Article's: GUIDE TO PERFORMING A BUSINESSMAN'S REVIEW

AN OVERVIEW OF THE INVESTIGATION PROCESS

BACKGROUND

If a business combination is to have a reasonable chance of succeeding, it

must be properly planned and the acquisition candidate thoroughly

investigated. The purpose of this Guide is to assist clients and our

personnel in designing and performing a thorough investigation,

particularly one type of investigation commonly referred to as a

"Businessman's Review." The Guide is divided into two sections:

- An Overview of the Investigation Process

- The Businessman's Review Checklist

The first section discusses the various types and stages of a purchase

investigation, together with some common problems and exposure areas. The

second section contains a model Checklist for a Businessman's Review,

which is usually performed during the preliminary negotiations. The

purpose of the Businessman's Review is to obtain a general understanding

of an acquisition candidate and whatever information is required without

verification before deciding to proceed with the negotiations.

To decide whether a deal is as good as it appears, the acquiror should

conduct an investigation, and verify the representations the seller has

made to strike the deal. We broadly refer to this effort as the "purchase

investigation." It is an ongoing activity that begins even before there is

a general understanding. It may involve fact gathering, review, analysis

and verification, or only some of these activities depending on the

circumstances.

Why is the investigation so important? Because the risks inherent in

acquisitions increase dramatically without it. Buying a business without

adequate information, or with half-truths, can lead to a significant

financial loss. Although this may sound simplistic, this basic principle

is frequently violated.

In some instances, purchase investigations can be ineffective, and may not

provide the information necessary to properly evaluate the candidate and

made a sound decision. The cause may be poor communication,

misunderstandings, lack of careful planning, failure to fix

responsibilities and coordinate the effort and, perhaps most important,

the fact that the investigation often focuses on the quantity of

information it can obtain, rather than on the quality. Important

information either gets lost in a sea of paper or the right information

never gets collected.

For example, with respect to marketing information, acquirors should focus

on data that help them evaluate why the acquisition candidate has been

successful in the marketplace and whether its competitive strategy will

continue to be viable, not just on market share or growth statistics. With

respect to financial information, acquirors should focus on major exposure

areas, trends and unusual financial characteristics - not on every item in

the financial statements.

NATURE AND SCOPE OF A PURCHASE INVESTIGATION

Depending on their experience and time availability, a company's personnel

can perform a purchase investigation with or without the help of outside

consultants (e.g., accountants, investment and merchant bankers, lawyers,

special industry consultants, actuaries, appraisers). We recommend that

management play a major role in the investigation. This permits them to

obtain information that is important to the ultimate decision to proceed,

and can be helpful in the successful operation of the business after

acquisition.

The scope of an investigation may range from a minimal effort (such as a

review of available financial information, visits to company facilities

and discussions with management concerning representations made or other

matters) to a comprehensive effort (involving a detailed investigation

and/or purchase audit). The type of investigation depends on management's

need for information, the size and relative significance of the

acquisition candidate, the availability of audited and internal financial

information, the degree of inherent risk, the time allowed, etc. For

example, in the case of a tender offer, the ability to analyze internal

information on the target company may be limited. Consequently, the

acquiror and its professional advisers may not be able to do much more

than gather, compile and analyze available public information. However, in

the case of a private company, the need for a full-scale investigation is

much greater and is more difficult to perform. This would also apply to a

divestiture by a company.

Frequently, an acquiror performs more than one type of investigation on

the same candidate or performs its investigation in stages as the

acquisition process moves forward. For example, it may be advisable to

perform a preliminary investigation before the general agreement is

reached or before the contract is signed. As noted earlier, this

preliminary investigation is a "Businessman's Review." It is usually

performed without independent verification or audit, and is designed to

obtain and analyze information needed before deciding to proceed with the

negotiations.

Later, after a general agreement is reached, it is wise to extend the

investigation and audit the seller's financial statements and/or verify

the representations made by its management. Whether this later

investigation involves a complete purchase audit or only limited

verification procedures depends on the degree of assurance required.

Once a definitive agreement or contract is signed, a purchase audit may be

required to verify the closing date financial statements. If a purchase

audit was already performed before the contract signing, updating

procedures may be all that is required to detect material changes

occurring between the date of the purchase audit and the closing.

THE ROLE OF THE BUSINESSMAN'S REVIEW

At a fairly early stage, the acquiror needs to obtain sufficient

information about the seller's operations to make a decision whether or

not to proceed with the acquisition. The Businessman's Review fulfills

this need.

This Review involves fact gathering and analysis, usually without

independent verification, of an acquisition candidate's financial and

accounting records or other information obtained. The acquiror's

management may or may not participate in this Review, and the Review may

be performed in one or several stages at various points during the

negotiations. The Businessman's Review provides a broad understanding of

all aspects of the company's business, including:

- Industry information

- Marketing methods

- Manufacturing and distribution methods

- Financial reporting systems and controls

- Industrial relations

- Comprehensive understanding of the company's financial statements,

accounting data and tax posture

- Research and development programs

- Regulatory reporting requirement

- International operations

- Legal matters

Besides obtaining information on the seller, the Businessman's Review may

also include a detailed review and analysis of the information obtained.

The scope of this part of the Review usually depends on the nature of the

transaction and the particular needs of the acquiring company. Usually,

however, accounting and tax principles and practices are reviewed in

depth, with special emphasis on the problems related to the intended

acquisition. The acquiror and its independent accountants must agree at

the outset on the scope of this part of the Review, and the acquiror must

understand its objectives and limitations.

Because the Businessman's Review normally generates a great deal of

information, management should prepare a checklist of questions for the

seller in advance. This will ensure that the buyer gets the right kind of

information from the seller. The Checklist contained in the second section

of this Guide can be used as a model; it can be used in its present form,

or sections can be added or deleted to suit a particular situation. For

example, the "Industry Analysis" section can be deleted if an analysis is

already available on the seller's particular industry. Also, the section

on "Research and Development" activities may be omitted if it is not

relevant. A section on international factors can be added if the company

is engaged in international activities.

The Checklist focuses primarily on financial and accounting matters,

particularly in the review and analysis phase. Generally, the buyer has

focused on nonfinancial or operating matters during its own investigation

(e.g., quality of products, reputation with customers, manufacturing

efficiency, management capabilities, etc.). However, the independent

accountant can be helpful in obtaining this information as well, which

explains why the Checklist contains sections on nonfinancial and operating

matters.

PURCHASE AUDIT AND OTHER VERIFICATION PROCEDURES

In some cases, review and analysis may not be enough. The buyer may

require an audit of the seller's financial statements and/or verification

of the representations made by its management, depending on the desired

degree of assurance, the seller's past audit history and the time

permitted. These verification procedures may involve a comprehensive

purchase audit or specially designed auditing procedures applied to

specific accounts and/or exposure areas. For example, inventory is such a

significant item to manufacturing and distribution enterprises that

auditors are frequently asked to observe and test the physical inventories

and audit the valuation, with particular emphasis on excess and obsolete

inventory and valuation practices.

These procedures often turn up undisclosed problems, particularly in

today's environment. Although management may not wish to incur the cost of

an audit, it does provide an additional level of assurance.

When the seller has a history of audits done by a reputable accounting

firm (which also may have prepared its tax returns), and the audited

financial statements are reasonably current, a purchase audit may not be

necessary, except in areas normally not covered by the annual audit, e.g.,

quality of the seller's products, its reputation with customers and other

nonfinancial areas. However, at a minimum, the seller's auditors'

workpapers should be reviewed in detail to identify potential problems and

exposure areas. This review may eliminate the need for independent

verification.

AREAS OF INVESTIGATION

The Businessman's Review, whether performed alone or in conjunction with

verification/auditing procedures, should accumulate a portfolio of basic

information about the seller. Depending on the extent of the particular

Review, it should investigate and analyze the areas noted below. If, after

the Review, the reliability of the information is suspect or if the buyer

wants greater assurance, a full purchase audit or other verification

procedures may be necessary.

COMPANY BACKGROUND AND HISTORY -

The general nature of the business, principal locations and facilities,

history and similar information should be collected in the early phase of

the investigation. In addition, information is usually obtained on

management, directors and outside advisers. Whenever possible, information

on recent developments in the company, plans for the future and major

problems, including lawsuits, government restrictions, environmental

considerations and sensitive transactions, should be covered.

INDUSTRY ANALYSIS -

When a proposed acquisition is in an industry new to the buyer, a detailed

industry review is prudent. This review normally is performed prior to the

investigation of a particular company.

Factors usually included in the industry analysis are:

- Competition - within the industry and from other industries - and

relative market share.

- Industry growth rates in sales and profits (past and projected),

and external factors affecting industry growth and profitability.

- Mergers and acquisitions in the industry - to determine if a

business combination is crucial for survival or growth in the

industry.

- Government regulations - degree and trends.

- Patents, trademarks, copyrights, etc. - important to the companies

within the industry.

- Key factors of success, barriers to entry and threats.

In many instances, companies may engage industry experts and consultants

to assist in the analysis.

FINANCIAL AND ACCOUNTING DATA -

it is useful to compare financial ratios by major business segments for a

period of years to determine important trends. These ratios usually

include, as a minimum, return on assets and stockholders' investment,

gross profit, profit margin, fixed charge coverage, current ratio, net

quick ratio and debt-to-equity ratio. Information concerning the impact of

inflation or cyclicality on operations and the company's ability to

operate in such an environment, together with current value and/or

replacement cost data and future capital requirements, also should be

obtained.

It also is useful to obtain and analyze the prior years' balance sheets,

statements of income and statements of changes in financial position, as

well as budgets and forecasts for the future. Understanding projected cash

flow and the underlying assumptions used in such projections is extremely

important. In addition, it is important to understand any differences in,

or questionable aspects of, accounting principles and practices followed

by the seller. The most important differences and questionable aspects

usually relate to bad debt reserves, inventory valuation depreciation,

accounting for long-term contracts, accounting for pensions and employee

benefits, reserves and special industry practices.

In the inventory valuation area in particular, questionable practices are

often uncovered such as valuing production overruns, excess stock or

returned goods at full cost.

TAXES -

The tax returns and status of tax examinations of the acquisition

candidate should be reviewed. This review normally will serve a dual

purpose. A review of the seller's tax status should satisfy the buyer that

the tax liabilities of the business being acquired are properly stated on

the seller's books. In addition, the tax review should focus on the

buyer's ability to monetize a portion of his investment through proper tax

planning strategies, tax attributes of the seller, etc.

The tax liability review essentially asks the question, "Has the seller

paid all its tax liabilities on a current basis and has a reasonable

reserve been accrued for known and anticipated adjustments likely to arise

on in-progress and future audits by various taxing authorities?" Although

the procedures used to satisfy these questions will vary depending on the

size of the candidate, complexity of the seller's particular tax

situation, etc., generally they will entail a review and analysis of the

tax returns filed for a minimum of three prior years with special emphasis

on the reconciliation between financial statement and taxable incomes,

together with a review of the most recent report of adjustments made by

the various taxing authorities, relating the nature of the adjustments to

years still open for examination. The results of this review then are

compared to the reserve for taxes, or so-called "cushion," to determine

whether the seller has provided adequately for any tax exposures.

Historically, these reviews focused primarily, if not exclusively, on

federal income tax issues that could result in a permanent tax cost.

