NEW ZEALAND GAZETTE

No. 66

1. Explanation (which does not form part of the determination)

(1) This Determination relates to mandatory conversion convertible notes ("MCNs") issued by the Issuer to the Holder for $51 million. The Issuer will apply the moneys borrowed to purchase the Holder’s 100% shareholding in another company.

(2) The MCNs constitute financial arrangements in which the Holder of the MCNs provides money to the Issuer, with the debt to be discharged at a future date by the issue of shares in the Issuer. Interest will be paid in the period between the issue of the MCNs and the conversion of the MCNs into shares in the form of a Cash Interest Component and Increments (being shares in the Issuer). The parties expected that the shares in the Issuer would have a market value of $3.13 at the time the MCNs were issued and this is the value of the shares on which the transaction between the parties was priced for the purpose of providing the desired commercial return for the Holder.

(3) Pursuant to section EH 2 of the Income Tax Act 1994, the amount of the gross income deemed to be derived or the expenditure deemed to be incurred by a person in respect of a financial arrangement under the Qualified Accruals Rules shall not include the amount of any income, gain or loss, or expenditure that is solely attributable to an excepted financial arrangement that is part of the financial arrangement.

(4) As a share is an excepted financial arrangement under section OB 1 of the Income Tax Act 1994, only the Cash Interest Component and Increments are regarded as income or expenditure for the purposes of calculating aggregate income or expenditure. Any fluctuation in market value of the Underlying Shares is disregarded.

(5) This Determination prescribes the method to be used when calculating for accruals purposes the aggregate income derived or aggregate expenditure incurred in respect of the MCNs for both the Holder and the Issuer. It details which amounts are to be included for this calculation, and which are attributable to an excepted financial arrangement.

(6) This Determination does not deal with the spreading of income or expenditure under the Qualified Accruals Rules in relation to the issuing and holding of the MCNs. In this regard, reference should be made to section EH 1 of the Income Tax Act 1994.

2. Reference

(1) This Determination is made pursuant to section 90 (1)(g) of the Tax Administration Act 1994.

3. Scope of determination

(1) This Determination applies only to the MCNs described as follows:

(a) The Issuer will borrow money from the Holder by issuing 19.2 million MCNs to the Holder for $51 million. The MCNs will be convertible into differing numbers of Ordinary Shares, depending on the length of time for which the MCNs have been outstanding. On the issue date, the MCNs will be convertible into 16,300,000 Ordinary Shares and thereafter the Holder’s entitlement to convert into Ordinary Shares will increase yearly on 1 January in each year from 1998 to 2002 in accordance with the following table:

Provided that if the Ordinary Shares in the Issuer are consolidated or subdivided, the number of Ordinary Shares to be issued on the conversion of the MCNs will be adjusted in the manner necessary to reflect the consolidation or subdivision.

Provided also that if the Issuer prior to the conversion of all the MCNs makes any bonus issue of shares, notes, debentures, or other instruments or obligations to its shareholders (other than an issue made in substitution for a cash dividend which its shareholders would otherwise have received) then the Holder will be allotted such instruments calculated as if it had converted the MCNs held by it into Ordinary Shares at the rate of conversion provided in the Table applicable on or after 1 January 2002 but if the Holder elects after this calculation to convert any of the MCNs prior to 31 March 2002, then at the time of conversion of the last of the MCNs, the Holder’s entitlement will be recalculated on the basis of the MCNs actually converted by the Holder, and any excess entitlements to the Holder will be cancelled or forfeited as the case may be.

(b) If the Holder elects to convert some but not all of the MCNs, then the number of fully paid Ordinary Shares into which such MCNs will convert will be calculated as follows:

A = (19,200,000 × B) / C where

A = the number of fully paid Ordinary Shares to be issued to the Holder;
B = the number of MCNs which the Holder has elected to convert; and
C = the number of fully paid Ordinary Shares that the Holder would have received if at that time it had converted all the MCNs determined from the above table.

(c) If the Holder converts some but not all of the MCNs then the Increments accruing on each subsequent 1 January will decrease. The relevant Increment will be reduced as follows:

A = (B / 19,200,000) × C where

A = the revised Increment;
B = the number of MCNs then held by the Holder; and
C = the Increment as determined from the table in paragraph (a) of subclause 3 (1) (ie as if all the MCNs had remained outstanding).

(d) Based on the market value of the Underlying Shares (that being $3.13) at the time the MCNs are issued, the MCNs have a market value of approximately $51 million at the time they are issued (16,300,000 shares, if converted, × $3.13).