expert webcast 7.10.2014: acquisition due diligence

Moderator:

- Alexander B. Kasdan, Senior Managing Director, DelMorgan & Co.

Panel:

- Neil Morganbesser, President & CEO, DelMorgan & Co.

- Leib Orlanski, Partner, K&L Gates

- Claudine M. Cohen, Principal, CohnReznick

- Dennis Duitch, CPA, Managing Director, Duitch Consulting Group

© Copyright 2014 Expert Webcast

ACQUISITION DUE DILIGENCE July 10, 2014

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MODERATOR: Alexander B. Kasdan is a Senior Managing Director at DelMorgan & Co. With more than 20 years experience in investment banking, corporate law and restructuring with firms such as Credit Suisse First Boston, O'Melveny & Myers LLP (formerly O’Sullivan Graev & Karabell LLP), Paul, Hastings, Janofsky & Walker LLP (formerly Battle Fowler LLP) and Schlumberger Ltd., and as a founding partner of Convergence Capital Partners, Alex brings more than twenty plus years of senior-level Wall Street advice to the middle market companies and entrepreneurs. He has executed over 100 domestic and cross-border transactions totaling more than $10 billion in overall volume in a variety of industries. Alex graduated magna cum laude from Middlebury College with a B.A. degree in Economics and Italian and was elected to Phi Beta Kappa during his junior year. In addition, he holds a J.D. degree from Columbia University Law School and has studied at the University of Florence in Italy. He is admitted to the Bar in the State of New York. Alex is a Senior Advisor to Governance and Transactions LLC, an advisory firm established in 2003 by Mr. James L. Gunderson, former Secretary and General Counsel of Schlumberger Limited, to assist boards, management and owners with corporate governance, compliance, structuring and strategic transactions.

100 Wilshire Blvd. Suite 750 Santa Monica, CA 90401 +1 310 980 1718 www.delmorganco.com [email protected]

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Panelist: Neil Morganbesser is co-Founder and President & CEO of DelMorgan & Co. where he provides senior leadership within the firm and helps oversee all client engagements. Mr. Morganbesser is also CEO of Globalist Capital LLC, DelMorgan’s broker-dealer affiliate. Mr. Morganbesser has over 20 years of experience providing financial and strategic advice to a full range of clients, including entrepreneurs, large corporations, governments, family businesses, private equity funds, and special committees of public companies. Mr. Morganbesser has been affiliated with some of the leading institutions in the world, and his experience ranges from representing the offshore owners in the sale of a small, private U.S. company for $10 million to representing the special committee of a large, public company in a $9 billion negotiated management buyout with a highly complex financial structure. Mr. Morganbesser has truly global experience with the most sophisticated transactions, across a broad range of industries and in a large number of jurisdictions, as the lead banker on a wide variety of transactional and other advisory assignments, including domestic and cross-border mergers, acquisitions, joint ventures, sales and divestitures, restructurings, special committee assignments, unsolicited acquisitions and hostile defense. With transactional experience in over 30 countries, Mr. Morganbesser has successfully advised on over 75 transactions. Until May 2008, Mr. Morganbesser was the head of West Coast and Asia Mergers & Acquisitions at Bear Stearns & Co., as a Senior Managing Director based in Los Angeles. Prior to joining Bear Stearns in May 2001, Mr. Morganbesser was an investment banker in the Mergers, Acquisitions and Restructuring Department at Morgan Stanley (in New York from 1993-1998 and in Los Angeles from 1998-2001). From 1990-1993, Mr. Morganbesser was a corporate and M&A attorney at the preeminent New York law firm of Wachtell, Lipton, Rosen & Katz. Mr. Morganbesser graduated with an A.B. magna cum laude in Applied Mathematics / Economics from Harvard University (Phi Beta Kappa) in 1986 and received his J.D. and M.B.A. degrees (Order of the Coif, with honors) from Stanford University in 1990.

