AUSMAQ Litigation

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AUSMAQ Litigation

• IDOPORT PTY LIMITED ANOR V NATIONAL AUSTRALIA
  BANK LIMITED ORS
• Hearing commences 24 July 2000
• Supreme Court of New South Wales
• Justice Einstein

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Todays Agenda
1. The Litigation 2. AUSMAQ and the
acquisition 3. Mr Maconochies claim 4. The cross
claims 5. Damages 6. The final hearing
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Key Points

• What the AUSMAQ service was.
• What the Consulting Agreement provides.
• The National has put over 35 million into
  AUSMAQ.
• Mr Maconochie's damages claim is completely
  misconceived.

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What is AUSMAQ?
Fund Manager
Order
Issue/Redemption of Units
Advice
Adviser
Investor
Instructions
AUSMAQ
Fund Manager
Aggregated Orders
Order
Issue/ Redemption of Aggregated Amount
PARTLY AUTOMATED
PARTLY AUTOMATED
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How did AUSMAQ operate?

• Not fully automated service.
• Not fully in "real time".
• Not on internet.
• Not on Windows platform.
• No shares.

• No superannuation.
• Only dealt in managed funds and debentures.
• Not a master trust.
• Not multi-currency.
• No credit/loans.
• No partial units.

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HISTORY

• October 1995 System launched.
• 28 June 1996 AUSMAQ Limited in
• administration.
• (24 owned by AIDC)

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Executive Summary to Investment Proposal

• "An investment in AUSMAQ would need to be
  recognised as receiving a stake in a start up
  venture and as such of relatively higher risk
  than the acquisition of a mature business when
  the commercial potential is well demonstrated by
  actual track record."

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Executive Summary to Investment Proposal

• "Our logic is that AUSMAQ must first prove its
  core concept in Australia. Each addition to the
  core system and expansion into new territories
  would need to be subject to future business plans
  where NAB would have the opportunity to assess
  them separately in light of the circumstances at
  the time."

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The Acquisition

• Opportunity for the National recognised as high
  risk.
• Mr Maconochie's marketing plan and projections.

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Projections
AUSMAQ Projections
Qtr 1 Qtr 2 Qtr 3 Qtr 4 Cum Qtr 5 Qtr 6 Qtr
7 Qtr 8 Cum 96/97 97/98 Revenue 59 132 392
697 1280 1074 1548 2114 2708 7444 Expenses -534 -
545 -536 -540 -2155 -600 -660 -720 -800 -2780 Net
Cashflow -475 -413 -144 157 -875 474 888 1394 1908
4664 Cumulative Net Cashflow -475 -888 -1032 -87
5 -401 487 1881 3789
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The revenue forecast excludes revenue that may
be derived from the operation of stock markets in
shares, and the new client and group
superannuation account addition to the Service,
both expected in operation within9 months, but
possibly sooner for shares
John Maconochie30 June 1996
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Control

• Memo from Mr Maconochie to R McKinnon dated 9
  August 1996
• "JMG has granted THREE MAJOR CONCESSIONS which it
  has
• consistently denied to all other current suitors,
  ...
• These concessions are
• NABL will have 100 ownership of the IP from day
  one, and
• NABL will have 100 ownership of all development
  and operating entities from day one and
• NABL will have 100 control of all development
  and operating companies from day one.
• I confirm that JMG regards these as fundamental
  and major concessions
• made to ensure completion of the transaction as
  soon as possible".

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Heads of Agreement dated 20 August 1996

• "The corporate structure of the AUSMAQ group of
  companies will remain at the discretion of the
  Bank at all times and the Bank may organise the
  structure as it sees fit ...
• The System IP Rights and the Ausmaq Service and
  each entity which is engaged in the commercial
  exploitation of them generally will be owned and
  controlled by the Bank. There will be no
  limitations on the Bank as to how it organises or
  deals with the Assets (which will remain at the
  Bank's absolute discretion)".

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The Consulting Agreement

• Service Fee
• Performance Bonus

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Consulting Agreement dated 13 September 1996

• "6 SERVICES FEES
• 6.1 Payments for Consultants' time
• The Company will pay to JMG the Services Fee for
  the term of the Services Provisions (as
  terminable under clause 8). Payments of the
  Services Fee will be made within 7 days of the
  end of each calendar month by the Company to an
  account nominated by JMG. The Services Fee will
  be payable regardless of whether the Services are
  actually required by the Group for any particular
  time or in any particular month".

