DUE DILIGENCE

DUE DILIGENCE DUE DILIGENCE QUESTIONNAIRE ? Croesus Management Group 2004 Croesus Management Group Due Diligence Questionnaire ______________________________________________________________________________________________________ __ DUE DILIGENCE QUESTIONNAIRE I COMPANY BACKGROUND (DIRECT TO MANAGING DIRECTOR) ? Croesus Management Group 2004 2 Croesus Management Group Due Diligence Questionnaire ________________________________________________________________________________________________________ I GENERAL BACKGROUND 1. Please supply the following basic information about the company: a) History of business, any predecessor companies and changes in capital structure, capitalisations or insolvency proceedings. b) Description of products/services, markets, principal customers, subsidiaries and their line of business. c) List of officers and directors, with their affiliations, ages and number of years in office. d) Number of people employed and their major areas of activity. e) Capitalisation and share distribution, including the number of shareholders and names of principal shareholders, rights of each class of capital and shareholders’ agreements. f) Terms of outstanding warrants, options and convertible securities. g) Any press clippings and media releases. h) Organisation chart. i) Names, addresses and contact personnel of company’s professional advisers, including legal, auditors, principal bankers and investment bankers j) Locations of company’s financial and legal records. k) State of incorporation and date incorporated. l) Key statistics and financial information. . 2. If any subsidiaries are not wholly owned, the details of outside ownership. 3. Has the company any significant investment in other companies (especially those carried on the balance sheet under the equity method of accounting). 4. What aspects of the business appear to be dominant in the industry (eg technology, product design, marketing). What factors make the company more attractive than other companies in the industry? 5. How can the company maintain a competitive advantage over other companies? 6. Have any of the company’s officers or directors been involved in criminal proceedings, regulatory violations or significant litigation. ? Croesus Management Group 2004 3 Croesus Management Group Due Diligence Questionnaire ______________________________________________________________________________________________________ __ 7. Any information regarding: a) The image of the company and its products and services compared to those of industry leaders. b) The reputation of present owners, directors, management and professional advisers. c) The trend of market share. d) Recent major developments among competitors. e) The extent of government or other regulation under which the company operates. f) Other external factors affecting the company, such as, the impact of a significant change in economic conditions. g) New developments, planned or in progress, including: , Industry programs affecting the company’s position in the industry , Capital equipment needs and commitments. h) Special skills and advantages, such as: , Technical position , Market dominance , Cost structures , Management/employee capabilities i) Major litigation, pending or potential. j) Cyclical factors affecting the industry. k) Credit rating. . l) Major operations discontinued in recent years or that may be discontinued in the near future. m) Contracts and leases nearing expiration. n) Labour negotiations pending. o) Trade association membership. p) International trends in similar industries. q) Major customers. r) Major suppliers. ? Croesus Management Group 2004 4 Croesus Management Group Due Diligence Questionnaire ______________________________________________________________________________________________________ __ DUE DILIGENCE QUESTIONNAIRE II MANAGEMENT & CONTROL (DIRECT TO GENERAL MANAGER) ? Croesus Management Group 2004 5 Croesus Management Group Due Diligence Questionnaire ________________________________________________________________________________________________________ II MANAGEMENT & CONTROL Management Approach 1. What would you say is the basic approach of management (eg. entrepreneurial, authoritative, management-by-objectives) and the extent of centralisation or decentralisation of authority? 2. Is the company well structured overall to best meeting the requirements of each area for management and supervision, eg. by activity, product, service, function, location. 3. To what extent could management be integrated or permitted to operate autonomously. 4. Will existing management remain in the employ of the company. 5. Set out the record of the management team as a whole, including: a) The success of the company relative to the industry. b) Whether the success of the company can be attributed to good management or a good market and industry. c) The strategies that management is using to increase market share and profitability. d) The intelligence demonstrated in taking advantage of anticipated changes in the marketplace and environment. e) The work environment that management has created in the company. Is the management as small in scale and as low in cost as possible. f) Does management work as an integrated unit or is it constantly dealing with crises and emergencies? Integrated and cohesive g) Are the right decisions being made at the right level of the organisation? 6. How would you rate the effectiveness of basic concepts and tools of good management, including: a) Documented objectives. b) Strategic and tactical plans c) Responsive organisational structures and . d) Effective policies and procedures. e) Adequate management information systems. f) Budgetary control and responsibility ? Croesus Management Group 2004 6 Croesus Management Group Due Diligence Questionnaire ________________________________________________________________________________________________________ g) Standards of performance and control. h) Management and manpower development. Planning 7. Outline: a) The company’s attitude towards the planning process, annual and long-term. b) Whether plans are well thought out. c) Whether plans and budgets are effective management tools 8. Who in the organisation is responsible for long-range plans and are the plans documented and communicated to the people responsible for implementing them? 9. Describe whether: a) In the budgeting process, the sales forecasts are based on real assessments of the market, rather than on percentage increases. How are costs estimated and how far down the company does the budgeting process extend? b) Budgets embody realistic assumptions of the availability of manpower, productive capacity and working capital. c) Long-term plans are integrated with capital budgeting and financial planning. d) Long-term plans reflect competitive reactions. e) These plans include alternative strategies. 