CASE STUDY. 3. Questions must be answered in English. 4. The answer should be referenced to the relevant workings.

Transcription

1 CASE STUDY Total Marks: 100 Time: 4 Hours 1. Check that your question paper contains all the exhibits as mentioned in page 3. The consecutive page numbering may be found under the base line at the foot of each page; 2. Use the answer script provided by the Institute. Write your name, roll no, registration no and name of the subject on the upper portion of the cover page of the answer script. Candidates are asked not to write any particulars of identification in any other place of the answer script and additional pages if taken. 3. Questions must be answered in English. 4. The answer should be referenced to the relevant workings. 5. Answer script and additional page(s) taken to write answer, used or unused, must not be removed or taken away from the Examination Hall.

2 Requirements & Marks Allocation: You are Shahir Jawad, a senior articled student of Ahmed Hasif, Chartered Accountants. The senior partner of the firm, Tazrian Ahmed has given you an detailing of your assignment. Requirements: You are required to prepare a draft report to your principal Tazrian Ahmed.Your report should comprise the following elements: An executive summary Your responses to the detailed requirements (a),(b) and (c) set out in Exhibit -1. State clearly any assumptions that you make. Marks Allocation: All of the marks in the Case Study are awarded for the demonstration of professional skills, allocated broadly as follows: Requirements Professional skills Integrative & multidisciplinary skills Assimilating and using information Structuring Problems and solutions Applying Judgment Conclusions & Recommendations Executive Summary Requirement (a) Requirement (b) Requirement (c) Total Total In planning your answers, you should be aware that not attempting one of the requirements, including an executive summary, will have a significantly detrimental effect on your chances of success. In addition, as indicated above, all skills areas will be assessed under each of your answer to the requirements. You should be clear that marks are awarded for demonstrating your professional skills, not for reproducing facts from the case. In order to be successful, you will need to: Demonstrate your knowledge of the case material and make use of your analysis. Carryout relevant analysis of the problems and structure your proposed solutions Apply your judgment on the basis of the analysis that you have carried out Draw conclusions from your analysis and judgment and develop them into practical commercial recommendations. Ethical issues may cover the following topics- Lack of professional independence or objectivity Conflict of interest among stakeholders Doubtful accounting or commercial practice or market competition Inappropriate pressure to achieve a reported result. Integrative & multidisciplinary skills may cover the following areas- Environmental issues Social and economic impacts, e.g. with regard to employment, business competitiveness, etc. 2

3 LIST OF EXHIBITS Exhibit Description Page reference 1 from Tazrian Ahmed, Partner, Ahmed Hasif, Chartered 4 Accountants to you, Shahir Jawad 2 from Sohel Ahmed, Managing Director of Tech Valley 5 &6 Limited, your client, to Tazrian Ahmed. 3 3 years summarized financial statements of Tech Valley 7 to11 Limited up to 31 December 2011 including Notes to the financial statements 4 Letter from Chief Executive Officer of Daffodil Computers Ltd. 12 outlining their proposal for acquiring the shares of Tech Valley Limited. 5 Financial Statements of Daffodil Computers Ltd. for the year 13 to16 ended on 31 December Explanatory commentary on the financial statements of Daffodil 17 Computers Ltd. 7 Extracts of information from the auditor s report and Board of directors report of TVL and Daffodil. 18 3

