Assignment No.

1: JORDAN WILLIAMS, INCORPORATED

Roll.No
Name Location City Groups
.
57 RAJKUMAR. K. Thiruvanmiyur Chennai
19
89 VISWANATHAN. N. Thiruvanmiyur Chennai

Key Points from Ted Chapman email to JWI Senior Management:

 NetKnowledge (NK) suffered losses of $29,693,086 and $19,909,857 in fiscal 2004 and fiscal
2003 respectively.

 In 2004, NK revenue increased by 20 % as a result of their major advertising campaign and

expansion of the sales force.

 NK going to cut down its operating expenditures by 80 percent of the amounts in fiscal 2003
($27,609,269).

 With current revenue at $17,547,648 and assuming an ongoing revenue growth rate of 20
percent, NK will be profitable in three years (i.e., at the end of fiscal 2007, revenue of
$30,322,337 will exceed expenses of $27,609,269).

 At the end of fiscal 2004, NK had approximately $20,000,000 in cash and cash equivalents. The
net decrease in cash and cash equivalents in fiscal 2004 was approximately $10,000,000. Thus, it
appears that the company will be able to survive for at least two years (through fiscal 2006).

 In the fourth quarter for fiscal 2004, NK signed contacts with three additional Fortune 500 clients
to deliver services in 2005.

 An investment of $10,000,000 would give JWI a substantial equity position in a firm that we
predict will be successful. Furthermore, it would allow us to have a substantial say in the
direction of NK, thus insuring that the company remains focused on our long-run needs in
addition to the needs of its other clients.

 Alternatively, in light of the fact that the company will be only a year away from profitability at
the end of fiscal 2006, if we decide not to make an equity investment, NK should be able to
obtain additional debt or equity financing from creditors or investors.

Observations from Financial Statements:

 From Net Knowledge, Inc. Income Statements, it can been seen that Interest Income
($1,120,000) is less than Interest Expense ($1,340,600).
  From NetKnowledge, Inc. Balance Sheets, NK have issued bonds for $ 14,400,584 to raise long
term debt in 2004.

 From NetKnowledge, Inc. Balance Sheets, the Total stockholders’ equity have decreased to $
7,221,520 in 2004 from $ 36,914,606 in 2003.

 From NetKnowledge, Inc. Statement of Cash Flows, Increase in accounts payable and accrued
expenses is $ 880,590.

 From NetKnowledge, Inc. Statement of Cash Flows, the Net cash used in operating activities is $
23,746,903 for 2004.

Analysis of the Recommendation given by Ted Chapman

As per Ted’s analysis,

 NK will be profitable in three years.

 NK has the cash to sustain it until it reaches profitability.

 NK revenue will approximately grow 20 percent per year.

 NK expanses will approximately be 80 % of 2003 for the upcoming years.

 NK net decrease in cash and cash equivalents is approximately $10,000,000 per year.

 JWI can make an equity investment with cash of $10,000,000 in NK for its third year survivals
before it becomes profitable and likely able to fund itself internally.

 Alternatively, in light of the fact that the company will be only a year away from profitability at
the end of fiscal 2006, NK should be able to obtain additional debt or equity financing from
creditors or investors.

Ted has missed out an important information in the NK’s Cash Flow Statement under Financial
activities. NK have issued bonds for $ 14,400,584 during 2004. Also their actual net operating cost is $
23,746,903. Hence Ted has made a serious error in interpreting NK’s Cash Flow Statement by
estimating the net decrease in cash and cash equivalents as approximately $10,000,000 per year.

Adding to it , this is going to increase Interest Expense for the upcoming years due to issuing of the
bonds.

If NK would have not issued the bonds in 2004 , their Cash and cash equivalents, end of period would
have been $ 5,550,884 which clearly shows that NK is in severe cash crunch.
Also Ted’s analysis of NK being profitable in there is overly optimistic. He expects the revenue would
grow by 20 % every year and their expanse would remain steady at 80% of 2003. This seems highly
impossible considering the fact NK is an infrastructure and service company where the technology is
likely to change rather dramatically over the next three years, requiring increased investments.

Regarding attracting equity investors at the end of fiscal 2006 for additional debt or equity financing
seems to be unconvinced. Since NK will be operating under heavy losses for 4 years in a stretch and
may require additional debt by the beginning of 2006 itself for survival.

Also considering the fact NK have signed contracts with three additional Fortune 500 clients to deliver
services in 2005 which will add additional revenue and also might add up additional operating cost.
Since we don’t have a clear information about the revenues that is going to be generated out of this
contracts, we have not considered it as an major factor in deciding upon the strategic alliance.

Also Ted’s suggestion on JWI make an equity investment with cash of $10,000,000 in NK seems to be
remote possibility. Since JWI has to invest heavily to modify its existing content to make it more
focused on the corporate training market and to make it compatible with NetKnowledge’s delivery
platform.

Conclusion:

Pursuing an alliance with NK does not appear to be a good idea for JWI. Since NK is already in a severe
cash crunch and would require additional debt soon to survive. Also with NK’s current loss figure and
Ted’s estimation of 3 more years for NK to be profitable would unlikely to attract creditors or investors
to obtain additional debt or equity financing.