Hi. I'm asked to take this class for graduation but I don't know how to do any of this. Please help me! I'm already devastated with the whole concept and Finance is new to me. Idk what I'm doing in this class. I need help with all the answers please. Our requirements are to have all these answers to be answered in a 2-page write up. I need help fast.

For the exclusive use of X. Wang, 2016. 9-803-104 REV: JANUARY 24, 2006 FELDA HARDYMON JOSH LERNER ANN LEAMON AIT Group plc On July 18, 2002, Rob Stavis and Jeremy Levine, of Bessemer Venture Partners, stared disbelieving as the words crackled out of the speakerphone. \"The investors have said that they won't take a split price,\" said Guy Peters, the broker doing a share placement for Stavis and Levine's current deal. \"They won't take any step-up at all, and we're still 4 million short.\" The investment in AIT Group plc, a U.K.-based software firm that had hit a major liquidity crisis one month before, suddenly looked seriously in doubt. AIT Group (LSE: AGP) had been put up for sale on June 18, 2002, after it had restated its annual earnings for the second time in two weeks and further delayed publication of its annual results. The market, already skittish after the two-year decline in the valuations of technology stocks and worried about AIT's burgeoning debt load, had dumped the stock, driving its price to 38.5 pence, down 63% from its previous close1 and off 98% from its high of 18.80.2 The stock was suspended from trading on the London Stock Exchange and the company's bank would not offer a further line of credit. Bessemer Venture Partners (BVP), a U.S. venture capital firm with a long history of investing in early-stage companies, had become involved in the deal through Nicholas Randall, a CEO whom BVP had backed in the past. Randall had joined forces with Richard Hicks, AIT's founder, former CEO, non-executive chairman, and most recently, non-executive member of the board,3 who had returned from sailing across the Atlantic to find that his company was in trouble, and was determined to save it. Along with the Arbib family, local businesspeople who had just sold a major mutual fund company, Hicks, Randall, and BVP were planning to restart AIT and operate it as a going concern. Key to refinancing the company was a \"step-up,\" the sale of shares at different prices. The investor group had proposed a two-stage deal: it would loan the company 6 million, which would convert to equity at 5 pence per share. A public offering of 11 million worth of shares at a price of 1 Anon., \"AIT Loses More Than Half of Value After Delaying Results,\" Wall Street Journal Europe, June 14, 2002. 2 For the time period of this case, the was worth, on average, USD 1.50. 3 U.K. corporations had two different kinds of directors on their main boardsexecutive directors who were usually full-time employees with full management roles, and non-executive directors who usually were not employees and had no operational responsibilities. The role of the latter was to provide independent advice and guidance and to protect the interests of shareholders. The term \"director\" had also become used for a management level corresponding to vice president in U.S. companies. In this case, \"director\" will be used as a title, and \"member of the board\" will refer to non-executive directors. ________________________________________________________________________________________________________________ Professors Felda Hardymon and Josh Lerner and Senior Research Associate Ann Leamon prepared this case. HBS cases are developed solely as the basis for class discussion. Certain details have been disguised. Cases are not intended to serve as endorsements, sources of primary data, or illustrations of effective or ineffective management. Copyright 2003 President and Fellows of Harvard College. To order copies or request permission to reproduce materials, call 1-800-545-7685, write Harvard Business School Publishing, Boston, MA 02163, or go to http://www.hbsp.harvard.edu. No part of this publication may be reproduced, stored in a retrieval system, used in a spreadsheet, or transmitted in any form or by any meanselectronic, mechanical, photocopying, recording, or otherwisewithout the permission of Harvard Business School. This document is authorized for use only by Xenia Wang in Venture Capital & Entrepreneurial Finance-Spring 2016 taught by Raj Nahata, HE OTHER from January 2016 to July 2016. For the exclusive use of X. Wang, 2016. 803-104 AIT Group plc 10.5 pence per share would follow, and the group had committed to take an additional 2.5 million of the shares at that price as well, raising 13.5 million in total. Guy Peters, the broker from Old Mutual Securities (OMS)4 who was handling the offering, had thought he could sell that amount with little trouble, given AIT's history, up to 2002, as a profitable company and positive initial feedback from potential investors. The pricing, however, had changed a week into the process. The institutional investors that Peters approached had lobbied to reduce the price differential, which was subsequently changed to 3.5 pence for the loan conversion and 6 pence for the shares in the public offering. Now, after the core investor group had already made a 2 million line of credit available to AIT and hired a number of high-priced experts to help with the due diligence, they had just learned that the investors would only take a straight 3.5p/3.5p deal. When the call was over, Stavis asked, \"So, Jeremy, what do you think? Would you walk?\" Levine replied, \"I keep thinking over the due diligence findings. I still think it's a good company. But can we get a deal to work?\" Stavis grimaced. \"We've already incurred close to 1 million in fees,\" he said. \"But we shouldn't let that cloud our judgment. The real question is whether it's a good investment.\" Customer Relationship Management Software In the late 1990s and into 2000, customer relationship management (CRM) software received a lot of attention. By connecting the \"back end\" of customer account data to the \"front end\" of customer interactions, these systems allowed providers of anything from financial services to chemicals to tailor their offerings to a customer's needs and to handle all aspects of a customer interaction from one station rather than with multiple transfers across different departments. Thus, when a customer complained to a cell-phone service provider, the representative could access the person's usage patterns, average bill, and recent marketing offers, and craft a resolution based on the degree to which the firm actually wanted to retain the customer's business. Based on a customer's account balances, a bank could place a call either in an automated queue or directly with a customer service representative. Ideally, such a system would allow perfect price discrimination; the provision of exactly the level of service desired at exactly the price the customer was willing to pay, and allow the provider to maximize profitability. In the real world, implementing CRM generally involved enterprise-level headaches. Customer-facing front ends, designed for ease-of-use in retrieving a few key pieces of information, had to be connected to back-end systems that often bordered on the arcane, having been designed for the very specific needs of highly trained individuals in the accounting department. Linking a customer record with name and address to a lifetime order, payment, and profitability history in real time was no trivial task. CRM software and service providers reveled in triple-digit growth rates through 1999 and 2000.5 Only when the economic slump began in earnest did the investment rate slow. By March 2002, only 4 OMS has been spun out of the Old Mutual group since this occurred. Renamed Arbuthnot, it is now part of the Secure Trust Banking Group. 5 Anon., \"European CRM Market Slows Down Drastically,\" Europemedia, September 18, 2002, p. 1. 