4 Ahmed Hasif, Chartered Accountants EXHIBIT 1 From : Tazrian Ahmed To : Shahir Jawad Re : Tech Valley Limited Date : 12 November 2012 We have received an from Mr. Sohel Ahmed, the Managing Director, Tech Valley Ltd.(TVL), a software development business, which I have attached to this as Exhibit 2 together with all the attachments which he sent to me. The attachments include a summary set of TVL financial statements for three years ended on 31 December 2011 together with explanatory notes relating to the summary financial statements as shown in Exhibit 3. Mr. Sohel has been approached by Daffodil Computers Ltd. (Daffodil) who are willing to make a bid to buy the whole of the TVL business the details of the Daffodil proposal are shown in Exhibit 4. Daffodil has also sent financial statements for the year ended 31 December 2011 together with the comparative figures for 2010 as shown in Exhibit 5. Daffodil has also provided a set of explanatory notes relating to their financial statements as shown in Exhibit 6. We have also extracted some information from the auditor s report and Board of Director s report of both TVL and Daffodil which is shown in Exhibit 7. I have spoken to Mr. Sohel today and confirmed that TVL would like us to provide a report identifying the key financial strengths and weaknesses based on TVL s financial statements and explanatory notes in comparison with the strengths and weaknesses identified from the information supplied by Daffodil You are advised to (a) Prepare a draft report to the Board of Directors, TVL. Your report should comprise a comparative analysis of the key trends and ratios in TVL and Daffodil s financial statements identifying and commenting on the strengths and weaknesses of their financial positions and operational performances. (b) Evaluate the Daffodil s proposal to acquire TVL business. You are also required to provide an indicative price to TVL Board of Directors so that they can bargain with Daffodils. Comment on areas of concern relating to the financial reporting issues of TVL and highlight other concerns that you would like to note that TVL should look into for negotiation. (c) Explain the ethical issues and evaluate social dimensions if the acquisition of TVL by Daffodil is succeeded. I look forward to receiving your draft report on or before 17 December 2012 so that we can finalize the report to Tech Valley on or before 20 December Best regards Tazrian Ahmed Partner 4

5 Tech Valley Limited EXHIBIT 2 From To Re : Sohel Ahmed, Managing Director, TVL : Tazrian Ahmed, Partner, Ahmed Hasif, Chartered Accountants. : Disposal of Shares of Tech Valley Limited. Date : 10 November 2012 Dear Ms. Tazrian, As discussed, please find attached in Exhibit 3 the financial statements for the years ended on 31 December 2009 to 2011 together with a set of explanatory notes of Tech Valley Limited (TVL). The figures in these financial statements are in agreement with the audited financial statements for each of those years. This information will provide you with a comprehensive financial picture of the financial history of our business. TVL has recently received a bid proposal from Daffodil Computers Ltd. Please find attached (i) the bid letter in Exhibit 4; (ii) a set of financial statements of Daffodil for 2011 and 2010 in Exhibit 5; and (iii) explanatory commentary on the financial statements of Daffodil Computers Ltd. in Exhibit 6 for your analysis. TVL will continue with robust development of significant new software in line with market demand. The company is in the process of developing a new software PeopleSoft with advanced version 3.1 and it is anticipated to go full to market in June In market, two other companies including Daffodil Computers Ltd. marketed this software and enjoyed 65 per cent market share. The advanced version of PeopleSoft of TVL will provide much better services to the customers in terms of providing ad-hoc reports on HR, payment processing and assets management. This will have a significant impact on software revenues of TVL. Other areas of revenue of TVL are also expected increase in line with or ahead of past trends. Overall TVL s market is seen as strong with compensating market sectors some of which are doing well despite the recession and some of which are, inevitably, finding the current economic climate very tough. TVL s clients are loyal and the company anticipates further growth from within its client base and by way of new market developments. TVL has an employment and management strategy which will allow it to achieve real anticipated growth. TVL invests strongly in its skilled workforce and recruits ahead of time offering good remuneration and training packages. It has a collegiate philosophy and operates its employment policies with transparent incentives and good opportunities for advancement within the business. These practices help to ensure its success. Outsourcing is not considered to be an option. TVL will continue to invest heavily but appropriately in new IT facilities according to availability and in anticipation of market needs. TVL also has a firm commitment to stick to its core business. The company will not seek external finance. TVL is becoming of interest to other businesses seeking to acquire it. TVL is new to this situation and the board of directors is aware that although it is flattering to be the subject of this attention, they, however, do not have any prior experience in either valuing TVL business or in critically appraising the bids which might come in. As a result, at recent board meetings, there has been an on-going discussion and a series of questions concerning the process which might develop including what strategies might be open to TVL to present the company in the best possible light to any bidder. From our initial enquiries, TVL has established the following facts concerning Daffodil: Daffodil is a software development business providing software to the legal profession for convincing, purchasing and planning purposes. It also manufactured and marketed PeopleSoft version 3.0 for HR and payment processing purposes. Currently it holds 65 percent market share in this segment. 5

