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PATHWAY GROUP LIMITED
MEETING OF THE BOARD OF DIRECTORS
TO BE HELD ON FRIDAY 15TH MARCH 1996
‘AT
ICL HOUSE, 1 HIGH STREET, PUTNEY, LONDON, SW15 1SW
AT 12.30pm - 2.00pm
an I
1. Minutes of Meeting 21 February 1996 =
(Attached)
2 Matters Arising
3. Managing Director's Report J H Bennett
(Attached)
4. Financial Director’s Report Oral: A E Oppenheim
5. ITT Update . Oral: J H Bennett
6. Sales Update Oral: J A Jones
7. Technical Audit Oral: T P Austin
8. Programme Plan Oral: T P Austin
96 Any Other Business
10. Date of Next Meeting:
To agree dates for the next meetings in 1996.
Note: The Board Meeting will be followed by a meeting of
representatives of ICL, De La Rue and Girobank from
2.00pm - 4.30pm. This meeting will cover the Business
Case and the Tender (both items led. by Mr Oppenheim).
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PATHWAY GROUP LIMITED
MINUTES OF A MEETING OF THE BOARD OF DIRECTORS
HELD AT
ICL FELTHAM, MIDDLESEX
WEDNESDAY 21ST% FEBRUARY 1996 a
Present: Sir Michael Butler (In the Chair from Item 14)
Mr R Banks
Mr J H Bennett
Mr A Oppenheim
Mr T K Todd : (In the Chair until Item 13)
Mr J White
In attendance: Mr R F Scott (Secretary)
Apologies for absence received from Mr T Reynolds
96/9. MINUTES OF PREVIOUS MEETING
The Minutes of the meeting held on 17 January 1996
were. approved for signature as a correct record.
This was after a minor change: "POCL/BA" in the
first line of the second paragraph of Minute 96/4
should be changed to "ORACLE”.
96/10 MATTERS ARISING
Mr Todd referred to his meeting with Mr Dykes of
the Post Office, which was principally about ICL
matters but in which Mr Dykes expressed concern
over the financial structure and the reliance on
Escher. Mr Todd had referred to discussions
concerning an
European Development Centre in the UK/Europe and
this had reassured Mr Dykes. Similarly, Mr Banks
had mét Mr Dykes who had referred to the Post
Office’s concerns about timescales and the Pathway
financial structure - which was seen as an ‘A’
risk.
96/11 MANAGING DIRECTOR’S REPORT
The report was noted. Mr Bennett said it seemed
certain the ITT would be issued by 29 February
although the preparatory negotiations would be by
no means completed. On the competitive side, IBM
were generally perceived in the strongest position
at present. They had been more forthcoming to
POCL/BA on guarantees than the other bidders and
had no perceived "supply side“ issues such as
Escher. Cardlink were suffering poor publicity
over NIRS II.
minutes/Grp.210296 Page 1
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96/12 FINANCIAL DIRECTOR'S REPORT
The report was noted. Mr Oppenheim reported that
the contract. negotiating teams had made significant
progress, although there was a long way to go to
finalise many of the schedules which would come out
with the ITT. The principal concerns. were over
guarantees, and the risks including fraud
liability.
96/13 PROGRAMME STATUS REVIEW
Mr Todd said he. felt that Pathway was proposing the
solution that the customers wanted. A way had to
be found between the subcontract issues e.g. over
Escher and the customer’s demands, for example on
guarantees and the supplier’s acceptance of risk.
When sensible relationships were worked out with
sub. contractors and sensible terms and conditions
achieved, it would be necessary to work through the
implications of these back to the Pathway
structure.
Mr Bennett said that on the programme status
Pathway felt there was a mismatch on the view of
the achievable timescale (of as much as six months)
between Pathway and the customer.
(Sir Michael Butler joined the meeting.)
