Guide To Due Diligence (www.gazhoo.com)

Financial Advisory Services October 6, 2005 KANG, Jong Tak PARK, Jae Hong Guide to Financial Due Diligence For Mergers, Acquisitions, Private Equity & Venture Capital

1. Due Diligence Process Overview

Financial and Tax Due Diligence Process Background Target’s auditor Data Room Supplemental Management Interviews / Data Requests/Analyses Financial Model Definitive Agreements Closing / Bring Down Diligence Communication, Analyses, Interim Deliverables Due Diligence Activities

Due Diligence Process Value Drivers Value drivers determine the merit, price, and structure of a transaction – and define the nature and scope of the due diligence Improve/Validate Valuation Model & Deal Structure Maximize Synergy Develop Additional Negotiating Leverage Provide feedback on Acquisition Agreements Identify, Assess & Minimize Risk Financial Tax Operations Technical IT Human Capital Risk Management Forensic / Investigative Services Legal Diligence Procedure

2. Pre Due Diligence – Getting started

Launching a Project

New client acceptance / background checks

Pre approval by audit committee, if applicable

Engagement letter

SA setup

Infrastructure for foreign office billing

Budget

Working group list

Look up other office team members on warehouse

Travel plans, directions

Confidentially agreement

Launching a Project - What Should I Ask ?

Who is our client?

Is this an existing client?

Who do we need on this deal from our group?

What other functions should be involved?

Foreign office involvement?

Are we going to need industry specialists?

Who does the tax compliance / advisory work?

When will we have access to the auditors?

Launching a Project - What Should I Ask (cont’d)?

What are the deadlines?

What is the fee expectation?

What are foreign office’s fee expectations, exchange rate?

What kind of report does the client expect and how often?

Will this be a phased approach?

What do we need to bring to the company / data room?

Dress code?

Launching a Project - What Else Should I Be Doing ?

Set up initial call with client and target

Understand client’s expectations re: scope and deliverables

Lookup background information

Comparative regulatory body (i.e. SEC, FSS, etc) filings

Distribute information package

Develop work plan, issues list

Document request list

Consider existing data room index information

Access letter (Accounting and Tax)

Launching a Project – Key Information

Initial information package

Client contact information

Target contact information

Client and Target advisor information – attorneys, actuaries, etc.

Target offering memorandum (“OM”) / Information Memorandum (“IM”)

Letter of intent (“LOI”) / Memorandum of Understanding (“MOU”)

Term sheet

Client model – capital structure and method of financing

Draft purchase agreement

Client memoranda / acquisition analyses

Competitor filings

Data room index

Target Company Website

Launching a Project – Data Request Considerations

Auction, exclusive, public, etc.

Agreed upon scope and work plan

Prioritize requests

Existing info – i.e. data room documents

Time period requested

Requests should be numbered to organize responses

Use to facilitate discussions with management

Launching a Project – Client’s Viewpoint

Primary motivation / Value Drivers

Pricing

Risks / Exposures

Opportunities

Hold / Exit strategies

What is the quality/reliability/sustainability of EBITDA/GAAP earnings?

Are “normalizing” adjustments appropriate?

What is stability/certainty/reliability of future cash flows?

Walk away from deal?

Reduce/modify offering price?

Obtain contractual protections?

Change post-acquisition plans?

Where is the value of the company and where are “black holes”?

Management capabilities?

Launching a Project – Client’s Need

How is our client going to utilize our work product?