Recent developments indicate that an expansion of scope probably is

warranted in many situations in the areas and local income taxes and the

interest cost of tax "timing items." Focusing on permanent disallowances

or adjustments measures a seller's liability for past taxes in absolute

dollars. In recent years, however, several countries, including the United

States, have escalated dramatically the interest imposed on assessments

for past taxes and most recently have adopted a compound versus simple

interest methodology. Thus, although timing differences such as

capitalization of repairs or a disallowance of financial statement

reserves will result in no additional tax over time, the shifting of

deductions to later years or acceleration of income to earlier years can

result in a very substantial interest cost.

State and local taxes also should be considered in this review process.

For example, in the United States, many states have become extremely

aggressive in taxing multistate enterprises. Some of those states are

actively pursuing collection of additional taxes for prior years. With the

advent of accelerated cost recovery in the United States, state taxes for

many enterprises are becoming an increasingly greater share of the overall

corporate tax bite. Accordingly, the buyer should consider a detailed

review of the seller's state and local taxes. Multinational companies

present unusual problems in this area and, depending on the size of the

international operations, may warrant tax reviews on a country-by-country

basis.

Succession of the seller's tax attributes also is an important area to

review. Because of recent tax legislation in the United States, many

companies today have tax net operating loss carryforwards, unutilized

investment tax and other credits. Depending on the type of acquisition

structure, these tax attributes can represent significant cash savings to

the buyer after the acquisition. Therefore, quantifying these attributes

is an important step in the review process. Quantification must go beyond

merely copying numbers from the tax returns. The buyer must get behind the

numbers and adjust the attributes for potential softness due to aggressive

tax positions that could be challenged successfully by the tax

authorities. If the buyer is purchasing a company's stock from an existing

consolidated group, an important part of this phase of the review is

advising the buyer on how to protect against the loss tax benefits

associated with postacquisition net operating losses or excess credits

that can be carried back for tax purposes to the preacquisition tax years

of the seller. This involves arranging the proper tax-sharing agreement

with the seller tailored to the specifics of the transaction.

Depending on the type of transaction, the tax review should also include a

tax basis analysis and an evaluation of potential "step-up" opportunities.

If the buyer is considering financing a potential acquisition by selling

off certain assets of the acquired company, it should make a careful

review of the potential taxes due on the sale of those assets, taking into

account the fact that tax basis of assets is usually less than the book

value. An evaluation of the seller's "step-up" potential and recapture tax

costs associated with this "step-up" starts with an allocation of the

purchase price to the various assets of the seller. From there, the

recapture costs associated with the allocation are quantified and compared

to the tax savings derived from "stepping up" the tax basis of the

seller's assets. Because the recapture taxes are required to be paid

within a short time after the acquisition and, typically, the "step-up"

will be realized over a number of year to arrive at a true comparison, it

is necessary to discount the future tax savings using a reasonable

interest rate. Unfortunately, recent tax law changes in the United States

have increased the potential for recapture tax liability, thereby making a

"step-up" of the tax basis of the assets less attractive unless a major

portion of the "step-up" can be allocated to inventories or similar

short-lived assets.

Investment tax credits, depreciation, international and DISC earnings and

profits and LIFO inventory reserves are just some of the types of

recaptures that could arise if a "step-up" is elected in the United

States. To combat these higher recapture costs, the buyer should look for

intangible assets of the seller that can be assigned value and for which a

useful life can be developed, e.g., patents, customer lists, etc.

HUMAN RESOURCES AND INDUSTRIAL RELATIONS -

The buyer must appraise the capabilities of the seller's management,

particularly when buying a company in an unrelated industry. The buyer

should interview key officers and managers, review their prior business

experiences, investigate their backgrounds and compare compensation

benefit levels and plans because changes often will result from the

transaction.

The buyer should review union contracts, strike history and related

factors to determine any existing problems. Many planned personnel savings

may not be possible because of labor agreements. Pension, profit sharing

and other employee benefit plans also must be reviewed to determine the

effect of the future operations of the combined business. If the seller

has many long-term employees, the buyer's cash flow will be depressed when

unfunded pension benefits must be paid upon retirement. On the other side

of the equation, many pension funds now have surpluses, making

acquisitions less expensive.

MARKETING -

The buyer should obtain information on and analyze various product and

marketing factors concerning:

- Sales, profit and backlog by product line

- Descriptions of major products and new product developments

- Annual and monthly sale histories (long-term trends and seasonal or

cyclical fluctuations)

- Government sales

- Major customers

- Marketing and sales organization, including special compensation

arrangements

- Sales planning and forecasting methods

- Advertising and promotion expenditures and methods

- Distribution channels and strategy

- Customer satisfaction and buying power

- Market shares of key competitors

- Product life cycles and technological obsolescence

- Pricing strategy

- Competitive strategy

- New product development

The trends should be compared to industry averages to determine the

company's relative performance. Competitive and potentially competitive

new products should be investigated because of their possible negative

impact on the seller's future results.

The marketing intelligence obtained and present sales trends by product

should be compared to an analysis (aging and usage by item) of inventory

to detect excess and obsolete inventory. Scrapping of inventory after the

company is acquired can be very costly.

MANUFACTURING AND DISTRIBUTION -

A review of the manufacturing and distribution areas should include:

- Each production facility (name, location, owned/leased, book value,

fair market value, capacity, employees, present condition, present

utilization, alternative uses, etc.).

- Manufacturing processes.

- Suppliers of major raw materials.

- Physical distribution methods (purchase, intracompany transfers,

final sales to customer).

- Manufacturing efficiency.

RESEARCH AND DEVELOPMENT -

The buyer should analyze past R&D programs (cost and actual or estimated

benefits), current and planned programs (estimated cost and benefits),

personnel and facilities utilized in R&D and the method of accounting for

R&D.

FINANCIAL AND MANAGEMENT CONTROL SYSTEMS -

Understanding a seller's internal reporting and control systems is always

important, particularly when the seller is in a different industry. The

acquiring company probably will rely heavily on the seller's existing

systems, since it is normally not possible to install identical systems in

both companies because of differences in operations or management

philosophy or because of the cost involved in conjoining systems.

Production and material control systems and order systems are particularly

important since deficiencies can seriously impact the company. However,

basic accounting controls are also important because of their potential

impact on the accuracy of reporting and employee fraud.

REGULATORY REPORTING REQUIREMENTS -

Reporting requirements promulgated by various regulatory authorities

should be given special attention because they can have a profound effect

on the future of the business. Ignoring them may result in substantial

fines and embarrassment. The buyer should be satisfied that the seller's

facilities in compliance with the various regulatory authorities, such as

the Environmental Protection Agency (EPA) and Occupational Safety and

Health Administration (OSHA) in the United States.

INTERNATIONAL FACTORS -

If the target company is engaged in international trade or has other

international activities, the acquiror should have a good understanding of

these international operations and how they impact the overall operation.

Questions concerning the international country's investment climate, trade

and investment restrictions, exchange controls, inflation rates and

reporting requirements should be addressed. Repatriation of earnings may

be necessary to repay acquisition debt, but may be impeded by exchange

controls or the seller's international tax credit limitation status.

DISCRETIONARY EXPENSES -

The seller can defer certain expenses, such as research and development

costs and repair and maintenance costs, for the short term with adverse

long-term effects. A careful review of these discretionary expenses can

avoid possible future unanticipated outlays of capital, which effectively

increase the cost of the acquisition.

COMMON PROBLEMS OR EXPOSURE AREAS

Following are some of the common financial and accounting problems

frequently uncovered in Businessmans's Reviews or other types of

investigations:

- Undervaluation of inventory by private companies to minimize taxes,

which can lead to distorted earnings trends and potential tax

assessments - This undervaluation usually is accomplished through

conservative pricing, excessive obsolescence writedowns or failure to

count inventory on hand accurately.

- Overvaluation of inventory due to unrecorded inventory obsolescence

or over-costing - This may be caused by product overruns, sales

returns and allowances, changing technology, new product development

and maturing or discontinued products. This may occur even when a

substantial LIFO reserve exists.

- Litigation - Few firms totally free from litigation. The most

common litigation results from product liability, which frequently

doesn't surface until after the acquisition is completed.

- "Dressing up" financial statements before selling a company - This

tactic can include deferral of R&D expenses and repairs and

maintenance, "release" of inventory reserves, inadequate reserves,

faulty estimates or changes in estimates or assumptions (e.g., for

bad debt reserves, pension accounting, sales returns and allowances,

warranties, slow-moving and excess inventory, etc.) and undisclosed

changes or aggressive accounting principles or methods.

- Receivables not collectible at recorded amounts - Doubtful

accounts, cash and trade discounts, dated receivables and sales

returns and allowances may not be adequately reserved.

- Certain investments may not be realizable - Investments accounted

for using the equity method and nonmarketable investments are

required to be written down only for "permanent impairment" in value,

not for temporary declines. Liberal judgments may have been applied

to avoid recognition of permanent impairment.

- Credibility and integrity of management - Often a private

investigation is needed to obtain sufficient information and

background on management to determine if they are right for the job

and trustworthy.

- Inclusion of personal expenses in the financial statements of a

private company - These expenses usually decrease reported net

income; however, this practice also can be used to yield a favorable

result when one does not exist, i.e., to change historical trends.

- Tax contingencies - One of the more important problem areas in an

acquisition. Most companies tend to be very aggressive when preparing

tax returns. A careful review of current and prior years' returns and

Revenue agents' reports should be made, and any unusual items should

be noted.

- Unrecorded liabilities - May include vacation pay, sales returns,

allowances and discounts (volume and cash), pension liabilities,

claims, items resulting from poor cutoffs, loss contracts and

warranties, among others.

- Related-party transactions - Most often found in private companies,

these can have a material effect on the company under new ownership

or on the historical trends presented.

- Inadequate financial controls, including poor pricing and costing

policies, and weak budgeting systems and controls.

- Major customers or contracts - Usually loss of one could have a

material effect on operations.

- Need for significant future expenditures - These could include

plant relocation or expansion, replacement of aging property, plant

and equipment and new product development.

- International operations - These present multiple problems of their

own including labor, management and operating difficulties, as well

as those of a financial nature.

- Unusual transactions and extraordinary items, such as sales of

assets - These often improve the trend presented and should be

identified and evaluated carefully.

The foregoing are some of the common financial and accounting problems

that a Businessman's Review and/or other type of investigation can

uncover.

CONCLUSION

A purchase investigation should provide the acquiror with a thorough

understanding of the seller's business, particularly concerning aspects

that are not readily known and/or are critical to the ultimate acquisition

decision. Accordingly, the investigation should be designed to obtain and

verify predetermined essential elements of information the acquiror needs

to evaluate the candidate properly. It also should provide for

verification of the information obtained whenever the reliability of that

information is important and/or suspect. The Businessman's Review is the

first step in the investigation process, and often the most critical. The

following section contains a Checklist that can be used for such Reviews.

This Checklist provides a standardized, fact-finding approach, eliminating

the initial start-up time and cost of designing information-gathering and

review procedures.

The importance of management's participation in the investigation cannot

be overemphasized. Management should be the prime mover, scope-setter and

leading edge of the investigation, in both financial and nonfinancial

areas. Too often management delegates the entire investigation to outside

accountants or industry experts, and important information is overlooked.

In addition, the "feel" for the seller, its management and qualitative

considerations so necessary in making the "buy" decision often are lost

when management does not take a primary role in the investigation.

THE BUSINESSMAN'S REVIEW CHECKLIST

INTRODUCTION

As discussed in the preceding section, this Checklist can help the buyer

obtain a broad understanding of all aspects of the seller's business

before independent verification is required. Verification or auditing

procedures frequently are employed at a later point in the negotiations to

substantiate the information obtained from using this Checklist.

The breakdown by area allows different members of management with

pertinent functional responsibility to review specific areas, with or

without the assistance of outside consultants.

