A US shareholder in KeyTech Ltd. has claimed foreign investors are being discriminated against under a capital restructuring plan which was narrowly approved last week.

Mr. Wistar Morris III said yesterday he believed the restructuring had been proposed to ensure a higher proportion of Bermudian shareholders, an assumption confirmed by a KeyTech spokesperson yesterday. The restructuring plan was for KeyTech Ltd. to acquire all 7 percent redeemable notes of Bermuda Telephone Company (BTC) (a wholly owned subsidiary of KeyTech Ltd.) in exchange for 8 percent cumulative redeemable convertible preferred shares of KeyTech on the basis of three preferred shares for every two BTC notes.

Last week shareholders approved a plan to issue the shares in place of notes by a majority vote of 51 percent. The board of KeyTech hoped the capital restructuring would reduce the company's debt and improve the capital structure.

However, disgruntled investor Wistar Morris III of Philadelphia said: "...this transaction amounts to a transfer of wealth from the shareholders to your creditors".

Voicing his displeasure to KeyTech chairman Dr. James King in a letter in August, Mr. Morris said the board were "putting aside the Board's fiduciary responsibility to all the shareholders by proposing this transaction". Mr. Morris also questioned the way the company was run in his examination of the now approved changes. "KeyTech's book value was $46.63 as per your March 31 Annual Report, and that this does not include the $10.00 per share "surplus available" in the terminated defined benefit plan, (the former plan) which you seem to be using as a source of funds to keep reported earnings at levels which minimise scrutiny from write-offs of poorly conceived investment policies."

Mr. Morris also said the company had ample cash reserves and large cash flow from amortisation and depreciation which it could use to pay off the debt when it was due in ten years.

He added: "Assuming the conversion price to be around the current market price, this conversion feature amounts to selling stock at two-thirds of stockholders book value and if you measured the value of the company by using a multiple of EBITDA (Earnings Before Interest, Tax, Depreciation and Amortisation) and comparing values with other telephone companies you would find the private value per share verging on $100 per share. Thus this transaction amounts to a transfer of wealth from the shareholders to your creditors." Mr. Morris also said he assumed a fairness opinion was prepared and would appreciate a copy, but a KeyTech spokesperson yesterday said no such opinion was produced. The spokesman said there was no need to produce the opinion as the BSX had been informed of the proposals and had approved the restructuring plan.

However, when asked yesterday if the BSX had approved of the proposals, a spokesperson said: "No comment." Mr. Morris added: "Unfortunately, as the notes were generated by a dividend to your shareholders at a time when 90 percent of the shares were held by Bermudians and as there has been little trading in the notes, all the people who were shareholders then are probably shareholders and note holders now and thus have an incentive to vote for this scheme. It is the shareholders who have bought their shares since the notes were issued in 1997 who will suffer diminution in value."

Mr Morris said as the proportion of Bermudian shareholders had declined over the last five years to something below 65 percent, it was obvious that these were the shareholders who would be most disadvantaged. "Maybe this plan is being driven by a perceived need to gain a higher number of Bermudian shareholders and avoid the consequences of approaching the limit of Bermuda's antiquated 60-40 rule. Even if this were the case, it would still not justify your putting aside the Boards fiduciary responsibility to all the shareholders by proposing this transaction." Mr. Morris said it would not be a bad thing if KeyTech hit the 60 percent limit and the foreign-owned shares traded at a premium to domestic-owned ones. "This would be only a reflection that global investors think highly of Bermuda capital markets and jurisprudence protecting shareholder rights," said Mr. Morris. However, in a simplified explanation of the KeyTech proposals prepared for the press, a spokesman wrote: "...share purchases by foreign investors over recent years have increased the percentage of total shares held by non-Bermudians. As a company, KeyTech must maintain a minimum Bermudian ownership of 60 percent. To preserve full liquidity options for shareholders, the Directors consider that the Bermudian ownership percentage should be increased. The Directors anticipate that would occur on conversion of Preferred Shares to Common Shares."

Commenting on this rationale, Mr. Morris said: "Under American law, it would not be permitted to disadvantage one group of shareholders against another. But even if Bermuda shareholder protection is not so far advanced, it still does not make it the right thing to do. It is poor public policy to allow a company to disadvantage any of your shareholders especially if they are not Bermudians."In response to Mr. Morris's concerns, Dr. King wrote back to Mr. Morris and said the directors were aware of their fiduciary duties to the company and said they believed the transaction would benefit the company as a whole. Dr. King added: "KeyTech is a publicly traded company and the Directors believe that the market price, rather than some other valuation, is a fair reflection of what someone would pay for the company's shares and that, in selecting that price, they are properly discharging their fiduciary duties." In response to Dr. King's comments, Mr. Morris wrote back and said he was not convinced of the fairness of the proposal. "Surely, as chairman of KeyTech, you cannot believe, that $40 is the "fair" value at which to convert outstanding long-term debt into KeyTech common shares, or - which is the same thing - to sell new shares to the public," said Mr. Morris. He then offered several different approaches to assign a value to the outstanding long-term debt and wrote: "Consider how the market would price an issue of convertible preferred shares which yield 8 percent when the common shares yield 4.76 percent. In my experience, a rule of thumb is that convertible preferreds are priced at up to a 20 percent premium to market plus the difference in yields priced at breakeven in, say, three years."

Secondly, Mr. Morris said: "KeyTech has a $50 book value, a figure which does not include the appreciated value of the extensive real estate bought in the 1930s. Similarly, the analysis does not include the $25,500,000 value, $11.90 per share, of the excess funding in the pension plan that accrues to the common shareholders. Moreover, last year KeyTech's cash flow from operations amounted to $31.7 million or $14.80 per share. The stock is surely worth a significant multiple of that figure. The cash and marketable securities on the balance sheet amount to $46,000,000 or $21.47 per share and compare to the $26.1 million of long term debt due in 2012, which could easily be refinanced at maybe half the interest rate. KeyTech also owns the largest ISP, (Logic Communications) currently at breakeven but growing rapidly, and has a large interest in the Islands only cable TV company. The above values are additive, yet all you say in your letter is that "they [the Directors are properly discharging their duties"."

Mr. Morris said that perhaps the directors had complied with Bermuda's body of corporate law but they certainly favoured the debt holders over KeyTech's common shareholders and again asked for a fairness opinion from a reputable independent source and added: "I have a hard time believing that a persuasive opinion could be produced for this Proposal." Mr. Morris concluded: "The effect of the Proposal is that those KeyTech common shareholders who are not also BTC noteholders are being treated differently from those KeyTech common shareholders who do hold BTC notes.

The former group of shareholders is therefore being disadvantaged as they are not being given the opportunity to take part in the offering of new shares." In the UK, the Special Utilities Investment Trust PLC of London was a 13.4 percent owner of common shares via a nominee company, and The Royal Gazette understands that principals from this investment trust were also unhappy with the restructuring plan for similar reasons.