BusinessDevelopment

Operations and Procedures

Carlos F. Camargo

Managing Director

Business Development

Table of ContentsPartnership Strategy and Process Overview for Business Development

Step One: Strategic Objectives for Partneringß Typical Strengths of ABC and its Alliance Partnersß Understanding the Building Blocks of Partneringß There is no typical partnering arrangement.ß Partnering Building Blocks: 2-way Mapping of Partnership Objectivesß Determining Strategic Needs/Bargaining Chips

Step Two: Developing the Partnering Planß A typical plan covers the following types of issues:ß Planning for Multiple Partnering Arrangementsß The existence of multiple arrangements adds another layer of complexity.

Step Three: Selecting Alliance Partner Targetsß Ideally, each potential candidate should meet the following criteria:ß Designing the Responsibility Listß Implementation

Step Four: Contacting the Alliance Partner Targetsß Corporate vs. Operating Staffß Recruiting a Championß Confidentiality Agreementsß Initial Meetings

Step Five: Creating A Proposalß Valuing the Proposalß Initial Proposalsß Legal, Tax and Accounting Assistance

Partnership Strategy andProcess Overview for Business Development

Step One: Strategic Objectives for Partnering

ÿ The first step in the ABC, Inc. partnering process is to identify the strategic reasons forseeking such an arrangement with a like-minded or similarly motivated partner, to pursuethe following…

• Competitive (re)Positioning• Cost Mitigation• Enhancing Market Reach/Presence/Halo• Funding for channel/distribution development• Funding for marketing/technology development• Quality Improvement• Revenue Enhancement• Securing Equity Investment• Securing Services/Products/Capabilities to fill Whole Product Reqs• Time to Market Efficiencies

Threshold for Considering Partnerships: A successful partnering arrangement results when the value each obtains

exceeds the costs (current and strategic) incurred in meeting the partnership’s objectives

Typical Strengths of All Bases Covered, Inc.s and its Alliance Partners

This chart highlights the typical benefits derived by All Bases Covered, Inc. and an Alliance Partner inmeeting different functional responsibilities during a product life cycle.

Responsibilities All Bases Covered, Inc. Strengths Alliance Partner Strengths

Product Development

q Creativity Focused developmentq Speedq Less developmental biasq Flexibility

q Broad market expertiseq Broad technical capabilitiesq Better lab and test facilities

Legal/Regulatoryq Cutting-edge technology patents q Cross-license opportunities

q Guidance on regulatory or patentapprovals

Manufacturingq Faster, low volume capabilityq Prototyping capabilityq Specialized niche manufacturing

q Component purchasing power Toolingand manufacturing

q Quality assurance capability

Marketing

q Understanding of niche marketq New technology or new market

excitementq Creativityq Competitive edge

q Broad market understandingq Established product linesq Volume edgeq Trade name recognition

Distributionq Specialized niche distributionq Flexibility

q Established customer baseq Established distribution and shelf spaceq Better storage and transportation

Service/Supportq Expertise in new technology problems q Established quality standards

q Warranty, service and customer supportprocedures

Product Revisionsq Next generation capability q Better product life extension Established

user groups

Understanding the Building Blocks of Partnering

To achieve All Bases Covered, Inc.’s and Alliance Partner’s partnering objectives, All Bases Covered,Inc. and Alliance Partner must mix and match five partnering building blocks to create an agreement thatbest meets those objectives.

Building Blocks of Partnering

ABC Dominant Agreements Partner Dominant Agreements

q Development: All Bases Covered, Inc.’s fundsdevelopment of Alliance Partner’s specifictechnology or products in return for rights to theresulting technology or products.

q Development: Alliance Partner funds All BasesCovered, Inc.’s development of specifictechnology or products in return for rights to theresulting technology or products.

q Distribution: All Bases Covered, Inc. receivesthe right (exclusive or non-exclusive) to distributeAlliance Partner’s products/services within aparticular geographic territory or vertical market.

q Distribution: Alliance Partner receives the rightto distribute All Bases Covered, Inc.’sproducts/services within a particular geographicterritory or vertical market.