The sections on Financial and Accounting Data, Financial Reporting System

and Accounting Procedures and Controls and Taxes are more detailed than

the other sections because they frequently are reviewed with the

assistance of independent public accountants. The other sections normally

are reviewed by company personnel with the occasional assistance of the

accountants or other outside specialists (engineers, employee benefit

specialists, actuaries, industry and marketing experts, etc.). Therefore,

these other sections are somewhat general because they are intended to

provide only a broad overview.

It is essential at the outset that management agree on the scope of the

review, its objectives and limitations, and the persons responsible for

reviewing each area. This will ensure that the right type of information

is obtained to properly evaluate the acquisition candidate.

This Checklist is intended only as a guide. Although the Checklist can be

used in its entirety, sections should be added or deleted to suit the

particular circumstances and information needs of each case.

I COMPANY BACKGROUND

A. Company Name

____________________________________________________________________________

B. Address

____________________________________________________________________________

C. Telephone Number

____________________________________________________________________________

D. Other Principal Locations (Describe)

1. Sales ___________________________________________________________________

2. Manufacturing ___________________________________________________________

3. Other ___________________________________________________________________

E. Date of Incorporation

____________________________________________________________________________

F. State of Incorporation

____________________________________________________________________________

G. Ownership

____________________________________________________________________________

1. Public or private _______________________________________________________

2. Exchanges on which traded _______________________________________________

3. Type of securities outstanding (common stock, preferred stock, etc.) ____

4. Principal stockholders and percentage of ownership ______________________

H. Directors

_______________________________________________________________________________

List all Directors Years as Other

Name Director Affiliations

-------------------------------------------------------------------------------

_________________________ ____________________ _________________________

-------------------------------------------------------------------------------

Identify board committee participants and chairperson, i.e., audit

committee, etc.

I. Outside Experts

-------------------------------------------------------------------------------

Years Description

Name Employed of Relationship

-------------------------------------------------------------------------------

1. Attorneys ___________________ __________ _____________________

2. Auditors ___________________ __________ _____________________

3. Bankers ___________________ __________ _____________________

4. Other - describe ___________________ __________ _____________________

-------------------------------------------------------------------------------

J. Brief Description of Business - Attach detailed description, if available.

Include all significant business segments, organizational structures,

products or services the company has developed, etc.

K. Brief History of Company - Attach detailed description, if available.

Include any recent significant changes in ownership and business operations.

L. Selling Objectives of the Company and Related Information

1. Why is the company for sale? ____________________________________________

_________________________________________________________________________

2. Who are the individuals responsible for the sale of the company? ________

_________________________________________________________________________

3. Are there any minority or dissenting shareholder rights that may affect

the sale transaction? ___________________________________________________

4. What are the proposed terms and conditions of the acquisition (e.g.,

cash/stock/combination thereof, etc.)?

_________________________________________________________________________

5. Is there an anticipated time frame to consummate the transaction? _______

_________________________________________________________________________

6. What are the tax objectives of the seller and its shareholders? _________

_________________________________________________________________________

7. What are the tax consequences to the seller and its shareholders? _______

_________________________________________________________________________

8. What is the anticipated accounting and tax treatment? ___________________

_________________________________________________________________________

9. Who is responsible for payment of brokers' fees (buyer/seller

responsibility)? What is the amount, terms, and when payable?

_________________________________________________________________________

M. Management

1. What is the reputation of major shareholders, directors and management?

_________________________________________________________________________

2. Will they continue after the sale with or without employment contracts?

_________________________________________________________________________

3. Have the company's officers, directors or major shareholders been

involved in criminal or other legal proceedings?

_________________________________________________________________________

4. Will the sale trigger severance or other employee benefit obligations,

loss of key customers or contracts, employee resignations, etc.?

_________________________________________________________________________

5. Have obvious management actions been taken to make the company look more

attractive, i.e., deferral of bonuses, research and development,

advertising and capital improvement expenditures, etc.?

_________________________________________________________________________

N. Recent Major Developments and Trends

1. Have there been any major trends or developments within the company?_____

_________________________________________________________________________

2. Have there been any major trends or developments within the industry

and competition?

_________________________________________________________________________

O. Plans for the Future - Obtain corporate minutes for the past______years and

any operating plans (including those pertaining to contemplated discontinued

operations), forecasts, budgets, etc., that are available.

P. Related Parties - Are the operations of the company significantly impacted

by related-party transactions? If so, list the parties and describe the

relationship and transactions.

____________________________________________________________________________

Q. Major Litigation, Pending or Potential - Describe and obtain letters from

attorneys assessing litigation.

____________________________________________________________________________

R. Governmental Restrictions and Regulation - Describe impact on business._____

____________________________________________________________________________

S. Cyclical Factors-Describe any affecting the industry._______________________

____________________________________________________________________________

T. Credit and Securities Rating - Obtain Dun & Bradstreet Report and securities

analyst research reports (if a public company)._____________________________

____________________________________________________________________________

U. Major External Forces That Affect the Company - Describe and note the

source._____________________________________________________________________

____________________________________________________________________________

V. Political and Social Attitudes Toward the Company - Describe and note the

source._____________________________________________________________________

____________________________________________________________________________

W. Related Industry Perception - Describe the general perception of suppliers

and customers toward the company. Specific supplier and customer checks

should be performed as part of Section II (Industry Analysis), Section VII

(Marketing - Products), Section VIII (Manufacturing - Distribution) or as

part of subsequent verification procedures.

____________________________________________________________________________

X. Other Comments _____________________________________________________________

____________________________________________________________________________

II INDUSTRY ANALYSIS

A. Industry Structure

1. Number of companies by size category ___________________________________

2. Degree of industry concentration _______________________________________

________________________________________________________________________

3. Merger and acquisition trends

a. Vertical ____________________________________________________________

b. Horizontal __________________________________________________________

c. Other _______________________________________________________________

4. Business failures/successes

a. Trends ______________________________________________________________

b. Causes ______________________________________________________________

5. Industry structure

a. Geographic location _________________________________________________

b. Product lines _______________________________________________________

c. Channels of distribution ____________________________________________

d. Pricing policies ____________________________________________________

e. Degree of integration _______________________________________________

f. Type of customer ____________________________________________________

6. Barriers to entry by new companies _____________________________________

________________________________________________________________________

B. Industry Growth

1. Estimated Annual Growth Rate - Last _________Years

==============================================================================

Total $ % Increase Variation Analysis*

______________________________________________________________________________

a. Sales _______ __________ _____________________

b. Profits _______ __________ _____________________

c. Market Share _______ __________ _____________________

==============================================================================

2. Estimated Annual Growth Rate - Next __________Years

==============================================================================

Total $ % Increase Variation Analysis*

______________________________________________________________________________

a. Sales _______ __________ _____________________

b. Profits _______ __________ _____________________

c. Market Share _______ __________ _____________________

*This should include reasons for growth or lack thereof, including demand

changes, cyclicality, trends, market share changes, competitive changes, etc.

==============================================================================

3. Factors Affecting Growth

==============================================================================

Major Minor Describe

______________________________________________________________________________

(check one)

___________

a. Demographic trends _________________

____________________________________ _____ _____ _______________

b. General economic trends ____________

____________________________________ _____ _____ _______________

c. Disposal income ____________________

____________________________________ _____ _____ _______________

d. Interest rates _____________________

____________________________________ _____ _____ _______________

e. Industry composition and trends ____

____________________________________ _____ _____ _______________

f. Market size ________________________

____________________________________ _____ _____ _______________

g. Market share _______________________

____________________________________ _____ _____ _______________

h. Technological innovation ___________

____________________________________ _____ _____ _______________

i. Production design __________________

____________________________________ _____ _____ _______________

j. Economic of scale __________________

____________________________________ _____ _____ _______________

k. Product pricing and differentiation

____________________________________ _____ _____ _______________

l. Imports/Exports ____________________

____________________________________ _____ _____ _______________

m. Advertising or marketing developments

____________________________________ _____ _____ _______________

n. Government factors _________________ _____ _____ _______________

- Demand ___________________________ _____ _____ _______________

- Fiscal Policy ____________________ _____ _____ _______________

- Regulation _______________________ _____ _____ _______________

o. Customer buying power ______________

____________________________________ _____ _____ _______________

p. Environmental considerations _______

____________________________________ _____ _____ _______________

q. Other (describe) ___________________

____________________________________ _____ _____ _______________

==============================================================================

C. Competition

1. Other companies in industry and their strategy _________________________

________________________________________________________________________

2. Competition from other industries, i.e., substitute products ___________

________________________________________________________________________

3. Nature and extent of trade practices and cooperation ___________________

________________________________________________________________________

4. Key factors for success, barriers to entry and major threats to success

________________________________________________________________________

D. Customer/Suppliers by Industry

1. List major industries to which products are sold.

==============================================================================

Total Industry Sales/

% Growth Rate/Market Share

___________________________________________

Last Next

Description ( ) Years ( ) Years Source

______________________________________________________________________________

________________________________ ___________ _________ ________________

==============================================================================

2. Has there been significant growth of new customers/suppliers in the

last five years? ______________________________________________________

3. Has there been a trend integration of suppliers and reverse integration

of customers?

_______________________________________________________________________

4. Is there a dependence on a few key customer/suppliers? _________________

_______________________________________________________________________

E. Labor - Overall industry and regional analysis

1. Are adequate community services and skilled labor available? ___________

________________________________________________________________________

2. Are the local pay rates industry competitive? __________________________

________________________________________________________________________

3. Have there been recent union negotiations and/or labor contract renewals?

What were the results and settlements of union negotiations?

________________________________________________________________________

4. What is the degree of unionization in the industry? ____________________

________________________________________________________________________

F. Government Regulations

1. To what extent is the company regulated by the government? (describe) __

________________________________________________________________________

2. What regulatory agencies are responsible? ______________________________

________________________________________________________________________

3. Is there a trend to increased regulation? ______________________________

________________________________________________________________________

4. Are there any unique reporting requirements? ___________________________

G. Patents, Trademarks, Copyrights, etc.

Are patents, trademarks, copyrights, etc., important in the company's line

of business? If so, describe major patents; indicate expiration dates and

discuss any recent patent litigation.

H. Other information - Obtain and attach, if available, current periodicals,

newspaper, clippings, trade association releases, company-prepared

documents (including annual reports, projections, budgets and business

plans, public filings and brochures), Standard & Poor's Reports, Value

Line Surveys, Moody's Manual extracts, securities research reports,

government data including IRS publications and census studies, etc., that

provide additional background on the particular industry and competition

therein. This should include, wherever possible, the opinion of suppliers,

customers, distributors, competitors, lending institutions and other

involved parties. The material should include, but not necessarily be

limited to, what is being done by the leaders within the industry in terms

of product, processes, marketing, pricing, organization, financing and

performance trends in terms of volume, market share, profitability and

growth.

III FINANCIAL AND ACCOUNTING DATA

A. Financial Statements - Obtain:

1. Balance Sheets- Annual and interim for last _______ years.

2. Income Statements - Annual and interim for last ________ years.

3. Statements of Changes in Financial Position and Cash Flow - Annual and

interim for last _______ years.

4. Comparative financial statements for major business segments, product

lines and geographical locations (include a breakdown of sales, gross

profit, operating profit and net assets as a minimum).

