Third Degree I.D.

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Educational Software Business Plan

Financial Plan

Our financial plan is based on our assumption of achieving desired levels of sales. Our first-year revenues (projected at $360,000) will probably be insufficient to turn a profit in the first year. However, we plan to generate net profit starting in year two. Our initial cash reserve should be sufficient to keep us afloat during the first year. Subsequent years' cash flows generate a cushion that will allow us to further develop our business.

8.1 Important Assumptions

Our main financial assumptions are summarized in the table below.

General Assumptions
Year 1 Year 2 Year 3
Plan Month 1 2 3
Current Interest Rate 10.00% 10.00% 10.00%
Long-term Interest Rate 10.00% 10.00% 10.00%
Tax Rate 30.00% 30.00% 30.00%
Other 0 0 0

8.2 Break-even Analysis

The main development costs of the product will be our staff costs. Our variable costs are solely those related to packaging (5% of sales), since our staff costs are monthly payroll numbers, reflected in the P&L forecasts later in this document. Our Break-even Analysis is summarized in the table below.

Break-even Analysis
Monthly Revenue Break-even $29,193
Assumptions:
Average Percent Variable Cost 5%
Estimated Monthly Fixed Cost $27,733

8.3 Projected Profit and Loss

First-year revenue is generated primarily from curriculum and content development services. The first-year gross income goal is $360,000, which represents a development objective of at least three full MA programs or training programs (10 courses each) or a combination of comparable curricula. It is the intent of the partners that every development project will yield re-usable learning objects that can be subsequently re-packaged to meet the needs of additional clients. The partners also intend to solicit co-ownership agreements that allow Third Degree I.D. to re-license courses and curricula to institutions other than those for which they were first developed.  The reusable learning objects and content re-licensure will provide a low-investment revenue stream that will contribute an increasingly large percentage of gross corporate revenue in subsequent years.

On the expense side, our staff costs are going to be our main cost. These are, technically, are our product development costs, as all three partners will be directly involved into the development of products for our clients. During the first year, we also plan to utilize services of outside consultants and contractors on the product development side. As stated earlier in this document, as our business grows, we plan to add additional staff. We also plan to utilize our CEO's home office for the remaining part of 2004 and move into a new office space in January 2005.

Overall, we plan to end our first year of operations with a loss. Subsequent years wil show increasing profitability, as summarized in the table below.

Pro Forma Profit and Loss
Year 1 Year 2 Year 3
Sales $360,000 $560,000 $770,000
Direct Cost of Sales $18,000 $28,000 $38,500
Other Costs of Sales $0 $0 $0
Total Cost of Sales $18,000 $28,000 $38,500
Gross Margin $342,000 $532,000 $731,500
Gross Margin % 95.00% 95.00% 95.00%
Expenses
Payroll $225,000 $300,000 $380,000
Sales and Marketing and Other Expenses $6,000 $10,000 $15,000
Depreciation $0 $0 $0
Rent $8,800 $14,000 $16,000
Utilities $1,000 $1,500 $2,000
Insurance $3,600 $4,000 $5,000
Payroll Taxes $0 $0 $0
Consultants $75,000 $0 $0
Telecommunications $2,600 $4,000 $5,000
Business Travel $5,000 $8,000 $10,000
Moving Expenses/Redecorating $1,000 $0 $0
Other $4,800 $10,000 $10,000
Total Operating Expenses $332,800 $351,500 $443,000
Profit Before Interest and Taxes $9,200 $180,500 $288,500
EBITDA $9,200 $180,500 $288,500
Interest Expense $2,188 $750 $0
Taxes Incurred $2,104 $53,925 $86,550
Net Profit $4,909 $125,825 $201,950
Net Profit/Sales 1.36% 22.47% 26.23%

8.4 Projected Cash Flow

Our cash plan is based on the assumption that we meet our sales objectives and collect receivables within 60 days. This will be especially critical during our first year of operations, during which our cash balance will also depend on the initial cash contributions of the three founding partners and a two-year $30,000 loan. The combination of the two should be sufficient to keep our cash balance positive during the most critical first year of operations.

The table below summarizes our cash flow forecasts.

Pro Forma Cash Flow
Year 1 Year 2 Year 3
Cash Received
Cash from Operations
Cash Sales $0 $0 $0
Cash from Receivables $281,333 $516,296 $724,111
Subtotal Cash from Operations $281,333 $516,296 $724,111
Additional Cash Received
Sales Tax, VAT, HST/GST Received $0 $0 $0
New Current Borrowing $0 $0 $0
New Other Liabilities (interest-free) $0 $0 $0
New Long-term Liabilities $0 $0 $0
Sales of Other Current Assets $0 $0 $0
Sales of Long-term Assets $0 $0 $0
New Investment Received $0 $0 $0
Subtotal Cash Received $281,333 $516,296 $724,111
Expenditures Year 1 Year 2 Year 3
Expenditures from Operations
Cash Spending $225,000 $300,000 $380,000
Bill Payments $116,130 $137,108 $183,622
Subtotal Spent on Operations $341,130 $437,108 $563,622
Additional Cash Spent
Sales Tax, VAT, HST/GST Paid Out $0 $0 $0
Principal Repayment of Current Borrowing $15,000 $15,000 $0
Other Liabilities Principal Repayment $0 $0 $0
Long-term Liabilities Principal Repayment $0 $0 $0
Purchase Other Current Assets $0 $0 $0
Purchase Long-term Assets $0 $0 $0
Dividends $0 $0 $0
Subtotal Cash Spent $356,130 $452,108 $563,622
Net Cash Flow ($74,797) $64,188 $160,489
Cash Balance $41,279 $105,467 $265,957