Structure and value deal

Negotiate purchase price and purchase agreement

Negotiate covenants

Determine future financing strategies

Identify post closing operational focus areas

Financial statement impact of transaction

Apply impact of accounting principles

Launching a Project – Deal Considerations

Strategic vs. PEI (Private Equity Investor)

Auction vs. exclusive

Geographical / channel / market share expansion

Asset vs. stock deal

Cash flows / EBITDA

GAAP earnings

Exit strategy

Pre Due Diligence – Prepare Preliminary Issues List

Dependent on available information (10K, OM, etc)

Highlight preliminary issues to focus diligence efforts

Consider timing and prior experience with client

Refine scope

Look for deal breakers

Pre Due Diligence – Balance Sheet and Income Statement Objective – identify:

Major fluctuations

Non-recurring items

Significant accounts

EBITDA adjustments

Normal levels / seasonal trends

Working capital requirements

Unusual accounting practices

Impact of changes in accounting practices

Tax exposures

Unrecorded obligations / liabilities

Pre Due Diligence – Financial Model

Transaction structure and accounting & tax treatment

Consistency with pre due diligence

Return sensitivity to financial factors

Integrity of model

Tax considerations

Sources & uses of funds

Future operating plan i.e. spin-off, add-on

Timing

Pre Due Diligence – Transaction Agreements (LOI, term sheet, MOU, financing agreements)

Structure proposed

Purchase price adjustment mechanism

Representation and warranties

Earn outs

Debt covenants

Tax indemnities and basis for tax allocations

Timing

3. Procedures

General Diligence Procedures Procedures Objective Read and analyze financial information, including company’s audited financial statements and related footnotes for the [two] most recent years and the most recent interim financial statements, tax, accounting and other relevant information made available in the data room Compare several years of footnote disclosures and related financial information to highlight changes and/or new items To identify major issues and risk areas for further consideration [Read/Scan] minutes of meetings of the audit committee, stockholders, and board of directors To obtain information that is relevant to performing due diligence. To obtain information about company’s legal obligation.

General Diligence Procedures (cont’d) Procedures Objective Read the independent auditor’s working papers and management letters for their [two] most recent audits and any quarterly review working papers for the current year Read management letters for the [two] most recent audits Read internal audit reports and inquire of internal auditors as to the scope of work performed, significant findings and status of management’s corrective actions To obtain an understanding of: - Accounting systems and internal controls, material weakness or reportable conditions - Scope of the audits, major issues and audit risk areas, significant judgments or estimates, unusual transactions and any disagreements with management - Assessment of quality of earnings and whether management’s approach to accounting and financial reporting would be characterized as conservative or aggressive - History of audit adjustments proposed and their disposition - Recent or prospective changes in accounting and reporting policies or procedures [Read/Scan] the proposed transaction offering memorandum and other available background information (overview of the company’s history, structure and operations) To identify preliminary tax and accounting issues and risk areas for further consideration

Accounting Items Items Procedures Changes in Target’s Business Inquire about the general history of current operations and recent changes in the Target’s business, including (i) products or services, (ii) any changes in key customer or supplier relationships, (iii) the extent of existing or continuing business or administrative activities between the Target and with the parent or any of its affiliates, (iv) changes in environment in which the company operates, markets served, and competitive conditions, (v) any unusual business practices inherent within the industry or the locations where the company operates, such as arrangements with labor organizations, local authorities, distributors, major customers and suppliers, etc., and (vi) any significant changes by rating agencies or analysts Internal Accounting Controls Inquire of the quality of internal controls and any procedures established by the Target to safeguard against conflict(s) of interest, potentially undesirable customers, questionable payments (i.e., kickbacks, bribes, etc.) and corruption, including: - Status of antifraud program and controls and what procedures have been and being performed to periodically make fraud risk assessments to ensure that such controls are designed and operating effectively - Controls related to “non-standard”, “non-systematic”, “non-routine”, or manual journal entries, including significant transactions that might have occurred in the last few days of a reporting period

Accounting Items (cont’d) Items Procedures Internal Accounting Controls (Con’t)

Existence of any special investigations (i.e., forensic, fraud, etc.) and the reasons for and the results of any such investigations

Reliance upon its internal and external auditors for maintaining reliable and timely financial statements.

