Free English Translation for Information Purposes Only
TELENET GROUP HOLDING NV LIMITED LIABILITY COMPANY
Statutory auditor’s report related to the issuance of new shares below the fraction value of the existing shares and the cancellation of the preferential subscription rights of the existing holders of shares and warrants (Offer to the employees) (Article 582 and 596 of the Belgian Company Code) Free English Translation for Information Purposes Only
To the extraordinary shareholders meeting of
Telenet Group Holding NV Liersesteenweg 4 2800 MECHELEN
Commercial Registry Mechelen no. 90.008 RLP 0477.702.333
INDEX
Page
1. Assignment 1
2. Legal framework 1
3. Identification of the transaction 1
4. Financial consequences of the transactions 2
5. Conclusion 6
Appendix 1: Special Report of the Board of Directors in accordance with Article 582 and 596 and as far as needed and applicable Article 560 of the Belgian Company Code Free English Translation for Information Purposes Only 1.
1. ASSIGNMENT
In accordance with article 582 and 596 of the Belgian Company Code, we were asked by the Board of Directors to review the attached Special Report of the Board of Directors. Our assignment is performed in the context of our assignment as statutory auditor of the company.
2. LEGAL FRAMEWORK
The legal framework is described in article 582 and 596 of the Belgian Company Code.
3. IDENTIFICATION OF THE TRANSACTION
The Board of Directors proposes a subscription offer to the employees of the Company and its Belgian subsidiaries. Each of the employees would be offered the possibility to subscribe during a certain period to new shares in the Company up to a maximum amount of EUR 640 increased with four months gross salary at an issuance price equal to the average exchange rate of the share of the Company for a 30-day period preceding (but not inclusive) the date of opening of the subscription period, reduced with 16.66%.
The company estimates the maximum subscription amount at 22 million EUR in the event of a full subscription.
On the basis of the exchange rate at the date of this report, the offer to the employees may possibly be effected below the fraction value of the existing shares (i.e. rounded EUR 16.44). Whether this will actually be the case, will depend on the evolution of the exchange rate of the share preceding to the date of the opening of the subscription period.
If the issuance price of the new shares is equal to, or below, the fraction value of the existing shares preceding to the issuance of the new shares, the issuance price shall be fully allocated to the share capital. If the issuance price of the shares were to be higher than the fraction value of the existing shares preceding to the issuance of the new shares, an amount equal to the fraction value per share shall be allocated to the share capital per share that is subscribed to, whereby the balance shall be booked on the “Issuance Premium” account, which constitutes a guarantee to third parties in the same manner as the share capital and of which can only be disposed in the manner required for an amendment to the Articles of Association.
The Board of Directors proposes to cancel the preferential subscription rights of the shareholders of the Company in accordance with Article 596 of the Belgian Company Code (and, upon exercise of their warrants, consequently also that of the warrant holders pursuant to Article 501 of the Belgian Company Code) to the benefit of the employees of the Company and its Belgian subsidiaries
Telenet Group Holding NV Art. 582 en 596 – Offer to the employees Free English Translation for Information Purposes Only 2.
For more information we refer to the Special Report of the Board of Directors.
4. FINANCIAL CONSEQUENCES FOR THE SHAREHOLDERS
The financial consequences for the shareholders are described as follows in the Special Report of the Board of Directors:
a) With respect to the evolution of the share capital and the number of shares
At the date of this report, the share capital of the Company amounts to EUR 1,647,364,634.04, represented by 100,204,853 shares without nominal value that each represent 1/100,204,853 of the share capital. The fraction value of the shares amounts to rounded EUR 16.44 per share.
To the extent that the new offered shares are subscribed to, the share capital and the number of outstanding shares shall increase. After all, as described above, the share capital shall increase upon issuance of the shares with an amount equal to the issuance price of the shares. To the extent that the issuance price of the shares exceeds the fraction value of the then existing shares of the Company (i.e. rounded EUR 16.44), the balance of the issuance price shall be booked as an issuance premium. In such case, the share capital shall increase in proportion to the number of new shares that are issued, and all shares, including the new shares, shall represent an equal portion of the share capital. On the other hand, to the extent that the issuance price of the new shares is lower, the issuance price shall be fully allocated to the share capital. In such case, the share capital shall also increase, but the fraction value per share of all shares shall reduce, since the new shares were issued at an issuance price lower than the fraction value of the existing shares.
