Fall 2007 issue of Horizons

A P u b l i c a t i o n b y R u b i n B r o w n L L P

Knowledge: The Foundation of Your Success

INSIDE THE IMPACT OF KNOWLEDGE ON BUSINESS AND BUSINESS MANAGEMENT INTERNATIONAL KNOWLEDGE: BAKER TILLY Page 5 STAFFING YOUR WORKFORCE Page 9 REVISED 404 GUIDANCE Page 15 PUTTING KNOWLEDGE TO WORK, UMSL Page 19 GROWTH OF ST. LOUIS EQUITY FUND Page 21 AND MORE

horizons

knowledge. commitment. value. CERTIFIED PUBLIC ACCOUNTANTS AND BUSINESS CONSULTANTS

CONTENTS ii Welcome 3-4

ASK RubinBrown 5-8 International News: Baker Tilly 9-10 Feature Article: Staffing at All-Time High 11-14 Selling Your Business 15-16 Revised 404 Guidance based on knowledge 17-18 401(k) Lawsuits – What You Don’t Know Can Hurt You 19-20 Guest Article: Tom George, Chancellor – University of Missouri-St. Louis 21-22 Client Spotlight: John Wuest, President/CEO, St. Louis Equity Fund Inc.

Industry News

23-24 ARCHITECTS & ENGINEERS 25-26 CONTRACTORS 27-28 HEALTHCARE 29 HOSPITALITY 31-32 HOME BUILDERS 33-34 LEGAL 35-36 MANUFACTURING & DISTRIBUTION 37-38 MORTGAGE BANKING 39 NOT-FOR-PROFIT 41-44 PUBLIC SECTOR

INFORMATION Editor: Eric Gutberlet Graphic Design: Millennium Communications Marketing Assistant: Laura Garanzini

Horizons, a publication of RubinBrown LLP, is designed to provide general information regarding the subject matters covered. Although prepared by professionals, its contents should not be construed as the rendering of advice regarding specific situations. If accounting, legal or other expert assistance is needed, consult with your professional business advisor. Please call RubinBrown with any questions. Located in St. Louis and Kansas City, RubinBrown has become one of the largest accounting and business consulting firms in the Midwest. www.rubinbrown.com

knowledge. commitment. value. CERTIFIED PUBLIC ACCOUNTANTS AND BUSINESS CONSULTANTS

John Herber Managing Partner

Welcome

Knowledge is the fuel that drives American business today. Knowledge is displayed through the innovators of processes, production, design, and concepts, which lead our companies. As business owners, we are challenged with making decisions about business initiatives that enhance and build value in the businesses we own and in time pass on to succeeding generations. As managers, we look to create value through the processes and operations we manage to meet quarterly projections. Finally as investors, we look for visionary companies with a track record of success or those gems buried in unglamorous and forgotten industries that are ripe for a period of growth and expansion. In this issue we try to capture the impact knowledge and a knowledgeable workforce has on business and business management. RubinBrown has long been a resource of business knowledge that has assisted so many of our clients in achieving their business and personal goals. I invite you to read this publication and offer us your feedback. Our goal is always to satisfy you our clients and friends. We hope to hear from you – john.herber@rubinbrown.com. Pleasant reading.

St. Louis office RubinBrown

One North Brentwood St. Louis, MO 63105

Kansas City office RubinBrown 9300 West 110 th St. Ste. 600 Overland Park, KS 66210

RubinBrown New Hires

David Duckwitz , CPA Joined RubinBrown in November as a manager in its Assurance Services Group. Based in the firm’s Kansas City office, he is responsible for the planning, execution and review of attest engagements for

Charles F. (Chip) Harris , CPA Joined RubinBrown in September as a partner in the Assurance Services Group. Based in the firm’s Kansas office, Chip is responsible for the planning, execution and review of audit engagements. He works with

companies in various industries. David has more than 12 years of accounting experience, most recently serving as manager of internal audit at Kellwood Co. He holds a bachelor’s degree in business administration with an emphasis in accounting from Washington University and is a member of the American Institute of Certified Public Accountants and the Missouri Society of Certified Public Accountants.

commercial, not-for-profit and public sector clients. Chip has more than 11 years of accounting experience, most recently working for Baker Tilly Limited (BVI) in the British Virgin Islands. He holds a bachelor’s degree in business and accounting from the University of Kansas.

John E. Preston , CPA/ABV, CVA Joined RubinBrown in September as a manager in its Real Estate Services Group. Based in the firm’s St. Louis office, John brings to RubinBrown more than 25 years of experience in accounting and tax consulting.

Christopher N. Foulk , CPA Joined RubinBrown in December as a manager in its Manufacturing and Distribution Group. Based in the firm’s St. Louis office, Chris brings to RubinBrown more than six years of experience in the

Prior to joining RubinBrown, he was employed by two major accounting firms as a tax manager. In his new position, he is responsible for reviewing and supervising tax return preparation and researching tax issues in the Real Estate Services Group. John holds a bachelor’s degree in accounting and a master’s degree in taxation from Brigham Young University. He is a member of the American Institute of Certified Public Accountants, the Missouri Society of Certified Public Accountants and the National Association of Certified Valuation Analysts.

insurance, manufacturing and distribution industries. He holds a bachelor’s degree in accounting from Truman State University and a master’s degree in accountancy from the University of North Carolina at Charlotte. He is a member of the American Institute of Certified Public Accountants.