_________________________________________________________________________

5. Prospectuses and Registration Statements (if any) _______________________

_________________________________________________________________________

6. Most recent Proxy Statement _____________________________________________

_________________________________________________________________________

7. Interim Financial Statements and Form 10-Q - Most recent ________________

_________________________________________________________________________

8. Dun & Bradstreet, Standard & Poor's and/or Value Line Reports ___________

_________________________________________________________________________

9. Other SEC Filings-Forms 10-K, S-1, etc. _________________________________

_________________________________________________________________________

10. Financial and operating projections, budgets, business plans, etc. ______

_________________________________________________________________________

11. Federal, state and local tax returns and Internal Revenue Service, state

and local agent reviews for last _______ years.

B. Assets

1. Cash

a. Name and number of major disbursement accounts. ______________________

______________________________________________________________________

b. Average cash balance for last. _______ years.

c. Have all bank accounts been reconciled on a timely basis and all

unusual reconciling items been properly explained?

______________________________________________________________________

d. Are there any restrictions due to compensating balances? _____________

e. Is cash in other than local currency, and, if so, is it subject to

restrictions?

______________________________________________________________________

2. Receivables - Describe the recognition policy for recording revenues

and establishing receivables.

a. Accounts Receivable

- Credit Terms - Describe collection, discount and return policies.

____________________________________________________________________

- List receivables that are discounted/factored - With whom, cost,

terms, purpose, etc.

____________________________________________________________________

- List all major receivables segregating trade, employee and other

for amounts over _______ %, ______ %, _______ % of respective

balances. Also segregate and highlight accounts receivable that

represent conditional sales.

____________________________________________________________________

===============================================================================

Current

Amount

Name Receivable Terms Age % Explanation*

_______________________________________________________________________________

____________________ __________ ________ ____ _____ ___________________

*Explain any trade receivables over _______ days old, and employee/officer or

other unusual receivables over $_______.

===============================================================================

b. Notes Receivable - List all notes over $ ________.

Indicate if any collateral is held.

===============================================================================

Amount Interest Explanation-

Name Receivable Rate Date Due Description

_______________________________________________________________________________

______________ ______________ _____________ _______________ _______________

===============================================================================

c. Obtain a description of the company's bad debt reserve policy.

d. Obtain a summary of bad debt experience for the last ______ years

and most recent interim period.

e. Obtain support for and determine reasonableness of general and

specific reserve balances.

f. Obtain a summary of the reserve for returns and allowances for

the last _______ years.

g. Obtain receivable aging and turnover analyses for last ___ years.

3. Investments

a. Marketable securities - List all holdings.

(Segregate current and long-term portfolios.)

===============================================================================

Date Effective Market Original Carrying

Description Acquired Yield Value Cost Value

_______________________________________________________________________________

___________________________ ________ __________ ______ ________ __________

===============================================================================

b. Other investments - List all other investments.

===============================================================================

Date % of Effective Estimated* Original Carrying

Description Acquired Ownership Yield Value Cost Value

_______________________________________________________________________________

_________________ ________ ________ _________ _________ _______ _________

*Indicate source of estimates for all significant investigations. Attach

financial information, and determine if more detailed review is required.

===============================================================================

4. Inventories - Obtain breakdown for each major component and product

line. Determine location of inventory (on hand, in transit, at outside

warehouses, etc.), ownership vs. "bill and hold" or on consignment and

whether pledged as collateral for outstanding borrowings. Obtain

specifics.

===============================================================================

Category Age or Beginning Estimated

By Turn- of Replacement

Product over Latest Beginning Previous Valuation Estimated

Line Rate* Date of year ( ) Years Method Cost NRV

_______________________________________________________________________________

Raw

materials _____ ______ _________ _________ _________ _________ _________

Work in

process _____ ______ _________ _________ _________ _________ _________

Finished

goods _____ ______ _________ _________ _________ _________ _________

Total _____ ______ _________ _________ _________ _________ _________

_______________________________________________________________________________

NOTE; Include a breakdown of labor, material and overhead content by category.

*Disclose how calculated and details.

===============================================================================

a. Describe physical inventory and cutoff procedures. ________________

___________________________________________________________________

b. Describe inventory accounting records (e.g., do perpetual

inventory records exist?; is the gross profit method used to

determine interim inventories?).

___________________________________________________________________

c. Dates of last ______ physical inventories; amount and nature of

adjustments. Obtain book-to-physical reconciliations and analyses.

d. Date of next physical inventory. __________________________________

e. Describe inventory reserve policy (excess, slow-moving, obsolete,

etc.), and procedures to identify such inventory.

___________________________________________________________________

f. Describe procedures used to determine net realizable value. _______

___________________________________________________________________

g. Analyze reserves and writedowns for past ______ years and most

recent period.

h. Compare trends in product line sales, new product development and

changing technology to inventory levels by product.

___________________________________________________________________

i. Analyze seasonal inventory requirements/fluctuation. ______________

___________________________________________________________________

j. Describe the inventory and production cost system. Is a standard

or actual cost system used? What are the accounting implications?

___________________________________________________________________

- How is job or process costing accomplished? _____________________

- What costs are included in overhead, and what overhead

allocations are made? List overhead rates for past ______ years

and most recent period.

_________________________________________________________________

- What assumption is made about practical capacity for purposes of

absorbing overhead costs? Is it conservative?

_________________________________________________________________

- How are returns, overruns and scrap costed?

_________________________________________________________________

- Have variances been significance if a standard cost system is

used? If so, obtain an analysis of variances by product line for

the last ______ years.

k. Describe inventory valuation procedures and assess degree of

reliability.

___________________________________________________________________

l. List open long-term contracts, including name and type of customer,

price, terms, profit recognized, total estimated cost, costs

incurred to date and estimate to complete, progress billings to

date and scheduled, subcontractors, details and the method of

recording income or loss. Obtain an analysis of historical

variations and open contracts. Inquire about procedures used and

their reliability. Note: A separate investigate work program may

have to be designed if the seller produces under long-term

contracts due to the inherent lack of accounting precision

normally attributable to such contracts.

___________________________________________________________________

5. Plant, Property and Equipment

a. Land - Obtain for each major holding

===============================================================================

Estimated Value

-------------------

Date Basis of

Location Description Acquired Cost Amount Valuation Liens

-------------------------------------------------------------------------------

___________________ _____________ ______________ _______ __________ _____

===============================================================================

b. Plant and Equipment - Obtain for each major facility

===============================================================================

Estimated

Original Book Estimated Replacement Accumulated Depreciation Remaining

Location Description Age Cost Value* Value* Cost Depreciation* Method* Life Lien

--------------------------------------------------------------------------------------------------------

________ ___________ ___ ________ ______ _______ ____________ ____________ ____________ _________ _____

*For tax and book purposes.

**Describe method and valuation, i.e., liquidation, going concern, etc.

========================================================================================================

c. Obtain a list of any significant plant, property and equipment

additions or retirements for past _______ years, and of projects

currently under construction or committed to.

d. Obtain a summary of all significant leasehold improvements,

including original cost, accumulated amortization, he period of

amortization and related lease expiration dates.

e. Describe the accounting policies of plant, property, equipment,

construction costs, interest during construction, start- up or

preoperating costs, recognition gains and losses upon

retirement/disposal and maintenance and repairs. Also describe

the depreciation and amortization policies.

_________________________________________________________________

f. Obtain a summary of changes in policy or estimates over the

past ______ years.

6. Other Assets - Obtain a description and analysis, including nature, how

they arose, capitalization and amortization policy, rights of use, liens,

threats to loss in value, appreciation, etc.

a. Goodwill _____________________________________________________________

b. Deferred charges _____________________________________________________

c. Research and development _____________________________________________

d. Organization costs ___________________________________________________

e. Contract rights ______________________________________________________

f. Patents ______________________________________________________________

g. Trademarks/Trade Names _______________________________________________

h. Other ________________________________________________________________

C. Liabilities

1. Accounts Payable

a. List all companies that constitute _____% or more of the total

accounts payable balance, or that account for _____% or more of annual

purchases during the past _____ years.

===============================================================================

Current Last Year $

Amount Amount of Description of Materials/

Name Payable Purchases Services Purchased

_______________________________________________________________________________

______________________ ___________ ______________ __________________________

b. Describe any unusual credit terms or relationships that exist with

the companies listed, e.g., volume discounts, extended terms,

commitments, etc.

_____________________________________________________________________

c. Describe normal credit terms - Are discounts taken, etc.? ___________

_____________________________________________________________________

2. Accrued Liabilities - Obtain an analysis of the current balance and the

balance at the past ______ years. Explain significant variations.

a. Have all required items been properly accrued, i.e., professional

fees, employee benefits, payroll, taxes, vacation pay, claims,

probable contingencies, severance and retirement benefits, warranty

costs, pension liabilities, planned move or facility shutdown costs,

utilities, unvouchered purchases, etc.?

_____________________________________________________________________

3. Notes Payable - List all notes over $ ______.

===============================================================================

Amount

_________________________________

Interest Payment

Payee Description* Rate Date Original Current Schedule

_______________________________________________________________________________

_______ _______________ _________ _______ __________ _________ __________

===============================================================================

4. Long-Term Liabilities - List.

===============================================================================

Amount

_________________________________

Interest Payment

Payee Description* Rate Date Original Current Schedule

_______________________________________________________________________________

_______ _______________ _________ _______ ___________ ________ __________

*Include conversion rights, other equity features, prepayment premiums,

sinking-fund requirements, effects of ownership changes, and credit ratings by

outside sources.

===============================================================================

5. Banking Relationships - List all banks with whom the company maintains a

borrowing relationship.

===============================================================================

Line of

Credit

Terms/

Unused Letters Commitment Interest Borrowing

Bank Name Location Balance of Credit Fees Costs History

_______________________________________________________________________________

_____________ ___________ ________ __________ ____________ _________ __________

===============================================================================

6. Obtain Loan Agreements and Indentures - Can all debt be assumed in the

case of an asset purchase or liquidation? State restrictions on debt

assumptions, if any.

_________________________________________________________________________

7. Describe financial covenants, and attach latest compliance computations

and auditor's/ officers' certification.

_________________________________________________________________________

8. What assets, if any, are pledged as collateral against the liabilities?

_________________________________________________________________________

9. Obtain an analysis of short-term borrowing patterns for past _____ years

(minimum and maximum levels, average amount, weighted average interest

rate, etc.), and compare to the cyclical nature of sales, inventory and

production levels, indicate interest rate and security required, if any.

_________________________________________________________________________

10. Describe any "off-balance-sheet" financing and obtain a summary of terms

and restrictions.

_________________________________________________________________________

D. Potential Unrecorded Liabilities - is an overall review for unaccrued and

unrecorded liabilities regularly performed by the seller? How?

____________________________________________________________________________

Have the following been considered?

1. Product and sales related:

a. Product safety or truth-in-advertising problems.

b. Product liability claims - Obtain a summary of reserves for

warranties for the past _____ years and discuss warranty policy,

reserve requirements and unusual trends with management.

c. Service guarantees.

2. Employee related:

a. Obtain recent compliance reports or deficiency letters issued by

governmental agencies or other regulatory authorities.

b. Describe any OSHA, EEO or other violations, and actions the company

has taken to resolve them.

_____________________________________________________________________

c. Are there any occupational diseases inherent to the industry? _______

d. What other unusual employee obligations exist? ______________________

e. Is the company a member of a multiemployer pension plan, and have the

related funded and unfunded accumulated benefits been calculated?

_____________________________________________________________________

f. Do unions have the right to veto planned facility shutdowns or be

compensated as a result?

_____________________________________________________________________

3. Environmental problems - Have there been any environmental regulation

violations or warnings given to the company? If so, what actions does

the company plan to take to resolve them, and what will the related

cost be?