6 Daffodil was formed after a number of smaller businesses merged. Daffodil was listed on Dhaka Stock Exchange Ltd. (DSE) in Bangladesh in 2008 following the takeover of a company named Genetic Computers Limited. They took over another company, NIIT in These actions identify that Daffodil has actively pursued a policy of expansion by acquisition and merger believing that growth by acquisition enables the Daffodils to achieve its targets in an accelerated timeframe. Daffodil seeks enterprise based organisations where owners are also managers. It requires its targets to meet certain basic financial and other key criteria: a constant pattern of growth over the past five years; positive cash flow; balance sheet shows a position of positive net assets. Daffodil s two recent takeovers have been valued on a multiple of adjusted net earnings, the purchase consideration comprising cash and Daffodil shares. According to the financial information provided in Exhibit 5, Daffodil s gross revenue at TK.15.6m indicates that Daffodil generates substantially more revenue than TVL and having total assets of TK.14.4 m compared to TVL s TK.3.4 m only, Daffodil appears to be a bigger company. Daffodil is a Bangladesh based company and operates in the same industry as TVL does, although it does not meet all the criteria that Daffodil identifies for example TVL s 2011 cash flow is negative. Daffodil would be willing to purchase the entire share capital of TVL for a multiple of TVL s 3 years average adjusted net profit after tax. Daffodil expects 15 percent risk premiums over the risk free rate of return on investments. Currently, 3 years Treasury bill s interest rate is 10 per cent. The TVL is pleased to appoint Ahmed Hasif, Chartered Accountants to: (a) Prepare a draft report to the Board of Directors, TVL. Your report should comprise a comparative analysis of the key trends and ratios in TVL and Daffodil s financial statements identifying and commenting on the strengths and weaknesses of their financial positions and operational performances; (b) Evaluate the Daffodil s proposal to acquire TVL business. You are also required to provide an indicative price to TVL Board of Directors so that they can bargain with Daffodils. Comment on areas of concern relating to the financial reporting issues of TVL and highlight other concerns that you would like to note that TVL should look into for negotiation. (c) Identify the ethical issues and social dimensions if the acquisition of TVL by Daffodil is succeeded; so that the following directors can review your report and take next course of action. i) Chairman of the Board of Directors, TVL ii) Mr. Monowar Hossain, Director, TVL iii) Mr. Masud Rana, Director, TVL iv) Mr. Sohel Ahmed, Managing Director, TVL I look forward to receiving your report on or before 20 December Yours sincerely Sohel Ahmed Managing Director Tech Valley Limited. 6

7 Tech Valley Limited 3 years financial statement (up to 31 December 2011) Comprehensive Income statement Note Years ended 31 December 2011 TK TK.000 EXHIBIT Tk.000 Revenue 1 9,766 8,812 7,046 Cost of Sales 2 (352) (332) (264) Gross Profit 9,414 8,480 6,782 Administrative expenses 3 (8,544) (7,658) (5,982) Earnings before interest, taxation, depreciation and amortisation Depreciation 4 (328) (280) (240) Amortisation (16) (16) (16) Profit/(Loss) on disposals of equipments 4 (12) (12) (8) Operating profit Interest income Profit before tax Taxation (114) (112) (110) Profit after tax Dividend Retained profit for the period Statements of Financial Position Note As at 31 December 2011 TK TK TK.000 Non-current assets Intangible assets Tangible assets Current assets Inventories Accounts receivable 7 1,452 1, Cash and cash equivalents ,456 2,314 1,762 Total assets 3,364 3,030 2,430 Shareholders' equity Ordinary share capital Retained earnings Total shareholders' equity Current liabilities Accounts payable Tax Payable Contract payments received in advance 9 1,324 1, Total current liabilities 2,652 2,416 1,940 Total shareholders equity and liabilities 3,364 3,030 2,430 7