10. State whether: a) Objectives are described so achievement can be monitored. b) Senior management assess operating personnel in working toward and achieving specified objectives. c) The company has a history of meeting its goals. d) The budgeting and internal accounting functions are integrated so that actual performance is reported on the same basis and under the same assumptions as the budgets were prepared. e) Actual is compared to budget, and if there is a formal procedure for documenting variances. ? Croesus Management Group 2004 7 Croesus Management Group Due Diligence Questionnaire ________________________________________________________________________________________________________ f) Actual financial results are used periodically to update budgets and revise the annual or quarterly financial projections. 11. Describe the procedures used to monitor the marketplace, such as: a) Market share. b) Activities of competitors. c) Attitudes of customers. Internal Controls 12. Set out the extent to which these basic elements of control operate within the organisation. a) The duties and responsibilities within the company are organised to provide adequate segregation of duties. b) The authority and responsibility of each function and person is clearly defined in a job description and understood by each person. c) There is an adequate accounting system that provides control over all assets and transactions. d) There are documented statements of policies and procedures. 13. Identify any cost reduction or profit improvement programs. On-going review of all facets of financial management. ? Croesus Management Group 2004 8 Croesus Management Group Due Diligence Questionnaire ______________________________________________________________________________________________________ __ DUE DILIGENCE QUESTIONNAIRE III INDUSTRY & COMPETITORS (DIRECT TO MARKETING MANAGER) ? Croesus Management Group 2004 9 Croesus Management Group Due Diligence Questionnaire ______________________________________________________________________________________________________ __ Markets 1. What is the demand for end product from the company? 2. Are customers individuals or corporate? 3. Is the company’s market new? 4. Does the company rely entirely on export or import markets? 5. Analyse factors affecting demand, including: a) Environmental issues. b) General business conditions. c) Population changes. d) New services, product changes or technological innovation. e) Advertising or promotional pressure. f) Governmental factors. g) Customer growth.. h) Ecological considerations. 6. Is the market for the company’s products entirely a function of the company’s ability to sell? 7. Describe market segments: , Type of customer , Geographic location , Product/service , Channel of distribution , Pricing policy 8. Analyse sales patterns and shifts. 9. Set out the record of sales performance. 10. Project growth/contraction trends. 11. Supply a forecast of sales expectations and estimated share of market. ? Croesus Management Group 2004 10 Croesus Management Group Due Diligence Questionnaire ________________________________________________________________________________________________________ 12. Give an estimate of the company’s ability to supply present and anticipated demand. 13. Review sales backlog, accounts receivable, sales correspondence and customer continuity. 14. Analyse present and probable pricing policies for services, considering: a) The sensitivity of both the industry and company to price changes. b) Whether there is a price leader. c) Whether there is price-cutting. d) Any excess capacity in the industry that might tend to depress prices. e) Whether the company has been able to pass along recent cost increases to customers. f) Regulatory factors, such as, the Australian Competition and Consumer Commission. g) Possible loss of customers. h) Whether there is a disproportionate level or type of sales to a number of customers eg. a high percentage of sales made to a few customers. 15. Assess advertising media and other sales promotion programs for cost and effectiveness. 16. Review trends in the major elements of marketing, including: a) Market forecasts compared to actuals. b) Sales cancellations and the reasons for them. c) Departmental costs compared to budget. d) Sales and expenses per salesman. e) Customer service costs. f) Shift in product mix profitability. g) Order processing costs. h) Customer complaints and loss of customers. i) Discount pattern by customer groupings. ? Croesus Management Group 2004 11 Croesus Management Group Due Diligence Questionnaire ________________________________________________________________________________________________________ j) New accounts opened. 17. Analyse the industry’s composition and, in particular, recent changes in that composition, considering: a) The number of companies that operate in this industry and whether that number has been declining or increasing. b) The recent merger, acquisition and divestiture deals that have occurred in the industry. c) The trends in the prices paid for these deals. d) Recent company closings or openings or announcements of such. e) The degree to which foreign companies are entering this market, possibly through joint ventures. f) The number of market leaders or specialists in this industry and whether they have diversified into other businesses. g) Whether the industry has significant over/under capacity. 