“96/14 RISK REGISTER
It was noted Pathway were perceived as having 2 ‘A’
risks - on guarantees and fraud liability and. 8
'Bl' risks. Satisfactory progress would be
necessary by the contract negotiating team by the
end of the next weekend, on the major risks i.e.
prior to the issue of the ITT.
96/15 DATR OF NEXT MEETING
The next meeting would be fixed following
Shareholder discussion on the future.
minutes/Grp.210296 Page 2
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Managing Director’s Report
Board Meeting - 15th March, 1996
1. INTRODUCTION
All our attention is currently going on the ITT and our Tender
Reply. The ITT document itself is large, getting on for 2,000
pages and shows all the signs of having been put together ina
hurry. There are significant changes since we last saw it
covering:
(a) ‘the contracting authorities obligations.
(b) the status of the service providers solutions with regard to
the requirements, and
(c) ‘new terms for transfer of fraud liability.
The reply date is the 21st March, one day less than three weeks.
2. TENDER RESPONSE
A full review of the ITT has been carried out, checking for new
areas of cost or risk. This has triggered off a substantial
amount of clarification requests on the programme, together with
proposals for them to reinstate more of their own obligations. I
have also told Andrew Stott that there are important issues in the
ITT which Pathway cannot meet or cannot accept. The lack of an
achieveable timetable for delivery is. the most significant. He
knows that we therefore cannot submit a fully compliant tender but
that we do intend to submit a strong variant bid which is
consistent with all the offers and proposals we have made to date.
This is a high risk strategy since legally they could refuse to
consider a variant bid unless there is a baseline compliant bid on
the table. We are taking more advice on this and the BA/POCL
Programme have taken note of our position. I expect more
development on this front before submission date arrives.
3. BUSINESS CASE
The result of all the changes discovered through the ITT scrutiny
has allowed us to update the business model and also carry out
sensitivity analyses. Three key areas are a better judgement on
fraud levels, how to build the performance penalties into the case
and a clearer judgement on steady state period for inflation
estimates. All this will allow the scorecard and the service
point calculations to be established which in turn drive the IRR
and return on equity calculations for final sign off.
COMMERCIAL-—IN-CONFIDENCE
jhb/Mar .96/161 Page 1 of 3
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On’ an important aréa for resolution in the business case is the
final constructs of the sub-contracts and these are likely to stay
on the critical path for reasons listed below.
4. PATHWAY SUB-CONTRACTS
Considerable work is going on to tie all our major sub-contracts
down to Heads of Agreement or Provisional Contracts. This is
taking an enormous amount of effort. Those worthy of commentary
are as follows:
(a) Ora¢lé quite late on have found the concept of PFI. -
increasingly difficult and impossible to get through their US
colleagues. They have therefore shifted their approach from
a risk taking attitude to one of a time and materials
contract. This is far from what was required.
(b) Girobank have just declared that they are now unable to take
the sub-contract for computer operations which was to manage
the PMS and CMS systems on behalf of Pathway. This is a very
late decision and has caused considerable effort with CFM to
see if a substitute contract can be constructed in time.
This work continues are present.
(c) On Escher the néw Teaming Agreement has been drafted and
considerable work and time spent in negotiating both with
Escher and with An Post. It is in a final form at the moment
but has not yet been signed. It would cover the
establishment of the EDSC in Feltham and make provision for
access to source code.
5. COMPETITION
The feedback from discussions around the. edges of the IBM camp
suggest that they have also had severe concerns about the ITT and
are likely. to propose a strong variant bid with a delivery
timetable ‘perhaps even more extended than ours. It is not clear
whether they will also input a compliant bid to be legally safe.
The position with Cardlink is that they are known to have a lot
more risks left than either IBM or ourselves but also they have
the track. record of committing to unachievable timescales and then
seeing how to unpick them later. They could on the face of it be
the only bidder to offer a fully compliant bid.
