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.Jane scanned the list and did not see any mention of Bailey Corporation.Jane knew that just last week, Bailey had called threatening a $10 million suit because of downtime that its factory had incurred when Apex was late in a delivery from its troubled Trycon line.Although it was very early in the process, based on what she knew, Jane felt that Bailey had a reasonable basis for a claim.However, she decided to check with her legal group before mentioning it to Crabb.She told Crabb that she would “review the list and get back to him.”FEBRUARY 15Just as she was leaving for the day, Bob Quest came running into her office, looking worried.He had just received a call from the state Department of Environmental Protection indicating that it was sending in a team next week for a complete analysis of the manufacturing processes at Apex.This review resulted from a complaint by several residents downstream from Apex’s main production plant in town.Bob’s first thought was, thank goodness, FCA would be gone by then.He did not know whether there was anything to this, as Apex was frequently subjected to environmental reviews in various forms.Fortunately, they had all turned out well to date.However, he also knew that FCA had not asked any questions about environmental liability at Apex.FCA had not visited all of the company’s locations or completed Phase I environmental reviews on any of the manufacturing sites.FEBRUARY 16Fred Thompson called a meeting of everyone involved in the due diligence process with FCA.Along with Sampson and Quest were representatives from Apex’s legal, tax, business development, and credit departments.Thompson stated that FCA had requested a full-day meeting with the group on February 17 to get answers to all outstanding questions and conclude its due diligence.Thompson thanked the group for its participation to date and indicted that FCA had not found anything “out of the ordinary” and was ready to close the deal, pending a good meeting the next day.Thompson congratulated everyone on a “job well done.”Samson raised her hand and said, “I don’t know about the others in the group, but I think FCA has missed some critical issues in its due diligence.For example, its financial projections of what this business can do are crazy.I am not sure how to handle this in the meeting tomorrow.” Joe Bliss, Apex’s chief credit officer, chimed in, “I agree.FCA has been overly58CHAPTER 4optimistic in its assumptions regarding the amount of credit losses we will sustain in this business.I wanted to check with you first, Fred, but don’t we need to make them aware of these issues?”Fred stood up and addressed the group.“Listen, we all want this deal to close, right? Just to remind you all, if FCA goes away, we file for bankruptcy and you are all out of work within two weeks.FCA has hired a nationally recognized investment bank to calculate these projections.they are not stupid.We have provided every bit of information that FCA requested.We have opened up our company and answered all of FCA’s questions for an entire week.I don’t know what else we can do.This is still a great company, and I am sure that, even with the minor issues you have, FCA will make this deal a huge success.My advice for tomorrow is to be positive and not get bogged down with any minor issues you might have.”At this point, the meeting was adjourned.Jane went back to her office to reflect on her next steps.Discussion Questions1.Assume that you are Jane Samson.What are your moral and legal obligations to disclose the issues you know of to FCA?2.What steps did FCA miss as part of its due diligence?A T T A C H M E N T 1FCA Due Diligence—ApexDetailed Information RequestFinance1.Audited financial statements for the past three years 2.Independent audit work papers for the past three years 3.Calculation of Reserve for Doubtful Accounts4.Accounting policy manual5.Internal audit work papers for the past three years 6.Sales backlog report7.Support for financial statement footnotesLegal1.List of existing, threatened, and pending litigation 2.Major legal settlements over the past five yearsDue Diligence: The Internal Side59Tax1.Tax returns for the past five years2.Calculations of effective tax rate for the last five years 3.Status of any IRS audits currently under wayHuman Resources1.Employee lists, including years of service, background, and compensation history 2.Documentation of compensation, benefit, and incentive plans 3.Key person life insurance plans4.All union agreements5.Status of unfunded or underfunded pension plansRisk1.Write-off activity for the last five years2.Major credit issues currently outstanding3.Recoveries of bad debts over the last five years4.List of top ten customer accountsBusiness Development1.Major contract proposals outstanding2.Any acquisition activity planned3.Status of relations with top ten customersInformation Technology1.Flowchart of major systems—accounting and other2.Disaster recovery plan3.IT initiatives/upgrades currently in processOther1.Minutes of board of directors meetings over the past five years60CHAPTER 4A T T A C H M E N T 2Apex Corporation FCA Due DiligencePro Forma Financials(in millions of dollars)HistoricalProjected200320042005200620072008Trycon Sales$12.9$13.0$12.5$15.0$18.0$21.6Bliston Sales4.05.06.57.57.98.5Scott Sales2.03.21.92.02.52.9Total18.921.220.924.528.433.0Cost ofGoods Sold10.011.010.912.113.214.0Gross Margin8.910.210.012.415.219
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