Mark Counts Joined RubinBrown in January 2007 as director of internal technology. Mark brings to RubinBrown more than 12 years of experience in accounting and technology. In his new position, he oversees

Jay E. Power , CPA Joined RubinBrown in October as a manager in its Tax Consulting Group. Based in the firm’s Kansas City office, he manages and supervises tax planning for corporations, partnerships, not-for-profits and individuals.

the technology support department, ensuring all RubinBrown departments and groups are making the most effective use of available technology. In addition, he participates in the planning, design, implementation and support of cost-efficient technology solutions. Mark holds a bachelor’s degree in business administration with a minor in accounting from the University of Missouri-St. Louis.

Jay most recently served as a tax manager with Employers Reinsurance Corp. He graduated with a bachelor’s degree in accounting from Kansas State University and is a member of the American Institute of Certified Public Accountants and the Missouri Society of Certified Public Accountants.

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Value. With the right financial partner, it all fits together.

For more than half a century, RubinBrown has been making a lasting mark on business. Our one-firm approach means you gain access to a comprehensive chain of services, all managed and delivered by an integrated team of experts. It’s how we’re able to provide the kind of insights and solutions you need to succeed. Firm-wide, specialized knowledge. An unmatched commitment to service. That’s the value RubinBrown delivers. Contact us today and discover for yourself the RubinBrown difference.

St. Louis, MO u 314.290.3300 www.Rubin Brown.com Certified Public Accountants and Business Consultants

Knowledge. Commitment. Value

Assurance | Internal Audit | Litigation Support | Qualified Plan Audit | SEC Advisory | Small Business State and Local Tax | Tax and Compliance | Valuations | Wealth Management

ASK RubinBrown ASK RubinBrown

LEAD Program participants also met with Dick Flemming, head of the St. Louis Regional Chamber and Growth Association. Flemming shared his own leadership insights with the group and gave them a first-hand introduction to St. Louis’ new branding campaign, designed to attract top businesses to the metropolitan area. He also discussed the revitalization efforts for downtown St. Louis. The pursuit of wisdom and knowledge is a significant component of the LEAD Program. Past program speakers have included Maxine Clark, CEO of Build-A-Bear Workshop and Kathy Osborn of the St. Louis Regional Business Council. The program agenda for 2006/2007 focuses on four key topics: strategic planning, time management, effective presentations and networking. The LEAD Program is one of many aspects of RubinBrown that make the firm a wonderful place to develop a career. I would welcome the opportunity to discuss the program with any of our readers.

How does RubinBrown LEAD

The RubinBrown LEAD (Leadership, Education and Development) Program is the firm’s innovative solution to the development needs of our younger leaders. The program offers participants tremendous knowledge sharing opportunities throughout the year. In the fall of 2006 alone, participants visited with two well-respected St. Louis leaders. Participants met one-on-one with Chuck Knight, former CEO of Emerson Electric. Knight discussed his book, “Performance Without Compromise.” He shared his leadership insights and the secrets of how Emerson consistently achieves winning results. To top off the afternoon, Knight personally signed copies of his book for each participant.

Questions? Contact Fred Kostecki, CPA Partner, Assurance Services Group 314-290-3398 fred.kostecki@rubinbrown.com

The RubinBrown LEAD (Leadership, Education and Development) Program is one of many aspects of RubinBrown that make the firm a wonderful place to develop a career.

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knowledge. commitment. value. CERTIFIED PUBLIC ACCOUNTANTS AND BUSINESS CONSULTANTS

technique. Attendance at external seminars, local and national conferences, and online and self-study programs also are coordinated through the University. The University encourages each team member to take charge of his or her professional career by developing a “career equity” plan. A career equity plan is a way for team members to map out where they are and where they plan on going throughout their professional career. RubinBrown provides services for many different industry and service groups. Each of these areas requires specific knowledge and skills. Once a career path is chosen, the University assists in providing a platform to teach team members the core competencies they need to succeed in their specialty area by identifying an educational focus. These core competencies (as well as advanced competencies) generally concentrate on technical skills, technological skills and leadership skills. Each team member works with another team member referred to as a “Career Development Coordinator” to ensure that he or she is advancing in his or her chosen specialty area and the firm is doing all it can to help that team member succeed. As the services RubinBrown provides continue to expand, so does the University. New courses are constantly added to the curriculum, technical and technological training is enhanced and improved, and the strengths of individual team members are incorporated into the University’s courses so team members can share their knowledge with others. Although we live in a world of constant change, the one thing that will never change is our recognition that our team members are our number one assets. By instilling them with the knowledge they need to succeed, RubinBrown is ensuring our team members will continually improve and become better overall advisors, accountants and business consultants.

