the benefit of employees and former employees (and their dependants) of the
Corp Group (the "Beneficiaries"). Corp has the power to appoint and remove the
Trustee.
The Trustee will be entitled to subscribe for or otherwise acquire Corp Shares
for the benefit of Beneficiaries and will be able to distribute these Corp
Shares under the terms of the Trust either directly or in accordance with the
rules of any employees' share schemes established by Corp. The Trustee will not
be permitted to enter into any forward swap derivative arrangements.
It is intended that the Trust may be funded by any person or company including
Corp or any company in the Corp Group by means of gift, loan or otherwise.
The limit on the number of Corp Shares which can be acquired by the Trustee
(whether by market purchase or subscription) will be that set out in the rules
of the relevant share incentive plan.
It is intended that the terms of the Trust will be amended at the discretion of
the Trustee and with the consent of Corp. Corp will not be entitled to consent
to any amendment to the advantage of Beneficiaries without the prior approval of
Corp in general meeting unless the amendment is minor to benefit the
administration of the Trust, to take account of any changes in legislation or to
obtain or to maintain favourable taxation, exchange control or regulatory
treatment for any Beneficiary of Corp or any company in the Corp Group.
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ABI GUIDELINES
The extent to which the Plans comply with the ABI's published guidelines for
share incentive plans (the "Guidelines") is summarised below.
Overview:
The Plans are not totally compliant with the Guidelines.
The design of the Management Plan, which is the least compliant (while being the
most important from Corp's perspective), has been driven by the importance of
ensuring that the senior management team remains in place and is suitably
incentivised. It is also designed to compensate for and replace existing bonus
arrangements and amendments to individuals' terms of employment (as previously
described above). The Scheme Creditors will also in effect, be asked to approve
the arrangements as part of approving the Corp Scheme.
The Principal Guidelines focus on:
a. Performance conditions
The ABI requires that performance conditions should emphasise the importance of
linking remuneration to performance, align the interests of participating
directors and senior executives with those of the shareholders, be demanding and
stretching and relate to overall corporate performance. Performance conditions
should also be demanding in the context of the prospects of the company and the
prevailing economic climate in which the company operates. They should also be
disclosed and transparent.
The Guidelines also require that the greater the level of potential award, the
more stretching and demanding the performance conditions should be.
Corp believes that the proposed performance conditions for the discretionary
plans are compliant with these requirements. The performance conditions chosen
are demanding and are clearly linked to the achievement of enhanced shareholder
value.
The Guidelines also state that performance should be measured against a peer
group or benchmark. Given the nature of the targets and the position of Corp,
this is not practicable.
b. Change of control provisions
The Guidelines state that there should be no automatic waiver of performance
conditions on a change of control. They also state that options should vest on a
pro-rata basis taking into account the vesting period that elapsed at the time
of the change of control though making due allowance for the reduction in value
resulting from the reduced life of the option.
Tranches of options will only vest if the financial performance conditions
applicable to them have been satisfied. The level of additional vesting is
dependent upon Corp's market capitalisation on change of control, as summarised
above. In essence, therefore, Corp believes the Plans are compliant.
c. Dilution limits
The Guidelines provide that not more than 10 per cent. of the issued ordinary
share capital of a company can be committed to be issued to satisfy share
options/awards under all of its share plans in any rolling 10 year period.
It is currently proposed that the number of unissued shares that may be
committed to be issued in the 5 years following the Plans Start Date will be 9
per cent. of the issued share capital of Corp under the Management Plan and 5
per cent. under the Employee Plan.
The Guidelines also encourage phased grants (generally on an annual basis to
spread the dilution over the life of the plan). No requirement for phased
granting is included in the Plans. The adoption of the Management Plan to
incentivise management in these circumstances is very much regarded as a one-off
arrangement.
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d. Participation
Participation in the Plans is limited to bona fide employees and executive
directors. This is compliant with the Guidelines. However, there are no limits
on individual participation. Corp considers this to be justifiable as option
grants must be of a level to retain and motivate participants who are being
asked in some cases, to waive existing entitlements to a bonus and amend the
terms of their contracts of employments, as stated above.
Participants who are granted an option under the Management Plan cannot
participate in the Employee Plan.
e. Exercise price
The Guidelines state that options should not be granted at a discount. Under the
Management Plan, only a nominal sum will be payable on the exercise of options.
The Employee Plan will be compliant. As stated above, the Management Plan has
been designed to ensure that senior management remains in place and suitably
incentivised. In order to achieve this, the necessary levels of potential gain
make it more efficient to grant options with an exercise price set at a discount
rather than at the prevailing market value (on the day the options are granted)
as fewer Corp Shares are required.
f. Timing of grant
The Plans are compliant with the Guidelines -- following Listing of the New
Shares, grants can only normally be made within the 42 day period following the
announcement of Corp's results.
g. Life of Plans and incentive awards
The Guidelines state that the life of plans should not exceed 10 years and that
options should not be exercisable within 3 years of grant. The Plans have a five
year life. Under the terms of the Management Plan and the Employee Plan, options
may be exercised in part after 12, 15, 18, 27 and 39 months following the Plans
Start Date.
In accordance with the Guidelines, no option can be exercised more than 10 years
following its grant.
h. Retirement
The Guidelines require that options should not be granted to a participant
within 6 months of his/her anticipated retirement date. The Management/Employee
Plans will provide that options cannot be granted to a participant within 2
years of his/her anticipated retirement date.
Where options are granted to a participant within 3 years of his/her anticipated
retirement date, the remuneration committee will have regard to the executive's
ability to contribute to the satisfaction of the performance conditions, in
accordance with the Guidelines.
i. Personal shareholding requirements
The Guidelines require that the rules of incentive plans should incorporate the
requirement to retain a significant proportion of the shares to which
participants become entitled. The Guidelines state that this is particularly
important in the case of awards where performance conditions apply principally
at the point of grant of an option. Given the nature of the performance
conditions which apply to the initial grants of options under the Management
Plan and the Employee Plan and the fact that they must be satisfied prior to
exercise, rather than grant, a personal shareholding requirement is not
considered necessary.
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j. Non-Executive Directors
As described in Part E.1, in accordance with the Guidelines, the Non-Executive
Directors (other than the Chairman) will acquire Corp Shares out of their net
fees at a price equal to the prevailing market value on the date of acquisition.
D.11 PENSIONS
Claims under this section are excluded from the Corp Scheme and, to the extent
that claims are preferential or otherwise incapable of being schemed, from the
plc Scheme. Please refer to Appendix 9 for fuller details of the exclusions.
UNITED KINGDOM PENSION SCHEMES
Description of the main scheme
The GEC 1972 Pension Plan (the "UK Plan") is the principal tax-exempt approved
occupational pension scheme in the United Kingdom in respect of which Corp Group
or any of its group companies has any liabilities (and the only one in respect
of which Corp has any liabilities). Employee contributions are 3 per cent. of
pensionable earnings with employers paying the balance of the cost. The UK
Plan's principal employer is Corp but Group companies participate and are
responsible for their own contributions. The executive directors of Corp and plc
are members (or entitled to be members of) of the UK Plan. There are other UK
pension arrangements and these are described below.
Corp and the other group companies and the UK Plan trustee have complied with
their legal obligations in respect of the UK Plan and the unapproved pension
arrangements Corp is not aware of any current or threatened material claim
against it, any member of the Group or the trustees in respect of the UK Plan or
in relation to any benefits provided on retirement, death or termination of
service.
Funding of the UK Plan
The scheme actuary has carried out the statutory, triennial Minimum Funding
Requirement ("MFR") valuation (as at 5 April 2002) and on 6 February 2003 signed
his report. The report states that the UK Plan was (as at the valuation date)
between 115 and 120 per cent. funded on an MFR basis. This means that no
statutory minimum company contributions are currently required to be paid.
On the UK Plan's own ongoing funding basis, the report states that the UK Plan
is 100 per cent. funded as at 5 April 2002. Please note that the funding level
may have changed since 5 April 2002, particularly having regard to falls in
equity markets and the UK Plan could currently be underfunded on an ongoing
basis.
Corp makes contributions at the rate of 8.2 per cent. of pensionable earnings
(having started in November 2002). The contribution rate is expected to remain
at 8.2 per cent. of pensionable earnings. The employee contribution rate will
remain at 3 per cent. of pensionable earnings.
The report states that if the UK Plan had been discontinued at the date of the
valuation in April 2002 and wound up, there would have been insufficient assets
(by a considerable margin) to provide accrued benefits by the purchase of
annuity policies. Nevertheless, the valuation did not indicate that a statutory
debt under section 75 of the Pensions Act 1995 would be placed on Corp if the UK
Plan were wound up and the debt calculation performed as at that date. This
position could alter if the debt calculation is carried out as at a later date,
as a consequence of a number of factors, including a change in the Statement of
Investment Principles of the UK Plan, the investment performance of its assets,
the estimated cost of annuities and the level of retirements within the UK Plan.
No winding up has so far been triggered in relation to the UK Plan. If a winding
up of the UK Plan were to be triggered in the future, the UK Plan trustee would
be able to determine the date on which any statutory debt would be calculated by
the actuary to the UK Plan. The amount of any debt depends on a number of
factors, including the investment strategy which has been adopted by the trustee
in the UK Plan's statement of investment principles and the value of the assets
and liabilities of the UK Plan at the date of the calculation. If a section 75
debt were to arise, the size of the debt (relative to Corp's assets) could have
a materially detrimental effect on Corp's resources. The materiality of the
detrimental effect on Corp's reserves is shown by the fact that the
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actuarial valuation stated that (as at 5 April 2002) the UK Plan has assets of
approximately L2.495 billion and liabilities (calculated on an ongoing basis) of
approximately L2.494 billion. On the winding up of a pension plan, the
applicable statute values the benefits of the members by reference to a stricter
test than the MFR valuation (for example, pensioner liabilities are valued on a
buy-out basis) and the sponsoring employer is liable to make good any deficit.
There is no guarantee that the value of the UK Plan's assets will not
deteriorate nor that legislation will not be introduced to oblige employers to
make further contributions to pension plans which are not fully funded, in
addition to current statutory obligations. The UK Government presented a Green
Paper on pension reform on 17 December 2002 which could lead to further
legislation on, amongst other issues, the obligations on employers to make good
pension scheme deficits, principally by replacing the MFR with a scheme-specific
minimum funding level.
See below for the impact on funding if a lower than expected transfer amount is
paid under an existing sale agreement. See also Part F.2: Risk Factors.
UNAPPROVED UK PENSION PLANS
The only other UK retirement and death benefit arrangements in respect of which
Corp has any liability in the UK are the following unapproved pension
arrangements.
a. Funded unapproved retirement benefit schemes for current employees
("FURBS")
There are thirteen FURBS for each of thirteen current senior employees.
FURBS are top-up pension plans funded in advance in respect of employees
who are subject to the earnings cap. The earnings cap is a figure set by
the Inland Revenue as the point at which tax relief on contributions
ceases and above which benefits from the UK Plan cannot be provided
(L97,200 for the 2002/2003 tax year).
Ten of the thirteen FURBS are defined contribution arrangements, where the
employer pays (depending on the employee/director) an amount equivalent to
between 10 and 35 per cent. of earnings in respect of the employee's
FURBS. Because an employer's contribution to a FURBS qualifies as a
taxable benefit, the employer in fact pays 60 per cent. of its
contribution described above to the FURBS and the balance of its
contribution to the employee, to cover the extra tax burden. All
contributions are up to date.
The remaining three FURBS are defined benefit arrangements and they each
have intended accrual rates of 3.33 per cent. depending on the value of
retained benefits. Mr Donovan's defined benefit FURBS is described in Part
E.1.
All employees who have a FURBS also have additional life cover that is
provided through an unapproved life assurance scheme, for which the
employer pays the premium.
b. Unfunded unapproved pensions ("UURBS")
Corp is currently liable to pay a total annual pension contribution of
currently L171,197 to Lady Weinstock under an UURBS established for the
late Lord Weinstock. This pension is to increase annually in line with
increases to pensions in payment under the UK Plan.
Corp was the original promisor of an unfunded top-up pension in 1998 in
favour of Anthony Cobbe. Mr Cobbe was promised a pension at age 62 of
two-thirds his final pensionable salary, funded from the UK Plan, the
GEC-USA Retirement Plan and by Corp itself. The pension is currently in
payment but the unfunded element is in fact paid by Marconi Communications
Limited, his actual former employer but no formal agreement documenting
this arrangement has been made.
PENSION INDEMNITIES
In sales of subsidiary companies and businesses in recent years, Corp has on
some occasions given an indemnity for employer debts which could arise under
section 75 of the Pensions Act 1995. If there were an MFR deficit at the point
at which the subsidiary or buyer of assets ceased to participate in the UK Plan,
section 75 would oblige the subsidiary or buyer to contribute to remedying the
deficit. The section 75 indemnity has been given on very
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few occasions and there is no indication that the funding of the UK Plan was
below MFR levels at the relevant dates. Accordingly Corp believes that the
indemnity is unlikely to be called upon.
Following the sale of General Domestic Appliances Holdings Limited in 2001, the
trustee of the UK Plan is to make a payment to the buyer's pension plan in
respect of the accrued benefits of the employees who transfer to the buyer.
Although a basis for calculation of the transfer amount was agreed in the sale
agreement for the sale of GDA, the trustee of the UK Plan is not bound by this.
Corp is responsible for 50 per cent. of any shortfall between the transfer
amount agreed in the sale agreement and the amount actually paid by the trustee.
Anticipating a shortfall at the time of the sale, an allowance of L3.255 million
was made in the sale price. The information received by Corp to date is that the
plan actuary intends to advise the trustee to calculate the transfer amount on
the agreed basis, which could (apart from the allowance in the sale price)
result in a liability to Corp under the shortfall obligation of approximately
L1.47 million. Allowing for the price adjustment, Corp would on these figures be
entitled to L1.785 million from the buyer. If the trustee does not follow the
advice of the actuary or if the actuary changes his advice, Corp expects its
maximum liability under the shortfall obligation to be approximately L14.665
million (or L12.88 million if the net over-allowance by Corp is taken into
account). The actuary is not bound by his representations and a final
determination of the transfer amount is not likely until April or May, 2003.
There can be no assurance that the trustee will not decide to follow a basis
which results in greater liability for Corp than Corp currently expects, which
could have a material adverse effect on the Group. Indeed, if the trustee
refuses or fails to transfer the whole or any part of the agreed amount, Corp
will be liable for 50 per cent. of the shortfall (less the buyer's prevailing
rate of corporation tax), which could produce a significantly larger liability.
If Corp is required to make a net payment of approximately L14.665 million (or
L12.88 million if the net over-allowance by Corp is taken into account), the
funding position of the UK Plan would improve considerably. This would be
because the UK Plan had distributed a smaller than anticipated amount to the
buyer's pension plan.
UNITED STATES PENSION PLANS
Description of the main US plan
The principal pension plan in the United States is the Marconi USA Employees'
Retirement Plan, which is a tax-qualified, funded defined benefit plan.
The following additional plans are also maintained in the US:
a. the RELTEC Corporation Retirement Plan, which is a tax-qualified,
funded defined benefit plan (the "RELTEC PLAN"). The benefit
accruals of participants in the RELTEC Plan were frozen, effective
as of 31 December 1997; and
b. the RELTEC Supplemental Executive Retirement Plan (the "SERP"),
which is an unfunded, non-tax-qualified plan for a select group of
management or highly compensated employees. There are approximately
seven participants covered by the SERP as of 1 April 2002. The SERP
was also frozen as of 31 December 1997. No benefits have accrued
under the SERP since that date.
Corp is not a sponsoring employer of the Marconi Plan or the RELTEC Plan but,
because Corp and plc are part of the plan sponsor's "controlled group" under the
Employee Retirement Income Security Act of 1974, as amended ("ERISA") and the
Internal Revenue Code of 1986, as amended (the "CODE"), Corp and plc would each
be jointly and severally liable under ERISA for any funding shortfall on
termination of either plan (together with the US subsidiaries which are
participating employers and other substantially owned US and non-US
subsidiaries). The sponsor of the Marconi Plan and the RELTEC Plan is a US
company, as are each of the participating employers. There is no formal or
informal plan or commitment at this time to terminate either the Marconi Plan or
the RELTEC Plan.
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Funded status of the US plans
Corp and plc estimate as at 30 September 2002:
a. on an ongoing basis and from an accounting perspective under US
Financial Accounting Standard Statement 132, the Marconi Plan had
assets with a value of US$164,915,249 and was underfunded by
US$18,378,172; and
b. on an ongoing basis and from an accounting perspective under US
Financial Accounting Standard Statement 132, the RELTEC Plan had
assets with a value of US$47,345,086 and was underfunded by
US$15,812,831.
This estimate is based on valuations prepared for the relevant plans as at 31
December 2001, adjusted for turnover in the first quarter of 2002 and a change
in the discount rate from 7 1/4 per cent. to 6 1/2 per cent. and rolled forward
to 30 September 2002. An actuarial report for the plans' status, as at 31
December 2002, is not expected to be completed for several months.
Potential consequences of the underfunding of the US plans on Corp and plc
If a sale of any of the US businesses which sponsor or participate in either of
the defined benefit pension plans (or any subsidiary or division of those
businesses) occurs, the portion of the assets and liabilities under any such
plan pertaining to the employees (and, perhaps, retirees) of the entities being
sold could either be transferred to the buyer's defined benefit plan or retained
in the Marconi Plan or the RELTEC Plan, as applicable. If, at the time that
assets and liabilities are to be transferred from the Marconi Plan or the RELTEC
Plan, either of such plans were underfunded, the assets and liabilities
transferred might have to be determined based on assumptions prescribed by the
United States Pension Benefit Guaranty Corporation ("PBGC"). The PBGC is a US
government agency established under ERISA to assure the payment of certain
guaranteed levels of benefits under most defined benefit plans. When liabilities
are determined on the basis of the fairly conservative PBGC assumptions they
generally result in a greater liability than the liability as determined under
applicable accounting standards for an ongoing plan or an amount an insurance
company would charge to assume the liability.
The PBGC has an early warning programme under which it scrutinises the financial
soundness of the parties to a corporate transaction and the funding status of
the relevant tax-qualified defined benefit pension plans. The PBGC has the
authority under ERISA to terminate an underfunded plan, thereby triggering the
required payment by the plan sponsor of any funding shortfall, if the PBGC
determines that the proposed transaction could reasonably be expected to
increase unreasonably its risk of possible long-term loss if the plan is not
terminated. If a sale of a US business were to occur at a time when the Marconi
Plan or the RELTEC Plan is underfunded, PBGC involvement is possible, depending
upon the circumstances then surrounding such potential sale. If the PBGC were to
elect to become involved, such involvement could impede or delay any such
proposed transaction, increase its cost or reduce the net sale proceeds
depending upon what, if any, action might be required by the PBGC. The PBGC
would also have the power to bring an action to terminate the Marconi Plan or
the RELTEC Plan if, at any time, the participating employers were unable to
contribute the annual amount required to satisfy minimum funding obligations
under US law, the plans were unable to pay benefits when due, or certain
so-called reportable events were to occur, and, in each case, the PBGC were to
determine that its risk of possible long-term loss could reasonably be expected
to increase unreasonably.
The filing of this document with the Court constituted a reportable event and
Corp and plc have notified the PBGC accordingly. In order to substantially
reduce the uncertainty of the potential involvement of the PBGC, Corp and plc
have entered into a legally binding memorandum of understanding with the PBGC
under which the PBGC has agreed not to terminate the Marconi Plan or the RELTEC
Plan solely as a result of the Restructuring nor make a claim under the plc
Scheme, in exchange for which Corp has agreed to provide (i) certain guarantees
to the PBGC relating to potential liabilities of its United States subsidiaries
under the two plans, (ii) if Corp intends to sell any of its business units in
the United States to a third-party purchaser whose debt immediately following
the consummation of such transaction is not then rated investment grade, no
proposed transfer of assets and liabilities of the Marconi Plan or the RELTEC
Plan to a pension plan of the third-party purchaser will be made without the
consent of the PBGC, (iii) a commitment to fund, from the proceeds of sale, any
shortfall in the
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Marconi Plan or RELTEC Plan, as applicable, which is attributable to any United
States business unit being sold, with the amount to be funded based on then
applicable PBGC safe harbour assumptions used for plan termination purposes, and
(iv) accelerated funding of contributions beyond the minimum otherwise legally
required. See Appendix 19 for a more detailed discussion of the memorandum of
understanding with the PBGC.
D.12 LISTING AND DEALING
Application has been made to the UKLA for the New Shares, the New Notes and the
Warrants to be admitted to the Official List of the UKLA and to the London Stock
Exchange for the New Shares, the New Notes and the Warrants to be admitted to
trading on the London Stock Exchange's market for listed securities. It is
expected that Listing will become effective and dealings in the New Shares, the
New Notes and the Warrants will commence at 8.00 a.m. (London time) on the
Effective Date which is currently expected to be 19 May 2003, but the Corp
Scheme is not conditional on Listing becoming effective and the New Shares, the
New Notes and the Warrants may therefore be issued as unlisted securities. Corp
will use its reasonable endeavours to effect the Listing of the New Shares, the
New Notes and the Warrants as soon as possible on or after the Effective Date of
the Corp Scheme.
A document comprising a prospectus relating to Corp has been prepared in
accordance with the Listing Rules made under section 74 of the FSMA and a copy
of it will be delivered for registration to the Registrar of Companies in
England and Wales pursuant to section 83 of the FSMA.
Corp will apply to list the ADRs in respect of its shares on NASDAQ and will use
its reasonable endeavours to effect this NASDAQ listing as soon as practicable
following the Effective Date of the Corp Scheme. It is currently expected that
the NASDAQ listing will become effective during the third calendar quarter of
2003.
Please see Part F.2 of this Section: Risk factors for a discussion of certain
risks relating to delay and potential delay in the listing of the New Shares,
New Notes, Warrants and ADRs.
D.13 REPORTING REQUIREMENTS AND ENTITLEMENT TO INFORMATION
Corp files reports and other information with the SEC under the US Securities
Exchange Act of 1934, as amended. Reports and other information filed with, or
submitted to, the SEC by Corp can be inspected and copied at the public
reference facilities maintained by the SEC at 450 Fifth Street, N.W., Room 1024,
Washington D.C. 20549 and at the SEC's regional offices at Citicorp Center, 500
West Madison Street, Suite 1400, Chicago, Illinois 60661. Reports and other
information are also available to the public through the internet in the EDGAR
database on the SEC's Web site at http://www.sec.gov.
Pursuant to the terms of the indentures governing the New Notes, following the
Restructuring Corp will begin to file annual, quarterly and periodic reports
with the SEC on Form 10-K, Form 10-Q and Form 8-K, respectively, as if it were a
US domestic issuer, subject to certain specified exceptions (as more
particularly described in Appendix 8, under the caption "SEC Reports; Other
Information"). (Corp will remain a foreign private issuer and as such will not
be subject to and (except as described herein) does not intend to comply with US
proxy rules or any other provision of the US securities laws from which foreign
private issuers are exempted.) The first such filing will be a Form 10-Q
quarterly report in respect of the quarter ending 30 September 2003. Prior to
that time, Corp will file an annual report on Form 20-F for the year ending 31
March 2003 within 90 days of the financial year end, and will submit a quarterly
report in respect of the quarter ending 30 June 2003 under cover of Form 6-K
within 60 days of the quarter end, in each case including financial statements
in accordance with or reconciled to US GAAP and non-financial statement
disclosures otherwise as required by Form 10-K or Form 10-Q, as the case may be,
subject to certain specified exceptions (as more particularly described in
Appendix 8, under the caption "SEC Reports; Other Information"). All of the
above reports (regardless of the forms under which they are filed or submitted)
will also include the certifications required with respect to filings by US
domestic issuers on Form 10-K and Form 10-Q pursuant to the Sarbanes-Oxley Act
of 2002 and SEC rules adopted thereunder. In addition, Corp will hold quarterly
investor conference calls following the release of such reports.
The specific reporting requirements described above will cease to apply once the
New Notes are no longer outstanding. At any time thereafter, subject to the
requirements of applicable law and regulation, Corp will be
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free to discontinue filing SEC reports on the forms used by US domestic issuers,
as well as the other reporting practices described in the previous paragraph.
D.14 MEMORANDUM AND ARTICLES
A summary of certain provisions of the Memorandum of Corp which has been
amended, and the Articles of Corp which have been adopted, in each case
conditionally on the allotment of the New Shares pursuant to the Corp Scheme, is
in Appendix 14.
D.15 AMERICAN DEPOSITARY RECEIPTS
GENERAL
Corp will establish an ADR programme in respect of the New Shares. Elections may
be made in Claim Forms and Account Holder Letters to have all or any portion of
the New Shares deliverable pursuant to the Schemes delivered in the form of
ADRs. Any person who elects to receive New Shares in the form of ADRs also will
receive all future distributions of New Shares to which such person may be
entitled pursuant to the Schemes in the form of ADRs. As described below no
depositary fees will be payable at any time in connection with the initial
issuance of ADRs pursuant to the Schemes and any UK stamp duty or SDRT payable
in this respect will be met by Corp.
ADRs will be issued pursuant to the Schemes in reliance on the exemption from
Securities Act registration provided by Section 3(a)(10) thereof (or, in the
case of plc Shareholders, in transactions not subject to such registration).
Following their initial issuance, such ADRs may be sold in ordinary secondary
market transactions without restriction under the Securities Act (subject to the
restrictions applicable to "affiliates" described in Part D.16 of this Section).
In addition, a registration statement on Form F-6 will be filed with the SEC in
relation to the ADRs. It is currently expected that this registration statement
will be effective prior to the Effective Date of the Corp Scheme. Once this
registration statement is effective, outstanding Corp Shares may be deposited
into the ADR programme in exchange for ADRs. Such ADRs may then be sold in
ordinary secondary market transactions without restriction under the Securities
Act.
Corp will apply to list the ADRs on NASDAQ and will use its reasonable
endeavours to effect this NASDAQ listing as soon as practicable following the
Effective Date of the Corp Scheme. It is currently expected that the NASDAQ
listing will become effective during the third calendar quarter of 2003. Persons
who are considering making an election to receive New Shares in the form of ADRs
should note that, unless and until the NASDAQ listing becomes effective,
development of a liquid trading market for the ADRs will be inhibited, which is
likely to have a material adverse effect on their value.
A summary of the material terms of the ADRs is set out in Appendix 16.
RESPONSIBILITY FOR FEES AND TAXES IN CONNECTION WITH ADRS
Persons electing to receive ADRs pursuant to the Schemes
Scheme Creditors and Designated Recipients who receive New Shares in the form of
ADRs pursuant to the Schemes at any time will not be responsible for any fees or
expenses of The Bank of New York, as ADR depositary, or any UK stamp duty or
SDRT, in respect of the initial issuance of such ADRs. The Bank of New York has
agreed to waive its fees and expenses in this connection, and any such UK stamp
duty or SDRT will be met by Corp.
Such persons will, however, be responsible for any other taxes or charges
arising in connection with such initial issuance of ADRs, as well as any fees,
expenses, taxes or charges arising in connection with any subsequent transaction
involving ADRs (except to the extent described below under "General fee
holiday").
Persons electing to receive New Shares pursuant to the Schemes
Subject to compliance with the procedures referred to below, Scheme Creditors
and Designated Recipients who receive New Shares pursuant to the Schemes will
not be responsible for any fees or expenses of The Bank of
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New York in respect of the initial issuance of ADRs upon deposit of those New
Shares (or an equivalent number of Corp Shares) in exchange for ADRs, if such
deposit is effected prior to the earlier of (x) the date falling two months
after the effectiveness of the NASDAQ listing of the ADRs and (y) 30 September
2003. The Bank of New York has agreed to waive its fees and expenses in this
connection.
In addition, subject to compliance with the procedures referred to below, Scheme
Creditors and Designated Recipients who receive New Shares pursuant to the
Schemes will not be responsible for any UK stamp duty or SDRT arising in
connection with the initial issuance of ADRs upon deposit of those New Shares
(or an equivalent number of Corp Shares) in exchange for ADRs, if such deposit
is effected prior to the date falling two months after the effectiveness of the
NASDAQ listing of the ADRs. Any such UK stamp duty or SDRT will be met by Corp.
To qualify for the treatment described above, Scheme Creditors and Designated
Recipients must comply with certain procedures, including providing such
certifications or other evidence as Corp and The Bank of New York may reasonably
require in order to permit verification of the number of New Shares obtained by
the depositor pursuant to the Schemes. For information with respect to the
relevant procedures, Scheme Creditors and Designated Recipients should contact
The Bank of New York's office in London on (attention Mr Peter Ridgwell),
telephone +44 207 964 6168, facsimile +44 207 964 6043.
Except insofar as these arrangements apply, Scheme Creditors and Designated
Recipients will be responsible for all taxes or charges arising in connection
with the initial issuance of ADRs as described above, as well as any fees,
expenses, taxes or charges arising in connection with any subsequent issuance of
or other transaction involving ADRs (except to the extent described below under
"General fee holiday").
GENERAL FEE HOLIDAY
The Bank of New York has agreed to waive any payment in respect of its fees and
expenses that would otherwise be required under the Deposit Agreement in
connection with any deposit of Corp Shares in exchange for ADRs that is effected
prior to the date falling two months after the Effective Date of the Corp
Scheme. This "fee holiday" will be implemented without regard to the special
arrangements for Scheme Creditors and Designated Recipients described above.
Persons depositing Corp Shares during this period (other than Scheme Creditors
and Designated Recipients, to the extent described above) will, however, be
responsible for any taxes or other charges (including UK stamp duty or SDRT)
arising in connection with the issuance of ADRs.
D.16 US SECURITIES LAW CONSIDERATIONS
CONSIDERATIONS FOR SCHEME CREDITORS AND BONDHOLDERS
US federal securities laws
The New Shares, ADRs and New Notes issued to Scheme Creditors and Bondholders
pursuant to the Schemes will not be registered under the Securities Act in
reliance on the exemption from registration provided by Section 3(a)(10)
thereof, and will not be registered under the securities laws of any state of
the US in reliance on exemptions provided under the securities laws of each
state of the US in which Scheme Creditors and Bondholders are located. The issue
of New Shares, ADRs and New Notes to Scheme Creditors and Bondholders located in
the states of Arizona, California, Colorado, Connecticut, Illinois, Ohio and
Vermont will, however, be subject to the limitations described in "US state
securities laws" below.
Any Scheme Creditor or Bondholder that is not an affiliate, for purposes of the
Securities Act, of Corp or plc prior to the implementation of the Schemes and is
not an affiliate of Corp following implementation of the Schemes may sell New
Shares, ADRs and New Notes received pursuant to the Schemes in ordinary
secondary market transactions without restriction under the Securities Act.
Any Scheme Creditor or Bondholder that is an affiliate of Corp or plc prior to
the implementation of the Schemes and/or is or becomes an affiliate of Corp
following implementation of the Schemes will be subject to restrictions on the
sale of New Shares, ADRs and New Notes received pursuant to the Schemes pursuant
to Rule 145(d) under the Securities Act.
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For purposes of the Securities Act, an "affiliate" of any person is a person
that directly, or indirectly through one or more intermediaries, controls, or is
controlled by, or is under common control with, that person. Scheme Creditors
and Bondholders that believe they are or may be "affiliates" of Corp or plc for
purposes of the Securities Act should consult their own legal advisers prior to
any sale of New Shares, ADRs or New Notes received pursuant to the Schemes.
US state securities laws
Corp and plc have formed the view, based on the advice of US state securities
law counsel, that the distributions of New Shares, ADRs and New Notes to Scheme
Creditors and Bondholders in the United States would be prohibited except after
compliance with unduly onerous conditions unless made pursuant to available
exemptions from state securities registration requirements under applicable
state law. Other than in the states of Arizona, California, Colorado,
Connecticut, Illinois, Ohio and Vermont, exemptions are available without regard
to the identity or status of the persons to whom securities are issuable under
the Schemes.
In these seven states the scope of the available exemptions will not permit New
Shares, ADRs and New Notes to be issued through the Schemes under all
circumstances. Accordingly Scheme Creditors and Bondholders in Arizona,
California, Colorado, Connecticut, Illinois, Ohio and Vermont will be eligible
to receive New Shares, ADRs and New Notes pursuant to the Schemes only if they
fall into one of the categories of persons described below, such that an
applicable state-law exemption will be available. Bondholders in Colorado,
Connecticut, Illinois and Vermont should note that they will be eligible to
receive securities pursuant to the Corp Scheme under state-law exemptions
applicable to transactions by an issuer with its existing security holders.
The Claim Form will require each person who completes it (other than the
Trustees), and the Account Holder Letter will require Account Holders, to
confirm certain facts in connection with the US state securities law
restrictions referred to above. To the extent that any person located in one of
these states is not eligible to receive securities pursuant to the Schemes by
virtue of these securities law restrictions, such person will receive cash
instead. These matters are discussed in further detail in Part C.9 of this
Section.
SCHEME CREDITORS AND BONDHOLDERS IN ARIZONA, CALIFORNIA, COLORADO, CONNECTICUT,
ILLINOIS, OHIO AND VERMONT SHOULD CAREFULLY CONSIDER THE ELIGIBILITY CRITERIA
DESCRIBED BELOW, THE PROVISIONS OF THE SCHEMES WITH RESPECT TO LEGAL AND
REGULATORY RESTRICTIONS GENERALLY AND THE CONTENTS OF THE CONFIRMATIONS TO BE
INCLUDED IN THE CLAIM FORM AND ACCOUNT HOLDER LETTER AS DESCRIBED IN PART C.9 OF
THIS SECTION. ANY SUCH PERSONS WHO ARE IN DOUBT AS TO HOW THESE RESTRICTIONS MAY
AFFECT THEM ARE STRONGLY ADVISED TO CONSULT THEIR PROFESSIONAL ADVISERS.
For these purposes, a Scheme Creditor or Bondholder will be deemed to be located
in a state if such Scheme Creditor or Bondholder (or, in the case of a legal
entity, the person acting on behalf of such Scheme Creditor or Bondholder) is
physically present within that state at the time that (i) such person receives
the Scheme Document, or any portion thereof or any information with respect
thereto which results in a Claim Form or Account Holder Letter (as the case may
be) being submitted by or on behalf of such person, or (ii) such person submits
a Claim Form or transmits instructions with respect to submission of an Account
Holder Letter (as the case may be).
The categories of Scheme Creditors and Bondholders located in the states of
Arizona, California, Colorado, Connecticut, Illinois, Ohio and Vermont to or to
the order of whom New Shares, ADRs and New Notes will be distributed through the
Schemes are as follows:
Arizona -- any bank, savings institution, trust company, insurance company,
investment company as defined in the US Investment Company Act of 1940, a
pension or profit sharing trust or other financial institution or institutional
buyer, or a dealer, whether the person is acting for itself or in a fiduciary
capacity.
California -- any broker-dealer, bank, savings and loan association, trust
company, insurance company, investment company registered under the US
Investment Company Act of 1940, or pension or profit-sharing trust (other than a
pension or profit-sharing trust of the issuer, a self-employed individual
retirement plan or an individual retirement account); any organisation described
in Section 501(c)(3) of the US Internal Revenue Code, as amended to 29 December
1981, which has total assets (including endowment, annuity and life income
funds)
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of not less than US$5,000,000 according to its most recent audited financial
statement; any corporation which has a net worth on a consolidated basis of not
less than US$14,000,000; any wholly-owned subsidiary of any of the foregoing
institutional investors; or the US federal government, any agency or
instrumentality of the US federal government, any corporation wholly-owned by
the US federal government, any state, any city, city and county, or county, or
any agency or instrumentality of a state, city, city and county, or county, or
any state university or state college and any retirement system for the benefit
of employees of any of the foregoing.
Colorado -- with respect to the Corp Scheme, any Bondholder and, with respect to
either Scheme, any broker-dealer, or a financial or institutional investor,
whether the purchaser is acting for itself or in some fiduciary capacity. A
financial or institutional investor includes: (a) a depositary institution,
which is defined as: (i) a person that is organised or chartered, or is doing
business or holds an authorisation certificate, under the laws of a state or of
the United States which authorises the person to receive deposits, including
deposits in savings, share, certificate, or other deposit accounts, and that is
supervised and examined for the protection of depositors by an official or
agency of a state or the United States, or (ii) a trust company or other
institution that is authorised by federal or state law to exercise fiduciary
powers of the type a national bank is permitted to exercise under the authority
of the comptroller of the currency and is supervised and examined by an official
or agency of a state or the United States; (b) an insurance company; (c) a
separate account of an insurance company; (d) an investment company registered
under the US Investment Company Act of 1940; (e) a business development company
as defined in the US Investment Company Act of 1940; (f) any private business
development company as defined in the US Investment Advisers Act of 1940; (g) an
employee pension, profit-sharing or benefit plan if the plan has total assets in
excess of US$5,000,000 or its investment decisions are made by a named
fiduciary, as defined in ERISA, that is a broker-dealer registered under the
Exchange Act, an investment adviser registered or exempt from registration under
the US Investment Advisers Act of 1940, a depositary institution, or an
insurance company; (h) an entity, but not an individual, a substantial part of
whose business activities consist of investing, purchasing, selling, or trading
in securities of more than one issuer and not of its own issue and that has
total assets in excess of US$5,000,000 as of the end of its latest fiscal year;
(i) a small business investment company licensed by the US federal small
business administration under the US Small Business Investment Act of 1958; and
(j) any other institutional buyer.
Connecticut -- with respect to the Corp Scheme, any Bondholder and, with respect
to either Scheme, any state bank and trust company, national banking
association, savings bank, savings and loan association, federal savings and
loan association, credit union, federal credit union, trust company, insurance
company, investment company as defined in the US Investment Company Act of 1940,
pension or profit-sharing trust, or other financial institution or institutional
buyer, or to a broker-dealer; whether the purchaser is acting for itself or in
some fiduciary capacity.