_________________________________________________________________________

4. Sensitive transactions--Describe the nature, extent and action taken with

respect to any sensitive transactions or irregularities.

_________________________________________________________________________

E. Contingent Liabilities and Commitments

1. Leases

a. List all leases for which the company is obligated by category

(capital or operating).

===============================================================================

Years Remaining Description of Description of

Minimum --------------- Escalation/ Renewal/

Annual Non- Adjustment Purchase

Description Amount cancellable Total Terms Options

_______________________________________________________________________________

______________ ________ ____________ ______ _____________ ________________

===============================================================================

b. List the aggregate minimum capital lease payments for the next ______

years, and the related imputed interest (in the aggregate) to derive

the present value of such future lease payments. Has such amount

been reflected as a liability? How has the related asset been

reflected?

_____________________________________________________________________

c. How does the present value of capital leases compare to their fair

market value?

_____________________________________________________________________

d. Describe major sublease terms. ______________________________________

_____________________________________________________________________

e. Has the availability/cost of entering into new lease agreements been

assessed?

_____________________________________________________________________

2. Litigation

a. Has the company been involved in any significant litigation in the

past ______ years, or is it threatened by pending or unsettled

claims? If so, list and describe the nature of those claims and the

current status. Attach legal opinions and representation letters

provided to the company's auditors, if available.

b. Are there any legal problems or potential litigation presently facing

the industry, and if so, what effect might this have on the company?

_____________________________________________________________________

c. Are there any potential antitrust problems, and have they been

considered in connection with the proposed acquisition?

_____________________________________________________________________

3. Loan Guarantees

a. List any loans for which the company is a guarantor, and assess the

financial condition of the related companies. Do subsidiary loans,

guarantees or exchange laws restrict dividend payments to the parent

company?

_____________________________________________________________________

4. Open Contracts

a. List all open contracts. Describe the nature and potential cost,

including informal agreements (i.e., consultants, severance, death,

pension, etc.).

_____________________________________________________________________

F. Stockholders' Equity - Net Worth

1. Summarize for all classes of stock:

a. Type ________________________________________________________________

b. Shares Authorized ___________________________________________________

c. Shares Outstanding __________________________________________________

d. Voting Rights _______________________________________________________

e. Liquidation Preferences _____________________________________________

f. Dividends ___________________________________________________________

g. Terms of Warrants and Options Outstanding ___________________________

h. Major Owners ________________________________________________________

i. Date Acquired by Major Owners _______________________________________

j. Major Owner Cost Basis ______________________________________________

k. Market Price Range __________________________________________________

l. Special Terms, Conversion Features __________________________________

2. Obtain a shareholders' list.

3. Obtain a list of treasury stock activity for the past ______ years.

4. List any stock option or purchase plans, and attach details concerning

each.

_________________________________________________________________________

G. Accounting Policies

1. Obtain a summary of significant accounting policies and procedures.

2. Obtain auditor's report and management's representation letters for the

past ______ years. Are there any issues or events that resulted in other

than an unqualified opinion?

3. Describe any significant changes in accounting principles, policies or

estimates over the past ______ years.

_________________________________________________________________________

4. Describe any accounting policies that are unique to the company's

industry.

_________________________________________________________________________

5. Describe any accounting policies that differ from industry practice,

represent alternative methods where other preferable methods exist, or

are excessively conservative or aggressive.

_________________________________________________________________________

6. Determine if the interim financial statements are prepared on a basis

consistent with that of the annual report. Describe any differences.

_________________________________________________________________________

7. Describe any proposed accounting pronouncements or government regulations

that may have significant impact on the company.

_________________________________________________________________________

8. Describe major accounting policy differences from that of the buyer.

_________________________________________________________________________

9. Have the financial statement effects of the above been quantified, where

appropriate, and have financial ratios been adjusted accordingly?

_________________________________________________________________________

H. Financial Statement Ratio Analysis

See Exhibit l for key ratios frequently used to help evaluate a proposed

acquisition.

1. Future Operating Results and Pro Forma Estimates

a. Has support projected financial statements been obtained? ___________

_ What methodology is the forecasted growth based upon (e.g.,

regression analysis, trend projection and extrapolation,

economic and/or industry indicators, market studies, management

estimate)?

_________________________________________________________________

_ Are the assumptions concerning sales growth (volume and price,

gross margins, working capital requirements, operating expenses,

capital expenditures, financing requirements and terms, etc.),

reasonable based on historical results, trends, industry and

overall business expectations, etc.?

_________________________________________________________________

b. Do the basic financial ratios (i.e., profit to equity and sales,

sales to assets and others in Exhibit l) indicate that projected

levels of growth are feasible without significant infusions of

outside capital or changes in historical financial ratios? If not,

how will increased financing, faster asset turnover, improved profit

margins and dividend increases be accomplished?

_____________________________________________________________________

c. Identity and describe any factors that could impact the pro forma

financial statements significantly and that are not readily apparent

from a review of the historical financial statements. The following

items may not be recorded at their current fair market value. The

extent to which these and other factors affect the pro forma

statements will depend on whether the acquisition is accounted for

as a pooling of interests or purchase and whether it is taxable or

nontaxable.

_____________________________________________________________________

Items that may not be recorded at fair market value--

_ Lease agreements

_ Long-term receivables/obligations

_ Plant, property and equipment

_ Inventory

_ Intangible assets, patents, copyrights, computer software

_ Distribution agreements, customer lists, licenses

_ Pension obligations and assets

_ OSHA, EPA and other regulatory deficiencies and related expected

obligations

_ Severance costs (anticipated layoffs)

_ Customer lists, licenses, franchises, air rights, easements

_ Net of tax valuation adjustments (resulting from different tax

vs. accounting valuations)

_ Other

Potential future earnings adjustments

_ Excessive expenses incurred to reduce tax liability, i.e.,

personal expenses, excessive owner compensation, etc.

_ Functions performed by parent for which no cost has been allocated

_ Salary adjustments required for a more competitive wage; other

employee benefit requirements

_ Expected changes in material or other costs

_ Incremental depreciation and amortization charges resulting from

expected asset/liability revaluation; other effects of

asset/liability revaluations

_ Different tax provision due to new ownership structure and tax

basis

_ Cost savings from elimination of duplicate facilities, overhead

and "synergy"

_ Reduction in interest income from excess cash

_ Expected sales of facilities

_ Other

Accounting Policies

_ Changes required to conform to the buyer's accounting principles

_ Anticipated industry changes/trends in accounting principles, and

effect upon present and future operations

I. Impact of Inflation on Operations and Financial Position

Provide additional information that will aid the buyer in determining the

current and future value of the business operations in view of possible

inflation/deflation including the following:

1. Impact on Financial Statements

a. If FIFO is used to value inventory, has the company prepared an

estimate of the impact of restating costs for current prices (i.e.,

elimination of "inventory profit") for each product line to determine

real gross profit?

_____________________________________________________________________

b. Have sales price increases during the last year (and projected for

the next year) offset the increase in costs? Has the gross profit

percentage been maintained?

_____________________________________________________________________

c. If depreciation or rental expenses were calculated on the estimated

replacement cost of property, plant and equipment and leases, what

impact would this have on reported and budgeted net income?

_____________________________________________________________________

d. Assuming interest on all long-term debt was at a current rate, what

impact would this have on net income?

_____________________________________________________________________

e. After adjusting for each of the above factors, what is the return on

capital? Is it still acceptable? Does it exceed the cost of capital?

_____________________________________________________________________

2. Review of Company's Ability To Operate in an Inflationary

Environment--How does the company manage each of the following to assure

current inflation is taken into account?

a. Sales price increases to pass through increased costs

b. Receivables

_ Speed in billing

_ Use of lock boxes in key geographical areas

_ Discount policy

_ Collection efforts

c. Fixed assets

_ Financing methods

_ Major replacement or expansion needs

_ Appropriation procedures

_ Increasing/decreasing fuel costs on older, less efficient

facilities

d. Accounts payable and accrued liabilities

- Deferral of payments

- Cash discount policy

- Pension and tax payment timing

e. Financing

- Type

- Timing

- Cyclical requirements

f. Labor costs

- Competitiveness of wages

- Influence of unions

- Pension funding assumptions

- Impact of possible relocation

g. Budgeting and planning

- Availability of accurate cash-flow projections

- Assumptions used in long-range planning

- Taxes

h. Impact of inflation of foreign operations

- Impact on exchange rates- Use of hedging contracts

i. Insurance coverage

-Frequency of review

IV FINANCIAL REPORTING SYSTEM AND ACCOUNTING

PROCEDURES AND CONTROLS

A. Management Reports

1. Obtain copies of key management reports

2. Describe each as follows:

Prepared Period Covered/ Reason for

Description By Issued Date User Report

______________________________________________________________________________

____________________ ________ _______________ ____ _______________________

3. Are performance reports prepared for all major areas of accountability?

Do these reports related actual performance to plans and budgets? Is

Adequate information provide information provided to manage

effectively and make informed judgments?

________________________________________________________________________

B. Reporting Structure

1. Described the interface of subsidiaries, divisions and departments with

corporate headquarters concerning centralized reporting requirements.

_______________________________________________________________________

2. Describe how the financial and management reporting systems work.

_______________________________________________________________________

C. Internal Controls

1. Obtain the corporate policies and procedures manual, if any, and broadly

assess comprehensiveness. Determine how compliance with these policies

and procedures is enforced.

2. Obtain independent accountants' memorandum on accounting procedures and

internal controls for past_______ years.

3. Describe the composition, policies and procedures of the internal audit

department, and obtain internal audit department reports for past______

years and management response thereto.

4. Obtain any other significant documentation concerning internal control.

5. Obtain Audit Committee minutes.

6. Based upon the information obtained in 1-5, and discussions with

management, describe and broadly assess the overall internal control

environment, noting any significant weaknesses.

D. Computer Facilities

Type of Date

Machine Ownership Installed Location Applications

______________________________________________________________________________

_______________ ______________ _________ ____________ ____________________

1. List outside computer services utilized.________________________________

________________________________________________________________________

2. How do users perceive the EDP function? How do user and EDP department

perceptions differ? How effective is communication between EDP and user

personnel?

________________________________________________________________________

3. Obtain any recent evaluations of the EDP function and note significant

weaknesses, problems and/or opportunities.

E. Insurance

1. Property - List policies and describe significant conditions, benefits

and frequency of review. Also list and describe any self-insurance

plans. Summarize significant claims filed over past______ years.

Compare coverage to estimated replacement cost of assets held and

contingent liabilities.

a. Are there significant unaccrued costs on open or incurred but not

reported claims?_____________________________________________________

b. Are increased premiums anticipated as a result of unfavorable trends

or the need for increased coverage?__________________________________

_____________________________________________________________________

c. Are significant retroactive premium adjustments anticipated?_________

_____________________________________________________________________

2. Obtain information on other insurance policies in force, e.g., product

liability, officer life, medical, etc., as noted above.

F. Long-Range and Budgetary Planning

1. Describe the process employed and objectives. Note the personnel

responsible.

a. Do the individuals within the organization help develop the

objectives and plans for their area of accountability, and are plans

communicated to the appropriate personnel?

_____________________________________________________________________

b. Does the budgeting system continually monitor the accuracy of

forecasts? Are there procedures established to explain major

variations (actual versus budget) on a current basis? Have

explanations for significant variations over the past........ years

been provided?

_____________________________________________________________________

c. Does the company develop and maintain contingency plans in the event

actual results vary significantly from budget?

_____________________________________________________________________

d. How is profitability of individual business units and product lines

monitored? Are financial ratios, controllable expense analyses,

contribution to overhead analyses, direct costing and other financial

evaluation techniques employed?