q Equity: All Bases Covered, Inc. purchases anequity stake (usually a minority position) inAlliance Partner in return for either a seat onAlliance Partner’s Board of Directors orcontractual rights to Alliance Partner’s technologyor marketing/distribution/channels. Equitypurchases may be supplemented or replaced byoptions to Alliance Partner stock, loans toAlliance Partner. or an option or warrant toacquire Alliance Partner

q Equity: Alliance Partner purchases an equitystake (usually a minority position) in All BasesCovered, Inc. in return for either a seat on AllBases Covered, Inc.’s Board of Directors orcontractual rights to All Bases Covered, Inc.’stechnology/marketing/distribution/channel. Equitypurchases may be supplemented or replaced byoptions to purchase All Bases Covered, Inc.stock, loans to All Bases Covered, Inc. or anoption to acquire ABC.

q Licensing: All Bases Covered, Inc receives the q Licensing: Alliance Partner receives the right to

Building Blocks of Partnering

ABC Dominant Agreements Partner Dominant Agreements

right to use and modify. Alliance Partner’stechnology/product/service within a particulargeographic territory or vertical market in abroader way than a manufacturing or distributiongrant (e.g., OEM agreements or internal uselicenses). Licenses All Bases Covered, Inc moreinformation about the technology and typicallybear royalties.

use and modify All Bases Covered, Inc.’stechnology/product/service within a particulargeographic territory or vertical market in abroader way than a manufacturing or distributiongrant (e.g., OEM agreements or internal uselicenses). Licenses give Alliance Partner moreinformation about the technology and typicallybear royalties.

q Manufacturing: All Bases Covered, Inc. receivesthe right to manufacture products using AlliancePartner’s technology.

q Manufacturing: Alliance Partner receives theright to manufacture products using All BasesCovered, Inc.’s technology.

There is no typical partnering arrangement.

♦ Each partnering arrangement is a hybrid of some or all of these building blocks and canbe formed during or after the development of the technology/service or product.

♦ Since strategic objectives of individual companies differ, All Bases Covered, Inc. mayfind that seemingly similar Alliance Partners may be interested in partneringarrangements with very different structures.

♦ To determine which of these building blocks is appropriate, it is important to understandwhat advantages All Bases Covered, Inc. and Alliance Partner might see in anyparticular building block.

Partnering Building Blocks: 2-way Mapping of Partnership Objectives

Building Block All Bases Covered, Inc. Objectives Alliance Partner Objectives

Equity Investment

ÿ Capital infusionÿ Enhance All Bases Covered, Inc.’s market credibilityÿ Strengthen other relationships with Alliance Partnerÿ Access to Alliance Partner’s operating and market

expertiseÿ Precursor to Alliance Partner’s acquisition of All

Bases Covered, Inc.

ÿ Window on All Bases Covered, Inc.’s service/productor market

ÿ Influence on All Bases Covered, Inc.’s strategicdirection

ÿ Strengthen other relationships with All BasesCovered, Inc.

ÿ Block competitors from obtaining access to All BasesCovered, Inc.’s technology

ÿ Precursor to acquisition of All Bases Covered, Inc.

Technology Development

Agreement

ÿ Access to Alliance Partner’s technology and patentsÿ Funding for All Bases Covered, Inc.’s own R&D

programÿ Access to Alliance Partner’s test and regulatory

approval capabilities

ÿ Access to All Bases Covered, Inc.’s service/productand patents

ÿ Basis for obtaining manufacturing, distribution orlicensing rights

ÿ Access to All Bases Covered, Inc.’s faster, cheaperand more flexible development capabilities

Manufacturing Agreement

ÿ Avoid capital expense of building own plantÿ Ship product more rapidlyÿ Obtain Alliance Partner’s quality and test capability

ÿ Use excess manufacturing capacityÿ Broaden manufacturing capability into new areaÿ Ensure quality of product to be acquired

Distribution Agreement

ÿ Arrive at specialized vertical or geographic marketfaster

ÿ Get benefit of Alliance Partner’s market reputationand support capacity

ÿ Complement and broaden current product line;diversify into new markets

ÿ Control sales and service process

Licensing Agreement

ÿ Royalties from markets that All Bases Covered, Inc.would not otherwise address

ÿ Gain access to Alliance Partner’s technology andpatents

ÿ Gain manufacturing and distribution capability

ÿ Incorporate All Bases Covered, Inc.’s service/productinto Alliance Partner’s products

ÿ Right to change All Bases Covered, Inc.’sservice/product itself

ÿ Right to use All Bases Covered, Inc.’sservice/product in other parts of its operations

Determining Strategic Needs/Bargaining Chips

♦ Once All Bases Covered, Inc.’s objectives and the likely objectives of a prospective partner have been analyzed, thenext step is to list ABC’s strategic needs and likely bargaining chips.