Significant Changes in Accounting or Estimates Inquire as to any changes in accounting principles or accounting estimates in the last two years and any anticipated changes that will have or may reasonably be expected to have an impact on earnings, including: - Most significant estimates and judgments management makes in preparing the financial statements - What steps has the Target and its auditors undergone on a periodic basis to ensure that the critical accounting policies are still appropriate Interim Reporting vs. Annual Audited Financial Statements Inquire of consistency of interim reporting and accounting practices compared to those used in the annual audited financial statements. Inquire about differences between interim accounting and normal year-end accounting or reporting practices (i.e., accruals being adjusted appropriately and timely during the interim periods or only at year-end)

Accounting Items (cont’d) Items Procedures Conversion from local GAAP to US GAAP Inquire as to significant differences between local GAAP and US GAAP and quantify their estimated impact on EBITDA, to the extent possible Timely Financial Reporting Inquire as to how long it normally takes for the Target to close its accounting records at its periodic reporting periods (timeframe for the closing process in terms of number of days), including year-end, in order to assess its ability to meet US SEC or other parent company reporting requirements. Inquire about the process and timing of periodic closing/consolidation cycle and consolidation entries Revenue Recognition Policy Inquire (and quantify, as applicable) about revenue recognition policies, including but not limited to the following; - Potential acceleration of earnings and deferring or delaying of expenses - Any recording of revenue prior to delivery - Shipping policies are inconsistent with prior periods - Any significant portion of the current income stream that will cease or drastically reduce in the next [five] years, including large contracts about to expire or terminate - Significant or unusual activity in the last reporting period, particularly near year-end

Accounting Items (cont’d) Items Procedures One-time/Non-Recurring Income and Expenses Inquire about one-time/non-recurring income and expenses, including but not limited to significant items of miscellaneous income and expense, items recognized as extraordinary charges or credits, prior period adjustments, etc. Trade Payables Analyze a summary of trade payables, including aging statistics. Inquire about: - Credit terms, significant past due payables and any disputes with suppliers - Trade payable payment policies Capital Expenditures Analyze capital expenditure projections broken down between maintenance vs. growth. Inquire about; - Historical experience of actual to budgeted amounts - Basis for projected amounts - Individually significant capital projects - Any related purchase commitments Quality and Realizability of Assets Inquire about the quality and realizability of assets, including but not limited to the following: - Any restricted cash - Validity of accounts receivables, collectibility of large overdue balances, analysis of aging and bad debt statistics, and basis for and adequacy of reserves for bad debts, returns, discounts and other allowances

Accounting Items (cont’d) Items Procedures Quality and Realizability of Assets (Con’t) - Inquire about notes receivable (terms, collateral, etc.), pledged receivables, accounts sold with recourse, factoring arrangements, etc. - Inquire about billing and credit policies, including special credit terms (including discounts and rebates) and collection performance - Review the Company’s inventory pricing and valuation methods, including procedures for determining that inventories are valued at lower of cost or market, allocation of overhead, use of standard cost systems, and frequency of physical counts - Inquire about pledged inventories, inventories held on consignment or consigned to others - Inquire about excess, obsolete, slow-moving and unsalable inventories on hand and perform LCM test and slow-moving test

Accounting Items (cont’d) Items Procedures Quality and Realizability of Assets (Con’t)

- Inquire about amount and nature of any inventory adjustments (book to physical, pricing errrors, mark-down, etc.)

- Inquire about significant purchase commitments

- Analyze a summary of other long-lived assets, including intangibles and inquire about realizability of carrying values

- Inquire about excess or idle property, including plant and equipment that has been reserved for, written off or will require replacement earlier than originally anticipated or can be disposed of

Review policies with respect to significant capitalization of costs, including R&D, and methods of depreciation, amortization and impairment

In case of property and equipment, inquire about date and results of last physical count

