Due Diligence Accounting Questionnaire
Content
A.
General 1. Copy of the internal statement of operations for the fiscal years ended 1998, 1997, and 1996. If unaudited, please provide a reconciliation of the internal statements to the Company’s general ledger/trial balance and to other supporting documentation, such as tax returns or a reconciliation of revenues to cash receipts, and provide a description of the accounting for significant transactions. A description of the following matters: (i) significant and/or unusual accounting policies; (ii) accounts that involve a significant amount of management judgment; (iii) whether the Company is using alternative accounting methods where other acceptable or preferable methods should be used; (iv) changes in accounting principles, policies, procedures or practices; (v) nature and extent of year-end closing adjustments; (vi) unusual or nonrecurring items of income or expense; (vii) transactions representing "soft" income or non-operating gains; (viii) transactions with affiliates; and, (ix) changes in business policies or practices. Copy of a complete listing of related party transactions (including fees associated with capital raised and/or revenue earned and management fees) for the historical and interim periods and describe the nature, amount and accounting treatment of such transactions. A schedule of nonrecurring revenues and costs related to the activities of the Company for the historical and interim periods. A statement of operations by month for the trailing twelve month period. A schedule of EBIT and EBITDA for the historical and forecast periods. Reconcile these amounts to the figures used in the Level 7 valuation. Provide supporting documentation for the proforma amounts (e.g. such as account balances, if applicable, and other documentation such as invoices or W-2 Forms). If audited, access to the working papers of the Company’s independent auditors for the fiscal years ended 1998, 1997 and 1996. Copies of audited financial statements, management letters or other reports issued by independent outside auditors or consultants.
2.
3.
4. 5. 6.
7.
B.
Historical income statement analysis Revenues and gross profit 1. Describe (i) revenue terms for consulting services & projects; (ii) revenue recognition policies for consulting services & projects; (iii) fee structures and pricing practices (i.e. fixed fee, hourly fee, fee per transaction, etc.); (iv)
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significant service lines; (v) billing practices; (vi) whether consulting, software and hardware sales are recorded separately; (vii) whether consulting revenue and related out-of-pocket expenses are segregated; (viii) whether consulting revenue is gross or net of fee adjustments; (ix) whether the Company monitors hours worked and billed by its consultants and whether it maintains reasonably reliable data on gross and net revenue per hour and consultant utilization; (x) key markets and customers; and, (xi) competitive strengths and weaknesses. 2. A schedule of the components that comprise revenue for fiscal years ending <X>, <X> and <X> by product (i.e. type of software package) and by service line (e.g. consulting, product, training or support). Reconcile gross to net revenues, and summarize gross profit and EBITDA for each period in the historical, interim and forecast periods. Schedule of revenues and gross profit by customer for the ten most significant customers for the historical and interim periods. Describe the reasons for changes in revenues and gross profit during these periods, including (i) the length of the relationship with each customer; (ii) the types of relationships that the Company has with each customer; (iii) how gross margin is determined for each principal line or business or service offering; (iv) changes in revenue levels to each customer; (v) the reasons for significant adjustments between revenues billed versus cash collected . Summarize contractual relationships with significant customers.
3. 4.
5.
Cost of Services 1. A schedule of the components which comprise cost of services in dollars and as a percentage of revenues for the historical and interim periods dissaggregated by significant component (i.e. hours and dollars paid to personnel). Describe unusual trends and relationships, correlating (i) changes in consulting revenue to changes in hours billed, hourly rates, net realization, etc.; (ii) changes in margins to number of consultants, average compensation, utilization, etc.; (iii) changes in other expenses to headcount, compensation levels for key individuals, changes in incentive and related discretionary expenses, etc. and other changes in the support structure. A schedule of the components that comprise cost of sales for fiscal years ending 1998, 1997 and 1996 by product (i.e. type of software package) and by service line (e.g. consulting, product, training or support).
2.
Operating expenses
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1.