100 Wilshire Blvd. Suite 750 Santa Monica, CA 90401 (310) 319-2000 [email protected] www.delmorganco.com

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Panelist: Leib Orlanski is a Partner at K&L Gates. Mr. Orlanski helps companies and management teams find acquisition targets to buy, brings in private equity firms to finance buy-outs or growth capital, and structures and documents the terms of the M&A and investment transactions that he originates. He also represents companies seeking to find underwriters for an IPO or a follow on public offering or a PIPE financing, structures the terms of the public offering or the private placement, and represents either the issuer or the underwriter in public stock offerings. He was named a Southern California "Super Lawyer" by Los Angeles Magazine in 2006, 2007 and 2008. Mr. Orlanski represents issuers and underwriters in their public stock offerings. He has been a member of the State Bar Corporation Committee; a Lecturer, California Continuing Education of the Bar; Los Angeles County Bar Association Annual Update on Developments in Securities Law; he has been a member of the Corporation Commissioner's Blue Ribbon Adversary Committee, and a Lecturer and Chairman for the University of California, Los Angeles Extension Courses on “Going Public,” and “Off-Balance-Sheet Financing.” Mr. Orlanski holds a J.D. from University of Southern California Law School, 1967, (Order of the Coif; Editor, Southern California Law Review) and a B.A. from University of California at Los Angeles (UCLA), 1964.

10100 Santa Monica Blvd. 7th Floor Los Angeles, CA 90067 310-552-5044 [email protected] www.klgates.com

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Panelist: Claudine M. Cohen is a principal in CohnReznick’s New York office and a member of the firm’s Transactional Advisory Practice (TAS). With over 20 years of business experience, she serves as an advisor to public and private companies both domestically and internationally. Her clients include private equity investors, alternative investment funds, lenders, and strategic investors. Claudine’s specific advisory services include strategic advisory, quality of earnings analyses, identifying revenue sources and profitability drivers, examining operating cost structures and sustainability factors, investigating business models including cash flow and financial projections. Prior to joining CohnReznick, Claudine served as the TAS principal at a large accounting and advisory firm. She led the TAS healthcare industry group while also serving other industry sectors including consumer industrial products, retail, distribution, and business and financial services. Claudine holds a Bachelor of Commerce and a Bachelor of Accountancy degrees from the University of the Witwatersrand, South Africa, and a Master of Business Administration, Marketing – Cum Laude degree from Bond University, Australia.

1212 Avenue of the Americas New York NY 10036 (212) 297-0400 [email protected] www.cohnreznick.com

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Panelist: Dennis Duitch, CPA, is Managing Director for the Duitch Consulting Group, providing strategic, financial and operational guidance to Owners, Executives & Boards of small and middle-market companies, including merger, acquisition, succession and exit planning. His background includes service with Chicago, San Francisco and Beverly Hills offices of Grant Thornton CPAs, presidency of a consumer products company, and as founder & managing partner for Duitch & Franklin LLP, among Southern California’s largest independent CPA/ Business Management practices acquired by a public company in 1998. With credentials including an MBA degree in Finance from Northwestern University and certificates of specialty in Business Appraisal and Mediation, Dennis provides pragmatic counsel in strategic direction & planning, business formation/structure & forecasts, operating plans & budgets, control systems/procedures & infrastructure, succession & exit strategy, deal negotiation, merger/acquisition/disposition, income & estate tax, crisis & continuity planning. He is a Certified Estate and Family Business Advisor, licensed insurance advisor, and mediator for matters including partner/shareholder disputes, business dissolution, divorce property settlement, and dysfunctional families & Boards.

818.905.0275 [email protected] www.duitchconsulting.com

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FOUNDER & HOST: Anna Spektor is founder and host of Expert Webcast, a sophisticated digital content resource and source of foremost expertise for the professional and business communities, domestically and cross-border. Under Anna's direction, Expert Webcast produces the industry’s leading programs covering corporate, M&A, restructuring and finance topics, addressing most pressing issues for business owners, C-level executives, corporate advisers and institutional investors. Anna is also a seasoned management consultant, specializing in helping professionals and senior executives develop new business, deepen stakeholder relationships and increase brand awareness.

100 Wilshire Blvd. Suite 750 Santa Monica, CA 90401 +1 (310) 935-3816 [email protected] www.expertwebcast.com

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MAJOR TOPICS •  Early planning and acquirer goals •  Strategic due diligence •  Business, legal and financial due diligence •  Management audits •  Quality of earnings •  Due diligence team, plan and process •  Corporate culture and communications •  What the acquirers are looking for •  Post-transaction integration

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© Copyright 2014 by K&L Gates LLP. All rights reserved.

