16th Jun 2005 07:30
Cape PLC16 June 2005 Cape PLC • Proposed Scheme of Arrangement ("the Scheme") in respect of asbestosliabilities • Placing to raise £32million Rationale • Cape's historical use of asbestos and its associated health risks has caused a rising number of claims which are expected to continue for at least the next 46 years. • It is extremely difficult to predict the long-term financial impact on Cape and it is therefore important for Cape to develop a more secure financial base from which to generate the funds needed to meet the claims. • If the proposed Scheme is approved it will provide a significant de-risking for Cape, removing a significant obstacle to the Group's growth and so that it is better able to generate the resources needed to secure the continued payment of compensation to claimants. Cape announces proposal for the long term funding of a great majority of Cape's asbestos related claims Martin May, Chairman of Cape PLC said: "Cape's historical use of asbestos in its industrial activities has meant that anumber of people have been exposed to asbestos and its associated health risks.The number of claims and the costs of settlement are, in most cases, rising andthere is the possibility of further types or classes of claims being made. Assuch, it is extremely difficult to predict with accuracy the long term financialimpact of these unpaid claims on Cape. It is therefore important that we areable to develop a stronger and more secure financial base. That is why we have announced today proposals to provide for the long-termfinancing of a great majority of all future asbestos-related claims, likely tobe made against Cape, including the establishment of a £40 million fund to beused in the settlement of Scheme claims. We believe that, if accepted, theseproposals should enable all Scheme claims to be settled. This providessignificant de-risking for Cape, removes a significant obstacle to the Group'sgrowth and leaves the Group better able to generate the resources needed tosecure the continued payment of compensation to claimants." The proposed Scheme • Cape's largest exposure to asbestos-related liabilities remains UK-based claims which are principally made by employees who worked in a Cape factory and those who used asbestos as part of Cape's contracting operations (a liability usually shared with other contractors). • Cape proposes to set up a £40m fund to be used in the settlement of a great majority of UK asbestos-related claims (Scheme Claims), not covered by previous settlements, in conjunction with a creditor and Court approved Scheme. • Funds will be ring-fenced, separate from any other Cape assets or banking arrangements, in a newly formed subsidiary, whose board will include two independent directors who will represent claimants' (Scheme Creditors)interests. • The initial funding of £40m, comprises: - £22m from the proceeds of the Placing - £3m from Cape's existing resources - £15m from increased bank facilities with Barclays Bank • The £40m will cover the projected amounts of Scheme Claims, not covered by a contract of insurance, for the next 12 years plus three years of projected running costs. • There will be an independent review every 3 years to determine the funding required to cover expected claims over the next 13 years. If, following the review there is any shortfall, Cape will top up the fund annually over the next three years out of available cash flows. The intention is that following such payments there should be sufficient to fund the payment of claims over the next 10 years. The fund is planned to exist for as long as there are Scheme Claims, currently estimated to be not less than 46 years. • An independent actuarial review's 'best estimate' of discounted value of all UK asbestos-related claims (net of insurance and other recoveries) is £80.9m of which approximately £10.7m come from UK shipyards covered by separate arrangements which are outside the Scheme. The 'lower' and 'higher'estimates in the review are £49.5m and £160.2m respectively. • Scheme Creditors will be paid in full unless the Scheme funding falls below 60% of the anticipated claims over the next 10 years when pro rata payments will be made until the funding level is adequately restored. In the event of no future funds being available from Cape, pro rata payments will be made until the funding is exhausted. • In order for the Scheme to be approved by the Court it must have the overwhelming support of Scheme Creditors. On the Scheme being approved by the Court, Scheme Creditors will be legally bound, other than in very limited circumstances, only to recover payment for any settled or agreed Scheme Claims from the fund and not from Cape thereby providing the Cape trading business with significant protection from insolvency. • Provisions protecting Scheme Creditors' interests will be introduced, including the creation of a special voting share in Cape, which will providethat until 2008 no dividends may be paid and thereafter only if the requiredfunding level is more than 110%. • The special voting share in Cape will be held by an independent trustee, The Law Debenture Trust Corporation p.l.c. • It is expected that formal Scheme documentation should be dispatched to Scheme Creditors in August 2005, Scheme Creditors' meetings will be held in October 2005 and, if approved, final Court sanction will be sought and the Scheme should become effective in October 2005. The Placing • Cape is raising £32 million, before expenses, by way of the Placing.The Placing, which is fully underwritten by Evolution Securities, is conditionalupon, inter alia, the approval of Shareholders and Admission. The Placing Priceof 110p represents a discount of 16 per cent to the prevailing mid-market priceof 131.5 pence. • £22 million is intended to be used to provide part of the initial funding of the Scheme Fund, £3 million will be used to provide ongoing working capital for the Group and £7 million will be used to meet the costs of the Proposals. The total costs of the Proposals of approximately £7million are made up as to £5.5 million for the Scheme and £1.5 million for the Placing. • The Placing is not conditional on the Scheme becoming effective. If the Scheme is not approved then the Placing proceeds will be used to: - Reduce existing bank debt- Meet the costs of the Proposals- Provide ongoing working capital for Cape Cape would continue to manage Claims as it does at present (i.e. pay out ofoperating cashflows). However, no part of the Placing proceeds will be specifically allocated for this purpose. Further information: Cape PLCMartin May, Chairman (01924) 876 