18. Outline the factors critical to success in this industry by considering: a) The industry leaders and reasons for their success. b) The principal bases of competition: , Price , Service , Quality , Innovation 19. Determine the extent to which external factors influence the industry’s health: a) Existing or pending litigation. b) Governmental regulations, such as Trade Practices Act, ACCC or surveillance bodies, tariffs. c) Environmental issues. d) Any potential adverse political, social or economic conditions. e) The existence and power of any industry lobby groups. ? Croesus Management Group 2004 12 Croesus Management Group Due Diligence Questionnaire ______________________________________________________________________________________________________ __ DUE DILIGENCE QUESTIONNAIRE IV HUMAN RESOURCES (DIRECT TO HUMAN RESOURCES MANAGER) ? Croesus Management Group 2004 13 Croesus Management Group Due Diligence Questionnaire ________________________________________________________________________________________________________ IV HUMAN RESOURCES 1. Supply details of the number of employees by sex and age, grouped into operating activity and approximate total wage or salary cost of each category. 2. Outline all union affiliations and contracts for significant agreements, including industrial awards. 3. Identify what labour unions are represented in the industry and the Company. 4. What are the average pay scale and fringe benefits for employees? 5. Overview the industrial relations history for the past five years. 6. Are there any formal cases pending and how have similar cases been resolved in the past. 7. Outline the incentive system, average rates (incentive and hourly), the date they were established and date of the last updating of standards. 8. Describe: a) Labour morale and the handling of labour relations. b) Working conditions, statistics on staff turnover and reasons for it. c) Employment, recruiting and personal policies and procedures. d) Accident frequency and safety inspection reports. e) Medical problems and sick leave. f) The wage and salary administration system. g) Training programs and apprenticeships systems. h) The productivity of the labour force. i) Any unfilled positions. j) The cost and effectiveness of the personnel department. 9. Overview the general labour market, including: a) The types of skills available in the area. b) Current pay rates and personnel practices of the industry and of other companies operating in the immediate area. c) Area transportation, community recreation facilities, housing and schools. ? Croesus Management Group 2004 14 Croesus Management Group Due Diligence Questionnaire ________________________________________________________________________________________________________ 10. Supply information on management personnel, such as: a) The organisation of management functions and responsibilities. b) Management and key employees, including position, career path, age, compensation, retention outlook and management training received. c) The terms of any employee service agreements or whether unwritten understandings exist. d) Any replacement candidates for present management. e) Recent key personnel losses to competitors. f) The character and attitude of the key personnel. g) Whether there has been a recent major “turnover” in key staff or whether these personnel are “stable”. 11. In evaluating employee benefit programs, please provide: a) The details and costs of pensions, post-retirement benefits, profit sharing, life insurance, disability insurance, medical benefits, travel, accident bonus, deferred compensation and severance plans. b) Whether superannuation funds are presently over-undertraded (as determined by most recently conducted actuarial valuation) and whether the performance of fund managers is satisfactory. c) Benefits and salary levels compared with those of other companies. Does the company need to upgrade its benefit programs or salaries? If so, estimate the cost. d) Vacation and sick pay policies. e) The number and average cost of company-provided cars. f) Employee share ownership schemes including any share option, share bonus or partly paid share plans. How is the efficacy of the scheme judged and what are estimated resulting costs? 12. State whether there are any outstanding claims, such as, sexual discrimination, illness, negligence, workers compensation. ? Croesus Management Group 2004 15 Croesus Management Group Due Diligence Questionnaire ______________________________________________________________________________________________________ __ DUE DILIGENCE QUESTIONNAIRE V OPERATIONS (DIRECT TO OPERATIONS MANAGER) ? Croesus Management Group 2004 16 Croesus Management Group Due Diligence Questionnaire ______________________________________________________________________________________________________ __ V PROPOSED AND EXISTING OPERATIONS Plant and Facilities 1. Please supply information on: a) Location and description of plant and property. b) Proximity to transportation facilities, materials sources. c) Description of the area, including climate and natural hazards. d) Restrictions imposed by building costs and zoning laws. e) Utilities, including availability, usage and rates. f) Property taxes and other fixed costs. g) Title to property. h) The adequacy of insurance coverage. i) Any liens or actual or potential condemnation proceedings. 2. Also supply land information, including: a) Size. b) Cost. c) Assessed value and fair market (appraised) value. d) Current and possible future use and value. 3. Please supply building information, including: a) Description, pictures and current use. b) Cost, accumulated depreciation and depreciation rates and policies (or lease terms). c) Assessed and fair market (appraised) value. 4. Supply machinery and equipment information, including: a) A list of principal machinery and equipment showing cost, age and condition, accumulated depreciation, location and departmental use.? Croesus Management Group 2004 17 Croesus Management Group Due Diligence Questionnaire ________________________________________________________________________________________________________ b) Depreciation rates and policies (or lease terms). Refer Asset register and depreciation schedules - financials c) Lead times established, by product and vendor. a) Formalised make-or-buy analyses. b) Commodity specific. c) Price standards and variance accounting. 5. Identify if there is any concentration of purchases of any items from individual vendors. 