8 Tech Valley Limited Statements of Cash Flow Years ended 31 December TK TK.000 TK.000 Cash flows from operating activities Profit before tax Adjustments for: Depreciation and amortisation (Profit)/Loss on disposals Finance income (78) (62) (42) Change in accounts receivable (162) (368) (286) Change in inventories (8) (4) (20) Change in accounts payable (trade) Cash generated from operations Interest received Income taxes paid (114) (112) (110) Change in Tax payable Change in contract payments received Net cash from operating activities Investing activities Proceeds from disposal of tangible assets Purchase of tangible assets (560) (376) (340) Net cash used in investing activities (548) (356) (332) Financing activities Dividends paid (380) (340) (300) Net cash (used in) financing activities (380) (340) (300) Net change in cash and cash equivalents (28) Cash and cash equivalents at start of year Cash and cash equivalents at end of year

9 Tech Valley Limited Statements of changes in equity Years ended 31 December Ordinary share capital Retained earnings Share - holders' equity Tk.000 Tk.000 Tk.000 Balance as at 1 January Profit for the period ended 31 Dec Ordinary dividends 5 - (300) (300) Balance as at 31 December Profit for the period ended 31 Dec Ordinary dividends 5 - (340) (340) Balance as at 31 December Profit for the period ended 31 Dec Ordinary dividends 5 - (380) (380) Balance as at 31 December Notes to the financial statements of TVL for the years ended on 31 December Note 1 Revenue Revenue (all Bangladesh) is split as follows: TK.000 TK.000 TK.000 Software and software installation 4,804 4,402 3,358 Support services under contract 3,642 3,234 2,556 Training courses 1,168 1,034 1,002 Other Total 9,766 8,812 7,046 Sales of software increased significantly in 2009 & 2010 caused by a new product sales push. This has been followed by a smaller increase in sales in 2011, which has been a significant year for major new product development. Support services under contact represents fees earned by selling support services contracts to those clients who buy TVL products. These are annual contracts which are renewable by negotiation. Support service contracts are taken out by clients when they initially purchase TVL software packages. In 2011 these were taken out by the majority of all new clients. A smaller proportion of these clients renew their service contracts for subsequent years. An appropriate proportion of the support service receipts are carried forward in the balance sheet as contract payments received in advance. There has been a continued steady increase in training course income. 9

10 Note 2 Cost of sales All subsequent product development has been based on this software. Note 3 General Overhead & Administrative expenses The main items of administrative expenses are: Tk.000 TK.000 TK.000 Staff salaries 5,640 5,048 3,622 Staff bonus Directors' emoluments 1,512 1,416 1,304 Marketing expenses General overheads ,544 7,658 5,982 The directors emoluments comprise: Monowar Hossain Masud Rana Sohel Ahmed Total 1,512 1,416 1,304 Note 4 Non-current assets Intangible assets Cost: Software distribution rights were purchased in January 2007 for Tk. 240,000. Amortisation of the purchase price of those software distribution rights is on a straight line basis over 15 years = TK.16,000 per annum. Tangible assets The company's policy on depreciation is to write down the value of all assets over their commercial useful life on a straight line basis, pro-rated monthly: computer equipment 33.33%; office furniture 15%; motor vehicles 25%. The company purchased some computer equipments (e.g. server) costing Tk. 350,000 on 1st April 2011 and the same was fully financed by foreign currency loan (i.e.us Dollars) repayable in five equal installments semi-annually (Exchange rate at the time of purchase was US $ 1= Tk ). As on the first installments was paid when US $ I fetched Tk The entire loss on exchange was included in general overhead expenses. The company provides depreciation on machinery at 20% on WDV basis. Any IT and office equipment disposal is normally donated to charitable organisations or local schools at TK. nil proceeds (after the removal of all software in the case of IT equipment). Note 5 Dividends The company makes a payment for dividends in the month of December based on its estimated profit for that financial year and the availability of cash to fund the dividend payment. Note 6 Inventories Inventories represent items of office and computer supplies held in the normal course of trade. 10