276 N M Rothschild & Sons LimitedDavid Forbes / David Wilton (0113) 200 1900 Bell Pottinger Corporate & FinancialNick Lambert (020) 7861 3232 The Placing Shares will, on issue, rank in full for all dividends and otherdistributions declared, paid or made in respect of the Ordinary Shares afterAdmission and will otherwise rank pari passu in all respects with the ExistingOrdinary Shares in issue. The Placing Shares have not been marketed or sold, nor are they available inwhole or in part, to the public in conjunction with the Application forAdmission or otherwise. This announcement does not constitute or comprise anyoffer to sell or to subscribe for, or the solicitation of any offer to buy or tosubscribe for any Placing Shares. Neither the Existing Ordinary Shares nor thePlacing Shares have been nor will they be registered under the United StatesSecurities Act of 1933, as amended (the "Securities Act") or qualified for saleunder the laws of any state of the United States of America except pursuant toan exemption from, or in a transaction not subject to, the registrationrequirements of the Securities Act and, subject to certain exceptions, may notbe offered or sold within or to any national, resident or citizen of any ofAustralia, Canada, Japan, South Africa, or the Republic of Ireland or theirrespective territories or possessions. Evolution Securities Limited is regulated by the Financial Services Authorityand is acting exclusively for the Company as nominated adviser and broker andfor no one else in connection with the Placing and Admission. EvolutionSecurities Limited will not be responsible to anyone other than the Company forproviding the protections afforded to customers of Evolution Securities Limitedon the Placing and Admission. N M Rothschild & Sons Limited, which is authorised and regulated in the UnitedKingdom by the Financial Services Authority, is acting exclusively for CapePublic Limited Company in connection with recommending the Proposals and no oneelse and will not be responsible to anyone other than Cape Public LimitedCompany for providing the protections offered to clients of NM Rothschild & SonsLimited nor for providing advice in relation to recommending the Proposals. Tillinghast, a part of Towers Perrin, Foster and Crosby Inc,. is actingexclusively for the Company and no one else in connection with the Proposals andwill not be responsible to, nor accepts any duty of care to, anyone other thanthe Company for providing advice to the Company, which advice is limited toadvice in relation to the estimates referred to or included in this announcementas to the quantum of unpaid asbestos-related claims. Proposed Scheme of Arrangement in respect of asbestos liabilities Placing of 29,090,910 new Ordinary Shares at 110 pence per share Amendment of Memorandum of Association Adoption of new Articles of Association And Notice of Extraordinary General Meeting 1. Introduction Cape today announced proposals to provide for the long-term financing of a greatmajority of all future asbestos-related claims likely to be successfully madeagainst the Group, including the establishment of a £40 million fund to be usedin the settlement of Scheme Claims. This funding is being established inconjunction with the Scheme which the Directors believe will provide the Groupwith substantial protection from the risks of insolvency arising from SchemeClaims. The intention is that the Proposals will provide the Group with astronger and more secure financial base from which the Directors believe it willbe better able to generate the resources needed to secure the continued paymentof compensation to claimants. The Directors also believe the Proposals, ifimplemented, will remove a significant obstacle to the Group's growth and willassist the Group in increasing its business activities. Cape has also announced today that it is proposing to raise £32 million, beforeexpenses, by way of the Placing of which £22 million is intended to be used toprovide part of the initial funding of the Scheme Fund, £3 million will be usedto provide ongoing working capital for the Group and £7 million will be used tomeet the costs of the Proposals. The total costs of the Proposals ofapproximately £7 million are made up as to £5.5 million for the Scheme and £1.5million for the Placing. The Placing, which is fully underwritten by EvolutionSecurities, is conditional upon, inter alia, the approval of Shareholders andAdmission. The Placing is not conditional on the Scheme becoming effective and in the eventthe Scheme does not become effective, the Company will use the Placing proceedsto reduce existing bank debt, to meet the set up costs of the Proposals and toprovide ongoing working capital for the Group. 2. Background to and reasons for the Proposals History The Group's historical use of asbestos in its industrial activities has meantthat a number of people have been exposed to asbestos and its associated healthrisks. Whilst the large majority of the Group's UK employees have not beenaffected, unfortunately a number of employees, contractors and others who havecome into contact with the Group's asbestos-related activities have been andwill be diagnosed with asbestos-related conditions. Whilst the Group has someinsurance cover for these claims, there remains significant financial exposurewhere there is either no or only partial insurance cover or the insurer isinsolvent. The Group has, for many years, been paying compensation for theseclaims: the net charge to the Group's profit and loss account (excluding thesettlements made in respect of the South African claims and the Shipyards Claimsreferred to below), was in the Financial Years ended 31 December 2000 £4.4million, 2001 £3.7 million, 2002 £2.4 million, 2003 £3.8 million and 2004 £3.7million respectively. With the exception of the claims covered by the SouthAfrican settlement, the overwhelming majority of these claims have been made bypersons who were exposed to asbestos in the UK. Implications of asbestos-related claims These claims will continue for the foreseeable future. With the number of claimsand the costs of settlement (in most cases) rising and the possibility offurther types or classes of claims being made, it is extremely difficult topredict with accuracy the long-term financial impact of these claims on theGroup. It is therefore important that the Group is able to develop a strongerand more secure financial base from which it is able to generate the fundsneeded to meet the claims. A number of other companies faced with the sameissues have been forced into insolvency, often leaving claimants, where there isno insurance cover, with