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Zen Research PLC (ZEN)

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Wednesday 27 March, 2002

Zen Research PLC

Scheme of arrangement

Zen Research PLC
27 March 2002

Zen Research plc 27 March 2002

This Announcement is not for release, publication or distribution, in whole or
in part, in or into or from the United States, Canada, Australia or Japan.

PROPOSAL TO RETURN CAPITAL TO SHAREHOLDERS AND RETURN ZEN RESEARCH PLC TO
PRIVATE OWNERSHIP BY WAY OF A SCHEME OF ARRANGEMENT

The Board of Zen Research plc ('Zen' or the 'Company') announces today a
proposal to return the Company to private ownership through a capital reduction.
The Proposal is intended to be effected by way of a scheme of arrangement.


    •      Under the Proposal, Scheme Shareholders would receive 10p per share
    in cash

    •      Zen would be de-listed and become wholly owned by Davidi Gilo, the
    Chairman and Chief Executive of the Company, and his Family Interests (whose
    aggregate shareholdings currently represent approximately 26% of the issued
    Ordinary Shares)

    •      The Proposal requires shareholder approval at a Court Meeting and at
    an Extraordinary General Meeting and sanction by the Court

    •      An institutional shareholder with an interest in approximately 12.8%
    in aggregate of the Ordinary Shares has confirmed, in writing, its current
    intention to vote in favour of the resolutions to be proposed at the Court
    Meeting and at the Extraordinary General Meeting

    •      A committee of independent Directors has concluded that the Proposal
    represents an opportunity for Scheme Shareholders to realise their
    investment in the Company at a price above that at which the Ordinary Shares
    have traded in the recent past. As a result, the Independent Committee
    believes it to be reasonable that the Proposal be put to Scheme Shareholders
    for their consideration and for them to vote upon. For the reasons explained
    in the full text of this announcement, the Independent Committee is unable
    to provide a recommendation.



Mr. Davidi Gilo, Chairman and Chief Executive of Zen Research plc, said today:

'Conditions remain challenging in the semi-conductor market, our New Silicon
Value chip design business has uncertain and limited earnings anticipated for
the near future, and additional investment is required over the medium term.
There is a much higher level of risk now associated with the Company and it will
need to adopt a highly entrepreneurial approach.

I am disappointed that Zen has not to date been the success that I and the Board
hoped it would be when we listed on the stock market. Although I believe that
Zen can prosper in the long term, I have listened to other shareholders. This
proposal allows all other shareholders to cash out at a price that reflects the
risks and liabilities that Zen carries.'

Enquiries:

Zen Research plc:

Mark Way, Head of Investor Relations: 020 7382 0470

UBS Warburg (advisers to the Independent Committee):

Michael Lacey-Solymar, Managing Director: 020 7567 8000

Hawkpoint (advisers to Mr. Gilo):

David Renton, Managing Director: 020 7665 4500

This summary should be read in conjunction with the full text of this
announcement.

The conditions to the Proposal are set out in Appendix I and definitions of
certain expressions used in this announcement are set out in Appendix II.

UBS Warburg is acting for the Independent Committee in relation to the Proposal
and is not acting for any of the members of the Board of Zen in their personal
capacities nor for any holders of Ordinary Shares in relation to the Proposal.
UBS Warburg will not be responsible to anyone other than the Independent
Committee for providing the protections afforded to its clients or advising any
such person in relation to the Proposal. In particular, UBS Warburg will not owe
any duties or responsibilities to any holders of Ordinary Shares concerning the
Proposal.

Hawkpoint is acting for Davidi Gilo in connection with the Proposal and will not
be responsible to anyone other than Davidi Gilo for providing the protections
afforded to clients of Hawkpoint, nor for providing advice in relation to the
Proposal or any other matter referred to herein.

27 March 2002

This Announcement is not for release, publication or distribution, in whole or
in part, in or into or from the United States, Canada, Australia or Japan.

PROPOSAL TO RETURN CAPITAL TO SHAREHOLDERS AND RETURN ZEN RESEARCH PLC TO
PRIVATE OWNERSHIP BY WAY OF A SCHEME OF ARRANGEMENT



1.     Introduction

The Board of Zen Research plc ('Zen' or the 'Company') announces today a
proposal to return the Company to private ownership by way of a capital
reduction. The Proposal is intended to be effected by way of a scheme of
arrangement. If the Scheme is approved and becomes effective, Scheme
Shareholders will receive a payment of 10p per Scheme Share in cash and Zen will
be de-listed and will become wholly owned by Davidi Gilo, the Chairman and Chief
Executive of the Company, and certain Family Interests.