2 This document is authorized for use only by Xenia Wang in Venture Capital & Entrepreneurial Finance-Spring 2016 taught by Raj Nahata, HE OTHER from January 2016 to July 2016. For the exclusive use of X. Wang, 2016. AIT Group plc 803-104 36% of North American executives of Global 3,500 companies were considering the purchase of CRM software, down from 62% the previous year.6 By August 2002, this figure had fallen to 15%.7 The European CRM market shared the pain. From triple-digit rates in the late 1990s, growth had fallen to 21% in 2001 and was expected to barely register 8% in 2002. The next two years, 2003 and 2004, were expected to see 14% growth.8 Much of the decline stemmed from the realization that CRM implementations were expensive both in terms of money and company time. One study cited expenditures of $2 to $7 on integration services for every $1 spent on the software itself.9 Return on investment was elusiveone survey found that half the firms with such systems considered them failures10 and 60% of companies with the package from Siebel, the market-dominating firm, had yet to see positive results, even two years after implementation.11 For vendors of CRM software, the economy exacerbated the situation, as 65% of CRM revenues had come from those sectors hardest hit by the recessionfinancial services, telecommunications, and high technology.12 AIT, in contrast, could cite several instances where large institutions had benefited from its software. After installing AIT's 3R, the Woolwich building society, a financial institution, had seen sales climb from an industry average of 1.2 products per customer to nearly 3. The Woolwich credited this change and a concurrent increase in market capitalization to a combination of 3R and an accompanying corporate change program. Commented Richard Hicks, AIT's founder, \"As in so many cases isolated technology change is not sufficient to create these results, but the corporate change would not have been possible without new technology.\" CRM software usually was sold directly through the firm that both developed the package and did the extensive customization work necessary to install it. Gradually, however, the installation work was outsourced to third-party integrators, allowing the software provider to concentrate on product development. Siebel Systems dominated the global market, with twice as large a share as that of SAP, the second-place player.13 Other firms included Oracle and PeopleSoft. AIT Group, Onyx, and Chordiant were smaller players with niche products. By the start of 2002, most were performing below their previous levels (see Exhibit 1 for industry performance). AIT Group plc Richard Hicks founded Applied Interactive Technology (AIT) in Henley-on-Thames, west of London, in 1986. He explained, \"I wasn't a typical entrepreneur, but I wanted to do something interesting and make some money.\" Located in a room above a barber's shop in the picturesque 6 Tom Pohlmann, \"Benchmark March 2002 Data Overview,\" Forrester Research, www.forrester.com/ER/Research/ DataOverview/0,2740,14399,00.html, March 2002, accessed November 7, 2002. 7 Tom Pohlmann, \"Benchmark August 2002 Data Overview,\" Forrester Research, www.forrester.com/ER/Research/ DataOverview/, August 2002, accessed November 7, 2002. 8 Anon., \"European CRM market slows down drasticallyreport,\" Europemedia, September 18, 2002, p. 1. 9 Jennifer Maselli, \"Making CRM fit,\" Information Week, June 24, 2002, p. 32. 10 Study by the Gartner Group, cited in Anon., \"Survey: Always-on people,\" The Economist, February 2, 2002, p. S9. 11 Brian Albright, \"Still a boom market for application software,\" Frontline Solutions, September 2002, p. 10. 12 Timothy Dolan, \"Siebel Systems, Inc. 'Hold,'\" Deutsche Bank Securities, October 18, 2002. 13 Albright. 3 This document is authorized for use only by Xenia Wang in Venture Capital & Entrepreneurial Finance-Spring 2016 taught by Raj Nahata, HE OTHER from January 2016 to July 2016. For the exclusive use of X. Wang, 2016. 803-104 AIT Group plc town, the company evolved from a software consultant developing graphical user interfaces for the then-new personal computers into a producer and installer of custom CRM software, primarily for U.K. financial institutions. In 1995, AIT introduced 3R, its second-generation product, developed in partnership with Computer Sciences Corporation (CSC), a U.S. firm. 3R provided multi-channel customer communications for call centers, and operated on almost any platform.14 AIT provided the sales, customization, and installation services, which were substantial because the product had to be closely integrated into the customer's existing system. CSC received royalties from every sale. The company was profitable from the start. As it grew, customers would contract with it on projects ranging from 3 million to 10 million, paying as costs were incurred. Hicks kept the company in Henley, saying, \"It was convenient for me; it was a pretty place. Buyers would make a day outing of it when they came for a demonstration.\" In 1997, AIT went public on the Official List of the London Stock Exchange (LSE), raising 5 million (see Exhibit 2 for a description of the U.K.'s stock market regulatory regime). Its market capitalization hit a peak of 400 million (see Exhibit 3 for AIT's stock price over time). By this time, many of the U.K.'s financial institutions were running AIT's software as their front end, paying a steady stream of maintenance fees. The following year, Hicks began reducing his involvement with the company. Carl Rigby, formerly director (vice president) of sales, became CEO in 1998 and chairman in 2000. The executives decided to accelerate the shift from a services model and focus more on developing and selling their own product, in part to control their destiny, but also to exploit the capabilities of the Internet. Nick Randall, one of the investor group, observed, \"They wanted to become a 100 million company, and they knew that they needed their own product to do so.\" Portrait, the new product, offered several improvements over 3R. Like 3R, it linked across different databases within an enterprise, but it functioned essentially as a platform on which thirdparty installers or even business analysts could build their own functionality. 3R's installation had required such specialized expertise that AIT had maintained a substantial installation force and sold directly; Portrait could be sold and installed by third-party system integrators. 2001 AIT seemed to have hit its stride in 2000 and 2001. Under CEO Rigby's leadership, the company won several awards as a top place to work in the U.K., with such amenities as a concierge and shopping delivery service, a subsidized personal trainer, extensive training opportunities, and generous bonuses. AIT also employed a corporate visionary and an artist-in-residence to ensure a creative workplace. In this high growth period, the company enjoyed unusually low staff turnover. At the same time, the company posted impressive results (see Exhibit 4). Revenues for the year ending March 31, 2000 reached 21.7 million, with net income of 2.5 million; the following year saw 56% growth to 33.9 million in revenue as net income climbed 40%, to 3.5 million. The company's market capitalization hit a high of 400 million, despite the general carnage in the surrounding CRM market. Revenue growth of 20% was forecast 2001/02. 14 Kamran Butt & Steve Robertson, \"AIT Group: performing strongly in turbulent times,\" Dresden Kleinwort Wasserstein Research, May 27, 2002, p. 14. 4 This document is authorized for use only by Xenia Wang in Venture Capital & Entrepreneurial Finance-Spring 2016 taught by Raj Nahata, HE OTHER from January 2016 to July 2016. For the exclusive use of X. Wang, 2016. AIT Group plc 803-104 In September 2001, Richard Hicks, the founder, departed on his sailboat for a transatlantic crossing.15 That same month, AIT purchased IMA, a bankrupt U.S.