July 10, 2014

Due Diligence in M&A Transactions: 10 Critical Areas

Leib Orlanski, K&L Gates LLP

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10 CRITICAL AREAS IN DUE DILIGENCE 1.  Float 2.  Pension Liability 3.  EBITDA Adjustments 4.  Corporate Overhead

Projections 5.  Customer Relations

6.  Employee Retention 7.  Intellectual Property 8.  Regulatory

Compliance 9.  OSHA 10. Chemicals

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1.  FLOAT !  Seller’s balance sheet will state cash balance as

of date of balance sheet. !  Presumably, based on latest bank online statement. !  Won’t reflect checks written by Seller post statement

date, if payee bank has not yet presented checks for payment = float.

!  Due Diligence Tip: !  To avoid float being included in Seller’s cash balance,

review Seller’s check ledger and deduct checks written, but not yet presented for payment.

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2.  PENSION LIABILITY !  Unfunded pension liabilities can be understated

if an improper interest rate is used. !  Due Diligence Tip:

!  If Seller has a pension plan, double-check extent of liabilities, funding amount, and interest rate assumptions.

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3.  EBITDA ADJUSTMENTS !  In calculating EBITDA, Seller will deduct “non-

recurring expenses” from calculation of operating income.

!  Due Diligence Tip !  Confirm that the “non-recurring expenses” are truly

“one-off” events. !  Example: Check items in EBITDA Adjustments called

“transaction fees.” Some Sellers categorize credit card charges improperly as transaction fees.

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4.  CORPORATE OVERHEAD PROJECTIONS !  When the business being sold is part of a larger

corporate business, the Buyer needs to verify true post-acquisition cost of supplying services that the former parent will no longer supply.

!  Example: IT services may cost less if they are part of a larger operation than if a separate IT department has to be established for the Buyer.

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5.  CUSTOMER RELATIONS !  Description of Customer Contracts

!  Buyer must review all significant customer contracts to determine terms of contracts, pricing and pricing adjustments provisions, cancellation provisions, and dollar value of contracts.

!  Buyer must compare results and “true up” to Seller’s backlog representation.

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5.  CUSTOMER RELATIONS (cont.) !  Satisfaction

!  Buyer may need to check with some key customers as to whether they are satisfied with the relationship and if they plan to switch to another supplier.

!  This is a sensitive point.

!  Purchase Orders !  Buyer should distinguish between customer contract

and purchase orders.

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6.  EMPLOYEE RETENTION !  Wrongful Termination

!  Determine whether any employees were terminated in past year.

!  Terminations may give rise to wrongful termination claims.

!  Terms of Employee Contracts !  Is employment is “at will” or for a term? !  Do contracts have “Change in Control” provisions,

which go into effect in this transaction?

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7.  INTELLECTUAL PROPERTY !  If Seller has patents:

!  Ask your patent lawyer to review patents.

!  If Seller licenses technology from third parties: !  Review license agreements for Change in Control

provisions, which may result in cancellation of the license because of sale to Buyer.

!  If Seller’s business is based on trade secrets: !  Review employee invention and assignment

agreements to make sure Seller owns the technology.

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7.  INTELLECTUAL PROPERTY (cont.) !  If Seller has granted licenses to third parties for

use of the technology in certain non-core applications: !  Review those agreements to determine if granting

those licenses is compatible with your business plan going forward.

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8.  REGULATORY COMPLIANCE !  If Seller is subject to government regulation:

!  Check all government permits, licenses, correspondence with regulatory agencies, investigations, government penalties, fines, and compliance orders.

!  Examples !  Pharmaceutical, cosmetics, transportation, broadcast,

and energy transmission businesses

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9.  OSHA (for Manufacturing Businesses) !  Check OSHA compliance, inspection, and

worker accident/injury records.

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10. CHEMICALS !  For businesses that produce chemicals:

!  Check where there is soil contamination. !  Check that hazardous materials are disposed of

properly.

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