6. PARTNERSHIP DISCUSSIONS
A final meeting with Bob People and Paul Rich took place which was
more like an interview than a discussion but was an attempt to
discover whether there was a cultural fit between Post Office
Counters and the service providers. I told them that there was a
major gulf between the demands of this as a PFI contract and their
wish to work in partnership with the service provider.
COMMERCTIAL—IN-CONF IDENCE
jhb/Mar .96/161 Page 2 of 3
ii.
iii.
iv.
SUMMARY OF
Submission
Resolution
Completion
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KEY POINTS
of a compliant and/or variant bid.
of outstanding sub-contracts.
of the ICL/Escher/An Post Teaming Agreements.
Finalisation of sharéholder agreements for the restructuring
of Pathway.
John Bennett
jhb/Mar.96/161
COMMERCIAL-—IN-CONFIDENCE
Page 3 of 3
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Ne
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Confidential wie et,
& cetera. GRWtrew,
(ann kh C2, OM Cut),
PATHWAY eye Maka oy ae bene erbren Goiel
TENDER 1 - 13/3/96 . ter Qing Yt Lee,
vouumerrics summary , & Lett flow fevat,
. hs. ; wely re
MILLIONS 1996 1997 1998 1999 2000 2001 2002 2003 2004 TOTAL ef JUNEI
INFRASTRUCTURE Given tent
COUNTER TERMINALS 0 19743, (34877 38868 38660 38454 38250 38049 37849 . 37849
CORRESPONDENCE SERVERS 4 2 20 20 20 20 20 20 20 20
COUNTER APPLICATIONS 4 s 6 7 9 9 9 L bd 9
POCL CLIENTS 1 3. WU zu 61 81 81 Li aL 81
oO Peresces i
ErrttrdenI Pebdek Jleceinns i ober feels a Roe Udo vickI Send cede
TRANSACTIONS BY GENERIC TYPE. 42-45 2av9 poe f Lo bia eel aek.
Pasa Cerny, — pm 0728 4689
PAS C 0 650 752 welt, 37 . 73x
‘SNS ° 167 291 106 0 0 0 0 ° 562
éus neligeireyel 5. halk, Civic. Eee FELCY ,
ENDORSE TOKEN Qo 0 1 2 10 4 2: 36 60 45
mpay » Ca, Arts of 9 35 168 408 552 532 519 518 337 3268
OUTPAY, Jue Voted, takd 7 Pa) 69 85 2 63 37 33 36
ppc Few! Mate 0 CL 0 dR jg vom 99 ee 143 153 158 164 i69 905
SIGNED RECEIPT Wie PAE “agele ji 26 «= «40046358453 449 as 2885
TOKEN MGT. 0 0 0 12. 56 63 ma 86 110 398
MAILS oO C) 50 302 38 324 331 37 344 > 2007
INVEST 0 oO 0 4 9 10 iW u 12 58
EPOS (= Total) 0 388 1581 2304 2354 2301 2268 2254 2262 15712
CARDS
‘NUMBER OF CARD HOLDERS. 00 43 18:3 221 219 27 21.6 24 23
CARD ISSUES 0.0 48 17.4 10,7 109 12.0 12.8 12.7 12.6 938
NUMBER OF TOKENS, 0.0 00 Os 18 22 22 22 22 22 13.6
TOTALCARDSISSUED 0.0 48 182 124 131 142 15.0 149 148 107.3
Ueotfelacc 5 Atlin.