-based developer of call center software. The merger had several justifications: new management had streamlined operations; the company had a history of developing and selling products through integrators, which would provide some pointers to AIT; IMA complemented AIT with strength in the U.S. and in non-financial sectors; and the Portrait product seemed to provide a good transition story from IMA's EDGE package, which was at the end of its life. EDGE was installed at some 350 enterprises, and had generated annual revenues of $50 million at its peak. AIT acquired IMA for $16 million, $10 million up front and the balance over the following year. The entire amount was in cash, in part because the bankruptcy court judge would not accept stock. AIT arranged for bank financing, the first debt it had ever required, and planned a possible rights (share) offering for early 2002 to pay off the loan. Also in 2001, AIT invested 3.4 million in a start-up that provided outsourced call center services. The new firm would also demonstrate a model installation of Portrait. In addition, the company signed its first reseller agreements, lining up five firms as third-party installers. To support its global expansion, AIT announced plans to establish offices in Australia and Singapore. AIT's semi-annual results to September 30, 2001 (U.K. companies did not have to release quarterly results) announced revenue of 22.3 million, up 57% from the same period the previous year, pre-tax profit up 34% to 2.7 million, and R&D spending up 72%, to 4.3 million. Nationwide Bank had just announced that it would implement Portrait. In February 2002, though, as the London Stock Exchange slogged through the collapse of its own technology sector amidst the Enron-inspired wariness about corporate accounting, analysts began questioning details of the results. In particular, they seized upon the inconsistency of a 6 million negative cash flow with the operating profit of 2.7 million.16 Members of the board of directors, among them the CFO, had sold 6.4 million in shares since August 2001.17 The CFO was appointed COO in December 2001 and resigned on February 18, 2002, exercising 1 million worth of options shortly before he did so.18 By the end of February, the stock had fallen to 590 pence. Spring 2002 On May 2, 2002, AIT announced the imminent release of full year results that would be \"in line with market expectations.\"19 On May 31, the company announced a 1.1 million profit shortfall due to contract deferrals.20 Four members of the board of directors, including Hicks, the founder, and CEO Rigby, loaned the company 1 million to meet a payment due on the IMA purchase. In June, the news became grimmer. The U.K.'s stock market regulator, the Financial Services Authority (FSA), began an investigation into the circumstances surrounding the profit warning and whether the company deliberately misled the markets.21 As AIT changed its auditor from Arthur 15 Simon Goodley, \"If AIT's broke, is Hicks in time to fix it?\" The Daily Telegraph, August 13, 2002, p. 30. 16 Neil Hume, \"Market forcesAIT's pluses add up to a minus,\" The Guardian, February 21, 2002, p. 26. 17 Ibid. 18 Anon., \"AIT Group PLC Director Shareholding,\" Regulatory News Service, January 8, 2002. 19 Anon., \"AIT Sees FY Sales, Pretax Pft In Line With Expectations,\" Dow Jones International News, May 2, 2002. 20 Anon., \"AIT Group Sees GBP 1.1 Rev, Pft Shortfall,\" Dow Jones International News, May 31, 2002. 21 Dearbail Jordan, \"AIT faces inquiry after profits warning,\" The Times, June 1, 2002, p. 54 and Richard Fletcher, \"CityFSA investigates `market abuse' at software group,\" The Sunday Telegraph, August 11, 2002, p. 2. 5 This document is authorized for use only by Xenia Wang in Venture Capital & Entrepreneurial Finance-Spring 2016 taught by Raj Nahata, HE OTHER from January 2016 to July 2016. For the exclusive use of X. Wang, 2016. 803-104 AIT Group plc Andersen to Deloitte & Touche, the company failed its audit. On June 13, the company announced that fact, and issued another profit warning.22 This time, net income fell by 4.3 million. An estimated 6.7 million profit as of May 30 had dwindled to almost nothing (see Exhibit 5 for profit estimates). AIT had debt of 10.5 million against a bank facility of 11.5 million.23 The shares, which had been steadily losing value throughout the spring, tumbled farther, from 66.5p to 38.5p overnight. The board, after being told that it would be impossible to refinance AIT on the stock market, instructed UBS Warburg to sell the company. Warned one rating company, \"AIT could go into receivership [an insolvency procedure initiated by the U.K. bankers]. Avoid the shares.\"24 On June 19, trading in AIT's shares was suspended (see Exhibit 6 for stock price). The Rescuers On June 20, Nicholas (Nick) Randall was returning home to Henley-on-Thames from Asia when he read about AIT's troubles in the Financial Times. He had been following AIT, a large local employer, for years. \"I'd never bought shares,\" he said, \"but I was impressed with what Richard [Hicks] was doing.\" Randall was an executive vice president at Remec, a defense electronics firm that had bought the wireless masthead amplifier company, Airtech, that he had turned around. The timing was fortuitous. His contract with San Diego-based Remec was expiring and the selfconfessed turnaround guy\"I like to do things that are difficult\"was ready for something closer to home, where he was building an oak-timbered house. His builder, who was also working on a project for Hicks's brother, put the two together. Said Randall: We arranged for a half-hour meeting on June 25 that became five hours. The bank was set on selling the company because it was scared that it wouldn't get its money back. I kept thinking there must be room for rescue rights here. All we needed was a broker and some venture money. And I knew where we could find both. Hicks recalled: I had returned from my trip in late March and things went very bad very fast. When the investment bankers first started talking about selling the company, I put my hand up and said, \"Aren't there any alternatives?\" and was given to understand that no, there weren't any. But I very much wanted to save the company; there were 16 years of my life tied up in it as well as the jobs in the community. I almost didn't call Nick; my brother gave me the number and everyone had been giving me numbers of some guy they knew that could save the company and after 100 of these, you get a little burned out. Nick's was 101, but as soon as we started talking, I knew this was perfect; he was talking about investing so I knew he was serious, and he had a proven track record in turnaround situations. \"The first thing I did,\" said Randall, \"was send Hardy Smith an email saying 'Help!'\" Smith and his firm, Bessemer Venture Partners (BVP), had backed Randall at Airtech and regarded him as \"one of our best CEOs ever.\" On June 26, Smith was en route to a meeting with his colleagues, Rob Stavis and Jeremy Levine, to talk about a different transaction (see Exhibit 7 for bios). He brought up AIT, based on Randall's three-page sketch of the deal, which envisioned a core investor group that included himself, Hicks, and BVP investing 6 million, 3 million of which would go in immediately 22 Goodley. 23 Anon., \"AIT Group Sees GBP 1.1 Rev, Pft Shortfall,\" Dow Jones International News, May 31, 2002. 24 Anon., \"AIT put up for sale,\" Investors Chronicle, June 19, 2002. 6 This document is authorized for use only by Xenia Wang in Venture Capital & Entrepreneurial Finance-Spring 2016 taught by Raj Nahata, HE OTHER from January 2016 to July 2016. For the exclusive use of X. Wang, 2016. AIT Group plc 803-104 to hold the company while it raised 6 million in a new share offering, of which the core group would take half, for a total injection of 12 million. Although the concept was outside BVP's early-stage focus, it matched a strategy that Stavis had been pursuing, as he explained: In the current market, you can do one of two things. You can seed new technology that will blossom in three to five years, or you can look into distressed assets. Currently, many companies have invested millions of dollars into building software packagessome are worthless, some are very valuable assets. We had to determine into which category Portrait fell. If it turned out to be interesting, we still were concerned that AIT needed significant financial restructuringtypical LBO workthat was not our forte. Levine added: But AIT was, in many ways, a start-up situation. It had a product in betaPortraitwith a half-installation, and no cash on its balance sheet. At the same time, it had an installed product that generated a steady income stream. If we could make Portrait work, we would have picked up a great product for pennies on the dollar. \"What we'd been looking for,\" Stavis said, \"was a deal with a hook. For us, the hook was Nick. Here was a seasoned, trusted CEO to inject. Moreover, the technology addressed the financial services sector, where I was comfortable.