Why invest in the pursuit of knowlege

With this Horizons’ being dedicated to “knowledge,” it is only fitting to discuss how RubinBrown has devoted itself to providing continuing education to our team members. We live in a world of constant change. New tax laws are frequently enacted, increased administrative and regulatory oversight must be accounted for in the services we provide, and technological enhancements must be brought to our clients’ attention to keep them competitive in the marketplace. In order to continue to provide our clients with the superior quality and service they deserve, RubinBrown established RubinBrown University in 2002. The stated purpose of the University is to provide an educational platform that enables each team member to continue to learn and grow as an advisor and professional throughout his or her entire career. The University is similar in design to other colleges and universities that we all attended. There currently are more than 150 internal training courses offered through the University. These courses consist of formal, substantive classroom instruction taught by RubinBrown specialists as well as external facilitators. The courses offered range in design from general classes that are structured to provide a broad base of knowledge to highly technical and sophisticated courses that concentrate on a particular topic, issue or planning

Questions? Contact Rich Petrofsky, JD Partner, Tax Consulting Services Group 314-290-3487 richard.petrofsky@rubinbrown.com

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INTERNATIONAL NEWS Baker Tilly International

USA Hosts the World!

US perspective on the international convergence of accounting standards. It is his belief that convergence is ultimately necessary and is devoting significant FASB resources to this effort. Other business notes… David Gwilliam, Baker Tilly London, joined by our own Steve Newstead, gave the Worldwide Corporate Governance Steering Committee update. They spoke of ongoing initiatives of the committee including plans for greater collaboration between firms as well as additional SOX training and client seminars offered through Baker Tilly International. Damien Connellan, former KPMG partner, was appointed to lead the continued development of Baker Tilly China. Damien will lead the China Desk initiative of Baker Tilly International and will be based in Beijing. To date Baker Tilly International is the 8th largest accounting and consulting network in the world with 126 independent firms, representing 93 nations, with annual aggregate billings of over $2.3 billion. New members to Baker Tilly International represent Croatia, Egypt, Kenya, Luxembourg, the Philippines, Poland, Tanzania and Uzbekistan.

The independent firms that comprise Baker Tilly USA hosted their international counterparts at the 2006 World Conference in Washington D.C. Member firms from around the world arrived to discuss a number of issues, not the least of which included global accounting and tax matters impacting clients. Attending the conference included member firms representing 61 nations, over 200 delegates and 70 guests. The conference began with a reception at the Library of Congress. Making the session’s opening remarks, RubinBrown’s Jim Castellano, Chairman of Baker Tilly International, spoke about a business approach that would enable Baker Tilly International to work more effectively worldwide. The Washington Post highlighted that new direction of cooperation in a feature story that ran on the opening day of the conference. Castellano further clarified, the intention of Baker Tilly USA is to fill the void created by the Big 4 displacement of clients and to offer greater choice to organizations seeking high quality professional services. Bob Herz, Chairman of the US Financial Accounting Standards Board (FASB), was a guest speaker at the annual conference and provided delegates with the

Questions? Contact Jim Castellano, CPA Chairman 314-290-3317 james.castellano@rubinbrown.com

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knowledge. commitment. value. CERTIFIED PUBLIC ACCOUNTANTS AND BUSINESS CONSULTANTS

Raising funds on the equity markets While there are many equity markets there is probably only one market that a UK growing company is likely to consider in order to raise new funds – AIM. AIM is the junior market of the London Stock Exchange which now has over 1500 companies listed on it and is likely this year to exceed the number on the main list. AIM has become the most successful growth company market in the world because it has struck an appropriate balance of regulation (AIM is regulated by the London Stock Exchange itself and not the FSA) which has attracted both companies and investors. Every UK institution except one now invests in AIM companies. This article focuses on the following three areas: 1. why should a company seek a public listing? Benefits and drawbacks of a public listing The benefits of listing include: • the ability to raise new equity funds for growth • increased profile and visibility • making acquisitions using shares as a currency. (A particular advantage of AIM is that acquisitions of other companies can usually be made without seeking the consent of shareholders in the AIM company). 2. which companies are suitable for AIM, and 3. how should a company prepare for an IPO?

For many companies the advantages, in particular the ability to raise new funds for growth, outweigh the disadvantages, but for some, who are not prepared to cross the corporate governance boundary, then a public listing should not be considered. A public listing is not usually an opportunity for the proprietors to fully exit. However, dependent on market conditions it may be possible to realise some worth on IPO in particular in order to create liquidity in the stocks. Suitable companies Suitable companies are those that will attract institutional investors. Sought after criteria include: • strong well balanced management team • demonstrable growth potential - a scaleable opportunity • niche products or services • no dependence on key customers, suppliers or staff. Companies with lifestyle operations are not likely to be attractive – although they may provide a good living for the proprietors these are companies that are not fundamentally valuable largely because they do not meet the ‘sought after’ criteria. AIM can attract companies of all sizes and trading history although a market valuation including new funds to be raised of over £15 million is more likely to be attractive and cost effective in relation to the costs of the listing. These are some of the considerations when seeking a listing: • consider appropriate board composition – a CFO is usually essential and to comply with corporate governance expectations at least two non executive directors should also be put in place one of which is normally the chairman • ensure that financial systems and reporting procedures are robust and comply with generally accepted accounting practice (GAAP) and that accounting policies are acceptable and in line with quoted competitors • ensure all litigation is resolved

Drawbacks include: • closer public scrutiny and city intrusion • management lock ins • the requirement for more regular reporting • increased corporate governance and costs.