little prospect, if any, of receiving compensation. Indeed, if there was a material deterioration in the Group's trading performanceor a significant increase in either the number of asbestos-related claims or thequantum of damages the Group had to settle, it is unlikely that, in the absenceof further external funding, the Group would be able to continue to meet claims.In those circumstances it is possible that the Directors would be faced with noalternative other than to realise the Group's principal assets and to commencethe breaking up of the Group. The Directors also consider that the uncertainty over asbestos-related claimshas had a prejudicial effect on the growth, both organically and by acquisition,and perception of the Group and that while the uncertainty remains, the Groupmay not be able to fulfil its growth potential. Steps taken to date to address the financial implications of asbestos-relatedclaims The Directors have sought to address the financial uncertainty surrounding thepayment of future asbestos-related claims. In this regard in 2003 the Groupreached two important settlements; the first in connection with claims arisingin South Africa as a result of mining and manufacturing activities by formerCape subsidiaries and the second in relation to various contribution claimsemanating from contracting work undertaken within shipyards in the UK. In March 2003, Cape reached a settlement, without admission of liability, withthe representatives of over 7,500 South African claimants, whereby Cape paid£7.5 million for the benefit of these claimants and £2.75 million as acontribution towards their legal costs. In September 2003, Cape agreed with the relevant UK shipyards and their insolvent insurer to make one-off payments, aggregating some £2.6 million insettlement of all then outstanding liabilities and to pay agreed proportions ofall future settlements made in respect of asbestos-related claims; theproportions vary for each shipyard emanating from those shipyards. In thefinancial year ended 31 December 2004 payments for Shipyards Claims totalledapproximately £1.3 million. Current and future claims The Directors consider that the Group's largest exposure to asbestos-relatedliabilities remains UK-based employee and third party claims. Claims received by the Group are made principally by employees who worked in aGroup factory and those who worked with asbestos as part of the Group'scontracting operations (liability for the latter is usually shared with othercontractors). In addition, Cape also receives claims from third parties such asfamily members of Group employees and those who lived in the neighbourhood of aformer Group factory or other employers whose employees have claimed againstthem and who in turn are entitled to claim against the Group. A substantialproportion of all claims relate to periods of exposure that pre-date compulsoryemployers' liability insurance and a significant element are not insured. As referred to below, an independent actuarial review of the Group's UKasbestos-related claims projects that claims will be received for not less than46 years with an anticipated peak in the value of claims arising between 2025and 2030. The aggregate projected discounted value, net of insurance recoveries,of all the Group's UK asbestos-related unpaid claims over the next 46 years, is,on the basis described under "Future Projections" below, estimated by theindependent actuary, Tillinghast, to amount to approximately £80.9 million. Thisfigure includes the Shipyards Claims which are estimated by Tillinghast (on thesame basis) to amount to approximately £10.7 million. Having addressed South African claims and the Shipyards Claims, the Directorshave sought to identify a structure which further improves the long-termfinancial viability of the Group by reducing the risk of Cape's insolvency dueto UK asbestos-related claims, whilst preserving the interests of SchemeCreditors (who include current employees, past employees and other potentialclaimants in the UK). The Directors have considered a number of options and,having consulted with its major Shareholders, leading political figures andclaimant representatives, are of the firm opinion that the Scheme is in the bestinterests of the Company, its Shareholders and the Scheme Creditors taken as awhole because the Directors believe it will allow the Group to increase itsbusiness activities as well as providing increased financial certainty andenhanced prospects for Shareholders. The Scheme does not prejudice any claimant's right to make a claim against theGroup or restrict the amount of compensation that may be awarded, although theScheme may, in certain circumstances, affect the timing of the payment ofcompensation to, or amounts received by, claimants. Insurance coverage and uninsured risks The employers' liability ("EL") and public liability ("PL") insurance coveravailable to the Group to recover the costs of meeting industrial disease claimsis variable. Not all Group Companies with liabilities have insurance cover inplace and, where there is insurance, it often does not provide asbestos cover orincorporates a pneumoconiosis exclusion so that it does not respond in certaincases of asbestos disease. Prior to January 1972 (December 1975 in Northern Ireland), it was not compulsoryfor employers such as the Group to have EL insurance. Most of the earlierinsurance policies of the Group have been commuted or discharged and, therefore,no longer respond. For EL cover after 1971, FSCS in accordance with its rules provides compensationwhere the insurer is now insolvent either to the insured company (if it issolvent) or, if the insured company is insolvent, to the claimant. For EL covertaken out prior to it being compulsory for employers to do so, FSCS will onlyprovide compensation where both the insurer and the insured (i.e. the employer)are insolvent. Certain of the Group Companies that undertook contracting activities held PLinsurance policies until October 1984, but these generally excluded cover forasbestos diseases. From October 1984, although asbestos-related diseases weregenerally excluded, cover was given for claims arising from the companies'asbestos stripping activities in the UK. However, Cape's PL insurance waswritten on a "claims made" basis and unless claims were notified to the insurerduring the period of cover (which, given the long term latency period of mostasbestos-related diseases, is unlikely) the policies will not respond. Since2003, the Group's asbestos-related PL insurance has been written on a "claimsarising" basis, but it only responds to claims made in respect of exposure