Richard Barrett, David Bell and Jacob Schimmel will not have a continuing role
with Zen upon the Scheme becoming effective. They are the members of the
committee of independent Directors which has considered the Proposal in order to
advise Scheme Shareholders.

By reason of his involvement in the Proposal, Davidi Gilo has been precluded
from participating in the formulation of the advice to Scheme Shareholders. In
addition, by reason of their being Continuing Directors, Stephen Pezzola, Emiko
Higashi, David Aber, Stanley Stern and Avraham Fischer have also been precluded
from participating in the formulation of the advice to Scheme Shareholders.

Before the Proposal can be implemented, it must be approved by Shareholders at
the Court Meeting and at the Extraordinary General Meeting and be sanctioned by
the Court.

2.     Outline of the Scheme

The Proposal will be implemented by way of the Scheme. If the Scheme becomes
effective, Scheme Shareholders will be entitled to receive:

                   for each Scheme Share          10p in cash



The cash payment of 10p per Scheme Share values the entire existing issued share
capital of the Company at approximately £18 million and represents a premium of
approximately 8% to the closing middle market price of 9.25p per Ordinary Share
on the London Stock Exchange on 26 March 2002 (the last dealing day prior to
this announcement) and a premium of approximately 43% to the average closing
middle market price during the month ended 26 March 2002.

If the Scheme becomes effective, cheques in respect of the Cash Consideration
will be despatched not later than 14 days after the Effective Date.

Further information on the Scheme, including the conditions to which the Scheme
is subject, is set out in Appendix I to this announcement.

3.     Indication of support

An institutional shareholder with an interest in approximately 12.8% in
aggregate of the Ordinary Shares in issue has confirmed, in writing, its current
intention to vote in favour of the resolutions to be proposed at the Court
Meeting and at the Extraordinary General Meeting.

4.     Background on Zen

Zen was brought to listing on the Official List in July 2000 with the intention
of commercialising the Company's MultibeamTM technology for the enhanced
performance of optical drives. Since that time, the prospects for the PC
industry, a primary target market for the Company's technology, have declined
sharply and the intensity of price competition in the PC industry has increased.
As a result, the attractiveness of one of the Company's primary markets has been
reduced significantly. This resulted in the announcement in November 2001 that
the Company would reduce the workforce in the MultibeamTM area by 65% and would
postpone indefinitely the further development of MultibeamTM products. A small
team of engineers has been retained to preserve the intellectual property of the
business and fulfil the contractual obligations of Zen in respect of a
development agreement that had previously been signed with a licensee.

In April 2001, the Company purchased the assets of New Silicon Value ('NSV') in
order to extend its capabilities into the design of application specific
integrated circuits ('ASICs'). NSV's technology is focused on producing more
efficient designs of ASICs, such that the size of the ASIC, and therefore the
cost of production, are reduced. The strategic rationale of the purchase
included using this capability to redesign one of the ASICs used with the
Company's MultibeamTM technology. Given the current state of overcapacity in the
wider semiconductor industry, the promise of possible cost reductions through
ASIC redesign has become less attractive to customers of NSV.

5.     Background to the Proposal

In view of the difficulties the Company faces in its chosen markets and the loss
of investor confidence in the Company's prospects, as reflected in the decline
in the share price, the Board has considered, with its advisers, the
alternatives available to it and with regard to the best interests of the
Company and Shareholders as a whole. The Board has not received any approaches
and the Company's efforts to sell its MultibeamTM division produced no
interested parties. Given the Company's net cash balances, one possibility that
has been considered is an orderly winding up of the Company and its
subsidiaries. Such an orderly winding up would involve them fulfilling their
current contractual obligations, discharging all other liabilities and not
incurring any further obligations. At the end of the winding up process, the
cash remaining within the business would be distributed to Shareholders. For the
Company, such a winding up would require, amongst other things, the approval by
the holders of at least 75% of shares voted on such a proposal. Mr. Gilo has
notified the Board that he and his Family Interests would vote their
shareholdings, representing approximately 26% of the issued share capital,
against such a proposal. However, Mr. Gilo indicated that he was, in principle,
prepared to put forward an alternative proposal which would afford Shareholders
an opportunity to realise their investment in cash.