Schedule of the significant components of operating expenses in dollars and as a percentage of revenues for the historical, interim and forecast periods. Describe unusual trends and relationships in the periods. Summarize the components of employee benefits (including 401(k) or defined benefit plans) and insurance expense for the historical periods. Describe the nature of the Company’s insurance plans relative to (i) health insurance, (ii) workers compensation, (iii) dental, (iv) life and (v) other insurance with management. Describe whether these plans are (i) premium based, (ii) retrospectively rated plans or (iii) self-insured and the extent to which the Company is exposed based upon the amount of claims actually incurred. A schedule of professional and outside consulting fees incurred for the historical and interim periods. Describe the nature of the costs (i.e. recurring versus nonrecurring). With respect to legal fees incurred, describe the nature of the contingencies relating to the professional fees paid. Summarize consultant wages and headcount by employee between staff, account manager and resource manager (or other groupings by level, as appropriate) for the historical periods. Describe the following: (i) applicable employment agreements (if any); (ii) salary trends and unusual relationships; (iii) incentives, including quarterly or yearly bonuses; (iv) other equity incentive programs; (v) stockholders’ distributions; and, (vi) commission-based compensation programs. A schedule of commission expense by employee for the historical and interim periods. Describe significant fluctuations and how commissions are paid, including (i) whether payment occurs prior to or after collection of the applicable cash receipt; and, (ii) the effect, if any, on commissions of bad debt expense.
2.
3.
4.
5.
Other income and expense 1. C. A schedule of other income and expense for the historical and interim periods.
Projected income statement analysis 1. A detailed description of the procedures utilized and the assumptions made in preparing the forecasted results of operations. Describe how the forecast is assembled and compared to actual operating results for the historical and interim periods. In addition, describe the seasonality, if any, of the Company’s operations. Describe other qualitative factors or assumptions which have been reflected in the forecasted operating results (e.g. changes in market conditions or within the services industry).
2.
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D.
Balance sheet analysis General 1. Provide balance sheets for fiscal years ended 1998, 1997 and 1996 and the interim period.
Cash and cash management 1. Describe the Company's procedures with respect to the receipt and disbursement of cash (i.e., utilization of imprest deposit accounts, authorization controls, segregation of duties, cut-off procedures, etc.), credit facilities and requirement for letters of credit, if any. Copies of the bank account reconciliations as of the end of the interim period.
2.
Accounts receivable 1. Describe the Company’s credit and collection policies and procedures (e.g., standard terms, discounts allowed, etc.), and cut-off procedures. Also, describe any non-standard or special financing terms offered to customers. Describe the Company’s procedures for analyzing accounts receivable at year end balance sheet dates. Copy of the accounts receivable aging report at the historical balance sheet dates. Reconciliation of the aged trial balance to the general ledger and provide a description of any unusual reconciling items. Describe significant trends in the aging categories or other unusual relationships. Describe the procedures used to estimate the allowance for doubtful accounts and any unusual or significant items provided for in the allowance for doubtful accounts. Summarize the significant past due accounts as of the end of fiscal year 1998 and provide a rollforward of the bad debt reserve for the historical and interim periods. Describe the collectibility of the past due accounts and evaluate the adequacy of the allowance for doubtful accounts.
2. 3.
4.
5.
Property and equipment 1. 2. Describe the Company's policies and procedures for capitalization and depreciation, including the capitalization of leases. A schedule changes in property and equipment by major category (furniture and fixtures, office equipment and software) for the fiscal years ended 1998, 1997 and
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1996. Provide a listing of significant additions and disposals for each period in the historical period and, for additions, indicate whether such expenditures are for growth or maintenance purposes. Prepaid expenses and other assets 1. A schedule of the components of prepaid expenses and other assets, including intangible assets, at the historical balance sheet dates.