sincethe inception of the policies in 2003. FSCS does not provide any compensation inrespect of PL claims. Third party indemnities During its history, the Group has acquired many companies and businesses thatmay have contingent liabilities for asbestos-related claims that relate toactivities undertaken by those companies and businesses before Cape acquiredthem. Due in part to the fact many of these acquisitions were made aconsiderable period of time ago, the Directors consider that it is highlyunlikely that even where the Group received an indemnity in respect of suchliabilities, such indemnities will, save as mentioned below, now respond. In 1992, the Group acquired the Darchem Contracting Business ("Darchem"). Underthe terms of the acquisition the Group has the benefit of an indemnity from thevendor for certain asbestos-related claims that may be made against the Group byreason of exposure to asbestos before the Group acquired Darchem. To date theindemnity has responded and continues, to respond with the vendor handling andsettling all relevant claims. The Directors expect the indemnity to continue torespond and therefore, for the purposes of this document, Tillinghast's reviewhas taken no account of these claims. Future projections For the purpose of the Proposals and in particular to determine the amountrequired to be made available to fund payments under the Scheme, Cape hascommissioned Tillinghast to review and provide an estimate of all of the Group'sunpaid UK asbestos-related claims as at 31 December 2004 (including futureclaims) other than claims that the Group expects to make recovery of, or aresettled, under certain third party indemnities. Tillinghast is part of TowersPerrin, the global professional services firm, and provides global actuarial andmanagement consulting services to companies advising on risk financing andinsurance-related matters. Unpaid claims do not represent an exact calculation, but rather are estimates ofthe expected future costs of the ultimate settlement of claims. As such,estimates of asbestos-related unpaid claims are inherently uncertain. In providing its estimates Tillinghast has relied, without audit or independentverification, on both historical financial and non-financial data and otherquantitative and qualitative information supplied by the Group. Tillinghast hasalso used disease emergence studies conducted in the UK by the Health and SafetyExecutive (HSE) as well as several academic studies including studies ofmesothelioma specific to the UK. Due to the historical nature of the informationprovided by the Group, there are variances in its completeness. This furtherincreases the inherent uncertainty in Tillinghast's estimates, although thisuncertainty should decrease over time as the information is further expanded andupdated. In its review, on the basis set out above, Tillinghast's best estimate of theaggregate projected discounted value, net of insurance recoveries, of all theGroup's unpaid UK asbestos-related claims is £80.9 million. This represents thebest estimate within the range of the highest and lowest estimates contained inTillinghast's review of £49.5 million and £160.2 million respectively. Thediscount rate applied is five per cent. per annum The Tillinghast review does not take into account claims (which will be SchemeClaims) against Group Companies which are the subject of third party indemnitiesin favour of the Group and are currently being handled and settled in full bythe relevant third party. Given the wide range of the estimates and thesignificant degree of uncertainty surrounding the estimates the Directors areunable to conclude that the aggregate projected discounted value, net ofinsurance recoveries, of all the Group's unpaid UK asbestos-related claims(including future claims) will amount to £80.9 million, nor is there anycertainty that the total cost of such claims will even fall within the range ofestimates. 3. The Scheme The key element of the Proposals is the establishment of long-term funding of agreat majority of the Group's future UK asbestos-related claims in conjunctionwith a Court approved Scheme. The long-term funding will be held and "ringfenced" in CCS, a subsidiary of the Company. The initial level of funding of £40million represents not less than Tillinghast's estimate of the amounts payableby the Group in respect of Scheme Claims against all Scheme Companies over thefollowing 12 years (other than claims that the Group expects to make recovery,or are settled, under certain third party indemnities) together with the runningcosts of CCS for the next three years. Thereafter the level of funding required will be independently reviewed everythree years, starting in 2008 and the Company will be contractually obliged totop up any shortfall to the level of the Funding Requirement (being an amount offunding available to enable CCS to settle Scheme Claims in the following 13years). No top up payment will be made before the first actuarial review in2008. In return for the setting up of this funding, the Scheme Creditors will bebound, except in certain limited circumstances only to recover payment of theirsettled or agreed Scheme Claims (including damages and claimants' costs) fromCCS and not the relevant Scheme Company. The Scheme, if approved by SchemeCreditors and sanctioned by the Court, will be binding on both present andfuture Scheme Creditors, and therefore will provide significant protection frominsolvency for the Group by reason of the enforcement of Scheme Claims. The Scheme will not seek to limit the amount recoverable under any Scheme Claimand Scheme Claims that are brought will continue to be made against the relevantGroup Company as at present. An essential aspect of the Scheme is thatclaimants' legal rights to bring claims against the Group are not prejudiced asthe Scheme relates only to the enforcement of such established claims. In orderto preserve the rights of certain Scheme Creditors under particular insurancepolicies and any future rights they might acquire against FSCS, the Scheme willprovide that, in certain limited circumstances, Scheme Creditors will haverecourse against the Group to enforce their claims. So far as Scheme Creditors are concerned, their claims will be handled in thesame manner as is currently the case, save that it is hoped that where the Groupis responsible for handling claims the settlement procedures and process may besimplified and shortened. During 2005, the Company will be investingapproximately £100,000 in improving its claims handling systems. Before the Company can implement and seek Court approval for the Scheme, it mustfirst