\" The timing was uncertain. The board could not set an official deadline for bids because AIT, as a public company, could always be purchased in a hostile takeover. Nonetheless, UBS Warburg, the investment bank, was running an accelerated sales process, and any party that wanted to be considered in that process had to submit a bid by Monday, July 8. Said Stavis: The big challenge was whether we could understand what we were getting into fast enough. It was incredibly complicatedold product, new product, new business model, existing deals which most early-stage companies never have. We had to understand the accounting and that was enough to really give us pause. Here we were, in the post-Enron age, looking at investing millions of dollars in a company that had admitted its accounting was screwed up! In his efforts to save the company, Hicks had also contacted the Arbib family, the founders and largest shareholders of Perpetual, an investment and mutual fund company that was Henley's largest employer. Amvescap had recently bought the firm for 1.3 billion. The Arbibs asked their former Main Board Director and Vice President of Information Technology, Geoff Probert, to review AIT's Portrait package. A product demonstration on Sunday, June 30, convinced Probert that he and the Arbibs should join the core group. Due Diligence At the same time that the core group was forming, BVP started its due diligence. The process began on Friday, June 28, when Levine delayed his trip to a family reunion to go to Meriden, Connecticut, the headquarters of AIT Group-USA, the former IMA. Levine and Stavis had decided that the Connecticut trip would provide background data with a minimal investment of time and money. Levine left the meeting intrigued: 7 This document is authorized for use only by Xenia Wang in Venture Capital & Entrepreneurial Finance-Spring 2016 taught by Raj Nahata, HE OTHER from January 2016 to July 2016. For the exclusive use of X. Wang, 2016. 803-104 AIT Group plc They were very smart guys. I saw a demonstration of the Portrait product and was very impressed, especially because it was conducted by business analysts rather than engineers. The progress that was being made in converting IMA's EDGE customers to Portrait was also encouraging. I did learn about some curious dealsit was vague, but it gave me a base to start asking questions. BVP's Smith had left for a board meeting in Europe on Thursday the 27th. During a layover at Heathrow, he met with Hicks, Randall, and Tim Oldridge, a partner with the law firm of Taylor Joynson Garrett (TJG, now Taylor Wessing), one of the few U.K. law firms to combine an early-stage investment practice with considerable public company expertise. This was the first time that the groupless the Arbibshad met. Said Smith, \"It helped us lay out the general approach for the deal and the diligence and take the pulse of the team.\" On July 2, Levine arrived in Henley to begin due diligence in earnest. He had a week to determine whether BVP should invest almost $5 million. Based on his initial research and the meeting with AITUSA, he had a list of questions to address. He said, \"I arrived with a sense of what I needed to focus on. I knew we couldn't know everything, but we had to know what could really hurt us.\" One decision had to be made very early in the process. Because AIT was an on-going concern and not a start-up, it had reams of contracts, leases, and other documents that would have to be examined before the core group knew what it would be acquiring in an investment. The investors therefore had to commit to hiring the lawyers at TJG to read every document available for potential bidders. Said Smith, \"This was a big decision. We didn't know if we'd get the deal, or even want it, yet we were hiring very expensive legal assistance.\" TJG's Tim Oldridge, the lead lawyer, dispatched a ten-person team to AIT's data room. He said: Jeremy [Levine] pointed out specific areas he wanted us to look atemployment contracts, banking agreements, acquisitions, mergers, joint ventures, licenses, patent deals, and any pending litigation, along with real estate. We needed to understand what was going on, and the scope for changing anything the core group could not live with. We read everything and made brief summaries. Levine moved into one of the conference rooms at AIT's headquarters. Another room in the building served as the data room, holding all the documents for inspection. He explained: This was very convenient. I had easy access to the data, and a good view of the other bidders. And it gave me a presence on site. I ate in the cafeteria, and I got to know the people. First, Levine talked with each executive. \"I wanted to get their perspective on what had happened and how things worked,\" he said. The AIT staff was aware that Hicks was trying to save the company. It seemed highly likely that the other bidders would take it into receivership to wipe out the impending liabilities of roughly 10 million from leases and the remaining sums due to IMA over the rest of the year. The core group presented a challenge for UBS Warburg, the investment bank coordinating the sale. Charged with getting the best price for the company, it was also supposed to ensure that all bidders had equal information. Yet the core group planned to invest in the company, rather than to purchase it, which created needs for different data. 8 This document is authorized for use only by Xenia Wang in Venture Capital & Entrepreneurial Finance-Spring 2016 taught by Raj Nahata, HE OTHER from January 2016 to July 2016. For the exclusive use of X. Wang, 2016. AIT Group plc 803-104 The List Over dinner on July 2, Levine, Smith, and Geoff Probert, for the Arbib family, assembled a list of five criteria that had to be satisfied before they would feel comfortable making a bid, assuming that the customers supported AIT and the Portrait product. Hicks, they knew, was already committed to saving his company. The list read: 1. Accounting issues run to ground 2. The model of the business going forward works with enough headroom for error 3. Richard's role is defined and appropriate 4. Confidence in the Portrait product 5. The deal is good enough With the tight timeframe imposed by the bank, each of the items would have to be pursued in parallel. Preamble: Customer Support for AIT and Portrait Levine had already started making customer calls. Tracy Isacke, director of alliances and marketing, and Alistair Rowley in sales supplied Levine with a comprehensive list of customers, partners, resellers, and firms that had evaluated AIT's product but purchased elsewhere. Isacke said: I liked him [Levine]. I had turned to some of my contacts from my tenure on the board at Xerox to see if I could put anything together to save the company, and by now, it was clear that the only way to keep it as a going concern was the core group. Levine called upon a part-time contractor for BVP, who happened to be in London on other business, to help with customer calls. The references were glowing. Levine recalled: From these calls, we learned that AIT had a very strong reputation among large customers, something that most start-ups lack. The customers wanted the company to survive. They truly felt that AIT had worked with them, rather than imposing an external framework on their business processes the way that some other providers did. But they had been unnerved by this situation. A bank's front-end system is its heart, and to think that the company that supports this might collapse is pretty scary. Even companies that had signed up with other vendors usually did so reluctantly, often citing AIT's inability to provide global support rather than shortcomings in the product. Accounting Issues Along with customer calls, Levine took the lead in delving into the details of AIT's accounting: I became obsessed with touchable revenues. What could we count on for revenues going forward? How fast would they come in? And here was where we ran into the difference between a takeover/turnaround situation and an early-stage venture investment. Early-stage companies don't have accounts, except maybe for QuickBooks. AIT had fifteen years of financials, the last five as a public company. Early-stage companies don't have customers or 9 This document is authorized for use only by Xenia Wang in Venture Capital & Entrepreneurial Finance-Spring 2016 taught by Raj Nahata, HE OTHER from January 2016 to July 2016. For the exclusive use of X. Wang, 2016. 