The exact evolution of the share capital pursuant to the proposed issuance shall depend on the subscription to the shares and on the amount of the final issuance price. These elements cannot yet be determined at the date hereof. Nonetheless, a simulation of the possible evolution on the basis of a numeric example has been included under item 5. As appears from this simulation, the effects of the proposed issuance are expected to be limited.
b) Evolution of certain rights attached to the shares
Currently, all shares entitle the holders thereof to one vote and all shares have equal rights to participation to possible profits of the Company. Furthermore, all shares have equal preferential subscription rights for capital increases by contribution in cash (if such preferential subscription rights are not cancelled or limited) and equal rights to participation to liquidation proceeds in the event of liquidation of the Company (except for the Liquidation Dispreference Shares, as defined in the Articles of Association of the Company). To the extent that new shares are issued, these shares will have the same voting rights, dividend rights, preferential subscription rights and liquidation rights as the existing common shares. Consequently, the relative value of each of the voting rights, dividend rights, preferential subscription rights and liquidation rights of the existing shares shall dilute. Further reference is made to the simulation under item 5 hereinafter. This dilution will, with respect to certain rights attached to the portion of the share capital
Telenet Group Holding NV Art. 582 en 596 – Offer to the employees Free English Translation for Information Purposes Only 3. that is represented by the shares (such as voting rights, preferential subscription rights and liquidation rights), be amplified if the new shares are issued at an issuance price below the fraction value of the existing shares and if all shares represent an equal, though lower, portion of the share capital.
c) Evolution of the participation in the net equity
The statutory net equity of the Company amounted to EUR 1.673.352.302,26 on December 31, 2005. The consolidated net equity of the Company amounted to EUR 709.098.000 on December 31, 2005. On the basis of these figures, the participation of each of the existing shares in the statutory net equity is equal to (rounded) EUR 16,70 per share, and the participation of each of the existing shares in the consolidated net equity is equal to (rounded) EUR 7,08 per share.
If the capital increase is subscribed to, the net equity shall increase with the same amount. After all, the issuance price shall be allocated to the net equity as share capital (and issuance premium, as the case may be).
If the issuance price of the shares is higher than the participation of the existing shares in the statutory, respectively consolidated, net equity of the Company, the issuance of the shares would from an accounting point of view entail an equity shift to the benefit of the existing shares. Conversely, if the issuance price of the shares is lower than the participation of the existing shares in the statutory, respectively consolidated, net equity of the Company, the issuance of the shares would from an accounting point of view entail an equity shift to the benefit of the new shares.
5. Simulation
For the mere purpose of illustration, a numeric example of the possible financial consequences of the proposed issuance of the new shares has been included hereinafter. This simulation departs from a hypothetical issuance price of EUR 16.00 and EUR 18.50. These issuance prices are not an indication of, and do not express an expectation on, the final issuance price of the relevant shares. The number of shares to be issued may be higher or lower than the number of shares to be issued in the event of full subscription of the capital increase at the relevant hypothetical prices. If the final issuance price is higher, less new shares will be issued (under the assumption that the capital increase is fully subscribed to). If the final issuance price is lower, more new shares will be issued (under the assumption that the capital increase is fully subscribed to).
The simulation is based on the following elements and assumptions:
(1) If the issuance price of the new shares amounts to EUR 16.00 and the maximum issuance of EUR 22 million is fully subscribed to, 1,375.000 new shares will be issued. If the issuance price of the new shares amounts to EUR 18.50 and the maximum issuance of EUR 22 million is fully subscribed to, 1,189,189 new shares will be issued. The issuance price of EUR 16.00 is for illustration purposes below the fraction value of the existing shares.
Telenet Group Holding NV Art. 582 en 596 – Offer to the employees Free English Translation for Information Purposes Only 4.