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INTERNATIONAL NEWS Baker Tilly International (cont.)

• consider the introduction of share option or employee incentive schemes to motivate, reward and lock in key staff. Take advice on the various schemes available • consider the group structure – are there some operations that should not be listed or do not form part of the core activities of the group? Should a new holding company be formed? • are all taxation matters up to date and fully complied with? In particular is there compliance with VAT, PAYE and corporation tax • take steps to ensure the commercial criteria in respect of customers, suppliers and staff are met as discussed above • review and update insurances – in particular it may be necessary to consider key man policies for certain directors. Preparation Companies seeking a listing must not only be suitable to gain admission to AIM but must also be ready. A typical listing process takes around three months but some companies may take up to two years to become ready for listing. There can be no IPO without full financial and legal due diligence so it is worth preparing for this. Above all it is essential that a company has prepared a robust business plan supported by a detailed financial model (integrated profit, cash flow and balance sheets) which can be easily flexed for sensitivity analysis and which can support the new funds to be raised on IPO. Steps to flotation Having met the suitability and preparation tests a flotation is a disruptive time, in particular for the directors and especially the finance director or CFO. Long hours in meetings will be necessary and the board needs to ensure that the underlying business is still run efficiently during this time. It is therefore essential that the board also chooses advisers who are experienced in this field, can identify key issues early and provide a solutions driven approach.

The steps to flotation are: • preparation as discussed above • choosing advisers • due diligence process – commercial, legal and financial • research note preparation • preparation of admission document • marketing to investors • admission Advisers The board will need to choose; reporting accountants, lawyers, a nominated adviser (Nomad) and a broker. Also required are financial PR and printers and registrars. The Nomad is a role particular to AIM – effectively the Nomad is responsible to the London Stock Exchange to determine whether a company is suitable for admission. The Nomad advise the directors on their duties and the AIM Rules, coordinate the admission process and draft the AIM Admission Document. The Nomad is usually (but not always) from the same firm as the broker who importantly arranges presentations with institutional investors and is effectively responsible for raising the required funding. AIM has become the most successful growth company market in the world because it has struck an appropriate balance of regulation which has attracted both companies and investors.

Reprinted from "Insight", Summer 2006, a newsletter of BakerTilly International.

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knowledge. commitment. value. CERTIFIED PUBLIC ACCOUNTANTS AND BUSINESS CONSULTANTS

How Baker Tilly Can Help We have been voted AIM Accountant of the Year for the last four years following a poll of all AIM companies. We acted on 44 AIM Admissions in the last year and now act for over 120 AIM clients. • advise on pre flotation ‘grooming issues’ including structure and taxation issues • advise on share option and employee incentive plans • carry out taxation health checks • introduce other advisers including lawyers, the Nomad and financial PR consultants – as we have worked with all recognised advisers in this area we are in a good position to discuss who is likely to be appropriate • subject to independent considerations, we can act as auditors and reporting accountants to AIM issues, carrying out the financial due diligence and reporting function. We are able to:

8 u winter 2007 issue

FEATURE ARTICLE

Temporary and Contract Employees Work in All Occupations

Staffing at All-Time High Did you know that there were more temporary or contract workers employed in the third quarter of 2006 than at any other time in U.S. history? That is more than 3 million average daily workers. This information is from a quarterly survey of the American Staffing Association, the primary professional group for the staffing industry. As a member of this organization, we have access to statistical information, industry trends and national conventions. Temporary workers are not only used as a stopgap measure tocover leaves for illness, pregnancyor extended vacation. More companies are using temporaries as a “try out” for a permanent position. This approach, “temp to permanent” as it is called in the industry, is popular not only with administrative positions, but also is gaining popularity with higher-level positions such as accounting manager or controller. Of our most recent placements, approximately 40 percent were “temp to permanent” situations. Asanattendeeof the recentAmericanStaffingConvention, I was able to learn more about the most current industry trends and expectations. Total employment is expected to increase from 145.6 million in 2004 to 164.5 million in 2014, or by 13 percent. The 18.9 million jobs that will be added by 2014 will not be evenly distributed across major industrial and occupational groups. Changes in consumer demand, technology and many other factors will contribute to the continually changing employment structure in the U.S. economy.

Percentage of Employees In Each Sector February 2001

21.0% Professional-Managerial

20.4% Office-Clerical

6.4% Technical

7.8% Health Care

9.3% Information Technology

35.1% Industrial

Figure 8: U.S. Business Turn Staffing Firms to Fill Work Force Gaps, Augment Their Own Staff, and Find Employees.