Accounting Items (cont’d) Items Procedures Sufficiency of Accruals/Liabilities Inquire about the appropriateness of accruals and liabilities, including but not limited to the following: - Basis for and adequacy of accruals for items such as pensions/other post-employment benefits, litigation, environmental matters or product liability and expected timing of related cash payments - Inquire about adequacy of recorded reserves and allowances, and impact on earnings of movements in reserves - Exposure to foreign currency, country, interest risks - Appropriateness of accruals for any current or post-employment fringe benefits including vacation, holidays, accident, medical, and related accounting and funding policies Contingent Liabilities Inquire as to the existence of contingent liabilities including, but not limited, to unasserted claims, environmental issues, guarantees, and employment issues Equity Obtain a summary of equity accounts. The summary should indicate the voting rights, conversion rights, dividend and liquidation preferences, etc., for each class of equity securities. Inquire if any of the shares are restricted or whether there are any restrictions on their use as collateral. Obtain copies of documents relating to stock option and purchase plans warrant arrangements and employee stock ownership Inquire about recent or planned equity issuances to investors, vendors, customers, etc. Inquire about dividend policy and commitments and any dividends in arrears

Accounting Items (cont’d) Items Procedures Liquidity and Commitments Inquire about trends, demands, commitments, events and uncertainties associated with the following: - Provisions in financial guarantees or commitments, debt or lease agreements or other arrangements that could trigger requirements for an early payment, additional collateral support, changes in terms, acceleration of maturity, or the creation of an additional financial obligation, such as adverse changes in the Target’s credit rating, financial ratios, earnings, cash flows, or stock price. - Extended payment terms or receivables, loans, and debt securities that may have uncertainties as to realization - Factors that are expected to be given significant weight in the determination of the Target’s credit rating or will otherwise affect the Target’s ability to raise short-term and long-term financing - Guarantees of debt, lines of credit, standby letters or commitments - Inquire about whether the company is exposed to credit/default risk of significant supplier/customer, service provider, lessor/lessee, debtor, financial guarantor, investor/investee or joint venture

Accounting Items (cont’d) Items Procedures Off-Balance Sheet Transactions Inquire and obtain the information for off-balance sheet obligations, such as litigation and guarantees of future performance. Also inquire about off-balance sheet transactions, such as operating lease, sales of receivables with recourse, and bank financial instruments such as letters of credit and loan commitments Derivatives and Hedging Activities Inquire about any contracts or other relationships entered into by the Target which involve the exchange, transfer or modification of risks associated with fluctuations in interest rates or foreign currency exchange rates - Inquire about whether the methodology for identifying and valuing such derivatives has been consistently applied - Inquire about risk management policies and whether the Target has a complete listing of all derivatives and related exposures Investments Review the summary of the investments accounts Review the accounting policies applied for such investments Review the realizability of the carrying amount of the investments For an investment accounted for on the equity method, request copies of financial statements of the investee to determine the appropriate earnings or losses to record

Accounting Items (cont’d) Items Procedures Debt (to the extent being assumed by the buyer) Inquire about and quantify to the extent possible based upon the information provided by the Target the amount of debt that might be assumed in connection with the Proposed Transaction as well as the timing of future payments, including, but ot limited to the following: - For debt that might be retained, inquire about whether there has been or is any violation of debt covenants as well as change-of-control provisions - Convertible features Related Party Transactions Inquire about the nature of the relationship with related parties and inquire about any carve-out issues, including but not limited to the following: - Existence of any significant transactions with the former group or former subsidiaries including but not limited to shared services, contract manufacturing, etc. - Nature of the relationships with and business purpose of joint ventures and investments accounted for on the cost or equity method as well as any other affiliates - Inquire regarding the nature of significant intercompany transactions - Review accounting records for large, unusual, or nonrecurring transactions or balances, paying particular attention to transactions recognized at or near end of the reporting period

Accounting Items (cont’d) Items Procedures Arrangements with Suppliers and Distributors/Customers Inquire as to any special deals with suppliers/co-operatives and distributors/customers including but not limited to variable pricing arrangements, long minimum purchase or sale commitments (particularly at fixed prices), unfavorable contracts, major contract disputes, financing/advances, extended payment terms, contract manufacturing, etc Material Transactions Obtain a “high-level” understanding of all material transactions over the past three years (i.e., acquisitions, dispositions, joint ventures, financings, restructurings and any other non-recurring transaction) and inquire about the following: - Due diligence reports (if available) related to any recent acquisitions by Target - Any significant obligations arising out of recent disposal of assets or entities - Any recent and proposed acquisitions, sale of subsidiaries, discontinuation of business services, plants shut-down, plant relocation or restructuring or similar transactions are contemplated or are in the discussion stage, and determine the anticipated effect thereof on future earnings.

