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84/03/1993 17:26 COMMERICAL AND LEGAL PAGE OL I
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COMMERICAL AND LEGAL PaGe 82
84/83/1999 Li2a
-4™ March 1999
Mr. Steve Robson,
Second Permancut Secretary
HM Treasury,
Parliament Street,
London.
swl
WITHOUT PREJUDICE
COMMERCIAL IN CONFIDENCE
Dear Steve, 1
[feit we had a useful and constrictive meeting on Friday last, and T was delighted ar your news that the
‘Prime Minister has given the go-abead to consider the adoption of either Option A or B. As I wold you F
‘on the telephone last night, I am very much looking forward to the mesting on Tuesday, under your
‘chairmanship, which I regard as the beginning of a constructive period of engagement that will at tast
bnug matters to a satisfactory conclusion for a!! concerned.
However, a8 I also told you, the Jack of any tangible, formal commitment is causing ICL, not to
mention Keith and npyself iv particular, considerable difficulty on a number of fronts — with our
sharcholdets, with our bankers and with our auditors.
Fujitsu regard ICL’s offer of 18" December 1998 (Option A) as exceedingly generous given their
undertaking to provide ail of the necessary funding and their agreement that ICL take a substantial loss
on the base case. They do not understand why Option A has not, by now, either been definitely
accepied or, at least, rejected with sume logical explanation as to the reasons for that rejection. With
year end and borrowing pressures mounting, shey are losing confidence and patience.
The dedicated facility of £250m for financing the Pathway project (guaranteed by Fujitsu) bas now
been completely drawn down. Keith and I have so far persuaded our board and shareholders that ICL
should continue to finance the current needs of the project out of its general working capital facilities,
‘but this will not be feasible for muck longer. Further, the dedicated facility is due for review on 31° i;
March 1999, and the bankers concerned are monitoring the current negotiations before deciding their I!
stance. In the event of an unfavourable resolution, or no resolution, they will withdraw the facility and
call on Fujitsu to honour its guarantee.
‘I have already talked with our auditors (Pricewaterhouse Coopers}. They are quite clear that, unless a
satisfactory solution, which allows the project to continue on a viable basis, is reached by the end of
‘March, they will require a provision to be made against the work in progress in respect of Pathway I
‘which is currently carried on our balance sheet. By that time this will amount to something in excess Ei
‘of £250m. If this occurs, ICL will become inso'vent unless Fujitsu injects further shareholders funds to I
pay off the dedicated Pathway facility. In those circumstances the project will terminate and it is
inevitable that court proceedings will follow. The matter will then be out of my hands.
R Christou Hi
‘continued. /2 Director
Commercial & Legal Affaire
26 Finsbury Square
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94/93/1993 17:20
2 1
Mr. Steve Robson. fT
4 March 1999
Merely keeping going without some definite resolution by the end of March, and hoping that things
will resolve themselves by some later date is thns not a realistic option. The combined pressure from
our shareholders, our bankers and our auditors means that some positive solution (albeit an interim
cone) has to be found by the end of March if we are to be able to camry on with the project, in whatever I
form, for the benefit of all parties concerned.
Thave been giving serious consideration to the best way to solve what, as I told you on Friday, I regatd
as our mutual problem, and I am heartened by tha fact that you said you would do what you could to
help in its resolution :
Tam convinced that the key to ths solution is to look at matters from the point of view of what will
satisfy the auditors, If this can be achieved, then no provision becomes necezsary, the pressure point of
ICL’s insolvency will disappear, and I am confident that both our shareholders and our bankers can be
persuaded to give you and me enough time to work through the details of Option B, which I consider, !
as 1 know you do, to be the best way forward for the project, provided that we can set a definite end
date for that process,
In approaching the problem from the aspect of the auditors, it is first of all important to make you I
awate that Fujitsu's year end is also 31 March, and that they have a different set of auditors - KPMG.
‘Thus, given the materiality of the amounts at stake even to Pujitwu, any solution will uot only have to
satisfy ICL’s auditors, but will alse be exposed to the rigorous scrutiny that KPMG will bring to bear
upon it, aiven that they ate acting as the auditors to a very large public company, with all the potential I
liability for them that that entails. i
The first point to make is that confirmation to the auditors (even if backed up by letters from HMG)
that negotiations are continuing will not, they tell me, be enough to satisfy them. They will not be
convinced even if we embellish this confirmation with statements that we are all confident a
satisfactory resolution will be achieved in the near future.