Illinois -- with respect to the Corp Scheme, any Bondholder and, with respect to
either Scheme, any corporation, bank, savings bank, savings institution, savings
and loan association, trust company, insurance company, building and loan
association, or dealer; a pension fund or pension trust, employees'
profit-sharing trust, other financial institution (including any manager of
investment accounts on behalf of other than natural persons, who, with
affiliates, exercises sole investment discretion with respect to such accounts
and provided such accounts exceed ten in number and have a fair market value of
not less than US$10,000,000 at the end of the calendar month preceding the month
during which the securities are sold) or institutional investor (including
investment companies, universities and other organisations whose primary purpose
is to invest its own assets or those held in trust by it for others, trust
accounts and individual or group retirement accounts in which a bank, trust
company, insurance company or savings and loan institution acts in a fiduciary
capacity, and foundations and endowment funds exempt from taxation under the
Code, a principal business function of which is to invest funds to produce
income in order to carry out the purpose of the foundation or fund), or any
government or political subdivision or instrumentality thereof, whether the
purchaser is acting for itself or in some fiduciary capacity; any partnership or
other association engaged as a substantial part of its business or operations in
purchasing or holding securities; any trust in respect of which a bank or trust
company is trustee or co-trustee; any entity in which at least 90 per cent. of
the equity is owned by: (i) persons described in this paragraph, (ii) any
partnership or other association or trader buying or selling fractional
undivided interests in oil, gas or other mineral rights, in frequent operations,
for its or his own account rather than for the account of customers, to such
extent it or he may be said to be engaged in such activities as a trade or
business, (iii) any natural person who has, or is reasonably believed
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by the person offering the securities to have (a) a net worth or joint net worth
with the person's spouse, at the time of the offer, sale or issuance of the
securities, in excess of US$1,000,000, or (b) an income or joint income with
that person's spouse of US$200,000 in each of the two most recent fiscal years
and reasonably expects such an income in the current year, (iv) any person, not
a natural person, 90 per cent. of the equity interest thereof is owned by
persons described in (a) or (b) immediately above, or (v) any person who is, or
is reasonably believed by the person offering the securities to be, a director,
executive officer, or general partner of the issuer of the securities or any
director, executive officer or general partner of a general partner of that
issuer (executive officer shall mean the president, any vice president in charge
of a principal business unit, division or function such as sales, administration
or finance, or any other officer or other person who performs a policy-making
function for the issuer); any employee benefit plan within the meaning of Title
I of ERISA if (i) the investment decision is made by a plan fiduciary as defined
in Section 3(21) of ERISA and such plan fiduciary is either a bank, insurance
company, registered investment adviser or an investment adviser registered under
the US Investment Advisers Act of 1940, or (ii) the plan has total assets in
excess of US$5,000,000, or (iii) in the case of a self-directed plan, investment
decisions are made solely by persons that are described herein; any plan
established and maintained by, and for the benefit of the employees of, any
state or political subdivision or agency or instrumentality thereof if such plan
has total assets in excess of US$5,000,000; or any organisation described in
Section 501(c)(3) of the Code, any Massachusetts or similar business trust, or
any partnership, if such organisation, trust, or partnership has total assets in
excess of US$5,000,000.
Ohio -- any dealer, corporation, bank (which includes a trust company, savings
and loan association, savings bank, or credit union that is incorporated or
organised under the laws of the United States or of any state thereof, or of
Canada or any province thereof, and subject to regulation or supervision by such
country, state or province), insurance company, pension fund or trust,
employees' profit-sharing fund or trust, any association engaged, as a
substantial part of its business or operations, in purchasing or holding
securities, any trust in respect of which a bank is trustee or co-trustee, or
any Qualified Institutional Buyer as defined in Rule 144A under the Securities
Act.
Vermont -- with respect to the Corp Scheme, any Bondholder and, with respect to
either Scheme, any financial or institutional investor, which means: (a) a
depositary institution, which includes: (i) a person that is organised,
chartered, or holding an authorisation certificate under the laws of a state or
of the United States which authorises the person to receive deposits, including
a savings, share, certificate, or deposit account, and which is supervised and
examined for the protection of depositors by an official or agency of a state or
the United States, or (ii) a trust company or other institution that is
authorised by a federal or state law to exercise fiduciary powers of the type a
national bank is permitted to exercise under the authority of the comptroller of
the currency and is supervised and examined by an official or agency of a state
or the United States; (b) an insurance company; (c) a separate account of an
insurance company; (d) an investment company as defined in the US Investment
Company Act of 1940; (e) an employee pension, profit-sharing or benefit plan if
the plan has total assets in excess of US$5,000,000 or its investment decisions
are made by a named fiduciary, as defined in ERISA, that is either a
broker-dealer registered under the Exchange Act, an investment adviser
registered or exempt from registration under the Investment Advisers Act of
1940, a depositary institution or an insurance company; (f) any other financial
or institutional buyer which qualifies as an accredited investor under the
provisions of Regulation D as promulgated by the SEC under the Securities Act,
as such provisions may be amended from time to time hereafter; (g) a
broker-dealer; and (h) such other institutional buyers as the commissioner may
add by rule or order; whether the purchaser is acting for itself or others in a
fiduciary capacity.
CONSIDERATIONS FOR PLC SHAREHOLDERS
The New Shares, ADRs and Warrants issuable to plc Shareholders pursuant to the
Corp Scheme will be issued in transactions that are not subject to the
registration requirements of the Securities Act or of the securities laws of any
state of the US. Such plc Shareholders may sell the New Shares, ADRs and
Warrants they receive pursuant to the Corp Scheme in ordinary secondary market
transactions without restriction under the Securities Act.
The additional Corp Shares issuable on exercise of Warrants will be issued
pursuant to an effective registration statement under the Securities Act.
Exercising holders will thus be able to sell the Corp Shares they receive on
exercise of Warrants in ordinary secondary market transactions without
restriction under the Securities Act. At an
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appropriate time, Corp will file a registration statement with the SEC to
provide for the issue of Corp Shares from time to time upon exercise of
Warrants. It is currently expected that this registration statement will become
effective during the third calendar quarter of 2003. Warrants will not be
exercisable by any person in the US prior to the effectiveness of this
registration statement.
D.17 SECURITIES LAW RESTRICTIONS IN FRANCE, ITALY AND MALAYSIA
This Part D.17 sets out information regarding securities law restrictions on the
distribution of New Shares, New Notes and Warrants pursuant to the Schemes under
the laws of France, Italy and Malaysia to persons located in those
jurisdictions.
FRANCE
Corp and plc have formed the view, based on the advice of French legal counsel,
that the distributions of New Shares and New Notes to Scheme Creditors,
Bondholders and Designated Recipients in France would be prohibited except after
compliance with unduly onerous conditions, unless made pursuant to an exemption
from the provisions of French law relating to public offerings. Accordingly, New
Shares and New Notes will be distributed pursuant to the Schemes to Scheme
Creditors, Bondholders and Designated Recipients in France only in reliance on
the exemption provided under Article L.411-2 of the French Monetary and
Financial Code and Decree no. 98-880 dated 1 October 1998 to persons that are
"qualified investors" as defined under such Article.
The Claim Form will require each person who completes it (other than the
Trustees), and the Account Holder Letter will require Account Holders, to
confirm certain facts in connection with the French legal restrictions described
above. To the extent that any person located in France is not eligible to
receive securities pursuant to the Schemes by virtue of these restrictions, such
person will receive cash instead. These matters are discussed in further detail
in Part C.9 of this Section.
For these purposes, a person will be deemed to be located in France if this
Scheme Document, or notice that this Scheme Document is available, (i) is sent
to him at an address (including the registered address for a company and the
branch address for a branch) in the Republic of France, or (ii) is made
available to him by electronic means and such person (if a natural person) is a
French national or (if a legal person) has its registered address in the
Republic of France.
SCHEME CREDITORS, BONDHOLDERS AND DESIGNATED RECIPIENTS LOCATED IN FRANCE SHOULD
CAREFULLY CONSIDER THE ELIGIBILITY CRITERIA DESCRIBED ABOVE, THE PROVISIONS OF
THE SCHEMES WITH RESPECT TO LEGAL AND REGULATORY RESTRICTIONS GENERALLY AND THE
CONTENTS OF THE CONFIRMATIONS TO BE INCLUDED IN THE CLAIM FORM AND ACCOUNT
HOLDER LETTER AS DESCRIBED IN PART C.9 OF THIS SECTION. ANY SUCH PERSONS WHO ARE
IN DOUBT AS TO HOW THESE RESTRICTIONS MAY AFFECT THEM ARE STRONGLY ADVISED TO
CONSULT THEIR PROFESSIONAL ADVISERS.
Corp has formed the view, on the advice of French counsel, that the distribution
of New Shares and Warrants pursuant to the Corp Scheme to plc Shareholders in
France is not currently prohibited by French law or regulation.
ITALY
The distributions of the New Shares, New Notes and Warrants have not been
approved by the Italian Securities Exchange Commission ("CONSOB") pursuant to
Italian securities legislation. A formal request has been submitted to CONSOB
seeking confirmation that the distributions of the securities under the Schemes
do not constitute public offerings under such legislation. However, as of the
date of this document, no such confirmation has yet been received.
If CONSOB does not provide the requested confirmation, Corp and plc have formed
the view, based on the advice of Italian legal counsel, that the distributions
of New Shares and New Notes to Scheme Creditors and Bondholders, and of Warrants
to plc Shareholders, in Italy would be prohibited except after compliance with
unduly onerous conditions, unless made pursuant to an exemption from the
provisions of Italian law relating to
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public offerings. The following exemptions under Italian law are potentially
applicable in connection with the various distributions to be made pursuant to
the Schemes:
- Corp Scheme -- Scheme Creditors: Except as described in the next
paragraph, a Corp Scheme Creditor in Italy will be eligible to receive
New Shares and New Notes pursuant to the Corp Scheme if (i) such person
is a "professional investor" as defined in the Consolidated Financial
Act Article 30, paragraph II and in CONSOB Regulation 11522/1998
Article 31, paragraph II or (ii) the number of all such persons that
are not "professional investors" does not exceed 200;
- Corp Scheme -- Bondholders: Bondholders in Italy will be eligible to
receive New Shares and New Notes pursuant to the Corp Scheme only if
the number of such persons does not exceed 200;
- plc Scheme -- Scheme Creditors and Bondholders: plc Scheme Creditors
and Bondholders in Italy will be eligible to receive New Shares and New
Notes pursuant to the plc Scheme if (i) such persons are "professional
investors" as defined in the Consolidated Financial Act Article 30,
paragraph II and in CONSOB Regulation 11522/1998 Article 31, paragraph
II or (ii) the number of all such persons that are not "professional
investors" does not exceed 200;
- Corp Scheme -- plc Shareholders: plc Shareholders in Italy will be
eligible to receive Warrants pursuant to the Corp Scheme only if the
number of such persons does not exceed 200.
Based on the advice of Italian legal counsel and such information as is
available to it, (i) Corp currently believes that the exemption with respect to
distributions of securities to limited numbers of persons will not be available
in connection with distributions in respect of claims by Bondholders located in
Italy under the Corp Scheme, and (ii) Corp and plc, respectively, believe that
there is significant doubt as to the availability of this exemption in
connection with other distributions to Scheme Creditors under the Corp Scheme
and in connection with distributions under the plc Scheme. The determination as
to whether securities can be distributed in reliance on this exemption will be
made by Corp or plc (as the case may be) in its sole discretion following the
Effective Date of the relevant Scheme based on the advice of Italian legal
counsel and such information as is available to it.
The Claim Form will require each person who completes it (other than the
Trustees), and the Account Holder Letter will require Account Holders, to
confirm certain facts in connection with the Italian legal restrictions
described above. To the extent that any person in Italy is not eligible to
receive securities pursuant to the Schemes by virtue of these restrictions, such
person will receive cash instead. These matters are discussed in further detail
in Part C.9 of this Section.
For these purposes, a person will be deemed to be located in Italy if such
person (i) is a natural person and is resident or domiciled within the
geographical territory of Italy or (ii) is a legal person and has its registered
office (sede legale) within the geographical territory of Italy or (iii) is a
legal person having any other office or conducting any business or other
activities within the geographical territory of Italy as a result of which it is
or is required to be registered in Italy.
SCHEME CREDITORS, BONDHOLDERS AND PLC SHAREHOLDERS IN ITALY SHOULD CAREFULLY
CONSIDER THE ELIGIBILITY CRITERIA DESCRIBED ABOVE, THE PROVISIONS OF THE SCHEMES
WITH RESPECT TO LEGAL AND REGULATORY RESTRICTIONS GENERALLY AND THE CONTENTS OF
THE CONFIRMATIONS TO BE INCLUDED IN THE CLAIM FORM AND ACCOUNT HOLDER LETTER AS
DESCRIBED IN PART C.9 OF THIS SECTION. ANY SUCH PERSONS WHO ARE IN DOUBT AS TO
HOW THESE RESTRICTIONS MAY AFFECT THEM ARE STRONGLY ADVISED TO CONSULT THEIR
PROFESSIONAL ADVISERS.
Persons in Italy should note that New Shares, New Notes or Warrants received
pursuant to an exemption may not be offered, sold or delivered nor may copies of
this document or any other document relating to the New Shares, New Notes or
Warrants be distributed in Italy except (i) pursuant to the exemptions under
Legislative Decree No. 58 of 24 February 1998 and its implementing CONSOB
Regulations, or (ii) to an Italian resident who submits an unsolicited offer to
purchase such New Shares, New Notes or Warrants.
Corp has formed the view, on the advice of Italian legal counsel, that the
distribution of New Shares pursuant to the Corp Scheme to plc Shareholders in
Italy is not currently prohibited by Italian law or regulation.
140
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MALAYSIA
Corp and plc have formed the view, on the advice of Malaysian legal counsel,
that the issue and allotment of New Shares, New Notes or Warrants to Scheme
Creditors, Bondholders, Designated Recipients or plc Shareholders located in
Malaysia would be prohibited except after compliance with unduly onerous
conditions.
The Claim Form will require each person who completes it (other than the
Trustees), and the Account Holder Letter will require Account Holders, to
confirm certain facts in connection with these Malaysian legal and regulatory
restrictions. Any person located in Malaysia will not be eligible to receive
securities pursuant to the Schemes and will receive cash instead, as described
in Part C.9 of this Section.
For these purposes, a person will be deemed to be located in Malaysia if such
person (i) is a natural person and is resident in Malaysia, or (ii) is a legal
person and has its principal place of business in Malaysia, or (iii) is deemed
to be resident in Malaysia for tax purposes pursuant to the Malaysian Income Tax
Act 1967 or any other Malaysian tax legislation.
SCHEME CREDITORS, BONDHOLDERS, DESIGNATED RECIPIENTS AND PLC SHAREHOLDERS
LOCATED IN MALAYSIA SHOULD NOTE THAT THEY WILL RECEIVE CASH IN LIEU OF ANY
SECURITIES TO WHICH THEY WOULD OTHERWISE BE ENTITLED UNDER THE SCHEMES, AND
SHOULD CAREFULLY CONSIDER THE RELEVANT PROVISIONS OF THE SCHEMES AS DESCRIBED IN
PART C.9 OF THIS SECTION.
D.18 CERTAIN SECURITIES LAW DISCLOSURES
This Part D.18 sets out certain disclosures in connection with the securities
laws of various jurisdictions. No action has been taken by Corp or plc that
would permit an offer or distribution of New Shares, New Notes or Warrants or
possession or distribution of this document or any offer of publicity material
in any jurisdiction where action for that purpose is required, other than in the
United Kingdom and as described below.
AUSTRALIA
This document has not been, and will not be, lodged with the Australian
Securities and Investments Commission as a disclosure document for the purpose
of Australia's Corporations Act 2001. The New Shares, New Notes and Warrants
that are the subject of this document will be distributed pursuant to exemptions
from, or in transactions not subject to the disclosure requirements of Chapter
6D of the Australia's Corporations Act 2001, and may not be offered for sale (or
transferred, assigned or otherwise alienated) to investors in Australia for at
least 12 months after their distribution, except in circumstances where
disclosure to investors is not required under Chapter 6D of the Australia's
Corporations Act 2001 or unless a compliant disclosure document is prepared and
lodged with the Australian Securities and Investments Commission.
LUXEMBOURG
The New Shares, New Notes and Warrants that are subject to this document will be
distributed pursuant to exemptions from or under a transaction not subject to
Luxembourg public offering law requirements and may consequently not be offered
or sold to the public in the Grand Duchy of Luxembourg, and neither this
document nor any other circular, prospectus, form of application, advertisement
or other material may be distributed, or otherwise made available in, or from or
published in, the Grand Duchy of Luxembourg, except in circumstances which do
not constitute a public offer of securities.
THE NETHERLANDS
The Prospectus together with the certificate of approval of the UKLA will be
submitted to the Authority for the Financial Markets (Autoriteit voor de
Financiele Markten) for mutual recognition (pursuant to section 3, paragraph 1
in conjunction with section 5, paragraph 2 of the Securities Transactions
Supervision Decree 1995).
Copies of the Prospectus will be available on request from Corp at its
registered office address.
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NEW ZEALAND
The offer (if any) and issue of New Shares, New Notes and Warrants is made in
accordance with the laws of the United Kingdom. This document is not a
prospectus registered under New Zealand law and does not contain all the
information that a New Zealand registered prospectus is required to contain.
Corp and plc may not be subject to New Zealand law and any instrument to be
issued under the Restructuring in relation to the New Shares, New Notes and
Warrants may not be enforceable in New Zealand courts.
D.19 MATERIAL CONTRACTS
A summary of the principal contents of each material contract (not being a
contract entered into in the ordinary course of business) entered into by Corp,
plc or their subsidiaries within the two years immediately preceding the date of
this document and those contracts entered into, or to be entered into by any
member of the Group (not in the ordinary course of business) which contain any
provision under which any member of the Group has, or will have, any obligation
or entitlement which is material to the Group at the date of this document or on
or about the date of implementation of the Restructuring appears in Appendix 19.
D.20 LITIGATION
Except as set out in Appendix 20, no member of the Group is or has been engaged
in nor, so far as Corp and plc are aware, has pending or threatened against it,
any legal or arbitration proceedings which may have, or have had during the
recent past (covering at least the 12 months preceding the date of this
document), a significant effect on the Group's financial position.
The UKLA has concluded its enquiries concerning plc's 4 September 2001 trading
announcement and has not made any finding of breach of the Listing Rules in
relation to it. Its enquiries concerning plc's 4 July 2001 trading announcement
have not been concluded. If it is determined that there has been a breach of the
Listing Rules, the UKLA may issue a public censure.
D.21 CORP WORKING CAPITAL STATEMENT
In the opinion of Corp, having regard to the facilities which will be available
to the Corp Group following the Effective Date, the working capital available to
the Corp Group will be sufficient for the Corp Group's present requirements as
from the Effective Date, that is from the Effective Date until 12 months
following the date of this document.
D.22 COSTS OF THE RESTRUCTURING
On the assumption that the Schemes are implemented on the timetable contemplated
in this document, Corp and plc estimate that the total costs and expenses
payable by the Group in relation to the Restructuring (including amounts payable
to advisers in relation to the Restructuring but not in relation to disposal of
businesses, litigation, general banking and derivatives advice and excluding
amounts payable to current and former employees), in relation to the period from
Corp and plc entering into negotiations with representatives of the
Co-ordination Committee and the Informal Committee of Bondholders regarding the
development of the Restructuring proposals of Corp and plc in March/April 2002
to the Effective Date of the Schemes, will be approximately L77,800,000
(excluding VAT).
Corp estimates that the ongoing costs of the implementation of the Corp Scheme
from the Effective Date, will be L6,500,000 (excluding VAT). This figure
includes advisers' fees and expenses in relation to the administration of the
Scheme including defending Allowed Proceedings, the remuneration and expenses of
the Supervisors, the Escrow Trustee and the Distribution Agent (including their
respective advisers' fees and expenses) and amounts payable to members of the
Creditors' Committee (including in respect of permitted advisers' fees and
expenses). The ongoing costs of the Corp Scheme are required to be met by Corp.
If Corp fails to meet the ongoing costs of the Corp Scheme the Supervisors are
entitled to have resort to any Corp Scheme Consideration that remains to be
distributed (generally subject to the consent of the Creditor's Committee, not
to be unreasonably withheld).
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The categories of the costs and expenses which plc anticipates will comprise its
Ongoing Costs from the Record Date are summarised in the Chairman's letter in
part I, Section 1 of this document. plc estimates that these will amount to no
more than L11,300,000 (including VAT) plus an amount which will be covered by
interest until the termination of the plc Scheme and the completion of a
subsequent dissolution or liquidation of plc. The plc Scheme provides that plc
will set aside the sum of L7,000,000 from the cash element of the Corp Scheme
Consideration received via Ancrane which, together with plc's cash of
approximately L2,300,000, interest on the aggregate of these two cash amounts
and L2,000,000 available to be drawn (at Corp's request) under a letter of
credit to be provided in favour of the plc Scheme Supervisors by HSBC Bank plc,
will be available to meet plc's Ongoing Costs.
D.23 PRINCIPAL SUBSIDIARY AND ASSOCIATED UNDERTAKINGS
The following table shows the principal subsidiary undertakings and other
associated companies of Corp, being those which are considered by Corp to be
likely to have a significant impact on the assessment of the assets and
liabilities, the financial position and/or the profits and losses of Corp Group.
Except where stated otherwise, the share capital is fully paid.
Class of share
Registered office or capital (issued and
Company Name and principal place of fully paid, unless
country of incorporation business otherwise stated) Proportion held Nature of business
------------------------ -------------------- ------------------- --------------- ------------------
Marconi New Century Park, Ordinary L1 100 per cent. Manufacture, sales and
Communications PO Box 53, service of
Limited Coventry, telecommunications systems
(UK) CV3 1HJ
UK
Marconi Via Ludovico Calda 5, Ordinary 15 Euros 100 per cent. Manufacture, sales and
Communications S.p.A. 16153 Genoa, service of
(Italy) Italy telecommunications systems
Marconi 1000 Marconi Drive, Common Shares 100 per cent. Manufacture, sales and
Communications, Inc. Warrendale, US$0.01 service of, inter alia,
(USA) Pennsylvania telecommunications systems
105086-7502
USA
Marconi Gerberstrasse 33, No share capital -- 100 per cent. Manufacture, sales and
Communications GmbH D71 522 Backnang, investment by way service of
(Germany) Germany of capital telecommunications systems
contribution
Easynet Group plc 44 Whitfield Street, Ordinary 4p 71.63 per cent. Network based provider of
(UK) London, W1P 5RF Convertible of the equity broadband services and
UK ordinary 4p share capital internet solutions
49.56 per cent.
of the voting
share capital
With the exception of Ancrane, which is discussed in Section 1 of this document,
following the Corp Scheme becoming effective there will be no subsidiary
undertakings or other associated companies of plc which are considered by plc to
be likely to have a significant impact on the assessment of the assets and
liabilities, the financial position and/or the profits and losses of plc Group
as it will then be.
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D.24 PRINCIPAL ESTABLISHMENTS
Details of the principal establishments of the Corp Group are set out below. plc
Group, excluding Corp Group, has no such principal establishments.
If current
leasehold, If leasehold, Approximate floor
Location Tenure rent per annum expiry of term area (square feet)
-------- ------ -------------- -------------- ------------------
AUSTRALIA
Victory, Level 1, Leasehold L112,368 2006 1,873
607 St Kilda Road,
Melbourne,
Victoria, 3004
Australia
Level 7, 9, & 13. Leasehold L492,000 2006 25,866
90 Arthur Street,
North Sydney,
New South Wales, 2060
Australia
BRAZIL
1st Floor, Rua Verbo Leasehold L49,110 2005 2,691
Divino
1488, Edificio Central
Transatlantico, Sao
Paulo
Brazil
5th Floor, Rua Verbo Leasehold L53,418 2005 8,676
Divino
1488, Edificio Central
Transatlantico, Sao
Paulo
Brazil
6th Floor, Rua Verbo Leasehold L213,965 2005 34,703
Divino
1488, Edificio Central
Transatlantico, Sao
Paulo
Brazil
Avenida 31 de Marco 61 Leasehold L56,558 2003 28,438
-- Votorantim
Brazil
CANADA
122 Edward Street, Freehold Not applicable Not applicable 45,000
St Thomas, Ontario,
N5P 1Z2
Canada
1135 Innovation Drive, Leasehold L1,361,000 2009 51,888
North Tech Campus,
Kanata, Ontario,
K2K 3G6
Canada
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If current
leasehold, If leasehold, Approximate floor
Location Tenure rent per annum expiry of term area (square feet)
-------- ------ -------------- -------------- ------------------
1375 Trans-Canada Hwy, Leasehold L1,102,000 2005 71,307
Dorval Quebec,
Montreal
H9P 2W8
Canada
CHINA
Building 106, Leasehold L19,402 2003 4,511
Wangjing
New Industrial Zone,
Lizeyusan. Chao Yang
District, Beijing
China
No. 98 Liu He Road, Leasehold L42,660 Indefinite 64,583
GuiLin, Guang Xi
China
1708, Westlands Leasehold L24,844 2003 2,476
Central,
20 Westlands Road,
Quarry Bay,
Hong Kong
China
GERMANY
Hueftelaecker 1 Freehold Not applicable Not applicable 8,762
71573 Allmersbach i. T
Backnang
Germany
Gerberstrasse 33 Freehold Not applicable Not applicable 714,160
71522 Backnang
Germany
SCALA West Leasehold L1,570,000 2011 116,500
SolmsstraSSe 83
60486 Frankfurt
Germany
Robert-Bosch Str. 10 Leasehold L441,044 Indefinite -- 64,335
01454 Radeberg 6 months'
Germany notice
Max-Planck Str. 1 Freehold Not applicable Not applicable 454,000
77656 Offenburg
Germany
INDIA
2nd Floor, Leasehold L61,320 2005 2,583
International Trade
Tower,
F Block, Nehru Place
New Delhi 110019.
India
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If current
leasehold, If leasehold, Approximate floor
Location Tenure rent per annum expiry of term area (square feet)
-------- ------ -------------- -------------- ------------------
ITALY
MARA 1 S.P. Leasehold L104,692 2004 22,604
Casapuzzano Marcianise
Italy
MARA 2 S.P. Leasehold L90,553 2004 22,604
Casapuzzano Marcianise
Italy
MAIN SITE S.P. Freehold Not Applicable Not applicable 113,021
Casapuzzano Marcianise
Italy
Via Ambrogio Freehold Not Applicable Not Applicable 284,899 including Via
Negrone 1/A Ludovico Calda 5.
(excluded L1 floor)
16153 Genova
Italy
Via Ludovico Calda 5 Freehold, Finance lease payment Finance lease See Via Negrone above
16153 Genova finance lease L755,834 arrangement
Italy ends January
2007, then
freehold
Via Alfieri 1 Pisa Leasehold L67,326 2003 5,382
Italy
MALAYSIA
Lot 24, Kumlim Leasehold No cost to Marconi 2046 348,483
Industrial Estate, Joint venture
00009, Kulm, Kedah, property
Daralam
Malaysia
Bangunar Tabung Haji, Leasehold RM 718,272 2003 19,002
18th Level,
201 Jalan Tun Razak,
50400
Kuala Lumpur
Malaysia
MEXICO
Ave. San Andres Atoto Leasehold L90,778 2004 56,058
165-D APARTADO
PSTL 77-001
Mexico D.F. Naucalpan
de Juarez,
Mexico 53550
Mexico
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If current
leasehold, If leasehold, Approximate floor
Location Tenure rent per annum expiry of term area (square feet)
-------- ------ -------------- -------------- ------------------
Ave. San Andres Atoto Leasehold L33,814 2004 10,764
165-A APARTADO
PSTL 77-001
Mexico D.F. Naucalpan
de Juarez,
Mexico 53550
Mexico
Ave. San Andres Atoto Leasehold L90,778 2004 56,058
165-B APARTADO
PSTL 77-001
Mexico D.F. Naucalpan
de Juarez,
Mexico 53550
Mexico
Plant 2, Calle 4 N01, Leasehold L193,321 2005 66,155
1A,
1C, 1D Fracc, Alc
Blanco,
Naucalpan de Juarez,
Estada de Mexico,
CP 53550
Mexico
Metepec No. 110, Leasehold L40,577 2003 12,917
Mexico DF, Naucalpan
de Juarez,
Mexico 53550
Mexico
No. 60 Parque Leasehold L11,796 2004 11,754
de Amargua,
Col. Parques de la
Herradura,
Huixquilucan Edo de
Mexico,
CP52785
Mexico
NEW ZEALAND
17 Shea Terrace, Leasehold L15,000 2003 1,238
Takapuna,
North Shore City,
Auckland
New Zealand
SAUDI ARABIA
19th & 20th Floors, Leasehold L314,026 2006 20,807
Al Faisaliah Building,
PO Box 9985,
Riyadh 11423
Saudi Arabia
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If current
leasehold, If leasehold, Approximate floor
Location Tenure rent per annum expiry of term area (square feet)
-------- ------ -------------- -------------- ------------------
Various residential Leasehold Variable Variable Variable
Leases.
Required as part of
business contract.
Saudi Arabia
SOUTH AFRICA
Iron Road, New Era, Freehold Not Applicable Not Applicable 318,289
Springs,
Johannesberg 1560
South Africa
SPAIN
Building E, Miniparc Leasehold L360,531 2004 21,506
III,
El Soto de la
Moraleja, Alcobendas.
Madrid
Spain
UNITED ARAB EMIRATES
37th Floor, Emirates Leasehold L186,004 2006 9,612
Towers,
Sheik Zayed Highway,
PO Box 71405,
Dubai,
UAE
UNITED KINGDOM
Siemens Technology Leasehold L967,900 (estimated 2005 65,326
House, at review April 2003)
Technology Drive,
Beeston,
Nottingham, NG9 1LA
UK
2B & Z Block, Siemens Leasehold L88,317 2003 17,663
Technology House,
Technology Drive,
Beeston,
Nottingham, NG9 1LA
UK
Waters Edge, Leasehold L408,000 2014 28,653
Watchmoor Business
Park,
Camberley, Surrey,
GU15 3PD
UK
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If current
leasehold, If leasehold, Approximate floor
Location Tenure rent per annum expiry of term area (square feet)
-------- ------ -------------- -------------- ------------------
Carr Lane, Chorley, Leasehold L135,000 2066 97,004
Lancs., PR7 3JP
UK
New Century Park, Leasehold L1,313,200 2021 618,924
PO Box 53,
Coventry, CV3 1HJ
UK
New Horizon Park, Leasehold L645,579 2005 314,000
Waterman Road Coventry
UK
13, Wilson Road, Leasehold L23,000 2076 105,497
Huyton,
Liverpool, L36 6AE
UK
Edge Lane, Leasehold L1,454,000 2012 221,010
Liverpool, L7 9NW
UK
4th Floor, Regent's Leasehold L660,000 Indefinite -- 7,104
Place, 3 months'
338 Euston Road, notice
London, NW1 3BT
UK
Harbour Exchange, Leasehold L294,000 2008 15,252
12th Floor, Docklands,
London
UK
Block A, The Hollies, Leasehold L97,700 2003 10,872
120 Newport Road.
Stafford, ST16 1DA
UK
18/20 Denington Road, Freehold Not applicable Not applicable 44,929
Wellingborough,
Northants
UK
UNITED STATES
Weston Corp. Centre, Leasehold L164,337 2006 9,375
2690 Weston Road,
Weston, Florida 33331
USA
Reltec Corporation, Freehold Not applicable Not applicable 172,004
104 Wiley Road,
La Grange,
Georgia 30240
USA
4350 Weaver Parkway Leasehold L438,773 2008 39,640
Warrenville Illinois
60555
USA
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If current
leasehold, If leasehold, Approximate floor
Location Tenure rent per annum expiry of term area (square feet)
-------- ------ -------------- -------------- ------------------
956 North Broadway Freehold Not applicable Not applicable 126,416
Extended,
Greenville,
Mississippi, MS 38702
USA
Evergood, 325 Welcome Freehold Not applicable Not applicable 158,000
Center Blvd.
Welcome NC 27374
North Carolina
USA
1000 Marconi Drive, Freehold Not applicable Not applicable 574,286
Warrendale, PA 15086
Pennsylvania
USA
1755 North Collins Leasehold L389,995 2005 28,007
Boulevard,
Richardson, TEXAS
75080
Texas.
USA
D.25 CORP GROUP INDEBTEDNESS STATEMENT
At the close of business on 21 February 2003, the total indebtedness of the Corp
Group was as follows:
L million
---------
Secured loans 17
Unsecured loans 4,578
Unsecured overdrafts 1
Finance lease obligations 6
---------
4,602
=========
Included within the indebtedness listed in the table above is L4,181 million
that is guaranteed by plc. In addition, included within unsecured loans is L263
million relating to loan creditor balances with plc and fellow subsidiaries of
plc outside the Corp Group.
Save as disclosed above, and apart from intra-group liabilities and guarantees,
the Corp Group did not have outstanding as at 21 February 2003 any material loan
capital (whether issued or created but unissued), term loans, other borrowings
or indebtedness in the nature of borrowing (including bank overdrafts and
liabilities under acceptances (other than normal trade bills) or acceptance
credits, mortgages, charges, hire purchase commitments and obligations under
finance leases) or material guarantees.
At 21 February 2003 the Corp Group had contingent liabilities in total of L30
million. In the opinion of Corp, these contingent liabilities are not expected
to have a material adverse effect on the Corp Group.
The Corp Group is engaged in a number of legal proceedings relating, amongst
other things, to class shareholder actions and claims relating to contracts,
industrial injury and patent infringement. The Corp Group is defending these
claims, the estimated possible unprovided exposure of which is included in the
contingent liabilities total disclosed above, and Corp currently believes that
the claims are unlikely to be settled for amounts resulting in material cash or
other asset outflows.
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At the close of business on 21 February 2003, the Corp Group had the following
cash balances:
L million
---------
Secured 763
Collateral against bonding facilities 122
Held by captive insurance company 17
---------
Restricted cash 902
Other 181
---------
Total cash at bank and in hand 1,083
=========
Of the secured cash, L720 million relates to amounts held under an interim
security by the Group's Syndicate Banks and Bondholders and also by Barclays
Bank PLC (in its capacity as an ESOP Derivative Bank) granted on 13 September
2002. A further L27 million relates to cash deposited against ESOP Derivative
Banks for the Strategic Communications business and L16 million relates to cash
deposited against secured loans in Italy.
For the purposes of the above, amounts denominated in currencies other than
sterling have been translated into sterling at the exchange rates prevailing at
the close of business on 21 February 2003.
D.26 NO SIGNIFICANT CHANGE
Save for the operating results for the three months ended 31 December 2002
disclosed in Part A of Appendix 4, there has been no significant change in the
financial or trading position of the Corp Group or the plc Group since 30
September 2002, the date to which the last audited consolidated accounts of the
Corp Group and the plc Group were prepared as set out in Appendix 1 and Appendix
3 respectively.
D.27 CORP INCORPORATION AND REGISTERED OFFICE
Corp was incorporated under the name The General Electric Company (1900) Limited
on 27 September 1900 under the Companies Acts 1862 to 1898 as a private limited
company limited by shares and registered in London, England with number 67307.
On 24 August 1903, The General Electric Company (1900) Limited changed its name
to The General Electric Company, Limited, on 29 November 1968 to The General
Electric and English Electric Companies Limited and on 17 September 1970 to The
General Electric Company Limited. On 4 January 1982, The General Electric
Company Limited was re-registered as a public limited company under the
Companies Acts 1948 to 1980 and became The General Electric Company, p.l.c. On 7
March 2000, The General Electric Company, p.l.c. changed its name to Marconi
Corporation plc.
The registered office of Corp and plc is at New Century Park, P.O. Box 53,
Coventry, Warwickshire, CV3 1HJ. Corp and plc have a head office at Regent's
Place, 338 Euston Road, London, NW1 3BT.
D.28 CORP SHARE CAPITAL
Information as to the authorised, issued and fully paid share capital of Corp is
set out in Appendix 13.
D.29 MATERIAL SHAREHOLDINGS IN CORP
Immediately following the Effective Date of the Corp Scheme the name of each
person (other than the Escrow Trustee and its nominee) who, directly or
indirectly, is expected to be interested in 3 per cent. or more of Corp's
ordinary share capital, and the amount of such person's interest is expected to
be as set out below. The Escrow Trustee's nominee is expected to hold up to 14
per cent. of the New Shares in issue immediately after the Effective Date, such
shares being held on trust for Scheme Creditors as provided in the Schemes and
the Escrow and Distribution Agreement. The Escrow Trustee's nominee has
instructions not to exercise any voting rights conferred by those shares. These
interests have been calculated by Corp based solely on the information
concerning Scheme Creditors (other than the Trustees and disputed creditors)
with Known Claims set out in Schedule 3 to each of the Schemes.
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Percentage of ordinary
Name No. of Corp Shares share capital of Corp
---- ------------------ ----------------------
Appaloosa Investment Ltd Partnership 48,717,593 4.87%
Cerebrus Partners LP New York 34,058,285 3.41%
Chase Manhattan Bank 33,843,309 3.38%
Neither Corp nor plc makes any representation as to whether or not any of the
above persons will retain, or whether any such person or any other person will
have acquired, an interest in any Known Claim at the Effective Date, whether any
such Known Claim will be Admitted in whole or part under the relevant Scheme or
whether any New Shares which any such person may receive under the Schemes will
be retained by such person after the Effective Date. Accordingly the above
calculation should not be relied upon as an accurate indication of the likely
material shareholdings in Corp on or after the Effective Date.
The holdings of Bonds by Bondholders (and therefore their prospective holdings
of New Shares) cannot be determined on the basis of the Known Claims set out in
Schedule 3 to each of the Schemes.
Save as disclosed in this Part D.29, Corp is not aware of any interest which
will represent 3 per cent. or more of the issued ordinary share capital of Corp
following the Effective Date of the Corp Scheme.
So far as Corp is aware, no person or persons, directly or indirectly, jointly
or severally exercise or could exercise control over Corp.
D.30 TAX
A description of certain UK and US tax consequences for Scheme Creditors and
Bondholders of implementation of the Schemes and of holding the Scheme
Consideration is set out in Appendix 17. Scheme Creditors and Bondholders in
jurisdictions other than the UK and the US are strongly urged to consult their
own professional advisers to determine their own tax position.
D.31 INSURANCE
The Group maintains the types of property and liability insurance which Corp and
plc regard as appropriate given the nature of the risks run in the course of its
business, and for amounts which they consider adequate. When considering the
appropriateness of insurance cover, the Group has made detailed assessments of
insurable risks using both in-house professionals and the advice of insurance
brokers. The Group has determined what it believes to be the appropriate level
of cover having regard, among other things, to the Group's loss record, the
industry in which it operates, its risk tolerance level, the cost of cover
relative to the risk, customer and legal requirements and any relevant and
available information on the levels of cover typically purchased by other
comparable companies which operate in the Group's industry.