803-104 AIT Group plc contracts either, or if they do, there may be two or three. AIT had 70 customers and real estate leases and contracts with resellersa whole room full of data. To understand the details, Levine interviewed AIT veteransTracy Isacke of alliances, Alistair Rowley in sales, and Gareth Bailey, CFO at that time. Recalled Isacke: It was intense. We were getting in at 6:30 AM and leaving at 11 at night. Jeremy knew what he needed to know and kept asking questions in a clever way. He'd start, \"Help me understand . . .\" or \"I don't quite get this yet,\" and he wouldn't leave the subject until he understood exactly what was going on. Rowley said: I realized that the investors wouldn't be working so hard unless they were investing for the long term. That was a relief, as I'd dealt with some U.K. venture folks before and it was like being savaged by a dead sheep. Touchable Revenues After talking with customers and other partners, Levine and Rowley took a hard look at the revenue forecast. Working from the \"worst-case\" projections, Levine further backed down the probability that prospects would actually buy: The most likely prospects had 75% to 100% ratings. And that would have been realistic if this hadn't happened. But we had to back them all down and move the revenue streams out in time, because the customers told me that they were rattled. If this had been an isolated situation, it would have been one thing, but after two years of software companies imploding, customers were skittish. As a result, anticipated revenues were set at 22 million, almost 30% lower than the company's earlier worst-case expectation of 33 million, and almost half the expected case of 40 million. Levine said, \"About 16 million of this came from maintenance fees and current engagements that would be very difficult to terminate. Even though AIT had won some good contracts in tough competition, we weren't going to count on anything that wasn't basically in the door.\" Other Accounting Issues Levine kept digging: I felt that we really needed to understand the balance sheets and customer contracts, as well as the deals that the AIT-U.S. people had mentioned. I rapidly realized that I was out of my depth. AIT had changed CFOs six months before, the previous CFO had left, and Matt White, the CFO who was coming on with Nick [Randall], was still working out his exit from Remec. So when I first arrived, I said, \"We need forensic accounting help.\" Even though I kept saying this, by the end of Friday, we still didn't have forensic accounting help. And the bid had to be presented on Monday. Levine learned that accounting support was still lacking at the daily wrap-up meeting on the evening of Friday, July 5. Although the core group was willing to pay whatever was necessary, the challenge lay in finding the accountants, as financial experts in high-tech contracts were scarce, especially on the day after a major U.S. summer holiday. Levine called Stavis at 1 PM New York time and explained the situation. Stavis said: I tried to contact a friend at Ernst & Young [E&Y] who wasn't in the diligence practice, but could possibly give us a start. He wasn't in. So I went to the website and started calling offices, moving west. No one was init was voicemail after voicemail. At last I found an executive assistant in the Chicago office who really wanted to help. I told her to take out a piece of paper 10 This document is authorized for use only by Xenia Wang in Venture Capital & Entrepreneurial Finance-Spring 2016 taught by Raj Nahata, HE OTHER from January 2016 to July 2016. For the exclusive use of X. Wang, 2016. AIT Group plc 803-104 and write a message, something like, \"Bessemer Venture Partners, which does a great deal of business with the firm, is working on a time-sensitive deal that requires some forensic hightech contract work in London over the weekend. Can you help?\" I then asked her to go down the halls and read it to any partner she found. An hour later, she called me back. Amazingly enough, the Chicago office of E&Y specialized in high-tech forensic accounting and two of their best guys had just moved to London. I simply couldn't believe it. I got their number, Jeremy got them, and they spent the weekend at AIT. The E&Y accountants studied AIT's books and found nothing of concern. Among the host of customer contracts, however, they found five instances of license sales to third-party installers where they recommended a restatement of revenue. All were signed between September 2001 and March 2002, and each followed a similar pattern. AIT sold the partner a number of licenses at a discounted price for which the partner paid up front, and AIT promised to purchase a certain value of services over a period of time on a \"take-or-pay\" basis. AIT was contractually obliged to pay the agreed-upon amount to its partner, regardless of whether it actually used the services. With rising demand, the contracts would have benefited both parties, but if demand did not materialize as expected, AIT would have had its own installation force sitting idle while the partner did the installations, or it would have to pay for services it did not consume. The deals took the following form: AIT sold an installer 1 million worth of licenses for its Portrait software for 650,000, a 35% discount. The installer paid 325,000 in March 2002 and the balance in January 2003. AIT committed to use 1.3 million of the partner's services over the coming fiscal year. AIT then credited the entire 650,000 as revenue received in fiscal 2002 (ended March 31, 2002) and ignored the possibility that the services could become a liability, believing that it would take them in the normal course of business. For the installer, which had a 50% margin on services, this was a wash. The deal gave AIT some up-front cash, an implicit commitment from the installer, and a chance to train it on Portrait, but at what could be a punishing price if the services it had committed to take were unneeded. The U.K. Generally Accepted Accounting Principles had no set rules for revenue recognition for software companies, which made this treatment technically legal.25 It was, however, aggressive. The E&Y report commented, \"Irrespective of the specific accounting rules, accounting is meant to reflect the economic reality of a business transaction.\" Correspondingly, the team recommended that the license fees match the service commitments made, essentially reducing fiscal year 2002 revenues by 6.5 million to 36.2 million. Backing out the contribution of IMA, true AIT revenues were 31.8 million, down 6% from 2001's 33 million and in line with the decline in the industry as a whole. As the core group had already known about these contracts, the fact that E&Y found nothing else untoward was comforting. \"In a way,\" said Levine, \"it was a good outcome. We had been afraid that we might have overlooked something else. Instead, it was just these five.