Accounts payable and accrued expenses 1. Describe typical accounts payable terms, payment practices and cut-off procedures. Also, describe the Company's policy with respect to held checks and the amount of held checks, if any, at the historical balance sheet dates. Copy of an accounts payable aged trial balance as of fiscal year 1998 year end, and a reconciliation of the accounts payable trial balance to the general ledger. Summarize the accrued liabilities recorded and unrecorded (payroll, payroll taxes, vacation, commission, etc.) at the historical balance sheet dates. Describe the nature of all significant accounts.
2. 3.
Other liabilities 1. A schedule of other liabilities including the revolving line of credit and capital leases at fiscal year end 1998. Describe the assignability of debt, prepayment penalties or premiums related to debt to be retired. Provide copies of debt agreements. A schedule of deferred consulting revenues at the historical balance sheet dates.
2.
Stockholders’ equity 1. A rollforward of stockholders’ equity accounts for the fiscal years ended 1998, 1997 and 1996. Forecasted Balance Sheet 1. Copy of the forecasted balance sheet at fiscal year end 1998.
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E. Cash Flows 1. For the historical, interim and forecast periods, prepare a comparative of the statements of cash flows and describe: (i) unusual items; (ii) related party accounts; (iii) unusual uses or sources of working capital; (iv) assets or liabilities specifically addressed in the letter of intent; and (v) assets or liabilities that should be addressed in the purchase agreement. Describe the relationships between the growth of working capital (primarily receivables) and revenue for the historical periods.
2. F.
Contracts, commitments, and contingencies 1. 2. Summarize all asserted and unasserted claims and assessments including, but not limited to, litigation and governmental/regulatory investigations. Copies of significant contracts and agreements, including employment agreements, equity incentive plans, bonus plans or deferred compensation plans, employee medical benefit summaries, purchase or sale agreements, lease agreements, covenants not to compete, etc. Copies of all outstanding lease obligations (operating and capital) and describe whether any penalties exist for changes in control or early termination. Summarize the Company’s other commitments or contingencies, including guarantees made by the Company on behalf of others and guarantees by others on behalf of the Company, if any, and other agreements that have change in control provisions and/or are not assignable or are otherwise transferable.
3. 4.
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General 1. Copy of the internal statement of operations for the fiscal years ended 1998, 1997, and 1996. If unaudited, please provide a reconciliation of the internal statements to the Company’s general ledger/trial balance and to other supporting documentation, such as tax returns or a reconciliation of revenues to cash receipts, and provide a description of the accounting for significant transactions. A description of the following matters: (i) significant and/or unusual accounting policies; (ii) accounts that involve a significant amount of management judgment; (iii) whether the Company is using alternative accounting methods where other acceptable or preferable methods should be used; (iv) changes in accounting principles, policies, procedures or practices; (v) nature and extent of year-end closing adjustments; (vi) unusual or nonrecurring items of income or expense; (vii) transactions representing "soft" income or non-operating gains; (viii) transactions with affiliates; and, (ix) changes in business policies or practices. Copy of a complete listing of related party transactions (including fees associated with capital raised and/or revenue earned and management fees) for the historical and interim periods and describe the nature, amount and accounting treatment of such transactions. A schedule of nonrecurring revenues and costs related to the activities of the Company for the historical and interim periods. A statement of operations by month for the trailing twelve month period. A schedule of EBIT and EBITDA for the historical and forecast periods. Reconcile these amounts to the figures used in the Level 7 valuation. Provide supporting documentation for the proforma amounts (e.g. such as account balances, if applicable, and other documentation such as invoices or W-2 Forms). If audited, access to the working papers of the Company’s independent auditors for the fiscal years ended 1998, 1997 and 1996. Copies of audited financial statements, management letters or other reports issued by independent outside auditors or consultants.
2.
3.
4. 5. 6.
7.
B.