_____________________________________________________________________

G. Procedures and Organization Manuals

Provide a brief description, including the use of manuals and personnel

responsible for preparation.

___________________________________________________________________________

H. Other Significant Areas

Describe other significant aspects of the company's operations as they

relate to financial reporting and accounting procedures and controls.

___________________________________________________________________________

V TAXES

A. Applicable Taxes - Describe, including federal, state and local income,

property, excise and other taxes paid by the company

1. Federal_________________________________________________________________

2. State___________________________________________________________________

3. Local___________________________________________________________________

B. Federal Income Taxes

1. Examinations conducted by local tax authorities, i.e., the Internal

Revenue Service (IRS) in the United States:

a. Last year examined___________________________________________________

b. Amount of deficiencies and nature of adjustments in last_______ years

examined.

c. Have the results of the above reviews been reflected in the current

reserve for taxes for both the years examined and the years

subsequent to the examination?_______________________________________

_____________________________________________________________________

d. Status of the current examinations___________________________________

_____________________________________________________________________

e. Tax years open and closed to future tax authority examination________

_____________________________________________________________________

2. Tax carryforwards - Amounts by year of expiration and type (i.e., net

operating loss, capital loss, ITCs, FTCs, R&D credit, etc.

________________________________________________________________________

3. Describe any special industry considerations - including depletion

allowances, special credit or deductions, etc.

________________________________________________________________________

4. Obtain a reconciliation of the effective income tax rate to the

statutory tax rate for the past_______ years. Obtain an analysis of the

deferred tax provision for the past_______ years.

5. Obtain an analysis of the current income tax requirements and compare

the total of those requirements to the current income tax reserve.

Obtain an analysis of the components of the deferred income tax reserve,

and assess the reasonableness and future cash requirements.

C. State and Local Taxes

1. Have all applicable state and local tax returns been filed?_____________

2. Have there been any state tax audits or disputes?_______________________

________________________________________________________________________

3. List the amount of deficiencies and nature of adjustments in the last

________ years examined.

________________________________________________________________________

4. Have the results of the above reviews been reflected in the current

reserve for taxes for both the years examined and the years subsequent

to the examination?

________________________________________________________________________

5. Have federal deficiencies been reflected in state and local tax

reserves?_______________________________________________________________

6. Tax carryforwards - amounts by year of expiration and type. Note that

not all states permit carryover of losses.

________________________________________________________________________

7. Is the company complying with regulations regarding sales and payroll

tax collection and remittance?

________________________________________________________________________

D. Tax Planning and Preparation

1. Is the company's tax planning and compliance performed internally or by

outside accountants and/or attorneys?

________________________________________________________________________

2. Has the company taken advantage of all potential tax savings? Are

aggressive interpretations adequately reserved for?

________________________________________________________________________

3. Does the company maintain adequate tax basis records?___________________

________________________________________________________________________

E. Other Considerations - Describe any other significant tax planning

considerations of interest to the buyer; include potential tax savings not

currently achieved but that could be achieved by the buyer, e.g., LIFO,

accelerated depreciation, installment sales, FSC, accelerated pension or

other expensing, etc., or proposed legislation that may adversely affect

the company to be acquired.

___________________________________________________________________________

F. Factors Affecting Purchase Structure and Price

1. Obtain an analysis of the tax basis of assets being acquired and an

estimate of the fair value of the assets being acquired and liabilities

assumed; estimate the recapture tax liability assuming that such is

triggered; consider the following:

a. Depreciation - machinery and equipment and buildings

b. Investment and other tax credits

c. LIFO inventory reserves

d. Research and development

e. International, FSC or DISC earnings and profits

f. Previously expensed items, e.g., supplies, tools and dies, etc.

g. Other

2. Determine if there are deferred intercompany gains or nondeductible

writeoffs that may result in additional taxes.

3. Determine the existence of "golden parachute"-type arrangements.

4. Determine the expected transaction effect on net operating loss and tax

credit carryovers.

5. What are the expected benefits of a taxable vs. nontaxable transaction?

Has the present value of step-up benefits been compared to the recapture

and related tax liability cost?

________________________________________________________________________

VI ORGANIZATION - HUMAN RESOURCES AND INDUSTRIAL

RELATIONS

A. Organization Chart--Obtain the most recent chart, or describe the

organization.

1. Are job descriptions updated as required to meet changing conditions?

Do they define reporting relationships, responsibility, authority and

basis for performance measurement?

________________________________________________________________________

2. Is the organization structure consistent with short- and long-range

business requirements?

________________________________________________________________________

3. Are potential savings available through consolidation, realignment and

other restructuring actions?

________________________________________________________________________

4. Are key personnel policies compatible? _________________________________

B. Key Executive Personnel - provide the following information (attach

resumes, if available), and highlight recent and/or anticipated key

personnel losses:

______________________________________________________________________________

Years Written/

in Years Prior Unwritten

Title Present with Business Compen- Employment

Name Position Age Position Co. Experience Education sation Agreements

_______________________________________________________________________________

____ ________ ____ ________ _____ __________ _________ _______ _____________

-------------------------------------------------------------------------------

1. Are successful and proven management personnel available to carry out

plans, or does everything depend on one key person? What happens if an

employee is not available for an extended period?

_________________________________________________________________________

2. Is there a blend of youth and experience, or are most employees in the

same age or experience bracket?

_________________________________________________________________________

3. Are there cohesive lines of authority and communication? Do all parts of

the unit work closely together? Is there an integrated approach to all

major problems?

4. Is there excessive domination of operations and planning by any one

individual?

_________________________________________________________________________

5. Have development plans been established for key managers and

high-potential employees?

_________________________________________________________________________

6. What is the strategy for filling key positions? Can internal development

alone meet requirements or will intercompany transfer or outside hiring

be required? Are outside consultant used? What has been past experience?

____________________________________

7. Are local laws prohibiting discriminatory hiring and advancement

practices being complied with?

_________________________________________________________________________

8. Is the compensation plan being administered so as to attract and retain

top-quality personnel? Are salary levels competitive with industry norms?

_________________________________________________________________________

9. Have any of the company's key management personnel or directors been

involved in:

a. Criminal proceedings? ________________________________________________

b. Regulatory commission violations? ____________________________________

c. Significant civil court litigation? __________________________________

d. SEC or IRS investigations? ___________________________________________

10. Key nonexecutive personnel by department.

_______________________________________________________________________________

Years

Total with Training Sick Compen-

Department Male Female Age Company Education Program Turnover Days sation

_______________________________________________________________________________

__________ ___________ ___ _______ _________ ________ ________ _____ _________

-------------------------------------------------------------------------------

a. What are the critical functions staffed with well-qualified people?

b. Are there special personnel or skill needs, e.g., related to

technology, marketing, manufacturing (short- or long-term)?

_______________________________________________________________________

c. What are the plans to respond to skill needs or technical obsolescence?

_______________________________________________________________________

d. Is there or will there be an excess of manpower in some functional

areas?

_______________________________________________________________________

e. Can excess people be retrained for other positions within the

organization if the need arises?

_______________________________________________________________________

C. Employee Benefits--Review accounting treatment, including amounts,

personnel covered and eligibility:

1. Describe pension plan, how funded and amount of unfunded or overfunded

vested benefits. Extract key pension plan provisions (e.g., effect of

employee terminations on vested benefits) and actuarial assumptions.

Include amount of unrealized gains and losses in portfolio. In the

United States, attach latest ERISA financial statement filings and

actuarial studies.

2. Describe profit sharing, bonus, incentive and deferred compensation

plans.

3. Describe other benefit, retirement, social and severance plans,

including escalation clauses, if any.

4. Describe medical and sick leave benefits and policies. Also determine

the number, type and cost of claims over the past_______years, and

specifically identify any significant open claims.

5. Describe vacation/holiday policies.

6. Describe stock option or related equity incentives.

7. Describe policies related to travel and entertainment expenses.

8. Describe policies related to use of automobiles, airplanes, limousines,

boats, etc.

9. Comment on escalation clauses or expectations, if any, within current

fringe benefit programs. Expected higher levels of benefits and/or

inconsistencies with the buyer should be highlighted.

10. Obtain a summary of the company's rating for unemployment and workmen's

compensation.

11. Determine if either buyer or seller would need to upgrade its benefits

programs or salaries as a result of the acquisition to effect

uniformity.

12. What are medical and life insurance costs for postretirement, and when

are they provided?

13. Other--Describe.

D. Union Contracts (Attach significant contracts):

1. Name(s) of union(s)

2. Control of membership (i.e., local or national)

3. Employees covered

4. Length of contract(s)

5. Expiration date(s)

6. Other significant terms-Describe (i.e., escalation clauses, regular

rate increases, productivity clauses, promotions, retirement and other

benefits, hiring and firing, hours/work week, etc.)

E. Labor Relations

1. Strike History-include all in past________years:

_______________________________________________________________________________

Date Union Duration Cause Settlement

______________________________________________________________________________

________ __________ ___________ ______________ __________________

------------------------------------------------------------------------------

2. List of grievances filed and arbitration awards.________________________

3. Are labor contract problems anticipated? _______________________________

4. If there is no union, are organizing efforts taking place that might

change that status? Are changes likely to occur after acquisition? _____

5. Are significant increases anticipated for contracts nearing expiration?

___________________________________

F. Labor (Payroll) Ratio Analysis

See Exhibit I for key ratios frequently used to help evaluate a proposed

acquisition.

VII MARKETING - PRODUCTS

A. Product Lines--Describe major products or product lines within the segments

identified in the "Financial and Accounting Data" section. Include all

that constitute ___% or more of total company sales. Summarize the

following:

_______________________________________________________________________________

Sales/Operating Income

Gross Profit*

________________________________

Last ( ) Year to Current-Year Total Order

Name of Line Description Year Date Estimate Backlog**

_______________________________________________________________________________

_______ __________________ _______ ________ ____________ ______________

Total Product Line

======== ============= ==============

Total Company ======== ============= ==============

======== ============= ==============

*Detail by geographic region, distribution channel and type of customer,

as available.

**Include the following information:

- Age of significant backlog orders

- Delivery date quoted customers on significant current orders, and actual

performance expected relative to dates promised

- Expected profitability of backlog

_______________________________________________________________________________

B. Major Products-This section should be prepared for each of the major

products listed above.

Also attach descriptive literature (e.g., product brochures):

1. Name ____________________________________________________________________

2. Description _____________________________________________________________

a. Components/key raw materials _________________________________________

b. Price ________________________________________________________________

c. Quality ______________________________________________________________

d. Customer service _____________________________________________________

e. Product life _________________________________________________________

f. Market size __________________________________________________________

g. Market share _________________________________________________________

h. Franchising protection _______________________________________________

i. Warranty terms _______________________________________________________

j. Patent/trademark protection __________________________________________

k. Technological sensitivity ____________________________________________

l. Competitive strategy and assessment __________________________________

m. Future plans _________________________________________________________

3. Date introduced ________________________________________________________

4. Significant modifications ______________________________________________

5. Amount in inventory and turnover (historical and projected) ____________

6. Distribution methods ___________________________________________________

7. Return history _________________________________________________________

8. Annual production capability ___________________________________________

9. Advertising-Promotion methods _________________________________________

10. Customers ______________________________________________________________

a. List all that account for____% or more of total product sales.

Indicate any special pricing policies, product warranties, return

privileges, contractual agreements (terms, expectation of renewal),

customer complaints and relationships dependent on a specific

individual within the company. Obtain available financial

information for significant customers.

