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ICL PLC
Minutes of the Board of Directors
Held at 2pm on Thursday 26™ November 1998
26 Finsbury Square, London, EC2A 1DS
Present Mr M Naruto (Chairman)
Sir Peter Bonfield (Deputy Chairman)
Mr T K Todd (Chief Executive)
Mr T Sekizawa
Vicomte Davignon
Mr S Gillibrand
Mr H Kurokawa
Mr H Sakai
In attendance Mr S Riesenfeld
Mr RF Scott (Secretary)
Mr M Aida
Mr T Yurino
Mr Y Katsuya
Mr R Strich (Item 37)
Sir Michael Butler (Item 38)
Mr R Christou (Item 38)
Mr J Bennett (Item 38)
Apologies for absence were received from Mr J J Ollila.
The meeting followed a presentation from Mr K Kontinen of MeritaNordbanken, an ICL
customer and discussions over lunch.
Sir Peter assisted Mr Naruto with the meeting.
On behalf of the Board, Mr Naruto welcomed Mr Sekizawa to his first meeting.
Action by: 98/34 Committee Membership
Mr Naruto asked the Board to appoint Mr Takaya to be a
member of the Directors’ Remuneration Committee in place
of Mr Sekizawa. This was approved.
98/35 Minutes of previous meeting
The Minutes of the meeting held on 23% July 1998 were
approved as a correct record and signed by Sir Peter.
/GRO!
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98/36 Chief Executive’s Report — November 1998 PLC/98/21
Financial Performance PLC/98/22
1999 Budget PLC/98/24
ICL’s Strategic Plan 1999 to 2003 PLC/98/29
ICL’s Markets PLC/98/23
Mr Todd and Mr Riesenfeld explained certain of the matters
covered in the papers and there were discussions.
Points noted:
a) Expanding on the Chief Executive’s report, Mr Todd
referred to the market circumstances, and ICL’s
competitors. He referred to significant contracts ICL had
won or was bidding for including the DTI ELGAR
contract, the DSS Accord bid and the UK Magistrates
Courts. ICL was expected to bid for a significant contract
with the UK Customs & Excise, in competition with BT
and Sir Peter’s interest was noted. On the BBC, Mr Todd
said the Corporation seemed to have difficulty in deciding
where to draw the line between public service
broadcasting and its internet commercial activities.
ICL was not prepared to go beyond the end of 1998 with
the existing contract even if this meant stopping work on
BBC Online.
b) Mr Riesenfeld referred to the performance of the ICL
businesses where eight of the twelve were improving on
last year. At High Performance Systems, the Trimetra
product had been a big success. The difficulties with the
services portfolio of businesses including the proposals to
divest ECRC were noted.
c) A distinction between profits on continuing, and
Mr Riesenfeld discontinued, operations would be given in the Board
papers from now on, as this showed how market and
analysts would view ICL. Mr Naruto said the Board
Mr Todd should consider which businesses should fall in which
area. The 1998 forecast operating profit before
rationalisation expenditure was £55.6m and Mr Todd
said, although he was not giving a firm commitment, that
ICL was trying strenuously to raise this to around £70m at
least}
I GRO:
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d) The Board noted the proposed 1999/00 budget showing
proposed revenue growth over 1998/99 of 14.4%,
operating profit of £115m (which was 3.7% of revenue)
and profit before tax of £95m. Mr Todd said ICL
intended to achieve 6% on revenue in the year 2000 and
following flotation should rise to 7%, 8% then 9%.
The profile of the Company’s borrowings were noted,
with the major projects, particularly Pathway, consuming
a major proportion.
e) ICL’s strategic plan 1999/2003 was introduced by
Mr Todd, including the descriptions of ICL’s core
offerings, the business model and non-core activities
identified for managed withdrawal. Both the budget and
the strategic plan would be discussed and agreed with
Fujitsu as major shareholder and the Board endorsed them
Mr Todd on this basis.
f) It was agreed the next Board meeting would consider the
Mr Todd flotation strategy in some detail. It was important to
establish whether ICL’s projected performance would
enable the float, and whether the company would be a
tisk stock, a growth stock or high dividend. Also it was
important now to establish the shareholder’s expectations
for ICL.
Further discussion took place on ICL’s position in the
marketplace. For example the development of
“Euroland” might have significant effects on markets
(possibly leading to increased worldwide demand for very
large European stocks and reduced demands for medium
size ones, which might include ICL). Therefore it would
be important for the Board to consider whether a single
company flotation was the answer or whether ICL’s and
its shareholder’s goals might be achieved by a different
strategy, for example, merger.