D.32 ENVIRONMENTAL AND OTHER REGULATIONS
ENVIRONMENTAL AND EMPLOYEE HEALTH AND SAFETY MATTERS
The Group is subject to increasingly stringent regulation under various UK, US,
EU and other international, national and local laws and regulations relating to
employee safety and health, and environmental protection, including law and
regulations governing air emissions, water discharges and the use, management
and disposal of hazardous substances.
One of the many environmental laws affecting the Group in the US is the
Comprehensive, Environmental Response, Compensation, and Liability Act, which is
the primary federal statute governing clean-up of contaminated properties.
CERCLA can impose joint, several and retroactive liability for the costs of
investigating and cleaning up contaminated properties, without regard to fault
or the legality of the original conduct. Potentially liable parties under CERCLA
can include current and former owners or operators of a site, as well as those
who generate or arrange for the disposal of hazardous substances. Environmental
laws in other jurisdictions can also impose significant clean-up liabilities.
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The Group is currently conducting investigation and clean-up at approximately 20
contaminated sites, principally in the US including four clean ups pursuant to
obligations imposed under CERCLA. The remaining sites are being cleaned up
voluntarily in connection with a prior property sale or purchase, or pursuant to
government directive. The Group estimates the total cost to clean up all of
these sites will be between approximately L10 million and L20 million. A number
of these and other current and former Group sites were associated with hazardous
substance use and may give rise to unforeseen liabilities. The Group could
therefore incur additional clean-up costs upon the discovery of new
contamination at these or other sites for which the Group may be found to be
responsible, either directly under CERCLA or other laws, or through a
contractual indemnity obligation as the result of a prior property or business
sale. The Group also could incur additional costs as a result of any related
personal injury or property damage claims. Although such additional costs, if
any, could be substantial, the Group is not aware of any material claims and
does not expect future clean-up or related costs to materially affect the Group.
See Appendix 20 for a description of a toxic tort claim against Plessey
Precision Metals. This claim is in its early stages and no estimate of liability
can be formed at this point. Litigation is by its nature an unpredictable form
of risk and is disclosed wherever unliquidated damages are sought but no
information currently available to the Group indicates a material liability of
Plessey Precision Metals in this matter.
The European Commission has issued two directives which will require member
states of the EU to meet certain targets for collection, re-use and recovery of
waste electrical and electronic equipment. It is likely that these obligations
will be achieved through legislation placing the responsibility for meeting
these obligations on equipment producers. Producers will also be required to
phase out certain hazardous materials from the equipment. This legislation could
significantly increase costs to producers of electrical and electronic
equipment.
The Group regularly audits its facilities' compliance with employee safety and
environmental requirements. The Group has not incurred material capital
expenditures for environmental, health or safety matters during the past three
financial years, nor does the Group anticipate having to incur material capital
expenditures during the current or the succeeding financial years. Although
environmental costs cannot be predicted with certainty, the Group believes that
costs relating to non-compliance or liability under current environmental,
health and safety laws and regulations will not have a material adverse effect
on the Group's financial condition or results of operations as a whole.
OTHER GOVERNMENT REGULATION
The Group's products are subject to industry-specific government regulation and
legislation in the United States, the EU and throughout the world. For example,
the Group's Network Equipment business must comply with US Federal
Communications Commission requirements and regulations and other safety
regulations governing communications products sold in the United States. The
Group's businesses would suffer if they failed to obtain or lost the
certifications, clearances and authorisations required to participate in new or
existing projects. Further, the Group could be subject to fines, criminal
sanctions or the revocation of important licences and certifications if it fails
to comply with government regulations. The Group believes that any
non-compliance or liability under current government regulations will not have a
material adverse effect on the Group's financial condition or results of
operation as a whole.
D.33 NO WAIVER OF DIVIDENDS
There are no arrangements in existence under which future dividends of Corp are
to be waived or agreed to be waived.
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D.34 DOCUMENTS AVAILABLE FOR INSPECTION
Copies of the following documents will be available for inspection at the office
of Allen & Overy, One New Change, London EC4M 9QQ during normal business hours
on any weekday (Saturdays, Sundays and public holidays excepted) up to the date
of the Scheme Meetings:
a. this document;
b. the Prospectus;
c. the existing memorandum and articles of association of Corp and the
Memorandum and Articles (being the proposed amended Memorandum, and
the proposed new Articles of Corp);
d. the memorandum and articles of association of plc;
e. the audited accounts of Corp for the three financial years ended 31
March 2000, 31 March 2001 and 31 March 2002;
f. the audited statutory accounts of plc for the financial years ended
31 March 2001 and 31 March 2002 and the audited interim financial
statements for the six months ended 30 September 2002;
g. the material contracts referred to in Appendix 19 (and drafts of
material contracts referred to in Appendix 19, which will be
replaced with executed versions as those contracts are executed);
h. the letters of current intention to support the Restructuring which
are referred to in Part D.1 of this Section and which are described
in more detail in paragraph 6 of Appendix 19;
i. all service contracts in relation to the Corp Directors;
j. all service contracts in relation to the plc Directors; and
k. the rules of the employee share schemes referred to in Part D.10 of
this Section.
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E. MATERIAL INTERESTS OF DIRECTORS AND TRUSTEES
E.1 DIRECTORS
The identities of the directors of Corp and plc are set out in Part A.10 of this
Section.
None of the directors of Corp and plc has any material interest (whether as
director, member, optionholder, creditor or otherwise) in the proposed
Restructuring except as disclosed below. Save as disclosed in this Part E.1 the
effect of the proposed Restructuring on interests of directors of Corp and plc
will not be different from the effect on similar interests of other persons.
DIRECTORS' SERVICE AGREEMENTS AND EMOLUMENTS
The executive directors' contracts are with Corp. New forms of service agreement
have been executed between Corp and each of Michael Parton and Michael Donovan,
to be effective on the Effective Date. The summary below refers to the
agreements (a) as they currently stand and (b) as they will be on and after the
Effective Date.
a. Directors' current service agreements and emoluments
The following executive directors currently have service agreements with Corp as
follows:
MICHAEL PARTON, as Chief Executive Officer, has a service agreement dated 2 May
2002 with plc, which was novated to Corp on 10 January 2003. The agreement lasts
until Mr Parton's sixty-second birthday but may be terminated earlier by either
party giving to the other twelve months' notice. The basic salary is L525,000
per annum, which is reviewable on 1 July 2003 (and thereafter annually) and Mr
Parton is eligible to participate in such incentive and stock option plans as
are generally offered to employees of Mr Parton's status. His agreement provides
for participation in a company car scheme and private medical healthcare for
himself and his family.
Mr Parton is entitled to participate in UK Plan (described in Part D.11 of this
Section) to which he contributes 3 per cent. of his basic salary (up to a
maximum of 15 per cent. of the Inland Revenue earnings cap, which is L97,200 in
the 2002/2003 tax year). As a consequence of the earnings cap restricting the
amount an employer can contribute into an exempt approved pension plan, Mr
Parton has a funded unapproved retirement benefits scheme (a "FURBS"), to which
Corp contributes an amount equal to 21 per cent. of his basic salary (with a
further 14 per cent. of his basic salary being paid to Mr Parton). In addition,
and as compensation for Mr Parton changing a defined benefit pension arrangement
into a defined contribution plan in 2002, Corp has agreed to make net
contributions of L88,250 to the FURBS and associated non-pensionable allowances
of L58,833.33 to Mr Parton himself on 15 April 2003, 15 July 2003, 15 October
2003 and 15 January 2004. The payments are conditional on Mr Parton remaining in
employment with Corp and if his employment is terminated (other than for cause),
any payments which have not been made on or before the termination date will
become due immediately. FURBS contributions for Mr Parton are paid to the FURBS
and to Mr Parton himself in the ratio 60:40. This is because the contributions
are taxable benefits, so the payment to Mr Parton is to offset the higher income
tax charge for which he is liable. The FURBS documents oblige Corp to fund an
unapproved life assurance scheme, which is to provide a lump sum on death in
service of four times basic salary and a widow's pension of four-ninths of final
pensionable salary.
The service agreement contains a provision entitling Corp to make a payment in
lieu of notice (a "PILON" payment) if it terminates the service agreement
without giving Mr Parton 12 months' notice. The PILON payment comprises the
following amounts for the notice period (or the unexpired balance of it: (i)
base salary, (ii) 100 per cent. of contributions to his FURBS, (iii) the cost
(to the employer) of providing benefits (other than bonus and pension) (which
cost Corp may set at 10 per cent. of Mr Parton's base salary) and (iv) 80 per
cent. of average core bonuses awarded in the last three completed financial
years immediately preceding the financial year in which the employment
terminates (pro rata for the PILON period).
In addition, the service agreement includes a change of control clause which
defines "Change of Control" as (a) the acquisition by any person or persons of
the power to control the composition of the board of directors or direct the
conduct of the company's business or (b) the determination by the remuneration
committee that a change of control has occurred. If within 12 months of a Change
of Control (i) Mr Parton's employment is terminated (other than for cause or
following prolonged sickness), or (ii) he ceases to be a director (other than
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through voluntary resignation or as a consequence of termination for
cause/prolonged sickness), or (iii) Mr Parton terminates his employment for one
or more "good reasons" (comprising material reduction of his status following
changes by Corp of his duties, a failure by Corp materially to comply with its
contractual obligations or a failure by Corp to enter into a new arrangement on
the same terms) then Mr Parton will be entitled to liquidated damages. The
liquidated damages comprise: his basic salary for his notice period, his pension
loss (comprising 166 per cent. of the cash equivalent transfer value of the
pension arrangements he would have accrued in the notice period under the main
UK Plan plus 100 per cent. of the contributions which would have been paid to
his FURBS), the cost to Corp providing other benefits (excluding pension and
bonus) in the notice period (which cost Corp may determine at 10 per cent. of Mr
Parton's base salary), a bonus equal to his basic annual salary plus the value
of share rights foregone. Any payment will be subject to tax.
There is a provision to place Mr Parton on garden leave if notice to terminate
is served by either party. Garden leave does not trigger the PILON payment. Mr
Parton is subject to post-termination protective covenants relating to
non-solicitation of clients and managerial or technical employees, non-dealing
with clients and not competing with the Group's business. All the covenants are
stated to last for 12 months.
Mr Parton is a member of the Retention and Emergence plan (described in Part
D.10 of this Section). The plan promises a bonus equal to 150 per cent. of his
base salary, paid in four equal tranches, two of which have been paid. The third
tranche, payable after restructuring, has yet to be paid but the fourth tranche
is to be waived.
MICHAEL DONOVAN, as Chief Operating Officer, has a service agreement dated 1
June 2002 with plc, whose obligations were guaranteed by Marconi Communications
Limited. The agreement was novated to Corp on 17 March 2003 (with Marconi
Communications Limited continuing to act as guarantor). The agreement lasts
until Mr Donovan's 62nd birthday but may be terminated earlier by Corp on 12
months' notice and by Mr Donovan on 6 months' notice. The basic salary is
L400,000 per annum, which is reviewable on 1 July 2003 (and thereafter
annually). Mr Donovan is eligible to participate in such incentive and stock
option plans as are generally offered to employees of Mr Donovan's status. His
agreement provides for a company car and private medical health care for himself
and his family.
Mr Donovan is entitled to participate in the UK Plan (described in Part D.11 of
this Section) to which he contributes three per cent. of his basic salary (up to
a maximum of 15 per cent. of the Inland Revenue earnings cap). As a consequence
of the earnings cap restricting the amount an employer can pay into an exempt
approved pension plan, Mr Donovan also has a funded unapproved retirement
benefits scheme (a "FURBS"). The documentation setting out Mr Donovan's FURBS
was amended by the terms of his service agreement (detailed below). Mr Donovan's
FURBS is funded on a defined benefit basis, with projected benefits of
two-thirds of his final pensionable salary. The current contribution rate (to be
reviewed in May 2003) is 39 per cent. of his base salary (although while Mr
Donovan is posted to the US, the rate is 46 per cent., owing to local tax
legislation). If Mr Donovan leaves service on the grounds of ill-health and
receives an immediate ill-health pension from the UK Plan, the total pension
payable to him will be two-thirds of his final pensionable salary of the date of
leaving. The actual FURBS documentation refers to a defined contribution
arrangement (based on 35 per cent. of that part of Mr Donovan's salary in excess
of the earnings cap). In addition, it contains an unfunded promise to make up
the difference (if any) between the level of benefits under the UK Plan and the
FURBS and the benefits to which Mr Donovan would have been entitled had he
remained in two pension schemes operated by group companies of his previous
employer (BAE Systems). A decision was taken to fund the FURBS on a defined
benefit basis rather than to risk the unfunded top-up obligation being called
upon and Mr Donovan's service agreement (which sets out the defined benefit
basis of the plan) amends the earlier, defined contribution wording. FURBS
contributions for Mr Donovan are paid into the FURBS and to Mr Donovan himself
in the ratio of 60:40 (or as necessary under US tax law). This is because the
contributions are taxable benefits, so the payment to Mr Donovan is to offset
the higher income tax charge for which he is liable. The FURBS documents oblige
Corp to fund an unapproved life assurance scheme, which is to provide a lump sum
on death in service or four times basic salary and a widow's pension of
four-ninths of final pensionable salary.
The service agreement contains a provision entitling Corp to make a payment in
lieu of notice if it terminates the service agreement without giving Mr Donovan
12 month's notice. The PILON payment comprises the same elements as Mr Parton's
agreement (described above) save that the compensation for loss of pension
benefits differs. Instead of receiving 100 per cent. of the employer
contribution to his FURBS, Mr Donovan is entitled to
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an amount equal to 166 per cent. of the cash equivalent transfer value of the
additional pension benefits (net of income tax) which Mr Donovan would have
accrued in the UK Plan if he had been asked to work his notice. In addition, Mr
Donovan would be entitled to an amount equal to 166 per cent. of the net
contributions which Corp would have paid to his FURBS during the unexpired
noticed period.
In addition, the contract includes a change of control clause. "Change of
control" is defined as (i) the acquisition by a person of the power to control
the composition of the board (or to secure the company's affairs are conducted
in accordance with that person's wishes) or (ii) the persons who were on Corp's
board of directors at the date of the agreement (or persons subsequently
appointed by two-thirds of those directors) (the "Incumbent Board") ceasing for
any reason to constitute the majority of Corp's board, or (iii) a "Business
Reconstruction" occurs (widely defined to include any disposition of all or
substantially all the of the equity in or the business and/or assets of Corp the
company to any person to other than another group company (or any other similar
transaction)). The definition of Business Reconstruction is, however, qualified
so that, for example, there is no trigger if there is an entity immediately
resulting from the reorganisation which has shareholders who (before and after
the reconstruction) hold more than 50 per cent. of the shares (in similar
proportions), does not have one person holding 20 per cent. or more of the
voting rights and where the majority of the board of the resulting entity were
members of the Incumbent Board who decided upon the reconstruction, or (iv) the
company's shareholders approve the dissolution of the company (except pursuant
to a Business Reconstruction fulfilling certain criteria). If within 12 months
of a change of control, Mr Donovan's employment is terminated or he resigns for
one or more specified "good reasons", he will be entitled to liquidated damages.
The damages are calculated on the same basis as the PILON payment, save that
there is compensation for loss of share schemes rights and there is an assumed
bonus equal to one year's salary.
There is provision to place Mr Donovan on garden leave if notice to terminate
was served by either party. Garden leave does not trigger the PILON payment. Mr
Donovan is subject to post-termination protective covenants relating to
non-solicitation of clients and managerial or technical employees, non-dealing
with clients and not competing with the Group's business. All the covenants are
stated to last for twelve months, save for the non-compete clause which lasts
for six months.
Mr Donovan also has an arrangement relating to his location in the United
States, which contains expatriate arrangements to cover relocation, housing,
exchange rate fluctuation, flights for himself and his family and matters common
to expatriate terms for senior executives.
Mr Donovan is a member of the Retention and Emergence Plan (described in Part
D.10 of this Section). The plan promises a bonus equal to 150 per cent. of his
base salary, paid in four each tranches, two of which have been paid. The third
tranche, payable after restructuring, has yet to be paid but the fourth tranche
is to be waived.
CHRISTOPHER HOLDEN, as Interim Chief Financial Officer, has a service agreement
with Corp dated 13 December 2002 (as varied by a deed dated 28 January 2003).
His role is as interim chief financial officer of Corp and plc, but Corp can
re-assign him to another position, so long as it is commensurate with his status
and seniority. The contract is for a fixed term, commencing on 14 November 2002
and ending on 30 June 2003. The basic salary is L25,000 per month, inclusive of
directors' fees. Mr Holden is entitled to join the UK Plan but there are no
other pension or incentive arrangements set out in his contract. Corp is
entitled to terminate Mr Holden's employment immediately by making a payment in
lieu of the base salary he would have otherwise earned in the balance of his
fixed term. Mr Holden is subject to post termination protective covenants, all
of which are to last for six months following the termination date. The
covenants cover non-solicitation of clients, non-dealing with clients,
non-poaching of managerial or technical employees and non competing with Group
companies.
JOHN DEVANEY, as Chairman, has a service agreement with Corp dated 14 March 2003
to which plc is also a party to take the benefits of Mr Devaney's covenants. The
agreement is effective on and from 16th December 2002. All payments and benefits
due to Mr Devaney are payable by Corp. The agreement is terminable by either
party on three months' notice and terminates automatically on Mr Devaney's 65th
birthday. Mr Devaney's salary is L250,000 per annum and he is required to devote
three days per week to his duties. Mr Devaney is entitled to participate in the
Senior Management Share Option Plan and to membership of the UK Plan. His
benefits comprise private medical insurance, life insurance, company car and
fifteen working days' holiday per annum.
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The agreement lists the companies in respect of which Mr Devaney is already a
director and permits him to continue those other interests, so long as they do
not affect his obligations under the service agreement. Consent may not be
unreasonably withheld or delayed should Mr Devaney wish to be interested in
companies substituted for, or additional to, the agreed list of companies from
time to time provided that his duties are not adversely affected and that he
does not contravene the overriding obligation not to hold more than 5 per cent
in any class of securities in any competing business.
There are no clauses relating to payments in lieu of notice or change of control
and there are no restrictive covenants.
Each of the other Directors of Corp and plc has terms of appointment as follows:
KENT ATKINSON was appointed a non-executive director of Corp and plc on 16
December 2002 for an initial term of three years (subject to the Articles and
described below). Mr Atkinson's duties include chairmanship of the audit and
membership of the nomination and remuneration committees. His fee is L30,000 per
annum (which includes the fee payable as a non-executive director of plc) based
on him spending two days per month on his duties for both companies. Mr Atkinson
will also be entitled to a fee of L15,000 per annum for so long as he serves as
chairman of the audit committee. Although he will not normally be expected to
provide his services for more than 52 days per annum, he is entitled to a fee of
L1,500 per day for each additional day worked over the two day per month
threshold. These fees are reviewable annually on 1 July and Corp will reimburse
business expenses. Mr Atkinson will also be entitled to an advance fee for each
of the first three years of his appointment. The fee payable will be L100,000
for the first year and L30,000 for each of the next two years which will be net
of any tax and national insurance contributions. The net amount of each year's
fee will be invested in Corp Shares. Mr Atkinson has agreed to hold the Corp
Shares acquired with the first year's advance fee for three years from the date
of his appointment and the Corp Shares acquired with each of the next two years'
payment for at least one year. If Mr Atkinson's appointment terminates in any
year for which an advance fee has been paid he is obliged to repay a pro-rated
amount of that year's fee. There is no other remuneration nor benefits.
DEREK BONHAM was appointed as a non-executive director of plc on 10 April 2001
and became interim Chairman on 4 September 2001. As from 31 March 2002, his fee
for this role was fixed at L180,000 per annum and his benefits include
reimbursement of expenses. He ceased to be Chairman on 16 December 2002 and it
is currently anticipated that he will remain a non-executive director of plc
until implementation of the plc scheme when he will resign as a director of plc.
He is currently chairman of plc's remuneration committee. Mr Bonham has agreed
that his fee as a non-executive director of plc will be paid by Corp (in
consideration of the value to Corp of Mr Bonham agreeing to continue providing
his services to plc).
WERNER KOEPF was appointed a non-executive director of Corp and plc on 16
December 2002 for an initial term of three years (subject to the Articles and
described below). Mr Koepf's duties include membership of the audit,
remuneration and nomination committees. His fee is L30,000 per annum (which
includes the fee payable as a non-executive director of plc) based on him
spending two days per month on his duties for both companies. Although he will
not normally be expected to provide his services for more than 52 days per
annum, he is entitled to a fee of L1,500 per day for each additional day worked
over the two day per month threshold. These fees are reviewable annually on 1
July and Corp will reimburse business expenses. Mr Koepf will also be entitled
to an advance fee for each of the first three years of his appointment. The fees
payable will be L100,000 for the first year and L30,000 for each of the next two
years which will be net of any tax and national insurance contributions. The net
amount of each year's fee will be invested in Corp Shares. Mr Koepf has agreed
to hold the Corp Shares acquired with the first year's advance fee for three
years from the date of his appointment, and the Corp Shares acquired with each
of the next two year's payment for at least one year. If Mr Koepf's appointment
terminates in any year for which an advance fee has been paid he is obliged to
repay a pro-rated amount of that year's fee. There is no other remuneration nor
benefits.
KATHLEEN RUTH FLAHERTY'S appointment as a non-executive director of Corp will
take effect on Listing of the New Shares, the New Notes and the Warrants for an
initial term of three years (subject to the Articles and as described below). Ms
Flaherty's duties include membership of the remuneration and nomination
committees. Her fee is L30,000 per annum based on her spending two days per
month on her duties for Corp. She is entitled to a fee of L1,500 per day for
each additional day over the two days per month threshold. Her fee is reviewable
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annually on 1 July and Corp will reimburse business expenses. Ms Flaherty will
also be entitled to an advance fee of L30,000 for each of the first three years
of her appointment which will be net of any tax and national insurance
contributions. The net amount of each year's fee will be invested in Corp
Shares. Ms Flaherty has agreed to hold the Corp Shares acquired with the first
year's advance fee for three years from the date of her appointment and the Corp
Shares acquired with each of the next two years' payment for one year. If Ms
Flaherty's appointment terminates in any year for which an advance fee has been
paid she is obliged to repay a pro-rated amount of that year's fee. There is no
other remuneration nor benefits.
IAN MCMASTER CLUBB'S appointment as a non-executive director of Corp will take
effect on Listing of the New Shares, the New Notes and the Warrants for an
initial term of three years (subject to the Articles and as described below). Mr
Clubb's duties include chairmanship of the remuneration committee and membership
of the audit and nomination committees. His fee is L30,000 per annum based on
his spending two days per month on his duties for Corp. Mr Clubb will also be
entitled to a fee of L10,000 per annum for so long as he serves as chairman of
the remuneration committee. He is entitled to a fee of L1,500 per day for each
additional day over the two day per month threshold. His fee is reviewable
annually on 1 July and Corp will reimburse business expenses. Mr Clubb will also
be entitled to an advance fee of L30,000 for each of the first three years of
his appointment which will be net of any tax and national insurance
contributions. The net amount of each year's fee will be invested in Corp
Shares. Mr Clubb has agreed to hold the Corp Shares acquired with the first
year's advance fee for the three years from the date of his appointment and the
Corp Shares acquired with each of the next two years' payment for one year. If
Mr Clubb's appointment terminates in any year for which an advance fee has been
paid he is obliged to repay a pro-rated amount of that year's fee. There is no
other remuneration nor benefits.
The existing articles provide for the removal of a director by (amongst other
causes) the written requirement of at least three-quarters of the other Corp
Directors or by ordinary resolution of the shareholders. Conditional on the
allotment of the New Shares, new articles of association will be adopted which
amend these provisions by requiring special notice to be given of the ordinary
resolution and furthermore, providing for the removal of a director by
extraordinary resolution.
For the financial year ended 31 March 2002, the aggregate remuneration
(including salaries, fees, pension contributions, shares payments and benefits
in kind) granted to the Directors by plc (no fees were payable in respect of
Corp) was approximately L2,287,000. It is estimated that for the financial year
ending 31 March 2003, under arrangements in force at the date of this document,
the aggregate remuneration of the Directors of Corp will be approximately
L5,165,000.
Save for an agreement by Michael Parton and by Michael Donovan to waive the
first two payments under an annual incentive bonus plan (20 per cent. of basic
salary) and the last payment under of the R&E Plan (37.5 per cent. of basic
salary), there is no arrangement under which a Director has waived or agreed to
waive future emoluments nor have there been any such waivers during the
financial year immediately preceding the date of this document.
There are no outstanding loans or guarantees granted or provided by any member
of the Group to, or for the benefit of, any of the Directors.
b. Directors' new service agreements
With effect from the Effective Date, service agreements of the following
Executive Directors with Corp replace their existing service agreements and will
take effect as follows:
MICHAEL PARTON, as Chief Executive Officer, will have a service agreement which
will take effect from the Effective Date. The agreement will last until Mr
Parton's sixty-second birthday but may be terminated earlier by Corp giving
twelve months' notice and by Mr Parton giving six months' notice. The basic
salary will be L525,000 per annum (inclusive of directors' fees), which will be
reviewable on 1st July 2004 (and thereafter annually) and Mr Parton is eligible
to participate in the senior management share option plan. His agreement
provides for participation in a company car scheme and private medical
healthcare for himself and his family.
Mr Parton will be entitled to participate in the UK Plan (described in Part D.11
of this Section) to which he contributes 3 per cent. of his basic salary (up to
a maximum of 15 per cent. of the Inland Revenue earnings cap,
159
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which is L97,200 in the 2002/2003 tax year). As a consequence of the earnings
cap restricting the amount an employer can contribute into an exempt approved
pension plan, Mr Parton will continue to have a funded unapproved retirement
benefits scheme, to which Corp will contribute an amount equal to 21 per cent.
of his basic salary (with a further 14 per cent. of his basic salary being paid
to Mr Parton). In addition, and as compensation for Mr Parton changing a defined
benefit pension arrangement into a defined contribution plan in 2002, Corp has
agreed to make net contributions of L88,250 to the FURBS and associated
non-pensionable allowances of L58,833.33 to Mr Parton himself on 15 April 2003,
15 July 2003, 15 October 2003 and 15 January 2004. The payments are conditional
on Mr Parton remaining in employment with Corp and if his employment is
terminated (other than for cause), any payments which have not been made on or
before the termination date will become due immediately. FURBS contributions for
Mr Parton are paid to the FURBS and to Mr Parton himself in the ratio 60:40.
This is because the contributions are taxable benefits, so the payment to Mr
Parton is to offset the higher income tax charge for which he is liable. The
FURBS documents oblige Corp to fund an unapproved life assurance scheme, which
is to provide a lump sum on death in service of four times basic salary and a
widow's pension of four-ninths of final pensionable salary.
The service agreement will contain a provision entitling Corp to make a payment
in lieu of notice if it terminates the service agreement without giving Mr
Parton 12 months' notice. The amount of the payment is at the reasonable
discretion of the remuneration committee which is to consider the relationship
between the Group's and Mr Parton's performance. The maximum PILON payment may
not exceed the aggregate of the following amounts for the notice period (or the
unexpired balance of it): (i) base salary (ii) 166 per cent. of the cash
equivalent transfer value of the pension contributions (net of tax) which would
have accrued in the UK Plan; (iii) 100 per cent. of the gross contributions
which Corp would have paid in respect of Mr Parton's FURBS and (iv) the cost (to
Corp) or providing benefits (other than bonus, pension and incentive
entitlements) (which cost Corp may set at 10 per cent. of Mr Parton's base
salary). If Corp does not make a full PILON payment (i.e. if the remuneration
committee reduces the amount payable), Mr Parton's protective covenants will
enure for a proportionately shorter period after the termination of his
employment.
In addition, the service agreement will include a change of control clause which
provide Mr Parton with a right to a payment if, following the Restructuring,
there is a change of control of Corp and one of the events described below
occurs. Change of control is defined as the acquisition of the power to control
the composition of the board of Corp or (by a variety of means) that its affairs
are conducted in a certain manner. If, immediately following an acquisition of
Corp's shares, the shares in the acquiring company are all held by the holders
of the shares of Corp immediately prior to the acquisition in materially the
same proportion as prior to the acquisition, then that will not constitute a
change of control. If the terms of the clause are triggered, Mr Parton will be
entitled to a payment calculated on the same basis as the PILON payment. The
events are:
(a) Corp or any other Group Company terminating employment (other than
for cause);
(b) Mr Parton ceasing to be a director of Corp other than by reason of
his voluntary resignation; or
(c) if Mr Parton terminates the service agreement for a "good reason".
The good reasons are one or more of the following:
- a failure to maintain Mr Parton in the role (or a substantially
equivalent position, with Corp or any Group Company) which he
held immediately prior to the change of control;
- an adverse change of material consequence in the nature or scope
of the authorities, powers, functions, responsibilities or
duties attached to the position which Mr Parton held immediately
prior to the change of control;
- a reduction in the aggregate of Mr Parton's basic annual salary
and share based incentives and other benefits received from Corp
or any Group Company, or the termination or denial of Mr
Parton's rights to employee benefits or a substantial reduction
in the scope or value thereof where such reduction is not
applied to other employees of a similar status and seniority to
Mr Parton;
- a change in the scope of the business or other activities for
which Mr Parton was responsible immediately prior to the change
of control, which has rendered Mr Parton substantially
160
I. EXPLANATORY STATEMENT
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SECTION 2: FURTHER EXPLANATION OF THE RESTRUCTURING -- PART E
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unable to carry out, has substantially hindered Mr Parton's
performance of, or has caused him to suffer a substantial
reduction in, any of the authorities powers, functions,
responsibilities or duties attached to his position held;
- Corp requiring Mr Parton to have his principal location of work
changed to any location that is in excess of 25 miles from its
location immediately prior to the change of control without his
prior written consent; or
- any material breach of the service agreement by Corp or any
successor.
In each case of a "good reason", however, Mr Parton must first have notified
Corp of the act or omission and Corp must have failed within 10 calendar days to
gain Mr Parton's agreement to any change or must in that period have remedied
the act or omission.
There will be a provision to place Mr Parton on garden leave if notice to
terminate is served by either party (without triggering any PILON payment). Mr
Parton is subject to post-termination protective covenants relating to
non-solicitation of clients and managerial or technical employees, non-dealing
with clients and not competing with the Group's business. All the covenants are
stated to last for 12 months, save for that relating to non-competing, which
lasts for six months. See the comments relating to PILON payments for a
potential reduction in the periods of such protective covenants.
Mr Parton is a member of the Retention and Emergence Plan (described in Part
D.10 of this Section). The plan promises a bonus equal to 150 per cent. of his
base salary, paid in four each tranches, two of which have been paid. The fourth
tranche is to be waived.
MICHAEL DONOVAN, as Chief Operating Officer, will have a service agreement with
Corp which will take effect on the Effective Date. The agreement will last until
Mr Donovan's sixty-second birthday but may be terminated earlier by Corp giving
twelve months' notice and by Mr Donovan giving six months' notice. The basic
salary is L400,000 per annum (inclusive of director's fees), which will be
reviewable on 1 July 2004 (and thereafter annually) and Mr Donovan will be
eligible to participate in the senior management share option plan. His
agreement will provide for participation in a company car scheme and private
medical healthcare for himself and his family.
Mr Donovan will be entitled to participate in the UK Plan (described in Part
D.11 of this Section) to which he contributes 3 per cent. of his basic salary
(up to a maximum of 15 per cent. of the Inland Revenue earnings cap). As a
consequence of the earnings cap restricting the amount an employer can pay into
an exempt approved pension plan, Mr Donovan also will have a funded unapproved
retirement benefits scheme. Mr Donovan's FURBS is funded on a defined benefit
basis, with projected benefits of two-thirds of his final pensionable salary.
The pension will be made up from Mr Donovan's benefits under the UK Plan, the
FURBS, two BAE pension plans and any other retained benefits he may have. If Mr
Donovan retires on or after his fifty-fifth birthday, there will be no actuarial
reduction in the value of his benefits. The current contribution rate (to be
reviewed in May 2003) is 39 per cent. of his base salary (although while Mr
Donovan is posted to the US, the rate is 46 per cent., owing to local tax
legislation). If Mr Donovan leaves service on the grounds of ill-health and
receives an immediate ill-health pension from the UK Plan, the total pension
payable to him will be two-thirds of his final pensionable salary of the date of
leaving. FURBS contributions for Mr Donovan are paid into the FURBS and to Mr
Donovan himself in the ratio of 60:40 (or as necessary under US tax law). This
is because the contributions are taxable benefits, so the payment to Mr Donovan
is to offset the higher income tax charge for which he is liable. The FURBS
documents oblige Corp to fund an unapproved life assurance scheme, which is to
provide a lump sum on death in service or four times basic salary and a widow's
pension of four-ninths of final pensionable salary.
The service agreement will contain a provision entitling Corp to make a payment
in lieu of notice if it terminates the service agreement without giving Mr
Donovan 12 months' notice. The PILON payment comprises the following amounts for
the notice period (or the unexpired balance of it): (i) base salary (ii) 166 per
cent. of the cash equivalent transfer value of the pension contributions (net of
tax) which would have accrued in the UK Plan; (iii) 166 per cent. of the net
contributions which Corp would have paid into Mr Donovan's FURBS and (iv) the
161
I. EXPLANATORY STATEMENT
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SECTION 2: FURTHER EXPLANATION OF THE RESTRUCTURING -- PART E
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cost (to Corp) or providing benefits (other than bonus, pension and incentive
entitlements) (which cost Corp may set at 10 per cent. of Mr Donovan's base
salary). The PILON payment would be taxable in Mr Donovan's hands.
In addition, the service agreement will include a change of control clause which
provide Mr Donovan with a right to a payment if, following the Restructuring,
there is a change of control of Corp and one of the events described below
occurs. Change of control is defined as the acquisition of the power to control
the composition of the board of Corp or (by a variety of means) that its affairs
are conducted in a certain manner. If, immediately following an acquisition of
Corp's shares, the shares in the acquiring company are all held by the holders
of the shares of Corp immediately prior to the acquisition in materially the
same proportion as prior to the acquisition, then that will not constitute a
change of control. If the terms of the clause are triggered, Mr Donovan will be
entitled to a payment calculated on the same basis as the PILON payment. The
events are:
(a) Corp or any other Group Company terminating employment (other than
for cause);
(b) Mr Donovan ceasing to be a director of Corp other than by reason of
his voluntary resignation; or
(c) if Mr Donovan terminates the service agreement for a "good reason".
The good reasons are one or more of the following;
- a failure to maintain Mr Donovan in the role (or substantially
equivalent position, with Corp or any Group Company) which he
held immediately prior to the change of control;
- an adverse change of material consequence in the nature or scope
of the authorities, powers, functions, responsibilities or
duties attached to the position which Mr Donovan held
immediately prior to the change of control;
- a reduction in the aggregate of Mr Donovan's basic annual salary
and share based incentives and other benefits received from Corp
or any Group Company, or the termination or denial of Mr
Donovan's rights to employee benefits or a substantial reduction
in the scope or value thereof where such reduction is not
applied to other employees of a similar status and seniority to
Mr Donovan;
- a change in the scope of the business or other activities for
which Mr Donovan was responsible immediately prior to the change
of control, which has rendered Mr Donovan substantially unable
to carry out, has substantially hindered Mr Donovan's
performance of, or has caused him to suffer a substantial
reduction in, any of the authorities powers, functions,
responsibilities or duties attached to his position held
- Corp requiring Mr Donovan to have his principal location of work
changed to any location that is in excess of 25 miles from its
location immediately prior to the change of control without his
prior written consent; or
- any material breach of the service agreement by Corp or any
successor.
In each case of a "good reason", however, Mr Donovan must first have notified
Corp of the act or omission and Corp must have failed within 10 calendar days to
gain Mr Donovan's agreement to any change or must in that period have remedied
the act or omission.
There will be a provision to place Mr Donovan on garden leave if notice to
terminate is served by either party (without triggering the PILON payment). Mr
Donovan is subject to post-termination protective covenants relating to
non-solicitation of clients and managerial or technical employees, non-dealing
with clients and not competing with the Group's business. All the covenants are
stated to last for 12 months, save for that relating to non-competing, which
lasts for six months.
Mr Donovan also will have an arrangement relating to his location in the United
States, which contains expatriate arrangements to cover relocation, housing,
exchange rate fluctuation, flights for himself and his family and matters common
to expatriate terms for senior executives.
162
I. EXPLANATORY STATEMENT
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SECTION 2: FURTHER EXPLANATION OF THE RESTRUCTURING -- PART E
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Mr Donovan is a member of the Retention and Emergence Plan (described in Part
D.10 of this Section). The plan promises a bonus equal to 150 per cent. of his
base salary, paid in four each tranches, two of which have been paid. The fourth
tranche is to be waived.
JOHN DEVANEY'S service agreement with Corp dated 14 March 2003 will not change.
CHRISTOPHER HOLDEN'S service agreement with Corp dated 13 December 2002 (as
varied by a deed dated 28 January 2003) will not change.
No changes are planned to take effect from the Effective Date, in respect of the
terms of appointment of the Chairman and each of the Non-Executive Directors.