ÿ “Strategic needs” are those items of strategic value that All Bases Covered, Inc. wants to obtain.

ÿ “Bargaining chips” are those items of strategic value that All Bases Covered, Inc. can offer to a potentialpartner.

♦ Initially, these lists should be as comprehensive as possible. Once the process of selecting specific partneringcandidates begins, the lists should be pared down to those items applicable to a given potential partner.

ÿ To illustrate, All Bases Covered, Inc.’s strategic needs and bargaining chips lists might look like the following:

ABC’s Strategic Needs ABC’s Bargaining Chips

ÿ Approximately $5 million in capital, revenues or reducedexpenses;

ÿ Existing proprietary products, technology or patents;

ÿ Distribution capability, particularly overseas or in a definedvertical market;

ÿ R&D capability to create a unique product or componentmeeting Alliance Partner’s specifications;

ÿ Customer leads, credibility; ÿ “Influence” on All Bases Covered, Inc.’s future direction,reflected by a Alliance Partner seat on All Bases Covered, Inc.’sBoard of Directors or R&D Committee;

ÿ domestic manufacturing capability for private label whiteboxinitiative;

ÿ Product manufacturing/assembly capability in the United States;

ÿ Related product lines, particularly those that create anopportunity for All Bases Covered, Inc. system sales;

ÿ Vertical distribution capability in defined areas or markets; and

ÿ Additional technology to incorporate into current or plannedproducts; and

ÿ Intangibles, such as the ability to move quickly, market focus,customer awareness, image and reputation in market niche,productivity and trend setting ability.

ÿ Sourcing of certain parts or raw materials. ÿ Niche market brand, presence, coverage, or reach

Step Two: Developing The Partnering Plan

ÿ Having determined the strategic needs and the current capabilities of All BasesCovered, Inc., the next step is to create a partnering plan.

ÿ The key managers of All Bases Covered, Inc. must be actively involved in creating aneffective plan. Polling via email or phone at a minimum is both a professional courtesyand invaluable decision-making and –sharpening tool.

ÿ The resultant plan will help focus the advisors and management team as All BasesCovered, Inc. goes through the partnering process.

A typical plan covers the following types of issues:

1. Strategic, operating and financial objectives that support All Bases Covered, Inc.’sstrategy for increasing market share;

2. Strategy for developing the partnering process;

3. Proposed deal structures, including likely alternatives, implications and negotiatinglimits;

4. Anticipated, realistic timetable;

5. Materials to be furnished to the potential partner: the first information pack to sparkinterest in All Bases Covered, Inc. and a second set to provide adequate disclosurefor Alliance Partner’s initial decision regarding degree of interest; and

6. Target list of partnering candidates by types, with brief reasoning and priorities.

Planning for Multiple Partnering Arrangements

ÿ Partnering arrangements are inherently more complex than a “straight” venturefinancing, acquisition, R&D contract, or manufacturing, distribution or licensingarrangement taken alone.

ÿ For a successful partnering arrangement, All Bases Covered, Inc. must meet thestrategic objectives of an Alliance Partner and provide an Alliance Partner with(sometimes) substantial rights to All Bases Covered, Inc.’s product/service/technologyand market. Monitoring and management are key to continued good relations.

ÿ At the same time, All Bases Covered, Inc. must ensure that it does not give away adisproportionate part of its product/service/technology and market to an Alliance Partnerin exchange for a minority equity investment or R&D contract.

ÿ When making concessions to an Alliance Partner, All Bases Covered, Inc. must considerthat it will want to do other partnering arrangements in the future.

The existence of multiple arrangements adds another layer of complexity.

ÿ It is often helpful to negotiate with two prospective Alliance Partners simultaneously,so as to have an alternative when negotiations get difficult.

ÿ When partnering arrangements occur in sequence, All Bases Covered, Inc. shoulduse previous arrangements as a baseline for later negotiations.

ÿ A long-term, exclusive grant of rights in one partnering arrangement may limit AllBases Covered, Inc.’s flexibility in creating later relationships unless each agreementis carefully structured to fit into All Bases Covered, Inc.’s strategic plan.

Step Three: Selecting Alliance Partner Targets

ÿ One of the most critical issues in the partnering process is determining which companiesto approach.