11 Note 7 Accounts receivable The accounts receivable balance represents the balance of all items invoiced to clients which remain outstanding at the year end. The balance of outstanding accounts receivable has grown in recent years but company has traditionally experienced a very small level of bad debts. Accounts Receivable of Tk. 100,000 for delivery of software to a company in Sri Lanka. As per agreement the amount is to be received in US Dollar. However, exchange permission was denied to the company in Sri Lanka for remitting the same. Note 8 Accounts payable The majority of the accounts payable balance is the outstanding balance of the bonus payable to employees. During the year to 31 December 2011 an interim bonus was paid in June Note 9 Contract payments received in advance This represents the advanced proportion of the amounts received from customers concerning their annual support services contracts which remain to be delivered. Note 10 Commitment for CSR activities TVL has following commitments: i) TVL is committed to donate 10 per cent of after tax profit annually to Islamia Eye Hospital as part of its corporate social responsibility. As per agreement, this amount will be used to organize eye camp for under privileged people. ii) TVL is committed to contribute Tk. 600,000 in next 3 years equally Tk. 200,000 each year to Paribesh Andolon Bangladesh (PAB) for campaigning awareness against river pollution around Dhaka City; iii) TVL is committed to contribute Tk. 100,000 to Manusher Jannya Foundation for tree plantation of 10,000 saplings across Dhaka-Bogra High Way for land reclamation, or landscaping purposes; and iv) One of the Director of TVL has reached an understanding with an influential political leader of a party not in power that if the party wins in next election to form the Government will undertake a project in Annual Development Program (ADP) for increasing the speed of bandwidth for transferring/transmitting data in and out of Bangladesh with an assurance that TVL will contribute to the election campaign of that party amounting to Tk. 1 lakh. 11

12 The Board of Directors Tech Valley Limited Dhaka Chamber Building, 22, Motijhieel C/A Dhaka 05 November 2012 Dear Sir, DAFFODIL COMPUTERS LTD. House No. 12, Road No. 4, Gulshan, Dhaka EXHIBIT 4 Re: Investment in Tech Valley Limited. Please refer to our meeting dated 12 October 2012, we are pleased to submit the following offer, on behalf of Daffodil, to purchase the all shares of Tech Valley Limited (TVL) as a going concern subject to shareholder approval in the EGM of Daffodil Computers Ltd. and agreement with TVL. Daffodil would be willing to purchase the entire share capital of TVL for a multiple of TVL s 3 years average adjusted net profit after tax. Daffodil expects 15 percent risk premiums over the risk free rate of return on investments. Currently, 3 years Treasury bill s interest rate is 10 per cent. Daffodil will use TVL accounts up to 31 December 2011 as the basis of valuation of TVL business. Daffodil proposes that the multiple should be 6 times of 3 years average adjusted net profit after tax. The adjustments that Daffodil suggests to be made would increase TVL net profit after tax for 2011, by adding back to profit directors emoluments in excess of TK.600,000 in total. The purchase price would comprise TK.2,000,000 in cash (raised either by debenture or by a rights issue), payable as soon as the purchase is completed and the balance amount in Daffodil s share at prevailing market price on the contract date (currently TK.9 per share). In our opinion, these adjustments would bring Tech Valley s accounting and remuneration policies in line with Daffodil s policies and make any comparisons of those policies easy. It would also provide a higher profit figure on which the multiple would be applied. We would also like to offer the Tech Valley Ltd. Managing Director a place on the Daffodil Board and he will also be given 5,000 share options in Daffodil after acquisition. The exercise price would be 25% lower than the prevailing market price of Daffodil. Also all other TVL directors be contracted to remain within TVL in their working roles for a period of 36 months at a remuneration to be mutually agreed, but not exceeding TK.200,000 per annum each. This letter should be read as the first step in the negotiation process but should provide TVL a clear indication of Daffodil s keen acquisition intentions. Attached herewith the Financial Statements of Daffodil Computers Ltd. for the year ended on 31 December 2011 in Exhibit 5 and an explanatory commentary on the financial statements of Daffodil Computers Ltd. in Exhibit 6 to substantiate our strengths to acquire the shares of TVL. Yours faithfully On behalf of Daffodil Computers Ltd. Board Mostafa Kamal Chief Executive Officer Daffodil Computers Ltd. 12