6. Review operating information and trends for the purchasing department, including: a) Trend of cash discounts earned. b) Operating costs compared to budget c) Waste, scrap and salvage disposals. d) Rejection of material on incoming inspections. Inventories and Costing 7. Supply information on: a) Trends in inventory levels by reporting category. b) Stratification by value of fast-moving, slow-moving, excess and obsolete inventory. c) Seasonal inventory fluctuations. d) Inventory turnover by product line, in line of business, division or subsidiary. e) Basis of valuation (eg. FIFO, average costs). f) Trends in customer service levels. g) Sales and write-offs of obsolete stock over the past few years. h) Inventories of plant, equipment, parts. i) Returnable packages, sacks, containers, and pallets. j) Arrangements for and experience with inventory held by others, whether under consignment or otherwise. k) Extent of any “field warehousing” financing activity. ? Croesus Management Group 2004 18 Croesus Management Group Due Diligence Questionnaire ________________________________________________________________________________________________________ 8. For cost accounting procedures, explain: a) Whether the cost system is job cost of process cost. b) The costs that are included in overhead. c) Whether unfavourable volume variances from idle plant overstate inventory unit costs. d) How overhead is distributed. e) Whether standard costs are used, and how under and over-absorbed costs are allocated to inventory and cost of sales. f) In ascertaining lower of cost or market, how market is determined. g) The treatment of intercompany profit in inventory and its effect on ratio analysis by line of business. 9. Supply information on long-term contracts, including: a) Contracts entered into, noting products, types of customer, price terms, payment schedules, extent of sub-contracting and dollar volume. b) The method of recording income and provision for losses. c) Cost-estimate procedures and an analysis of cost overruns and underruns. d) Bidding procedures and strategy. e) Any disputes or litigation with customers subcontractors. 10. Overview trends of important controllable elements, including: a) The frequency and adequacy of physical counts and extents of adjustments required. b) The accuracy and quality of perpetual inventory records. c) Inventory security and insurance coverage. Research and Development 11. Assess the quality of service and market research available to the company. Compare it to that of the industry as a whole. 12. Identify the industry’s basic source of effective research. 13. Review industry expenditures for research and how the company’s research expenditure compares. 14. Identify the company’s policy regarding research and development. Review the percentage of sales it has been spending on R & D and any significant new services under development. ? Croesus Management Group 2004 19 Croesus Management Group Due Diligence Questionnaire ________________________________________________________________________________________________________ 15. Evaluate the company’s technical activities and services by classification. 16. Review the current and proposed staffing and personnel requirements for each activity. 17. Identify the methods of authorisation, funding and reporting for product engineering and company R & D, related to overall research plans and market requirements. 18. Assess the effectiveness of the R & D program and identify whether the research program actually produced new services during the past five years. 19. Set out the relationship of customer services to market activity, product sales and profitability. 20. Are proprietary rights on all services under development adequately secured? . 21. Identify any patents and trademarks held or that have been applied for. 22. Are there any agreements under which the company is licensee or licenser? Ascertain the level of the estimated current business models. 23. Are any key patents held by shareholders, management or other individuals. 24. Set out any infringement suits or claims that are outstanding. Environment 25. Does the company comply with national, state and local environmental regulatory agencies? 26. Evaluate the impact on operational costs and efficiencies of: a) Non-compliance with applicable regulations. b) Ensuring compliance. c) The use of by-products and recyclable materials. d) Recycling by-products and other materials for sale to third parties. ? Croesus Management Group 2004 20 Croesus Management Group Due Diligence Questionnaire ______________________________________________________________________________________________________ __ DUE DILIGENCE QUESTIONNAIRE VI LEGAL (DIRECT TO COMPANY SECRETARY) ? Croesus Management Group 2004 21 Croesus Management Group Due Diligence Questionnaire ________________________________________________________________________________________________________ IV LEGAL 1. What is the legal structure of the group and the relationship of the company with subsidiaries and/or holding companies. 2. Supply any minutes of meetings of the Board of Directors and minutes of committee meetings relating to any current or contingent legal proceedings to which the company is a party or is likely to become a party. 3. Outline the circumstances surrounding the prior issue of all securities of the company and whether they are likely to impact on the results of this due diligence investigation. No impact on Due Diligence investigation. 4. Identify any charges pending against the company by any governmental agency or public authority and the nature of such charges, including outstanding taxation obligations. State whether such obligations are likely to give rise to any penalties for non-compliance. 5. Do you believe that the proposed float will raise any trade practices problems and will it be in compliance with the applicable Companies Code and Trade Practices regulations and requirements? 6. Supply a copy of the most recent legal representation letters sent to the company’s auditors and identify any evidence of current or contingent legal proceedings involving the company. 7. Is the company in compliance with all relevant special Acts of Parliament (State or Federal) that are applicable to operations? 8. Is the company in compliance with environmental, equal employment opportunity and other regulatory requirements? If not, what efforts have or need to be made to ensure satisfactory compliance. 