\" The core group already knew about another situation, too. AIT had participated in the founding of an outsourced customer call center that used Portrait. AIT had loaned the start-up 3.4 million, of which 1 million had been used to buy a Portrait license. This amount was listed on AIT's books as revenue in 2002. The entire loan, however, appeared highly unlikely to ever be repaid. In turn, this meant that the 1 million could not be treated as revenues but as a partial payment of a debt. 25 Similar accounting treatments had occurred in the United States as well, although not in the software industry, which had strict revenue recognition rules. Some Internet firms were known to book advertising sales as revenue without reporting the commitments they had made to buy ads elsewhere. Another example occurred with Global Crossing and other telecommunications firms, which employed bandwidth swaps in the same manner, crediting revenues from bandwidth they \"sold\" without noting the concomitant purchases they would have to make. 11 This document is authorized for use only by Xenia Wang in Venture Capital & Entrepreneurial Finance-Spring 2016 taught by Raj Nahata, HE OTHER from January 2016 to July 2016. For the exclusive use of X. Wang, 2016. 803-104 AIT Group plc A Good Deal At the same time that Levine was sorting through contracts and sales forecasts, Randall, the incoming CEO, was working with Guy Peters, the broker from Old Mutual Securities, to create a deal that would save the company and provide meaningful returns to the core group. Peters explained: It was a very complicated situationyou can't just put equity money into a public company, even if it's been suspended. You have to comply with the market rules, company law, and the guidelines laid down by the largest institutional investors, which meant that you generally have to offer a significant proportion of the new shares first to the existing shareholders [a rights offering]26 before offering them to other investors. The process usually requires an extraordinary general meeting [EGM] to approve the sale. All this takes time. So the core group would have to loan the company money in the meantime pending the requisite approvals. Randall added, \"But we didn't want to loan anything until we knew (1) that we would win the deal, and (2) that it was even a deal we wanted.\" As the diligence continued to expose liabilities and reduce expected revenue, the amount needed to refinance AIT grew. Randall's initial email to Smith had proposed a total investment between 10 million and 12 million, with 6 million from the core group. It now became obvious that AIT would require closer to 20 million (see Exhibit 8 for sources and uses of funds). Early on, Old Mutual's Peters had suggested the structure of a private deal followed by a public one: a 6 million loan from the core group to cover AIT's operating expenses, later to be converted into stock. The core group could not participate in a rights offering because, except for Hicks, the members were not current shareholders. The loan would hold the company until a public offering in the range of 11 million could be arranged. These shares would be offered first to existing shareholders, each of whom would receive the right to purchase a certain number of shares at 10.5 pence each. Despite the recent tumble in the share price, the discount between its last close at 38.5 p and the new share price of 10.5 p seemed enough to generate some interest from existing investors. The core group's 6 million bridge loan would convert to shares at a price of 5 pence, and the group would purchase an additional 2.5 million of shares in the public offering at 10.5 pence. Peters felt he could sell the 11 million of shares. At this point, a number of differences between investing in public and private companies and investing in the U.S. and the U.K. became apparent. The core group wanted its loan to be senior to AIT's bank loan. The executives and Hicks, however, had loaned the company 1.35 million of their own money, junior to the bank. BVP's Stavis, who handled the eventual negotiations with the bank on the matter said, \"It's a business culture differencein the U.S., new money is always senior to old.\" Other differences arose. In a private deal, investors just injected money into a company. In a U.K. quoted company, any new shares issued for cash (beyond a pre-authorized level) first had to be offered to existing shareholders before they could be offered to new investors, unless the existing shareholders approved an alternate deal. In private deals, an investor naturally received the right to appoint a board member. BVP would have two seats on AIT's five-member board and Probert would have one. In a U.K. public company, this was highly unusual and difficult for Peters to explain to other potential investors. 26 In the U.K., a public stock offering could take one of several forms. A \"public offering\" referred to any sale of shares to the public through any mechanism; a rights offering gave existing shareholders a right to purchase a certain number of shares at a certain price; and a firm placement offered shares to public entities, usually institutional investors, which committed to purchasing a certain amount. 12 This document is authorized for use only by Xenia Wang in Venture Capital & Entrepreneurial Finance-Spring 2016 taught by Raj Nahata, HE OTHER from January 2016 to July 2016. For the exclusive use of X. Wang, 2016. AIT Group plc 803-104 The speed of the process and the company's dire financial straits meant that the core group had to provide interim financing before it knew if the shareholders would approve the deal at the extraordinary general meeting. In addition, BVP's Levine commented, \"Every day that went by, we were incurring more fees.\" The Model Works Going Forward, with Headroom for Error The current CFO, Gareth Bailey, and Matt White, the future CFO, with input from Levine, built a very complex model to test the impact of different assumptions on the company's future cash position. This became central to the next phase of the diligencedetermining whether the company was raising enough money. The model fed pricing discussions that were taking place with Peters, fee negotiations with UBS Warburg and the law firms, contract renegotiations with partners and landlords, and cost-cutting measures that would be enacted at AIT. While many of these would not be implemented until the core group knew whether its bid had been accepted, the model directed the diligence efforts. Levine explained, \"The model gave us an idea of where to look next. We knew what we could count on coming in. Now we had to minimize what was going out.\" Here, the work of the legal team from Taylor Joynson Garrett was particularly helpful in determining whether AIT had any scope for renegotiation. The lawyers from TJG had not been working alone. \"A typical early-stage deal,\" said Levine, \"has about 10 documents. AIT had a room full of it, and five law firms.\" One firm represented the nonexecutive directors who were concerned about their liability in the FSA investigation, one represented the company in the purchase negotiations, TJG represented the core group, and another law firm, replaced by yet one more, was working for AIT and its executive directors. They had been running up fees at the rate of 14,000 per day. Levine shared the results of his model with everyone involved (see Exhibit 9 for projections). Said Tracy Isacke, director of alliances: It was a shock at first, to see the numbers [revenues and contracts] so low. You could push back and he'd explain his assumptions and you ended up agreeing that where he ended up was pretty much the right place. He put his numbers together and he didn't change anything. Levine noted: It was comforting to people that I put things on paper. It showed them what I was thinking. With in-depth interviews where you pick and probe, people feel very exposed. When you write up a summary and share it with them, it's comforting; they can trust that you've understood what they told you. And their feedback helped me test my assumptions. Confidence in Portrait The Arbibs' Geoff Probert took on the task of assessing Portrait: I sat in on some of Jeremy [Levine]'s interviews, and I was confident that I didn't have to duplicate his work. He and Hardy [Smith] were so thorough that the Arbibs and I felt that, if it was good enough for them, it was good enough for us. So I focused on the software. In my experience, a system that can work across a company's existing database information, permit changes to the database structures, and allow the definition of new products within the database without requiring substantial rewrites is the Holy Grail for business software developers. And Portrait did it. 13 This document is authorized for use only by Xenia Wang in Venture Capital & Entrepreneurial Finance-Spring 2016 taught by Raj Nahata, HE OTHER from January 2016 to July 2016. For the exclusive use of X. Wang, 2016. 