13 Daffodil Computers Ltd. Consolidated Income Statement Year ended 31 December 2011 EXHIBIT Commentary TK.000 TK.000 Revenue 1 15,598 11,466 Cost of sales 2 (5,382) (4,052) Gross profit 10,216 7,414 Administrative expenses 3 (6,708) (5,474) Earnings before interest, taxation, depreciation and impairment (EBITDI) 3,508 1,940 Impairment 4 (400) (340) Depreciation 5 (432) (294) Loss on disposal (146) (106) Operating profit 2,530 1,200 Finance costs (262) (130) Profit before tax 2, Taxation 6 (666) (288) Profit for the period 1, Daffodil Computers Ltd. Consolidated statement of Changes in Equity Year ended 31 December 2011 Ordinary share capital Share premium Retained earnings Shareholders' equity TK.000 TK.000 TK.000 TK.000 Balance as at 1 January , ,244 Issued during the year 1, ,100 Profit for the year ended 31 December Ordinary dividends Balance as at 31 December , ,026 7,126 Profit for the year ended 31 December ,602 1,602 Ordinary dividends Balance as at 31 December , ,628 8,728 13

14 Daffodil Computers Ltd. Consolidated Statement of Financial Position As at 31 December Commentary TK.000 TK.000 Non-current assets Intangible assets 4 6,660 7,060 Tangible assets 5 1, ,190 7,750 Current assets Inventories - Work in Progress 8 3,130 1,854 Accounts receivable 3,008 2,010 Cash and cash equivalents ,256 4,006 Total assets 14,446 11,756 Shareholders' equity Ordinary share capital 9 5,900 5,900 Share premium account Retained earnings 2, Total shareholders' equity 8,728 7,126 Non-current liabilities Deferred tax Bank Loan 10 3,100 3,100 Total non-current liabilities 3,302 3,220 Current liabilities Accounts payable 1,812 1,106 Taxes payable Total current liabilities 2,416 1,410 Total shareholders equity and liabilities 14,446 11,756 14

15 Daffodil Computers Ltd. Consolidated Statement of Cash Flow Year ended 31 December Commentary TK.000 TK.000 Cash flows from operating activities Profit before tax 2,268 1,070 Adjustments for: Finance costs Impairment Depreciation Loss on disposals Change in accounts receivable (998) (668) Change in work in progress (1,276) (718) Change in accounts payable Cash generated from operations 1, Interest paid (262) (130) Income taxes paid 6 (284) (96) Net cash from operating activities 1, Investing activities Proceeds from disposal of non-current assets Purchase of non-current assets 4 & 5 (1,448) (4,462) Net cash used in investing activities (1,418) (4,416) Financing activities Increase in long-term borrowings - 3,100 Proceeds from the issue of shares - 1,100 Net cash from financing activities - 4,200 Net change in cash and cash equivalents (24) 132 Cash and cash equivalents at start of year Cash and cash equivalents at end of year

16 Daffodil Computers Ltd. As at 31 December 2011 Non-current assets 4. Intangible assets TK.000 Goodwill at cost at 1 January ,400 Additions in the year ended 31 December ,000 Impairment in the year ended 31 December Carrying value as at 31 December ,060 Impairment in the year ended 31 December Carrying value as at 31 December , Tangible assets Computer Office Motor Total Equipment Furniture Vehicles TK.000 TK.000 TK.000 TK.000 Cost At 1 January ,726 Additions Disposals (172) - (112) (284) At 31 December , ,904 Depreciation At 1 January ,052 On disposals (76) - (56) (132) Charge for the year At 31 December Carrying value 31 December Cost At 1 January , ,904 Additions ,448 Disposals (244) (94) (152) (490) At 31 December , ,862 Depreciation At 1 December ,214 On disposals (134) (70) (110) (314) Charge for the year At 31 December ,332 Carrying value as on 31 December , ,530 16