undertake an extensive exercise to identify all those who are or may beScheme Creditors. This process, together with a programme of explanatorydiscussions with claimant representatives and other interested bodies will nowbegin and it is anticipated that the formal Scheme documentation should bedispatched in August 2005 with the final Court approval expected to be receivedin October 2005. It should be stressed that in order for the Scheme to beapproved by the Court it must have the overwhelming support of Scheme Creditorsand there remains a significant risk that either this support may not beforthcoming or the Court may not sanction the Scheme and the Scheme maytherefore not become effective. If the Scheme is not approved, the Group willcontinue to manage claims as it does at present. Given the wide range of the estimates and the significant degree of uncertaintysurrounding the estimates, it is unlikely that the initial funding of £40million will be sufficient, nor is there any certainty that the total cost tothe Group of all Scheme Claims will even fall within Tillinghast's range ofestimates. Accordingly the Scheme provides for a "top up" mechanism. In order to protect the interests of Scheme Creditors, special voting shares, tobe held by Law Debenture as an independent third party on trust for SchemeCreditors, will be created in Cape and CCS. The rights attached to the sharesare designed to ensure the Scheme Assets are only used to settle Scheme Claimsand ancillary costs and impose restrictions on dividends and other distributionsby the Company if the Scheme Funding Percentage being an amount of fundingavailable to enable CCS to settle the Scheme Claims in the following 10 years isless than 110 per cent. The Scheme will not seek to address all potential asbestos-related claims whichmay be made against the Group and there remains the risk that other claims forasbestos-related diseases may continue to be made by claimants outside theScheme. Potential asbestos-related liabilities not covered by the Scheme willinclude (i) Shipyards Claims (including claims brought outside of the relevantagreements direct against Cape by former employees of the shipyards), (ii) anyclaim brought by the purchaser of the Group's manufacturing operations whichwere sold in 2002 (iii) any claim not governed by the law of a jurisdictionwithin the United Kingdom and (iv) any claim not brought by a "UK person" (a "UKperson" being essentially an individual resident in or a company incorporated inthe United Kingdom at the time of the Scheme) regardless of the law that governsthe claims. The Directors believe that the Scheme Claims will represent thegreat majority of all future asbestos-related claims likely to be successfullymade against the Group. 4. Funding the Scheme The initial funding of CCS of £40 million will be made up by £22 million fromthe proceeds of the Placing, £3 million from the Group's existing resources(through the disposal of certain non-core properties in the UK and leverage ofoverseas assets) and £15 million from increased bank facilities with BarclaysBank PLC. The funding of CCS and thereby the Scheme Fund are thereforeconditional on both the completion of the Placing and the increased bankfacilities not being terminated in accordance with their terms prior to theCourt sanctioning the Scheme. On the Scheme becoming effective, the Scheme Fund will be held in a CCS bankaccount, separate from any other Group assets or banking arrangements, and willbe under the control of the directors of CCS which will include two independentScheme Directors. This funding will be invested by CCS in accordance withinvestment criteria which will be determined by, and may only be altered withthe consent of, the Scheme Directors. Thereafter, as mentioned above, commencing in 2008, every three years anindependent actuarial review will be undertaken of the projected Scheme Claimsfor the next 13 Financial Years not covered by either a contract of insurance inrespect of which the insurer or FSCS is expected to respond either in full or atall or by a third party indemnity that the Directors expect to respond. To theextent there is any shortfall in the Funding Requirement, the Company will becontractually required to top up the Scheme Assets. The top up payments will bemade in three equal annual instalments, the intention being that, following suchpayments, the Scheme Assets at each Financial Year end should be sufficient tofund the payment of Scheme Claims for the next ten Financial Years and threeyears of CCS's running costs. The obligation to provide further funding will besubject to the Group retaining sufficient operating cash flows. Whether the Scheme Fund is sufficient to settle all Scheme Claims payable by CCSwill depend on the continued successful trading of the Group and the accurateprojection of Scheme Claims. Long term trading projections, as well as actuarialestimates of potential future claims, are inherently difficult to predict withaccuracy and the occurrence of any of the following may result in the Groupbeing unable to provide the further payments to ensure that CCS is fully funded: • if there is an extended and material deterioration in the Group's trading performance; • if there is either a significant one-off or continued increase in the number or value of Scheme Claims; • if there is an adverse change in the legal or regulatory environment surrounding asbestos-related diseases resulting in, for example, a significant increase in the amount of damages awarded and the costs associated with defending a claim or the admission of a new class or type of claimant whether in or outside the Scheme; or • investment returns falling below, and the effect of inflation on Scheme Claims rising above, current expectations. However, the Directors are confident that, assuming there is no materialdeterioration in the Group's trading performance nor a significant increase ineither the number of asbestos-related claims or the quantum of damages or coststhe Group has to settle nor any significant shortfall in the recoveries that theDirectors expect the Group to make from its insurers and under third partyindemnities and the Scheme Fund achieves investment returns in line with currentexpectations, the Group will be able to ensure CCS is sufficiently funded tosatisfy all Scheme Claims. CCS will pay all Scheme Claims that it has agreed to pay under the SchemeGuarantee in full whilst the Scheme Funding Percentage is 60 per cent. orgreater. Should the Scheme Funding Percentage fall below 60 per cent., CCS willpay Scheme Creditors at a rate (the Payment Percentage) determined by the