Chairman’s Letter To Shareholders
London, 12 July 2001. Marconi plc (London and NASDAQ: MONI). Sir Roger Hurn, Chairman of Marconi plc, has today written to Shareholders; the text of Sir Roger’s letter is as follows:
“Following my letter of 18 June 2001 and in advance of the Annual General Meeting on 18 July 2001, I would like to bring you up to date on recent events affecting our Company.
On 4 July, the Board issued a trading statement to the London Stock Exchange, which has been widely commented upon in the media. The statement explained that there has been a marked deterioration in the short-term outlook for the Company as a result of a slowdown in the placing of orders by several of our major customers.
In the early hours of the morning of 4 July, the Company entered into an agreement with Philips for the sale of the Company's Medical Systems business. Under the rules of the UK Listing Authority, the Company was obliged to announce the sale without delay. The Board had not by that time been able to complete its review of the trading position of the Group. We were advised by our brokers, in order to prevent a false market in our shares, that we could not permit trading in the Company's shares on the basis of an announcement of a major disposal without also, at the same time, informing the market of the Company's current trading position. Accordingly, we were advised, by our brokers, that we should make an application for suspension of listing of our shares pending the announcement of the outcome of our review of the Group's trading position. The suspension took place before the market opened on 4 July. The trading update was issued that evening after the market in London closed, and trading in Marconi’s shares resumed the following morning in London.
Concerning the senior management of Marconi, your Board has announced that it will not now be implementing the succession proposals previously announced. Lord Simpson will remain as Chief Executive and I will continue as Chairman. John Mayo will not now become Chief Executive and has resigned from the Board and the Company.
Following consultation with shareholders and in light of the movement in the Company’s share price, the Board has decided to withdraw Resolution 14, relating to the option exchange proposal, which was to be put to shareholders at the forthcoming Annual General Meeting. You need take no action to withdraw any proxy vote you have given in respect of Resolution 14, since I will not now propose the Resolution to the meeting.
This has been a difficult period for the Company and its shareholders which the Board sincerely regrets. Looking forward, the Board and management are fully committed to restoring the Group's trading performance and rebuilding confidence in the Company's prospects. We remain confident in the medium-term outlook and would like to emphasise the strength of the Group's financing with committed banking facilities through to March 2003 of approximately £4.5 billion in addition to the Group's long-term bond funding. With its reduced cost base, the added flexibility of its outsourced manufacturing facilities, its technology and skilled workforce and strong incumbent customer base, Marconi will be well positioned to benefit from the market upturn when it occurs.
We have set out in full in an appendix to this letter the announcements we have made through the London Stock Exchange since 4 July 2001 relating to the above matters.”
The appendix referred to in Sir Roger’s letter is as follows:
“APPENDIX
MARCONI SELLS MEDICAL SYSTEMS BUSINESS TO PHILIPS FOR $1.1 BILLION AND ENTERS INTO FIVE YEAR COMMUNICATIONS SOLUTIONS AGREEMENT
London, 4 July 2001. Marconi plc (London and NASDAQ: MONI) a global provider of innovative communications solutions, announced today that Royal Philips Electronics (AEX: PHI and NYSE:PHG) has agreed to acquire Marconi’s Medical Systems business for $1.1 billion (£780 million) in cash.
In addition, Philips and Marconi have agreed that Marconi will supply Philips with communications solutions over the next five years. The contract envisages that these communications solutions will be worth in the order of $150 million.
“This transaction results in Marconi achieving its objective of focusing its activities on providing communications solutions”, said John Mayo, Deputy Chief Executive of Marconi. “We’re pleased that as part of the transaction, we have the opportunity to provide communications solutions to Medical Systems, and to develop a broader, mutually beneficial relationship with Philips. The sale realises value for our shareholders, and creates a larger medical business which offers complementary strengths to its customers and greater opportunity for employees.”
Marconi Medical Systems recorded profits of $155 million for the year ended 31 March 2001. Net assets attributable to the business at closing are expected to amount to approximately $740 million. Proceeds from the transaction will be applied to reduce group debt.
The transaction is expected to close in the fourth quarter of this calendar year, and is subject to customary regulatory approvals and other closing conditions.