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Consulting Agreement dated 13 September 1996

• "7 PERFORMANCE BONUSES
• The Company will pay or procure the payment of
  periodic payments by way of performance bonuses
  as additional consideration for the Services of
  JMG on the following terms
• (a) The payments will be calculated by reference
  to the financial
• performance of each Operating Entity, and will
  be paid (in
• respect of an Operating Entity) by
• (i) the Company
• (ii) by the Operating Entity itself if it is a
  Group member,
• at the election of the Company
• (c) The amount of the Performance Bonuses will
  be determined in
• accordance with Schedule 2".

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November 1996 - August 1997

• Peter Crutchley
• First board meeting

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NAB Approach to AUSMAQ

• ...
• Growth potential in new products markets BUT
  MUST BE PROVEN

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NAB/JMG Balance of Interests

• Common goal of business profitability
• Broad split of roles
• JMG - dedicated consultants
• Product market development
• Business strategists
• NAB - controller/managers
• Operationally focused
• However final arbiter of all investment decisions
• Authority (has) to rest with NAB officers

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November 1996 - August 1997

• 1997 Business Plan
• Two scenarios
• Board approves scenario 1
• Problems with sales
• Previous sales experience
• Failure of sales efforts

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Monthly Dealers Registered
30
Sep
July
Aug
25
20
15
Jun
May
Apr
Budget
Actual
10
Jun
Feb
Jan
Mar
5
July
Apr
Jan
Feb
May
0
Mar
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Cumulative Dealers Registered
160
Sept
140
Aug
120
100
July
Cum Budget
80
Jun
Cum Actual
60
May
Apr
40
Feb
July
Jan
Existing
Jun
May
Mar
Apr
20
Feb
Jan
Existing
0
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Cumulative Clients Registered
1600 1400 1200 1000 800 600 400 200 0
Sept
Aug
July
Budget Actual
Jun
May
Apr
Mar
Jan
Feb
July
Jun
Feb
May
Mar
Apr
Jan
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Clients Registered by Month
300 250 200 150 100 50 0
Sept
Aug
July
Budget Actual
Jun
Apr
May
Feb
Jan
Mar
July
Jun
May
Jan
Apr
Mar
Feb
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Redirecting Mr Maconochie's Efforts

• Board concerns.
• Mr Crutchley and Mr Maconochie.

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Memorandum from Mr Maconochie to National Markets
Group Limited dated 3 May 1997

• "I believe that our May '97 review of the
  business will
• show
• a company adequately staffed with sufficient
  competent and suitably qualified people necessary
  to contain the business operational continuity
  risk and carry the company forward and
• expense and revenue items in line with budget".

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Redirecting Mr Maconochie's Efforts July 1997

• Mr Meikle appointed.
• Mr Maconochie to focus on development.
• Mr Meikle's 1997/98 business plan.

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The Proceedings

• Commenced September 1998.
• The National is currently funding AUSMAQ.

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Mr Maconochie's Claims
DAMAGES
PRE-CONTRACTMISREPRE- SENTATIONS
CLAIM
MISAPPROP- RIATION
POSTCONTRACTUAL- BREACH OF OBLIGATION
PROJECTS
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Cross Claim

• National cross claim against Mr Maconochie
• he did not disclose important market information
• he had a duty to disclose
• If he had, we would not have bought AUSMAQ

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Second Cross Claim

• Mr Maconochie claims
• Bank represented due diligence would be thorough
• We said we would exploit AUSMAQ internationally
  and would enhance system.We did not intend to do
  so

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Damages Mr Maconochie's Claim
Region Gross operating Market capitalisation
JMG loss revenue (at PE multiple of 60) (US
billion) (US million) (US billion) North
America 749 million 21.7 billion 7.3
billion Europe 665 million 19.5 billion 6.5
billion Asia and Oceania 712 million 20.8
billion 7.0 billion Total 2126 million 62
billion 21 billion
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Extrapolation of business plan numbers
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Nationals position on damages

• Damages assessment strongly disputed
• AUSMAQ would not have succeeded internationally
• Experts
• Australia and New ZealandAUSMAQ more costly and
  complex
• Other placesAUSMAQ would not have succeeded
• Valuation methodology wrong

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Court Timetable
Indicative Dates