SchemeDirectors until it is able to recommence full payments. The Scheme Directors shall at any time be entitled to require that a furtherindependent actuarial review of the value of the Scheme Claims is undertaken inorder to be able to ascertain the current level of funding and to determine thePayment Percentage. The Company's funding obligation will not be affected bythis review. In addition, certain Scheme Creditors will, in limited circumstances, haverecourse to the relevant Scheme Company for direct payment of their Scheme Claimif they receive from CCS less than 50 per cent. of their claim at the time ofsettlement or have not received 100 per cent. within 12 months of their SchemeClaim being established. The Directors consider that, notwithstanding theability of these Scheme Creditors to seek recourse from the relevant GroupCompany in limited circumstances, the Scheme provides the Group with significantprotection and should, in such circumstances, afford it sufficient time in whichto seek further and alternative funding so as to avoid recourse against theGroup. 5. Benefits of the Scheme Although there can be no certainty as to Tillinghast's estimates, the Directorsbelieve that the establishment of the Scheme with an initial funding of £40million, together with the ongoing funding obligation to be made by reference toavailable operating cash flows, should enable all Scheme Claims to be settledand provide significant financial de-risking for the Group. The Directors anticipate the Scheme and the Placing will provide the Group withthe following benefits: • the Group will be protected, to a significant extent, from the risks ofinsolvency if there is a significant increase in either the number of claims or the quantum of damages or costs the Group has to settle or a material deterioration in the Group's trading performance which would otherwise have caused the Group to be unable to settle Scheme Claims payable by it in full; • the Group will have a stronger and more secure financial base from which the Directors believe it will be better able both to generate the resources needed to secure the continued payment of compensation to claimants and to grow and develop the Group's business; • the ability to use surplus cash flows to grow its business organically (in particular in the Middle East and on Sakhalin Island off the east coast of Russia) and by acquisition; • the Group's profile and customer perception will be enhanced with a reduction in the risk of insolvency from liabilities for the Scheme Claims; and • they will, in the medium term, enable the Company to be better placed tomove to a position in which it would be able to declare dividends to Shareholders as and when it is prudent so to do provided the Scheme FundingPercentage is greater than 110 per cent. Accordingly, the Directors believe that implementation of the Proposals willremove a significant obstacle to the Group's growth and will assist the Group inincreasing its business activities as well as in providing increased financialsecurity and stability and enhanced prospects for Shareholders. 6. Scheme Shares In order to protect the interests of Scheme Creditors, and in particular toensure the Scheme Assets are only used to settle Scheme Claims and permittedancillary costs and to ensure that, if at any time the Scheme Funding Percentageis 110 per cent. or less, dividend payments or any other distribution may not bemade outside the Group, the Scheme Shares, with special voting rights, are beingcreated. These Scheme Shares will be held by the Scheme Shareholder, on trustfor the benefit of Scheme Creditors. The PLC Scheme Share It is proposed at the EGM to adopt the New Articles which, if approved, willinclude the rights attaching to the PLC Scheme Share. The PLC Scheme Share willbe issued to Law Debenture as the first Scheme Shareholder, to hold on trust forall Scheme Creditors. The rights of the PLC Scheme Share, will provide that,inter alia, without the prior written consent of the Scheme Shareholder alltransactions carried out by the Group (other than intra Group transactions) mustbe on arm's-length terms, no significant transactions may be undertaken withrelated parties unless on arm's-length terms and not materially prejudicial tothe interests of Scheme Creditors, the Company may not dispose of any shares inCCS and that, if at any time the Scheme Funding Percentage is 110 per cent. orless, no dividends or other distributions may be made to Shareholders. The PLC Scheme Share prohibits the payment of any dividend prior to the firstindependent actuarial review in 2008 and provides limits as to the amount ofannual dividends which may be paid. The PLC Scheme Share will give the Scheme Shareholder rights to vote on certainresolutions of the Company. On those resolutions where the PLC Scheme Share isenfranchised, the Scheme Shareholder will be entitled to two votes for everyvote that the other Shareholders are entitled to cast, thereby giving it ablocking majority. The Panel on Takeovers and Mergers has confirmed that neitherthe acquisition of the PLC Scheme Share nor the exercise by the SchemeShareholder of its voting rights under the PLC Scheme Share will give rise to anobligation on the Scheme Shareholder to make an offer for the Company under Rule9 of the City Code on Takeovers and Mergers. The CCS Scheme Share The rights of the CCS Scheme Share will provide that, inter alia, until allScheme Claims have been settled, without the prior written consent of the SchemeShareholder, CCS will not carry on any business or activity other than themanagement of the Scheme Fund and the conduct and payment of Scheme Claims andpermitted ancillary costs and its funds and assets may only be used for thatpurpose. The CCS Scheme Share will entitle the Scheme Shareholder to appoint twodirectors (the Scheme Directors) who will represent the interests of SchemeCreditors. Only Scheme Directors shall be entitled to vote on, and be counted in the quorumin relation to, any resolution concerning any or all of the investment criteriaon which the Scheme Funds are invested and any changes to the Trust Deed, theFunding Agreement, the Services Agreement, the Scheme Guarantee (includingdetermining the Payment Percentage), the Contribution Claims Agreement, the PLCReimbursement Agreement and the CCS Reimbursement Agreement (including, withoutlimitation, the decision as to whether to enforce, or the manner of enforcementrelating to, the rights of CCS under these agreements) and any termination orvariation (including, without limitation, any modification, forgiveness,forbearance, indulgence, delay, failure to