MARCONI REQUESTS SUSPENSION OF SHARES BETWEEN ANNOUNCEMENT OF MEDICAL SYSTEMS DISPOSAL AND PROPOSED TRADING STATEMENT
London, 4 July 2001. Today, the board of Marconi (London and NASDAQ: MONI) will meet for the first time following the end of the first quarter of the current financial year. The meeting will consider current trading and the outlook for the rest of the year and Marconi intends to make a trading statement thereafter. In light of the regulatory requirement to announce the disposal of Medical Systems this morning and the timing of the trading update to be made following conclusion of the board meeting, Marconi has requested suspension of its shares pending this second announcement to ensure that investors have full information before trading in its shares recommences.
TRADING STATEMENT AND REQUEST FOR RESUMPTION OF TRADING IN SHARES
London, 4 July 2001. Marconi (London and NASDAQ: MONI), a global provider of innovative communications solutions, today provided a trading update and summarised actions taken to address current business conditions.
Market Outlook for the year ending 31 March 2002
Market conditions during the first three months to June have been much tougher than expected. Whilst customers continue to show operational interest in solutions and continue to request information, in recent weeks it has become clear that financial constraints in the service providers, particularly in Europe, are now causing that interest to not convert into firm orders at the usual rate. Based on the current order book and a clear slowdown in the approval of capital expenditure by customers, management believes that these factors will impact this financial year more strongly than indicated by our previous guidance and current market expectations.
Marconi has completed market research and its internal re-forecast for the first half and the full year and the Board is now in a position to disclose headline expectations. Marconi expects sales for the year ending 31 March 2002 to be around 15 per cent lower than the previous year and operating profit before exceptional items to be down by approximately 50 per cent. These figures exclude from both years the results of Medical Systems, which is now being held pending completion of the disposal announced earlier today.
Profitability is being impacted primarily by the reduced sales volume compared to the speed at which the business can be re-scaled, made more flexible and overheads can be removed. As a result, Marconi expects to report an approximately break-even position at the operating profit level in the first half and to record a stronger second half, when the benefit of major cost reductions will have a significantly greater impact.
Cost Reduction
The Company is now taking further steps to accelerate and expand its previously announced cost-cutting actions in order to re-align its cost base with the revised sales forecasts. The effects of these new cost reductions are included in the above guidance.
On 10 April Marconi announced a reduction in its global workforce by around 3,000 positions. This target has been exceeded and over 4,000 people have left or agreed to leave the Group.
As a result of the further review of its cost base, Marconi now plans to withdraw from a number of existing facilities and increasingly concentrate its activities on major sites. These measures are expected to reduce Marconi’s workforce around the world by a further 3,000 jobs. In addition, Marconi will be taking steps to streamline its management structure, reducing the overall number of management positions by around 1,000. F
ull details of these reductions and other actions necessary to re-shape the cost base to meet current business requirements will be communicated to our employees over the next few days.
This new restructuring programme will result in a further exceptional charge of £150m and is expected to save a further £150m on an annualised basis and £75m in this financial year. This will bring the total restructuring charges for the current year to £550m, saving £350m on an annualised basis, and £200m in this financial year. These will be recorded as operating exceptional items in the period in which they are incurred.
In total, including the transfer of employees to Jabil Circuit within the framework of the Company’s outsourcing programme, this will lead to a total headcount reduction of over 10,000.
Balance Sheet and Cash Flow
The cost reduction programme is expected to be funded through operational cash flow. As a result, the sale of Marconi Medical Systems will strengthen the Company’s balance sheet through a reduction in the level of net debt. Management is targeting a year end net debt figure of £2.5 billion, indicating financial headroom of a further £4 billion under Marconi’s committed bank facilities.
The Company is still on track to make progress by March 2002 to unwind the higher than normal level of inventory reported at the end of the last financial year.
Dividend
The Board of Marconi will set the interim and final dividends for the year to 31 March 2002 at the appropriate time and in the light of the actual results achieved. If the outlook for next year continues to show a recovery in profits, we anticipate maintaining the dividend for the current financial year at last year’s level.
Medium-term Outlook M
arconi remains confident in the medium-term outlook and expects to see some signs of recovery in the first half of 2002. With its reduced cost base, the added flexibility of its outsourced manufacturing facilities and its strong incumbent customer base, Marconi will be well positioned to benefit from the market upturn when it occurs.