Percentage of Businesses With 25+ Employees That Cite as a Main Reason

Fill in for absent employees or temporary vacancies

80%

Provide extra support during busy times or seasons

72%

Staff special short-term projects

68%

Help find good permanent employees

59%

0% 10% 20% 30% 40% 50% 60% 70% 80%

Source: American Staffing Associiation, Staffing Customer Survey

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knowledge. commitment. value. CERTIFIED PUBLIC ACCOUNTANTS AND BUSINESS CONSULTANTS

Employers in the finance, insurance and real estate markets are reporting their most optimistic outlook since the second quarter of 2005. For these industries, the needs will be great, both in temporary and permanent staffing. Accounting management and auditing professionals rank No. 4 out of the 50 hottest fields, with ITprofessionals being in the fastest growing area. Employment of accountants and auditors is expected to grow faster than average for all occupations through the year 2014 in permanent as well as temporary staffing. An increase in the number of businesses, changing financial laws and regulations, and increased scrutiny of company finances will drive growth. In addition to openings resulting from growth, the need to replace accountants and auditors who retire or transfer to other occupations will produce numerous job openings. As the economy grows, the number of business establishments will increase, requiring more accountants and auditors to set up books, prepare taxes and provide management advice. As these businesses grow, the volume and complexity of information developed by accountants and auditors regarding costs, expenditures and taxes will increase as well. An increased need for accountants and auditors will arise from changes in legislation related to taxes, financial reporting standards, business investments, mergers and other financial events. After most states instituted the 150-hour rule for CPAs, enrollment in accounting programs declined; however, enrollment is slowly beginning to grow again as more students become attracted to the profession. Those who earn a CPA should have excellent job prospects. In addition to the CPA, many accounting graduates are pursuing other certifications, such as the CMA and CIA, to broaden their skills and enhance their ability to find jobs in many diverse fields. Regardless of specialty, accountants and auditors who have earned professional recognition through certification or licensure should have the best job prospects. Applicants with a master’s degree in accounting, or a master’s degree in business administration with a concentration in accounting, also will have an advantage. In the aftermath of the accounting scandals, professional certification is even more important in order to ensure that accountants’ credentials and ethics are sound.

Remember, if you need a temporary worker for a short assignment, temp-to-hire or permanent staffing, please call us at either 314-878-5522 or 636-530-3636, and our recruiting managers will be glad to assist you with your temporary staffing or permanent placement needs. ABACUS Executive Recruiting specializes in executive accounting and business management placement. RBGStaffing specializes in temporary and permanent financial staffing.

Questions? Contact Tamara Vasquez President, ABACUS Executive Recruiting and RBGStaffing 636-530-3636 tamara.vazquez@rubinbrown.com

More companies are using temporaries as a “try out” for a permanent position. Of our most recent placements, approximately 40 percent were “temp to permanent” situations.

10 u winter 2007 issue

GENERAL TOPICS

Selling Your Business

No matter what kind of business you own, there’s probably a buyer out there looking for it if the price is right. But finding the right buyer and selling the business on favorable terms requires planning and hard work. There are four major steps in selling your business - making the decision to sell and setting the purchase price, finding the appropriate professionals to assist you, preparing your company for sale, and going through the sales process. Selling your business can be rewarding but also challenging, adding a lot of time and effort to your existing workload. First you must establish what your business is worth and how much money you expect to receive. Usually, a transaction price is based on a multiple of earnings before interest, taxes, depreciation and amortization (EBITDA). The multiple varies depending upon industry, stage of the business and condition of the business. Business Broker Your team of professionals should include a business broker, accountant and attorney. A business broker will help you findpotential buyers. Buyers can be broken down into two major categories: financial or strategic. Typically private equity firms, financial buyers generally do not have operations in the industry. They are interested in the cash flow generated from the company and the future exit opportunities. Strategic buyers intend to expand their business and usually are in it for the long term. Business brokers have experience finding qualified financial and strategic buyers and will market your business in all of the appropriate places. Typically, you pay the business broker a deposit and a commission. Commissions vary from 1-8 percent of the sales price, and different deposits are required for different types of transactions. A business broker also will perform background investigations on potential buyers, ensuring they are capable of buying your business.

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knowledge. commitment. value. CERTIFIED PUBLIC ACCOUNTANTS AND BUSINESS CONSULTANTS

gross margins. Get all of your vendor supply agreements in order, documenting vendor payment terms, the length and status of current vendor relationships, and the availability of alternative supply sources. 4. Provide all of the line item components of operating expenses and other income and expense. For each line item, include compensation, employee benefits, rent, leases, marketing, professional fees and all other expenses of your business. You must have current (not expired) copies of employment agreements, operating and capital leases, benefit plan documentation and any other legal binding contracts. Historical Balance Sheets – Make sure you document everything regarding cash, accounts receivable, inventory, other current and long-term assets, fixed assets, accounts payable, accrued expenses, debt and equity. 1. Document your cash receipt and disbursement policies and procedures, including the use of lockboxes, authorization controls, segregation of duties and credit facilities. Confirm that the appropriate bank reconciliations have been performed for each month of the year. 2. Document credit, billing, revenue recognition, and collection policies and procedures. Be able to provide an accounts receivable aging at any time. For any accounts greater than 60 days old, you must be able to guarantee their collection or provide an adequate allowance for the balance. In addition, be able to support the adequacy of the allowance for doubtful accounts and roll forward the allowance for doubtful accounts balance, including significant write-offs and recoveries. 3. Document your inventory control, procurement, delivery, stocking, physical control and valuation policies and procedures, including the methodology for applying costs to inventory. Detail price times quantity for each inventory item on hand. Document the workings of your perpetual inventory system, including the frequency of physical inventory observations, cycle counts and cut- off procedures. Provide book-to-physical and other inventory adjustments recorded. Also prepare an analysis of excess, slow-moving, and/or obsolete inventories, comparing the quantities on hand by significant product with trailing and projected sales. Identify all significant inventory purchase or sale commitments, pledged or consigned inventories, and customer inventories on all sites.