enforce, waiver, release,abandonment, compromise or any other variation in or of any payment or otherobligation of any Group Company) of any or all of these agreements. The Scheme Shareholder and the Trust Deed The Scheme Shares will be held by the Scheme Shareholder under the terms of theTrust Deed for the benefit of Scheme Creditors. In exercising any voting rightsor other discretion arising under the Scheme Shares, the Scheme Shareholdershall take such independent advice as it considers appropriate and have regardto the interests of all Scheme Creditors, both current and future, but will notbe required to consult with any individual Scheme Creditors nor their advisers. Founded in 1889, Law Debenture is an independent provider of trustee, fiduciaryand related services to the international financial and corporate markets and tooccupational pension schemes. Law Debenture may only transfer both, and not onlyone, of the Scheme Shares to a similar provider of trustee services which willhold the Scheme Shares on the terms of the Trust Deed. 7. The Placing The Company intends to raise in aggregate approximately £32 million (beforeexpenses) by way of the Placing which is being conducted by Evolution Securitiesas agent for and on behalf of the Company. The Placing Shares represent 53.4 percent. of the Existing Ordinary Shares, and 34.8 per cent of the Enlarged ShareCapital. The Placing Shares are being placed firm with existing and new institutionalinvestors to provide such investors with certainty as to the number of PlacingShares they will receive. The provision of certainty as to the level of PlacingShares that institutional investors will receive under the Placing has been acrucial factor in attracting these investors to support the Placing. The Directors would prefer all Shareholders to have the opportunity toparticipate in the Placing; however this would involve the Company making an"offer to the public" which, as a result of the requirements of the AIM Rulesand the implementation of the EU Prospectus Directive (2003/71/EC), wouldrequire the Company to issue a prospectus complying with the new statutoryprovisions relating to public offers of securities which comes into force on 1July 2005. In view of the new statutory requirements this would involve a significantdelay, beyond 1 July 2005, with the risk that such a delay could jeopardise theraising of funds through the Placing and thereby the Scheme. Accordingly, theDirectors have concluded that it is not feasible, taking into account thecircumstances, to structure the fundraising so that all Shareholders couldparticipate in the Placing. The Directors have agreed to subscribe in aggregatefor 95,000 Placing Shares in the Placing. Pursuant to the Placing Agreement, Evolution Securities has conditionally agreedto use its reasonable endeavours as agent for the Company to procure subscribersfor Placing Shares. To the extent it fails to procure subscribers for thePlacing Shares, Evolution Securities has agreed to subscribe at the PlacingPrice for the Placing Shares not placed under the Placing. The Placing Price represents a discount of 16 per cent. to the prevailingmid-market price of 131.50p per Existing Ordinary Share on 15 June 2005 beingthe Business Day immediately prior to the announcement of the Proposals. The Placing is conditional upon the Placing Agreement becoming unconditional inall respects (otherwise than with respect to Admission) by 8.00 a.m. on 15 July2005 (or such later date being not later than 8.00 a.m. on 29 July 2005 as maybe agreed by the Company and Evolution Securities) and not having beenterminated in accordance with its terms prior to Admission. The Placing Agreement is conditional, inter alia, on a) the passing of the Resolution at the Extraordinary General Meeting; andb) Admission becoming effective by not later than 8.00 a.m.on 15 July 2005 (orsuch later time and/or date as the Company and Evolution Securities may agreebeing not later than 8.00 a.m. on 29 July 2005). None of the Placing Shares have been marketed or sold or been made available inwhole or in part to the public in conjunction with the application forAdmission. The Placing Shares will, on issue, be fully paid, rank in full forall dividends and other distributions declared, paid or made in respect thereonfollowing Admission, and otherwise, rank pari passu in all respects within theexisting Ordinary Shares then in issue. If, for any reason, the Placing and therefore the Scheme does not proceed, basedon the recent history of settlements, the Directors anticipate that thesettlements of asbestos-related claims would, for the foreseeable future,continue to be made from the future cash flows generated by the tradingoperations of the Group. However, should the future pattern as regards timingand quantum of claims prove to be materially and adversely different from thehistoric trend or the Group's recovery from its insurers or under third partyindemnities prove to be significantly less than the Directors anticipate, therecould be a material adverse effect on the Group's financial position. It wouldalso be the case that the costs associated with the development of the Proposalsincurred to date would have to be met out of the Company's current cash flows.Without the proceeds of the Placing, the Group's working capital would beseverely constrained for at least the next 12 months. In the event that the Placing is approved but the Scheme does not becomeeffective, the Directors would use the net proceeds of the Placing of some £25million, after the payment of the costs of developing the Proposals: • to reduce Group borrowings; • to provide working capital in particular to cover the Group's peak requirements in the middle of the calendar year when the activity levels are much higher than at other times of the year; • to invest in organic growth of the overseas business, particularly in the Middle East and on Sakhalin Island, and other opportunities; and • to fund suitable acquisition opportunities which expand the range of services or extend existing Group activities. In these circumstances, the payment of asbestos-related claims would, based onthe recent history of settlements, continue to be funded from future cash flowsgenerated by the Group's trading operations. However, no part of the Placingwill be specifically allocated for this purpose. 