Historical income statement analysis Revenues and gross profit 1. Describe (i) revenue terms for consulting services & projects; (ii) revenue recognition policies for consulting services & projects; (iii) fee structures and pricing practices (i.e. fixed fee, hourly fee, fee per transaction, etc.); (iv)
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significant service lines; (v) billing practices; (vi) whether consulting, software and hardware sales are recorded separately; (vii) whether consulting revenue and related out-of-pocket expenses are segregated; (viii) whether consulting revenue is gross or net of fee adjustments; (ix) whether the Company monitors hours worked and billed by its consultants and whether it maintains reasonably reliable data on gross and net revenue per hour and consultant utilization; (x) key markets and customers; and, (xi) competitive strengths and weaknesses. 2. A schedule of the components that comprise revenue for fiscal years ending <X>, <X> and <X> by product (i.e. type of software package) and by service line (e.g. consulting, product, training or support). Reconcile gross to net revenues, and summarize gross profit and EBITDA for each period in the historical, interim and forecast periods. Schedule of revenues and gross profit by customer for the ten most significant customers for the historical and interim periods. Describe the reasons for changes in revenues and gross profit during these periods, including (i) the length of the relationship with each customer; (ii) the types of relationships that the Company has with each customer; (iii) how gross margin is determined for each principal line or business or service offering; (iv) changes in revenue levels to each customer; (v) the reasons for significant adjustments between revenues billed versus cash collected . Summarize contractual relationships with significant customers.
3. 4.
5.
Cost of Services 1. A schedule of the components which comprise cost of services in dollars and as a percentage of revenues for the historical and interim periods dissaggregated by significant component (i.e. hours and dollars paid to personnel). Describe unusual trends and relationships, correlating (i) changes in consulting revenue to changes in hours billed, hourly rates, net realization, etc.; (ii) changes in margins to number of consultants, average compensation, utilization, etc.; (iii) changes in other expenses to headcount, compensation levels for key individuals, changes in incentive and related discretionary expenses, etc. and other changes in the support structure. A schedule of the components that comprise cost of sales for fiscal years ending 1998, 1997 and 1996 by product (i.e. type of software package) and by service line (e.g. consulting, product, training or support).
2.
Operating expenses
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1.
Schedule of the significant components of operating expenses in dollars and as a percentage of revenues for the historical, interim and forecast periods. Describe unusual trends and relationships in the periods. Summarize the components of employee benefits (including 401(k) or defined benefit plans) and insurance expense for the historical periods. Describe the nature of the Company’s insurance plans relative to (i) health insurance, (ii) workers compensation, (iii) dental, (iv) life and (v) other insurance with management. Describe whether these plans are (i) premium based, (ii) retrospectively rated plans or (iii) self-insured and the extent to which the Company is exposed based upon the amount of claims actually incurred. A schedule of professional and outside consulting fees incurred for the historical and interim periods. Describe the nature of the costs (i.e. recurring versus nonrecurring). With respect to legal fees incurred, describe the nature of the contingencies relating to the professional fees paid. Summarize consultant wages and headcount by employee between staff, account manager and resource manager (or other groupings by level, as appropriate) for the historical periods. Describe the following: (i) applicable employment agreements (if any); (ii) salary trends and unusual relationships; (iii) incentives, including quarterly or yearly bonuses; (iv) other equity incentive programs; (v) stockholders’ distributions; and, (vi) commission-based compensation programs. A schedule of commission expense by employee for the historical and interim periods. Describe significant fluctuations and how commissions are paid, including (i) whether payment occurs prior to or after collection of the applicable cash receipt; and, (ii) the effect, if any, on commissions of bad debt expense.
2.
3.
4.
5.
Other income and expense 1. C. A schedule of other income and expense for the historical and interim periods.
Projected income statement analysis 1. A detailed description of the procedures utilized and the assumptions made in preparing the forecasted results of operations. Describe how the forecast is assembled and compared to actual operating results for the historical and interim periods. In addition, describe the seasonality, if any, of the Company’s operations. Describe other qualitative factors or assumptions which have been reflected in the forecasted operating results (e.g. changes in market conditions or within the services industry).
2.
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D.
Balance sheet analysis General 1. Provide balance sheets for fiscal years ended 1998, 1997 and 1996 and the interim period.