ÿ Enormous amounts of time and resources can be wasted with inappropriate candidatesthat are not likely to meet All Bases Covered, Inc.’s strategic needs.

Ideally, each potential candidate should meet the following criteria:

• Ability to meet All Bases Covered, Inc.’s strategic objectives;

• Strategic objectives that All Bases Covered, Inc. can meet without having AlliancePartner dominate All Bases Covered, Inc.’s business;

• Clear need for All Bases Covered, Inc.’s bargaining chips at the operating (not justthe corporate) level;

• Distinct and non-conflicting target markets;

• Familiarity with All Bases Covered, Inc.’s services, technologies, products andmarkets;

• Interest, or successful experience in making similar deals;

• No recent major change in identity or organization;

• Compatible people and corporate cultures; and

• Ability to complete the transaction within the required timeframe.

It is difficult to obtain this type of information about potential partners and no one partner will meet all thesecriteria. Still, gathering this type of information and using it to prioritize the list of candidates will bothreduce the amount of time spent with inappropriate candidates and increase the likelihood of success.

Designing the Responsibility List

ÿ Once the list of prospective candidates has been prioritized, Business Development orspecific members of the management team or Board of Directors, should be assignedthe responsibility of contacting one or more of the top-priority targets.

ÿ Ideally, the assigned person should have a personal contact within the target AlliancePartner who is already familiar with All Bases Covered, Inc. or willing to learn more.

ÿ Only contact a few companies at a time, both to avoid overwhelming management andto avoid giving the impression that All Bases Covered, Inc. is being “shopped” or is“partner happy or desperate.”

ÿ As the process continues, the responsibility list should be updated by BusinessDevelopment to show the current contact status of each active candidate.

Implementation:

♦ Successfully completing negotiations is only the first step in creating an effectivepartnering arrangement.

♦ Once it is clear that a partnering arrangement will be concluded both parties mustfocus on how the partnering arrangement will be implemented.

♦ To effectively integrate the partnership objectives into operations, continuedcommunications, commitment and execution by all parties is an absolute priorityto achieve sustainable success.

Step Four: Contacting The Alliance Partner Targets

Corporate vs. Operating Staff

ÿ One difficulty in introducing a partnering proposal to an Alliance Partner is that although theAlliance Partner’s operating staff frequently will have the greatest interest in the potentialarrangement, it rarely will have the authority to engage in a significant transaction withoutcorporate approval.

ÿ Since most Alliance Partners require corporate approval for an equity proposal, All BasesCovered, Inc. may want to first consider a non-equity partnering proposal.

ÿ When the operating group in an Alliance Partner cannot complete the partnering arrangementalone, carefully consider how to approach Alliance Partner.

ÿ If an Alliance Partner has a corporate business development or strategic development group,Business Development should approach that group first, in the absence of a clear champion.

Recruiting a Champion

ÿ If not, All Bases Covered, Inc. will probably want to start with or get an introduction to an appropriateperson in the operating unit. Such a person can act as the champion within the corporate structure,attesting to the feasibility and value of the technology and the available market.

ÿ It is critical that Business Development identify a credible and persuasive champion within an AlliancePartner who has a vested interest in the success of the relationship. Without such a champion,partnering negotiations may eventually stall.

ÿ Business Development also should realize that the Alliance Partner corporate staff members whonegotiate the partnering arrangement generally will not be responsible for implementing thearrangement.

Confidentiality Agreements

♦ Before attending any meetings with Alliance Partner, Business Development shoulddecide exactly how much technological, business plan or market information ABC iswilling to provide to an Alliance Partner without getting a signed confidentialityagreement.

♦ The first information given to an Alliance Partner should be sufficiently general that noconfidentiality agreement is necessary. Large companies rarely sign confidentialityagreements before they have concluded that they have some threshold degree ofinterest in pursuing the opportunity.

♦ Once that level of interest is attained, it is important that Business Development get asigned confidentiality agreement from the Alliance Partner.

♦ Corporate partnering relationships invariably require All Bases Covered, Inc. torelinquish proprietary information.

♦ This is information that All Bases Covered, Inc. will not want an Alliance Partner to useoutside the scope of the proposed partnering arrangement.

♦ Business Development should consult with its outside counsel (Barry Carr &Associates) regarding the appropriate form of confidentiality agreement and othermechanisms that can help protect its proprietary information during the partneringprocess.