Mr Todd added he had recently been unhappy with the
performance of Schroders over the Pathway contract
where they perceived a conflict of interest (and how they
handled it), and he was developing a successful working
relationship with Hambros. He said he may in future be
recommending to the Board that a US financial adviser be
appointed and that the role and choice of the UK financial
adviser be reviewed...
'GROI
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98/37 Project Q
Mr Strich presented on ICL’s proposals to seize the
opportunity to become the trusted personal information broker
for the individual by collecting available personal information
about him, providing the information collected in return for
the right to be his collective bargaining agent for personal
information, eliminating other personal information collection
and distribution sources to increase the value of information,
and rewarding the individual for allowing this. It was planned
that the project would establish a global brand that promised
inclusive collective power based on control over collection,
storage and distribution of personal information.
Mr Todd recommended the proposal and the Board discussed
it. It was noted that there were similarities between Q and
Project iMi of Fujitsu and Mr Strich would be talking to
Fujitsu.
It was estimated that Q would require $110m of investment
and the options were that Fujitsu/ICL embark on this by itself,
or that the project was for three to five selected investment
partners, or for a larger number of eight to ten investment
partners. The recommended proposal was that ICL would be
one of three to five partners in the project, with ultimately a
$30m investment and around 23% ownership. $1m had been
committed by ICL to-date and $10m was requested for
commitment in the quarter beginning 1 January 1999.
Mr Todd recommended that Mr Naruto, Mr Sekizawa and
himself be delegated power to agree this first $11m of
funding.
Sir Peter commented that Q was an interesting concept.
As with such an idea, success would in a significant part
depend on the competition and the market which developed.
It would be important to structure Q with minimal initial cost
to ICL but maximum return on e.g. sale, float, etc.
Mr Gillibrand said Q would require a fast moving pro-active
entrepreneurial approach and he wondered if a sizeable
organisation such as ICL could move fast enough. Also the
legal framework affecting Q (e.g. as regards information over
the internet, individual privacy etc) might change, affecting
success. However Q could be an exciting prospect as e.g. part
of ICL’s portfolio on listing.
The delegation to Mr Naruto, Mr Sekizawa and Mr Todd was
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ICL Pathway PLC/98/25
Mr Bennett then Mr Christou presented and Sir Michael
Butler reported. There was then a lengthy discussion.
Points noted were:
a) Mr Bennett reported encouraging operational progress
with the live service in 204 Post Offices. Those who saw
demonstrations of the system continued to be impressed.
b) Mr Christou and Sir Michael reported on the without
prejudice negotiations which had taken place with
Government to resolve the project dispute. The contents
of the without prejudice negotiations are briefly
summarised in the attached report marked (A).
This report is to be submitted to Masons for the purpose
of obtaining urgent legal advice as to the merits/risks of
proceeding with litigation against the background of the
commercial negotiations set out in the report.
Year 2000 — Update PLC/98/26
The Board noted the paper and sent their thanks to Ms Beaton
and Mr Rowley who, because of the time necessarily taken
over the discussion on Pathway, had not been able to present.
Acquisitions and Divestments
Mr Todd referred to proposals to divest ECRC, an internet
related business in Germany, and the health business in
Holland.
Pension Policy Committee Minutes
& Audit Committee Minutes
These were noted.
Documents signed and sealed
The Board agreed:
The signing of the documents dated 1* July to 11" November
inclusive set out in the Register of Documents signed Under
Hand.
The sealing of the documents numbered 76123 to 76128,
between 1 July to 11" Nover lusive set out in the
Register of Documents Sealed.
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Half Yearly Preference Share Dividend
RESOLVED
a) THAT a net dividend of £3,879,671.70 exclusive of
associated tax credit in respect of the period ending
1 January 1999 on the Company’s 83,655,600 9.15% net
Cumulative Convertible Redeemable Preference shares
be declared on 2 January 1999 to the holders of the said
shares registered at the close of business on
19 December 1998. Such dividend will be paid at a
future date that Mr Todd and Mr Yurino shall agree.
b) THAT a net dividend of £3,879,671.70 exclusive of
associated tax credit in respect of the period ending
1 January 1999 on the Company’s 83,655,600 9.15% net
Cumulative holders of the said shares registered at the
close of business on 19 December 1998. Such dividend
will be paid at a future date that Mr Todd and Mr Yurino
shall agree.