9. Is the company likely to experience legal action in relation to industrial matters? 10. Give confirmation that share capital has been validly issued and that the corporation is in good standing in the state of its incorporation and in all states in which it is doing business. 11. Identify any legal problems competitors have experienced and determine whether they will ever confront the company. 12. Assess whether the company has adequate insurance coverage with regard to public and professional indemnities. Ascertain whether such coverage has an effect on specific performance and warranty clauses in current or pending contracts. 13. Supply copy of the Memorandum and Articles of Association of the company. 14. Is there a current Shareholders list? 15. Are there any service agreements with the directors of the company? ? Croesus Management Group 2004 22 Croesus Management Group Due Diligence Questionnaire ________________________________________________________________________________________________________ 16. What is the legal/beneficial ownership of shares in the company? 17. Supply statutory registers ie. charges, options, directors and other officers of the company. 18. Identify any encumbrances over the property of the company (eg. mortgages and caveats). 19. Describe the financing arrangements relating to the company (eg. bank facilities). 20. List any intellectual property rights owned by the company and any licenses it may have given in respect of them. . 21. Are there any share investments or other interests the company holds in companies that are not part of its group. 22. Is the company a guarantor under any agreement? 23. Compile a list of the loans made by the company, as well as the loans in which the company is the borrower, and the security given as part of the loan agreement. 24. Is the company involved in any joint venture agreements? 25. Supply copies of any major or long-term contract containing unusual or onerous obligations and any agreements outside the ordinary course of business. 26. Does the company have any interest in land and is it freehold or leasehold. ? Croesus Management Group 2004 23 Croesus Management Group Due Diligence Questionnaire ______________________________________________________________________________________________________ __ DUE DILIGENCE QUESTIONNAIRE VII FINANCIAL (DIRECT TO THE COMPANY ACCOUNTANT) ? Croesus Management Group 2004 24 Croesus Management Group Due Diligence Questionnaire ______________________________________________________________________________________________________ __ VII FINANCIAL CONSIDERATIONS Financial Analysis Overview 1. Supply for the past three years: a) (Audited) financial statements. b) Recent corporate returns. c) Comparative financial results by division. d) The most recent unaudited financial statements. e) Tax returns f) Projected operating and financial statements. g) The chart of accounts and a description of accounting practices. h) Sales backlog information. 2. Supply industry data on: a) Market trends b) Economics of the industry. c) Accounting and auditing implications. d) Taxes. e) Management technology f) Employment benefit plans. 3. List the terms of the following agreements, where applicable, and of any other pertinent contracts or agreements: a) Bonus or profit-sharing plans. b) Royalty agreements. c) Union contracts and employment contracts. d) Long-term leases. ? Croesus Management Group 2004 25 Croesus Management Group Due Diligence Questionnaire ______________________________________________________________________________________________________ __ e) Sales contracts. f) Supplier contracts. g) Major marketing agreements. 4. Calculate the following ratios, on a company basis, and on a divisional basis where appropriate: a) Return on total assets (%). b) Return on net assets (%). c) Return on ordinary shareholders’ funds. d) Earnings per share e) Gross profit margin (%). f) Net earnings margin (%). g) Growth in net profit (%). h) Growth in earnings per share (%). i) Interest cover (times). j) Trade receivable turnover (times). k) Fixed assets turnover (times). l) Effective tax rate (%). m) Gross cash flow to net profit (times). n) Current (or working capital) ratio. o) Quick assets (or liquid) ratio. p) Debt to equity ratio. q) Net tangible assets per share. Accounting Policies 5. Are the company’s accounting policies in accordance with accounting standards, are they reasonable in the circumstances and have they been consistently applied. ? Croesus Management Group 2004 26 Croesus Management Group Due Diligence Questionnaire ________________________________________________________________________________________________________ Operating Results 6. Prepare a detailed comparative analysis of the profit and loss accounts for the last five completed years, and the most recent interim period. Where available, budgets for the periods under review should also be included. 7. Prepare an analysis of gross profit, reconciled to the gross profit reported in the financial statements. 8. Analyse operating results for unique or non-recurring items: a) Trends in sales, gross profit, net income, earnings per share, dividends and return on equity. Determine compound growth rates. b) The affects of acquisitions, dispositions and charges in accounting presentation. c) The costs of services sold, selling expenses, general and administrative expenses. Review these expenses for significant trends, especially controllable costs such as advertising, travel, entertainment, and repairs & maintenance. d) All extraordinary and abnormal items for the periods reviewed. e) Significant items in the other income and expenses categories. f) Annual interest expense and other fixed charges. g) Compensation paid to officers and key personnel. h) Legal retainers, consultants’ fees and similar arrangements. i) The impact of income taxes and changes in effective tax rates. j) Variations from budgets. Financial Positions , Cash 9. Delineate the company’s cash position, present and projected, including: a) Listing banks where the company maintains accounts and related balances at balance sheet date. b) Analysing total cash by function of account. c) Reviewing monthly cash balances and inquiring about unusual fluctuations and significant outstanding cheques or deposits in the reconciliations. d) Are idle cash balances promptly invested? e) Are seasonable bank borrowings required? ? Croesus Management Group 2004 27 Croesus Management Group Due Diligence Questionnaire ________________________________________________________________________________________________________ f) Evaluate the company’s cash management techniques and controls, including approved lists, credit limits. , Accounts Receivable 10. Provide an analysis of the total receivable balance for amounts due from customers, officers, employees and others. 