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4.03[8] Checklist: Due Diligence for Acquisition of a Company I. Financial Information. One of the most important areas of the due diligence investigation from the perspective of an acquiror is financial information-does the acquiror clearly understand the financial condition of the business or set of assets being bought? The following checklist will help the diligence team to ensure that the acquiror does indeed have such an understanding:* Audited financial statements for three years, together with the independent auditor's reports * The most recent unaudited statements, with comparable statements for the prior year * Auditor's letters and replies for the past five years * The company's credit report, if available * Any projections, capital budgets, and strategic plans * Analyst reports, if available * A schedule of all indebtedness and contingent liabilities * A schedule of inventory * A schedule of accounts receivable * A schedule of accounts payable * A description of depreciation and amortization methods and changes in accounting methods over the past five years * Any analysis of fixed and variable expenses * Any analysis of gross margins * The company's general ledger * A description of the company's internal control procedures II. Organizational Structure. The organization of the target company and whether the company is in good standing are other important facets of the review. The following items should be reviewed and analyzed: * The company's Articles or Certificate of Incorporation (or other charter documents), and all amendments * The company's bylaws, and all amendments * The company's minute book, including all minutes and resolutions of shareholders and directors, executive committees, and other governing groups * The company's organizational chart * The company's list of shareholders and number of shares held by each * Copies of agreements relating to options, voting trusts, warrants, puts, calls, subscriptions, and convertible securities * A Certificate of Good Standing from the Secretary of State of the state where the company is incorporated * Copies of the active status reports in the state of incorporation for the last three years * A list of all states where the company is authorized to do business and annual reports for the last three years * A list of all states, provinces, or countries where the company owns or leases property, maintains employees, or conducts business * A list of all of the company's assumed names and copies of registrations III. Physical Assets. The physical assets of the target company are in most instances a substantive part of the business being acquired, and should be an area of special diligence investigation. Among other things, the following should be prepared and reviewed: * A schedule of fixed assets and their locations * All U.C.C. filings * All leases of equipment * A schedule of sales and purchases of major capital equipment during the last three years IV. Real Property. Real property of the target company can also be an important component of the acquisition. Where real property is involved, the following documents should be prepared, reviewed and analyzed: * A schedule of the company's business locations * Copies of all real estate leases, deeds, mortgages, title policies, surveys, zoning approvals, variances, or use permits V. Employment-Related Matters. In all acquisitions, the acquiror will need to develop a thorough understanding of the target company's employment records and practices. The following checklist should assist in this regard: * A list of employees, including positions, current salaries, salaries, and bonuses paid during last three years, and years of service * All employment, consulting, nondisclosure, nonsolicitation, or noncompetition agreements between the company and any of its employees * RŽsumŽs of key employees * The company's personnel handbook and a schedule of all employee benefits and holiday, vacation, and sick leave policies * Summary plan descriptions of qualified and nonqualified retirement plans * Copies of collective bargaining agreements, if any * A description of all employee problems within the last three years, including alleged wrongful termination, harassment, and discrimination * A description of any labor disputes, requests for arbitration, or grievance procedures currently pending or settled within the last three years * A list and description of benefits of all employee health and welfare insurance policies or self-funded arrangements * A description of workers' compensation claim history * A description of unemployment insurance claims history * Copies of all stock option and stock purchase plans, and a schedule of grants VII. Intellectual Property. The intellectual property of a target company is an increasingly important area of due diligence. The following schedules should be prepared and information analyzed as part of the acquisition diligence exercise: * A schedule of domestic and foreign patents and patent applications * A schedule of trademark and trade names * A schedule of copyrights * A description of important technical know-how * Any "work for hire" agreements * A schedule and copies of all consulting agreements, agreements regarding inventions, licenses, or assignments of intellectual property to or from the company * Any patent clearance documents * A schedule and summary of any claims or threatened claims regarding intellectual property by or against the company VIII. Licenses and Permits. Licenses and permits held by the company must also accompany a due diligence review: * Any governmental licenses, permits, or consents * Any correspondence or documents relating to any proceedings of any regulatory agency IX. Material Contracts. The acquiring company must assess all material contracts. The following list provides a comprehensive look at what might be requested: * A schedule of all subsidiary, partnership, or joint venture relationships and obligations, with copies of all related agreements * Copies of all contracts between the company and any officers, directors, five-percent shareholders, or affiliates* All loan agreements, bank financing arrangements, line of credit, or promissory notes to which the company is a party * All security agreements, mortgages, indentures, collateral pledges, and similar agreements, including guaranties to which the company is a party, and any installment sale agreements * Any distribution agreements, sales representative agreements, marketing agreements, and supply agreements * Any letters of intent, contracts, and closing transcripts from any mergers, acquisitions, or divestitures within last five years * Any options and stock purchase agreements involving interests in other companies * The company's standard quote, purchase order, invoice, and warranty forms * All nondisclosure or noncompetition agreements to which the company is a party X. Environmental Matters. For some companies, an environmental review will be necessary. Ensure that the following documents can be made available to the acquiring company for review: * Environmental audits, if any, for each property leased by the company * A listing of hazardous substances used in the company's operations * A description of the company's disposal methods * A list of environmental permits and licenses * Copies of all correspondence, notices, and files related to EPA, state, or local regulatory agencies * A list identifying and describing any environmental litigation or investigations * A list identifying and describing any contingent environmental liabilities or continuing indemnification obligations XI. Tax Matters. Tax returns and tax considerations must also be evaluated in an acquisition. The following tax documents should be assembled and reviewed: * Federal, state, local, and foreign income tax returns for the last three years * States sales tax returns for the last three years * Any audit and revenue agency reports * Any tax settlement documents for the last three years * Employment tax filings for three years * Excise tax filings for three years * Any tax liens XII. Customer Information. Information about the customer base will also prove valuable to an acquiring company. This information can help determine the viability of the company based on the strength of the customer base: * A schedule of the company's twelve largest customers in terms of sales thereto and a description of sales thereto over a period of two years * Any supply or service agreements * A description or copy of the company's purchasing policies * A description or copy of the company's credit policy * A schedule of unfilled orders * A list and explanation for any major customers lost over the last two years * All surveys and market research reports relevant to the company or its products or services * The company's current advertising programs, marketing plans, and budgets, and printed marketing materials * A description of the company's major competitors XIII. Product Line. In addition to customer information, service and product line descriptions and attendant documents will need to be reviewed. The following information will be necessary: * A list of all existing products or services and products or services under development * Copies of all correspondence and reports related to any regulatory approvals or disapprovals of any of company's products or services * A summary of all complaints or warranty claims * A summary of results of all tests, evaluations, studies, surveys, and other data regarding existing products or services and products or services under development XIII. Litigation. Litigation that is pending against the target company and litigation that has been initiated by the target company: * A schedule of all pending litigation * A description of any threatened litigation * Copies of insurance policies possibly providing coverage as to pending or threatened litigation * Documents relating to any injunctions, consent decrees, or settlements to which the company is a party * A list of unsatisfied judgments. XIV. Risk Management and Insurance. Target Company risk management practices and insurance coverages should also be part of the diligence review: * A schedule and copies of the company's general liability, personal and real property, product liability, errors and omissions, key-man, directors and officers, worker's compensation, and other insurance * A schedule of the company's insurance claims for the past three years XV. Miscellaneous. Other relevant documents include: * A schedule of all law firms, accounting firms, consulting firms, and similar professionals engaged by the company during the past five years * Any articles and publicity related to the company to be acquired within the last three years