SHAREHOLDINGS AND MANAGEMENT INCENTIVES
Save as set out below the interests of the Director(s), their immediate families
and any person connected with any Director within the meaning of section 346 of
the Act in the share capital of Corp, plc or any other relevant member of the
Group, as the case may be, (all of which are beneficial unless otherwise
stated), which:
a. have or following Listing of the New Shares will be required to be
notified to Corp and/or plc pursuant to sections 324 and 328 of the
Act;
b. are required to be entered into the register referred to in section
325 of the Act; or
c. are interests of a connected person (within the meaning of section
346 of the Act) which would, if the connected person were a
Director, be required to be disclosed under (a) or (b) above and the
existence of which is known to or could with reasonable diligence be
ascertained by that Director, as at 27 March 2003 (the latest
practicable date prior to the publication of this document), are
currently and are anticipated following the Restructuring to be as
follows:
Number of Number of Percentage of
Number of New Shares Warrants New Shares
Number of Percentage of Corp Shares after First after First after First
plc Shares plc Shares and Warrants Initial Initial Initial
Director currently held currently held currently held Distribution Distribution Distribution
-------- -------------- -------------- -------------- ------------ ------------- -------------
John Devaney NIL NIL NIL NIL NIL NIL
Michael Parton 128,122 0.005 NIL 229 2,287 0.00002
Michael Donovan 169,670 0.01 NIL 303 3,029 0.00003
Christopher Holden NIL NIL NIL NIL NIL NIL
Kent Atkinson NIL NIL NIL NIL NIL NIL
Derek Bonham 156,000 0.01 NIL 279 2,785 0.00003
Werner Koepf NIL NIL NIL NIL NIL NIL
All of the Executive Directors, as possible beneficiaries, are deemed to be
interested in the 1,208,545 plc Shares, the 2,161 Corp Shares and the 21,581
Warrants that will be held by the trustee of the MET following the First Initial
Distribution. Mr Parton and Mr Donovan are also deemed to be interested in the
1,135,644 plc Shares, the 2,031 Corp Shares and the 20,279 Warrants that will be
held by the trustee of the GEC Employee Share Trust following the First Initial
Distribution.
The interests of the Directors (excluding their deemed interests described
above) together are expected to represent approximately 0.0009 per cent. of the
issued ordinary share capital of Corp on the First Initial Distribution.
163
I. EXPLANATORY STATEMENT
(IN COMPLIANCE WITH SECTION 426 OF THE COMPANIES ACT 1985)
SECTION 2: FURTHER EXPLANATION OF THE RESTRUCTURING -- PART E
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The following options over Corp Shares are expected to be granted to the
Directors under the Management Plan described in Part D.10, such options being
exercisable at the price and between the dates shown below:
Number of Total
Corp Shares Exercise price
Name of Director under option (per exercise) Exercise period
---------------- ------------ -------------- -----------------------
Michael John Parton 17,500,000 L1 May 2004 - May 2013
Michael Donovan 10,000,000 L0 May 2004 - May 2013
Christopher Holden NIL L1 May 2004 - May 2013
John Devaney 3,000,000 L1 May 2004 - May 2013
There will be no consideration payable for the grant of an option. Options will
be granted as soon as practicable following the Listing of the New Shares, New
Notes and the Warrants.
The Directors have the following interests in plc Shares under plc's existing
share incentive plans.
MICHAEL PARTON
Exercise Number of
Scheme Date of grant price Exercise period plc Shares
------ ------------- -------- ------------------- ----------
The Marconi 1999 Stock Option Plan November 1999 801.5 November 2002- 684,360
November 2009
December 2000 787.0 December 2003- 76,238
December 2010
November 2001 35.0 November 2004- 3,000,000
November 2011
The GEC 1997 Executive Share Option October 1997 331.5 October 2000- 165,912
Scheme -- B Option October 2007
July 1998 384.5 October 2000- 106,631
October 2008
The GEC 1997 Executive Share Option October 1997 331.5 October 2000- 165,912
Scheme -- C Option October 2007
The GEC 1997 Executive Share Option July 1998 384.5 July 2001-July 2008 106,631
Scheme -- C Option
The Marconi Phantom Option Scheme November 1999 538.5 November 2002- 139,274
(Converted) October 2009
The Marconi Launch Share Plan November 1999 NIL November 2002- 1,000
November 2009
The Long Term Incentive Plan June 2001 NIL June 2004-June 2011 28,405
(option)
The Long Term Incentive Plan (award) July 2000 NIL July 2003-July 2010 26,483
---------
TOTAL 4,500,846
=========
164
I. EXPLANATORY STATEMENT
(IN COMPLIANCE WITH SECTION 426 OF THE COMPANIES ACT 1985)
SECTION 2: FURTHER EXPLANATION OF THE RESTRUCTURING -- PART E
--------------------------------------------------------------------------------
MICHAEL DONOVAN
Exercise Number of
Scheme Date of grant price Exercisable period plc Shares
------ ------------- -------- ------------------- ----------
The Marconi 1999 Stock Option Plan November 1999 801.5 November 2002- 266,271
November 2009
The Marconi 1999 Stock Option Plan December 1999 1008.5 December 2002- 69,410
December 2009
The Marconi 1999 Stock Option Plan December 2000 787.0 December 2003- 198,048
December 2010
The Marconi 1999 Stock Option Plan November 2001 35.0 November 2004- 2,500,000
November 2011
The Marconi Phantom Option Scheme October 1998 338.0 October 2001- 266,271
(Converted) September 2008
The Marconi Launch Share Plan November 1999 NIL November 2002- 1,000
November 2009
The Long Term Incentive Plan June 2001 NIL June 2004-June 2011 5,299
(option)
The Long Term Incentive Plan (award) July 2000 NIL July 2003-July 2010 24,718
---------
TOTAL 3,331,017
=========
Save as set out in this Part E.1, it is not expected that any Director will have
any interest in the share or loan capital of Corp or plc on the Effective Date
of the Corp Scheme.
No Director has or has had any interest in any transactions which are or were
unusual in their nature or conditions or are or were significant to the business
of the Group and which were effected by Corp, plc or any Group company during
the current or immediately preceding financial year or during an earlier
financial year and which remain in any respect outstanding or unperformed.
DIRECTORSHIPS
The Directors of Corp and plc and their functions are set out in Part A.10 of
this Section.
The business address of John Devaney, Michael Donovan, Christopher Holden, Kent
Atkinson, Derek Bonham and Michael Parton is Regents' Place, 338 Euston Road,
London, NW1 3BT, UK and the business address of Werner Koepf is Ueberlandstrasse
1, CH-8700, Duebendorf, Switzerland.
In addition to their directorships of Group companies, the Directors and the
individuals who have agreed to become Directors of Corp hold or have held the
following directorships and are or were members of the following partnerships,
in the past five years:
Position
still held
Name Position Company/Partnership (Y/N)
---- -------- ------------------- ----------
John Devaney Director Baltic Media Group Limited (in
Liquidation) Y
Director Baltic Publishing Limited (in
Liquidation) Y
Chairman Bizenergy Limited Y
Director Bizenergy.com Limited Y
Director Bizzconsulting Limited Y
Director Bizzenergy Group Limited Y
Director Bizzgeneration Limited Y
Director Boocher Limited N
Director British Power International
Limited N
Non-executive Director British Steel Ltd. (now known as
Corus UK Limited) N
Director Candihide Limited N
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I. EXPLANATORY STATEMENT
(IN COMPLIANCE WITH SECTION 426 OF THE COMPANIES ACT 1985)
SECTION 2: FURTHER EXPLANATION OF THE RESTRUCTURING -- PART E
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Position
still held
Name Position Company/Partnership (Y/N)
---- -------- ------------------- ----------
Director Chesleigh Limited N
Director Consort EU Limited N
Director E Gas Limited N
Director EA Technology Limited Y
Director Eastern Energy Management Limited N
Director Eastern Group Finance Limited N
Director Eastern Private Network
Management Limited N
Director EBO Czech Investments Limited N
Director Electricity Association Limited N
Director Energy Holdings (No. 3) Limited N
Director EPN Distribution Limited N
Director Exel Investments Limited N
Chairman Exel Plc N
Director F.W. Cook (Mechanical Services)
Limited N
Director Forne Limited N
Director Genient Limited Y
Director GTC Pipelines Limited N
Non-executive Director HSBC Bank plc N
Executive Chairman Kelsey-Hayes Corporation N
Chairman Liberata plc N
Director Mainpower plc Y
Director Mel Group Limited N
Director Norwich Capital Investments
Limited (Dissolved) N
Director NTL Telecom Services Limited N
Director Offshore Oil & Gas Development
Company Limited N
Director The Energy Group Limited N
Director Three Gates Limited Y
Director TXU (UK) Holdings Limited N
Director TXU Direct Sales Limited N
Director TXU Europe (Ten) Limited N
Director TXU Europe Energy Trading Limited N
Director TXU Europe Group plc N
Director TXU Europe Leasing (4) Limited N
Director TXU Europe Leasing (5) Limited N
Director TXU Europe Limited N
Director TXU Europe Natural Gas (Trading)
Limited N
Director TXU Europe Overseas Finance
Limited N
Director TXU Europe Power Limited N
Director TXU Europe Renewable Generation
Limited N
Director TXU Nordic Holdings Limited N
Director TXU UK Limited N
Director Unicorn Music and Dance Limited Y
Michael Donovan Director British Aerospace Defence Systems
Limited (now called BAE Systems
(Defence Systems) Ltd) N
Director British Aerospace Land & Sea
Systems Limited (now called BAE
Systems (Land and Sea Systems)
Ltd N
Director General Domestic Appliances
Holdings Limited N
Director Matra BAe Dynamics SAS N
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Position
still held
Name Position Company/Partnership (Y/N)
---- -------- ------------------- ----------
Director STN-Atlas Elektronik GmbH N
Director Yard Limited N
Christopher Holden Partner Arthur Andersen (in dissolution) Y
Director St Kenelms Management Services
Limited Y
Kent Atkinson Senior Non-Executive Coca-Cola HBC S.A. (Athens) Y
director
Non-Executive Director Coca-Cola Beverages Ltd
(Dissolved) N
Non-Executive Director Cookson Group plc (with effect
from 1 April 2003) Y
Director Lloyds Bank Financial Services
(Holdings) Limited N
Director Lloyds Bank Subsidiaries Limited N
Director Lloyds Commercial Properties
Limited N
Non-Executive Director Lloyds TSB Bank plc Y
Non-Executive director Lloyds TSB Group plc Y
Director Lloyds TSB Financial Services
Holdings Limited N
Director TSB Bank Limited N
Director Three Copthall Avenue Limited N
Werner Koepf Director Compaq Computer Group Limited N
Director Compaq Computer Limited N
Director Compaq Computer Manufacturing
Limited (now called
Hewlett-Packard Manufacturing
Ltd) N
Director Pixelpark CEE Holding AG (now
known as PXP Software AG) Y
Managing Director Compaq Computer International
GmbH (now known as Hewlett
Packard International SARL GmbH) N
Managing Director Compaq Computer EMEA BV N
Chairman Compaq Computer GmbH N
Chairman Compaq Computer Austria GmbH N
Derek Bonham Chairman Cadbury Schweppes Public Limited
Company Y
Chairman CamAxys Group plc Y
Director Energy Holdings (No. 3) Limited N
Non-executive Director Glaxo Wellcome plc (now called
GlaxoSmithkline Services
Unlimited) N
Non-executive Director GlaxoSmithkline plc N
Director Hanson Pension Trustees Limited N
Director I-Fax Europe Limited N
Director I-Fax Limited N
Chairman Imperial Tobacco Group plc Y
Director Newzquest plc N
Director Newzeco Limited Y
Director Peabody Holdings Company, Inc N
Director The Energy Group Limited (In
Administration) N
Non-executive Director TXU Corporation Y
Non-executive Director TXU Europe Limited N
Ian Clubb Non-Executive Chairman Amalgamated Scottish Oil Limited Y
Chairman B Elliott Group Limited Y
Chairman B Elliott Limited Y
Director B Elliott plc N
Non-Executive Chairman Concentric plc N
Non-Executive Chairman DMWS 601 Limited N
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Position
still held
Name Position Company/Partnership (Y/N)
---- -------- ------------------- ----------
Director Dunedin Smaller Companies
Investment Trust plc N
Non-Executive Director Expro International Group plc Y
Non-Executive Director First Choice Holidays plc Y
Non-Executive Director Keycom plc N
Director Kuoni Holdings plc N
Non-Executive Chairman Longville Group Limited Y
Non-Executive Chairman Platinum Investment Trust plc Y
Non-Executive Chairman Shanks plc Y
Non-Executive Chairman Sitex Security Products Limited N
Director Thorn Lighting Group plc N
Director Thorn Lighting Pension Trustees
Limited N
Director Unijet Group Limited N
Kathleen Flaherty Non-Executive Director CMS Energy Corporation Y
Non-Executive Director Consumers Energy Company Y
Director Winstar Europe S.A. (Belgium) N
Director Winstar Communications S.A. N
Director Winstar Holdings BV (Netherlands) N
Director Winstar Communciations GMBH
(Germany) N
Director Winstar Communications BV
(Netherlands) N
Director Winstar Communications S.A.
(France) N
Director Winstar Communications Limited
(UK) N
Director Winstar Communications S.A.
(Switzerland) N
Director Winstar Communications S.A.
(Belgium) N
Director Winstar Columbia Ltda. N
Director Winstar Japan Limited (Japan) N
Director KDDI Winstar Corporation (Japan) N
Director Winstar International HongKong
Holding
(BVI) Limited N
Director Winstar HongKong (BVI) Limited N
Director Winstar Communications HongKong
Limited N
Director Winstar Asia NDMO Pte Limited
(Singapore) N
Save as disclosed in this Part E.1, at the date of this document none of the
Directors:
a. has been director or partner of any companies or partnerships at any
time in the previous five years; or
b. has any unspent convictions in relation to indictable offences; or
c. has been bankrupt or entered into an individual voluntary
arrangement; or
d. was a director with an executive function of any company at the time
of or within 12 months preceding any receivership, compulsory
liquidation, creditors voluntary liquidation, administration,
company voluntary arrangement or any composition or arrangement with
that company's creditors generally or with any class of its
creditors save in the case of the plc Scheme and the Corp Scheme as
described in parts II and III; or
e. has been a partner in a partnership at the time of or within 12
months preceding any compulsory liquidation, administration or
voluntary arrangement of such partnership; or
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f. has had his assets the subject of any receivership or has been a
partner of a partnership at the time of or within 12 months
preceding any assets thereof being the subject of a receivership; or
g has been subject to any public criticism by any statutory or
regulatory authority (including any recognised professional body) nor
has ever been disqualified by a court from acting as a director of a
company or from acting in the management or conducting the affairs of
any company.
E.2 TRUSTEES OF THE BONDS
The Law Debenture Trust Corporation p.l.c. has a material interest in both of
the Schemes by reason of being a Scheme Creditor in each Scheme. Law Debenture
Trust Company of New York will be appointed New Senior Notes Trustee in respect
of the New Senior Notes to be issued under the Schemes and The Law Debenture
Trust Corporation p.l.c. will be appointed Security Trustee under the Security
and Intercreditor Trust Deed. Law Debenture Trust Company of New York is an
affiliate of The Law Debenture Trust Corporation p.l.c. The Bank of New York has
a material interest in both of the Schemes by reason of being a Scheme Creditor
in each Scheme. The Bank of New York will be appointed as Distribution Agent and
as ADR Depositary in respect of any ADRs to be issued under the Schemes.
The Eurobond Trustee and the Yankee Bond Trustee also have a material interest
in the Schemes by reason of their being owed sums in respect of fees, costs,
expenses and liabilities, amounting to a total of L155,159.92 as at 18 March
2003 in respect of the Eurobond Trustee, and a total of L144,450.96 as at 14
March 2003 in respect of the Yankee Bond Trustee (both figures inclusive of
VAT). These fees, costs, expenses and liabilities were incurred as a result of
the Eurobond Trustee and Yankee Bond Trustee's roles during the drafting and
negotiation of the Schemes. If the Schemes are implemented then these fees,
costs, expenses and liabilities will be paid in priority to Scheme Claims.
Affiliates of the Eurobond Trustee, through such affiliates acting as New Senior
Notes Trustee and Security Trustee, and the Yankee Bond Trustee, through its
acting as Distribution Agent and ADR Depositary, will be entitled to the payment
of fees and reimbursement of expenses incurred in performing their respective
duties under these ongoing roles.
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F. RISK FACTORS
This Part F sets out the principal risk factors affecting the Group and should
be read in conjunction with all other information contained in this document.
Additional risks and uncertainties not presently known to the Group or that the
Group currently deems immaterial may also have a material adverse effect on the
business, financial condition or results of operations of the Group. Except in
Part F.1 and as the context otherwise requires, this Part F assumes that the
Schemes will be implemented in accordance with their terms and does not include
risk factors about the Group in the event that either or both of the Schemes do
not become effective (which are discussed in the letter from the Chairman of plc
and of Corp in Section 1).
All statements in this document (other than parts II and III) are to be read
subject to, and are qualified in their entirety by, the matters referred to in
this Part F.
For ease of reference only, the risk factors set out below have been grouped
into the following four categories:
a. Risks related to a failure to implement or a delay in implementing
the Restructuring;
b. Risks arising from implementation of the Restructuring;
c. Operating risks; and
d. Risks related to ownership of the New Shares, the New Notes and the
Warrants.
F.1 RISKS RELATED TO A FAILURE TO IMPLEMENT OR A DELAY IN IMPLEMENTING THE
RESTRUCTURING
ESOP DERIVATIVE BANKS MAY BE ABLE TO TERMINATE THEIR STANDSTILL UNDERTAKINGS
PRIOR TO IMPLEMENTATION OF THE RESTRUCTURING.
As discussed in Part D.2 of this Section, plc is the guarantor with respect to
the equity derivative transactions with the ESOP Derivative Banks. The ESOP
Derivative Banks have previously asserted that they also have claims against
certain Group operating companies, including Corp, based on the ESOP Funding
Letters executed by those companies. Under the terms of the ESOP Settlement
Agreement, Corp will pay a total of L35 million to the ESOP Derivative Banks in
full and final settlement of their ESOP related claims against the Group. The
settlement is conditional upon the Corp Scheme becoming effective and, in the
interim, the ESOP Derivative Banks have agreed to a standstill, namely that they
will not commence or further any claims or proceedings against Bedell Cristin
Trustees Limited, plc or any Group operating companies (or any of their
respective directors and officers) under the ESOP Funding Letters (including
releases thereof), the ESOP Derivative Transactions or the plc guarantee of the
ESOP Derivative Transactions.
The standstill terminates on the occurrence of one of the relevant events set
out in the ESOP Settlement Agreement, including (a) the further release of ESOP
Funding Letters in certain circumstances, (b) enforcement of the interim
security, (c) the Corp Scheme not obtaining the requisite approval at the Scheme
Meeting, (d) the Court sanction for the Corp Scheme not being obtained, (e) a
demand being made by the agent for the repayment of the Bank Facility, (f) an
insolvency event occurring in relation to Corp or, subject to certain
limitations, plc and (g) the Effective Date for the Corp Scheme not occurring on
or before 31 December 2003.
EFFECTIVENESS OF THE SCHEMES REQUIRES THE APPROVAL OF CREDITORS AND SANCTION BY
THE COURT.
In order for the Corp Scheme and the plc Scheme to become effective, they must
be approved by Scheme Creditors of Corp and plc, respectively, as described in
this document. Although each of the then members of the Informal Committee of
Bondholders and certain members of the Co-ordination Committee indicated as at
13 December 2002 that it was their current intention to vote in favour of the
Schemes, they are not bound to do so and in any event do not represent a
sufficient proportion of the Scheme Creditors to ensure that the Schemes will be
approved. Each of the ESOP Derivative Banks has provided a voting undertaking in
relation to the Schemes (as described in more detail in Appendix 19). The
willingness of other creditors to vote in favour of the Schemes will be
dependent on their assessment of what they would be likely to receive if the
Restructuring was successfully concluded, which will depend among other things
on their view of the prospects with respect to the Group's future results of
operations, financial condition and working capital position and their
assessment of
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what they would be likely to receive in insolvency proceedings in connection
with the Group. Accordingly, there can be no assurance that the Scheme Creditors
will vote to approve either of the Schemes.
In addition, for the Schemes to become effective, they must receive the sanction
of the Court, as described in this document. The Court will not sanction either
of the Schemes unless it is satisfied that the proposed arrangements are fair to
the creditors whose claims are being compromised pursuant to the Schemes. There
can be no assurance that the court will determine that the Schemes are fair to
creditors or that the Court will not conclude that there are other reasons why
the Schemes should not be approved.
EFFECTIVENESS OF EACH OF THE SCHEMES WILL DEPEND UPON THE GRANTING OF AN ORDER
BY A US BANKRUPTCY COURT.
Even if one or both of the Schemes are approved by Scheme Creditors and
sanctioned by the English Court, the necessary steps required to make either of
them effective will not be taken unless a permanent injunction in respect of the
relevant Scheme is granted by a US Bankruptcy Court under Section 304 of Title
11 of the United States Code. The US Bankruptcy Court will not grant such an
injunction unless it is convinced that the relevant Scheme will abide by
fundamental standards of procedural fairness and is not repugnant to any
fundamental principle of US law. There can be no assurance that the US
Bankruptcy Court will determine that this standard has been met, or that the US
Bankruptcy Court will not conclude that there are other reasons why the order
should not be granted.
THE CORP SCHEME MAY BE IMPLEMENTED EVEN IF THE PLC SCHEME IS NOT, IN WHICH CASE
CORP SCHEME CREDITORS WILL RECEIVE LESS SCHEME CONSIDERATION THAN IF BOTH
SCHEMES BECOME EFFECTIVE, AND PLC WILL BE FORCED INTO AN INSOLVENCY PROCEEDING.
The effectiveness of the plc Scheme is conditional on the Corp Scheme becoming
effective, but the effectiveness of the Corp Scheme is not conditional on the
plc Scheme becoming effective. Because Scheme Creditors must vote on each of the
Corp Scheme and the plc Schemes independently, the Corp Scheme may be approved
by Scheme Creditors, while the plc Scheme is not. Moreover, it is possible that
the Court may sanction one Scheme but not the other, or that the US Bankruptcy
Court may issue an injunction in respect of one Scheme but not the other.
If the Corp Scheme becomes effective but the plc Scheme does not, Corp Scheme
Creditors will receive less, and Corp Scheme Creditors that are also plc Scheme
Creditors could receive significantly less, Scheme Consideration than if both
Schemes become effective. There are two reasons for this. First, Corp itself is
expected to be a significant plc Scheme Creditor, and the portion of the plc
Scheme Consideration that Corp would receive in respect of its claim against plc
will not be available for distribution to Corp Scheme Creditors pursuant to the
Corp Scheme unless the plc Scheme becomes effective. Second, a significant
portion of the Corp Scheme Consideration is expected to be distributed via
Ancrane, a wholly owned subsidiary of plc, and this portion of the Corp Scheme
Consideration will not be distributed to plc Scheme Creditors pursuant to the
plc Scheme unless that Scheme becomes effective.
If the plc Scheme does not become effective as and when contemplated in this
document, then plc would inevitably have to enter into some form of insolvency
proceeding. If the Corp Scheme has become effective, however, the portion of the
Corp Scheme Consideration distributed to Ancrane would be among the assets on
which plc creditors would have a claim in any such proceeding. Moreover, Corp
itself would be entitled to prove its claim against plc in such an insolvency
proceeding, and any recovery by Corp in that proceeding would eventually be
available for distribution to Corp Scheme Creditors.
CORP AND/OR PLC AND/OR THE PROSPECTIVE SUPERVISORS OF THE CORP SCHEME AND/OR THE
PLC SCHEME MAY CEASE TO BE SATISFIED AS TO THE SUFFICIENCY OF THE RESERVE CLAIMS
SEGMENT OF THAT SCHEME AND/OR CORP MAY CEASE TO BE OF THE OPINION THAT CORP'S
WORKING CAPITAL STATEMENT REMAINS VALID.
Corp will not take the necessary steps to make the Corp Scheme effective unless
and until (among other things), (a) Corp has, following the passing of a
unanimous Board resolution to approve the same, provided confirmation in writing
to the Prospective Supervisors (for the sole benefit of the Prospective
Supervisors) prior to each of (i) the release of the interim security granted by
Corp through its special purpose subsidiary Highrose Limited, (ii) the Corp
Scheme Meeting, (iii) the hearing to sanction the Corp Scheme and (iv) the
Effective Date, to the
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effect that Corp remains satisfied that the reserves built into the Corp Scheme
are sufficient to meet distributions due to be made to all Corp Scheme Creditors
and that Corp remains of the opinion that its statement as to the Corp Group's
working capital contained in Part D.21 of this Section remains valid; and (b)
the Prospective Supervisors of the Corp Scheme have provided confirmation in
writing to Corp (for Corp's sole benefit) on the day of, but prior to, each of
events (i) to (iv) above to the effect that they have no reason to disagree with
Corp's view that the reserves built into the Corp Scheme are sufficient to meet
distributions due to be made to all Corp Scheme Creditors.
plc will not take the necessary steps to make the plc Scheme effective unless
and until (among other things) (a) plc has, following the passing of a unanimous
Board resolution to approve the same, provided confirmation in writing to the
Prospective Supervisors (for the sole benefit of the Prospective Supervisors)
prior to each of (i) the release of the interim security granted by Corp through
its special purpose subsidiary Highrose Limited, (ii) the plc Scheme Meeting,
(iii) the hearing to sanction the plc Scheme and (iv) the Effective Date, to the
effect that plc remains satisfied that the reserves built into the plc Scheme
are sufficient to meet distributions due to be made to all plc Scheme Creditors;
and (b) the Prospective Supervisors of the plc Scheme have provided confirmation
in writing to plc (for plc's sole benefit) on the day of, but prior to, each of
events (i) to (iv) above to the effect that they have no reason to disagree with
plc's view that the reserves built into the plc Scheme are sufficient to meet
distributions due to be made to all plc Scheme Creditors.
If any of the confirmations relating to the Corp Scheme is not forthcoming,
neither the Corp Scheme nor the plc Scheme will proceed. If any of the
confirmations relating to the plc Scheme is not forthcoming the plc Scheme will
not proceed.
THE INTERIM SECURITY MIGHT BE ENFORCED, OR MIGHT NOT BE RELEASED, BEFORE THE
SCHEME MEETINGS.
If the interim security has not been released prior to the Corp Scheme Meeting,
neither Corp nor plc will proceed with their respective Schemes and, in their
inevitable subsequent insolvency proceedings, the interim security would remain
in place (meaning that the Bank Creditors, Secured Bondholders and Barclays Bank
PLC (in its capacity as an ESOP Derivative Bank) would rank ahead of all
unsecured creditors of Corp with respect to the cash held in the Lockbox
Accounts, the balance of which was approximately L770,700,000 as at 27 March
2003).
The occurrence of an enforcement event under the interim security (details of
which are set out in Part D.1 of this Section) prior to the Scheme Meetings
would have the following implications:
a. the majority Bank Creditors (66 2/3 per cent. by value, which
includes in its calculation bilateral and guarantee exposures of the
Syndicate Banks to Corp) would be entitled to instruct the security
trustee for the interim security not to release any further amounts
from the Lockbox Accounts;
b. the majority, currently three out of four, of the members of the
Informal Committee of Bondholders would be entitled to instruct Corp
and Highrose Limited not to make or request further withdrawals from
the Lockbox Accounts (this is the practical equivalent of (a), but
in favour of the Informal Committee of Bondholders who have not been
granted rights to instruct the security trustee directly); and/or
c. the majority creditors (ie. more than 50 per cent. by value of all
Bank Creditors and all Secured Bondholders) would be entitled to
instruct the security trustee (through the Co-ordination Committee)
to enforce the interim security (in practice, Bank Creditors hold
more than 50 per cent. of the value of claims and thus currently
have the ability to do this).
The interim security contemplates an Effective Date of the Restructuring of no
later than 30 June 2003. Implementation of the Corp Scheme later than that date
(or it becoming apparent that that date is no longer likely to be achieved) is
one of the enforcement events in relation to the interim security.
An enforcement event under the interim security would also entitle Barclays Bank
PLC, the participating ESOP Derivative Bank, to terminate its Restructuring
Undertaking Agreement (as described in Part D.2 of this Section) (unless it is
apparent that the Corp Scheme will proceed in any case). Enforcement of the
interim security would entitle any of the ESOP Derivative Banks to terminate the
standstill contained in the ESOP Settlement Agreement and would also entitle
them to terminate their related voting undertakings.
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THE SCHEMES WILL NOT BE EFFECTIVE BY THE TIME PRINCIPAL OR INTEREST BECOMES
PAYABLE UNDER THE BANK FACILITY AND/OR THE BONDS.
The Bank Facility was due for repayment on 25 March 2003. Corp has not made such
repayment and the facility agent has reserved all rights in this regard. Failure
by Corp to repay the Bank Facility gives rise to direct rights on the part of
individual Syndicate Banks to bring actions for recovery of the debt owing to
them and, in addition, will, after the expiry of a five Business Day grace
period, result in a cross default under the Eurobonds and Yankee Bonds. The
longstop date applicable to (a) Corp's interest rate swap close-out loans with
JP Morgan Chase Bank and Barclays Bank PLC, (b) Corp's terminated interest rate
swap with UBS AG and (c) the closed-out equity derivative between Bedell Cristin
Trustees Limited and UBS AG (in respect of which plc is the credit support
provider) was also 25 March 2003, after which date such creditors may demand
repayment or payment (as applicable) of principal and interest thereunder.
A Yankee Bond interest payment was due on 15 March 2003. Given the expiration of
the applicable 14 day grace period, non-payment of such interest will be an
event of default entitling the Yankee Bond Trustee or the holders of 25 per
cent. of each respective Yankee Issue to accelerate repayment of the respective
Yankee Issue. Failure to pay interest under the Yankee Bonds on the due date
also entitles individual holders of Yankee Bonds (under the US Trust Indenture
Act of 1939 (as amended)), to sue for recovery of the missed interest coupon
from Corp.
The Eurobonds had an interest payment due on 30 March 2003. Failure to make the
interest payment will, after a grace period of 14 days, be an event of default
entitling the holders of 25 per cent. of each respective Euro Issue to instruct
the Eurobond Trustee to accelerate repayment of that Euro Issue.
In England, if Bondholders or Syndicate Banks sought to exercise direct rights
against Corp and/or plc in respect of payment defaults it is likely that they
would:
(a) petition for a winding up or administration order against Corp
and/or plc; or
(b) seek to obtain a summary judgment for repayment of the money owed to
them.
Assuming a statutory demand is not required, it would take a creditor at least
three weeks (from the date of service of a winding up on Corp and/or plc) to
obtain an order for winding up. In practice, however, this is likely to take
closer to six weeks. Administration and winding up are both class remedies in
that the Court would be required to exercise its discretion in the best
interests of Corp's and/or plc's creditors as a whole. Corp and plc each believe
that a Court is likely to conclude that such interests would best be served by
creditors being given an opportunity to consider the Corp Scheme and/or plc
Scheme (as applicable) and that the Court would therefore be unlikely to allow
an individual creditor to frustrate the Restructuring by obtaining an
administration order or winding up order prior to the Scheme Meetings. Further,
Corp and plc each believe that it is unlikely that the Court would make a
winding up order after the Scheme Creditors have voted in favour of the Corp
Scheme and/or the plc Scheme (as applicable). Corp would strongly oppose the
making of an administration or winding up order prior to or after the Scheme
Meetings and would, at the appropriate stage, actively encourage Scheme
Creditors that support the Restructuring to appear and oppose such order.
It is likely that it would take a creditor at least three months to obtain a
summary judgment against Corp and/or plc (on the basis that a Court would be
unlikely to consider the aim of defeating the Schemes to be good grounds for an
expedited hearing). Levying execution against Corp's and/or plc's property in
respect of any summary judgment which was obtained would require the relevant
creditor to make further applications to the Court (with the attendant delays).
Corp and plc believe that they would have good grounds for obtaining a stay of
enforcement given that a writ of execution (or other form of execution) would
otherwise prefer that creditor over the relevant Scheme Company's other
creditors.
In the United States, if any Scheme Creditor sought to exercise direct rights
against Corp and/or plc in respect of payment defaults it is likely that they
would:
(a) seek to obtain a judgment for repayment of the money owing to them;
and/or
(b) file an involuntary petition against Corp or plc, as the case may
be, under Chapter 7 (liquidation) or Chapter 11 (reorganization) of
the Bankruptcy Code (three creditors, with aggregate claims of at
least US$11,625 would be required to file such a petition).
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Corp has submitted to New York state and federal jurisdiction in connection with
the Yankee Bonds and would therefore be subject to any action filed there. In
the New York state courts, an individual creditor might avail itself of a
procedure allowing expeditious judgment on a claim for non-payment of money on
an instrument (where such claim is for a sum that can be made certain by
computation). The process to judgment would take at least 20 days. There is a
small risk that, in conjunction with such action, a creditor could successfully
seek to attach Corp's assets in New York (by way of ex parte application and by
demonstrating sufficient risk that the asset might otherwise be dissipated or
removed from the jurisdiction). If a creditor obtained a New York court judgment
against Corp, then that creditor could try to enforce that judgment against
Corp's US assets.
Corp believes that a US federal bankruptcy court would be likely to suspend or
dismiss an involuntary petition under Chapter 7 or Chapter 11 if it determined
that the interests of Corp and its creditors would be better served thereby, or
if a foreign proceeding (such as the Corp Scheme) was pending and the same would
be consistent with the due process requirements and insolvency principles
necessary to establish an ancillary proceeding under section 304 of the
Bankruptcy Code (in respect of which see Appendix 21). Corp further believes
that support from Scheme Creditors that support the Restructuring would be
likely to have a bearing on the court's determination and would therefore
actively encourage such support in defending a petition.
Corp has approximately L2.2 billion outstanding under the Bank Facility which,
as described above, was due for repayment on 25 March 2003. In addition, the
principal amounts outstanding in respect of the Eurobonds and Yankee Bonds are
E1.5 billion and US$1.8 billion respectively. Each of these obligations is
guaranteed by plc. Failure to repay the Bank Facility when due would trigger a
cross default under the Eurobonds and Yankee Bonds, entitling (i) the holders of
25 per cent. of each respective Yankee Issue to accelerate repayment of the
relevant Bonds, and (ii) the holders of 25 per cent. of each respective Euro
Issue to require the Eurobond Trustee to accelerate repayment of the relevant
Bond. For the reasons described above, there can be no assurance that the
Schemes will become effective, or that they will become effective within the
timeframe contemplated. If the Corp Scheme does not become effective in the
manner described in this document, the Group will be unable to repay the above
debt to its Syndicate Banks and, when due, to its Bondholders and Corp and plc
will be forced into insolvency proceedings.
THE CONDITIONS TO EFFECTIVENESS OF THE SCHEMES MAY NOT BE SATISFIED BY 19 JUNE
2003.
If the conditions to the effectiveness of either Scheme have not been satisfied
by 19 June 2003, then the relevant Scheme will be withdrawn and not made
effective. If the Corp Scheme does not become effective as and when contemplated
in this document, and in any event by 19 June 2003, Corp and plc would have to
enter into some form of insolvency proceedings.
F.2 RISKS ARISING FROM IMPLEMENTATION OF THE RESTRUCTURING
CORP WILL HAVE SIGNIFICANT DEBT OUTSTANDING AND WILL HAVE SIGNIFICANT DEBT
SERVICE REQUIREMENTS, WHICH WILL MAKE THE GROUP MORE VULNERABLE TO ECONOMIC
DOWNTURNS AND REDUCE ITS FLEXIBILITY.
Following the Restructuring, Corp will have significant debt outstanding. This
is likely to limit Corp's ability to obtain additional financing on satisfactory
terms to fund working capital, capital expenditures, product development efforts
and acquisitions of new assets in excess of those in its current business plan.
In addition, although Corp will be permitted to meet interest payment
obligations under the New Junior Notes through payment in kind by issuing
additional New Junior Notes, it will otherwise be required to devote a
significant proportion of its cash flow from operations to the payment of
interest on its debt obligations, thereby reducing the funds available for other
purposes. Corp's level of debt and the fixed nature of a portion of its debt
service costs will make it more vulnerable to economic downturns, reduce its
flexibility to respond to changing business and economic conditions and limit
the Group's ability to pursue business opportunities, to finance its future
operations or business needs and to implement its business strategies.
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CORP WILL BE REQUIRED TO COMPLY WITH RESTRICTIVE COVENANTS AND AFFIRMATIVE
FINANCIAL COVENANTS, WHICH WILL SIGNIFICANTLY LIMIT THE GROUP'S FINANCIAL AND
OPERATIONAL FLEXIBILITY.
Following the Restructuring, the terms of the indentures governing the New Notes
will require Corp and its Subsidiaries to comply with restrictive covenants and
the terms of the indenture governing the New Senior Notes will also require Corp
to comply with certain affirmative financial covenants. In addition, the
Performance Bonding Facility and the Working Capital Facility will contain
restrictive covenants. The relevant covenants will become applicable immediately
upon issuance of the New Notes and execution of the Working Capital Facility and
the Performance Bonding Facility, as the case may be, and will, among other
things, restrict the ability of Corp and its subsidiaries to incur additional
indebtedness, pay dividends on and redeem shares of Corp and its subsidiaries,
redeem certain subordinated obligations, make investments, undertake sales of
assets, engage in certain transactions with affiliates, sell or issue capital
stock of subsidiaries, permit liens to exist, operate in other lines of
business, engage in certain sale and leaseback transactions and engage in
mergers, consolidations or sales of all or substantially all the assets of Corp.
The affirmative financial covenants in the indentures governing the New Senior
Notes will apply only from and after 30 September 2005 and relate to the minimum
ratio of EBITDA to gross cash finance charges and the maximum ratio of
indebtedness to total EBITDA, in each case measured with respect to the Corp
Group other than the Ringfenced Entities. Restrictions stemming from these
covenants and from the need to comply with the affirmative financial covenants
will significantly limit the Group's financial and operational flexibility, and
could have a significant adverse effect on its business, results of operations
and financial condition.
Corp's ability to satisfy the affirmative financial covenants will be affected
by changes affecting its business, results of operations and financial
condition, and is thus subject to the risks described elsewhere in this Part F.
A failure to comply with the restrictive covenants or the affirmative financial
covenants in the indentures governing the New Notes would, if not cured or
waived, constitute an event of default under the New Notes; a failure to satisfy
restrictive covenants under the Working Capital Facility and/or the Performance
Bonding Facility could also constitute an event of default. Subject to the
Security Trust and Intercreditor Deed, the occurrence of an event of default in
respect of any of these facilities would permit acceleration of all amounts
borrowed thereunder, which could constitute a cross-default under the others, as
well as other borrowing arrangements to which Corp or its subsidiaries are
party. In such circumstances, there can be no assurance that Corp would have
sufficient resources to repay the full principal amount of the New Notes and the
relevant indebtedness under the Working Capital Facility and the Performance
Bonding Facility in full. Holders of the Corp Shares might then receive no
return on their investment. Moreover, a failure to comply with restrictive
covenants constituting an event of default under the Working Capital Facility or
the Performance Bonding Facility would permit the lenders under the facilities
to terminate their commitments to make further extensions of credit thereunder,
which would be likely to have a material adverse effect on the business, results
of operations and financial condition of the Group.