11. Supply “aged” trial balances of all the amounts analysed above. Compare them to ageing percentages for previous years and note any deterioration in the overall age of receivables. Give explanations for major variations between years. 12. Analyse customer receivables, including: a) Terms of sales. b) The number of customers. c) The names of large customers and volume of annual sales to each by service line. Are there are any unusual arrangements with any of these customers. d) Turnover. e) Credit policies. f) The amount of unfilled orders. g) The effectiveness of the credit department. h) The real significance of credit limits. 13. Schedule the ratio of returns and allowances sales by month for the year and explain any fluctuations. 14. Are any receivables discounted or factored to finance operations. 15. State the purpose and repayment terms of loans (other than minor amounts) to officers, employees and others. How does the company determine the level of doubtful debt provisions and assess the adequacy of this provision. 16. How does the company establish credit terms? 17. Evaluate the collection efforts and effectiveness of debt recovery procedures. 18. Review the basis, appropriateness and adequacy of calculating other provisions (eg. discounts). ? Croesus Management Group 2004 28 Croesus Management Group Due Diligence Questionnaire ________________________________________________________________________________________________________ , Inventory 20. Prepare an analysis of inventories recorded on the balance sheet showing the various classes of inventory and inventory provisions. Are perpetual records maintained for the various classes of inventory? 21. Are appropriate controls and procedures in place over the physical movement of inventories and updating of accounting records? 22. In the counting and summarisation of physical inventories, are all items counted, regardless of whether or not they are deemed to have value. 23. Prepare a full description of the valuation policies and methods for each class of inventories, including the following: a) Basis of valuation (eg. lower of cost and net reliable value). b) Items reflected in costs of inventories (eg. inward freight, volume rebates, import costs such as duties and commissions, fixed and variable overheads). c) Methods used to assign cost (eg. standard cost, average cost, FIFO). d) Whether a job cost or process cost system is used. e) The costs included in overhead. f) The distribution of overhead. 25. Is an allowance for inventory shortages established? 26. Review purchasing cut-off procedures to ensure they are adequate. , Investments 27. Prepare an analysis of investments recorded on the balance sheet showing the cost, carrying value and market value of each item. 28. Review the classification of investment for appropriateness. 29. Has the company an acceptable policy for assessing the market value of listed and unlisted investments. 30. Assess the liquidity of the investments and whether the company will be required to contribute further working capital. 31. Has there been any material change in the market value of investments. ? Croesus Management Group 2004 29 Croesus Management Group Due Diligence Questionnaire ________________________________________________________________________________________________________ , Property, Plant & Equipment 32. Prepare an analysis of property, plant and equipment recorded on the balance sheet, showing separately amounts at cost and valuation, with accumulated depreciation shown as deductions therefrom. The analysis should show the figures at the end of the two previous financial years and the most recent interim period. 33. Provide explanations for major variations between the balances at the above rates. 34. Does the company have formal policies and procedures in relation to the following matters: a) Capitalisation (eg. capitalisation of capital expenditures above a certain amount, but expensing of lower expenditure). b) Depreciation methods (eg. straight line, diminishing balance). c) Commencement of depreciation (eg. from the month asset was placed into service). d) Assessment of economic lives and residual values of assets.. 35. Assess whether asset lives and residual values are periodically reviewed to determine whether changes to depreciation rates are warranted. . 36. Does the company maintain a detailed fixed assets register? 37. When the company carries out physical inventories of fixed assets, describe the following: a) The frequency with which they are conducted and the date of the latest physical inventory. b) The results of the latest physical inventory. c) Whether differences between the inventory and book records were adjusted in the general ledger. 38. Are controls in existence for the authorisation of fixed asset additions and disposals and for expenditure on repairs and maintenance? 39. Does the company have a written policy for differentiating between capital expenditure and repairs and maintenance?. 40. Assess whether there are any surplus and/or idle fixed assets, including land and buildings. 41. Have there been any recent market valuations of land and buildings and other fixed assets. Are such valuations reflected in the accounts? ? Croesus Management Group 2004 30 Croesus Management Group Due Diligence Questionnaire ________________________________________________________________________________________________________ , Intangibles 42. Prepare an analysis of intangible assets on the balance sheet, showing the cost, accumulated amortisation and net book value of each class of intangibles. 43. Explain how any goodwill and other intangibles arose and consider the acceptability of the basis upon which they are included in the balance sheet. 