803-104 AIT Group plc BVP also arranged for a technical expert from Extraprise, one of its portfolio companies and a systems integrator that worked closely with Siebel Systems, to attend a product demonstration. Probert recalled, \"He was very excited about the product, too. What with the customer assessment and the outside corroboration, we felt that we really had a viable product, assuming we could save the company.\" Probert was sufficiently impressed with the product and the rescue team that he agreed to serve on AIT's main board as its Director of Software, and to draw no pay, aside from a performance-related bonus, for the first nine months. Hicks's Position Of all the members of the core group, Hicks's position was the most unclear. Nick Randall was clearly the CEO-in-waiting; Probert and BVP's Smith, Levine, and Stavis the investors. Hicks, on the other hand, was an insider from the beginning, but also a member of the outside rescue group. Levine said, \"Richard [Hicks] had bought us a seat at the table, but he didn't have a clear role. For a time it was unclear who was in chargethe old CEO was shell-shocked, the new one wasn't in yet.\" Hicks agreed: This was a strange situation. I hadn't been on the front lines for a long time. All the executives were running around helping various bidders and supplying information, while the potential bidders went trolling through all our data. I didn't know anything about refinancings or rescue rights. So I did some cash flow management and basically tried to keep the faith, and convince peoplecustomers and employeesthat AIT would continue. Because of Hicks's long history with the firm, he had built personal relationships with the bank and other parties. He commented, \"BVP definitely put orders of magnitude more effort into the due diligence process than I'd ever expected.\" After a series of conversations with Randall, the in-coming CEO, the two agreed that Hicks would be executive chairman, essentially, as Hicks described it, \"keeper of the flame. This is a very special company that got terribly fat, but I'm hoping it can survive.\" The Letter to the Board The bid letter was due to the board of directors by 5 PM on Monday July 8. On Sunday, the core group held a meeting with everyone involved in the diligence effort, including the legal team, the Ernst & Young accountants, and BVP's Levine. One of the lawyers from TJG said: The time pressure was great. We had reviewed vast quantities of documents and I had less than an hour to tell the core investor group what they needed to know. A customary diligence report would be hundreds of pages long, detailing what we had seen, what we wish we'd seen, and why the client can't sue us. For this key briefing, I spoke from a bundle of notes. In the bid letter, the core group proposed injecting 20.5 million into the company. The core group would invest a total of 8.5 million, 6 million as a loan that would convert to shares and an additional 2.5 million purchase of shares outright. This would be accompanied by approximately 11 million raised through a combination of a firm placement with other institutional investors and a rights offering, in addition to 1 million to 2 million of debt-for-equity swaps with various creditors. The precise composition of the package, beyond the core group's participation, was somewhat flexible. The group emphasized that the board must decide quickly. \"We were afraid that there might 14 This document is authorized for use only by Xenia Wang in Venture Capital & Entrepreneurial Finance-Spring 2016 taught by Raj Nahata, HE OTHER from January 2016 to July 2016. For the exclusive use of X. Wang, 2016. AIT Group plc 803-104 be other bidders,\" said Randall. \"And particularly concerned about a trade sale, possibly to Chordiant.\" Here the group hit a hurdle. The board did not want to accept anything but a full proposal, and the core group could not complete a full proposal without knowing if it had won the deal, which would then allow it to restructure the company's obligations. By July 10, no other credible bidder had emerged and the board awarded the deal to the core group. Making It Work BVP's Levine said, \"Now that we had won the deal, it became a lot of negotiating. In a way, it was less fun.\" Isacke, AIT's director of alliances, differed: We had established what was wrong, now we were going to fix it. Jeremy [Levine] hadn't dwelled too long on what had gone wrongwe had tried to do what was best for the company and what we'd had directions to dobut it had been painful. Levine commented, \"It was like we had this bright shiny apple of 20.5 million. And everyone kept taking bites out of it.\" Bites at the Apple The costs that Levine had included in the model did materialize, and were often larger than anticipated. Severance costs of reducing AIT's work force from almost 500 to 200 approached 3 million. The company, in keeping with U.K. custom, had a fleet of 17 company cars under leases that were difficult to break. The real estate leases were long-running and had limited break clauses. A number of deals had to be renegotiated. These included equipment leases, the IMA purchase agreement, and the installer deals, but the most pressing was the bank loan. BVP's Stavis said, \"In conversations with stockholders, everyone was really steamed that the bank was going to get out of this whole, when it had let the situation get so far out of control.\" After a series of conversations, the bank agreed to convert between 1 million and 2 million of debt to equity in exchange for an upfront payment of 3 million. The bank was reluctant to grant seniority to the first 2 million of the core group's 6 million loan. It was willing to negotiate, though, because AIT had few assets. \"The executives had gone in junior with their money,\" said Stavis: . . . so the bank didn't see why we should be any different. We kept holding the fact that the company was running out of money over the bank's head, and the company kept getting these stays of executiononce it was a tax refund. In the end, though we did get seniority. AIT's Isacke and BVP's Levine took up revising the reseller deals. Isacke said: It was sort of good cop/bad cop. Jeremy [Levine] would take a very hard line and I'd jolly the partner along convincing them that this was the best we could do. I'd think we had everything ironed out and then Jeremy would throw in something new and we'd be back at it. But in the end, we had better contracts for most of them. 15 This document is authorized for use only by Xenia Wang in Venture Capital & Entrepreneurial Finance-Spring 2016 taught by Raj Nahata, HE OTHER from January 2016 to July 2016. For the exclusive use of X. Wang, 2016. 803-104 AIT Group plc The Pricing \"The biggest bite of the apple, said Levine, \"was the way the price fell.