Accountant Next, it is critical to have an accountant assist you in properly appraising the value of your company, getting your financial records in order, assessing tax strategies and providing personal financial planning once the deal is closed. A good company will sell fast for the right price. In addition to offering a viable product or service, a good company has accurate and reliable accounting records, consistent financial reporting, and an effective system of internal controls. You must have audited financial statements for the past three years to give the potential buyer the confidence that you are reporting your accounting records in accordance with Generally Accepted Accounting Principles. If your company has never obtained these statements, you can have an accounting firm perform an audit for prior years. You should have detailed information regarding your historical operating results, historical balance sheets, working capital and seasonality, taxes, information systems and projections. Be sure you gather this information for at least the past three years. Historical Operating Results – In accumulating your historical operating results, you should provide detailed informationabout sales, cost of sales, operatingexpenses and other income and expense. 1. Provide details of revenue recognition policies, marketing, sales, pricing and distribution strategies, sales terms and billing practices, freight practices, credit policies, and product liability terms and claim history. Provide a reconciliation of gross to net sales, disaggregating sales discounts, returns and allowances, volume discounts and other deductions. Break out customers by product, including any customer agreements. Also detail net sales, cost of sales and gross profit by product line and geographic territory. In addition, provide sales and gross profit fluctuations attributable to volume, sales price and mix considerations. 2. Provide the line item components that make up cost of sales. Ensure there are definite and consistent policies and procedures in place for determining cost of sales (i.e., standard cost, actual costs, hybrid method, etc.). 3. Provide raw material purchases by type for your top vendors, documenting the impact of changing prices on

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GENERAL TOPICS Selling Your Business (cont.)

4. Provide the components of all current and long-term assets and all documents and support. Document your company capitalization and depreciation policies, including asset useful lives and capitalization thresholds. 5. Make sure you have a roll forward of fixed assets by major classification and a schedule of all planned capital expenditures. 6. Document your policies and procedures with regard to cash disbursements and accounts payable, including materials purchasing, significant vendor terms, month and year-end cut-offs. Detail accounts payable agings by vendor. 7. For accrued expenses, provide a detail of all accrued expenses and document that the appropriate accruals have been recorded for all liabilities, including but not limited to salaries, wages and bonuses, vacation pay, warranties, customer returns, self-insurance and other insurance accruals, pension and post-retirement employee benefits, environmental reserves, litigation claims, severance/termination, deferred compensation, customer deposits and any other potential liability. 8. Provide listings of all current and non-current debt, including capitalized leases, notes payable and revolving lines of credit. Gather copies of all debt agreements. 9. Provide an analysis of all equity changes. Working Capital and Seasonality – Provide a schedule of monthly net sales, EBITDA and working capital. Working capital consists of current assets minus current liabilities, excluding cash and current portions of long-term debt. Be prepared to explain unusual trends and the impact of seasons and cycles on the business. Taxes – Provide all federal, foreign, state and local tax returns for all years in which the statute of limitations is not closed. Collect any IRS audits, current or pending sales/ use tax audits, tax notices, correspondence and inquiries for unresolved issues from any taxing jurisdiction. Provide a schedule showing each state/locale where the company has property, payroll or sales activity as compared to state income, sales/use, payroll, property or other tax filings. Provide support for whether taxes are collected and

remitted in each state where the company has a nexus. Gather copies of all resale certificates or other exemption documentation, payroll tax filings, deposits, a listing of any independent contractors and the appropriate Forms 1099, the state unemployment account balances and any state unemployment rate notices. Information Systems – Describe your information systemscapabilities, includingsystemreliability, hardware and software, organization structure, etc. Discuss whether your existing information systems are adequate to support the business in the near and long term. Provide your information systems budget and technology plan, along with reports from outside consultants regarding the information systems function. Document whether disaster recovery procedures are in place, the status of procedures and any periodic testing. Projections – Gather financial statement projections that include a breakdown of sales, cost of sales, gross profit and operating expenses for projected periods, along with the assumptions underlying such projections. If applicable, compare projected sales to your company’s current sales backlog with an analysis of projected headcount used in your assumptions. Attorney – Lastly, an attorney will organize your legal documents, helping with the confidentiality agreement, letter of intent (due diligence performed), sales contract/ purchase agreement, federal and state law requirements/ agreements and closing documents. Confidentiality Agreement – You must sign a confidentiality agreement before either party exchanges confidential information to prevent disclosure to third parties or use for competitive purposes. The agreement often includes provisions in which the parties agree not to hire one another’s employees or directly compete with each other. Letter of Intent – The letter of intent summarizes the most important terms of the transaction and usually is in effect for 30 days. The typical letter of intent is non-binding;