______________________________________________________________________________

Total Sales

____________________________________________

Next Year's

Last ( ) Years Year to Date Budget

______________ ____________ ___________

% of % of

Total Total Total

Customer Name/Location $ Product $ Product $ Product

_______________________________________________________________________________

______________________________ ______ ________ _____ _________ _____ _______

______________________________ ______ ________ _____ _________ ______ _______

Total All Other ====== ======== ====== ======== ====== =======

Total Product Line* ====== ======== ====== ======== ======= ======

*Amount from VII-A

-------------------------------------------------------------------------------

b. What industry purchases the products, and how are the products used?

___________________________________________________________________

c Why do companies and individuals purchase the products? What

differentiates the products from others in the industry (i.e.,

price, service, availability, etc.)?

____________________________________________________________________

11. Monthly sales history by segment and/or major product line

_______________________________________________________________________________

Next Year's

Last ( ) Years This Year* Budget

_____________________ _________________ _____________________

% of % of % of

$ Total $ Total $ Total

_______________________________________________________________________________

January _______ ________ ________ _________ _________ ______________

February _______ ________ ________ _________ _________ ______________

March _______ ________ ________ _________ _________ ______________

April _______ ________ ________ _________ _________ ______________

May _______ ________ ________ _________ _________ ______________

June _______ ________ ________ _________ _________ ______________

July _______ ________ ________ _________ _________ ______________

August _______ ________ ________ _________ _________ ______________

September _______ ________ ________ _________ _________ ______________

October _______ ________ ________ _________ _________ ______________

November _______ ________ ________ _________ _________ ______________

December _______ ________ ________ _________ _________ ______________

Total 100% 100% 100%

======= ======== ======== ========= ========= ==============

*Actual to date plus estimate for remainder of year.

------------------------------------------------------------------------------

12. Product line comparison to industry (last - years and next - years.).

Describe key assumptions.

------------------------------------------------------------------------------

Sales Gross Profit

___________________________________ ____________________

Name of Product Industry Market Company/

Product Line Total Total Share% Industry Average

______________________________________________________________________________

_____________ __________ _________ __________ ____________________

------------------------------------------------------------------------------

13. Competitors' history and projections (last ______ years and _____ years)

Obtain Standard & Poor's, Value Line and Dun & Bradstreet Reports. Also

obtain description of the overall strategies and goals for these

companies, and the specific strengths and weaknesses

------------------------------------------------------------------------------

14. Amount of sales, if any, subject to renegotiation. List all open

contract, terms, conditions, etc.

15. Summary of intracompany/intercompany sales.

------------------------------------------------------------------------------

Total Sales

________________________________________________

Last ( ) Years Current Year

_________________________ ____________________

%of Total %of Total

Description $ Product $ Product

------------------------------------------------------------------------------

__________________ ______________ ____________ ____________ _________

------------------------------------------------------------------------------

16. Unit Pricing

a. Obtain the following:

- Description of how prices and discount policies are developed by the

company and its competitors.

- List average unit prices of major products (last ------ years and

next ------ years).

------------------------------------------------------------------------------

Price

Product Year Company/Competition

______________________________________________________________________________

_____________________________ ________________ __________________________

------------------------------------------------------------------------------

b. What has been the price movement in relation to frequency of

occurrence, magnitude of occurrence, elasticity of demand and sales

promotion?

________________________________________________________________________

- What is the industry's ability to meet current and future product

demand?

________________________________________________________________________

- Does management believe cost increases could be passed on? Why?

________________________________________________________________________

_ Is the company sensitive to industry price changes?

________________________________________________________________________

- Is there a price leader? Which company? Describe circumstances.

C. Other Products - Less than - % of total company sales.

------------------------------------------------------------------------------

Sales

East Current

Year Current Year

Last to Year Backlog Gross

Name Description Year Date Total Total Profit

------------------------------------------------------------------------------

___________ _____________________ _____ _____ _____ ________ ________

Total ===== ===== ===== ======== ========

------------------------------------------------------------------------------

D. Marketing and Sales Organization

1. Obtain a description of the company's marketing and sales strategy.

2. Obtain organization chart. If no available, or flow-chart the

organization.

E. Personnel

1. Describe key personnel(i.e. experience, age, training, etc.).

2. Describe how marketing and sales personnel are compensated (i.e. salary

commission, incentive plans, etc.). List and describe any contractual

agreements.

3. Describe training programs, if applicable.

4. Are bonus incentive plans, quotas, etc., used to increase sales

initiative?

F. Sales Planning

1. How are plans formulated? Is there a general consistency between

geographic locations and market segments?

___________________________________________________________________________

2. Who is responsible? Are there account or territorial coverage plans?

___________________________________________________________________________

3. Describe use of sales reports and external information.

___________________________________________________________________________

G. Advertising Expenditures - Obtain an analysis of the last-----year and

next------years projections.

------------------------------------------------------------------------------

Type Amount %of Sales Description

------------------------------------------------------------------------------

a. Media ________ _________ _______________________________

b. Point of sale ________ _________ _______________________________

c. Other ________ _________ _______________________________

Total

Advertising

Expenditures ======== ========= ===============================

------------------------------------------------------------------------------

1. Does the company use an advertising agency, and are the results of

advertising evaluated? How do expenditures and results compare to

competitors? To industry norms?

___________________________________________________________________________

H. Public Relations

1. Does the company have a public relations department or utilize outside

consultants?

___________________________________________________________________________

2. Is there a planned public relations program and, if so, at whom is it

directed (i.e. stockholders, press, customers, financial community,

etc.)?

___________________________________________________________________________

I. Describe the company's philosophy on new product promotion and advertising.

Have specific programs been undertaken to create new markets, enlarge

existing markets, obtain new accounts or improve sales to existing

account? Compare current with prior programs and highlight any deferral

of advertising/promotion efforts to increase current earnings at the

expense of future earnings and product development.

___________________________________________________________________________

J. Competitive Position

Has an assessment of the company's position and projected future position

in the industry vis-a-vis the competition been made? Discuss with how they

perceive the company's strengths and weaknesses relative to its competition

and what factors they attribute to helping or preventing them from

achieving their objectives. What are the key factors for success, barriers

to entry and threats to success?

___________________________________________________________________________

K. Marketing Ratio Analysis

See Exhibit 1 for key ratios frequently used to help evaluate a proposed

acquisition.

VIII MANUFACTURING - DISTRIBUTION

A. Production Facilities

Describe each production as follows:

Facility

______________________________________

No. 1 No. 2 No. 3 No. 4

____________________________________________________________________________

1. Name ________ ________ ________ ________

2. Location ________ ________ ________ ________

3. Date Constructed ________ ________ ________ ________

4. Owned/Leased ________ ________ ________ ________

5. Cost ________ ________ ________ ________

6. Book Value ________ ________ ________ ________

a. Method ________ ________ ________ ________

b. Years ________ ________ ________ ________

7. Estimated Remaining Life ________ ________ ________ ________

8. Capacity ________ ________ ________ ________

a. Floors ________ ________ ________ ________

b. Square Feet ________ ________ ________ ________

c. Production Units ________ ________ ________ ________

9. Shifts ________ ________ ________ ________

10. Employees ________ ________ ________ ________

11. Present Condition ________ ________ ________ ________

12. Capacity Utilization ________ ________ ________ ________

13. Alternative Uses ________ ________ ________ ________

B. Machinery and Equipment - List principal machinery and equipment, including

cost, age, accumulated depreciation, depreciation rates, condition,

replacement cost, location, production use, specific or general nature and

capacity utilization.

C. Manufacturing Processes - Obtain description of the manufacturing processes/

operations that take place at each of the facilities listed previously, Have

plant visits been made where significant operations exists? Have the

following been considered in assessing the nature of the process?

1. What kind of manufacturing process exists?

a. Mass production or job shop oriented

b. Product or process structured flow

c. Production to order or for stock

2. Have the key components of the manufacturing process been identified?

________________________________________________________________________

3. Nature of operations:

a. What are the major operations and their sequence (e.g, component

fabrication and machining, component assembly, final assembly and

testing)?

_____________________________________________________________________

b. What is the relationship of the cost of each operation to total

product cost?

_____________________________________________________________________

c. What percentage of total factory floor space is used for each major

operation?

_____________________________________________________________________

d. What is the degree of mechanization and automation for each major

operation (highly automated machinery, semiautomatic, etc.)?

_____________________________________________________________________

4. To what extent are finished products and components standardized?

________________________________________________________________________

5. What programs exist for increasing standardization and ensuring quality

control?

________________________________________________________________________

6. What are the major components of total production cycle time?

________________________________________________________________________

a. Lead Time - resource acquisitions, production engineering, planning

and scheduling.

b. Manufacturing time - volume effects (e.g., can several units be in

process at the same time?) and product mix effects.

7. Are subcontractors utilized?

________________________________________________________________________

8. Productivity:

a. What are the current trends in manufacturing productivity?

_____________________________________________________________________

b. Are there indications of technical obsolescence?

_____________________________________________________________________

c. Does product design restrict the selection of the manufacturing

process?

_____________________________________________________________________

d. Is the design conducive to an efficient manufacturing process

(safety, degree of accuracy, etc.)?

_____________________________________________________________________

e. What degree of integration exists between product and manufacturing

engineering?

_____________________________________________________________________

9. Has the efficiency of this process been compared to competitors in the

industry?

________________________________________________________________________

10. Does the plant layout appear efficient?

________________________________________________________________________

D. Purchasing

1. Procedures

a. Obtain a copy of the company's purchasing procedures or, if not

available, determine through discussion with management informal

procedures that may exist.

2. Supplier

a. List the basic raw materials used in the manufacturing process.

b. List all suppliers who furnish ________% or more of the total material

purchases for any of the facilities listed previously for the

Last ________ years and next years:

Unit Price

Supplier and Total

____________________ Type of Purchased Special

Facility Name Location Material Amount Terms

______________________________________________________________________

________ ________ ________ ________ ________ ________

c. Determine (though discussion with management, etc.) the economic

condition of the suppliers' industry, including competitive structure,

and the related possibility of significant raw materials shortages,

interruption of deliveries or price fluctuations.

d. List and describe any long-term supply contracts and/or reciprocal

buying agreements.

e. Summarize intracompany/intercompany purchases:

Total Purchases

_______________________________________

Last - Years Current Year

% of % of

Description $ Total $ Total

______________________________________________________________________

______________________________ ________ ________ ________ ________

E. Maintenance

1. Capitalization vs. expense policies and scheduled maintenance and repair

expense for the past ________ years and next ________ years; explain

inconsistent trends or unusual expenditures.

_________________________________________________________________________

2. List any maintenance facilities, and describe the company's program for

maintenance and repairs.

_________________________________________________________________________

3. Determine if the company is following its regular maintenance program.

(Has maintenance been deferred?) Highlight deferral of preventive

maintenance to increase current earnings at the expense of future

earnings.

_________________________________________________________________________

F. Distribution

1. Describe physical distribution methods and transportation facilities

utilized. Estimate costs where possible.

Company Competition

______________________________________

% of % of

$ Sales $ Sales

_________________________________________________________________________

a. Raw material purchases ________ ________ ________ ________

b. Intracompany transfers ________ ________ ________ ________

c. Finished goods to customers ________ ________ ________ ________

G. Does the company use any of the following techniques to operate efficiently

in the manufacturing and inventory management areas:

1. Control of inventory using "ABC," zero inventory and/or "just in time"

inventory techniques.