A NUMBER OF SIGNIFICANT GROUP CONTRACTS CONTAIN TERMINATION PROVISIONS THAT MAY
BE TRIGGERED BY THE RESTRUCTURING.
Some of the Group's significant contracts to supply customers with systems and
services contain provisions that allow its counterparties to terminate the
contracts upon a change of control or a composition with creditors or similar
arrangement affecting one or more Group companies. Some or all of these
counterparties may take the view that the Restructuring gives rise to a right of
termination under these contracts, and may accordingly seek to terminate or
renegotiate them. Early termination or significant renegotiation of these
contracts, individually or in the aggregate, could have a materially adverse
effect on the Group's results. Moreover, disputes over whether the Restructuring
constitutes a change of control for purposes of terminating these contracts
could result in litigation which would be costly, would adversely affect the
Group's ability to make accurate predictions needed to run its business and
could adversely affect customers' perceptions of the Group.
THE GROUP WILL LOSE THE BENEFIT OF CERTAIN TAX LOSSES AS A RESULT OF THE
RESTRUCTURING.
In recent years, the Group has accumulated significant tax losses (and other tax
credits) that are not currently recognised as deferred tax assets (see Appendix
1). As a result of the Restructuring the Group may (and, in some
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cases, expects that it will) forfeit these losses, or be restricted in its
ability to offset them against future profits, in various jurisdictions due to
the requirements of existing and proposed tax legislation governing the use of
losses after a change in ownership. The relevant jurisdictions each define a
change in ownership differently, and in some cases include additional conditions
which, if met for a considerable amount of time after the change in ownership,
allow the losses to continue to be used. It is not therefore possible at this
stage to quantify the total amount of forfeiture or restriction of the tax
losses. There should be no immediate cash cost of any such forfeiture or
restriction, but if profits are earned in an affected jurisdiction in the
future, they could be subject to tax in full.
THE EFFECTIVENESS OF THE SCHEMES IS NOT CONDITIONAL ON THE ADMISSION OF THE NEW
SHARES, THE NEW NOTES OR THE WARRANTS TO THE OFFICIAL LIST OR TO TRADING ON THE
LONDON STOCK EXCHANGE OR ANY OTHER SECURITIES EXCHANGE, AND PERMISSION FOR SUCH
LISTING MAY BE DELAYED OR DENIED.
Application has been made to the UKLA for the New Shares, the New Notes and the
Warrants to be admitted to the Official List and to trading on the London Stock
Exchange. While it is expected that admission to the Official List and to
trading will take place on the Effective Date of the Corp Scheme, there can be
no assurance that there will not be a delay in, or denial of, the admission of
the New Shares, the New Notes and/or the Warrants after the Corp Scheme has
become effective. If admission to the Official List and to trading on the London
Stock Exchange does not take place as and when expected, Corp will use its
reasonable efforts to list the New Shares, the New Notes and the Warrants in
London or on another recognised stock exchange thereafter.
If admission to the Official List and to trading on the London Stock Exchange
does not take place on the Effective Date, this will inhibit the development of
a liquid trading market for the New Shares, the New Notes and the Warrants which
is likely to have a material adverse effect on their value. Additionally, if the
New Notes are not listed on a recognised stock exchange within the meaning of
applicable UK tax legislation, withholding tax may be payable on interest
payments in respect of the New Notes. Under the terms of the New Notes, Corp
will be required to pay additional amounts to the holders of the New Notes in
respect of any amounts withheld. While this should not result in any direct cost
to the holders of the New Notes, the payment of these "gross up" amounts will be
an additional cash expense for Corp and could have a material adverse effect on
Corp's financial condition and results of operations.
Additionally, Corp intends to establish an ADR programme in respect of the New
Shares and will apply to list such ADRs on NASDAQ. It is currently anticipated
that this listing will become effective during the third calender quarter of
2003. Nevertheless, there can be no assurance that such listing will take place
within the time expected, or at all. If the NASDAQ listing does not take place
as and when expected, this may also inhibit the development of a liquid trading
market for the ADRs, which is likely to have a material adverse effect on their
value.
F.3 OPERATING RISKS
THE TELECOMMUNICATIONS INDUSTRY IS EXPERIENCING A SEVERE DOWNTURN, MANY OF THE
GROUP'S CUSTOMERS HAVE REDUCED AND ARE CONTINUING TO REDUCE CAPITAL EXPENDITURE
AND, AS A RESULT, DEMAND FOR THE GROUP'S PRODUCTS AND SERVICES HAS DECLINED AND
MAY CONTINUE TO DECLINE.
The telecommunications industry is currently experiencing a prolonged and severe
downturn. Many of the Group's current and potential customers are network
operators with high levels of indebtedness and, in some cases, emerging or weak
revenue streams. Adverse economic conditions, network over-capacity due to
excess build-out, lack of funding for telecommunications development and
overspending on licence fees have forced network operators to undertake
extensive restructuring and cost-cutting initiatives. In light of market
conditions, many of the Group's customers have delayed delivery of orders
previously placed and have implemented drastic reductions in capital expenditure
in 2002 and 2003 as compared to 2001 and even more so in comparison with 2000,
and may further reduce capital expenditure. As a result, demand for the Group's
products and network roll-out services has declined.
The Group's near-term financial objectives do not depend on assumptions or
expectations of improvement in market conditions for the telecommunications
industry or improvement in current levels of sales in the Core
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businesses. However, they do assume that there will not be a further material
deterioration in current market conditions or a material decline in sales
levels. Additionally, achievement of the Group's longer-term financial
objectives will depend upon an increase in the Group's sales volumes based on an
improvement in demand for the Group's products and services, due to a recovery
of the industry or otherwise. Consequently, if demand remains weak for the
Group's products and services, resulting from the financial condition of the
Group's customers, market and industry conditions or otherwise, it is likely to
have a material adverse effect on the Group's business, results of operations
and financial condition in the longer term. In particular, this may affect the
Group's ability to achieve its profitability and cash flow objectives and,
consequently, it may impact on the future funding requirements of the business.
There can be no assurance that the telecommunications market will improve within
any particular timeframe or at all, or that it will not experience subsequent,
and possibly more severe and/or prolonged, downturns in the future.
THE GROUP IS CURRENTLY NOT PROFITABLE AND HAS BEEN EXPERIENCING NET OPERATING
CASH OUTFLOWS, AND WILL NEED TO EFFECT FURTHER CHANGES IN ITS BUSINESS IN ORDER
TO ACHIEVE ITS NEAR-TERM FINANCIAL OBJECTIVES.
The Group is currently not profitable and has been experiencing net operating
cash outflows, and has not made an operating profit (before exceptional items
and goodwill amortisation) in any fiscal quarter since the quarter ended 31
March 2002. The Group does not expect trading conditions in the
telecommunications market to improve in the near-term and, as discussed above,
there can be no assurance that such conditions will improve at all. Accordingly,
the Group's ability to become profitable and generate positive cash flow depends
significantly on improving gross margins through changes in product mix,
achieving operating efficiencies, and reducing operating costs, as well as there
being no further material decline in sales.
a. Improvement in gross margins. The Group is aiming to improve gross
margins within the Core businesses to between 24 and 27 per cent.
during the year ending 31 March 2004. This target assumes that
trading conditions in the telecommunications market will not change
materially over this period from current conditions. The Group will
accordingly seek to increase its gross margins by focusing its sales
on higher margin products and through further supply chain
rationalisation, lower unit product cost from on-going
re-engineering of its products and further improvements and
efficiencies in its manufacturing process, such as lower materials
costs. If sales of higher margin products do not increase as a
proportion of total sales and unit production costs do not fall as
expected, the Group may not be able to achieve the improvement in
gross margins it anticipates. Moreover, competitive pressures may
compel the Group to reduce prices, such that gross margins remain
steady or decrease, even if production costs fall.
b. Reduction in operating costs (before goodwill amortisation and
exceptional items). The Group is aiming to reduce the annual
operating cost run-rate of the Core businesses (before goodwill,
amortisation and exceptional items) to below L450 million during the
financial year ending 31 March 2004, as compared with a run rate at
31 December 2002 of L550 million (before goodwill, amortisation and
exceptional items). The Group will seek to achieve these cost
reductions primarily through further planned reduction in headcounts
as a result of further rationalisation of its activities and from
natural attrition in its workforce. Reduced spending on sales and
marketing initiatives and professional fees are also expected to
contribute to operating cost savings. However, the actions that will
be required to achieve this cost base target have not yet been fully
implemented, so there is a risk that the Group may not achieve this
forecast operating cost run rate or that it will not do so within
the anticipated timeframe.
c. No further decline in sales levels. The Group's sales have declined
quarter on quarter for the past five quarters, reflecting the
current downturn in the telecommunications industry as a whole.
While the Group expects the market to recover at some stage, if
sales in the Group's Core businesses continue to decline materially
for a prolonged period, it is unlikely that the Group will be able
to return to and maintain profitability or generate positive cash
flow solely through gross margin improvements and operating cost
reductions.
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Because of these risks and uncertainties, as well as the other risks and
uncertainties discussed in this Section, there can be no assurance that the
Group's actual experience will correspond with its assumptions and expectations,
and thus no assurance that the Group will be able to return to profitability or
generate positive operating cash flows within a particular timeframe or at all.
Moreover, even if the Group does attain profitability and positive operating
cash flow, it may not be able to sustain or increase this from quarter to
quarter or from year to year.
Failure of the Group to become and remain profitable and to generate positive
operating cash flow may affect its ability to pay interest and principal on the
New Notes when due and will affect its ability to pay dividends on the Corp
Shares. The Group may find it has limited or no ability to raise additional
capital through offerings of debt or equity securities in the capital markets in
the near or medium term.
A RELATIVELY SMALL NUMBER OF CUSTOMERS ACCOUNT FOR A LARGE PROPORTION OF THE
GROUP'S BUSINESS. IN PARTICULAR, THE LOSS OF BRITISH TELECOMMUNICATIONS PLC AS A
CUSTOMER WOULD HAVE A SIGNIFICANT ADVERSE EFFECT ON THE GROUP'S RESULTS.
A relatively small number of customers account for a significant proportion of
the Group's turnover. In the six months ended 30 September 2002, sales to the
Group's 10 largest customers represented approximately 46 per cent. of turnover
of the Group's Core businesses. Because of this concentration, adverse changes
that affect only a small number of customers or customer relationships could
have a significant adverse effect on the Group's results.
British Telecommunications plc and its subsidiaries are of particular importance
to the Group. For the six months ended 30 September 2002, sales to BT
represented approximately 17 per cent. of turnover of the Group's Core
businesses. The loss of BT as a customer or any substantial reduction in orders
by BT, particularly for the products and services of the Core businesses, would
have a significant adverse effect on the Group's results.
PERCEPTIONS OF UNCERTAINTY SURROUNDING THE FUTURE PROSPECTS OF THE GROUP MAY
HAVE AN ADVERSE EFFECT ON ITS BUSINESS.
In deciding whether or not to buy the Group's products or services, potential
and existing customers are likely to consider certainty of supply as part of
their procurement decision-making process. Although the Restructuring process
has made it possible for the Group to continue to operate, perceptions of
uncertainty may remain with respect to its financial condition and business
prospects. By comparison, some competitors may have more secure balance sheets
and may be perceived as more attractive suppliers. If new customers are not won,
or if existing customers do not continue to place orders or are lost, it would
materially adversely affect the Group's business and results of operations.
In addition, perceived uncertainties associated with the Group may adversely
affect existing relationships with suppliers. If suppliers become concerned
about the ability of the Group to pay its creditors, they may demand shorter
payment terms or not extend normal trade credit, either of which would adversely
affect the Group's working capital position. The Group may not be successful in
obtaining alternative suppliers if the need arises and this would adversely
affect its results of operations.
THE GROUP OPERATES IN A HIGHLY COMPETITIVE AND RAPIDLY CHANGING MARKET AND MAY
BE UNABLE TO INVEST SUFFICIENTLY IN RESEARCH AND DEVELOPMENT TO SUSTAIN OR
INCREASE SALES OF ITS PRODUCTS.
The Group's products are sold in markets that are characterised by rapid
adoption of new technologies, many new product introductions, shortening product
lifecycles and evolving industry standards. If the Group's products cease to be
competitive, the Group would be likely to lose customers and sales, which would
materially adversely affect the Group's business, results of operations and
financial condition.
The process for developing new products based on rapidly moving technologies for
broadband fixed networks and optical networks is complex and variable. It
requires innovative solutions that are cost effective and based on accurate
insights into technology and trends. Success depends on the timely and effective
introduction of new products or enhancements to existing products in a way that
meets customer needs and differentiates the Group's products from those offered
by its competitors. At the same time, these new product introductions must
achieve
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market acceptance, anticipate and accommodate emerging industry standards and be
compatible with current and competitor products. If there is an unforeseen
change in one or more of the technologies affecting telecommunications the
Group's products may cease to be competitive.
As part of its cost reduction effort, the Group has refocused and significantly
reduced its spending on research and development. The Group is aiming to reduce
overall research and development spending with a target spend of around 10 per
cent. of Core sales. The Group has focused more of its research and development
expenditure on Core products and intends to devote an increasing proportion of
spending to the optical networks and broadband routing and switching businesses.
However, this may not be sufficient to maintain the competitiveness of the
Group's Core products or enable it to increase its market share in key market
segments. Moreover, as discussed above, the Group will be subject to restrictive
covenants and other limitations and is likely to have difficulty obtaining
additional sources of financing, which may affect its ability to increase
spending or otherwise develop its technologies effectively.
A number of the Group's competitors have greater financial and technological
resources than the Group and, therefore, are in a better position to invest in
developing and acquiring proprietary technology, to expand into new business
segments and to increase their market shares. The Group may not be able to
develop new products and services at the same rate, maintain compatibility of
its products with competitors' products or keep up with technology market
trends. If the Group's products and services are not competitive, it is likely
that the Group will lose customers and business, its turnover will decline and
its business will be materially adversely affected.
THE GROUP IS DEPENDENT ON KEY MANAGEMENT PERSONNEL AND SKILLED TECHNOLOGY
WORKERS WHOSE DEPARTURE COULD ADVERSELY AFFECT THE GROUP'S ABILITY TO DEVELOP
ITS PRODUCTS AND OPERATE ITS BUSINESS.
The overall headcount of the Group's Core business has been reduced to
approximately 16,000 at 31 December 2002 from 33,000 at 31 March 2001, excluding
the impact of the discontinued operations (medical systems, data systems and
strategic communications). This reduction has been due to the implementation of
cost-reduction plans and disposals of assets and businesses. Included in the
number of employees that have left the Group are managers with many years of
experience in the management and operations of the Group's business as well as
highly skilled technology workers and other employees with years of operational
experience in the Group's business. Further workforce reductions are planned and
could include key employees with valuable skills and knowledge whose departure
would adversely affect the Group's ability to continue to develop new and
enhance existing products.
At the same time, the uncertainties associated with headcount reductions and the
Group's prospects generally may cause key employees to leave and otherwise
increase employee and management turnover, which may contribute to and result in
inefficiencies in running the Group's business. In addition, following the
Restructuring, the incentive arrangements offered by the Group may be perceived
as unattractive in comparison with those offered by the Group's competitors,
which may make it more difficult to retain personnel and attract qualified
replacements for those who leave. The loss of additional key managers and highly
skilled technology workers may result in the Group's inability to develop new
products on a timely basis, improve current technologies or operate its business
efficiently.
THE GROUP IS RELIANT ON THE CONTINUED PERFORMANCE OF THIRD PARTIES IN RELATION
TO CERTAIN OUTSOURCING ARRANGEMENTS.
The Group relies on outsourcing arrangements for the manufacture of certain
products and components and is considering further potential outsourcing
opportunities in its supply chain and logistics organisation and with respect to
information technology. If the third parties on whom the Group relies or will
rely in relation to these outsourcing arrangements do not fulfil their
obligations under such contracts, or seek to terminate or change the terms of
their contracts due to perceived uncertainty with respect to the Group's ongoing
ability to perform under such contracts, or if the Group does not otherwise
properly manage these relationships, such supplies or services could be severely
disrupted or reduced. A significant increase in the price of key supplies or
services or constraints on suppliers' capacities, particularly during periods of
significant demand, in the absence of an alternative supplier, would adversely
affect the Group's business. Moreover, outsourcing initiatives ultimately
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may not yield the benefits the Group expects, and may raise product costs and
delay product production and service delivery. The Group's outsourcing
arrangements are discussed in Part A.7 of this Section.
MEASURES TO REDUCE OPERATING COSTS COULD ADVERSELY AFFECT RELATIONS WITH
EMPLOYEES OF THE GROUP, ITS SUPPLIERS AND/OR ITS PARTNERS, WHICH COULD DISRUPT
ITS BUSINESS.
In order to further reduce operating costs, the Group intends to reduce the size
of its workforce, in part through further rationalisation of its activities and
outsourcing initiatives, and to seek to renegotiate certain existing contracts
with suppliers and partners in order to obtain more favourable terms. The
implementation of these plans may increase demands on, and/or negatively impact
relations with, employees of the Group and its suppliers and partners. Such
negative impact may result in a diminution in employee morale, labour
disruptions, industrial action and/or labour-related law suits against the
Group, its suppliers or partners. Any of these results could diminish the
efficient operation of the Group's business, disrupt services at the facilities
of the Group, its suppliers or partners and inhibit the realisation of the
operating cost reductions that are fundamental to the Group's financial
objectives, which would have a material adverse effect on the Group's business,
financial condition and results of operations.
In Europe, particularly, employees are protected by laws giving them, through
local and central work councils, rights of consultation with respect to specific
matters regarding their employers' business and operations, including the
downsizing or closure of facilities and employee terminations. These laws, and
collective bargaining agreements to which the Group, its suppliers or partners
may be subject, could impair the Group's flexibility as it continues to pursue
reductions in operating expenses.
THE GROUP'S FINANCIAL REPORTING SYSTEMS REQUIRE SIGNIFICANT OPERATIONAL
RESOURCES.
As a result of the rapid expansion of the Group in 1999 and 2000, the number of
different acquired systems, the deferral of the introduction of a Group-wide FRP
system due to cost considerations and the disposal of a number of businesses
from the Group, the operation of the Group's financial reporting systems has
required and will continue to require considerable personnel resources. Taken
together with the demands of the Restructuring process, this has placed
significant pressure on the resources of the finance function. The Group is also
in the process of implementing a number of changes to its consolidation and
financial reporting systems, with a view to streamlining the existing reporting
processes. Although Corp and plc currently believe that the Group's financial
reporting systems are, and without the changes referred to above would remain,
fit for purpose, the continued effectiveness of these systems following the
Restructuring is dependent on a combination of the continued availability of
sufficient finance team resources and any changes that are made to the financial
reporting system being successfully implemented.
FUNDING OF PENSION PLANS MAY BECOME MORE DIFFICULT.
The interaction of poor equity markets and low interest rates over the last
several years has had a significant negative impact on the funded status of and
liabilities under the Group's defined benefit pension plans and contribution
obligations under such plans, more details of which are set out in Part D.11 of
this Section. Corp either sponsors such plans or is exposed to liabilities with
respect to plans sponsored by affiliates or former affiliates. It is possible
that unless equity markets and/or interest rates improve, such obligations may
require Corp and/or its affiliate sponsoring companies to such plans to make
additional contributions. Likewise, changes in the statement of investment
principles of the UK plans, the actuarial assumptions employed in conjunction
with any such plans or legislation could also result in a need for Corp and/or
its affiliates to make additional contributions to such plans.
Corp does not believe that (as at 5 April 2002, the date for when figures are
last available) the UK Plan has a funding deficit (by reference to the plan's
own on-going basis), however investment conditions have deteriorated since 5
April 2002. If the UK Plan is wound up, however, then it is unlikely that it
will have sufficient assets to discharge in full all liabilities, calculated on
a winding-up rather than an on-going basis. No plans have been made to wind up
the UK Plan but should such a decision be made (as opposed to operating it as a
plan closed to new members), Corp and the participating Group Companies would
(under current legislation) be required to make good any statutory debt (if
there is one). If a statutory debt were to arise, the size of the debt (relative
to the
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Group's assets) could have a materially detrimental effect on the Group's
resources. The significance of the potential detrimental effect should be seen
against Corp's estimate that (as at 5 April 2002) the value of the UK Plan's
assets was L2.495 billion and the value of its liabilities was L2.494 billion.
There is no guarantee that the value of the UK Plan's assets will not
deteriorate nor that legislation will not be introduced to oblige employers to
make further contributions to pension plans which are not fully funded on a
specified basis which is stricter than that required by current legislation. In
its Green Paper published on 17 December 2002, the UK government has said that
it is considering replacing the statutory minimum funding requirement with a
scheme-specific minimum funding level, which could be higher.
Following the sale of General Domestic Appliances Holdings Limited in 2001, the
trustee of the UK Plan is expected to make a payment to the buyer's pension plan
in respect of the accrued benefits of the employees who transferred to the
buyer. Although a basis for calculation of the transfer amount was agreed in the
sale agreement for the sale of General Domestic Appliances, the trustee of the
UK Plan is not bound by this. Corp is responsible for 50 per cent. of any
shortfall between the transfer amount agreed in the sale agreement and the
amount actually paid by the trustee. Anticipating a shortfall at the time of the
sale, an allowance of L3.255 million was made in the sale price. The information
received by Corp to date is that the plan actuary intends to advise the trustee
to calculate the transfer amount on a basis which would (apart from the
allowance in the sale price) result in a liability for Corp under the shortfall
obligation of approximately L1.47 million. Allowing for the price adjustment,
Corp would on these figures be entitled to L1.785 million from the buyer. If the
trustee does not follow the advice of the actuary or if the actuary changes his
advice, Corp expects its maximum liability under the shortfall obligation to be
L14.665 million (or L12.88 million if the net over-allowance by Corp is taken
into account). The actuary is not bound by his representations and a final
determination of the transfer amount is not likely until April or May 2003.
There can be no assurance that the trustee will not decide to follow a basis
which results in a greater liability for Corp than Corp currently expects or
that any such liability would not have a material adverse effect on the Group.
Indeed, if the trustee refuses or fails to transfer the whole or any part of the
agreed amount, Corp will be liable to pay 50 per cent. of the shortfall (less
the buyer's prevailing rate of corporation tax), which could produce a
significant larger liability.
THERE IS A RISK THAT THIRD PARTY INTELLECTUAL PROPERTY RIGHTS WILL BE ASSERTED
AGAINST THE GROUP.
The Group relies on patents, trade marks, trade secrets, design rights,
copyrights, confidentiality provisions and licensing agreements to establish and
protect its proprietary technology and to protect against claims from others.
Infringement claims have been and may continue to be asserted against the Group
or against its customers in connection with their use of the Group's systems and
products. The Group cannot ensure the outcome of any such claims and, should
litigation arise, such litigation could be costly and time-consuming to resolve
and could result in the suspension of the manufacture of the products utilising
the relevant intellectual property. In each case, the Group's operating results
and financial condition could be materially affected.
F.4 RISKS RELATED TO OWNERSHIP OF THE NEW SHARES, THE NEW NOTES AND THE
WARRANTS
THERE IS NO CURRENT TRADING MARKET FOR THE NEW SHARES, THE NEW NOTES OR THE
WARRANTS, AND THE MARKET PRICES OF THE NEW SHARES, THE NEW NOTES AND THE
WARRANTS MAY BE ADVERSELY AFFECTED BY SIGNIFICANT SELLING ACTIVITY IN THE PERIOD
FOLLOWING IMPLEMENTATION OF THE RESTRUCTURING.
The New Shares, the New Notes and the Warrants comprise new issues of securities
for which there is currently no public trading market. There can be no assurance
as to the development or liquidity of any market for the New Shares, the New
Notes or the Warrants. To the extent that the New Shares and the Warrants are
traded after their initial issuance, they may trade at prices that are lower
than the initial market values thereof depending on many factors, including
prevailing interest rates and the markets for similar securities as well as
technological, market, economic, legislative, political, regulatory and other
factors. Similarly, the New Notes may, after their initial issuance, trade at a
substantial discount to their principal amounts, depending upon prevailing
interest rates, the market for similar securities, the performance of Corp and
other factors. There can be no assurance that active trading markets will
develop or be maintained for the New Shares, the Warrants or the New Notes.
Significant sales of the New Shares, the Warrants or the New Notes would be
likely to result in a decline in their respective market prices. It is likely
that certain persons who receive New Shares or Warrants through the
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Schemes will sell the New Shares or the Warrants they receive very soon after
the Corp Scheme becomes effective and those securities are initially issued.
These sales could result in significant downward pressure on the market price of
the New Shares or the Warrants. Similar sales and corresponding price pressure
could also affect the New Notes.
CORP WILL BE DEPENDENT IN PART ON FUNDS RECEIVED FROM ITS SUBSIDIARIES TO PAY
INTEREST AND PRINCIPAL ON THE NEW NOTES AND TO PAY DIVIDENDS, IF ANY, ON THE NEW
SHARES.
Corp is a holding company, its principal assets being its investments in its
subsidiaries. As a holding company, Corp's ability to pay dividends on the New
Shares and to pay interest and principal on the New Notes is dependent upon the
receipt of funds from its subsidiaries by means of dividends, interest,
inter-company loans or otherwise. The ability of its subsidiaries to make funds
available to Corp is subject, among other things, to applicable corporate and
other laws and restrictions contained in agreements to which such subsidiaries
are subject. There can be no assurance that Corp's subsidiaries will be in a
position to make funds available. Any limitations on the ability of its
subsidiaries to make funds available to Corp would have a corresponding adverse
effect on Corp's ability to make payments of interest and principal on the New
Notes and to pay dividends, if any, on the New Shares. In addition, the terms of
the indentures governing the New Notes will significantly restrict the ability
of Corp to pay dividends on Corp Shares while the New Notes are outstanding.
Accordingly, Corp does not expect to pay dividends on Corp Shares for the
foreseeable future.
THE US RINGFENCING WILL GIVE RISE TO OPERATIONAL AND FINANCIAL INEFFICIENCIES
AND OTHER COSTS WHICH MAY ADVERSELY AFFECT THE GROUP'S BUSINESS AND THE MARKET
PRICE OF THE NEW SHARES.
As described in Part A.2 of this Section certain of the Group's US businesses
will be contractually separated or "ringfenced" from the rest of the Group upon
implementation of the Restructuring. This US Ringfencing may have significant
implications for holders of New Notes, as well as holders of New Shares.
The covenants in the indentures governing the New Notes will regulate the type
of financial, operational and other dealings that the Non-Ringfenced Entities
can have with the Ringfenced Entities. The covenants in the New Notes will also
require Corp to separate the North American Access Business, BBRS Business and
OPP Business into separate subsidiaries within the US Ringfencing no later than
the second anniversary of the issue date of the New Notes. Moreover, the
Non-Ringfenced Entities will generally be prohibited from providing funding for
any of the Ringfenced Entities and, following the separation of the three
principal businesses within the US Ringfencing, the North American Access
Business, BBRS Business and OPP Business will generally be prohibited from
providing funding to each other. The Ringfenced Entities will enter into various
agreements with the Non-Ringfenced Entities necessary to ensure that from the
Effective Date those dealings that are permitted with each other will be
provided in the ordinary course of business on an arm's-length basis or
otherwise as permitted by the covenants in the indentures governing the New
Notes. These arrangements for the provision of such services may lead to higher
costs for the Group as a whole which may affect its results of operations, as
well as Corp's ability to repay the New Notes.
In addition to the foregoing, the operational and financial inefficiencies and
other costs associated with the US Ringfencing arrangements could have an
adverse effect on Corp's business and on the market price of the New Shares.
CORP MAY BE UNABLE TO REPAY THE NEW NOTES AT MATURITY.
Corp currently intends to repay any principal amount outstanding in respect of
the New Notes at their maturity in part from cash generated by the Group. As
discussed above, the Group currently is cash flow negative and its ability to
generate significant positive cash flow in the future is subject to significant
risks and uncertainties. If the Group is unable to generate sufficient cash to
allow Corp to repay the New Notes at maturity, Corp would need to obtain other
financing for this purpose. However, also as discussed above, Corp's ability to
obtain such financing may be extremely limited. Accordingly, no assurance can be
given that Corp will be able to repay any of the New Notes at their maturity.
182
I. EXPLANATORY STATEMENT
(IN COMPLIANCE WITH SECTION 426 OF THE COMPANIES ACT 1985)
SECTION 2: FURTHER EXPLANATION OF THE RESTRUCTURING -- PART F
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In the event that Corp is unable to repay the New Notes following an event of
default or at their maturity (either from its own cash or from other sources of
funding), no assurances can be given as to whether the proceeds of the security
granted by Corp and the Guarantors in connection with the New Notes will be
sufficient to meet any shortfall.
Whilst the holders of the New Notes will have the benefit of the Security (as
described in Appendix 10), such security:
a. ranks in its entirety behind the security in favour of the providers
of the Performance Bonding Facility;
b. ranks behind certain cash collateral in favour of the providers of
existing performance bonds; and
c. in relation to the property located at Warrendale Pennsylvania,
ranks behind the first mortgage in favour of Liberty Funding L.L.C.
as provider of the Working Capital Facility to be made available to
Marconi Communications, Inc.
THE NEW NOTES ARE SUBJECT TO A REDEMPTION OBLIGATION AT A PREMIUM UPON A CHANGE
OF CONTROL OF CORP WHICH MAY DISCOURAGE POTENTIAL BIDDERS.
Upon the occurrence of specific kinds of change of control or merger events,
Corp will be required to offer to repurchase all outstanding New Notes at the
greater of 110 per cent. of their aggregate principal amount or a make whole
amount based on 50 basis points above the yield on US treasuries of similar
maturity plus, in each case accrued and unpaid interest. This obligation to
redeem the New Notes at a premium could have the effect of deterring third
parties who might otherwise offer to acquire a controlling interest in the Group
or could adversely affect the terms on which any such offer is made. This
redemption obligation may accordingly have an adverse effect on the market price
of the New Shares and could deprive holders of the New Shares of an opportunity
to receive a premium for their New Shares upon a change of control of the Group.
THE FUNDING STATUS OF THE GROUP'S US PENSION PLANS AND THE AGREEMENT ENTERED
INTO BY CORP WITH THE PBGC WITH RESPECT TO THOSE PLANS COULD DELAY OR ADVERSELY
AFFECT THE TERMS OF THE SALE OF THE GROUP'S US BUSINESSES.
As described in Part D.11 of this Section, the funding status of certain
tax-qualified defined benefit plans subject to the regulation of the Pension
Benefit Guaranty Corporation ("PBGC") in the United States could result in
action being taken by the PBGC that might delay or otherwise adversely affect
the sale of the Group's US Businesses or assets used therein (or the net
proceeds realised therefrom). The likelihood of such action will depend in part
on the funded status of such plans at the time of any such sale, the
creditworthiness of the purchaser following such sale and the extent to which
the pension liabilities are assumed by the purchaser in any such sale. Although
Corp has entered into a memorandum of understanding with the PBGC with a view to
making such adverse action less likely, under this memorandum of understanding
specified conditions must be satisfied in connection with any such sale. To the
extent that these matters give rise to any delay or other adverse consequences
with respect to the sale of the Group's US Businesses, holders of New Shares and
New Notes, and in particular holders of New Junior Notes, could be adversely
affected.
IT IS UNLIKELY THAT CORP WILL PAY DIVIDENDS FOR THE FORESEEABLE FUTURE.
Corp does not anticipate paying dividends on the New Shares in the foreseeable
future. Moreover, even if Corp has distributable reserves and becomes cash flow
positive and profitable and so is in a position to pay dividends, the indentures
relating to the Notes significantly restrict its ability to pay dividends.
Certain institutional investors may only invest in dividend-paying equity
securities or may operate under other restrictions that may prohibit or limit
their ability to invest in the New Shares. This may reduce the demand for the
New Shares until Corp is able to pay dividends in respect of the New Shares,
which may in turn adversely affect the price of the New Shares in the market.
183
I. EXPLANATORY STATEMENT
(IN COMPLIANCE WITH SECTION 426 OF THE COMPANIES ACT 1985)
SECTION 2: FURTHER EXPLANATION OF THE RESTRUCTURING -- PART F
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PRE-EMPTIVE RIGHTS FOR NON-UK HOLDERS OF NEW SHARES MAY NOT BE AVAILABLE.
In the case of, amongst other things, an increase of the share capital of Corp,
existing shareholders are entitled to pre-emptive rights pursuant to the Act and
Corp's articles of association unless waived by a resolution of the shareholders
at a general meeting or in the circumstances stated in Corp's articles of
association. Even where pre-emptive rights apply, holders of the New Shares in
the United States, South Africa, Australia, Canada and other jurisdictions
outside the United Kingdom may in practice not be able to exercise pre-emptive
rights in respect of their New Shares unless Corp decides to comply with
applicable local laws and regulations and, in the case of holders of the New
Shares in the United States, a registration statement under the US Securities
Act is effective with respect to such rights, or an exemption from the
registration requirements thereunder is available. Corp intends to evaluate at
the time of any pre-emptive rights offering the costs and potential liabilities
associated with any such registration statement and compliance with other
applicable local laws and regulations, as well as the indirect benefits to it of
thereby enabling or facilitating the exercise by holders of the New Shares in
the United States and such other jurisdictions of their pre-emptive rights for
new securities in respect of their New Shares and any other factors Corp
considers appropriate at the time, and then to make a decision as to how to
proceed and whether to file such a registration statement or comply with such
other applicable local laws and regulations. No assurance can be given that any
registration statement with respect to the securities offered under a pre-
emptive issue would be filed or any such other local laws and regulations would
be complied with to enable the exercise of such holders' pre-emptive rights.
IN THE EVENT OF ENFORCEMENT OF THE SECURITY FOR THE NEW NOTES AND THE
PERFORMANCE BONDING FACILITY, THE NEW NOTES WILL RANK JUNIOR IN RIGHT OF PAYMENT
TO THE PERFORMANCE BONDING FACILITY, THE NEW JUNIOR NOTES WILL RANK JUNIOR IN
RIGHT OF PAYMENT TO THE NEW SENIOR NOTES, AND THE RIGHTS OF THE NEW JUNIOR NOTES
TO TAKE ENFORCEMENT ACTION WITH RESPECT TO THE SECURITY WILL BE LIMITED.
Corp, the Guarantors, the indenture trustees for the New Notes and the agent
under the Performance Bonding Facility, among others, will enter into a Security
Trust and Intercreditor Deed that will establish the relative priorities among
the New Senior Notes, the New Junior Notes and the Performance Bonding Facility
in the event of enforcement of the security therefor. Following the occurrence
of a payment default and/or an acceleration of the maturity of the New Senior
Notes, all proceeds from enforcement of the security granted by Corp and the
Guarantors to secure their respective obligations under the New Notes, the
guarantees thereof and the Performance Bonding Facility will be applied as
follows:
- first, to the fees and expenses of the trustees and other agents;
- second, to the banks providing the Performance Bonding Facility;
- third, to repayment of the New Senior Notes; and
- fourth, to repayment of the New Junior Notes.
Under the terms of the Security Trust and Intercreditor Deed, no payments may be
made on the New Junior Notes (other than payments of interest in kind) and no
redemptions of the New Junior Notes from the proceeds of asset sales may be
made, subject to limited exceptions: (i) following a payment default under, or
acceleration of, the New Senior Notes until the payment default or acceleration
has been remedied or waived or unless at least a majority in principal amount of
the New Senior Notes consent in writing or all liabilities arising under the New
Senior Notes are paid in full, or (ii) following a standstill notice being
delivered by the New Senior Notes Trustee to the Security Trustee (notifying it
of the occurrence of a default under the New Senior Notes) for a period of up to
179 days.
In addition, under the terms of the Security Trust and Intercreditor Deed, the
holders of the New Junior Notes may not:
- accelerate the New Junior Notes during a standstill period (as
described in more detail in Part C of this Section);
- take enforcement action against any security securing the New Junior
Notes without the consent of the holders of the New Senior Notes or
unless all liabilities arising under the New Senior Notes have been
discharged in full; or
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I. EXPLANATORY STATEMENT
(IN COMPLIANCE WITH SECTION 426 OF THE COMPANIES ACT 1985)
SECTION 2: FURTHER EXPLANATION OF THE RESTRUCTURING -- PART F
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- amend the indenture for the New Junior Notes, with limited exceptions.
Furthermore, if the holders of the New Senior Notes agree to waive a default or
event of default and/or amend the New Senior Notes or the related indenture to
address the circumstances leading to such default or event of default, the
holders of the New Junior Notes will be deemed to have waived such default or
event of default and/or the corresponding provisions of the New Junior Notes and
the related indenture will be amended or supplemented to the same effect, in
each case without the consent of any holder of New Junior Notes (but subject to
certain limitations).
THE VALUE OF THE GUARANTEES AND THE COLLATERAL MAY BE LIMITED BY APPLICABLE
LAWS.
Corp's obligations under the New Notes and the Performance Bonding Facility will
be guaranteed by certain of Corp's subsidiaries that, with limited exceptions,
must include on an ongoing basis (i) subsidiaries that together account for at
least 80 per cent., and (ii) each subsidiary that individually accounts for more
than 5 per cent, in each case, of the total assets, total external assets, total
external sales, and (commencing as of 31 March 2005) total EBITDA of Corp and
its subsidiaries. Corp and the Guarantors will, with limited exceptions, grant
security over substantially all of their respective assets to secure their
respective obligations under the New Notes and the guarantees as well as the
Performance Bonding Facility.
The obligations of the Guarantors will be limited under the relevant laws
applicable to such Guarantors and the granting of such guarantees and/or
security (including laws relating to corporate benefit, capital preservation,
financial assistance, fraudulent conveyances, fraudulent transfers or
transactions at an under value) to the maximum amount payable or secured such
that such Guarantees or security will not constitute a fraudulent conveyance,
fraudulent transfer or a transaction at an under value, or otherwise cause the
Guarantor to be insolvent under relevant law or such guarantees or security to
be void or unenforceable or cause the directors of such Guarantor to be held in
breach of applicable corporate or commercial law for providing such Guarantee or
security. As a result, a Guarantor's liability under its guarantee and/or the
value of security granted could be reduced to zero. Notwithstanding the
foregoing limitations to the guarantees, there can be no assurance that the
provision of any guarantee by any particular Guarantor or Guarantors will not be
challenged by a liquidator, administrator or other creditor of such Guarantor or
Guarantors. If a court voided any guarantee or held it unenforceable, holders of
New Notes would cease to have a claim in respect of the guarantee by the
relevant Guarantor and, accordingly, would cease to be a creditor of such
Guarantor.