(2) The number of shares of the Company amounts to 113,065,853 shares on a fully-diluted basis. This is based on the following securities of the Company which are outstanding on the date of the present report:
(a) The Company has 100,204,853 outstanding shares.
(b) The Company has 3,426,000 outstanding “Subordinated Debt Warrants”. Each warrant entitles the holder thereof to subscribe to three shares against payment of an exercise price of EUR 40. Therefore, a maximum of 10,278,000 new shares can be issued if all warrants are exercised in such manner. Holders may also opt for a ‘‘cashless’’ exercise of the Subordinated Debt Warrants. In such case, they shall be entitled to acquire less shares, whereby the value of their warrants (which is determined at the market value of the shares at the time of the exercise, reduced with the exercise price of the warrants) shall be used for the acquisition of shares at their market value.
(c) The Company has approved two option plans pursuant to which the Board of Directors granted 1,500,000 “Class A Options” to senior management and 1,083,000 “Class B Options” to management. The Class A Options entitle the holders thereof to subscribe, subject to certain conditions, to 1,500,000 “Class A Profit Certificates”. The Class B Options entitle the holders thereof to subscribe, subject to certain conditions, to 1,083,000 “Class B Profit Certificates”. The Class A and the Class B Options must be exercised in tranches of three, and entitle the holders thereof to acquire three Class A Profit Certificates against payment of EUR 20 or three Class B Profit Certificates against payment of EUR 25. A number of the options was already exercised. Upon exercise of the options which are vested, and subject to compliance with certain conditions, the Class A Profit Certificates and the Class B Profit Certificates can be converted into shares of the Company. Each profit certificate entitles to one share. Therefore, 2,583,000 new shares can be issued if all options are exercised and if all profit certificates are converted into shares.
The simulation departs from the assumption that all warrants were fully exercised for the maximum number of shares, and that all options were exercised into profit certificates and that the profit certificates were converted into shares.
(3) The evolution of the share capital was calculated on the basis of the share capital at the date of the present report, i.e. EUR 1,647,364,634.04.
On the basis hereof, the evolution of the share capital and the number of shares as a result of the issuance of the new shares can be illustrated as follows:
Telenet Group Holding NV Art. 582 en 596 – Offer to the employees Free English Translation for Information Purposes Only 5.
Maximum amount of issuance 22.000.000,00 22.000.000,00
Issuance price per new share 16,00 18,50
Prior to the capital increase: Share capital (in euro) 1.647.364.634,04 1.647.364.634,04 Number of shares (prior to dilution) 100.204.853 100.204.853 Fraction value per share (in euro) 16,44 16,44
The capital increase: Capital increase (in euro) 22.000.000,00 19.550.267,16 Issuance premium (in euro) - 2.449.729,34 Number of new shares 1.375.000 1.189.189 Fraction value per share (in euro) 16,00 16,44
After the capital increase: Share capital (in euro) 1.669.364.634,04 1.666.914.901,20 Number of shares (prior to dilution) 101.579.853 101.394.042 Fraction value per share (in euro) 16,43 16,44
Dilution: Prior to dilution Number of outstanding shares 100.204.853 100.204.853 Number of new shares 1.375.000 1.189.189 Total number of shares 101.579.853 101.394.042 Dilution 1,35% 1,17%
After dilution Number of outstanding shares 113.065.853 113.065.853 Number of new shares 1.375.000 1.189.189 Total number of shares 114.440.853 114.255.042 Dilution 1,20% 1,04%
Telenet Group Holding NV Art. 582 en 596 – Offer to the employees Free English Translation for Information Purposes Only 6.
5. CONCLUSION
Based on the work performed we can confirm that the financial and accounting information included in the Special Report of the Board of Directors is fairly stated and is sufficient to inform the general meeting of shareholders.
Brussels, April 26, 2006
BDO Atrio Bedrijfsrevisoren Burg. Ven. CVBA Statutory auditor Represented by
Hans Wilmots Luc Annick
Telenet Group Holding NV Art. 582 en 596 – Offer to the employees