________________________________________________________________________

2. Setup and production line time reduction studies________________________

3. Plant utilization and layout studies____________________________________

4. Obsolescence reviews____________________________________________________

5. Long-term supplier contracts____________________________________________

6. Responsibility accounting for inventory and scrap_______________________

7. Value engineering (input from purchasing into decisions made by

engineering regarding the components of new products)___________________

8. Parts standardization___________________________________________________

9. Establishment of a cycle counting program_______________________________

10. Reduction of ECNs (Engineering Change Notices)__________________________

11. Purchasing reviews (e.g., usage vs. substitution, competitive bidding,

approved vendor list, etc.)_____________________________________________

12. Vendor evaluation procedures (quality, timeless, price)_________________

13. Establishment of a routing system_______________________________________

14. Time and motion studies_________________________________________________

15. In-line vs. batch manufacturing_________________________________________

16. Make or by analyses_____________________________________________________

H. What is management's plan for capital expansion and investment over the next

five years, and have any commitments been made? Analyze that plan to

determine if future capital investment is (1) merely to maintain present

capacity or (2) to increase present production capabilities that will

increase future profitability. Are these plans consistent with present

condition of facilities, production needs on projections and anticipated

technological changes?

____________________________________________________________________________

I. Obtain a summary of historical capital expenditures, and comment on

significant variations contained therein. Highlight current deferrals and

expenditure programs to improve liquidity and comment on the future impact

thereof.

____________________________________________________________________________

J. Productivity/Efficiency Ratio Analysis

See Exhibit 1 for key ratios frequently used to help evaluate a proposed

acquisition.

IX RESEARCH AND DEVELOPMENT

A. Major Programs

1. Completed in last 5 years

Description Cost Estimated Benefits

_________________________________________________________________________

______________________________ _____________ ________________________

2. Currently in process

Cost

_________________

Est. To Est. Time To

Description To Date Complete Complete Estimated Benefits

_________________________________________________________________________

____________________ _______ ________ ____________ __________________

3. Proposed for future

Estimated

________________________

Description Cost Time Estimated Benefits

_________________________________________________________________________

___________________________ ___________ ___________ __________________

B. List any significant products recently developed and/or under development by

competition.

C. What attempt has been made to develop new or improved products to satisfy

current customers' needs in existing and potential markets, and customer

needs currently being met by other products?

____________________________________________________________________________

D. Personnel

Name Salary Background

____________________________________________________________________________

________________________________________ ___________ _____________________

1. Review for current and proposed staffing

_________________________________________________________________________

2. Evaluate technical competence

-------------------------------------------------------------------------

E. Facilities-Laboratories (Describe)------------------------------------------

-------------------------------------------------------------------------

________________________________________________________________________

F. Discuss current vs. historical levels of R&D and highlight variations

thereof , particularly with respect to any apparent deferral of R&D effort

to increase current earnings and the effect of this policy on future

product development and earnings and in comparison to industry trend. Are

budgets sufficient to maintain or improve the company's competitive

position?

___________________________________________________________________________

G. Compare industry expenditures for R&D to that of the company and its

competitors. Review the percentage of expenditures for R&D costs to sales

for the last------years, and explain

major variations.

H. What is status of patents, trademarks, etc.?_______________________________

___________________________________________________________________________

I. Are proprietary rights protected by the company for all R&D projects in

the United States as well as international markets?

___________________________________________________________________________

EXHIBIT I-FINANCIAL RATIOS

INTRODUCTION

The ratios presented in this exhibit are frequently used to help evaluated

a proposed acquisition. If the buyer desires these ratios, the following

should be performed with respect to them:

1. Compute (or request management to compute) the ratios for - years;

2. Identify and explain significant trends and variations between

years;

3. Compare the ratios to industry averages and key competitors;

obtain explanations for significant variations;

4. Review the calculations to ensure that significant, unusual or

nonrecurring items have been considered and/or disclosed.

A. FINANCIAL STATEMENT RATIO ANALYSIS

__________________________________________________________________________

Sales/Profitability

Factors Equation Purpose

__________________________________________________________________________

Gross Profit Margin = Gross Profit Measures gross profit margin,

------------ and, by comparing to prior

Net Sales periods, can be used to

determine trends

Pretax Profit Margin = Income before Taxes Measures profit per sales

------------------- dollar after all expenses

Net Sales (except income taxes)

Net Return on Sales = Net Income Indicates net profitability

------------------- of each dollar of sales

Net Sales

General Income Various Measures relationship of

Statement Analysis major expense categories as

percent of sales; cost of

sales to operating and

selling, general and

administrative expenses;

major components of cost of

sales as percent of total;

profitability of sales by

division, location or product

line, and to other income and

expenses

Return on Total = Net Income Measures profitability on the

Investment ------------------- total capital invested

Total Capital

Return on Equity = Net Income Measures the return on

------------------- invested capital

Total Shareholder

Equity

Return on Assets = Net Income Indicates return on each

-------------------- average dollar of assets

Average Total Assets

Price/Earning Ratio = Market Price Measures the future

--------------------- expectation of the trading

Earnings public and potential

dilutive effect on buyer's

equity or earnings per

_______________________________________________________________________________

Liquidity Factors

_______________________________________________________________________________

Current Ration = Current Assets Measures ability to pay

-------------------- short-term obligations

Current Liabilities

Quick Ratio = Current Assets- Measures ability to pay

Inventories short-term obligations

-------------------- without utilizing inventory

Current Liabilities funds

Stockholder's = Stockholder's Equity Measures long-term

Equity Ratio -------------------- liquidity; measures

Total Assets financial strength and

cushion for creditors

Working Capital to = Working Capital Indicates net liquid assets

Total Assets --------------------- relative to total

Total Assets capitalization

Overall Liquidity = Total Assets Measures the overall

Ratio --------------------- liquidity of the company

Total Liabilities

_______________________________________________________________________________

Working Capital and

Debt Factors

_______________________________________________________________________________

Working Capital = Net Sales Measures how effectively

Turnover ---------------------- working capital is used

Average Working to generate sales and

Capital whether a company has a

high proportion of fixed

or slow assets

Assets Utilization = Net Sales Indicates the efficiency

---------------------- with which total resources

Average Total Assets are used

Cash Flow to Total = Net Cash Flow Measures cash generated in

Assets ----------------------- relationship to assets

Total Assets

Debt-to-Equity = Debt Measures debt levels of

Ratios ------------------------ the company in comparison

Stockholders' Equity to owner's equity

Total Liabilities = Total Liabilities Measures the relative

to Stockholders' ------------------------ "ownership" of the

Stockholders' Equity company's assets by

owners and creditors

Debt Coverage Ratio = Earnings before

Interest and Taxes Measures the ability to

------------------------- pay off debt

Annual Debt Service

Times Interest = Earnings before Measures the extent to

Earned Interest and Taxes which earnings could

------------------------- decline before

Interest Charges resulting

in an inability to pay

annual interest charges

Ratio of Earnings = Earnings before

to Fixed Charges Interest and Taxes Measures the extent to

plus Fixed Charges which earnings can

------------------------- decline without

Fixed Charges affecting the ability to

meet fixed costs

_______________________________________________________________________________

Realizability and Cash Management Factors

_______________________________________________________________________________

Cash Cycle = Receivables + Measures the number of

Inventory days in the cash cycle

_________________________

Average Cost of

Goods Sold

Receivables = Net Credit Sales Indicates efficiency of

Turnover __________________________ receivables collections

Average Trade and effectiveness of

Receivables (net) of credit policies

Past-Due Index = Total Receivables

Past-Due Used to indicate trends

__________________________ in collection activity

Total Receivables

Bad Debt Expense

as a Percentage of = Bad Debt Expense

Sales ___________________________ Measures bad debt

Total Credit Sales trends

Inventory Turnover = Cost of Goods Sold Measures number of

___________________________ times average

Average Inventory inventory "turned

over" or was sold

during the period

_______________________________________________________________________________

B. LABOR (PAYROLL) RATIO ANALYSIS

__________________________________________________________________________

Labor (Payroll)

Analysis Factors Equation Purpose

__________________________________________________________________________

Sales per Employee = Net Sales Measures the efficiency

_____________________ of employee utilization

Number of Employees

Average Salary per Total Payroll

Employee by Division = Expense for Division

or Class

_____________________ Measures overall salary

Number of Employees levels

in Division or Class

Total Payroll and Total Payroll and

Benefits as a = Benefits Expense

Percentage of Sales ______________________ Measures labor costs

Net Sales relative to sales

Benefits as a Benefits

Percentage of = _______________________ Measures level of

Payroll Total Payroll benefits relative to

Expense payroll

Employees Per Number of

Supervisor = Employees

_______________________ Helps identify

Number of top-heavy supervisory

Supervisors structures

Number of

Employees That Quit

Employee Turnover = or Were Terminated Measures employee

_______________________ stability and

Average Number of satisfaction

Employees

__________________________________________________________________________

C. MARKETING RATIO ANALYSIS

__________________________________________________________________________

Marketing Analysis

Factors Equation Purpose

__________________________________________________________________________

Returns as a Returns

Percentage of Sales = _______________________ Measures customer

Sales before Returns satisfaction and/or

but after Discounts product quality

Marketing Expense Marketing Expense

as a Percentage of = _______________________ Measures the cost of

Sales Sales marketing programs

relative to sales

generated

Gross Profit per Gross Profit

Marketing Dollar = _______________________ Measures marketing

Marketing Expense effectiveness

Discounts as a Discounts

Percentage of Sales = _______________________ Indicates the level

Gross Sales of discounts given

Selling Expense as a Selling Expense

Percentage of Sales = _______________________ Measures the level of

Sales selling efforts

expended for the

current level of

sales

Net Salesmen's

Sales per Salesman = Sales Measures salesmen's

_______________________ efficiency and

Number of Salesmen productivity

Sales Salaries and Sales Salaries and

Commissions as a = Commissions Measures the sales

Percentage of Sales _______________________ payroll cost relative

Sales to sales

__________________________________________________________________________

D. PRODUCTIVITY/EFFICIENCY RATIO ANALYSIS

__________________________________________________________________________

Productivity/Efficiency

Analysis Factors Equation Purpose

__________________________________________________________________________

Available Direct

Direct Labor Labor Hours - Idle

Utilization = Time

_______________________ Measures efficiency

Available Direct of employees

Labor Hours

Production per Units Produced

Direct Labor Hour = ________________________ Measures employee

Direct Labor Hours productivity

(including overtime)

Overtime Hours

Percentage of Hours = Worked

Worked on Overtime ________________________ Measures overtime

Total Hours Worked and capacity

utilization

Labor Cost to Total Labor Cost

Production Cost = ________________________ Measures proportion

Total Product Cost of labor cost to

total production

cost

Material Costs to Cost of Material

Total Production = ________________________ Measures proportion

Costs Total Product Cost of material to

total production

cost

Manufacturing Manufacturing

Overhead to Total = Overhead Measures proportion

Production Cost ________________________ of manufacturing

Total Product Cost overhead to total

production cost

Productive Machine

Machine Utilization = Hours

________________________ Measures efficiency

Total Available of equipment and

Machine Hours scheduling

Number of Units

Scrap Rate = Scrapped Measures how

________________________ efficiently

Total Units Produced materials are used

Direct Labor Hours

Direct Labor Hours ________________________

as a Percentage of = Total Hours of Measures the level

Total Factory Hours Factory and of production

Production support personnel

Personnel

Warehouse and Warehouse and

Delivery Expense = Delivery Expense

per Order ________________________ Measures the cost

Number of Orders of filling an order

__________________________________________________________________________

Article's

GUIDE TO PERFORMING A BUSINESSMAN'S REVIEW

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