185
II. THE CORP SCHEME
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IN THE HIGH COURT OF JUSTICE
CHANCERY DIVISION
COMPANIES COURT
NO. 1783 OF 2003
IN THE MATTER OF MARCONI CORPORATION PLC
AND
IN THE MATTER OF THE COMPANIES ACT 1985
------------------------------------------------------------
SCHEME OF ARRANGEMENT
(UNDER SECTION 425 OF THE COMPANIES ACT 1985)
------------------------------------------------------------
BETWEEN:
MARCONI CORPORATION PLC
AND
ITS SCHEME CREDITORS
(AS HEREINAFTER DEFINED)
186
II. THE CORP SCHEME
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PART I
PRELIMINARY
RECITALS
DEFINITIONS
A In this Scheme, unless the context otherwise requires or unless otherwise
expressly provided for, the following expressions shall bear the following
meanings:
"ACCOUNT HOLDER" has the definition in Recital G(3);
"ACCOUNT HOLDER LETTER" a letter in the form, or substantially in the
form, set out as the annex to Appendix 28;
"ACT" the Companies Act 1985;
"ADMISSIBLE INTEREST" an amount in respect of any interest to which a
Scheme Creditor is entitled to be paid by the Company or which has accrued
but is not yet payable by the Company to a Scheme Creditor, whether by
reason of contract, judgment against the Company, decree or otherwise, in
respect of the period up to and including, the Record Date;
"ADMITTED"
(1) when used of a Scheme Claim, the amount of any relevant claim which
has been admitted by the Supervisors pursuant to clause 9 so as to
qualify for Distributions; and
(2) when used of a Scheme Creditor, that Scheme Creditor in respect of
the amount of its Scheme Claim which has been admitted by the
Supervisors as described in (1);
"ADMITTED IN FULL" in connection with a Disputed Claim for the purposes of
determining the currency or currencies in which New Senior Notes will be
denominated only means Admitted in the amount set out against that
Disputed Claim in the second column of Schedule 3 or in the second column
of Schedule 3 of the plc Scheme as the case may be;
"ADR" an American depositary receipt evidencing an American depositary
share, each representing 10 New Shares, issued pursuant to the deposit
agreement dated on or around 31 March 2003 between the Company, the ADR
Depositary, and the owners and beneficial holders of American depositary
receipts;
"ADR DEPOSITARY" Bank of New York, as depositary under the deposit
agreement relating to the ADRs;
"AFFILIATE" in relation to the Company, a body corporate in which it has a
direct or indirect interest as a shareholder of at least 25 per cent. of
the issued ordinary share capital;
"ALLOWED PROCEEDING"
(1) any Ascertainment Proceeding in any jurisdiction commenced or
continued by a person claiming to be a creditor of the Company and
whether against the Company alone or against the Company and others
which is commenced or continued (so far as the Company is
concerned) for the sole purpose of ascertaining whether such person
has (and, if so, the quantum of) a Scheme Claim including for the
avoidance of doubt any adjudication pursuant to sub-clause 17(1)
and Part VI; and
(2) any proceeding by a Scheme Creditor to enforce its rights under the
Scheme where the Company or the Supervisors fail to perform their
respective obligations under the Scheme;
"ANCRANE" Ancrane, an unlimited liability company incorporated in England
and Wales with registered number 4308188, which is a subsidiary of plc;
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II. THE CORP SCHEME
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"ANCRANE DIRECTION"
(1) the irrevocable direction given by Ancrane to the Company directing
the Company to deliver to plc any Scheme Consideration to which
Ancrane is entitled pursuant to any Claim Form filed by it in
respect of the Known Claim listed against its name in Schedule 3
(which, for the avoidance of doubt, does not include any claim or
entitlement in respect of Bonds of which Ancrane is the Bondholder);
together with
(2) the irrevocable authorisation and direction given by Ancrane to each
of the Eurobond Trustee, the Yankee Bond Trustee, the Escrow
Trustee, the supervisor of the plc Scheme and the Supervisors to
direct the Distribution Agent to pay all Scheme Consideration or
distributions received pursuant to the plc Scheme to which Ancrane
is entitled by virtue of its holding of Bonds to plc;
"ASCERTAINMENT PROCEEDING" any action or other legal proceeding including
any judicial review, arbitration, alternative dispute resolution or
adjudication;
"ASSET SALE" has the meaning given to it in the New Junior Notes'
indenture and in Appendix 8;
"BANK OF NEW YORK" The Bank of New York, a New York banking corporation
having an office at 101 Barclay Street, New York, New York, 10286, U.S.A.;
"BANKS" the banks, financial and other institutions which provide the
Existing Facility to the Company as at the Record Date;
"BASIC KNOWN CLAIMS SEGMENT" has the meaning given to it in sub-clause
21(3)(a);
"BASIC RESERVE CLAIMS SEGMENT" has the meaning given to it in sub-clause
21(3)(b);
"BASIC SCHEME CONSIDERATION" the Cash and the New Rights as further
described in sub-clause 21(1);
"BONDHOLDER COMMUNICATIONS" Bondholder Communications Group, a New York
corporation having an office at 30 Broad Street, 46th Floor, New York,
NY10004 U.S.A.;
"BONDHOLDER" a person with the ultimate economic interest in any of the
Bonds;
"BOND ISSUES" the Euro Issues and the Yankee Issues;
"BONDS" all or any of the Eurobonds and the Yankee Bonds;
"BOOK-ENTRY DEPOSITARY" Bank of New York in its capacity as book-entry
depositary in relation to the Yankee Bonds (or, from time to time, any
successor to Bank of New York as such book entry depositary);
"BUSINESS DAY" any day on which banks are open for general business in
both London and New York;
"CASH" the sum of L340,000,000, plus any Excess Cash, to be distributed to
Eligible Recipients in accordance with the provisions of the Scheme;
"CHANGE OF LAW" a change of law or regulation since 27 March 2003 in any
jurisdiction, such that distribution of securities pursuant to the Scheme
to a person in such jurisdiction would be prohibited (if previously
permitted) or permitted (if previously prohibited) pursuant to sub-clause
30(7);
"CLAIM FORM" each or any of the claim forms to be completed by or on
behalf of a Scheme Creditor (or its duly authorised agent) detailing its
Scheme Claim substantially in the form which is set out in Appendix 30;
"CLEARSTREAM, LUXEMBOURG" Clearstream Banking, societe anonyme;
"COMPANY" Marconi Corporation plc, a company incorporated in England and
Wales with registered number 67307;
"CONCLUSIVELY REJECTED" when used of a Scheme Claim or part thereof means
that following a notice of rejection given pursuant to clause 16 either:
(1) the decision of the Supervisors in relation to that Scheme Claim
(or part thereof) has been upheld (in whole or in part) by a
determination in an Allowed Proceeding pursuant to clause 18 or by
adjudication pursuant to Part VI; or
(2) the Company has been released from that Scheme Claim (or part
thereof) pursuant to clause 20;
"CONSOB" The Commissione Nazionale per le Societa e la Borsa, the public
authority responsible for regulating the Italian securities market;
188
II. THE CORP SCHEME
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"CO-ORDINATION COMMITTEE" the co-ordination committee of Banks which has
acted in connection with the restructuring proposals, the present members
being Barclays Bank PLC, HSBC Bank plc, London Branch, JPMorgan Chase
Bank, The Royal Bank of Scotland plc and Commerzbank Aktiengesellschaft,
London Branch and of which Intesa BCI S.p.A. was a member from 22 October
2001 to 5 March 2003;
"CORP GROUP" the Company and its Affiliates;
"CORP/PLC MODEL" the distribution model described in sub-clause 27(2);
"CORP SPV" Regent Escrow Limited, a limited liability special purpose
company incorporated specifically to act as escrow trustee pursuant to the
Scheme and the plc Scheme;
"COURT" the High Court of Justice of England and Wales;
"COURT HEARING" the hearing of the Company's application to the Court
requesting the Court's sanction of the Scheme;
"CREDITORS' COMMITTEE" the committee of Scheme Creditors established and
operated pursuant to and in accordance with Parts VIII and IX;
"CREST" the system for the paperless settlement of trades in listed
securities of which CRESTCo Limited is the operator;
"CURRENCY RATE" the Exchange Rate on the last Business Day before the
meeting of creditors of the Company convened pursuant to the order of the
Court is held (being, in the case of an adjournment of that meeting, the
day the last meeting pursuant to such adjournment is held);
"DEFINITIVE HOLDER" the registered holder of a Yankee Bond in definitive
form and the bearer (whether pursuant to an attornment or otherwise) of a
Eurobond in individual global form other than a Eurobond in individual
global form in respect of which no Account Holder Letter has been
delivered pursuant to the arrangements described in Recital G(4);
"DEPOSITARIES" the holders for the time being of the global bonds
described in Recital G(5) in respect of which no Account Holder Letter has
been delivered;
"DESIGNATED RECIPIENT" a person specified in the valid Account Holder
Letter (or, in the case of Ancrane, in the Escrow and Distribution
Agreement) relating to a particular principal amount of Bonds as being the
recipient of any part of the First Initial Distribution and of any further
Distribution in respect of those Bonds and includes, in the case of any
cash distributed as part of any Distribution made in respect of the
Eurobonds, each person to whom such cash is distributed through Euroclear
or Clearstream, Luxembourg;
"DIRECTORS" the directors of the Company from time to time;
"DISPUTED CLAIMS" those Known Claims in Schedule 3 to which note 6 to that
Schedule applies;
"DISTRIBUTION" a distribution of Elements of the Scheme Consideration to
Eligible Recipients in accordance with the Scheme;
"DISTRIBUTION AGENT" Bank of New York as distribution agent pursuant to
the Escrow and Distribution Agreement and any successor from time to time;
"DISTRIBUTION ENTITLEMENT" the entitlement under the Scheme of an Admitted
Scheme Creditor to a Distribution;
"DISTRIBUTION NOTICE" an irrevocable notice served by the Supervisors on
the Escrow Trustee (with a copy to the Distribution Agent) instructing the
Escrow Trustee to direct the Distribution Agent to make a Distribution;
"DTC" The Depository Trust Company of New York;
"EFFECTIVE DATE" the date on which an office copy of the order of the
Court sanctioning the Scheme shall have been delivered to the Registrar of
Companies for registration;
189
II. THE CORP SCHEME
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"EFFECTIVE TIME" the time at which the office copy of the order of the
Court sanctioning the Scheme is delivered to the Registrar of Companies
for registration;
"ELEMENT" when used of any of the Basic Scheme Consideration, the plc
Distribution Supplement, any plc Receipts and any Rejected Claim
Supplement, each of the New Rights and the Cash (and, in the case of the
plc Distribution Supplement, any plc Receipt or any Rejected Claim
Supplement, any other Property);
"ELIGIBLE RECIPIENT"
(1) in relation to an Admitted Scheme Claim other than Scheme Claims in
respect of Bonds, the Scheme Creditor; and
(2) in relation to an Admitted Scheme Claim in respect of Bonds, the
relevant Designated Recipient;
"EMPLOYEE" any partner in the same firm as the Supervisors, or any person
employed, whether under a contract of service or a contract for services,
by that firm or by any company owned by that firm, who is employed by the
Supervisors in accordance with Part VII in connection with the conduct of
the Supervisors' functions and powers under the Scheme;
"ESCROW AND DISTRIBUTION AGREEMENT" the agreement entered into on 27 March
2003 between, inter alios, the Company, the Supervisors, the Escrow
Trustee and the Distribution Agent in the form set out in Appendix 7, a
condition precedent to the effectiveness of which (in so far as it relates
to the Scheme) is the occurrence of the Effective Time;
"ESCROW TRUSTEE" Corp Spv, appointed as escrow trustee under the terms of
the Escrow and Distribution Agreement and any successor from time to time;
"ESOP BANKS" Barclays Bank PLC, Salomon Brothers International Limited and
UBS AG;
"ESOP ESCROW AGREEMENT" the escrow agreement between plc, the Company,
HSBC Bank plc and Barclays Bank PLC dated 13 December 2002;
"ESOP SETTLEMENT AGREEMENT" the ESOP settlement agreement dated 26 March
2003 between the Company, plc, HSBC Bank plc, the ESOP Banks and Bedell
Cristin Trustees Limited;
"EURO" or "E" the single currency of those member states of the European
Communities that have adopted (or adopt) the euro as their lawful currency
under the legislation for the European Union for European Monetary Union;
"EUROBONDS" all or any of the bonds comprising the Euro Issues;
"EUROBOND TRUSTEE" The Law Debenture Trust Corporation p.l.c. in its
capacity as trustee under the Trust Deeds;
"EUROCLEAR" Euroclear Bank S.A./N.V., as operator of the Euroclear system;
"EURO ISSUES" E500,000,000 5.625 per cent. bonds due 2005 and
E1,000,000,000 6.375 per cent. bonds due 2010, both issued by the Company
and both guaranteed by plc;
"EXAMINATION PERIOD" has the meaning given to it in sub-clause 24(2);
"EXCESS CASH" any Net Proceeds of Asset Sales, other than up to
L82,000,000 of Excluded Asset Sale and Liquidation Proceeds, received by
the Company or any of its Subsidiaries on or after 1 December 2002 and
before 1 May 2003;
"EXCHANGE RATE" means the mid-point rate of exchange on the relevant
Business Day for the conversion of one currency to another currency as
published in the Financial Times, (or, if the Financial Times is not
published, in the International Herald Tribune or another internationally
recognised newspaper) on the following Business Day;
"EXCLUDED ASSET SALE AND LIQUIDATION PROCEEDS" has the meaning given to it
in the New Junior Notes' Indenture and in Appendix 8;
190
II. THE CORP SCHEME
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"EXCLUDED CLAIM" any claim or right which a person is or may in any
circumstances become entitled to bring or enforce against the Company in
respect of any Liability of the Company in each and every case (save as
otherwise provided below) in existence as at the Record Date or to which
the Company may become subject after that date by reason of any Liability
of the Company incurred before that date in respect of any of the
following:
(1) claims of employees who were employed by the Company at the Record
Date under their respective contracts of employment and fee
arrangements of Directors (who were directors of the Company at the
Record Date) including those set out in part I of Appendix 9;
(2) the Company's Liability in respect of any promise or arrangement to
provide pensions, allowances, lump sums or other like benefits on
retirement, death, termination of employment (whether voluntary or
not), or during periods of sickness or disablement, which are for
the benefit of any officer or former officer or employee or former
employee of the Marconi Group or for the benefit of persons
dependent on any such persons, including any guarantees and
indemnities given by the Company to trustees or administrators of
arrangements providing such benefits and any statutory liabilities
owing to any government authority (including the Pension Benefit
Guaranty Corporation) in respect of any such promises or
arrangements, including those set out in part I of Appendix 9;
(3) certain guarantee or indemnity obligations of the Company given in
respect of obligations of Affiliates which are considered to be
beneficial to that Affiliate's ongoing operations as set out in part
I of Appendix 9;
(4) Liabilities in respect of Trading Obligations of the Company or its
Affiliates under contracts where, and to the extent that, the
Company is a joint or joint and several obligor with one or more
Affiliates including those set out in part I of Appendix 9;
(5) contractual obligations, including warranty and indemnity
obligations, of the Company under disposals and acquisitions (each
otherwise than in the Ordinary Course of Business), demergers,
mergers and joint ventures and any Pre-Disposal Liabilities
including those set out in part I of Appendix 9;
(6) intra-group loan and trading account claims against the Company by
any Affiliate;
(7) the Company's Liabilities under commercial contracts or licences
relating to the Corp Group and ongoing trading operations of
Affiliates to which the Company is a party and which are regarded as
beneficial to the Corp Group's ongoing operations and the
documentation which has been entered into prior to the Record Date
in connection with the proposed financial restructuring of the
Company and plc pursuant to the Scheme and the plc Scheme in each
case as set out in part I of Appendix 9;
(8) the Company's Ordinary Course of Business Liabilities incurred in
connection with the supply of goods and/or services to the Company
as set out in part I of Appendix 9;
(9) the Company's Liabilities to third parties which are covered by
Insurance and Liabilities of the Company which would be covered by
Insurance but for;
(a) any excess, deductible or limit of liability applicable under
any Insurance to any such Liability; or
(b) any insurer failing to satisfy any Insurance claim in full when
payable when the insurer is in liquidation or provisional
liquidation or administration under the Insolvency Act 1986 or
subject to any scheme of arrangement under section 425 of the
Act (or any equivalent or analogous proceeding or arrangement in
any other jurisdiction, including any proceeding under chapter
11 of the US Bankruptcy Code); or
(c) the Insurance or any claim under it being void or avoided by any
insurer,
being Liabilities of the Company in respect of which the third party
would have rights against the insurer under that Insurance by virtue of
section 1 of the Third Party (Rights against Insurers) Act
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1930 in the event that any of the events set out in section 1(1)(b)
of that Act occurred with respect to the Company;
(10) Preferential Claims;
(11) rights of indemnity of directors and officers of the Company (who
were directors and/or officers of the Company at the Record Date)
against the Company under its articles of association and at common
law;
(12) costs, fees and expenses of:
(a) all advisers to the Company;
(b) the Prospective Supervisors and their advisers;
(c) the Escrow Trustee and its advisers;
(d) the Distribution Agent and its advisers;
(e) the Eurobond Trustee and its advisers;
(f) the Yankee Bond Trustee and its advisers;
(g) the Co-ordination Committee and its advisers;
(h) the Informal Committee of Bondholders and its advisers;
(i) Bondholder Communications;
(j) the Sponsors and their advisers;
(k) the ESOP Banks and their advisers;
(l) the trustee of the New Senior Notes and its advisers;
(m) the trustee of the New Junior Notes and its advisers; and
(n) the security trustee in respect of the New Notes,
(and any Liability under any engagement letter or similar
arrangement entered into by the Company with such parties) incurred
in connection with the consideration, negotiation and implementation
of the restructuring of the Company and plc in each case as set out
in part I of Appendix 9;
(13) Liabilities of the Company to a creditor where such Liabilities in
aggregate to that creditor do not exceed L5,000 (which, for the
avoidance of doubt, do not include any Liabilities in respect of
Bonds);
(14) the Company's Liabilities in respect of Unclaimed Dividends;
(15) the Company's Liabilities in respect of the lease of the property at
329-333 High Street, Stratford, London;
(16) the Company's Liabilities under the restructuring undertaking
agreements with each ESOP Bank, the ESOP Escrow Agreement, Mobile
Escrow Agreement, Subsequently Sold Opco Escrow Agreements and the
ESOP Settlement Agreement;
(17) the Company's Liabilities in respect of any personal injury claims
which are not excluded from the Scheme under sub-paragraph (9)
above; and
(18) the Company's Liability (if any) in respect of the Italian Implied
Guarantee;
"EXISTING FACILITY" the E6,000,000,000 syndicated credit facility dated 25
March 1998 between The General Electric Company p.l.c. (now the Company),
HSBC Investment Bank plc (as agent), Marine Midland Bank (as US swingline
agent) and the financial institutions named therein (as banks) as amended
from time to time;
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"EXISTING SHARES" the 2,866,250,735 issued ordinary shares of 5 pence each
in the capital of the Company as at the Record Date which will become
Non-Voting Deferred Shares forthwith and conditionally upon the allotment
of the New Shares to be allotted upon the issue of the First Initial
Distribution Notice;
"EXPLANATORY STATEMENT" the explanatory statement circulated with this
Scheme pursuant to Section 426 of the Act;
"FINAL DISTRIBUTION" the Distribution of all remaining Scheme
Consideration made at the direction of the Supervisors which the
Supervisors state in writing to the Company and the Creditors' Committee
will be the final Distribution of Scheme Consideration;
"FINAL DISTRIBUTION DATE" the date of the Final Distribution;
"FIRST CLAIM DATE" 17 April 2003;
"FIRST INITIAL DISTRIBUTION" the Initial Distribution to Eligible
Recipients on the basis set out in clause 23;
"FIRST INITIAL DISTRIBUTION NOTICE" the Distribution Notice in respect of
the First Initial Distribution compiled by the Prospective Supervisors and
presented at the Court Hearing detailing those Scheme Claims which the
Prospective Supervisors are satisfied should properly be Admitted on the
Effective Date;
"FORCE MAJEURE" any act of God, government act, war, fire, flood,
explosion, civil commotion or act of terrorism;
"GOES INTO LIQUIDATION" has the meaning given in section 247(2) of the
Insolvency Act 1986 and "GO" or "GOING" into liquidation shall be
construed accordingly;
"INDENTURE" the indenture dated 19 September 2000 between the Company, plc
and the Yankee Bond Trustee and relating to the Yankee Bonds;
"INFORMAL COMMITTEE OF BONDHOLDERS" the informal ad hoc committee of
certain parties with interests in Bonds which has participated in the
negotiation of the restructuring of the Company as detailed in Appendix
22;
"INITIAL DISTRIBUTION" an initial distribution to Eligible Recipients of
the Elements of Scheme Consideration on the bases set out in clause 23;
"INSURANCE" any contract of liability insurance insuring the Company in
respect of a liability which as at the Record Date is valid and
enforceable;
"ITALIAN IMPLIED GUARANTEE" the guarantee implied under Article 2362 of
the Italian Civil Code which may arise as a result of the Company's sole
shareholding in Marconi Finanziaria SpA for the period from March 2000 to
29 October 2001;
"KNOWN CLAIMS" the Scheme Claims (including Admissible Interest thereon)
listed in Schedule 3;
"KNOWN CLAIMS SEGMENT" has the meaning given to it in sub-clause 21(4)(a);
"KNOWN CLAIMS SUPPLEMENT" has the meaning given to it in sub-clause
27(3)(a);
"KNOWN CREDITOR" a Scheme Creditor in respect of its Known Claim;
"KNOWN REJECTED CLAIM SUPPLEMENT" has the meaning given to it in
sub-clause 29(1)(a)(i);
"KPMG" KPMG LLP, a UK limited liability partnership;
"LIABILITY" or "LIABILITIES" any liability or obligation of a person
whether it is present, future, prospective or contingent, whether or not
it is fixed or undetermined, whether or not it involves the payment of
money or performance of an act or obligation and whether it arises at
common law, in equity or by statute, in England and Wales or in any other
jurisdiction, or in any other manner whatsoever, but
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such expression does not include any liability which is barred by statute
or otherwise unenforceable under English law or arises under a contract
which is void or, being voidable, has been duly avoided;
"LIQUIDATION DISTRIBUTION PRINCIPLES" English law relating to dividends
paid to creditors in a liquidation under English law;
"LISTING" admission to the Official List maintained by the UKLA for the
purposes of part VI of the Financial Services and Markets Act 2000 and to
trading on the London Stock Exchange's market for listed securities and
"LISTED" shall have a corresponding meaning;
"MARCONI GROUP" plc and its Affiliates;
"MOBILE ESCROW AGREEMENT" the escrow agreement between the Company, plc,
Marconi Bruton Street Limited, HSBC Bank plc, the ESOP Banks, Bedell
Cristin Trustees Limited and Slaughter and May dated 2 August 2002;
"NASDAQ" the national market as operated by Nasdaq Stock Market, Inc.;
"NET PROCEEDS" has the meaning set out in the New Junior Notes' indenture
and in Appendix 8, save that the references therein to "Cash Equivalents"
shall be treated as deleted;
"NEW CREDITOR SHARES" the 995,000,000 new ordinary shares of nominal value
5p each in the capital of the Company, comprising 99.5 per cent. of the
New Shares, which are to form part of the Scheme Consideration as
described in sub-clause 21(1)(d);
"NEW JUNIOR NOTES" the junior notes to be issued by the Company to the
Escrow Trustee to hold on behalf of Scheme Creditors in respect of their
Admitted Scheme Claims and to be issued on or substantially on the terms
and conditions set out in Appendix 8;
"NEW NOTES" the New Senior Notes and the New Junior Notes;
"NEW RIGHTS" the New Notes and the New Creditor Shares;
"NEW SENIOR NOTES" the senior notes to be issued by the Company to the
Escrow Trustee to hold on behalf of Scheme Creditors in respect of their
Admitted Scheme Claims and to be issued on or substantially on the terms
and conditions set out in Appendix 8;
"NEW SHARES" 1,000,000,000 new ordinary shares of 5 pence each to be
issued by the Company to the Escrow Trustee to hold on behalf of Scheme
Creditors in respect of their Admitted Scheme Claims and on behalf of plc
Shareholders and which will carry the rights and be subject to the
restrictions contained in the articles of association of the Company
particulars of which are contained in Appendix 14 or, except as the
context requires otherwise, the equivalent amount of such shares in the
form of ADRs;
"NOMINEES" Marconi Nominees Limited, a limited company incorporated in
England and Wales with registered number 3854422;
"NON-VOTING DEFERRED SHARES" the non-voting deferred shares of 5p each in
the capital of the Company held by plc and Nominees arising from the
conversion and re-designation of the Existing Shares forthwith and
conditionally upon the allotment of the New Shares pursuant to the Scheme;
"NOTIONAL RESERVE CLAIM" means a notional claim against the Company of
L125,000,000;
"ORDINARY COURSE OF BUSINESS" the ordinary day-to-day business activities
carried on by the Company, conducted with a degree of regularity, or a
one-off transaction concluded in the nature of trade and with a view to a
profit and being such as might reasonably be expected to occur without
requiring the specific authority of the board of directors;
"PLC" Marconi plc, a public limited company incorporated in England and
Wales under registered number 3846429;
"PLC DISTRIBUTION SUPPLEMENT" (if any) the net additional cash and/or New
Rights receivable by the Company pursuant to the Corp/plc Model (or any
similar or analogous arrangements agreed by the
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Supervisors with the supervisors of the plc Scheme pursuant to sub-clause
27(5)) for distribution to Eligible Recipients with the Initial
Distribution in accordance with clauses 26 and 27;
"PLC RECEIPTS" distributions actually received by the Company from plc:
(1) pursuant to the plc Scheme (but not, for the avoidance of doubt, any
plc Distribution Supplement); or
(2) if the plc Scheme does not become effective or subsequently
terminates in accordance with its terms, from any liquidation,
voluntary arrangement or scheme of arrangement (other than the plc
Scheme) in respect of plc or otherwise received from plc;
"PLC SCHEME" the scheme of arrangement in respect of plc under section 425
of the Act sent to certain creditors of plc with the Explanatory Statement
with or subject to any modification, addition or condition approved or
imposed by the Court;
"PLC SHAREHOLDER" a registered holder of ordinary shares of nominal value
5p each in the capital of plc at the close of dealings in such shares on
the last day of dealings in such shares on the London Stock Exchange prior
to the Effective Date;
"PLC SHAREHOLDER STOCK" the 5,000,000 new ordinary shares of nominal value
5 pence each, comprising 0.5 per cent. of the New Shares and which are to
be dealt with in accordance with clause 31;
"POST" delivery by pre-paid first class post or air mail;
"PRE-DISPOSAL LIABILITIES" any Liability of the Company to a third party
in respect of a former Affiliate of the Company which has been the subject
of a disposal and arising as a result of:
(a) any financial or other guarantee, indemnity, counter-indemnity or
similar arrangement given by the Company in respect of the
obligations of that former Affiliate; or
(b) any claim being made under a performance bond, bank guarantee or
similar instrument in respect of that former Affiliate;
"PREFERENTIAL CLAIM" any claim against the Company which would have been
preferential under section 386 of the Insolvency Act 1986 if the Company
were to have gone into liquidation on the Record Date and on the basis
that the Record Date is the "relevant date" for the purposes of section
387 of the Insolvency Act 1986;
"PROCEEDING" any process, action, legal or other proceeding including any
arbitration, alternative dispute resolution, judicial review,
adjudication, demand, execution, seizure, lien or enforcement of judgment;
"PROHIBITED PROCEEDING" any Proceeding against the Company or its Property
in any jurisdiction whatsoever other than an Allowed Proceeding;
"PROPERTY" all forms of property tangible and intangible, including money,
goods, things in action, land and every description of property wherever
situated and also the benefit of obligations and every description of
interest, whether present or future, vested or contingent or otherwise
arising out of, or incidental to, property;
"PROSPECTIVE SUPERVISORS" means Philip Wallace and Richard Heis being the
persons that it is anticipated shall be appointed as Supervisors of the
Scheme;
"RECORD DATE" 5.00 p.m. (London time) on 27 March 2003;
"REGISTRAR OF COMPANIES" the registrar or other officer performing under
the Act the duty of registration of companies in England and Wales and
including a deputy registrar;
"REGISTRARS" Computershare Investor Services PLC, or such other person as
the Company may appoint as its registrars for the purposes of the Scheme;
"REJECTED CLAIM SUPPLEMENT" has the meaning given to it in sub-clause
29(1)(a);
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"RELEVANT DEDUCTION" the euro equivalent (calculated at the Currency Rate)
of the aggregate amount of New Senior Notes which would be allocated in
respect of Disputed Claims under each Scheme and in respect of the
Notional Reserve Claim under each Scheme, assuming that those claims had
been admitted in full and converted into Sterling at the Currency Rate (if
required);
"RESERVE CLAIM" a Scheme Claim which is not a Known Claim;
"RESERVE CLAIMS SEGMENT" has the meaning given to it in sub-clause
21(4)(b);
"RESERVE CLAIMS SUPPLEMENT" has the meaning given to it in sub-clause
27(3)(b);
"RESERVE CREDITOR" a Scheme Creditor in respect of its Reserve Claim;
"RESERVE REJECTED CLAIM SUPPLEMENT" has the meaning given to it in
sub-clause 29(1)(a)(ii);
"RESTRICTED JURISDICTION" each of France, Italy, Malaysia and the US
states of Arizona, California, Colorado, Connecticut, Illinois, Ohio and
Vermont;
"SCHEME" the scheme of arrangement in respect of the Company under section
425 of the Act in its present form or with or subject to any modification,
addition or condition approved or imposed by the Court;
"SCHEME CLAIM" any claim or right which a person is or may in any
circumstances become entitled to bring or enforce against the Company in
respect of any Liability of the Company in each and every case in
existence as at the Record Date or to which the Company may become liable
after that date by reason of any Liability of the Company incurred before
that date, and including, for the avoidance of doubt but without
double-counting and subject as provided in Recital I, the claims of the
Depositaries and of Definitive Holders in respect of Bonds but excluding
always Excluded Claims;
"SCHEME CONSIDERATION" the Basic Scheme Consideration together with any
plc Distribution Supplement, plc Receipts and/or Rejected Claim
Supplement;
"SCHEME CREDITOR" subject as provided in Recital I, a creditor of the
Company in respect of a Scheme Claim including, in respect of Scheme
Claims in relation to the Bonds, for the avoidance of doubt and without
double counting, the Depositaries and all persons who become Definitive
Holders pursuant to the arrangements described in Recital G or otherwise;
"SCHEME IMPLEMENTATION DEED" the deed dated 27 March 2003 made between the
Company, plc, E A Continental Limited, Ancrane, Nominees and others;
"SCHEME RATE" the mid-point rate of exchange five Business Days prior to
the Effective Date for the conversion of the relevant currency to another
currency as published in the Financial Times (or, if the Financial Times
is not published, in the International Herald Tribune or another
internationally recognised newspaper) on the fourth Business Day prior to
the Effective Date;
"SDRT EXPENSE" any UK stamp duty or stamp duty reserve tax payable in
respect of:
(1) the issuance of ADRs to an Eligible Recipient who elects to receive
any New Creditor Shares distributed to it pursuant to the Scheme or
the plc Scheme in the form of ADRs; or
(2) the issuance of ADRs to an Eligible Recipient who deposits any New
Creditor Shares received pursuant to the terms of the Scheme or the
plc Scheme (or an equivalent number of New Shares) into the
Company's ADR programme prior to the date falling two calendar
months after the effectiveness of the listing of the ADRs on NASDAQ
in accordance with the procedures specified by the Company and the
ADR Depositary as described in the Explanatory Statement;
"SPONSORS" Lazard Brothers & Co., Limited and Morgan Stanley & Co.
Limited;
"STERLING" or "L" pounds sterling or other lawful currency being the
currency of the UK for the time being;
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"SUBMITTED" when used of a Scheme Claim, that it has been duly submitted
to the Prospective Supervisors or the Supervisors (as applicable) in
accordance with clause 12;
"SUBSEQUENTLY SOLD OPCO ESCROW AGREEMENT" an escrow agreement established
in connection with an operating subsidiary of plc whose employees were
entitled to participate in certain employee share option plans and which
was sold after 28 August 2002;
"SUBSIDIARY" has the meaning given to it in the New Junior Notes Indenture
and in Appendix 8;
"SUPERVISORS" the persons holding office as supervisors of the Scheme from
time to time;
"SUPERVISORS' ENGAGEMENT LETTER" the engagement letter dated on or around
31 March 2003 between the Company, KPMG and the Prospective Supervisors;
"TERMINATION DATE" the date ten Business Days after issue of the
Termination Notice;
"TERMINATION NOTICE" a written notice served by the Supervisors on the
Company, the members of the Creditors' Committee and the Scheme Creditors
(being, in the case of the Bonds, the Definitive Holders the Eurobond
Trustee and the Yankee Bond Trustee) at the termination of the Scheme as
provided for in clause 110 and clause 116;
"TRADING OBLIGATIONS" obligations of a commercial character incurred in
the Ordinary Course of Business and which arise from the supply of goods
or services in exchange for payment in money or money's worth;
"TRUST DEEDS" the two trust deeds each dated 30 March 2000 between the
Company, plc and the Eurobond Trustee and constituting the Eurobonds;
"UK" the United Kingdom of Great Britain and Northern Ireland;
"UKLA" the Financial Services Authority in its capacity as the competent
authority for the purposes of part VI of the Financial Services and
Markets Act 2000, including, where the context so permits, any committee,
employee, officer or servant to whom any function of the UK Listing
Authority may for the time being be delegated;
"UNADMITTED" when used of a Scheme Claim, the amount of any relevant claim
which has been Submitted but has neither been Admitted nor Conclusively
Rejected;
"UNCLAIMED DIVIDENDS" dividends declared prior to the Record Date on the
Existing Shares but not claimed by the relevant shareholder or former
shareholder as at the Effective Date;
"UNDISTRIBUTED SCHEME CONSIDERATION" shall have the meaning given to it in
sub-clause 25(1);
"UNRESTRICTED JURISDICTION" each of the United Kingdom, Bahamas, British
Virgin Islands, the Canadian provinces of Alberta, British Columbia,
Ontario and Quebec, Cayman Islands, Guernsey, Jersey, Netherlands
Antilles, the United States (as to federal securities law) and each state
of the United States other than Arizona, California, Colorado,
Connecticut, Illinois, Ohio and Vermont;
"USA" or "US" the United States of America;
"US DOLLAR" or "US$" United States dollars or other lawful currency being
the currency of the USA for the time being;
"WAITING PERIOD" the period of 12 months after the Effective Date or such
shorter period as results from the operation of clause 24(1);
"WARRANTS" up to 50 million warrants each entitling its holder to
subscribe for one ordinary share of 5 pence each in the Company at a
subscription price of 150 pence to be issued to or for the benefit of plc
Shareholders on the basis described in the Scheme, and in particular Part
IV, the conditions of which are set out at Appendix 12;
"YANKEE BONDS" all or any of the bonds comprising the Yankee Issues;
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"YANKEE BOND TRUSTEE" Bank of New York, in its capacity as trustee under
the Indenture; and
"YANKEE ISSUES" US$900,000,000 7 3/4 per cent. bonds due 2010 and
US$900,000,000 8 3/8 per cent. bonds due 2030 both issued by the Company
and both guaranteed by plc.
INTERPRETATION
B In this Scheme, unless the context otherwise requires or otherwise
expressly provides:
(1) references to Recitals, Parts, clauses, sub-clauses and Schedules
are references to the Recitals, Parts, clauses, sub-clauses and
Schedules respectively of the Scheme;
(2) references to Appendices are references to the appendices to the
Explanatory Statement;
(3) references to a "person" include references to an individual, firm,
partnership, company, corporation, unincorporated body of persons or
any state or state agency;
(4) references to a statute or a statutory provision include the same as
subsequently modified, amended or re-enacted from time to time;
(5) the singular includes the plural and vice versa and words importing
one gender shall include all genders;
(6) references to "including" shall be construed as references to
"including without limitation" and "include" shall be construed
accordingly;
(7) headings to Recitals, Parts, clauses, sub-clauses, Schedules and
Appendices are for ease of reference only and shall not affect the
interpretation of the Scheme;
(8) references to the Scheme becoming effective are references to the
office copy of the order of the Court sanctioning the Scheme being
delivered to the Registrar of Companies for registration; and
(9) references to consents not being "unreasonably withheld" shall be
construed as references to such consents not being "unreasonably
withheld or delayed".
THE COMPANY
C The Company was incorporated in England and Wales on 27 September 1900 as
a private limited company under company number 67307 and re-registered as
a public limited company on 4 January 1982.
D At the date hereof the Company has an authorised share capital of
L300,000,000 divided into 6,000,000,000 ordinary shares of 5 pence each,
of which 2,866,250,735 have been issued and are fully paid up or credited
as fully paid up, and the remainder remain unissued.
E At an extraordinary general meeting of the Company duly convened and held
on 26 March 2003 there was passed a special resolution pursuant to which:
(1) the directors are, forthwith and conditionally upon the Court making
an order sanctioning the Scheme, authorised to allot relevant
securities up to a maximum nominal amount of L69,100,000 and equity
securities for cash:
(a) pursuant to the Scheme;
(b) pro rata to ordinary shareholders; and
(c) otherwise up to a maximum nominal amount of L2,500,000;
(2) forthwith and conditionally upon the allotment of new ordinary
shares of 5 pence each pursuant to the Scheme:
(a) the Company is to alter its memorandum of association by
inserting a new object giving the Company the power to
establish and operate share incentive plans and to establish
trusts to operate in conjunction with these plans;
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(b) the Company is to adopt new articles of association; and
(c) the 2,866,250,735 existing ordinary shares of 5 pence each are
to be converted into non-voting deferred shares of 5 pence
each; and
(3) forthwith upon the said conversion taking effect and upon the entry
in the register of members of the Company of the names of the
persons to whom the said new ordinary shares have been allotted, the
capital of the Company is to be reduced by the cancellation of the
non-voting deferred shares of 5 pence each resulting from the said
conversion and the cancellation of the share premium account of the
Company.
