THE Newport RFC shareholders’ EGM to decide whether to accept the Welsh Rugby Union’s proposed deal for the Dragons and Rodney Parade will take place on Tuesday, May 9.

A meeting has been scheduled for Monday, April 24 ahead of the EGM and the board have issued the following Q&A sheet to shareholders and supporters:

Why is change necessary?

The need for change was recognized by the Group’s Directors in 2015 because of a failing business model, poor financial projections and a desire to attract fresh investment into the Dragons, to preserve rugby for both the Dragons and Newport RFC.

How did we get to this point?

The process started with a Group’s Directors’ Strategic Planning meeting in April 2015.

By June 2015, a strategic plan had been agreed, requiring the modernization of the organization and a need to determine the best structure and arrangements for the business going forward.

In October 2015, it was decided that the preferred option was to separate the Dragons, making them an independent entity capable of attracting fresh investment. In April 2016, having looked at the legal and financial considerations of achieving this preferred option, this was announced, with the initial model being based on a lease arrangement between the Dragons and the Company.

A number of investment proposals were considered, with the lease arrangement proving problematic, either because of the need to have control of the venue or investors wishing to secure loans against the Ground, with the possibility that it could be lost further down the line if loans were unpaid and ‘called in’.

Given the above, and the desire to protect the future of the Ground, the WRU latterly became a possible solution, leading to the current proposal.

Aren’t the WRU a ‘choice of last resort?

No. This is not a ‘hostile takeover’ or a ‘formal intervention’ by the WRU. If, as has been suggested, they wished to see rugby fail in Gwent and create another region elsewhere, they could just have sat back and let things take their natural course.

Moreover, it was a conscious decision to move from an investment proposal to a Union based solution based on the Union’s intent and the assurances given, in the best interests of protecting and sustaining rugby at the venue.

Is this proposal the only option available – can’t Newport RFC ‘go it alone’?

The vote is not to decide between two options. There is a single proposal being tabled that can sustain rugby at Rodney Parade for both professional sides, the Dragons and Newport RFC, with the financial implications of not proceeding with it being made very clear, as explained elsewhere in the answers to the questions listed and in the Document. Quite simply, the debt on the balance sheet is greater than the value of the asset, and nothing will be left with which Newport RFC could ‘go it alone’ . The Benefactor Creditors are prepared to back this option at considerable personal cost on the terms outlined to preserve the future of professional rugby at Rodney Parade and provide a home for Newport RFC.

Is this a Newport RFC solution to a Dragons problem?

The part ownership of the Dragons by the Company and recent business arrangements and decisions mean that the companies have been intrinsically linked over the last decade or so. The interdependencies are clear to see, whether that be debt on the Newport RFC balance sheet or the dependency on the Dragons to generate the income to sustain the venue, and to an extent Newport RFC. Be that as it may, there is a need to act in respect of the ‘here and now’, as the business presents currently, and it is with regard to this that the decisions have been taken.

We have heard a lot about the business collapsing immediately if this does not go ahead. Can this be explained please?

The business traditionally faces cash flow issues at this time of year, and these have been made even more difficult this year by the removal of a bank overdraft facility. Cash flow projections indicate that the Group will run out of money imminently if this deal does not progress and the Directors of each individual company will then need to consider their fiduciary responsibilities as company directors.

Given the inability to pay debts, including staff and playing squad costs, as they fall due, the Dragons will commence insolvency proceedings. The Dragons will fold, WRU funding will cease and associated loans recalled. Newport RFC in turn would also be unable to pay its debts, again including playing staff, as they fall due and would also need to commence insolvency proceedings, at which point the secured loans (against the ground) will be called in. Handelsbanken will then intervene to appoint a receiver, since they have first charge on the ground.

The insolvency process itself would then necessitate the sale of the ground as the means to repay the secured loans, leading to the cessation of rugby at Rodney Parade. Any one of the above could trigger the ‘domino effect’, that whichever way leads to the loss of the ground and nothing left over for Newport RFC.

How does administration/liquidation work?

When a company is unable to pay its debts as they fall due, the company and its directors are required by law to cease to trade. This is normally effected through the appointment of an insolvency practitioner – a “receiver” if appointed by the company’s secured creditors, or an “administrator” if appointed by the directors. In either case, the insolvency practitioner’s role is to act in the best interest of the business creditors and to maximize the amounts recovered from business assets, in order to pay creditors. In the Company’s case, as some of its creditors have secured loans, a receiver would be appointed, whose role would be to pay down those secured creditors, in the order of their priority and then release any residual amounts recovered to be shared amongst the other unsecured creditors. Only after this further stage would any final amounts remaining be available for distribution to shareholders.

The ‘asset’ is valued at £6.8m on the NRFC balance sheet, yet only £3.75m is being paid. How is this explained?