Cash and cash management 1. Describe the Company's procedures with respect to the receipt and disbursement of cash (i.e., utilization of imprest deposit accounts, authorization controls, segregation of duties, cut-off procedures, etc.), credit facilities and requirement for letters of credit, if any. Copies of the bank account reconciliations as of the end of the interim period.
2.
Accounts receivable 1. Describe the Company’s credit and collection policies and procedures (e.g., standard terms, discounts allowed, etc.), and cut-off procedures. Also, describe any non-standard or special financing terms offered to customers. Describe the Company’s procedures for analyzing accounts receivable at year end balance sheet dates. Copy of the accounts receivable aging report at the historical balance sheet dates. Reconciliation of the aged trial balance to the general ledger and provide a description of any unusual reconciling items. Describe significant trends in the aging categories or other unusual relationships. Describe the procedures used to estimate the allowance for doubtful accounts and any unusual or significant items provided for in the allowance for doubtful accounts. Summarize the significant past due accounts as of the end of fiscal year 1998 and provide a rollforward of the bad debt reserve for the historical and interim periods. Describe the collectibility of the past due accounts and evaluate the adequacy of the allowance for doubtful accounts.
2. 3.
4.
5.
Property and equipment 1. 2. Describe the Company's policies and procedures for capitalization and depreciation, including the capitalization of leases. A schedule changes in property and equipment by major category (furniture and fixtures, office equipment and software) for the fiscal years ended 1998, 1997 and
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1996. Provide a listing of significant additions and disposals for each period in the historical period and, for additions, indicate whether such expenditures are for growth or maintenance purposes. Prepaid expenses and other assets 1. A schedule of the components of prepaid expenses and other assets, including intangible assets, at the historical balance sheet dates.
Accounts payable and accrued expenses 1. Describe typical accounts payable terms, payment practices and cut-off procedures. Also, describe the Company's policy with respect to held checks and the amount of held checks, if any, at the historical balance sheet dates. Copy of an accounts payable aged trial balance as of fiscal year 1998 year end, and a reconciliation of the accounts payable trial balance to the general ledger. Summarize the accrued liabilities recorded and unrecorded (payroll, payroll taxes, vacation, commission, etc.) at the historical balance sheet dates. Describe the nature of all significant accounts.
2. 3.
Other liabilities 1. A schedule of other liabilities including the revolving line of credit and capital leases at fiscal year end 1998. Describe the assignability of debt, prepayment penalties or premiums related to debt to be retired. Provide copies of debt agreements. A schedule of deferred consulting revenues at the historical balance sheet dates.
2.
Stockholders’ equity 1. A rollforward of stockholders’ equity accounts for the fiscal years ended 1998, 1997 and 1996. Forecasted Balance Sheet 1. Copy of the forecasted balance sheet at fiscal year end 1998.
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E. Cash Flows 1. For the historical, interim and forecast periods, prepare a comparative of the statements of cash flows and describe: (i) unusual items; (ii) related party accounts; (iii) unusual uses or sources of working capital; (iv) assets or liabilities specifically addressed in the letter of intent; and (v) assets or liabilities that should be addressed in the purchase agreement. Describe the relationships between the growth of working capital (primarily receivables) and revenue for the historical periods.
2. F.
Contracts, commitments, and contingencies 1. 2. Summarize all asserted and unasserted claims and assessments including, but not limited to, litigation and governmental/regulatory investigations. Copies of significant contracts and agreements, including employment agreements, equity incentive plans, bonus plans or deferred compensation plans, employee medical benefit summaries, purchase or sale agreements, lease agreements, covenants not to compete, etc. Copies of all outstanding lease obligations (operating and capital) and describe whether any penalties exist for changes in control or early termination. Summarize the Company’s other commitments or contingencies, including guarantees made by the Company on behalf of others and guarantees by others on behalf of the Company, if any, and other agreements that have change in control provisions and/or are not assignable or are otherwise transferable.
3. 4.
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