13 u winter 2007 issue

knowledge. commitment. value. CERTIFIED PUBLIC ACCOUNTANTS AND BUSINESS CONSULTANTS

however, if not carefully drafted, it may unintentionally become a binding contract. Next, you must go through the buyer’s due diligence, the process of acquiring objective and reliable information. This structured, systematic research effort is used to gather the critical facts and descriptive information (or determine an absence of significant negative factors) that are most relevant to making an informed decision. We suggest you use an electronic data room, which stores the financial and legal information you have pulled together. Electronic data rooms are inexpensive and enable you to compile all of your financial information and legal documents on a secure, password-protected Website for potential buyers to review. You can control who has access to this Website, view who has been on the Website and for how long. Site visits and questions are inevitable, but the electronic data room helps keep them to a minimum. Sales Contract/Purchase Agreement – The potential buyer will sign a sales contract/purchase agreement before the letter of intent expires. This agreement states the buyer’s agreement to buy and the seller’s agreement to sell the specified property under stated terms and conditions. It provides representations and warranties that are fair and reasonable in accordance with the parties' circumstances. Proper document drafting and review of the sales contract minimizes later problems and litigation or arbitration. Typically, a purchase is structured as an asset or stock purchase. An asset purchase allows There are four major steps in selling your business - making the decision to sell and setting the purchase price, finding the appropriate professionals to assist you, preparing your company for sale, and going through the sales process.

the buyer to purchase assets, free and clear of liabilities. The buyer is not actually buying the business entity itself. Thus, an asset purchase is much like buying the company's merchandise without buying the store. A buyer usually prefers an asset purchase agreement because the buyer (i) can acquire assets only, without assuming the seller’s liabilities, (ii) gets a "stepped-up" tax basis on the assets being acquired, (iii) usually has the option but not the obligation to hire the seller's employees, and (iv) has the ability to choose which contracts to assume. In a stock purchase, the selling shareholders swap their stock certificates for the purchase price from the buyer. The buyer is actually taking over the seller’s business. Sellers usually prefer a stock sales contract because of the transfer of liabilities, favorable tax consequences and seamless change of ownership. Federal and State Law Requirements/ Agreements – The attorney will determine which federal and state law requirements/agreements need to be drafted and signed, then the final closing documents are prepared and the deal is closed on a specified date. Any post-closing obligations and rights, including purchase price adjustments, earnouts and indemnification obligations, are worked out after the closing date. Once the deal is closed and money has been exchanged, because of the complexities of different investment options and tax laws, we recommend you obtain the advise of a personal financial consultant.

Questions? Contact Tonja Hilton, CPA Partner-in-Charge, Small Business Services Group 314.290.3334 tonja.hilton@rubinbrown.com

14 u winter 2007 issue

GENERAL TOPICS

Revised 404 Guidance Based on Knowledge

• Proposed rule for management regarding its evaluation of ICFR: “… make it clear that an evaluation that complies with the interpretive guidance is one way to satisfy the rules.” A first in the SOX generation! If a company complies with the guidance, it will have fulfilled its obligation under SEC regulations. • Re-affirmation of the terminology “reasonable assurance” The expectation should not be that controls would be effective 100 percent of the time and that controls address all risks to the business. Rather, controls are designed to address the risk of material misstatement in financial reporting. • Guidance assumes management has established and maintained a system of internal accounting controls as required by the Foreign Corrupt Practices Act of 1977 Effective internal control is not a new concept; it was first addressed by the FCPA, and companies have implemented controls to address those basic requirements. The FCPA addresses the maintenance of “accounting controls,” which the SEC stated is consistent with the definition of ICFR. • Guidance for evaluating the design and operating effectiveness of ICFR using a top-down, risk-based approach The risk of material misstatement over financial reporting should drive the design, evaluation and operating effectiveness of internal controls. Only those controls that address the risk of material misstatement need to be evaluated and compliance tested, and they should be directly linked to a financial statement assertion. In organizations with multiple locations, the degree of testing at each location should vary according to the respective risk associated with that location. Compliance testing should therefore be tailored for each specific location based on the risk and the expected reliance on entity-level controls.

On Dec. 20, 2006, the Securities and Exchange Commission and the Public Company Accounting OversightBoardissuedforpubliccomment theirproposals for complying with Section 404 of the Sarbanes-Oxley Act (SOX). With these two proposals, both agencies are expecting compliance costs to decrease and lessen the burden on smaller public companies. The proposals are a result of what has been learned over the past four years since the enactment of SOX and input from the various groups, committees, established to study the impact of SOX. When the SEC and PCAOB independently issued their revised guidance for Section 404, there is a premise that management and the auditor have knowledge of the risks inherent in the business and that they use that knowledge and experience to determine the scope of their respective work. Furthermore, management’s knowledge of and daily interaction with the controls could be a substitute for management’s testing. SEC - Management’s Report on Internal Control Over Financial Reporting The SEC proposed guidance for management’s assessment of internal controls over financial reporting (ICFR) emphasizes a process that is scalable for the smallest of public companies and is a risk-based approach for evaluating the design and evidence of operation of ICFR. Following are some of the principles emphasized by the proposed SEC guidance:

15 u winter 2007 issue

knowledge. commitment. value. CERTIFIED PUBLIC ACCOUNTANTS AND BUSINESS CONSULTANTS

• Permitting prior audit knowledge/experience AS2 required that each year’s audit should stand in its own and, therefore, this was interpreted as preventing the auditor from using knowledge obtained in prior years. Under the proposed new auditing standard, the auditor will be required to consider the results of prior years’ compliance testing in determining the risk of material misstatement. The proposed new auditing standard will not permit the rotation of testing. • Considering and Using the Work of Others The proposed new auditing standard eliminates the “principal evidence” provision, which was interpreted as limiting the auditor on using the work of others in performing its compliance work on ICFR. Under the proposed new auditing standard, the auditor will be given more judgment in determining the extent on using the work of others, and the PCAOB will be issuing a separate auditing standard on considering and using the work of others, which will supersede the current auditing standard (AU 322). The SEC proposed guidance is open for public comment for 60 days, and the PCAOB proposed new auditing standard is open for public comment for 70 days.