8. Related party transactions Owing to the size of their shareholdings in the Company, M&G InvestmentManagement ("M&G") which holds approximately 14.86 per cent. of the ExistingOrdinary Shares and Schroder Investment Management ("Schroder") which holdsapproximately 10.19 per cent. of the Existing Ordinary Shares are each a relatedparty of the Company for the purposes of the AIM Rules. Under the Placing it isproposed that 4,318,000 Placing Shares will be placed with M&G and 3,380,000Placing Shares will be placed with Schroder, in each case at the Placing Price.The issue of the Placing Shares to each of M&G and Schroder will constitute arelated party transaction for the purposes of the AIM Rules. The Directorsconsider, having consulted with Evolution Securities, its nominated adviser,that the terms of the Placing with M&G and Schroder are fair and reasonableinsofar as Shareholders are concerned. 9. Current trading and prospects The Group's results for the year ended 31 December 2004 were released on 23March 2005. Group turnover from continuing operations, including its share ofjoint ventures was £238.9 million, up 4.6 per cent. on 2003 (£228.3 million) ofwhich 72 per cent. was from the Group's operations in the energy sector. Totaloperating profit from continuing operations, including its share of jointventures, increased from £3.5 million to £5.1 million. The Group's corebusiness, Cape Industrial Services ("CIS") performed ahead of budget in 2004 andcontinues to win significant contracts both in the UK and internationally. CIS'sorder book remains robust in the UK and sales in the Middle and Far Eastcontinue to increase. The Board is particularly optimistic about prospects inthe Middle East and on Sakhalin Island, Russia. 10. Extraordinary General Meeting An Extraordinary General Meeting of the company has been convened for 2:00pm on11 July 2005 at 10 Snow Hill, London, EC1A 2AL in order to seek shareholderapproval for the Proposals. APPENDIX A DEFINITIONS The following definitions apply throughout this announcement, unless the contextrequires otherwise: "Admission" the admission of the Placing Shares to trading on AIM becoming effective in accordance with the AIM Rules "AIM" a market operated by London Stock Exchange "AIM Rules" the rules for AIM companies and their nominated advisers, issued by London Stock Exchange in relation to AIM-traded securities "Board" or "Directors" the directors of the Company "CCS" Cape Claims Services Limited, a wholly-owned subsidiary of the Company "CCS Reimbursement the reimbursement agreement to be entered into byAgreement" the Company and CCS "Company" or "Cape" Cape Public Limited Company "Contribution Claims the contribution claims agreement to be entered intoAgreement" by each Scheme Company and CCS "Court" the High Court of Justice in England and Wales "EGM" or "Extraordinary the extraordinary general meeting of the CompanyGeneral Meeting" convened for 2:00pm on 11 July 2005 and any adjournment thereof "EL" employers' liability "Enlarged Share Capital" the Existing Ordinary Shares and the Placing Shares "Evolution Securities" Evolution Securities Limited "Existing Ordinary Shares" the existing issued Ordinary Shares in issue at the date of this document "Financial Year(s)" (a) financial year(s) of the Company "FSCS" the Financial Services Compensation Scheme "Group" the Company and its subsidiaries and "Group Company" or "Group Companies" shall, as the context may require, refer to one or any of such companies "Law Debenture" The Law Debenture Trust Corporation p.l.c. "London Stock Exchange" London Stock Exchange plc "New Articles" the new articles of association of the Company proposed to be adopted by the Resolution "Ordinary Share" an ordinary share of 25 pence in the share capital of the Company "Payment Percentage" the percentage of all Scheme Claims payable by CCS that is from time to time settling as defined in the Scheme Guarantee "Placing" the conditional placing of Placing Shares pursuant to the Placing Agreement "Placing Agreement" the conditional agreement dated l6 June 2005 between the Company and Evolution Securities relating to the Issue "Placing Price" 110 pence per Placing Share "Placing Shares" the 29,090,910 new Ordinary Shares that are the subject of the Placing "the PLC Scheme Share" the special voting share of £1 in the share capital of the Company to be created by the Resolution and which will have the rights set out in the New Articles and be issued to the Scheme Shareholder "the Proposals" together the Scheme, the Placing, the amendment of the Memorandum, the adoption of the New Articles and the redesignation of the unissued Cumulative Preference Shares "PL" public liability "Resolution" the special resolution to be proposed at the EGM "Rothschild" N M Rothschild & Sons Limited "the Scheme" the proposed schemes of arrangement under section 425 of the Companies Act to be entered into by the Company and various Group Companies with Scheme Creditors in respect of Scheme Claims "Scheme Assets" the amount of cash or equivalent held by CCS on the Relevant Balance Sheet Date out of which Scheme Claims may be settled, as defined in and certified in accordance with the Funding Agreement "Scheme Claims" asbestos-related personal injury and industrial disease claims and other claims against any Scheme Company which are within the Scheme "Scheme Creditors" those persons defined in the Scheme as such, being persons who are, or may in the future be, entitled to bring Scheme Claims "Scheme Fund" the fund to be established in accordance with the terms and conditions of the Scheme "Scheme Funding the amount of the Scheme Assets expressed as a Percentage" percentage of the Scheme Funding Requirement as defined in and certified in accordance with the Funding Agreement "Scheme Funding the amount as certified in accordance with the Requirement" Funding Agreement as being required by CCS to settle the level of Scheme Claims anticipated over the next 10 Financial Years plus three years of CCS's running costs "Scheme Guarantee" the guarantee to be entered into by CCS whereby CCS will agree to settle Scheme Claims "Scheme Shareholder" the holder of the Scheme Shares which in the first instance shall be Law Debenture "Scheme Shares" the PLC Scheme Share and the CCS Scheme Share "Shareholders" holders of Existing Ordinary Shares "Shipyards Claims" asbestos-related claims against Cape emanating from three UK shipyards "subsidiary" shall be defined by reference to sections 736 and 736A of the Companies Act "Tillinghast" Tillinghast, a part of Towers Perrin, Foster & Crosby Inc. "Trust Deed" the trust deed to be entered into by Cape, CCS and Law Debenture "UK" or "United Kingdom" the United Kingdom of Great Britain and Northern Ireland This information is provided by RNS The company news service from the London Stock ExchangeRelated Shares:
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