Date of next meeting
After discussion it was agreed that the next meeting of the
Board should be 4" February, but it was likely to be a
morning meeting (probably with the Directors’ Remuneration
Committee taking place after lunch). Due to the Audit
schedule, there was unlikely to be a meeting of the Audit
Committee on 4 February and a date was being considered
between 21 and 23 or 26 April instead.
The meeting on 13 May was confirmed and July and
November dates of Board meetings were still under
discussion. (Subsequently set as 21 July and 25 November.)
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Made in contemplation of litigation
(contains without prejudice material)
Report (A) — ICL Pathway
Introduction
This is an up to-date report on the without prejudice negotiations between ICL
Pathway and the Government in order to resolve the project dispute. This report
has been created for the purpose of seeking Mason’s views on the question of
proceeding to litigation rather than continue negotiations.
Without Prejudice Negotiations
a)
b)
c)
The HM Treasury Independent Panel findings, and the Independent Advisor’s
recommendations which, if accepted, would have led to ICL incurring a loss
of £225m (net present value) even with an extended contract, and ICL signing
away its legal rights. Consequently the Advisor’s proposals had been
rejected. A strongly worded letter had been received from Government which
did however say that if new arrangements could be proposed with Post Office
Counters Ltd (POCL) alone, this could be a way forward. Therefore new
proposals, including plans for substantial (but hard to accurately quantify)
future business with POCL, a price increase, revised acceptance procedures
and funding changes, the effect of which proposals was a lessening loss for
ICL had been put forward on 9"November only to be rejected by
Government. The new opportunities for future business would have come
from Government plans for Better Government (improved contact with the
citizen etc) together with other opportunities POCL and Pathway might
develop.
Government’s rejection indicated a basis for further negotiations up to their
imposed closing date of 9" December. They also wished assurances that
Fujitsu would stand behind any agreed revised contract.
Sir Michael believes that the DSS are being difficult over this matter and
believes that they misled ICL into believing their CAPS system would
integrate successfully ou the apprupriale limescales with the Pathway project
to enable the project to proceed without the delays which had now occurred.
It is considered that the Government/Independent Advisor proposals are
unacceptable. They incorporated a net present value loss of £225m which
was equivalent to over £500m undiscounted. Mr Naruto believes that it is
ridiculous to expect the commercial concern to borrow up to £600m to fund a
contract with a loss of £500m. ICL/Pathway would have to negotiate against
this unacceptable situation and if possible avoiding litigation, to achieve a
much better outcome although possibly not by 9" December, a deadline
which, it was felt need not apply to us.
‘GRO
d)
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Made in contemplation of litigation
(contains without prejudice material)
It is important to reach Ministers to obtain an overarching Government view
in the light of all the factors including political matters such as the future of
the Post Office. However Ministers, who were cordial and businesslike on
other matters, were avoiding ICL over Pathway, possibly as a negotiating
tactic.
Mr Naruto (when advised by Mr Todd) is to approach the British Ambassador
in Tokyo to point out the unfairness of the treatment of the Fujitsw/ICL group
on this matter. Sir Michael is to make the representations to Government.
There is the need to minimise the loss to the Fujitsu/ICL group including the
effect on other ICL Government business. Here, others in ICL could
contribute with their views on the effects they would see from, for example,
termination. The Post Office’s activities are a concern— because the Post
Office performs a public service function with effectively some services free
to the community, does this mean that the Post Office expects its suppliers to
provide their services uneconomically? There are doubts over the amount of
work ICL could obtain from POCL in future and what this would represent.
Any contractual changes proposed must be carefully weighed.
It would be important to emphasise to Government the total resolve of ICL’s
Board, shareholder and executives to achieve a fair commercial decision but if
not the determination to litigate. Reference to the Board should be made in
future to strengthen our representations on this resolve to the Government,
and on the course ICL Pathway would pursue after 9 December if
negotiations failed by then.
The significance of this issue to ICL and its flotation plans should not be
understated and the financial/accounts consequences would have to be
considered carefully balancing for example the desirability of taking the
losses/costs as soon as possible (to clear the decks for flotation) against the
effects on profits.
In order to reach a solution Mr Naruto, Mr Sekizawa and Mr Todd,
who would supervise Mr Christou, Sir Michael and Mr Bennett are delegated
to deal with the matter.
The Pathway project is ICL’s largest and most significant contract and
stopping the project now would be regarded as an admission of failure.
Although the Board does not wish to be involved in litigation if at all possible
there is a point beyond which the Board will not go. It is believed that ICL
has good grounds for litigation with a view to obtaining significant
compensation and Masons’ views are sought in this matter.
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