The current “carrying value” of the Ground on the Company’s balance sheet represents an aggregate of costs spent over the lifetime of the business, and hence is not reflective of a market value.

A market value of the Ground may either be on a “going concern/current use” basis and thereby reflect Rodney Parade’s ability to generate profits from its “trade” as a sports venue or as a land area available for redevelopment. Given the history of losses, and need for further investment, then a “going concern/current use” valuation is likely to be negligible and therefore the Ground’s maximum market value will be on a development basis.

In recommending the proposal the directors have made enquiries of other development activity in the locality when reaching their judgement that the proposal represents fair value for the Company, whilst recognizing the preferred outcome is to ensure the continuance of rugby at Rodney Parade.

There is £4.40m of directors’ loans currently on the balance sheet of Newport RFC, secured against the property, with a further £1.23m of unsecured loans from their related companies. Will these loans be ‘called in’ if the proposal is not supported?

The £1.23m will certainly be payable and Tony Brown/Martyn Hazell have also indicated that they will be requiring payment in full if the proposal is not supported, given that it will result in the cessation of rugby at Rodney Parade.

If it is supported, how much will Directors take from the receipts and how much is likely to be received by Newport RFC?

Newport RFC will receive a fixed sum of £600,000 with the balance allocated amongst Tony Brown and Martyn Hazell, ensuring the Company is not at risk if the Directors’ estimates of the debts recoverable are overstated and costs of cessation are greater than expected. Any balance will be payable to Tony and Martyn. Based on the estimates set out above, this would equate to £900,000.

In addition to any capital receipt from the sale of the Ground, what revenue will Newport RFC be able to rely on and what will be their expenses?

The Directors have compiled a financial forecast for the Company, allowing for the impact of the terms of the proposed sale, but reflecting the current levels of income and cost for the ongoing parts of the business. The projected headline values are summarized in the table below.

However, as noted in the answer to question 14 above, the new structure will bring with it the opportunity for the Company, and potentially a new Board of Directors, to review and revise operations both to drive additional revenue and deliver changes in costs, with the buffer of a substantial cash lump sum, whilst this process is undertaken.

The above performance is based on projected income levels as detailed in the table below, together with playing squad and operating costs commensurate with current commitments.

How much money does Newport RFC need to continue to operate each year as a standalone club? Therefore, under the proposal, how long will the residual money retained by the Company last?

If it were to continue to operate with its current cost structure, it would sustain circa £90,000 per annum in trading losses. Therefore, if the Company were to retain £600,000 from the disposal proceeds, then if net operating losses were to remain unchanged, this would provide Newport

RFC with around six to seven years to generate new income streams and adjust its cost base.

Clearly the intention would have to be for Newport RFC to become self-sustaining and to live within its revenue expectations thereby preserving the cash proceeds as far as possible.

Why is there no guarantee of a minimum term for Newport RFC to continue playing at Rodney Parade?

Understandably, this is one of the most contentious issues. In re-iterating, the WRU’s very reason for getting involved, and spending millions of pounds in the process, is to maintain professional rugby in

Gwent at Rodney Parade and in doing so offering assurances to Newport RFC that they may also

continue to play there. However, the Union also feel that they are subject to possible variables in the future that are outside of their control, thus making it impossible to deal in minimum terms.

Their clear intent though, is to make a success of the Dragons, and in that respect the

interdependencies in respect of rugby being played at Rodney Parade continue

Is a 4G pitch likely to be laid, and if so, what access will Newport RFC have to it?

The WRU have stated that their preference is to ensure that the pitch is improved, but that the existing arrangements with Newport County AFC need to be considered first, which will affect the type of pitch improvements available.

However, the WRU believe a 4G pitch would remove any concerns about weather and drainage, whilst providing a facility with fewer use restrictions that is capable of being utilized by the wider community and region as well as the rugby teams currently playing there.

Will the stadium facilities continue to be available to Newport RFC, and if so, how will the revenue be treated?

Subsequent to the sale of the Ground to the WRU, the Union have agreed to make available:

• the use of the pitch and stadium facilities for the home rugby fixtures of Newport RFC, at no cost for the first 10 years other than all costs and expenses incurred in staging such fixtures and the use of the relevant part of the stadium;

• the exclusive use of the Rodney Hall building as its clubhouse for home rugby fixtures of Newport RFC until the end of the 2017/18 season;

• the exclusive use of the current Newport RFC gym facility until the end of the 2017/18 season (other than on non- Newport RFC match and stadium event days);

• use of the ‘cabbage patch’ field until the end of the 2017/18 season, for training by

Newport RFC at no cost save for a service charge to cover the costs and expenses of making the facility available for such use, utilities and maintenance;

• use of the Burnett Suite for all seasons following the end of the 2017/18 season as a clubhouse for home rugby fixtures of Newport RFC, at no cost other than all costs and expenses incurred in staging such use; and

• use of a hospitality box at the Ground for committee, and other similar Company meetings, free of charge for meetings of up to 2 hours.