44. Do you consider that the company’s amortisation rates are reasonable in the circumstances? , Creditors, Accruals and Provisions For accounts payable and accrued expenses: 47. Supply an analysis of the type (eg. trade creditors, payroll, payables on reimburseable contracts) and described payment practices for each. 48. Compare the balances in the various accounts with those at the end of the previous month, quarter and year. 49. Does the company take appropriate advantage of discounts for prompt payment? 50. Supply a list of the company’s principal suppliers, together with the approximate annual amounts purchases. 46. Outline the company’s procedures and controls for ensuring that all material liabilities and provisions are properly taken up. , Debt Finance a) For borrowings (short and long-term): b) List the amounts of all financial liabilities and determine the general terms of notes, bonds and mortgages payable (eg. lender, payment schedules, interest rates, seniority, personal guarantees and other pertinent information). c) Note the nature and exact amount of assets pledged as collateral. d) Summarise aggregate payments due. 48. Are any amounts due to officers and shareholders and state the nature of the advances and repayment terms. e) Describe the terms of the facilities and assess whether all covenants have been complied with. f) Supply the terms of leases. What is the nature of the property subject to the leases and what renewal or purchase rights exist? ? Croesus Management Group 2004 31 Croesus Management Group Due Diligence Questionnaire ________________________________________________________________________________________________________ g) Are there any quasi-financing agreements (eg. put/call option contracts) and guarantees of debt of other entities? h) Supply information on any established lines of credit, terms and unused amounts available. i) Are there any “off balance sheet” items? , Contingencies and Commitments i) Prepare an analysis of all significant contingencies and commitments at the end of the previous financial year and the most recent interim period, including: a) Contingent Liabilities, such as: ii) Endorsements, warranties, sureties or guarantees. iii) Claims under costed contracts. iv) Claims for faulty goods. v) Claims, including liquidated damages, for breach of contract. vi) Claims under pollution control regulations. vii) Other claims for damages. viii) Claims under guarantees given by the company on behalf of subsidiary or associated companies, joint ventures, directors or employees. ix) Liabilities in respect of goods on hire purchase or hire purchase debts sold to finance company with recourse. x) Liabilities in respect of notes, drafts and bills receivable that have been discounted or sold with recourse. xi) Pending law suits, proceedings, hearings or negotiations possibly involving retroactive adjustments. xii) Inadequate insurance cover for events that occurred up to the accounting date. xiii) Uncalled liabilities on investments. xiv) Adjustments of consideration for any business acquired or sold. xv) Tax on undistributed profits of overseas companies. xvi) Options and working capital commitments. ? Croesus Management Group 2004 32 Croesus Management Group Due Diligence Questionnaire ______________________________________________________________________________________________________ __ a) Commitments b) Capital commitments, for the acquisition of fixed assets by purchase or by finance lease including fixed assets or investments either: , contracted for but not provided for, or , authorised by the Board of Directors but not contracted for. c) Pension commitments, whether legal or moral, whether provided for at the accounting date or not. Such commitments may include: , Future commitments in respect of past service or guarantees given. , Obligations to executive under specific arrangements not covered by a scheme. , Contractual obligations to staff generally or to certain groups of staff. , Obligations in relation to early retirement pensions. , Obligations to pay indemnities or compensation to staff on completing service contracts and , Commitments to pay pensions to past directors. i) Other financial commitments such as: , Significant commitments in the ordinary course of trading for a longer term or for a greater amount than normally experienced, such as: i) Purchase commitments extending more than one year from the accounting date. ii) Long-term supply contracts on favourable terms resulting in a drain on resources. , Forward purchase or sale contracts in relation to: i) Foreign currencies. ii) Commodities. , Commitments not in the ordinary course of trading, such as: 49. Leasing commitments, either in respect of finance leases or operating leases. 50. To borrow or lend money. 51. To acquire companies or net assets or to form joint venture, and 52. To purchase or sell investments. ? Croesus Management Group 2004 33 Croesus Management Group Due Diligence Questionnaire ________________________________________________________________________________________________________ , Equity a) Supply details of any preference shares outstanding. 50. For ordinary shareholders’ equity: 51. Supply a shareholders’ list. 52. Describe the rights for each class. 53. Does the company have any obligations to issue or repurchase shares. 54. Outline the company’s past dividend policy. 55. Are there any unusual capital accounts (eg. donated capital, appraisal surplus). 56. Set out the source and use of funds or cash flow statements for the last five years 57. Assess the extent to which the company’s growth has been (or could have been) financed by internally generated cash. 58. What is the company’s policy on financing its operations? 59. Assess the company’s relationship with banks, lenders and the financial community in general. 60. Review the capital budget and planned sources of funds. 