‘What they require is certainty of one or more outcomes which, on # tue and fair view of the situation,
will enable ICL to construct a business case which avoids a write off. Ciearly, this position could be
achieved in a number of ways.
There seem to me to be four possible ways in which the auditors’ requirements could be satisfied.
‘The fust, and most practicable and desirable, is the adoption of the new proposal, Option B. There is, 1
believe, a strengthening view that Option B is the best way forward, notwithstanding the need to
specify it more carefully both commercially and technically. We. therefore, as you and I have already
discussed, need to give priotity to agreeing the details of Opdon B as soon as possible, including a
viable business case which (after taking account of abortive costs, changes to specifications, I
timescales, development costs and business mix and auty other relevant matters) will give ICL the same
opportunity over all, neither more nor less, as it would have had if Option A, had been accepted.
gle Ur?
‘The second is a decision to take only what I have previously described to you as the core system. In
this situation, since there would clearly be much less oppormnity for additional business, there would
* have to be significant adjustments to the ICL business case, if ICL were not to suffer a write off.
‘continued. ../3
4
84/03/1999 17:23
COMMERICAL AND LEGAL
3.
Mr. Steve Robson
* 4 March 1999
* ‘The third option is of course to accept Option A, as contained in ICL’s offer of 18 December 1998,
: although, with the passage of time, and the considerations relating to mothballing the benefit payment
' card, there would clearly have to be adjustments to the programme, contract time scales and ICL's
business case, if this were the preferred route. My personal opinion is that, as -confidence builds
* through our discussions on Option B, Option A will drop by the wayside. Nevertheless the concepts of
mothballing the benefit payment card and resurrecting Option A, if required, axe still certainly feasible.
"Finally, the fourth option is termination for convenience, I mention this option only for the sake of
completeness, since, although none of the parties are contemplating this, nor do auy of us regard this as
a desirable or likely outcome, it is currently provided for in the contract, and would afford a method by
i which ICL could continue the project until discussions are concluded, with the surety that, as a matter
: of last resort, at least most of its costs would be covered
To construct a satisfactory solution then, it seems to me that we need to agree the commercial
Sramework and enter into an open, legally binding agreement between all the parties
My understanding of the proposed commercial framework is that we would develop the scope and
I commercial arrangements for Option B whilst continuing the prepurations to roll out the Cote System
im accordance with the planned program. We would keep Option A available for a finite period by
; mothballing the Benefit Payment Card.
' The legally binding agreement would therefore be along, the following lines:
1. ICL will mothball the benefit payment card immediately.
2, ICL will continue to rolt out the core system (ie the system a5 currently specified without those
modules relating to the benefit payment card) to the currently agreed programme time scales,
3, All parties will work as speedily as possible to finalise the technical and commercial details for
Option B. This should be achieved by no later than 4 specified end date, Given the time pressures
relating to mothballing, the end of June 1999 secs appropriate,
4, BA/POCT. will (subject to S below) agree that by the specified end date, at the latest, they will
amend the current contact either:
{iy to adept Option B, if agreement bas been reached on all the details as provided in 3
above; or
(ii) to adopt only the core systern, without the benefit payment card; or
(iii) to resurrect the benefit payment card from mothballing, and, in effect, to return to
Option A.
5. If BA/POCL do ot wish to accept any of the thres possibilities in 4, by the specified end date, thea
they will, on that date, terminate the contract for convenience in accordance with it current terms.
Since time is short, I have taken the liberty of fleshing out in an attached appendix some further details
of this solution, which should assist in you consideration of the issues that would have to be addressed,
As I told you over the telephone, Keith is going to Tokyo next week, and, so far, has nothing further to
tell his shareholder and board members than the statement he pave them at the last board meeting. in
Continued. ../4
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84/03/1999 17:28 I GRO } COMMERICAL AND LEGAL PAGE 85 I
4.
Mr. Steve Robson
4" March 1999
: February; namely, that discussions on Option B are continuing in a posinve atmosphere. He really
* needs a letter from HMG to confinn support for an interim solution as described above, by carly aext
week. This will enable him to have a positive meeting in Tokyo and to carry his sharcholder with him. i
‘This will give you and me the breathing space to achieve the resolution that we both now believe is }
I Withis our grasp.