HELP DESK CALLS
CMS 00 o4 24 37 37 33 29 . 28 28
PMS from POCL counter clerks 00 Od 23 23 2 21 21 21 20 16
PMS from BA staff 0.0 0.0 03 05 0.2 02 02 02 0.2 2
TMS 0.0 00 00 0.0 0.0 0.0 0.0 00 0.0 0
ROLL-OUT 0.0 0.06 0.05 0.0. 0.0 00 0.0 0.0 i) oO
SYSTEM SERVICE 0.0 08 14 ia 12 12 12 13 12 10
SERVICE MANAGEMENT 0.0 00 00 00 0.0 0.0 0.0 a 0.0 0
TOTAL 00 #17 66 79 73 68 64 63 49.4
len Wor clint he pie hee
Cette ey, Fon phe ars poe 2,
KEY PERCENTAGES WL bat fry Boy leresel ete, frre (hye
ACT % of total BA payment 18% 22% 24% 25% 26% 27% 28% 29% 30%
BA % of Total business 115% 64% 71% 68% 67% I 67% 67% 66% 65%
"Day One" % of Total 100% 100% 93% 81% 79% 79% 78% 78% 76%
adr ew bya eae Crmten, ey pl Pee neg ne 2
7) . oan, (Pu bet dehd// Sekar bg [tote Arn ob
TO 47:47 eth, — brane crete Pages / St yar Br 414103/96
Sethe ty Gel Plt, &, OG Dat Rosni Du. Or Feet FEL
; atte x i Fon 4 F Shats
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Confidential
SERVICE WORK BREAKDOWN STRUCTURE
YEAR 2000 [54 4, [led Sete.
BA 2000 POCL AND OTHER CLIENTS 2000 [DayOn New
Total charges 16 Total charges 92 59 34
Cost savings - estimated 58 Cost savings - estimated 67
I
"PAS" 2000 Us Coren cated VAP/OSS 2000
porno Oe. AB epee eo, “po lua
Cum Capital cost 8 Wetimer te cel ; Cum Capital cost 1
operating cost 19 I STO ebtlew de. Operating cost 0
Fraud 12 Lele Depreciation 0
Depreciation PI eebent ob 4. St ; Interest 0
Interest 0 [TMs 2000 Alloen. from MIS 0
Total cost 32 Total cost 0
{Cum Capital cost 2
Revenue 47 . Revenue 0
Operating cost 1
I Depreciation 0
[CMS incl. card purchase 2000 Interest 0
CAR gm Sing Lem Total cost 2 MIS ~
cum Capital cost 4 en ter
Cum Capital cost 3
lOperating cost 23 T
Depreciation 1 Counter - Day One 2000 Operating cost Zi
Interest 0 Depreciation 0
Total cost 24 Cum Capital cost 136 interest 0
Less allocn. to VAP/OSS 0
Revenue 33 Operating cost 28 INet cost 2
Depreciation 23
Interest 6
Total cost 57
Revenue 59
Control ‘Sum Adis Totals
[Counter - expanded 2000
Capital les 2 162
Cum Capital cost 11
JOperating 84 0 fy
Operating cost 7 [Depn. 7 ' 2
Depreciation 2 [Interest 7 ° 8
Interest 1 ICost ug 2 121
Total cost 10 [Revenue 169 “1 168
Revenue 38
PBT 50 2 47
PATHWAY NON-ATTRIBUTED OVERHEADS
Pathwa Insur’ce Security Bank'g Tel.exc PSMC Support Other Total cost
6 3 1 0 0 0 0 6 4
17:47 Page 5 14/03/96
TENDER I - 13/3/96
PDS M
BASE SIS
Counter equipment
Counter software licences
Hangering
Delivery & Installation
Training ;
Post Office Site Prepn. + LAN's
ISDN connections
Correspondence servers/ISDN adaptors
Data centre equipment
Central Software development
Helpdesks - hardware
ontingency @ 0%
Recoveries from subs @ 30%
Sub-total
UPGRADES FOR OTHER POCL CLIENTS
Counter equipment
Counter software licences
Counter application devt.