Will we have a chance to discuss things further ahead of the EGM?

Yes. Once the shareholder information has been made available, we will confirm the date of a further open meeting ahead of the vote to discuss its contents and any questions further.

Why is the Company settling £1.025m of Dragons loans, as well as paying off its supplier creditors?

This is a condition of the WRU’s proposal and is also the desire of Newport RFC’s secured

Benefactor Creditors to ensure an orderly transition to new ownership with no “fallout” either for local suppliers or for the wider game. To ensure this does not prejudice the Company and its other creditors, however, the Benefactor Creditors have agreed that between them they will reduce the book value of their secured loans by an amount equal to the amount paid to such creditors, thereby ensuring that this payment is in effect borne by them.

Why isn’t the WRU contributing 50% towards settling any loans/supplier creditors in line with its shareholding?

The WRU has taken no active role in either the management or financing of the Group, other than through its role as a governing body for the game at all levels and under the agreements to all other regional and premiership clubs. The WRU has not been an active shareholder party to the decisions which have resulted in the Group’s current financial position, but, despite this, is offering to contribute to a possible solution, within the terms of its proposal, in contrast to the wider Newport RFC shareholder base, who are not being asked to contribute to address the group’s financial position.

What are the total value of the loans secured on the businesses? How much are in each of Dragons and the Company?

The total secured or guaranteed loans owed by the Group currently stand at £7.4m of which £1.03m are within Dragons with the balance in Newport RFC.

Why can’t Dragons be left to “fold” and leave Newport RFC with Rodney Parade to carry on playing there, keeping all the income from the venue?

The trading income from Newport RFC and Rodney Parade venue, without the Dragons operations being on site, is neither sufficient to cover the operating costs of the Ground nor to meet Newport

RFC’s own loan commitments. This would also not be accepted as a satisfactory solution to the

Benefactor Creditors whose support would in any event be necessary for this (leaving aside the impracticalities of it).

Why can’t Dragons be left to “fold” and leave the Company to sell Rodney Parade, keeping all the cash generated to fund its future trading?

If the Dragons were to fold, this would have a “domino effect” given that Newport RFC would then have insufficient income to meets its debts as they fell due, resulting in its subsequent and inevitable collapse into insolvency proceedings. A receiver would be appointed by the Company’s secured creditors, who would dispose of the

Ground distributing the proceeds to the creditors, with proceeds likely to be insufficient to pay off those debts in full, leaving neither a ground nor any residual funds for Newport RFC’s use.

Again, leaving aside the impracticalities of what this would actually achieve, it would not be acceptable as a solution to the Benefactor Creditors and as such would not be supported.

Will the amounts owed to Newport RFC by Dragons/RPL of c£1.70m be paid as part of any the proposed deal, so that Newport RFC can use that money?

No, but the Benefactor Creditors have agreed that between them they will reduce the book value of their secured loans by an amount equal to the net amount of any amounts owed by either the

Dragons and RPL to the Company thereby ensuring that this reduction in value is borne by them, and not the Company.

Hence, through the Benefactor Creditors agreeing to reduce their loans by an equivalent amount, before capitalizing any balance as shares, to ensure that the Company is not subject to any loss from this amount, the dilution effect of the loan capitalization on other shareholders is also reduced.

How have the benefactor loans ended up in Newport RFC and why is Newport RFC paying off its loans?

As discussed above, the Group Companies (which includes Newport RFC for this purpose) have effectively been managed as a single business, with interlinked income, cost and funding streams.

Currently, the Dragons’ rugby operations generate income in excess of the direct rugby and related match-day costs, but as noted earlier in the answer to question 1, the non-rugby venue activity is insufficient to cover the Ground’s operating and maintenance costs, resulting in an overall loss. This “Group” loss has historically been attributed to the Dragons, as the lead “user” of the facility, although, without the positive contribution of the Dragons rugby activity, those losses would still have been incurred, and would in all likelihood be larger given the net income lost to the Group.

The Group’s overall funding deficit, which is driven largely by the shortfall in income compared to cost of the non-rugby venue operations, has been met in recent years by loans, primarily from the

Benefactor Creditors, but also through loans from both the WRU and Handelsbanken. Individual loans have been made to different corporate entities within the Group to reflect the security requirements of each loan provider, but the funds introduced have then been used to support the activities of the Group as whole, irrespective of this.

In repaying all the Group’s loan creditors either in full, or in the Benefactor Creditors case, in only small part, the Directors are recognising the above arrangements.