Twould welcome an early oppostunity to discuss the contents of this letter with you in person, once you
have had a chance to consider it in detail.
Your sincerely,
ce. Keith Todd - ICL.
{
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94/83/1999 17:28 COMMERICAL AND LEGAL PAGE 95
Without Prejudice — Curmercial in Confidence
Appendix
As Basic Commercial Framework
The Parties wil] agree the scope and appropriate commercial arrangements for Opton
B. Whilst these discussions are taking place ICL will continue with the preparations
to roll out the core system to the agreed program without the Benefit Payment Card
(BPC).
ICL will complete any necessary development work on the BPC to ensure that it is
‘mothbalied’ for a defined periad. Option A will therefore remain an available a
option for this defined penod. i
. POCL and ICL will agree a contractual joint venture in relation to pursuing ‘Modern
Government’ opportunities.
* HMG will agree by a defined date (no later than 30th June) which Option to pursue.
B. Commercial and Legal Implications
‘The proposed solution does not require a decision on stopping the BPC by 31st
March, but it does require a decision to carry on or to mothball the BPC for a period.
Mothballing the BPC is not a viable option in the long term. The decision on
whether to reinstate Option A needs to be taken fairly soon Our mothballing paper
indicated a date of 30th June 1999,
The successfil mothballing of BPC is reliant on all parties working together to
maintain their respective capabilities with respect lo the end to end system.
The mothballing of BPC will delay the introduction of the BPC and will adversely
affect the economics of the ICL business case.
C. Contractual Arrangements 7
D Option B {
> Apres a procedure and timeframe for completing the development of
the scope and.commercial arrangements for Option B.
> Agree that all costs in relation to developing Option B should be paid
ona time and materials basis.
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94/03/1999 17:20 COMMERICAL AND LEGAL PAGE Uf I
12) Mothballing the BPC
> Agree the definition and program impact of ‘mothballing’.
> Agree the upfront costs of mothballing for the defined period {not later
than 30th June 1999). The costs of mothballing until 30th June 1999
are expected to be similar to carrying on with Option A.
Saad oa
> Hold ICL harmless from any liability for failure of POCL or DSS to
carry out their obligations ip relation to mothballing including the parts
of the end to end system for which they are responsible.
3) HMG Decision
> Agree an end date (not later than 30th June) by which HMG must
choose to.
- adopt Option B;
- take core system without BPC;
- reinstate Option A; or
- terminate for convenience,
a’)) Consequences of HMG Decision
a) If Option B adopted
e ICL to receive payments to cover:
- abortive costs on BPC
- upfront mothballng costs
- development costs of Option B on a time and materials
basis.
. Adjustment to contract program as appropriate.
. Adjustment to contract pricing to bing ICL’s business plan
back to 18th December 1998 position inchiding:
- compensation for lost revenue as a result of program
slippage
- changes in costs and funding
effect on POCL/ICL Joint Venture revenues.
b) If Core System without the BPC is taken:-
° ICL to receive payments to cover
- abortive costs of BPC
> upfront mothballing costs
- development casts of Option B.
e Contract pricing stnicture will need to be considerably adjusted
to take into account lost revenues which will include:
: the loss of BPC revenue
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COMMERTCAL AND LEGAL PAGE 88 Hl
4/93/1999 17:28
- the loss of potential upside (in particular the loss of i
POCLAICL joint venture revenues)
- the effect on the Post Office footfall i
ce) if Option A is reinstated
. ICL to receive payments to cover.
- any incremental costs as a result of mothballing
- remobilisation costs.
- Development costs of Option B on a time and materials
basis
. Adjustment to contract program to cover slippage caused by
mothballing and reinstatement of Option A.
. Adjustment to contract pricing to bring ICL.’s business plan
back to the 18th December 1998 position including
- compensation for lost revenue as a result of program
slippage.
- effect on POCL/ICL Joint Venture revenues
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i d) if termination for Convenience is adopted the current contract
provisions would apply.
e) General Consequences i
On 31st March the BPC costs will not necessarily be abortive because
Option A would remain one of the possible outcomes, A write-off in
the 1998-99 Accounts would therefore not necessarily be needed as i
long as HMG agreed to provide compensation as described above if 4
Option A was subsequently reinstated.
ee
Par ves Se