17 EXHIBIT 6 Explanatory commentary on the financial statements of Daffodil Computers Ltd. 1. The increase in Daffodil s revenue in 2011 is due to NIIT, acquired in the year to 31 December 2010, coming fully on stream in the year to 31 December The revenue of NIIT prior to its acquisition was approximately TK.4,800,000 per annum and its EBITDI was TK.1,900,000. The effect of Daffodil s acquisitions since 31 December 2008 is that revenue has virtually doubled in the past three years. 2. Cost of sales is the salaries of the hardware & software engineers and overheads. 3. Administrative expenses include all directors remuneration: salaries, pensions and bonuses paid to our directors. The highest paid director earns remuneration of TK.200,000 per annum. Pension contributions for all directors are up to a maximum of 20% of basic salary. 4. Impairment in 2011 is the writing down by TK.400,000 of the purchased goodwill of TK.4,000,000 created by the purchase of NIIT to reflect changes in NIIT s client base since the time of the acquisition. In 2010 the impairment related to the previously acquired Genetic Computers purchased goodwill. 5. Tangible assets policies on depreciation are based on the expected economic lives, pro-rated monthly, of the various categories of assets: computer equipment 20% reducing balance; office furniture 10% straight line; motor vehicles 25% straight line. During the year to 31 December 2011 there has been a significant level of expenditure (TK.1,044,000) on refurbishing and upgrading the facilities at our head office, as well as investing in a new fleet of vehicles for our board members. 6. Taxation is provided for at 30% of net profit (adjusted for any disallowable expenses and depreciation charges) in these accounts. 7. Since its creation, Daffodil has never declared dividend. 8. Inventories work in progress represents the cost of commissioned work being conducted on the development of Emerging Revenue software for NBR and banking industries. 9. Ordinary share capital comprises 590,000 shares of Tk. 10 each. The number of shares in issue increased during the year to 31 December 2010 as part of the 100% acquisition of NIIT during that year. Daffodil has no share options at this current time. Dhaka Stock Exchange is now very much volatile and there is expected volatility of 25% needs to be considered. The current market price of Daffodil shares is Tk per share ( ) which could be use for transferring shares to the Managing Director of TVL. 10. The bank loan is 5 years term loan bearing 8% per annum and was taken during the year ended 31 December 2010 to provide additional funds to finance expansion and provide increased working capital. 17

18 EXHIBIT 7 Extracts of information from the auditor s report and Board of directors report of TVL and Daffodil 1. TVL is in the process of developing software PeopleSoft version 3.10 which is very much competitive product of Daffodil in the market. It is expected to launch this product in the market in June Currently Daffodil has 65 per cent market share in this segment which could be a threat to DCL and reduce the revenue line of Daffodil by 45 per cent. Daffodil s profitability ratio is similar to all products 2. Related party disclosure of the companies revealed that one of the existing directors of TVL, Mr. Masud Rana holding 10 per cent stake in the company also shareholders of Daffodil Computers Ltd. with 25 per cent stake. 3. Employee benefit schemes are different in TVL and Daffodil. Since the companies are in the same industry, there is a strong possibility to streamlining benefits to reduce internal conflict if Daffodil acquired TVL. Moreover, there is a scope of cost savings in terms of synergy benefits in software and hardware sections of the companies. As a result, five hardware engineer in TVL and three software engineer in Daffodil may be redundant which would result cost savings of Tk. 350,000 per month. The redundancy cost is Tk. 2 million. 4. Daffodil has banking covenants on long-term bank loans requiring it to maintain a certain ratio of non-current assets to net borrowings. As a result, management may have an incentive to overstate non-current assets or to understate net borrowings. 5. National Board of Revenue (NBR), Bangladesh has appointed five software development companies in the country to develop software called Emerging Revenue which aims to reconcile VAT and tax collection and deposit by the companies in banking industry in the country. Both Daffodil Computers Limited and Tech Valley Limited are enlisted with NBR to deliver this software by July All Banks in the country must install this software within 30 June NBR will administer this software. 6. In order to keep the talents, the remuneration committee after much discussion have decided to issue 12,000 share options to each of 75 directors and senior managers after acquisition. The options will be granted immediately. The exercise price would be Tk.5 per share. A condition of the share option scheme is that recipients must remain with Daffodil for at least three years after the granting date before being able to exercise their options, and they must be exercised within 3 months from the date of purchase agreement. It is estimated that 80% of the current directors and managers will remain with Daffodils for three years or more. This share option scheme is in addition to the 5,000 share options offered to the Managing Director of TVL after acquisition. 7. Daffodil Directors are very much concerned about the overhead expenditures and other costs. The Board of Directors are reluctant to contribute to the society other than payment of corporate tax and VAT. As a result, Daffodil didn t participate any social activities over last five years. 18