A committee of independent Directors has considered the Proposal. The
Independent Committee considered that, in order to evaluate the Proposal, it
should be compared with the theoretical alternative of an orderly winding up of
the Company and its subsidiaries. Whilst the actual outcome is hard to assess
with any accuracy, the Independent Committee, with the assistance of its
advisers, concluded that the actual and contingent liabilities upon an orderly
winding up would consume a large proportion of the cash balance of $59.8 million
as at 31 December 2001. In particular, this would be due to:-


  • significant liabilities in respect of contracts for design and development
    services which remain to be performed;

  • the costs of liquidation and the likely timescale;

  • severance pay for the Group's employees;

  • termination costs in respect of leasehold properties;

  • termination of other contractual obligations; and

  • other contingent liabilities.


In addition, when considering whether the Proposal should be put forward to
Shareholders, the Independent Committee has taken into account, amongst others,
the following matters:-


  • if approved and sanctioned by the Court, the Proposal will provide Scheme
    Shareholders with a cash consideration for all their Scheme Shares at a
    premium of:


  • 8% over the closing middle market price of an Ordinary Share on 26 March
    2002 (the last dealing day prior to the date of this announcement); and

  • 43% over the average closing middle market price over the month ended 26
    March 2002;


  • the theoretical alternative of an orderly winding up of the Company and
    its subsidiaries (as outlined above) would take considerably longer to
    achieve a final distribution to Shareholders and the final outcome would be
    uncertain;

  • if the Proposal is not approved and made effective then, in the absence of
    significant changes in the Company's prospects, the Independent Committee
    believes it unlikely that all Shareholders would be able to dispose of their
    Ordinary Shares in the market at above 10p per share in the foreseeable
    future; and

  • the Proposal requires both the approval of Shareholders at the Court
    Meeting and at the Extraordinary General Meeting and the subsequent sanction
    of the Court following a hearing at which the fairness of the Proposal and
    the interests of creditors will be considered by the Court.


Having taking into consideration the matters outlined above, the Independent
Committee, which has received financial advice from UBS Warburg, has concluded
that the Proposal represents an opportunity for Scheme Shareholders to realise
their investment in the Company at a price above that at which the Ordinary
Shares have traded in the recent past. As a result, the Independent Committee
believes it to be reasonable that the Proposal be put to Scheme Shareholders for
their consideration and for them to vote upon. Given the inherent uncertainty
and wide range of outcomes for Shareholders if an orderly winding up were to be
an available alternative, the Independent Committee is unable to provide a
recommendation.

6.     Interests in Ordinary Shares

As at 26 March 2002 (the latest practicable date prior to the publication of
this announcement), the members of the Independent Committee had an aggregate
beneficial holding of 230,000 Ordinary Shares, representing 0.1% of the Scheme
Shares.

As at 26 March 2002 (the latest practicable date prior to the publication of
this announcement), Mr. Gilo had the following interests in Ordinary Shares:

                                      Number of Shares                  Options
The Gilo Family Trust                       27,887,500
Gilo Family Partnership*                    20,127,555
The Gilo Family Foundation                     750,000
The Gilo Family Supporting
Foundation                                     250,000
The Elad Gilo DSP Tel Trust                    910,133
The Adi Gilo DSP Tel Trust                     910,133
The Yael Gilo DSP Tel Trust                    910,134
Davidi Gilo                                                          1,000,000**

*     Of which Mr. Gilo is the general partner
**     Exercise price 14p exercisable 05/09/01-05/09/11

The above table includes beneficial and non-beneficial interests.

7.     Effect of the Scheme on the Directors' shareholdings

If the Scheme is approved, the shareholdings of the Directors, other than Davidi
Gilo and his Family Interests, totalling 4,429,696 Scheme Shares (representing
2.4% of the total issued Ordinary Shares and 3.3% of the Scheme Shares) will be
cancelled under the Scheme.

8.     Share Option Schemes

Appropriate proposals will be made to Optionholders in due course.

9.     Meetings

The Proposal involves an application by Zen to the Court to sanction the Scheme.
Before such Court sanction can be sought, the Scheme will require approval by
the Scheme Shareholders at the Court Meeting. In addition, an Extraordinary
General Meeting of Shareholders will be convened to consider and, if thought
fit, pass the special resolution to be proposed thereat.