Contingency @
g
Sub-total
TOTAL
JUNE
CUM Total
JUNE
Memo: financing,
Leased
Owned
Memo: sources of supply
IcL
Girobank
De La Rue
Other
17:47
Class
Ke Renew ewe
wun e
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99.4, 130.7
Korb ow teh
74
5.0
812
5.0
137.4
5.0
137.4
214
137.47
222
0.0
10.4
Page 18
137.4
23.4
0.0
137.4
23.9
0:0
0.0
aprk - ot on
137.4
24.0
0.0
0.0
Confidential
INVESTMENT COSTS
1996 1997 1998 1999 2000 2001 2002 2003 2004
00 449 © 34.8 9.1 0.0 0.0 00 «0.0 0.0
0.0 27 19 15 0.0. Li 0.0 0.0 0.0
00 21 “7 0.5 0.0 0.0 00 = 0.0 0.0
0009 1.0 03 0.0 0.0 00 = 0.0 0.0
0.0 © 10.8 35 10 0.0 0.0 00 © 0.0 00
00 © 56 5.0 14 0.0 0.0 00 = (0.0 0.0
00 «25 37 1d 0.0 0.0 00 = 0.0 0.0
02 «05 04 0.0 0.0 0.0 00 860.0 00
67 Ls 0.0 0.0 0.0 0.0 00 0.0 00
300024 0.2 02 0.0 0.0 00 © 00 0.0
0.5 0.0 00 0.0 0.0 0.0 0.0 0.0 0.0
00 = (0.0 0.0 0.0 0.0 0.0 00 = 0.0 0.0
00-06 0.0 0.0 0.0 0.0 00° 00 00
W4 73.3522 15.0 0.0 12 00 = 0.0 0.0
00 04 40 0.0 0.0 0.0 0.0 0.0 0.0
00 «04 07 09 08 0.0 05 0.0 00
2.0 10°05 0.5 0.0 0.0 0.0 0.0 0.0
00 00 00 0.0 0.0 00 0.0 0.0 0.0
2.0 18 $2 14 0.8 00 05 0.0 00
240 75.10 (574 16.4 09 12 0s 00 0.0
117.0 313 27 06 81 218 12 0.0
12.4 876 1449 161.3 162.1 163.4 163.9 163.9
13340 13401424, 1639 ILD
137.4
24.0
00
0.0
14/03/96
TENDER I - 13/3/96
PDS M
BASE SIS/BPS
‘System service - counter SIS
System service Help desk
‘Software Maintenance - counter
PMS/CMS/TMSI/MIS FM incl. mtce,
ISDN rental charges/ mgt. charge
‘Comms useage - BPS only
Card, PUN and token production
Card and PUN distribution
POCL Card issue Excluded
CMS Help desk
PMS Help desk
MS Help desk
Roll-out Help desk
Paper processing
Storage and retrieval
On-going Training Excluded
Banking services
Public awareness
Insurance Assumption
Security
POCL/BA fraud investigation Bn
POCL fraud inéentive scheme FI ~~~
POCL services - other Excluded
Technical Support
EDSC
Pathway costs incl. Bid cdsts.from 1 March
Contingency: 0%
Sub-total
"HER POCL CLIENTS
Counter equipment mtce.
Counter s/w mice.
Comms useage
Reporting
Marketing/ Research
Contingency @ 10%
Sub-total
Performance penalties
Recoveries from subs @ 30%
TOTAL COST
JUNE
IcL
Girobank
De La Rue
Other
17:47
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a
LM iw 2 Mepree ovelead
Confidential "
PATHWAY ~~
OPERATING COST ANALYSIS
1995 1996 1997 1998 1999 2000 2001 «2002 20032004
0.0 17 7.6 118 ug 12.8 13.4 B8 14.2
0.0 6.7 10.9 98 8.7 94 10.1 10.8 11.2
0.0
0s
0.2
0.0
0.0
0.0
0.0
0.0
0.0
0.0
0.0
0.0
0.0
00
0.3
03
A.