BINDING OF THIRD PARTIES
F The following persons involved in the implementation of the Scheme have
undertaken to be bound to carry out their designated functions under the
Scheme and, if applicable, the Escrow and Distribution Agreement:
(1) the Supervisors;
(2) the Escrow Trustee;
(3) the Distribution Agent
(4) the Registrars;
(5) the Eurobond Trustee;
(6) the Yankee Bond Trustee;
(7) Bondholder Communications; and
(8) plc.
BONDS ISSUED BY THE COMPANY
G Each of the Bond Issues is held under an arrangement whereby:
(1) the Bond Issues are constituted by the Trust Deeds (in respect of
the Eurobonds) and the Indenture (in respect of the Yankee Bonds),
the trustees being the Eurobond Trustee and the Yankee Bond Trustee
respectively;
(2) the Bonds were initially issued in wholly global bearer form and
were held by a depositary under systems designed to facilitate
paperless transactions;
(3) the systems involve immediate interests of persons in the Bonds
being recorded in books or other records maintained, in the case of
Eurobonds, by Clearstream, Luxembourg and Euroclear and, in the case
of Yankee Bonds, by DTC, Clearstream, Luxembourg and Euroclear (such
persons with interests being herein defined as "ACCOUNT HOLDERS");
(4) at the request of certain creditors of the Company, arrangements
have been made for the global Bonds representing the Yankee Bonds to
be exchanged in whole or in part for Yankee Bonds in definitive form
registered in the names of the Definitive Holders specified in
Account Holder Letters and the global Bonds representing the
Eurobonds to be exchanged in whole for individual global Eurobonds
in bearer form held on behalf of the Definitive Holders specified in
Account Holder Letters; and
(5) any unexchanged Yankee Bonds will, pending their exchange in
accordance with subsequently delivered Account Holder Letters,
continue to be held in global bearer form by the Book-Entry
Depositary and any individual global Eurobonds in respect of which
no Account Holder Letter has been delivered will be held by
depositaries for Euroclear and Clearstream, Luxembourg.
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THE PURPOSE OF THE SCHEME
H The purpose of the Scheme is to constitute a compromise and arrangement
between the Company and the Scheme Creditors by:
(1) the Scheme Creditors exchanging their Admitted Scheme Claims for the
Scheme Consideration; and
(2) providing full and effective releases of all of the Company's
Liabilities in respect of Scheme Claims.
THE BONDS AND THE SCHEME
I With the agreement of the Eurobond Trustee, the Yankee Bond Trustee and
the Book-Entry Depositary respectively:
(1) Claim Forms in relation to the Bonds are to be returned by the
Eurobond Trustee (in reliance on the promise to pay in favour of the
Eurobond Trustee contained in the Trust Deeds) and the Yankee Bond
Trustee (in reliance on section 5.04 of the Indenture and the
promise to pay in section 10.01 of the Indenture) respectively;
(2) persons with interests in or in respect of Bonds have been invited
to instruct their Account Holders as to the manner in which the
Account Holder Letter delivered in respect of each of the Bonds in
respect of which they have an interest should be completed
including, in particular, as to the identity of the Definitive
Holder and any Designated Recipients;
(3) none of the Eurobond Trustee, the Yankee Bond Trustee, the
Book-Entry Depositary and the respective depositaries for Euroclear
and Clearstream, Luxembourg will vote at the meeting of creditors of
the Company convened at the direction of the Court and instead the
Definitive Holders (as creditors of the Company for the purpose)
will be the persons entitled to attend and vote at those meetings;
(4) Scheme Consideration which is to be distributed in relation to the
Bonds is, with the authority and at the direction of the Eurobond
Trustee and the Yankee Bond Trustee (as the persons with Submitted
Scheme Claims in relation to the Bonds which will have been
Admitted), to be distributed to Designated Recipients;
(5) as a result, and subject as provided in Recital I(6) below,
references in this Scheme to Scheme Creditors shall, in relation to
the Bonds:
(a) in the context of entitlements to make a Scheme Claim,
submission of Claim Forms and receiving or directing the
receipt of Scheme Consideration in respect of that Scheme
Claim be construed as references only to the Eurobond Trustee
and the Yankee Bond Trustee in relation to the Bonds; and
(b) in the context of entitlement to be appointed to the
Creditors' Committee and attend and vote at meetings of Scheme
Creditors be construed as references only to the Definitive
Holders; and
(6) except where otherwise specifically provided, references in this
Scheme to:
(a) Scheme Creditors in relation to the Bonds in Parts II, VII
(excepting clauses 53 and 55), X and XI (except clause 113)
include the Eurobond Trustee, Bank of New York in its
capacities as the Book-Entry Depositary and the Yankee Bond
Trustee, the respective depositaries for Euroclear and
Clearstream, Luxembourg, the Depositaries and all persons who
are Definitive Holders; and
(b) Scheme Creditors in relation to the Bonds in Parts III, IV, V
and VII (in clause 55) mean the Eurobond Trustee and the
Yankee Bond Trustee as entitled claimants under the Scheme;
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(c) Scheme Creditors in relation to the Bonds in Part VII (in
clause 53), VIII, IX and XI (in clause 113) mean the
Definitive Holders; and
references to related Scheme Claims shall be construed in the same
manner.
CURRENCY ELECTION
J (1) The New Senior Notes to be issued as part of the Scheme
Consideration may be issued denominated in both, or either, euro
and US dollars.
(2) New Senior Notes denominated in US dollars will only be issued if,
following all elections made in Claim Forms and Account Holder
Letters received by the Prospective Supervisors and Bondholder
Communications respectively by the First Claim Date together with
all equivalent currency elections made in accordance with the plc
Scheme, elections have been made which would, assuming the plc
Scheme becomes effective, result in an aggregate of at least the US
dollar equivalent (calculated at the Currency Rate) of euro
250,000,000 (less the Relevant Deduction) of New Senior Notes being
required to be distributed in the First Initial Distribution and the
first initial distribution under the plc Scheme.
(3) New Senior Notes denominated in euro will only be issued if,
following all elections made in Claim Forms and Account Holder
Letters received by the Prospective Supervisors and Bondholder
Communications respectively by the First Claim Date together with
all equivalent currency elections made in accordance with the plc
Scheme, elections have been made which would, assuming the plc
Scheme becomes effective, result in an aggregate of at least euro
250,000,000 (less the Relevant Deduction) of New Senior Notes being
required to be distributed in the First Initial Distribution and the
first initial distribution under the plc Scheme.
(4) If no New Senior Notes denominated in US dollars are issued as a
result of the mechanism described in Recital J(2), all of the New
Senior Notes will be denominated in euro.
(5) If no New Senior Notes denominated in euro are issued as a result of
the mechanism described in Recital J(3), all the New Senior Notes
will be denominated in US dollars.
LISTING
K The Scheme Consideration includes New Shares and New Notes. Application
has been made for Listing of these New Shares and New Notes, together with
the Warrants.
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PART II
THE SCHEME
APPLICATION AND EFFECTIVENESS OF THE SCHEME
1. (1) The compromise and arrangement effected by the Scheme shall apply
to all Scheme Claims and shall be binding on all Scheme Creditors.
(2) For the avoidance of doubt, the Scheme is not conditional upon the
plc Scheme becoming effective.
(3) The Scheme shall become effective at the Effective Time.
STAY OF PROHIBITED PROCEEDINGS
2. (1) Subject to sub-clause 2(2), no Scheme Creditor shall commence or
continue any Prohibited Proceeding in respect of, arising from, or
relating to, a Scheme Claim after the Effective Time.
(2) Nothing in this Scheme shall prevent:
(a) a landlord of leasehold property of the Company from
exercising such rights and remedies of distress, forfeiture
and re-entry (and any other of such landlord's self-help
rights and remedies) as it may have in respect of such
leasehold property; or
(b) a secured creditor from exercising its rights and remedies as
a secured creditor in respect of any Property of the Company.
3. Subject to sub-clause 20(2), a Scheme Creditor may commence or continue
an Allowed Proceeding against the Company after the Effective Time
provided that it has first:
(1) where the Scheme Creditor is continuing an Allowed Proceeding,
notified the Supervisors in writing of its intention to do so;
(2) where the Scheme Creditor intends to commence an Allowed Proceeding,
given the Supervisors five Business Days' prior notice in writing of
its intention to do so; and
(3) where sub-clause 17(2) applies with respect to an Allowed
Proceeding, it has, in addition to complying with sub-clause 3(1) or
3(2) as applicable, complied with that sub-clause.
4. (1) Save in respect of any Allowed Proceeding as permitted by this
Scheme or any action permitted under sub-clause 2(2), each Scheme
Creditor by this Scheme covenants not to sue the Company in respect
of a Scheme Claim.
(2) For the purpose of enforcing the covenant in sub-clause 4(1), the
Company is hereby appointed as the agent and attorney of each and
every Scheme Creditor for the purpose of giving any and all
instructions (and doing any such acts or things) as are necessary or
desirable to enforce that covenant.
5. If any Scheme Creditor commences or continues any such Prohibited
Proceeding as is prohibited by sub-clause 2(1) after the Effective Time
it shall be treated as having received, on account of its entitlement to
Scheme Consideration, an advance payment by way of a Distribution equal
to the amount or gross value of any money, property, benefit or advantage
obtained by it after the Effective Date at the expense of the Company or,
as applicable, as a result, directly or indirectly, of such Prohibited
Proceeding, and the extent, if any, to which it is entitled to Scheme
Consideration shall be reduced accordingly. Such Scheme Creditor shall
hold any benefit received or receivable in excess of its entitlement to
Scheme Consideration pursuant to the terms of the Scheme as a result,
directly or indirectly, of a Prohibited Proceeding on trust for the
Company and shall account to the Company for such excess benefit. For
this purpose, the gross value of any such property, benefit or advantage
shall be conclusively determined by the Supervisors and may include such
amount as the Supervisors may consider to be appropriate by way of
interest or costs, charges or expenses incurred by the Company and/or the
Supervisors as the result of such Prohibited
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Proceeding. This treatment and reduction is without prejudice to the
Company's rights first to any injunctive or other relief or remedy to
which the Company may be entitled in respect of the breach and, secondly,
in respect of any loss the Company may suffer as a result of the breach.
The Supervisors shall make such consequential adjustments to the amount
and timing of payment of Distributions to any such Scheme Creditor (and
in the case of Definitive Holders, to the Eurobond Trustee or the Yankee
Bond Trustee or both as appropriate) pursuant to the rules and formulae
in Part III as are necessary to give effect to this clause.
ASSIGNMENTS OR TRANSFERS
6. (1) The Supervisors shall be under no obligation to recognise any
assignment or transfer of Scheme Claims after the Record Date for
the purposes of determining entitlements under the Scheme, provided
that where the Supervisors have received from the relevant parties
notice in writing of such assignment or transfer, the Supervisors
may, in their sole discretion and subject to the production of such
other evidence as they may require and to any other terms and
conditions which they may consider necessary or desirable, agree to
recognise such assignment or transfer for the purposes of
determining entitlements under the Scheme. Any assignee or
transferee of a Scheme Claim so recognised by the Supervisors shall
be bound by the terms of this Scheme and for the purposes of this
Scheme shall be a Scheme Creditor.
(2) For the purposes of the Scheme (including for the purposes of the
definition of Excluded Claims) no recognition shall be given to any
assignment or transfer of any (or any part of any) debt, claim or
right of any person in respect of a Liability of the Company
effected between 1 January 2003 and the Record Date (both dates
inclusive) other than any such assignment or transfer pursuant to
or contemplated by the Scheme Implementation Deed if, in the
reasonable opinion of the Supervisors, a material purpose of such
assignment or transfer was to make such debt, claim or right (or
part thereof) an Excluded Claim (under sub-paragraph 13 of the
definition of Excluded Claims) and not a Scheme Claim.
(3) For the avoidance of doubt, in relation to the Bonds, Bondholders
are permitted to assign or transfer their interest in Bonds after
the Record Date.
EFFECT OF SCHEME
7. (1) This clause is without prejudice to the Company's rights
under clauses 2 and 5 and is subject to Part X.
(2) Without prejudice to clause 20, in consideration of the rights of
Scheme Creditors under this Scheme (including the rights of
Admitted Scheme Creditors to receive Scheme Consideration), all
Liabilities on the part of the Company in respect of each Scheme
Claim (and any interest accruing thereon or other amounts payable
in connection therewith whether arising before or after the Record
Date), automatically and without further documentation or action of
the parties, shall be compromised, fully and finally discharged,
satisfied and cancelled on the earlier of:
(a) the first date on which such Scheme Claim is both Admitted
and the subject of a Distribution Notice;
(b) the Final Distribution Date; and
(c) the issue of the Termination Notice (other than a Termination
Notice served pursuant to sub-clause 115(3)).
(3) No Scheme Claim of a Scheme Creditor shall be reduced or in any way
affected by the compromise of any claims of that Scheme Creditor
against plc pursuant to the terms of the plc Scheme nor shall it be
reduced or in any way affected by reason of any distributions
received by or on behalf of that Scheme Creditor in the plc Scheme
provided that the aggregate recoveries of a Scheme Creditor in
respect of a claim pursuant to the Scheme and the plc Scheme shall
not exceed the quantum of the Scheme Claim.
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PART III
DETERMINATION OF SCHEME CLAIMS AND PROCEDURE FOR DISTRIBUTIONS
RECORD DATE
8. (1) All Scheme Claims shall be determined as at the Record Date.
(2) Any Scheme Claim which at the Record Date is not immediately due and
payable but on the Company going into insolvent liquidation would,
either automatically without further action by any party or by the
issue of a notice by the relevant Scheme Creditor, be capable of
being made legally and immediately due and payable shall be treated
for the purposes of Distributions under this Scheme as immediately
due and payable as at the Record Date (and hence not a debt payable
at a future time).
RULES AND PROCEDURES
9. The Supervisors shall consider each Claim Form submitted to determine the
existence and quantum of each Submitted Scheme Claim and shall decide the
extent, if any, to which it shall be Admitted in accordance with the
rules and procedures set out in the Scheme and in particular in Schedule
1.
ONLY ADMISSIBLE INTEREST
10. Without prejudice to sub-clause 7(2), for the purpose solely of the
determination and payment of Distributions under the Scheme, no Admitted
Scheme Claim shall include any amounts in respect of interest except
Admissible Interest and, for the avoidance of doubt, any interest other
than Admissible Interest shall not be taken into account by the
Supervisors in determining the quantum of the relevant Scheme Claim.
NO ADMISSIONS OF LIABILITY
11. Save as expressly set out in this Scheme or the Explanatory Statement,
nothing in the Scheme or the Explanatory Statement or the distribution
thereof to any person evidences or constitutes any admission by the
Company, the Prospective Supervisors, the Supervisors or KPMG that a
person is a Scheme Creditor or that a Liability is owed to any person in
respect of any claim or right. The failure to distribute the Scheme,
Explanatory Statement, any notice or any other communication to any
Scheme Creditor shall not constitute an admission by the Company, the
Prospective Supervisors, the Supervisors or KPMG that such person is not
a Scheme Creditor or that any Liability owed to such person is an
Excluded Claim.
PROVISION OF INFORMATION
12. (1) A Scheme Creditor submitting a Scheme Claim:
(a) shall provide the Supervisors with such information as they
may reasonably require to enable the claim to be determined
(and for the avoidance of doubt shall comply with such of the
rules and procedures in Schedule 1 as the Supervisors may
require); and
(b) shall, in any event, submit a Claim Form to the Prospective
Supervisors or, after the Effective Date, to the Supervisors
(in accordance with the instructions set out in the Claim
Form) at the relevant address set out in the Claim Form by
hand or by Post.
(2) Scheme Creditors who wish an Initial Distribution to be distributed
to the Eligible Recipient in respect of that Scheme Creditor's
Scheme Claim on the Effective Date must have submitted their duly
completed Claim Forms so as to be received by the Prospective
Supervisors by 5.00 p.m. (London time) on the First Claim Date.
Only Known Creditors that have complied with this precondition and
whose Scheme Claims are listed in the First Initial Distribution
Notice shall be Admitted by the Supervisors in accordance with the
Scheme on the Effective Date and participate in the First Initial
Distribution in accordance with clause 23. Only if a Scheme
Creditor has
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complied with this pre-condition and its Scheme Claim is Admitted
by the Supervisors in accordance with the Scheme on the Effective
Date shall that Admitted Scheme Creditor's Eligible Recipient
receive an Initial Distribution when the First Initial Distribution
is made.
(3) For the purposes of this Scheme, it is expressly recognised that:
(a) the Eurobond Trustee shall be entitled to submit a Claim Form
in its capacity as creditor under the Trust Deeds in respect
of all of the Eurobonds and, in consequence, no person with
an interest in the Eurobonds other than the Eurobond Trustee
shall be entitled to submit a Claim Form in respect of the
Eurobonds by virtue of such interest; and
(b) the Yankee Bond Trustee shall be entitled to submit a Claim
Form in accordance with section 5.04 of the Indenture and, in
consequence, no person with an interest in a Yankee Bond
other than the Yankee Bond Trustee shall be entitled to
submit a Claim Form in respect of the Yankee Bonds by virtue
of such interest.
ENTITLEMENT TO SCHEME CONSIDERATION
13. Eligible Recipients shall be eligible to receive Scheme Consideration in
accordance with the Scheme. A Scheme Creditor with a Scheme Claim which
is Unadmitted shall not be entitled to Scheme Consideration in accordance
with the Scheme unless, until and to the extent that such Scheme Claim
becomes Admitted.
14. The amount of the Scheme Consideration to which a Scheme Creditor is
entitled (and any Eligible Recipient in respect of that Scheme Creditor's
Admitted Scheme Claim is eligible to receive) shall be calculated in
accordance with this Part III.
ADMISSION AND REJECTION OF SCHEME CLAIMS
15. A Scheme Claim may be Admitted by the Supervisors either for the whole
amount claimed by the Scheme Creditor or for part of that amount.
16. If the Supervisors refuse to admit a Scheme Claim, in whole or in part,
they shall promptly prepare a written statement of their reasons for
doing so, and send it to the Scheme Creditor, accompanied by a notice of
rejection in such form as the Supervisors shall determine.
APPEAL AGAINST DECISION ON SCHEME CLAIMS
17. (1) If a Scheme Creditor is dissatisfied with a refusal by the
Supervisors to admit, in whole or in part, a Scheme Claim then,
subject to sub-clause 17(2), it may either commence or continue an
Allowed Proceeding to determine the existence and/or quantum of its
Scheme Claim or elect by notice in writing to the Supervisors that
the existence or quantum of its Scheme Claim be referred for
adjudication in accordance with Part VI.
(2) If an Allowed Proceeding has not been commenced, or is not being
continued as at the date of the notice of rejection, then either:
(a) an Allowed Proceeding must be commenced (and notice given in
accordance with clause 3); or
(b) an election for adjudication made in accordance with
sub-clause 17(1) by the Scheme Creditor,
in each case within 40 Business Days following receipt by the
Scheme Creditor of the notice of rejection.
18. If a Scheme Claim has not been Admitted and at the expiration of the 40
Business Days period referred to in sub-clause 17(2) an Allowed
Proceeding is continuing (whether commenced by the Scheme Creditor before
or after receipt of the notice of rejection) or an election has been made
for adjudication (in each case in accordance with clause 17) then:
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(1) any final determination of that Allowed Proceeding (after the
ordinary time for appealing the original determination or any
determination on appeal has expired without any appeal having been
made) shall be binding on the Scheme Creditor, the Company and the
Supervisors;
(2) if an election has been made for adjudication the provisions of Part
VI shall apply; and
(3) without prejudice to sub-clauses 18(1) and 18(2), the Scheme
Creditor and the Supervisors may at any time agree to any matter or
issue in the Allowed Proceeding being determined in some manner
other than in the Allowed Proceeding, and any Proceeding commenced
pursuant to such agreement shall have effect as an Allowed
Proceeding commenced in accordance with clause 17.
19. If in an Allowed Proceeding or in an adjudication pursuant to Part VI any
order or direction shall be made that any costs of such proceeding or
adjudication are to be borne by the Supervisors or by the Company, such
costs shall be payable in full by the Company.
20. If a Scheme Claim has not been Admitted and at the expiration of the 40
Business Days period referred to in sub-clause 17(2) neither an Allowed
Proceeding (in accordance with the terms of the Scheme) is continuing in
respect of such Scheme Claim nor an election (in accordance with the terms
of the Scheme) has been made for that Scheme Claim to be referred to
adjudication in accordance with Part VI, then:
(1) the Company shall be released from all Liabilities in relation to
the Scheme Claim (or part thereof) which has not been Admitted (and
any interest accruing thereon or other amounts payable in connection
therewith whether arising before or after the Record Date); and
(2) any Proceeding which is thereafter commenced and which would
otherwise have been an Allowed Proceeding shall be a Prohibited
Proceeding.
THE BASIC SCHEME CONSIDERATION, THE KNOWN CLAIMS SEGMENT AND THE RESERVE CLAIMS
SEGMENT
21. (1) The Basic Scheme Consideration is:
(a) cash of L340,000,000 or such larger sum of cash calculated in
accordance with sub-clause 21(2);
(b) the euro equivalent (applying the Currency Rate) of
L450,000,000 New Senior Notes to be issued in both or either
euro and US dollars, subject to elections by Scheme Creditors
and Bondholders described in Recital J;
(c) an aggregate of US$300,000,000 and the US dollar equivalent
(applying the Currency Rate) of L117,270,000 New Junior Notes
(or such smaller principal amount of New Junior Notes
calculated in accordance with sub-clause 21(2) if the amount of
Cash is increased); and
(d) 995,000,000 New Creditor Shares.
(2) If there is any Excess Cash, the amount of Cash comprising the Basic
Scheme Consideration shall be increased by the amount of such Excess
Cash, converted into sterling applying the Exchange Rate on the date
such cash is first received by the Company or the Subsidiary, as the
case may be. Following 1 May 2003 but prior to the Effective Date,
the aggregate principal amount of the New Junior Notes shall be
decreased by 10/11ths of the sterling amount by which the Cash has
been so increased (such calculation to reduce the L117,270,000
figure referred to in sub-clause 21(1)(c)).
(3) In this Scheme:
(a) the term "BASIC KNOWN CLAIMS SEGMENT" means that part of the
Basic Scheme Consideration calculated by applying the fraction:
KC
----------------
125,000,000 + KC
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to each Element of Basic Scheme Consideration, where KC = the
aggregate amount of the Known Claims; and
(b) the term "BASIC RESERVE CLAIMS SEGMENT" means that part of the
Basic Scheme Consideration calculated by applying the
fraction:
125,000,000
----------------
125,000,000 + KC
to each Element of Basic Scheme Consideration, where KC = the
aggregate amount of the Known Claims.
(4) In the Scheme:
(a) the term "KNOWN CLAIMS SEGMENT" means that part of the Scheme
Consideration available until the expiry or termination of the
Waiting Period from which Distributions of Distribution
Entitlements of Admitted Known Creditors shall be made being,
from time to time, the aggregate of the following:
(i) the Basic Known Claims Segment;
(ii) any Known Claims Supplement arising under sub-clause
27(3) (or equivalent supplement pursuant to sub-clause
27(5));
(iii) any plc Receipts made available to Known Creditors as a
result of the operation of clause 28; and
(iv) any Known Rejected Claim Supplement made available to
Known Creditors as a result of the operation of clause
29.
The parts of the Known Claims Segments listed in (ii) - (iv)
above shall be treated for all purposes as a supplement to the
Basic Known Claims Segment. Any entitlement to receive a
distribution from the Basic Known Claims Segment shall be
supplemented by an entitlement to receive a distribution of
those other parts (if any) of the Known Claims Segment of the
same proportion as the Distribution Entitlement of the
relevant Scheme Creditor to the Basic Known Claims Segment is
of the Basic Known Claims Segment (but such proportion shall
be calculated after taking into account any decrease in the
size of the Basic Known Claims Segment resulting from:
(A) Known Claims being Conclusively Rejected resulting in a
Rejected Claims Supplement being deducted from the Basic
Known Claims Segment pursuant to sub-clause 29(1)(a) and
becoming available for distribution to Scheme Creditors
in accordance with sub-clause 29(2); and/or
(B) Known Claims being Conclusively Rejected resulting in the
Distribution Entitlement to which the Known Creditor who
would have been entitled had its Known Claim been
Admitted being deducted from the Basic Known Claims
Segment and becoming part of the Reserve Claims Segment
pursuant to clause 29(1)(b)).
(b) the term "RESERVE CLAIMS SEGMENT" means that part of the
Scheme Consideration available until the expiry or termination
of the Waiting Period from which Distributions of Distribution
Entitlements of Admitted Reserve Creditors shall be made
being, from time to time, the aggregate of the following:
(i) the Basic Reserve Claims Segment;
(ii) any Reserve Claims Supplement arising under sub-clause
27(3) (or equivalent supplement pursuant to sub-clause
27(5));
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(iii) any plc Receipts made available to Reserve Creditors as a
result of the operation of clause 28; and
(iv) any Reserve Rejected Claim Supplement made available to
Reserve Creditors as a result of the operation of clause
29.
The parts of the Reserve Claims Segment listed in (ii) - (iv)
above shall be treated for all purposes as a supplement to the
Basic Reserve Claims Segment and any entitlement to receive a
distribution from the Basic Reserve Claims Segment shall be
supplemented by an entitlement to receive a distribution of those
other parts (if any) of the Reserve Claims Segment of the same
proportion as the Distribution Entitlement of the relevant Scheme
Creditor to the Basic Reserve Claims Segment is of the Basic
Reserve Claims Segment (but such proportion shall be calculated
after taking into account any increase in the size of the Basic
Reserve Claims Segment resulting from Known Claims being
Conclusively Rejected which results in the Distribution
Entitlement to which the Known Creditor who would have been
entitled had its Known Claim been Admitted being deducted from
the Basic Known Claims Segment and becoming part of the Reserve
Claims Segment pursuant to clause 29(1)(b)).
22. If a Known Claim is Admitted at a value higher than the value of that
Known Claim set out in Schedule 3, the excess over the value set out in
Schedule 3 shall be treated as an Admitted Reserve Claim.
INITIAL DISTRIBUTION AND FIRST INITIAL DISTRIBUTION
23. (1) Each Scheme Creditor who has a Submitted Scheme Claim which is
Admitted before the expiry or termination of the Waiting Period
shall be entitled to receive an Initial Distribution from:
(a) the Known Claims Segment if its Admitted Scheme Claim is a
Known Claim; or
(b) the Reserve Claims Segment if its Admitted Scheme Claim is a
Reserve Claim.
(2) The Supervisors shall use reasonable endeavours to determine
promptly whether or not a Submitted Scheme Claim shall be Admitted
and, if they do so determine, shall promptly Admit that Submitted
Scheme Claim.
(3) As soon as reasonably practicable after a Scheme Claim has been
Admitted it shall be the subject of a Distribution Notice.
(4) On the Effective Date:
(a) Known Creditors whose Scheme Claims are Submitted on or
before 5.00 p.m. (London time) on the First Claim Date and
which have been listed in the First Initial Distribution
Notice shall be Admitted by the Supervisors;
(b) the Supervisors shall issue the First Initial Distribution
Notice to the Escrow Trustee (with a copy to the Distribution
Agent);
(c) Scheme Creditors whose Scheme Claims are Submitted on or
before 5.00 p.m. (London time) on the First Claim Date which
are Admitted by the Supervisors on the Effective Date but
which were not listed in the First Initial Distribution
Notice shall be the subject of a Distribution Notice issued
by the Supervisors to the Escrow Trustee (with a copy to the
Distribution Agent) at the same time as the First Initial
Distribution Notice; and
(d) Scheme Creditors with Admitted Scheme Claims listed in the
First Initial Distribution Notice or in any Distribution
Notice issued pursuant to sub-clause 23(4)(c) shall be
entitled to an Initial Distribution forthwith upon the issue
of the First Initial Distribution Notice (and any
Distribution Notice issued pursuant to sub-clause 23(4)(c))
in respect of such Admitted Scheme Claim and its Initial
Distribution shall be made to its Eligible Recipient.
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(5) Scheme Creditors whose Scheme Claims are Submitted and which are
Admitted before the expiry or termination of the Waiting Period but
in respect of which a First Initial Distribution pursuant to
sub-clause 23(4)(b) or an Initial Distribution pursuant to
sub-clause 23(4)(c), is not made shall be entitled to an Initial
Distribution in respect of such Admitted Scheme Claims and such
distributions shall be made to their Eligible Recipients as soon as
practicable after such claims have been Admitted.
(6) The amount of the Initial Distribution (including, for the avoidance
of doubt, the First Initial Distribution) from the Known Claims
Segment to which an Admitted Known Creditor is entitled shall be
calculated in accordance with the following formula:
KDE = AKC X KCS
---
KC
where KDE = the Distribution Entitlement of the relevant Admitted Known
Creditor to each of the Elements of the Basic Scheme
Consideration in the Initial Distribution;
AKC = the Admitted Known Claim of the relevant Admitted Known
Creditor;
KC = the aggregate amount of the Known Claims; and
KCS = separately, the amount of each of the Elements of the Basic
Scheme Consideration comprising the Basic Known Claims
Segment as at the Effective Time.
(7) The amount of the Initial Distribution from the Reserve Claims
Segment to which an Admitted Reserve Creditor is entitled shall be
calculated in accordance with the following formula:
RDE = ARC X KCS
---
KC
where RDE = the Distribution Entitlement of the relevant Admitted
Reserve Creditor to each of the Elements of the Basic Scheme
Consideration in the Initial Distribution;
ARC = the Admitted Reserve Claim of the relevant Admitted Reserve
Creditor;
KC = the aggregate amount of the Known Claims; and
KCS = separately, the amount of each of the Elements of Basic
Scheme Consideration comprising the Basic Known Claims
Segment as at the Effective Time.
(8) Any Distribution Notice given by the Supervisors to the Escrow
Trustee (with a copy to the Distribution Agent) shall instruct the
Escrow Trustee to direct the Distribution Agent to make a
Distribution to all relevant Eligible Recipients referred to in the
Distribution Notice in accordance with the terms of the Scheme.
(9) Where in sub-clauses 21(3), 23(6), and 23(7) above any sum included
in any of the terms AKC, KC and ARC is in a currency other than
sterling then, for the purposes of calculating the relevant
fraction, that sum shall be converted to sterling at the Scheme
Rate.
(10) In the case of a Scheme Claim in respect of Bonds which is Admitted
where the aggregate total of all Distributions to Designated
Recipients in respect of that claim is less than the Distribution to
which the Eurobond Trustee or the Yankee Bond Trustee as appropriate
in respect of that claim is entitled, the remainder of the Scheme
Consideration shall be held by the Escrow Trustee and dealt with in
accordance with the Escrow and Distribution Agreement.
TERMINATION OF THE WAITING PERIOD
24. (1) Subject to sub-clause 24(2), if at any time after the issue of the
First Initial Distribution Notice the Supervisors are not satisfied
that the Reserve Claims Segment is sufficient to make Distributions
of
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Distribution Entitlements in respect of all Reserve Claims which
have been, or are likely to be, Admitted, the following shall apply:
(a) the Supervisors shall forthwith notify the Company and the
Creditors' Committee;
(b) the Waiting Period shall terminate and all entitlements of
Admitted Scheme Creditors to Scheme Consideration which have
not been the subject of a Distribution Notice shall be dealt
with in accordance with the provisions of clause 25; and
(c) for the avoidance of doubt, the provisions of this clause
shall not affect the Distribution Entitlement of any Scheme
Creditor whose Admitted Scheme Claim is the subject of a
Distribution Notice issued prior to the issue of the
Supervisors' notice in sub-clause 24(1)(a).
(2) If a Scheme Claim is Submitted after the issue of the First Initial
Distribution Notice which:
(a) if immediately Admitted would result in the Supervisors not
being satisfied that the Reserve Claims Segment is sufficient
to make Distributions of Distribution Entitlements in respect
of all Reserve Claims which have been, or are likely to be,
Admitted; and
(b) the Supervisors cannot immediately determine whether, or the
extent to which, that Submitted Scheme Claim should be
Admitted,
the Supervisors may consider that Scheme Claim for a period of up to
30 Business Days from the date on which that Scheme Claim is
Submitted (the "EXAMINATION PERIOD"). The Supervisors shall
forthwith notify the Company and the Creditors' Committee of the
commencement of the Examination Period. On, or prior to, the expiry
of such 30 Business Days the Supervisors shall confirm to the
Creditors' Committee and the Company whether or not they are
satisfied that the Reserve Claims Segment shall be sufficient to
make Distributions of Distribution Entitlements in respect of all
Reserve Claims which have been, or are likely to be, Admitted. The
issue of the Supervisors' confirmation or, if later, the expiry of
the 30 Business Day period shall bring the relevant Examination
Period to an end. If no confirmation is provided prior to the expiry
of such 30 Business Days, the Supervisors are deemed to be not
satisfied that the Reserve Claims Segment is sufficient to make
Distributions of Distribution Entitlements in respect of all Reserve
Claims which have been, or are likely to be, Admitted. If the
Supervisors are (or are deemed to be) not satisfied that the Reserve
Claims Segment is sufficient to make Distributions of Distribution
Entitlements in respect of all Reserve Claims which have been, or
are likely to be, Admitted sub-clauses 24(1)(a)-(c) shall apply. No
Distribution Notice shall be issued during an Examination Period.
For the avoidance of doubt, nothing in this sub-clause shall affect
the Distribution Entitlement of any Scheme Creditor whose Admitted
Scheme Claim has, prior to the commencement of the Examination
Period, been the subject of a Distribution Notice.
FURTHER DISTRIBUTIONS
25. (1) Any Scheme Consideration which has not been the subject of a
Distribution Notice by the termination or expiry of the Waiting
Period (in this clause "UNDISTRIBUTED SCHEME CONSIDERATION") shall,
from the termination or expiry of the Waiting Period, be dealt with
as set out in this clause.
(2) Before the Undistributed Scheme Consideration (if any) shall be
available for making further Distributions pursuant to this clause
25 to Admitted Scheme Creditors which have already received or
become entitled to receive an Initial Distribution, the
Undistributed Scheme Consideration shall be used to reimburse the
Company for any SDRT Expense that it has incurred in excess of
L500,000. For the avoidance of doubt, the Company shall have no
right to receive any such reimbursement in respect of the first
L500,000 of SDRT Expense it incurs. The Supervisors, acting
reasonably, shall determine which Elements of Scheme Consideration
shall be utilised to effect the reimbursement, converting Elements
into money as the Supervisors, acting reasonably, deem necessary to
enable the reimbursement to be made. The Supervisors shall give the
necessary
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directions to the Escrow Trustee and the Distribution Agent to
effect the reimbursement of the Company pursuant to this clause.
(3) Thereafter the Undistributed Scheme Consideration shall be used to
make further Distributions to Eligible Recipients on the following
basis:
(a) the distinction between the Known Claims Segment and the
Reserve Claims Segment shall no longer be relevant and the
remainder of the segments shall be aggregated for future
Distribution purposes;
(b) the Supervisors' approach to further Distributions shall be
in accordance with the approach a liquidator would take
following Liquidation Distribution Principles including the
following concepts:
(i) the setting of final dates by which a creditor must
claim if it wishes to participate in a planned
dividend;
(ii) in the case of claims which have not been Admitted at
the time of the declaration of a dividend to
creditors, the taking into account of any such
disputed claim in setting the dividend on a prudent
basis so that if the disputed claim is later Admitted,
the relevant creditor shall receive the dividend it
would have received if and to the extent its claim had
been Admitted at the date of the relevant dividend;
(iii) generally, the concept of pari passu distribution; and
(iv) any Scheme Creditor whose Scheme Claim is Admitted but
whose Distribution Entitlement has not yet been
satisfied shall be entitled to a Distribution in
priority to the entitlement of other Admitted Scheme
Creditors (whose entitlements to previous
Distributions have been satisfied) to further
Distributions until that Scheme Creditor is entitled
to (and such entitlement is satisfied) the same
rateable Distribution that other Admitted Scheme
Creditors are entitled to (which entitlements have
been satisfied).
(4) The Supervisors, in deciding whether and, if so, when to direct a
further Distribution, shall have regard to the cost of making the
Distribution in relation to the value of the Undistributed Scheme
Consideration to be distributed and may, acting reasonably, decide
to delay directing a Distribution until such time (if any) as the
costs of making the Distribution do not exceed the value of Scheme
Consideration (or proceeds of sale of such Scheme Consideration) to
be distributed.
THE COMPANY AS A CREDITOR OF PLC
26. Property received or receivable by the Company from plc from time to time
by virtue of the Company being a creditor of plc (whether pursuant to the
plc Scheme, any other scheme of arrangement for plc, any voluntary
arrangement for plc or any liquidation of plc or otherwise) shall be
available for distribution and shall be distributed by the Company to
Admitted Scheme Creditors subject to, at the time, in the manner and on
the basis set out in the Scheme. In the light of the position of Ancrane
as a Scheme Creditor and a Bondholder and the Ancrane Direction, this may
involve successive distributions between the Company and plc, either
notional or actual, as provided for in this Scheme and the plc Scheme.
THE PLC DISTRIBUTION SUPPLEMENT
27. (1) Sub-clauses 27(2), (3) and (4) shall apply to the Initial
Distribution if all of the conditions set out at (a) to (c)
inclusive below are satisfied on the Effective Date:
(a) the plc Scheme including provisions in the form or
substantially the form of that set out in Schedule 2 becomes
effective;
(b) the plc Scheme supervisors admit the Company's claim against
plc pursuant to the plc Scheme; and
(c) (i) the Known Claim of Ancrane is Admitted by the
Supervisors; or
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(ii) either (or both) of the Known Claims of the Eurobond
Trustee are Admitted by the Supervisors; or
(iii) either (or both) of the Known Claims of the Yankee Bond
Trustee are Admitted by the Supervisors.