Notices convening the meetings will be contained in a Scheme document to be
posted to Shareholders in due course. If the Scheme becomes effective, it will
be binding on all Scheme Shareholders irrespective of whether they vote in
favour of the Scheme at the Court Meeting or in favour of the special resolution
to be proposed at the Extraordinary General Meeting. Further details of the
meetings are given in Appendix I to this announcement.



10.     General

The formal documentation relating to the Proposal containing, inter alia, a
letter from Mr. Gilo, the Chairman and Chief Executive of Zen, setting out his
reasons for making the Proposal, a letter from the Independent Committee, and an
explanatory statement regarding the Scheme from UBS Warburg, advisers to the
Independent Committee, will be posted to Shareholders in due course. The
conditions to the Proposal are set out in Appendix I and definitions of certain
expressions used in this announcement are set out in Appendix II.

11.      The Panel on Takeovers and Mergers

The Panel on Takeovers and Mergers has indicated that, because central
management and control of the Company is outside the United Kingdom, it does not
regard the Company as being subject to the provisions of the Code. However, the
Company has agreed to abide by the Code for so long as the Independent Committee
remains a duly constituted committee of the Board. Mr. Gilo has undertaken to
the Company to abide by the Code in relation to the Proposal. Disclosure
requirements ordinarily in effect for shareholders with holdings of greater than
1% and for connected exempt market makers will not apply.

12.      Sources and bases of information

The value of the Scheme Shares under the Proposal (£13,338,160.60) is based upon
the number of Scheme Shares in issue, being 133,381,606 (ignoring any cash
payments that may be made to Optionholders under the proposals to be made to
them).

The average closing middle market share prices over the last month have been
calculated based on data sourced from Datastream.

Enquiries:

Zen Research plc:

Mark Way, Head of Investor Relations: 020 7382 0470

UBS Warburg (advisers to the Independent Committee):

Michael Lacey-Solymar, Managing Director: 020 7567 8000

Hawkpoint (advisers to Mr. Gilo):

David Renton, Managing Director: 020 7665 4500

UBS Warburg is acting for the Independent Committee in relation to the Proposal
and is not acting for any of the members of the Board of Zen in their personal
capacities nor for any holders of Ordinary Shares in relation to the Proposal.
UBS Warburg will not be responsible to anyone other than the Independent
Committee for providing the protections afforded to its clients or advising any
such person in relation to the Proposal. In particular, UBS Warburg will not owe
any duties or responsibilities to any holder of Ordinary Shares concerning the
Proposal.

Hawkpoint is acting for Davidi Gilo in connection with the Proposal and will not
be responsible to anyone other than Davidi Gilo for providing the protections
afforded to clients of Hawkpoint, nor for providing advice in relation to the
Proposal or any other matter referred to herein.

                                     PART 2


                           Appendix I - The Proposal

1.      Operation of the Proposal

Under the terms of the Scheme, the Company will reclassify Scheme Shares into B
shares, issue bonus C shares of 5p each to Scheme Shareholders, consolidate the
bonus shares with the B shares held by the Scheme Shareholders as D shares and
then reduce the D shares and pay to the holders of such shares 10p in cash per
share. The Scheme will leave 48,015,055 Ordinary Shares in issue which will
continue to be held by Mr. Gilo and his Family Interests.

Before the Court sanction of the Scheme can be sought, the Scheme will require
approval by the Scheme Shareholders at the Court Meeting. The Court Meeting will
be convened by order of the Court for the purposes of considering and, if
thought fit, approving the Scheme (with or without modification).

At the Court Meeting, voting will be by poll and Scheme Shareholders will be
entitled to one vote for each Scheme Share held by them.

The resolution to be proposed at the Court Meeting will be passed if a majority
in number, representing at least three quarters in value of the Scheme Shares
voted, of the Scheme Shareholders who attend and vote, either in person or by
proxy, vote in favour of the Scheme. For the purposes of the Scheme, Mr. Gilo
and the holders of the Family Interests will not be Scheme Shareholders and,
accordingly, will not be entitled to attend or vote at the Court Meeting.

An Extraordinary General Meeting of Shareholders will also be required to
consider and, if thought fit, to pass the special resolution to approve, amongst
other things, the reduction of the Scheme Shares to be reduced under the Scheme.

If the Scheme becomes effective, it will be binding on all holders of Scheme
Shares, irrespective of whether they attended the meetings or voted in favour of
the Scheme.