61. Can the existing debt repayment schedule be met from operating cash flow? , Forecasts 62. Supply any available projections of earning and cash flow. 60. Evaluate the reasonableness of the assumptions used. 61. Review cash flow projections to determine that appropriate provisions have been made for investment in working capital, new plant and equipment. , Financial Management 62. Express an opinion about the overall creditability and reliability of the accounting system and reporting capabilities of the company. Consider the effects of private versus public ownership, tax-oriented accounting and the attitudes of senior management. a) Have any practices been adopted which may have made the company appear more attractive, including: 62. Adoption of less conservative accounting policies. ? Croesus Management Group 2004 34 Croesus Management Group Due Diligence Questionnaire ______________________________________________________________________________________________________ __ 63. Cutbacks in discretionary expenses, such as advertising, personnel development and maintenance. 64. Non-conservative accounting judgements, such as inappropriate provisions for sales returns, obsolete inventories or contingent liabilities. 65. Company expenses being paid by shareholders, directly or indirectly (eg. lease arrangements). 66. Whether shareholder-managers are drawing inadequate compensation. 67. Profit recognition. 68. Revaluations/over valuation of assets. a) Are there any “private company adjustments” including: a) Inappropriate stock valuations. b) Private expenditures. c) Unrecorded income. d) Excessive salaries, superannuation and other benefits for the major shareholder and family. e) Interest on shareholders’ loans. f) Personal security or guarantees given to secure the company’s debts and obligations. 63. Independent Review 64. Does the company have an audit committee or equivalent that takes an active interest in the company’s internal control system. . 65. Is the audit committee independent of management? 66. Does the committee adequately review the scope of audit of financial statements? 67. Does the committee effectively respond to findings of internal and external audit? 68. Is there evidence of frequent changes of, or an undue number of, independent legal or other professional advisers? . 69. Are the directors, as far as possible, independent of management and controlling shareholders. 70. Are Board meetings held on a regular basis and supplied with adequate information upon which to make decisions. 71. Is the Board actively involved in major decisions affecting the organisation? ? Croesus Management Group 2004 35 Croesus Management Group Due Diligence Questionnaire ________________________________________________________________________________________________________ 72. Assess the strength of the financial management and controllership function. a) How centralised is the accounting function and do subsidiaries have autonomous accounting departments. How is overall control exercised? b) Outline: 67. Whether interim reports are prepared on a consolidated basis or only by autonomous entities. 68. The manner in which foreign subsidiaries or branches report. 69. Consider the way management information reporting is integrated with financial accounting. Integrated with monthly and quarterly reporting. 69. Is exception reporting used? , Electronic Data Processing 70. List all significant accounting and operational functions currently on computer. 76. Assess the sophistication of the EDP installation and the extent to which various needs are integrated. 77. Are the needs of user departments satisfied by this function? 78. Supply a list of hardware used by the company and the lease terms. 79. Identify the company’s sort and long-term hardware plans. 80. Assess whether the EDP function could be rationalised. 81. Do you consider that there is any intangible software value? , Risk Management 82. Review the insurance currently in effect and the extent to which the company is assuming large deductibles or self-insured retentions. Considered satisfactory. a) Is insurance coverage determined on a “claims made” basis? . b) Identify any liabilities that have been assumed or transferred through contractual arrangements. c) Review any loss experience for insured and uninsured claims. d) Identify any unusual circumstances that may give rise to claims in the future that are as yet unreported. e) Identify the potential for cancellation of coverage, such a Director’s and Officer’s liability insurance. ? Croesus Management Group 2004 36 Croesus Management Group Due Diligence Questionnaire ________________________________________________________________________________________________________ f) Identify any outstanding premium adjustments and determine whether there will be any credits or charges for them. g) Review the methods by which accruals and tax deductions for premiums are handled. h) Does the company have an internal risk management/insurance department? i) Outline the principal taxes to which the company is subjected and the amount paid for the past five years. j) Supply detailed reconciliations of the company’s effective tax rate for the past five years. k) Consider any changes in the tax law that would affect the company. l) Describe: 89. Whether the company is required to file payroll or other business tax returns in other states and, if so, whether they have been filed and taxes been paid. 90. Whether local taxes have been accrued and paid currently. Identify any of these taxes that are in dispute. 91. Whether there are or have been any tax audits. 92. Whether all payroll taxes have been withheld from employees and forwarded promptly. 93. Whether there are any problems with other taxes to which the company is subject. a) Does the company have any significant foreign taxes or any significant local tax problems relating to its foreign operations, such as: 90. Foreign tax credits. 91. Inter-company pricing and re-allocation of income or expenses between related entities. 92. Any transfers of assets/liabilities to a foreign corporation. 93. Assess all other areas of potential tax exposure or savings including details of Franking Account. . a) Determine whether the company has obtained any private rulings. b) Assess the company’s internal tax function: To what extent does the company rely on outside advisers for tax planning and return preparation. How oriented is the company to tax savings. ? Croesus Management Group 2004 37 Croesus Management Group Due Diligence Questionnaire ________________________________________________________________________________________________________ Does the company maintain good tax records of items, such as the tax basis of depreciable assets, basis of subsidiaries, accumulated earnings and profits and deferred taxes? * * * * * ? Croesus Management Group 2004 38