Request for Resumption of Trading in Shares
Marconi has requested that the London Stock Exchange resumes trading in its shares from the start of business on Thursday 5 July, 2001.
MARCONI MANAGEMENT CHANGES
London July 6, 2001 — The Board of Marconi plc (London and NASDAQ: MONI), today announces that John Mayo, its Deputy Chief Executive, has resigned from the company with immediate effect.
George Simpson will remain as the Chief Executive of the Company and Sir Roger Hurn will remain as its Chairman.
Commenting on the announcement, Sir Roger Hurn, Chairman of Marconi said:
“The priority for Marconi is to optimise its operational performance in these difficult and unpredictable markets. Lord Simpson has agreed to continue in his role as Chief Executive, and I will continue as Chairman. I believe that George’s experience and commitment to the Group means that he is best placed to lead the management team through this difficult period.”
George Simpson, Chief Executive, added:
“In the changed circumstances we are committed to the task of restoring confidence in a company that we believe has a strong future. The speed and severity of the downturn in the markets clearly requires firm action and the solutions will not emerge overnight. However, the longer-term prospects of the industry remain good, we are soundly financed and we believe we are much better positioned than a number of our competitors. Marconi has excellent products, blue-chip customers and a good geographic spread. We will be working hard in the coming months to restore the fortunes of the Group.”
John Mayo said:
“Marconi is a great company going through difficult times that are not of its own making. The entire workforce faces immediate short term challenges and it is inevitable that sacrifices will have to be made for Marconi to enjoy the prosperity and growth available in the medium and long term. I wish all my colleagues good fortune and look forward to my Marconi shares under George’s stewardship appreciating in value over the coming years.”
CHANGES TO MARCONI’S PROPOSED SHARE OPTION PLANS
London July 6, 2001 — Marconi plc (London and NASDAQ: MONI) The notice of Annual General Meeting dispatched to shareholders on 18 June 2001 contained two resolutions dealing with proposed changes to the Company’s share option plans.
Resolution 13 effects a range of amendments to the rules of the Company’s 1999 Stock Option Plan; in essence, those amendments are designed to make that plan operate with more flexibility and give the Company’s Remuneration Committee an appropriate level of discretion so as to ensure that the Company can continue to recruit and retain key employees. On 29 June, the Company confirmed that it intended to put its remuneration policy to shareholders for their approval at the 2002 Annual General Meeting.
Resolution 14 effects an exchange proposal (the “Exchange Plan”) under which option holders (including the 34,400 holders of the Company’s nil cost Launch Plan options) can elect either to keep their current options on their existing terms or to exchange those options for new options over half the original number of ordinary shares at an exercise price equal to half the original exercise price but with a new minimum exercise price of £4. In designing the Exchange Plan, the Company sought to strike an appropriate balance between the interests of shareholders and the need to provide employees with an effective incentive tool. The Marconi share price on 11 June, the last practicable date before printing of the notice of AGM, was 335.5p.
The Company has engaged in extensive discussions with its major shareholders both before and after the release of its trading statement on Wednesday 4 July. Those discussions lead the Company to believe that it has a widespread measure of support for resolution 13 and it intends to put that resolution to its shareholders at the forthcoming Annual General Meeting.
It is clear, however, that many shareholders are concerned about the precedent setting nature of the Exchange Plan, however sympathetic they may be to the reasons for its original proposal. Equally, it is no longer clear, given the £4 minimum exercise price, that, when set against the current share price, the revised option terms would necessarily act in the short to medium term as a significant incentive tool.
The Company has therefore decided that it should withdraw resolution 14 and accordingly that resolution will not be put to the vote of shareholders at the AGM. In reaching this decision, the Company has been greatly encouraged by the clear willingness of very many of its major institutional shareholders to enter promptly into a dialogue with a view to creating alternative proposals for changes to its remuneration plans so as to ensure that the Company can remain competitive and, whatever the near term trading challenges that it faces, emerge with the financial and intellectual capital necessary to protect its position as a leading player in the global telecommunications equipment marketplace.
This document comprising a letter from the Chairman and press releases made by the Company since 4 July 2001, contains forward-looking statements with respect to products, partners, customers, future growth and other matters. Please refer to the Form 20-F report and Form 6-K reports filed by Marconi plc with the United States Securities and Exchange Commission for a discussion of risks that could cause actual results to differ materially from such statements.”
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