2.      Conditions of the Proposal


The implementation of the Scheme is subject to the following conditions:

(a)     a resolution to approve the Scheme being passed by a majority in number,
representing at least three quarters in value of the Scheme Shares voted, of the
Scheme Shareholders present and voting in person or by proxy at the Court
Meeting;

(b)     the passing of the special resolution to reorganise and reduce the share
capital of Zen to be proposed at the Extraordinary General Meeting; and

(c)     the Scheme being sanctioned (with or without modification), and the
Reduction of Capital being confirmed, by the Court and an office copy of the
necessary orders of the Court being delivered to, and registered by, the
Registrar of Companies.

3.     Circular to Shareholders

A circular to be sent to Shareholders containing full details of the Scheme and
notices of the Court Meeting and the Extraordinary General Meeting is expected
to be posted to Shareholders in due course.

4.     Cancellation of listing

If the Scheme is approved, the UK Listing Authority will be requested to cancel,
respectively, the trading in the Ordinary Shares on the London Stock Exchange's
market for listed securities and the listing of the Ordinary Shares from the
Official List with effect from the commencement of business on the Effective
Date.



                           Appendix II - Definitions


The following definitions apply through this announcement, unless the context
requires otherwise:

'Act'                                 the Companies Act 1985, as amended

'Board' or 'Directors'                the board of directors of the Company

'Cash Consideration'                  the sum of 10p for each Scheme Share

'Code'                                the City Code on Takeovers and Mergers

'Company' or 'Zen'                    Zen Research plc

'Continuing Directors'                Davidi Gilo, Stephen Pezzola, Emiko Higashi, David Aber, Stanley Stern and Avraham
                                      Fischer

'Court'                               the High Court of Justice in England and Wales

'Court Meeting'                       the meeting of the holders of Scheme Shares to be convened by order of the Court
                                      pursuant to section 425 of the Act to consider and, if thought fit, approve the
                                      Scheme, including any adjournment thereof

'Effective Date'                      the date on which the Reduction of Capital becomes effective

'Extraordinary General Meeting'       the extraordinary general meeting of Zen to be held to consider and, if thought
                                      fit, to pass the special resolution to approve, amongst other things, the
                                      reduction of the Scheme Shares, including any adjournment thereof

'Family Interests'                    Ordinary Shares held by Davidi Gilo, the Gilo Family Trust and the Gilo Family
                                      Partnership

'Group'                               Zen and its subsidiary undertakings

'Independent Committee'               Richard Barrett, David Bell and Jacob Schimmel

'Hawkpoint'                           Hawkpoint Partners Limited

'London Stock Exchange'               London Stock Exchange plc

'Official List'                       the Official List of the UK Listing Authority

'Optionholders'                       the holders of options granted under the Share Option Schemes

'Ordinary Shares'                     ordinary shares of 5p each in the capital of Zen

'Proposal'                            the proposal to return the Company to private ownership by means of the Reduction
                                      of Capital to be effected by way of the Scheme

'Reduction of Capital'                the reduction of the issued share capital of the Company by the reduction of the
                                      Scheme Shares

'Registrar of Companies'              the Registrar of Companies in England and Wales

'Scheme'                              the proposed scheme of arrangement under section 425 of the Act, incorporating a
                                      reorganisation of the share capital of the Company and the Reduction of Capital,
                                      with or subject to any modification, addition or condition approved or imposed by
                                      the Court

'Scheme Shareholders'                 holders of the Scheme Shares

'Scheme Shares'                       all the Ordinary Shares in issue other than the Family Interests

'Shareholders'                        holders of Ordinary Shares

'Share Option Schemes'                the Zen 2000 Executive Share Option Plan, the Zen 2000 Employee Stock Purchase
                                      Plan, the Zen N.V. 1996 Key Employee and Consultants Stock Plan, the Zen N.V. 1999
                                      Non-Qualified Stock Plan and the Zen N.V. 1999 Stock Incentive Plan

'UBS Warburg'                         UBS AG acting through its business group UBS Warburg

'UK'                                  the United Kingdom of Great Britain and Northern Ireland

'UK Listing Authority'                the Financial Services Authority in its capacity as competent authority under the
                                      Financial Services and Markets Act 2000

'United States'                       the United States of America, its territories and possessions, any state of the
                                      United States of America, any other areas subject to its jurisdiction and the
                                      District of Columbia



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