(2) To give effect to clause 26 and on the conditions in sub-clause
27(1) being satisfied on the Effective Date, the Supervisors shall
agree with the plc Scheme supervisors a distribution model
simulating successive distributions to the Company in the plc Scheme
and to plc in the Scheme (pursuant to the Ancrane Direction) (using
the figures for the Company's claim against plc, Ancrane's claim
against the Company as actually admitted by the Supervisors of the
respective Schemes and Ancrane's holding of Bonds) in order to
produce a net additional amount of Scheme Consideration available
for Distribution to Admitted Scheme Creditors with the Initial
Distribution (such net additional amount being the "PLC DISTRIBUTION
SUPPLEMENT"). The plc Distribution Supplement shall be distributed
to Eligible Recipients at the times and in the manner set out
sub-clauses 27(3) and 27(4).
(3) The Elements of the plc Distribution Supplement shall for these
purposes be treated as being made up of two parts as follows:
(a) the "KNOWN CLAIMS SUPPLEMENT" which shall be the plc
Distribution Supplement less the Reserve Claims Supplement;
and
(b) the "RESERVE CLAIMS SUPPLEMENT" which shall be the same
proportion of the plc Distribution Supplement as the Basic
Reserve Claims Segment (which for this purpose shall be
calculated after taking into account any increase in the size
of the Basic Reserve Claims Segment resulting from Known
Claims being Conclusively Rejected and the Distribution
Entitlement of the Known Creditor who would have been entitled
had its Known Claim been Admitted rather than Conclusively
Rejected becoming part of the Reserve Claims Segment pursuant
to clause 29(1)(b)) is of the Basic Scheme Consideration
(which for this purpose shall be calculated after taking into
account any decrease in the size of the Basic Known Claims
Segment resulting from:
(A) Known Claims being Conclusively Rejected resulting in a
Rejected Claims Supplement being deducted from the Basic
Known Claims Segment pursuant to sub-clause 29(1)(a) and
becoming available for distribution to Scheme Creditors
in accordance with sub-clause 29(2); and/or
(B) Known Claims being Conclusively Rejected resulting in the
Distribution Entitlement to which the Known Creditor who
would have been entitled had its Known Claim been
Admitted being deducted from the Basic Known Claims
Segment and becoming part of the Reserve Claims Segment
pursuant to clause 29(1)(b)).
(4) (a) The Elements of the Known Claims Supplement shall be
distributed to Admitted Known Creditors at the same time as
the Initial Distribution.
(b) The Elements of the Reserve Claims Supplement shall be
distributed to Admitted Reserve Creditors at the same time as
the Initial Distribution.
(5) (a) For the purposes of Distributions under the Scheme:
(i) other than the Initial Distribution; and/or
(ii) as regards the Initial Distribution if the provisions
of sub-clauses 27(2)-27(4) inclusive do not come into
force because one or more of the conditions in
sub-clause 27(1) is not satisfied,
the Supervisors may agree similar or analogous arrangements to
those in sub-clause 27(2) (a "MODEL") with the supervisors of
the plc Scheme (if any, or, if none, any other duly
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authorised representative of plc) where, acting reasonably,
the Supervisors consider that to do so shall be in the
interests of Admitted Scheme Creditors.
(b) If a model is agreed pursuant to sub-clause 27(5)(a) prior to
the expiry or termination of the Waiting Period, the
equivalent of the plc Distribution Supplement thereby created
shall be apportioned in the same manner as provided for in
sub-clause 27(3), otherwise no apportionment shall be made.
(c) Any supplement arising pursuant to sub-clause 27(5)(a)(ii)
which shall be apportioned in accordance with sub-clause
27(5)(b) shall be distributed at the same times and in the
same manner as provided for in sub-clause 27(4).
(d) Any supplement arising pursuant to sub-clause 27(5)(a)(i)
prior to the expiry or termination of the Waiting Period shall
become available for distribution following apportionment
under sub-clause 27(5)(b) and the Supervisors shall promptly
issue a Distribution Notice to the Escrow Trustee (with a copy
to the Distribution Agent) in respect of the distribution of
the relevant amount of the supplement to which Admitted Known
Creditors are entitled pursuant to sub-clause 21(4)(a) and the
relevant amount of the Reserve Claim Supplement to which
Admitted Reserve Creditors are entitled pursuant to sub-clause
21(4)(b) to Eligible Receipts in respect of the previously
Admitted Claims provided that the costs of making that
Distribution would not exceed the value of the Scheme
Consideration to be distributed.
(e) Any supplement arising pursuant to sub-clause 27(5)(a)(i)
after the expiry or termination of the Waiting Period shall be
distributed in accordance with the provisions of clause 25.
PLC RECEIPTS
28. (1) As regards:
(a) the Initial Distribution if the provisions of sub-clauses
27(2) - 27(4) above do not come into force for any reason; and
(b) any Distributions other than the Initial Distribution,
in each case, to the extent that relevant similar or analogous
arrangements as referred to in clause 27(5) are not agreed in
respect of the Company's entitlement to the plc Receipts, Admitted
Scheme Creditors shall be entitled to all plc Receipts from time to
time which shall be held on trust for Scheme Creditors under the
Scheme.
(2) If plc Receipts arise pursuant to sub-clause 28(1) prior to the
expiry or termination of the Waiting Period, those plc Receipts
shall be apportioned in the same manner as provided for in sub-
clause 27(3), otherwise no apportionment shall be made.
(3) Any plc Receipts arising pursuant to sub-clause 28(1)(a) which shall
be apportioned in accordance with sub-clause 28(2) shall be
distributed at the same times and in the same manner as provided for
in sub-clause 27(4).
(4) Any plc Receipts arising pursuant to sub-clause 28(1)(b) prior to
the expiry or termination of the Waiting Period shall become
available for distribution following apportionment under sub-clause
28(2) and the Supervisors shall promptly issue a Distribution Notice
to the Escrow Trustee (with a copy to the Distribution Agent) in
respect of the distribution of the relevant amount of the supplement
to which Admitted Known Creditors are entitled pursuant to
sub-clause 21(4)(a) and the relevant amount of the Reserve Claim
Supplement to which Admitted Reserve Creditors are entitled pursuant
to sub-clause 21(4)(b) to Eligible Recipients in respect of the
previously Admitted Claims provided that the costs of making that
Distribution would not exceed the value of the Scheme Consideration
to be distributed.
(5) Any plc Receipts arising pursuant to sub-clause 28(1)(b) after the
expiry or termination of the Waiting Period shall be distributed in
accordance with the provisions of clause 25.
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REJECTED CLAIMS
29. (1) Where a Known Claim is Conclusively Rejected before the expiry or
termination of the Waiting Period, the Distribution Entitlement to
which the Known Creditor would have been entitled, had its Known
Claim been Admitted rather than Conclusively Rejected, shall:
(a) if the quantum of the Known Claim which is Conclusively
Rejected exceeds L250,000,000 (such Distribution Entitlement
being a "REJECTED CLAIM SUPPLEMENT"), be deducted from the
Known Claims Segment and be apportioned as follows:
(i) the "KNOWN REJECTED CLAIM SUPPLEMENT" which shall be
the Rejected Claim Supplement less the Reserve Rejected
Claim Supplement; and
(ii) the "RESERVE REJECTED CLAIM SUPPLEMENT" which shall be
the same proportion of the Rejected Claim Supplement as
the Basic Reserve Claims Segment (which for this
purpose shall be calculated after taking into account
any increase in the size of the Basic Reserve Claims
Segment resulting from Known Claims being Conclusively
Rejected and the Distribution Entitlement of the Known
Creditor who would have been entitled had its Known
Claim been Admitted rather than Conclusively Rejected
becoming part of the Reserve Claims Segment pursuant to
clause 29(1)(b)) is of the Basic Scheme Consideration
(which for this purpose shall be calculated after
taking into account any decrease in the size of the
Basic Known Claims Segment resulting from:
(A) Known Claims being Conclusively Rejected resulting
in a Rejected Claims Supplement being deducted
from the Basic Known Claims Segment pursuant to
sub-clause 29(1)(a) and becoming available for
distribution to Scheme Creditors in accordance
with sub-clause 29(2); and/or
(B) Known Claims being Conclusively Rejected resulting
in the Distribution Entitlement to which the Known
Creditor who would have been entitled had its
Known Claim been Admitted being deducted from the
Basic Known Claims Segment and becoming part of
the Reserve Claims Segment pursuant to clause
29(1)(b)); and
(b) if the quantum of the Known Claim (or part thereof) which is
Conclusively Rejected is less than or equal to L250,000,000,
be deducted from the Known Claims Segment and form part of
the Reserve Claims Segment and therefore not be available for
distribution to Admitted Scheme Creditors as a Rejected Claim
Supplement pursuant to sub-clause 29(2).
(2) A Rejected Claim Supplement shall become available for distribution
following apportionment under sub-clause 29(1)(a) and the
Supervisors shall promptly issue a Distribution Notice to the
Escrow Trustee (with a copy to the Distribution Agent) in respect
of the distribution of the amount of the Known Rejected Claim
Supplement to which Admitted Known Creditors are entitled pursuant
to sub-clause 21(4)(a) and the amount of the Reserve Rejected Claim
Supplement to which Admitted Reserve Creditors are entitled
pursuant to sub-clause 21(4)(b) to Eligible Recipients in respect
of the previously Admitted Claims.
(3) For the purposes of distributing the Rejected Claim Supplement; if:
(a) the plc Scheme including provisions in the form or
substantially in the form of that set out in Schedule 2
becomes effective;
(b) the plc Scheme supervisors admit the Company's claim against
plc pursuant to the plc Scheme;
(c) (i) the Known Claim of Ancrane is Admitted by the
Supervisors; or
(ii) either (or both) the Known Claims of the Eurobond
Trustee are Admitted the Supervisors; or
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(iii) either (or both) the Known Claims of the Yankee Bond
Trustee are Admitted by the Supervisors; and
(d) the waiting period under the plc Scheme has not been
terminated or expired,
the Supervisors may agree similar or analogous arrangements to those
in sub-clause 27(2) with the supervisors of the plc Scheme (if any,
or, if none, any other duly authorised representative of plc) where,
acting reasonably, the Supervisors consider that to do so would be
in the best interests of Admitted Scheme Creditors.
GENERAL PROVISIONS ON DISTRIBUTIONS
30. (1) No Scheme Creditor shall have any right to disturb a prior
Distribution, whether on the grounds that there remains insufficient
Scheme Consideration to satisfy that creditor's Distribution
Entitlement (if any) or otherwise.
(2) The Supervisors shall give all necessary directions and issue all
necessary Distribution Notices to the Escrow Trustee (with a copy to
the Distribution Agent) to enable Distributions to be made in
accordance with the Scheme. The issue by the Supervisors of
directions in accordance with this sub-clause 30(2) shall be a
complete discharge of the Supervisors' responsibilities with respect
to such Distributions. Without prejudice to the generality of the
previous sentence, the Supervisors shall not be liable in any way
whatsoever for any acts or omissions of the Escrow Trustee, the
Distribution Agent or Bondholder Communications in respect of those
directions.
(3) Subject always to sub-clause 30(1) an Admitted Scheme Claim may be
withdrawn or reduced as to the amount claimed by agreement between
the Supervisors and the relevant Scheme Creditor.
(4) Any sums of cash or rights or benefits paid, transferred or credited
to the Escrow Trustee pursuant to clause 34 shall be distributed
together with, or, as appropriate, in place of, and at the same time
as, the New Rights to which such sum of cash or other rights or
benefits relate.
(5) (a) Elections may be made in Claim Forms and Account Holder
Letters for the Eligible Recipient:
(i) to receive any New Creditor Shares in the form of ADRs;
and/or
(ii) subject to the thresholds described in Recital J being
met, to receive euro-denominated or US
dollar-denominated New Senior Notes (but not both);
and/or
(iii) to receive any New Creditor Shares:
(A) in certificated form; or
(B) into an account held with CREST.
(b) The Company shall pay any applicable SDRT Expense.
(c) Where there are any New Creditor Shares which are not
sufficient in number to equate to one ADR and which therefore
cannot be transferred to the ADR Depositary in accordance with
the terms of the Escrow and Distribution Agreement, the
Supervisors shall direct the Escrow Trustee to procure that
the Distribution Agent, acting on behalf of the Escrow Trustee
shall sell those New Creditor Shares and remit the proceeds to
augment the Reserve Claims Segment.
(6) Eligible Recipients shall receive Distributions in accordance with
the provisions of the Scheme provided that no fraction of a New
Share and no fraction of a New Note shall be transferred, allotted
or issued to any Eligible Recipient but:
(a) if the New Creditor Shares or New Notes or any of them are
Listed all fractions of such Listed New Creditor Shares or New
Notes which, but for this proviso, any such Eligible
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Recipients would have received shall be aggregated and sold in
the market and the net proceeds of sale shall comprise part of
the Reserve Claims Segment; and
(b) if any of the New Creditor Shares or New Notes are not listed,
all entitlements of Eligible Recipients to all fractions of
such New Creditor Shares and New Notes which, but for this
proviso any such Eligible Receipts would have received, shall
be rounded down to zero and the fractions shall comprise part
of the Reserve Claims Segment.
(7) (a) New Creditor Shares and New Notes will not be distributed to
or to the order, or for the account or benefit, of any person
where such distribution would be prohibited by any applicable
law or regulation, or so prohibited except after compliance
with conditions or requirements that are unduly onerous. Where
any determination is required as to whether the conditions or
requirements of applicable law or regulation are "unduly
onerous," such determination will be made by the Company with
the advice of legal counsel and having due regard for the
number of Scheme Creditors and Bondholders that are or may be
located in the relevant jurisdiction, the value of the
securities to which such persons are or may be entitled
pursuant to the Scheme, the extent to which the requirements
of the laws and regulations of such jurisdiction as applied to
the Scheme are uncertain, the nature and extent of the risks
or penalties associated with any violation of those legal or
regulatory requirements and the costs, administrative burden
and timing implications of taking such action (if any) as
might permit distributions of securities to be made in that
jurisdiction (including pursuant to any available exemptions)
in accordance with applicable legal and regulatory
requirements.
(b) Notwithstanding the foregoing, distribution of New Creditor
Shares and New Notes will not be refused on the grounds of any
legal or regulatory prohibition of general application under
the laws of any Unrestricted Jurisdiction, unless there has
been a Change of Law.
(c) New Creditor Shares and New Notes will not be distributed to
or to the order of any Scheme Creditor or Bondholder located
in a Restricted Jurisdiction, except that New Creditor Shares
and New Notes will be distributed to or to the order of:
(i) any Scheme Creditor or Bondholder located in France if
the Scheme Creditor or (as the case may be) the
Bondholder and any Designated Recipient of such
Bondholder is a "qualified investor" as defined in
Article L.411-2 of the French Monetary and Financial
Code;
(ii) any Scheme Creditor or Bondholder located in Italy, if
CONSOB has confirmed that such distribution does not
constitute a public offering under Italian securities
legislation;
(iii) any Bondholder located in Italy, if the number of such
persons does not exceed 200;
(iv) any Scheme Creditor other than a Bondholder located in
Italy, if:
(A) such person is a "professional investor" as defined
in the Consolidated Financial Act Article 30,
paragraph II and in CONSOB Regulation 11522/1998
Article 31, paragraph II; or
(B) such person is not a "professional investor" as so
defined but the number of such persons that are not
"professional investors" does not exceed 200; and
(v) any Scheme Creditor or Bondholder located in the US
states of Arizona, California, Colorado, Connecticut,
Illinois, Ohio and Vermont if such persons falls within
one of the relevant categories of persons set out in
Schedule 4.
Notwithstanding the foregoing, New Creditor Shares and New Notes may
be distributed to or to the order of persons located in a Restricted
Jurisdiction to the extent that there has been a Change of Law.
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(d) Notwithstanding the provisions of sub-clause (c) above, if the
confirmations required by box 3 of the Claim Form or section 5,
paragraphs (D), (E) and (F) of the Account Holder Letter are given
in the form requested by the Claim Form or the Account Holder Letter
(as the case may be), then distribution of New Creditor Shares and
New Notes to or to the order of the relevant persons will not be
refused on the grounds of any legal or regulatory prohibition of
general application under the laws of any Restricted Jurisdiction,
unless:
(i) the Company determines that such confirmations have been given
inappropriately on the basis that information provided in or
in connection with the transmittal of the Claim Form or
Account Holder Letter indicates that such Claim Form has been
submitted by, or such Account Holder Letter has been delivered
on behalf of, or delivery of securities is being requested to
or for the account or benefit of, a person that is located in
a Restricted Jurisdiction and that could not be eligible to
receive the securities under any provision described in
sub-clause 30(7)(c);
(ii) the Company obtains actual knowledge that such confirmations
are false; or
(iii) there has been a Change of Law.
Notwithstanding the foregoing, New Creditor Shares and New Notes
will be distributed in Italy pursuant to sub-clauses 30(7)(c)(ii),
30(7)(c)(iv)(B) (to the extent applicable) without regard to whether
the required confirmations have been inappropriately or falsely
given in any relevant Claim Form or Account Holder Letter.
(e) To the extent that New Creditor Shares or New Notes that would
otherwise be deliverable pursuant to the Scheme cannot be delivered
because of a legal or regulatory prohibition described in sub-
clause 30(7) (a) above, such New Creditor Shares or New Notes will
not be delivered and instead:
(i) in the case of New Creditor Shares or New Notes that are
listed on a securities exchange, such New Creditor Shares or
New Notes will be sold and the net proceeds of such sale
delivered to the relevant person in full satisfaction of the
rights of such person in respect of such New Creditor Shares
or New Notes under the Scheme, all as more particularly
specified in the Escrow and Distribution Agreement; and
(ii) in the case of New Creditor Shares or New Notes that are not
listed on a securities exchange, the relevant person will
receive a sum in cash which is substantially equivalent in
value to such New Creditor Shares or New Notes, such sum to be
determined by agreement between the Company and the
Supervisors or absent such agreement by adjudication under
Part VI and the Supervisors shall direct the sale of the New
Creditor Shares and/or New Notes to which the relevant person
would otherwise have been entitled.
(8) The Supervisors shall give all appropriate directions to the Escrow
Trustee (with a copy to the Distribution Agent) to give effect to
this clause 30.
(9) Any sale referred to in this clause 30 shall be made for the best
terms reasonably available at the time of the sale and shall be
undertaken on behalf of the person absolutely entitled to the
relevant asset and none of the Supervisors, the Company, the Escrow
Trustee, the Distribution Agent, the Registrars or any other person
shall be responsible for any loss arising from the terms or timing
of the sale.
(10) For the avoidance of doubt, a Scheme Creditor must comply with the
terms of the Scheme, including submitting a Claim Form in accordance
with the provisions of clause 12, in order for its Eligible
Recipient to receive any Distributions of Scheme Consideration to
which that Scheme Creditor's Scheme Claim might entitle it.
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PART IV
FURTHER PROVISIONS REGARDING
THE ISSUE OF NEW SHARES AND WARRANTS
31. The following shall apply in relation to the allotment and issue of the
New Shares and the Warrants in pursuance of the Scheme:
(1) The New Shares shall be allotted and issued by the Company to the
Escrow Trustee by means of credit to an appropriate CREST account
of the Escrow Trustee or its nominee.
(2) Each New Share shall be allotted and issued credited as fully paid
in consideration of:
(a) the release of Scheme Claims which are the subject of the
First Initial Distribution Notice on the basis set out in the
Scheme; and/or (as the case may be)
(b) the agreement of Scheme Creditors with other Scheme Claims
not to commence or continue Prohibited Proceedings in respect
of such Scheme Claims as set out in clauses 2 to 5,
(such consideration being in aggregate net of the amount of the
Cash and the face value of the New Notes).
(3) The plc Shareholders shall receive the plc Shareholder Stock on the
following basis:
(a) each plc Shareholder shall be provisionally allocated one New
Share from the plc Shareholder Stock in respect of every 559
ordinary shares of nominal value 5p each in the capital of
plc ("PLC SHARES") which it holds on the last day of dealings
in those shares prior to the Effective Date (the "REGISTER
DATE"). No fractions of New Shares shall be provisionally
allocated to plc Shareholders.
(b) each plc Shareholder who holds less than 559 plc Shares at
the Register Date shall be allocated one New Share from those
New Shares not distributed by virtue of the prohibition
against the allocation of fractions of New Shares set out in
sub-clause 31(3)(a) ("RESIDUAL SHARES"). If there are
insufficient Residual Shares to enable one New Share to be
allocated to each such plc Shareholder (the "SHORTFALL"),
sub-clause 31(3)(c) shall apply until the Shortfall has been
eliminated. If there are Residual Shares in excess of the
number of New Shares required to ensure that each plc
Shareholder is allocated one New Share from the plc
Shareholder Stock pursuant to sub-clause 31(3)(a) (the
"EXCESS"), sub-clause 31(3)(d) shall apply.
(c) (i) One New Share shall be deducted from the provisional
allocation of each plc Shareholder beginning with the
plc Shareholder receiving the highest provisional
allocation (from which no New Share has been deducted
under this sub-clause) and continuing with the plc
Shareholder with the next highest provisional
allocation.
(ii) Where more than one plc Shareholder has the same
provisional allocation and a deduction pursuant to
sub-clause 31(3)(c)(i) is required to be made from the
provisional allocation of one such plc Shareholder,
such deduction shall be made in the alphabetical order
of the first letter of the surname or corporate name
(or first surname or corporate name if more than one)
of such plc Shareholders as they appear in the register
of the members of plc.
(iii) Deductions pursuant to sub-clauses 31(3)(c)(i) and
31(3)(c)(ii) shall continue until the number of New
Shares so deducted equals the Shortfall.
(d) (i) If the Company reasonably believes that the New Shares
shall be (and they are in fact) Listed within 30
Business Days of the Effective Date, the Registrars
shall use reasonable endeavours to procure the sale of
the Excess on the London Stock Exchange and the net
proceeds of sale shall be paid to the Company for its
benefit.
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(ii) In any other circumstances, the Registrars shall use
reasonable endeavours to procure the sale of the Excess
and the net proceeds of such sale shall be paid to the
Company for its benefit.
(e) Once the provisional allocations under this sub-clause have
been finalised they shall be treated as final allocations and
distributed to plc Shareholders as soon as reasonably
practicable in the manner provided for in the Escrow and
Distribution Agreement.
(4) The Warrants shall be allotted and issued by the Company prior to
the Effective Date and the Registrars shall hold the Warrants for
the benefit of the plc Shareholders to be distributed to (or, as
the case may be, sold in the market as provided in sub-clause
31(6)(b)) as directed by the Company in accordance with the terms
of the Scheme.
(5) Each plc Shareholder shall be allocated one warrant in respect of
every 56 plc Shares which it holds at the Register Date. No
fractions of Warrants shall be allocated to plc Shareholders.
(6) (a) New Shares and Warrants will not be distributed to or to the
order, or for the account or benefit, of any plc Shareholder
where such distribution would be prohibited by any applicable
law or regulation, or so prohibited except after compliance
with conditions or requirements that are unduly onerous
(determined in accordance with sub-clause 30(7)(a)).
Accordingly,
(i) New Shares and Warrants will not be distributed to any
plc Shareholder that is shown in the register of plc
Shareholders as having a registered address in
Malaysia, unless there has been a Change of Law; and
(ii) Warrants will not be distributed to any plc Shareholder
that is shown in the register of plc Shareholders as
having a registered address in Italy, unless:
(A) CONSOB has confirmed that such distribution does
not constitute a public offering under Italian
securities legislation; or
(B) the number of such plc Shareholders does not
exceed 200; or
(C) there has been a Change of Law.
(b) To the extent that New Shares or Warrants that would
otherwise be deliverable to a plc Shareholder cannot be
delivered because of a legal or regulatory prohibition
described in sub-clause 31(6)(a) above, such New Shares or
Warrants will not be delivered and instead the Registrars
shall use reasonable endeavours to sell such New Shares or
Warrants and will pay the net proceeds of such sale (if any)
to the relevant plc Shareholder in full satisfaction of the
rights of such plc Shareholder in respect of such New Shares
or Warrants under the Scheme, all as more particularly
specified in the Escrow and Distribution Agreement.
(7) Any sale pursuant to clause 31 shall be for the best terms
reasonably available at the time of the sale and shall be
undertaken on behalf of the relevant plc Shareholders and none of
the Supervisors, the Company, the Escrow Trustee, the Distribution
Agent, the Registrars or any other person shall be responsible for
any loss arising from the terms or timing of the sale or the
failure to procure any purchaser for all or any plc Shareholder
Stock or Warrants to be sold pursuant to clause 31.
32. The plc Shareholder Stock and the Warrants shall only be available for
the purposes of Distributions to plc Shareholders (or sale) pursuant to
clause 31.
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PART V
ESCROW AND DISTRIBUTION ARRANGEMENTS
ESCROW AND DISTRIBUTION AGREEMENT
33. On the Effective Date, those provisions of the Escrow and Distribution
Agreement which have not already come into force shall come into force in
accordance with its terms. In particular, but without limitation, the
Company, forthwith upon the Effective Date, shall allot and issue or, as
the case may be, pay the Basic Scheme Consideration (and the plc
Shareholder Stock) to the Escrow Trustee or its nominee to be dealt with
in accordance with the Escrow and Distribution Agreement. Any plc
Receipts shall (as soon as practicable after receipt by the Company) be
paid or transferred to the Escrow Trustee to be dealt with in accordance
with the Escrow and Distribution Agreement.
SCHEME CONSIDERATION AND PLC SHAREHOLDER STOCK WHEN HELD IN ESCROW BY THE ESCROW
TRUSTEE
34. All of the Scheme Consideration allotted, issued and/or transferred to
the Escrow Trustee or its nominee shall be held by the Distribution Agent
or the Escrow Trustee's nominee, as the case may be as custodian for the
Escrow Trustee. The Escrow Trustee shall hold that Scheme Consideration
on bare trust absolutely for the Scheme Creditors on the basis set out in
the Escrow and Distribution Agreement and all of the plc Shareholder
Stock allotted, issued or transferred to the Escrow Trustee shall be held
by the Escrow Trustee on trust absolutely for the plc Shareholders. In
each case and so as to bind the Scheme Creditors and any person deriving
title from them, the Scheme Consideration shall be applied by the Escrow
Trustee on behalf of the Scheme Creditors absolutely entitled to it, in
accordance with the Escrow and Distribution Agreement and the provisions
of the Scheme. Subject to the provisions of the Escrow and Distribution
Agreement, the Escrow Trustee shall at no time whatsoever, either present
or future, have any beneficial interest in the Scheme Consideration or
the plc Shareholder Stock.
35. Whilst any New Shares, New Notes or any Cash are held by, or on behalf
of, the Escrow Trustee:
(1) dividends paid on (or any other rights or benefits added or
attached to) such New Shares; and/or
(2) interest accrued on any such Cash or interest paid on any such New
Notes; and/or
(3) any cash arising from the prepayment by the Company of any such New
Senior Notes or New Junior Notes in accordance with their terms and
any interest accruing thereon,
shall be paid, transferred or credited to the Escrow Trustee to hold on
the terms of the Escrow and Distribution Agreement.
36. The Escrow Trustee shall not exercise any voting rights attaching to any
New Notes or New Shares held in escrow.
37. (1) The Escrow Trustee's liabilities as trustee shall be solely those
arising out of its trusteeship and other obligations set out in the
Escrow and Distribution Agreement.
(2) The Distribution Agent's liabilities as custodian for the Escrow
Trustee and as distribution agent shall be solely those arising out
of its custodianship and other obligations set out in the Escrow
and Distribution Agreement.
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PART VI
INDEPENDENT ADJUDICATION
38. If any question or issue in relation to the existence or quantum of a
Scheme Claim shall be referred for adjudication as a result of an
election made pursuant to clause 17 or the question of what sum an
Eligible Recipient shall be entitled to shall be referred for
adjudication pursuant to sub-clause 30(7)(e)(ii) the question or issue
shall be referred for adjudication to an individual agreed between the
Supervisors and the relevant Scheme Creditor (the "COUNTERPARTY"), such
individual to be an independent third party considered by the Supervisors
and the Counterparty to be a fit and proper person duly qualified to
adjudicate on the question or issue, or in the absence of any such
agreement between the Supervisors and the Counterparty within 10 Business
Days of the election, to an individual nominated by The President of the
Law Society of England and Wales.
39. The individual to whom the question or issue is referred (the
"ADJUDICATOR") shall be entitled to prescribe such reasonable provisions
and procedures as, in his absolute discretion, he may consider
appropriate for the purposes of assisting him in reaching his decision,
and shall be entitled for such purpose to call for such evidence in
relation to the question or issue referred to him as he may require,
provided that the Counterparty and the Company shall always be afforded a
reasonable opportunity to make oral submissions to the Adjudicator. In
any one adjudication, such oral submissions shall not in aggregate occupy
more than one working day save with the approval, in his absolute
discretion, of the Adjudicator.
40. With regard to any adjudication before him, the Adjudicator may make such
directions in respect of payment of his remuneration and in respect of
the costs, charges and expenses incurred by him, the Supervisors, the
Company or the Counterparty as he shall think just. In particular, but
without limitation, one party may be directed to pay remuneration and
costs, charges and expenses of another party if, in the opinion of the
Adjudicator, any such party has made a claim, relied on a defence or
otherwise howsoever conducted himself in relation to the adjudication in
a manner which is frivolous, vexatious or had no reasonable prospect of
success.
41. If the Adjudicator shall direct that any such remuneration, costs,
charges and expenses be paid by the Supervisors or by the Company, the
same shall forthwith be paid in full by the Company.
42. If the Adjudicator shall direct that any such remuneration, costs,
charges and expenses be paid by the Counterparty, the same shall
forthwith be paid in full by the Counterparty and, if not so paid then,
for the purposes of determining whether such Counterparty is entitled to
participate in any Distribution under the Scheme, he shall be treated as
having received on account an advance distribution under the Scheme equal
to the amount which he has been directed to pay.
43. Subject to any directions which may be given by the Adjudicator in
accordance with clause 40, the Company shall pay all costs, charges and
expenses incurred by the Adjudicator in the course of exercising and
performing his powers, duties and functions under the Scheme and shall
pay such remuneration to the Adjudicator for the exercise and performance
of his powers, duties and functions as may be agreed between the
Adjudicator and the Supervisors and approved by the Creditors' Committee.
44. The Adjudicator shall notify the Supervisors and the relevant
Counterparty of his decision by notice in writing by Post as soon as
practicable.
45. Subject to any mandatory applicable law, the determination of the
Adjudicator of any question or issue shall be final and binding on the
Company, the Supervisors and the Counterparty and, for the avoidance of
doubt, there shall be no right of appeal therefrom, and no right to make
any claim against the Adjudicator in respect thereof. For the avoidance
of doubt, this exclusion of any right of appeal shall operate only to the
extent permitted by law.
46. If at the expiration of 6 months in the case of a question or issue
referred for adjudication as a result of an election made pursuant to
clause 17 or of 3 months in the case of a question or issue referred for
adjudication pursuant to sub-clause 30(7)(e)(ii) no decision on such
question or issue has been reached by an Adjudicator, then nothing in
this Scheme shall preclude the Counterparty from taking any appropriate
action in the Court for the purposes only of securing a determination of
the question or issue concerned.
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PART VII
THE SUPERVISORS
47. The Supervisors shall have the powers, duties and functions conferred
upon them by the Scheme and any other documents entered into pursuant to
the Scheme.
48. The Supervisors shall be a minimum of two individuals (and not more than
three) who are each licensed insolvency practitioners and duly qualified
in the reasonable opinion of the Company and the Creditors' Committee to
discharge the function of the Supervisors under the Scheme. The initial
Supervisors shall be Philip Wedgwood Wallace and Richard Heis of KPMG
LLP, 8 Salisbury Square, London EC4Y 8BB, England.
49. The Supervisors, or any of them, may resign their appointment at any time
by giving not less than 28 days' notice in writing to the Company and the
Creditors' Committee or such shorter period as may be agreed by the
Company and the Creditors' Committee.
50. The office of Supervisor shall be vacated by an appointee to that office
if that appointee:
(1) dies, becomes bankrupt or mentally disordered; or
(2) is convicted of an indictable offence (other than a road traffic
offence); or
(3) resigns his office by 28 days' notice in writing to the other
Supervisors; or
(4) ceases to be a licensed insolvency practitioner.
51. In the event of a vacancy in the office of the Supervisors pursuant to
clauses 49 and 50, the Company and the Creditors' Committee (acting in
accordance with sub-clause 82(2)) shall, if required, forthwith appoint
as a replacement Supervisor a person who is suitably qualified so to act
pursuant to clause 48 and not disqualified to act under clause 50 and who
consents to act as Supervisor.
52. The functions and powers of the Supervisors under the Scheme may be
performed and exercised jointly or severally and any act required to be
done by the Supervisors pursuant to the Scheme may be done by all or any
one or more of them.
53. (1) The Supervisors shall supervise, and carry out their functions as
set out in, the Scheme.
(2) Without prejudice to the generality of sub-clause 53(1), the
Supervisors shall:
(a) execute an accession letter to the Escrow and Distribution
Agreement on the Effective Date and on and from the Effective
Date, perform their obligations and duties thereunder;
(b) prepare a report on the conduct of the affairs of the Company
in relation to the Scheme and the operation of the Scheme
during each period of 12 months since the later of the
Effective Date and the date when the last such report was
prepared;
(c) attend meetings of the Creditors' Committee and meetings of
the Scheme Creditors convened and operated in accordance with
Part IX to discuss such reports or if requested by the party
convening the meeting for any other purpose in relation to
the operation of this Scheme; and
(d) maintain a record of Scheme Creditors entitled to attend
meetings of Scheme Creditors based on information contained
in Claim Forms and supplied by Bondholder Communications to
the Supervisors in accordance with the terms of the Escrow
and Distribution Agreement.
54. The Supervisors shall, with effect from the Effective Date, ensure that
there is in force in relation to the Company such bond as would have had
to be in force if the Company had been wound up in England on the
Effective Date and they had been appointed as liquidators of the Company.
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55. Without prejudice to the generality of clause 53, in carrying out their
functions and powers under the Scheme, the Supervisors shall be entitled:
(1) to admit or refuse to admit Scheme Claims Submitted by Scheme
Creditors (including to ensure the Company properly conducts its
defence of any Prohibited Proceedings and/or any Allowed
Proceedings) and direct:
(a) Distributions; and
(b) realisations of Scheme Consideration to generate cash for
Distributions by the Distribution Agent in accordance with
the Scheme and the Escrow and Distribution Agreement;
(2) to have access at all reasonable times to all relevant employees,
books, papers and other documents of the Company and to receive all
such information from the Company as they may reasonably require in
relation to their duties as Supervisors and to receive the
reasonable co-operation of the Company in connection with the
conduct of any Prohibited Proceedings, any Allowed Proceedings or
defending any Proceedings against the Supervisors in respect of
carrying out their functions and exercising their powers under the
Scheme;
(3) to delegate to any Employee all or any of the functions, powers,
rights, authorities and discretions conferred upon the Supervisors
under the Scheme and from time to time to revoke any such
delegation, provided that the Supervisors shall be responsible for
any act or omission of any such employee or delegate to the same
extent as if they had expressly authorised it;
(4) to be remunerated by the Company for the carrying out of such
functions and powers (in the case of the initial Supervisors,
Philip Wedgwood Wallace and Richard Heis, such remuneration to be
calculated by reference to the Supervisors' Engagement Letter) and
to be reimbursed by the Company for all expenses properly incurred
by them in connection with this clause including any adverse costs
ordered to be paid by the Supervisors as a result of any Proceeding
in connection with the Scheme;
(5) to defend any proceedings against them in respect of carrying out
their functions and exercising their powers under the Scheme;
(6) to apply to the Court for directions in relation to any particular
matter arising in the course of the Scheme;
(7) to liaise with the Creditors' Committee and to attend Creditors'
Committee meetings;
(8) to convene a meeting of Scheme Creditors in accordance with Part
IX, if appropriate; and
(9) to exercise such powers as are necessary or desirable to enable
them to fulfil their functions under the Scheme and to do all other
things incidental to the exercise of the functions and powers
referred to in this and clause 53.
56. Save as expressly set out in this Scheme, the Supervisors shall be
entitled to employ and remunerate accountants, actuaries, lawyers and
other professional advisers or agents in connection with the conduct of
their functions and powers under the Scheme.
57. Any function of or power conferred on the Company or its officers,
whether by statute or by its memorandum or articles of association, which
could be exercised in such a way as to interfere with the exercise by the
Supervisors of their functions and powers in relation to the Company or
the Scheme, shall not be so exercised except with the consent of the
Supervisors, which may be given either generally or in relation to
particular cases. Any such consent given by the Supervisors may be
withdrawn.
58. In carrying out their functions and exercising their powers under the
Scheme, the Supervisors shall act bona fide and with due care and
diligence in the interests of the Scheme Creditors as a whole and they
shall use their powers under the Scheme for the purpose of ensuring that
the Scheme is operated in accordance with its terms.
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59. (1) Save as expressly set out in this Scheme or the Escrow and
Distribution Agreement, the Supervisors shall act as agents of the
Company (without personal liability) in respect of all functions and
powers conferred on them under this Scheme. The Supervisors shall,
in their capacity as such, incur no liability to any Scheme Creditor
or any other person:
(a) in respect of any decrease in the value of a Scheme Creditor's
Distribution Entitlement during the period between that Scheme
Creditor submitting its Scheme Claim and that Scheme Creditor
receiving Scheme Consideration in satisfaction of its
Distribution Entitlement;
(b) in respect of bringing the Waiting Period to an end pursuant
to sub-clause 24(1);
(c) arising from the structure or establishment of the Scheme
including any claim based upon:
(i) the quantum of the Reserve Claims Segment; and
(ii) the timing of the First Initial Distribution; and
(d) arising from the exercise of any power or discretion vested in
them under the Scheme,
except where such liability arises as a result of their own
negligence, wilful default, breach of duty, breach of trust, fraud,
bad faith or dishonesty (or as a result of the negligence, wilful
default, breach of duty, breach of trust, fraud, bad faith or
dishonesty of any Employee).
(2) The Company shall indemnify the Supervisors for any Liability
incurred by the Supervisors arising out of or in connection with
making or having made any Distributions in accordance with the terms
of the Scheme save to the extent that such Liability arises from the
Supervisors own