APPENDIX 2E

BUSINESS DUE DILIGENCE

CHECKLIST
I. Strategy and Company Overview
A. History.
B. Strategy.
C. Market opportunity.
D. Barriers to entry.
E. Financing needs.

II. Products
A. Market size breakdown by product segment.
B. Historical and projected growth rates, penetration, and major market and product
drivers/trends.
C. Market share.
D. Pricing.
E. Product road map for next four years.

III. Research and Development

A. Projections in new hire in R&D group needed to sustain growth.
B. Description of competitive advantage derived from intellectual property.
C. List of any strategic relationships that will be required to maintain technology
advantage.
D. Description of R&D organization
1. Strategy.
2. Key personnel.
E. New product pipeline.
1. Status and timing.
2. Cost.
3. Risks.
F. Key past and future engineering milestones.
G. Relationships with third parties.

IV. Description of Strategic Relationships

A. List of key strategic relationships.
1. Contact name.
2. Address.
3. Phone number.
4. Revenue product type.
5. Description of relationship.
6. Benefits of relationship.
7. Constraints of relationship.
 8. Royalty agreement.
B. Brief description of any significant relationship severed within the last two years.
C. Exclusivity of strategic relationships.

V. Marketing, Sales, and Distribution

A. Positioning of the products and the Company.
B. Description of sales and distribution strategy.
C. Description of sales force (experience, productivity, recent changes if any).
D. Description of sales quota, incentive and compensation scheme.

VI. Customer Information

A. List of top ten customers in calendar 2000 and YTD (contact name, address, phone
number, market segment, product type).
B. List of significant lost customers over past two years (customer name, reason for
discontinued sales).

VII. Competition
A. Describe the competitive landscape.
1. Market position and related strengths and weaknesses.
2. Basis of competition.
3. Competitive case study: customers won and lost and why.

VIII. Management and Personnel

A. Historical and projected headcount by functional area.
1. Executive management.
2. Finance and administration.
3. Development and operations.
4. Sales, marketing, and product management.
5. Direct sales.
6. Product management and sales support.
7. Consulting services.
8. Production support services.
B. Compensation arrangements.
1. Copies (or summaries) of key employment agreements.
2. Benefit plans (including ESOP and medical).
C. Personnel turnover.
1. Data for past two years.
2. Key unfilled positions.

IX. Financial Information and Related Information

A. Financial statement breakdown—historical (past three years) and projected (next
three years).
1. Income statements, balance sheets, cash flows.
a) Actual versus budget.
2. Quarterly breakdown of:
a) Sales by product/product category.
b) Sales by geography.
c) Sales by customer (top ten per quarter).
d) Pricing and volume metrics.
e) Royalty revenue.
f) Average selling price by product.
 g) Cost of sales by product/product category.
h) Breakdown of cost of sales between direct costs and overhead.
3. Detailed breakdown of operating expenses by year.
a) Cost of revenues.
b) Research and development.
c) Sales and marketing.
d) General and administrative.
e) Non-compensation-related selling expenses.
4. Balance sheet detail.
a) Detail of current assets.
b) Fixed assets.
c) Depreciation.
d) Accounts receivable and accounts payable.
e) Reserves, accruals. and allowances.
5. Detail of NOL (amount, timing, and U.K./U.S. split).
6. Discuss quarterly financial projections.
a) Current pipeline visibility: revenue by product, revenue type, and geography.
b) Pricing and volume metrics.
c) Expectations for trends in license and services/support revenue.
7. Auditors’ management letters, internal control letters.
8. Detailed history of financings.
a) Timing.
b) Investors.
c) Valuations.
B. Capital structure.
1. Current shares outstanding.
2. All options, warrants, rights, and any other potentially dilutive securities with
exercise price and vesting provisions.
3. Bank line and convertible notes.
a) Key terms and conditions.
b) Accrued interest detail.
c) Summary of indenture provisions.
4. Summary of current federal, state, and foreign tax positions.
5. Description of material contracts.

X. Legal and Other Matters

A. Description of major past, current and potential future litigation, if any.
B. Description of environment and employee safety issues and liabilities, if any.
1. Safety precautions.
2. New regulations and their consequences.
C. Discussion of all material patents, licenses, and trademarks, including any suits
brought against or by competitors.
D. Summary of insurance coverage/any material exposures.
E. Summary of important contracts.