♦ In addition to confidentiality, ABC may wish to have an Alliance Partner agree not tosolicit All Bases Covered, Inc.’s key employees for some extended period of time.(Currently, two separate corporate NDAs cover these situations.)

Initial Meetings

♦ Business Development can expect at least two or three initial meetings with AlliancePartner staff, over a period of several weeks, to discuss All Bases Covered, Inc.’sobjectives, strategy, technology and markets.

♦ Advisors will help All Bases Covered, Inc. develop a comprehensive presentation to begiven by All Bases Covered, Inc.’s senior management.

♦ In these initial meetings, Business Development should be prepared to outline brieflywhat it wants to achieve in the proposed transaction, even though an Alliance Partnergenerally will not be ready to negotiate or respond to All Bases Covered, Inc.’s proposalat this stage.

♦ It is important, however, to inquire about Alliance Partner’s strategic objectives in orderto determine how All Bases Covered, Inc. can modify its proposal to fit the mutualobjectives of the two companies.

Step Five: Creating A Proposal

ÿ All Bases Covered, Inc. should expect to formulate the partnering proposal.

ÿ An Alliance Partner typically will not feel the same degree of urgency as All BasesCovered, Inc. to generate a timely and creative proposal and All Bases Covered, Inc.will want to drive the process.

ÿ An Alliance Partner’s staff will help refine the proposal, establish Alliance Partner’snegotiating limits, and will assist in gaining corporate approval.

Valuing the Proposal

♦ In formulating the proposal, consider an Alliance Partner’s strategic objectives and try to separateperceived “investment objectives” from “operating objectives.”

♦ An Alliance Partner generates its returns from its operating business. As a result, an AlliancePartner will tend to value the All Bases Covered, Inc. partnering proposal based on an operatingdiscounted cash-flow analysis of the commercial rights that the Alliance Partner will obtain.

♦ To determine Alliance Partner’s cash-flow benefits from these arrangements, it is important tounderstand the nature of the Alliance Partner decision.

♦ Is this a strategic direction the Alliance Partner cannot achieve without All Bases Covered, Inc., ora “make or buy” decision (i.e., can Alliance Partner accomplish its objectives faster or cheaperthrough All Bases Covered, Inc. than it can by doing it itself?)?

♦ A careful understanding of Alliance Partner’s alternatives will help All Bases Covered, Inc. interpretAlliance Partner’s discounted cash-flow analysis. Thus, All Bases Covered, Inc. should primarilyanalyze the partnering proposal in terms of its operating present value returns to Alliance Partner.

Initial Proposals

ÿ Initially, proposals should be kept in outline form, leaving the details to be developed in negotiations. Initialproposals must be realistic and businesslike.

ÿ Unrealistic expectations or poorly thought out proposals may jeopardize an otherwise promising relationship.

ÿ The initial proposal should accomplish the following:

• Indicate generally what All Bases Covered, Inc. wants from the transaction, leaving any valuationissues until later;

• Define what All Bases Covered, Inc. is prepared to give in the transaction, including deliverables orrights to be granted to the Alliance Partner;

• Address and satisfy Alliance Partner’s objectives and concerns;• Prepare for future negotiating trade-offs; and• Set a timetable for completion.

ÿ If Alliance Partner indicates an interest in negotiating an arrangement based on the summary proposal, AllBases Covered, Inc. should prepare a detailed version of the proposal, modified to reflect what has beenlearned to date.

ÿ A useful way to prepare for discussions is to complete a matrix similar to the following:

ABC Proposal Items Possible Partner Responses ABC Counter Responses

1.

2.

3.

1a.1b.1c.2a.2b.2c.

3a.3b.3c.

1a.1b.1c.2a.2b.2c.

3a.3b.3c.

Legal, Tax and Accounting Assistance

ÿ Business Development should seek competent legal, tax and accounting input earlyin the negotiating process, as wells throughout the negotiations and managementphases of the relationship.

ÿ Not only may legal restrictions make some agreements impossible, but taximplications may make certain legal structures far more costly than others.

ÿ In many cases, experienced counsel will know of simpler, safer and more cost-effective mechanisms for accomplishing All Bases Covered, Inc.’s objectives.

ÿ When analyzing the issues in the individual building block agreements that make upa partnering arrangement, Business Development and executive management andoutside counsel must consider how these issues are affected by the interaction ofseveral of those agreements together.