8.5 Projected Balance Sheet

The table below summarizes our forecasted balance sheet. For the first two years of operations (i.e., until we generate a sufficient cash reserve), receivables represent our main current asset. Our fixed assets should be mostly limited to the computer equipment that we depreciate over 5 years. With manageable liabilities, our accounting net worth should steadily grow over the projected period.

Pro Forma Balance Sheet
Year 1 Year 2 Year 3
Assets
Current Assets
Cash $41,279 $105,467 $265,957
Accounts Receivable $78,667 $122,370 $168,259
Other Current Assets $0 $0 $0
Total Current Assets $119,946 $227,838 $434,216
Long-term Assets
Long-term Assets $13,000 $13,000 $13,000
Accumulated Depreciation $0 $0 $0
Total Long-term Assets $13,000 $13,000 $13,000
Total Assets $132,946 $240,838 $447,216
Liabilities and Capital Year 1 Year 2 Year 3
Current Liabilities
Accounts Payable $13,961 $11,028 $15,456
Current Borrowing $15,000 $0 $0
Other Current Liabilities $0 $0 $0
Subtotal Current Liabilities $28,961 $11,028 $15,456
Long-term Liabilities $0 $0 $0
Total Liabilities $28,961 $11,028 $15,456
Paid-in Capital $105,000 $105,000 $105,000
Retained Earnings ($5,924) ($1,016) $124,809
Earnings $4,909 $125,825 $201,950
Total Capital $103,985 $229,810 $431,760
Total Liabilities and Capital $132,946 $240,838 $447,216
Net Worth $103,985 $229,810 $431,760

8.6 Business Ratios

The table below summarizes our key business ratios, with comparisons to standard ratios for our industry, Educational Computer Software (SIC Code 7372.9903).

Ratio Analysis
Year 1 Year 2 Year 3 Industry Profile
Sales Growth 0.00% 55.56% 37.50% 5.21%
Percent of Total Assets
Accounts Receivable 59.17% 50.81% 37.62% 19.34%
Other Current Assets 0.00% 0.00% 0.00% 46.42%
Total Current Assets 90.22% 94.60% 97.09% 68.91%
Long-term Assets 9.78% 5.40% 2.91% 31.09%
Total Assets 100.00% 100.00% 100.00% 100.00%
Current Liabilities 21.78% 4.58% 3.46% 32.29%
Long-term Liabilities 0.00% 0.00% 0.00% 20.16%
Total Liabilities 21.78% 4.58% 3.46% 52.45%
Net Worth 78.22% 95.42% 96.54% 47.55%
Percent of Sales
Sales 100.00% 100.00% 100.00% 100.00%
Gross Margin 95.00% 95.00% 95.00% 100.00%
Selling, General & Administrative Expenses 27.91% 72.53% 68.77% 80.41%
Advertising Expenses 0.00% 0.00% 0.00% 1.08%
Profit Before Interest and Taxes 2.56% 32.23% 37.47% 1.17%
Main Ratios
Current 4.14 20.66 28.09 1.45
Quick 4.14 20.66 28.09 1.16
Total Debt to Total Assets 21.78% 4.58% 3.46% 61.68%
Pre-tax Return on Net Worth 6.74% 78.22% 66.82% 1.52%
Pre-tax Return on Assets 5.27% 74.64% 64.51% 3.96%
Additional Ratios Year 1 Year 2 Year 3
Net Profit Margin 1.36% 22.47% 26.23% n.a
Return on Equity 4.72% 54.75% 46.77% n.a
Activity Ratios
Accounts Receivable Turnover 4.58 4.58 4.58 n.a
Collection Days 57 66 69 n.a
Accounts Payable Turnover 9.32 12.17 12.17 n.a
Payment Days 27 34 26 n.a
Total Asset Turnover 2.71 2.33 1.72 n.a
Debt Ratios
Debt to Net Worth 0.28 0.05 0.04 n.a
Current Liab. to Liab. 1.00 1.00 1.00 n.a
Liquidity Ratios
Net Working Capital $90,985 $216,810 $418,760 n.a
Interest Coverage 4.21 240.67 0.00 n.a
Additional Ratios
Assets to Sales 0.37 0.43 0.58 n.a
Current Debt/Total Assets 22% 5% 3% n.a
Acid Test 1.43 9.56 17.21 n.a
Sales/Net Worth 3.46 2.44 1.78 n.a
Dividend Payout 0.00 0.00 0.00 n.a