\" Peters, the broker, had felt confident that he could sell the step-up of 5 pence/10.5 pence. When he and Randall started meeting with institutional investors, though, they encountered fierce resistance. \"We had thought that it was such a discount from its last trading position that there'd be no problem,\" said Peters: What we found, though, was that the old investors were furious. They wanted to know exactly what had gone wrong and whom they could blame. And new investors, distressed securities experts, were not happy about the instant 2X return for the core group. A week into the process, Peters suggested to the core group that they reprice the deal to 3.5 pence and 6 pence (see Exhibit 10 for cap table). BVP's Stavis said: That really made us reconsider if we wanted to do the deal. We could get out, with about three weeks invested and about 500,000 in fees. In fact, at the end of every day, Hardy [Smith], Jeremy [Levine], and I would ask each other if we still wanted to do this. And the answer kept being yes. While Peters was on the road raising money with Randall, the in-coming CEO, he was also working with the lawyers at TJG to gain regulatory approval of the deal, and nursing a severely broken hip. Because AIT had been part of the Official List, it was subject to certain disclosure requirements. AIT's anticipated relisting on the less stringent and tax-preferred Alternative Investment Market (AIM) reduced but did not eliminate the regulations to which the company had to conform. Hovering in the distance was the FSA investigation and how that might affect the company. A senior banker had observed, \"The FSA is not in the business of putting companies out of business, but to track down wrong-doers.\" BVP's Smith concluded that AIT's brand-new management and board, along with its complete cooperation with the agency, made the investigation more likely to cause distraction than anything else. The structure of the deal required various waivers from the U.K. regulatory authorities. The 6 million convertible loan would normally require shareholder approval before the money was committed, because of the involvement of Hicks, a shareholder and board member, and the rules of the U.K. Listing Authority that governed transactions between public companies and their directors. Given AIT's financial straitjacket, the listing authority made an exception and waived that requirement. In addition, another agency, the Panel on Takeovers and Mergers, sanctioned a \"Rule 9\" waiver. This regulation, which was part of the U.K. Takeover Code and applied to all U.K. public companies, required any group acquiring more than 30% of a company's shares to make an offer for 100%. Subject to approval by AIT's shareholders at an extraordinary general meeting (EGM), this \"concert party\" rule was waived after each member of the core group disclosed his previous transactions in AIT shares, his seats on the boards of other companies, and a certain amount of personal detail. Another issue involved timing. Once the price was agreed upon, a circular had to be prepared and sent to all shareholders and anyone else who might invest through the public offering. This essentially served as a prospectus, and described the company, its financial condition, and the investment proposition. At least 23 days had to elapse between the distribution of the circular and the EGM where the offering would be approved. Only then could the shares be issued and sold. \"And then,\" said BVP's Levine, \"the price problem came back.\" Not only were the investors unhappy about the price, but the overall value of the U.K. financial markets, especially the broad16 This document is authorized for use only by Xenia Wang in Venture Capital & Entrepreneurial Finance-Spring 2016 taught by Raj Nahata, HE OTHER from January 2016 to July 2016. For the exclusive use of X. Wang, 2016. AIT Group plc 803-104 based FTSE All-Share index, had fallen steadily over the period (see Exhibit 11). After approaching 20 institutional investors with the 3.5p/6p deal, Peters said, \"It became clear that we couldn't raise enough money that way. We were short about 4 million.\" In-coming CEO Randall recalled: We were meeting with a well-known investor who said he would invest 2.5 million on behalf of his funds, and there were three or four other investors who would follow his lead, but only if there wasn't a step-up. He was concerned that the core group could make money while the other investors were still in a losing position. He said he didn't mind us getting more if the company did well. If this had been at the beginning, we might not have listened, but this was the end and we wanted to stop this process and get on with the real business of turning the company around. So we called BVP back in the States. The Price Problem Levine and Stavis looked at each other. \"So what do you think?\" asked Levine. \"Early on, OMS said something about warrants,\" said Stavis, \"and the Arbibs seemed OK about them. Why don't you figure out how many three-year warrants with a 3.5p exercise price we'd need for a corresponding deal?\" As Levine left the office, Stavis called after him, \"Really, do you think we've found everything?\" 17 This document is authorized for use only by Xenia Wang in Venture Capital & Entrepreneurial Finance-Spring 2016 taught by Raj Nahata, HE OTHER from January 2016 to July 2016. For the exclusive use of X. Wang, 2016. 803-104 AIT Group plc Exhibit 1 Competitor Performance, 2000 and 2001 Total Sales ($ millions) Profit bef. Tax ($ millions) % Change 12/31/01 12/31/00 % Change Raw Beta Mkt. Cap. Debt ($ millions) ($ millions) 12/31/01 12/31/00 Siebel Systems 2048.4 1795.4 14% 404.1 384.4 5% 3.36 12,937 300.00 Chordiant 76.0 33.7 126% -42.1 -35.4 -19% 1.68 419.23 0.08 Onyx 97.0 119.0 -18% -97.0 -4.5 -2056% 2.17 168.81 0.42 10 Year UK Government Bond 4.85% 90 Day UK Gov't T-Bill 4.06% Source: Annual report data from all companies, obtained through OneSource, January 29, 2003, Thomson Financial Datastream, and Bloomberg Financial. Note: Betas over period of June 18, 2000 - June 18, 2002. Exhibit 2 U.K. Stock Market Regulation The U.K. securities environment was broadly similar to that in the United States. Like the U.S., there were two major stock exchanges, the senior Official List, which was the London Stock Exchange's (LSE) principal market for listed companies, and the junior market known as the Alternative Investment Market (AIM), which had more flexible rules and less stringent listing requirements. The Official List comprised over 2,000 U.K. companies and 500 overseas firms, while more than 850 firms had been admitted to AIM. Small emerging U.K. companies would list on AIM just as emerging companies in the U.S. listed on NASDAQ. AIM companies could apply to the LSE Official List after trading on AIM for two years. The legal framework had recently been updated through the Financial Services and Markets Act 2000, a massive work that detailed the role of the regulatory body, the Financial Services Authority (FSA), along with the processes for applications and suspensions of listing, prospectus requirements, penalties for the breach of listing rules (market abuse) and general procedures. Although its regulatory role was akin to that of the Securities and Exchange Commission in the U.S., the FSA also possessed the power to levy unlimited fines on companies or individuals deemed to have abused the market by giving false or misleading information. While the FSA managed the listing and the ongoing disclosures for companies on the Official List, the LSE itself regulated these for companies on AIM. To list on AIM, a company had to comply with regulations published in the Public Offers of Securities Regulations of 1995, along with the LSE's AIM Rules; incorrect or misleading information carried civil and/or criminal liability. Once a company had managed to list on either the Official List or AIM, it had to obey the LSE's rules for trading. All companies incorporated in the U.K. had to file information with the government as specified by the Companies Act 1985. Yet one more entity was involved during takeovers, the Panel on Takeovers and Mergers. This self-regulating body was not part of the government, and oversaw the operation of The City Code on Takeovers and Mergers, which was designed to ensure fair and equal treatment of all shareholders, and provided an orderly framework within which takeovers could occur. Source: Timothy Oldridge, Esq., Partner at Taylor Wessing, and www.londonstockexchange.com, accessed January 13, 2003, and www.sec.gov, accessed January 13, 2003. 18 This document is authorized for use only by Xenia Wang in Venture Capital & Entrepreneurial Finance-Spring 2016 taught by