570 No. 26

NEW ZEALAND GAZETTE

Telecom and any other person to provide a further return or further benefit to that Noteholder.

(g) Irrespective of any election by a Noteholder, but subject to the subordination and pari passu provisions in Article XI of the US Indenture, TC Finance may (at its option and on a pro rata or non-pro rata basis) purchase or redeem some or all of the Capital Notes for cash.

(h) If TC Finance cannot redeem the Capital Notes for cash or Telecom Shares (or ADRs) because it would, in the opinion of its directors, not be solvent if it did so, then the election date is reset for a period not exceeding 2 years. If TC Finance is still unable to redeem the Capital Notes for the same reason, then the Trustee of the Capital Notes is entitled to apply to appoint a liquidator.

(i) If TC Finance cannot redeem the Capital Notes for Telecom Shares (or ADRs) (because Telecom cannot lawfully issue the shares or ADRs are no longer listed, or TC Finance cannot lawfully subscribe for the shares) then the election date is reset for a period not exceeding 2 years. If TC Finance is still unable to redeem the Capital Notes for Telecom Shares (or ADRs) (for any of the stated reasons) then another election date is set, again for a period not exceeding 2 years.

(j) During the period between issue and the relevant election date, each Capital Note will bear interest at a prescribed fixed rate determined as at the time the issue is priced by reference to the relevant US Treasury yield rate and being at the time the issue is priced no more than 60 basis points above the rate at which TCNZ Finance Limited as the primary funder for the Telecom group could issue a similar volume of senior fixed rate bonds denominated in the same currency as the Capital Note and with a maturity equivalent to the term until the initial election date for redemption of that Capital Note, and being no less than such senior fixed rate bond rate. Interest is payable 6-monthly. Unpaid interest bears interest itself and is compounded on each subsequent date for payment of interest.

(2) This determination does not deal with the spreading of accrual income or expenditure under the qualified accruals rules in relation to how those rules apply to the issuing and holding of the Capital Notes. Nor does this determination deal with the translation into New Zealand dollars of the US Dollar denominated Capital Notes.

(3) For the avoidance of doubt, this determination also does not deal in any respect with the manner in which the number, or value, of Telecom Shares (or ADRs) issued, in the event that any Capital Note is redeemed for Telecom Shares (or ADRs), is actually calculated. In this regard, reference should be made to section 12.4 of the US Indenture. (A copy of the US Indenture is available for inspection at the registered office of TC Finance, Telecom Networks House, 68 Jervois Quay, Wellington).

4. Principle

(1) The Capital Note is a hybrid financial arrangement which has a debt and an equity component. The equity component is the option available to TC Finance to procure the issue of Telecom Shares (or ADRs) to Noteholders in lieu of payment in cash of the Cash Redemption Amount.

(2) Any income, gain or loss, or expenditure that is solely attributable to an excepted financial arrangement is not included when calculating gross income or expenditure under the qualified accruals rules.

(3) The effect of this determination is that income and expenditure under the qualified accruals rules will be calculated, in respect of TC Finance, and to the extent applicable the Noteholder of the Capital Note, on the basis that only the difference between the value of the Telecom Shares (or ADRs) (denominated in US Dollars) received by the Noteholder, and the Cash Redemption Amount, is solely attributable to the excepted financial arrangement.

5. Interpretation

In this determination (and the Explanation), unless the context otherwise requires:

Words and expressions used shall have the same meaning as in the Act, except that where there is a conflict between the meaning of an expression used in the qualified accruals rules as defined in section OZ 1 of the Act, and the meaning of the expression elsewhere in the Act, the expression shall have the meaning as in the said qualified accruals rules.

“the Act” means the Income Tax Act 1994.

“ADRs” means Telecom American Depository Receipts.

“Capital Note” or “Capital Notes” means the capital note or capital notes issued by TC Finance on the terms and conditions set out in the US Indenture.

“US Indenture” means the trust deed between TC Finance and The Bank of New York as Trustee dated February 1998.

“Cash Redemption Amount”, in respect of Capital Notes to be redeemed by the issue of Telecom Shares or ADRs, means the cash amount expressed in US Dollars in which the Capital Notes are denominated that, according to the terms of the Capital Notes, the Noteholder of those Capital Notes would receive upon the redemption for cash of the Capital Notes (such amount being the same as the aggregate of the “Redemption Amount”, as defined in the US Indenture for those Capital Notes).

“Coupon Interest Payment” or “Coupon Interest Payments” in respect of a Capital Note means any cash amount or amounts expressed in the US Dollars in which the Capital Notes are denominated, paid on the Capital Note by TC Finance to or on behalf of the Noteholder, other than the Cash Redemption Amount.

“Noteholder” or “Noteholders” means a person or persons investing in a Capital Note or Capital Notes.

“TC Finance” means Telecom New Zealand Finance Limited.

“Telecom” means Telecom Corporation of New Zealand Limited.

“Telecom Shares” means ordinary shares issued by Telecom.

6. Method

(1) Where any Capital Notes are converted into, redeemed or paid by the issue or delivery of Telecom Shares (or ADRs), the income, gain or loss, or expenditure that is solely attributable to the excepted financial arrangement component of such Capital Notes equals any amount by which the aggregate market value of the number of Telecom Shares (or ADRs) (expressed in the US Dollars in which the Capital Notes are denominated) issued on redemption of those Capital Notes (the number of shares (or ADRs) issued being determined in the manner described at paragraph 3 (1) (d) of this determination) is above, or below, (as the case may be) the Cash Redemption Amount for those Capital Notes.

(2) For the purposes of the base price adjustment, the amount of the acquisition price of each Capital Note shall be determined in accordance with the acquisition price definition as provided in section OB 1 of the Act with no part of the core acquisition price being attributable to the