Accounting Items (cont’d) Items Procedures Quality of Earnings Read and analyze the company’s consolidating internal financial statements and related management discussions and analysis. Inquire about: - Reconciliation between the audited and the internal financial statements - Significant accounting policies, with a focus on revenue recognition, cost capitalization and other areas - Significant differences between company accounting policies and U.S. GAAP - Events subsequent to the most recent balance sheet date that could have a significant impact on current financial position, future earnings or cash flows - Large last-minute transactions that result in significant revenues being recognized as revenues at then end of the financial reporting period - Significant inter-company and intra-company transactions, including corporate overhead allocations

Accounting Items (cont’d) Items Procedures Quality of Earnings (Cont’d)

- Analyze monthly operating data, including:

Reconciliation between gross and net revenue

Revenues and expenses (or other measure of profitability) (a) by major business unit or major product line and (b) by customer

Cost of sales by major business unit or major product line and by cost components (i.e., material, labor, overhead)

Selling, general and administrative expenses (by type and by function)

Professional fees, particularly legal and outside consultants

Other income and expense

Analyze movement in “reserve” (e.g., bad debts, inventories, asset impairment, litigation and claims, potential losses). Inquire about “reserves” activity.

Accounting Items (cont’d) Items Procedures Quality of Earnings (Con’t)

Inquire about:

Composition of account balances

Variances of annual and year to date results from prior year from budget and trends

Any unusual fluctuations in monthly amounts

Significant trends in pricing structures, terms and customer retention

Significant non-recurring, unusual or out-or-period charges and credits

Significant differences between accrual and cash basis revenues and expenses, such as stock compensation, pension/other post-employment expenses or reserves

Book-tax differences, effective tax rates, cash taxes and any tax “cushion”

Expected changes in economies of scale as a result of the proposed transaction, such as purchasing power for materials and other production costs, employee benefit costs, insurance costs

Change in control costs

Review organization charts and analyze salary, fringe benefits, head count and turnover information, where available, by department/function, and for individual members of senior management . Inquire about responsibilities and efficiency of lines of reporting by organizational unit or department

Accounting Items (cont’d) Items Procedures Quality of Earnings (Con’t)

Inquire as to how foreign currency translation and transaction adjustments are treated, procedures used to minimize the company’s exposure to the effects of foreign currency fluctuations, how the company hedges its foreign currency exchange risk and whether any currency hedging agreements are in place. Consider whether changes in exchange rates could have a material impact on the business

Working Capital Analysis - Analyze monthly working capital trends (balances and turnover statistics), with a focus on elements directly attributable to operations (excluding the impact of cash, restructuring/purchase accounting reserves, significant accruals for capital expenditures, debt, interest and income taxes). Inquire about factors impacting the trends indicated (such as seasonality and comparison to industry)

Other Items Procedures Company Projections Read strategic plans and similar planning documents; inquire as to key assumptions and significant matters identified - Read and analyze business unit projections of revenues, expenses (excluding interest and income taxes), earnings and cash flows and inquire about the consistency of underlying assumptions and the basis of presentation vs. historical periods - Inquire about procedures and controls over operating and capital budgeting and forecasting Financial Model Provide consultative comments on the client’s proposed transaction model, with a focus on: - Accounting and financial reporting consequences of the transaction structure, including consideration of the effective tax rate on a book and cash basis - Consistency with issues noted during due diligence (e.g., cash commitments, settlement of existing debt and other liabilities) Purchase Agreement Read and comment on purchase and other transaction documents to the extent that we are provided drafts and requested to provide such comments, with focus on: - Consistency with the desired tax and accounting transaction structure - Financial, accounting and tax aspects of representations, warranties and indemnifications - Financial aspects of conduct of the business through closing