Information technology controls and application controls should be directly linked to a financial statement risk. IT-related controls that have no impact on financial statement accounts should not be part of management’s compliance effort for 404. PCAOB - AS 5: An Audit of Internal Control Over Financial Reporting That Is Integrated with An Audit of Financial Statements The PCAOB new proposed auditing standard is principles-based and designed to focus the auditor on the most important matters related to ICFR. The proposed new standard will replace Auditing Standard No. 2. The proposed new auditing standard codifies much of the guidance provided by the PCAOB on May 16, 2005, re- emphasizing the following principles: AS 5 directs the auditor to perform, at an account level, a risk assessment for the possible material misstatement of the financial statements . It also directs the auditor to consider entity-level controls and the likelihood these will be effective in detecting material misstatements. If deemed adequate, reliance can be placed on these higher-level controls without the need to compliance test process-level controls. The auditor will no longer be required to issue an opinion on management’s 404 assessment process. AS2 has been interpreted as requiring management to follow the auditors’ standard in order to obtain a “clean opinion” on management’s process. The auditor will still need to obtain an understanding of management’s process in order to determine the nature, timing and extent of its own procedures; however, the process does not need to comply with the auditors’ standards. • Directing the auditor to the most important controls… importance of risk assessments • Removing the requirement to evaluate management’s process

Questions? Contact Steve Newstead, CPA, FLMI Partner-in-Charge, Internal Audit Services Group 314-290-3325 steve.newstead@rubinbrown.com

Companies should not treat the above statements about proposed and final rules as a substitute for what might be adopted or for any other SEC or PCAOB requirements. Companies should not act on any of the above statements without first referring to the texts of the SEC requirements and consulting with professional advisors.

16 u winter 2007 issue

GENERAL TOPICS

401(K) Lawsuits What You Don’t Know Can Hurt You A St. Louis law firm launched a surprise attack on 9/11 of last year. The firm filed a series of class action lawsuits, alleging that 401(k) plan sponsors had breached their fiduciary duties. The common thread among the suits is that plan sponsors failed to make sure certain expenses incurred by their plans were reasonable and appropriate. The first lawsuits involved large Fortune 500 companies – Lockheed Martin, General Dynamics, International Paper, Bechtel, Caterpiller, Exelon and United Technologies. Soon thereafter, similar suits were filed against Northrup Grumman, Kraft Foods and Boeing. In addition to the sponsoring employers, the defendants typically include plan committees, committee members and various company officers. 1. Fees paid by the plan are excessive. 2. Disclosures to participants regarding the fees are inadequate. 3. Plan sponsors failed to investigate, understand and monitor the fees adequately. A number of the suits allege that plan sponsors did not fully understand all fees being charged to the plan, overtly and otherwise. In particular, the complaints target Though the specifics of each case vary, the general themes are:

revenue-sharing arrangements that are commonplace in the 401(k) industry. On a broad basis, revenue sharing means the transfer of asset-based compensation from investment management providers (mutual funds, collective trust funds, insurance companies, etc.) to service providers such as plan record keepers, administrators and trustees. The transfers help offset the actual costs of providing recordkeeping and other services to 401(k) plans. Revenue-sharing arrangements, if not fully disclosed, make it difficult for plan sponsors to quantify a plan’s total expenses. The complaints allege that the defendants did not understand, monitor and control all hard dollar costs plus all revenue-sharing payments made directly or indirectly by the plans to their service providers. In addition, the suits allege that the defendants did not determine that the expenses were reasonable for services and incurred solely for the benefit of plan participants. Some of the complaints target lack of fund suitability and inappropriate benchmarks for fund review. Some complaints assert that fiduciaries selected inappropriate “retail” mutual fund share classes for the plan when they should have selected institutional share classes with lower expense ratios. Large plans often qualify as institutional investors, so the selection of retail funds for their portfolios raise the question of appropriate selection. Another complaint alleges that a plan offered “shadow” or “closet” funds – funds that claimed to be actively managed but behaved like passively managed index funds. The charges for active fund management are deemed excessive since it is alleged that similar returns could be obtained from a less expensive index fund. Some of the complaints targeted employer stock funds. One allegation is that management fees for the stock fund are excessive. Another allegation is that certain unitized stock funds composed of cash and employer stock included too much cash, thus diluting rates of return on the fund. Another allegation appearing in certain suits is that the performance benchmarks used to monitor certain funds are inappropriate. In some cases, the benchmark used for fund oversight is deemed inappropriate because the fund’s manager is guilty of “style drift” or investing portions of a fund in underlying investments that are not in line with the target benchmark for the portfolio.

17 u winter 2007 issue