4 Os ! !
oo 6000 iii
0.4 td 04 0:5 0:5 0:5 0.6 0.6. 0.6
0.5 13 1:3 i is 1.6 7 us 19
69 58 5.6 54 $7 6.0 64 67 cal
0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0
9.0 34.5 65.9 m9 78.9 81.2 83.3 85.8 88.1
00 4600 «0306 6K
0.0 0.0 0.0 0.1 oO! 01 Ol 02 0.2
0.0 03 16 34 3.6 35 34 33 33
0.0 0.0 Od 03 0.6 ~ 08 08 08 08
lo 12 14 16 47 12 18 19 20
Ol 0.2 0.3 0.6 0.7 0.7 07 0.7 0.7
Lt LF 38 6:5 73 15 1S 76 77
00-08-26 24-2 BBB 1B
10.1 35.4 67.2 82.0 84.1 86.9 89.1 91.6 94.0
28.9 S21 73.1 88.0 95.3 98.0 100.0 O21
13 14.5 24.9 28.5 27.7 29.4 31.0 32.3 333
03 38 14.6 19.8 20:5 20.0 19.5 20.1 20.7
0.0 18 6.7 88 9.0 9.9 10.9 2 Ws
8.5 15.4 21.0 249 26.9 27.6 27.7 28.1 28.5
Page 26 14/03/96
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Confidential
PATHWAY
TENDER I - 13/3/96
PDS M PROFIT AND-LOSS
1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004
REVENUE
Benefits Agency 0.0 0.0 00 42 437 706 762 749 749 742 73.0
POCL 00 0.0 00 125 583 853 918 920 918 927 95.0
TOTAL REVENUE 0.0 0.0 0.0 «16.7 102.0 155.9 168.0 166.9 166.7 166.9 168.0
JUNE 8 «79S 120.2 139.1 150.6 = 152.7 1S4AASS.7
DIRECT COSTS
Depreciation of Investment 00 = 0.0 07 60 158 242 288 318 340 179 29
Operating costs 00 860.0 18 2050 52.9 69.1 70.5728 744 76.4 78.1
Fraud 00 «Ol 34 10200 (124128 13.3 BB 143
TOTAL 00 «600.25 26.6 103.4 117) HI7.S-—124.6 108.0 98.3
TOTAL GROSS MARGIN 0.0. 0.0 25 9.9 29.9 52.5 56.2 49.4 45.1 58.9 TI
SG&A 00 8600 8349 13600 «14100 147153159
OPERATING PROFIT 0.0 0.0 =108 — -24.8 427 353-304 43.6 56.8
Interest & fees charge/(credit) 00 00 02 39 104 110
PROFIT BEFORE TAX 00 0.0 106 = -28.7 52 286
JUNE 50-16 102, 19. 22B 28.0373 AT
Tax charge 0.0 0.0 3:8 9.6 17 8.7 11.7 10.4 99 149 20.1
PROFIT AFTER TAX 0.0 00 68 191 3500 «199-2330 198 179 9.239.
ference share dividend 0.0 00 = 0.0 0.0 0.0 1014.7 0.0 0.0 0.0
wurdinary share dividend 0.0 00 ©6000 0.0 00 = 19.9 S10 179° (29.2 39.1
Retained Earnings for period 00 00 68 -191 35 0.0 oo) Ot
RATIOS:
Revenue % from BA 15% 25% 43% 45% 45% 45% 45% = 4% ©4396)
Revenue % from Other Clients 28% 75% S7% 55% 55% 55% 55% 56% 57%)
Revenue growth % 0% 48976% 510% 53% 8% -1% 0% 0% iv]
Gross Margin, % ~59% 29% += 34% «= 33% ©=— 30% © 27% «= 35% = 43%
SG&A-% to Revenue. 89% 14% 8% 8% 8% 9% 9% 9%
PBT % “171% __ 8% ___18% 21% ——*18% 17% 26% 35%
Retum on Capital Employed, % “31% -38% 5% 26% «42% ~—~BO% «139% _—-221%__294%I
47:47 Page 6 . 14/03/96