Telespace, Inc.

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Telecommunications Business Plan

Financial Plan

TeleSpace, Inc. seeks a seed round of equity capital to initiate corporate operations, secure office and engineering space, hire the executive staff and initial employees, and initiate billing and customer service for the core MyLine customers. The company seeks start-up equity financing to accelerate market penetration through a multi-media national advertising campaign, hire additional sales, marketing, customer service and engineering personnel, and upgrade the operational hardware and software capability of the existing MyLine system. There is also a need to invest over the next year in hardware infrastructure. This capital investment will be sufficient to take the company to profitability and ongoing positive cash flow until the acquisition of the company, or initial public offering of common stock.

The company is offering 20% of its fully-diluted common stock, on a post-funding basis, for this investment, which can be Series A convertible preferred stock or any reasonable form the investor prefers. The company has also reserved one seat on its Board of Directors for the investor(s) or his representative.

The financial exit strategy would preferably be through acquisition by a public competitor or potential competitor. The company plans to be generating sales at a "high run rate" within three years, with comenserate gross margins and net margins. We should be an attractive stock acquisition for a large company contemplating the time and cost of competing against an established brand and experienced and successful management team. Management will naturally assess the viability of the public stock markets with its investment banker and will take the company public through an initial offering of its common stock if that vehicle offers superior returns to our investors at that time.

The following financial plan details the staffing plan and pro forma income statement, cash flow, balance sheet and other financial analysis over the next three years. Management assumes that its present owner, AmericomUSA, Inc., will pay all costs and expenses through 1999. The sale of the company is assumed to be effective January 1, 2000. Profitability should be achieved by June, 2000 and positive cash flow by September, 2000.

7.1 Important Assumptions

The financial plan depends on important assumptions, most of which are shown below. The key underlying assumptions are:

  • A stable U.S. and world economy, with no worse than an average cyclical recession in the next year.
  • As unified messaging technology continues to evolve, no new proprietary technology obsolesces the MyLine technology.
  • The federal government does not significantly alter the regulatory climate and continues to allow the evolution of telecommunications into a more competitive industry.
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 9.00% 9.00% 9.00%
Tax Rate 25.42% 25.00% 25.42%
Other 0 0 0

7.2 Key Financial Indicators

The key financial performance measures for TeleSpace are:

  • Sales growth: The company must demonstrate steady and accelerating growth to establish market presence in this huge marketplace.
  • Gross margins must remain high to provide the internal growth capital needed.
  • Productivity as measured by sales per employee must be at least $130,000 by the end of the first year and should approach $1 million by the end of year three.

7.3 Break-even Analysis

The break-even analysis shows that the company has a good balance of steadily increasing operating costs and sales, and where the break-even point will be reached in monthly sales.

Break-even Analysis
Monthly Revenue Break-even $96,546
Assumptions:
Average Percent Variable Cost 0%
Estimated Monthly Fixed Cost $96,546

7.4 Projected Profit and Loss

Profitability will be reached in June, 2000 resulting in a loss for the first year. Consistent high gross profit margins and net margins will be achieved within one year.

Pro Forma Profit and Loss
Year 1 Year 2 Year 3
Sales $837,350 $15,320,000 $42,235,000
Direct Cost of Sales $0 $0 $0
Production Payroll $178,400 $220,000 $265,000
Network expense $120,000 $250,000 $500,000
Total Cost of Sales $298,400 $470,000 $765,000
Gross Margin $538,950 $14,850,000 $41,470,000
Gross Margin % 64.36% 96.93% 98.19%
Operating Expenses
Sales and Marketing Expenses
Sales and Marketing Payroll $203,850 $540,000 $930,000
Advertising/Promotion $270,000 $1,000,000 $2,000,000
Trade Shows $10,000 $30,000 $60,000
Travel $36,000 $100,000 $200,000
Marketing Collateral & Supplies $21,000 $75,000 $150,000
Publications $6,500 $20,000 $40,000
Demos and Samples $10,000 $50,000 $100,000
Total Sales and Marketing Expenses $557,350 $1,815,000 $3,480,000
Sales and Marketing % 66.56% 11.85% 8.24%
General and Administrative Expenses
General and Administrative Payroll $336,000 $670,000 $905,000
Sales and Marketing and Other Expenses $0 $0 $0
Depreciation $36,000 $290,000 $790,000
Leased Equipment $17,000 $35,000 $75,000
Utilities $9,000 $20,000 $40,000
Insurance $12,000 $25,000 $50,000
Rent $26,000 $50,000 $100,000
Other $0 $0 $0
Payroll Taxes $165,198 $328,900 $483,000
Other General and Administrative Expenses $0 $0 $0
Total General and Administrative Expenses $601,198 $1,418,900 $2,443,000
General and Administrative % 71.80% 9.26% 5.78%
Other Expenses:
Other Payroll $0 $0 $0
Consultants $0 $0 $0
Contract/Consultants $0 $0 $0
Total Other Expenses $0 $0 $0
Other % 0.00% 0.00% 0.00%
Total Operating Expenses $1,158,548 $3,233,900 $5,923,000
Profit Before Interest and Taxes ($619,598) $11,616,100 $35,547,000
EBITDA ($583,598) $11,906,100 $36,337,000
Interest Expense $22,625 $9,500 $0
Taxes Incurred $0 $2,901,650 $9,034,863
Net Profit ($642,223) $8,704,950 $26,512,137
Net Profit/Sales -76.70% 56.82% 62.77%

7.5 Projected Cash Flow

Management expects that equity capital will be required to take the company to permanent positive cash flow by September, 2000.

Pro Forma Cash Flow
Year 1 Year 2 Year 3
Cash Received
Cash from Operations
Cash Sales $41,868 $766,000 $2,111,750
Cash from Receivables $397,018 $7,662,226 $27,315,367
Subtotal Cash from Operations $438,885 $8,428,226 $29,427,117
Additional Cash Received
Sales Tax, VAT, HST/GST Received $0 $0 $0
New Current Borrowing $350,000 $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 $1,250,000 $1,500,000 $0
Subtotal Cash Received $2,038,885 $9,928,226 $29,427,117
Expenditures Year 1 Year 2 Year 3
Expenditures from Operations
Cash Spending $718,250 $1,430,000 $2,100,000
Bill Payments $660,561 $4,557,479 $12,180,440
Subtotal Spent on Operations $1,378,811 $5,987,479 $14,280,440
Additional Cash Spent
Sales Tax, VAT, HST/GST Paid Out $0 $0 $0
Principal Repayment of Current Borrowing $160,000 $190,000 $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 $360,000 $1,000,000 $2,000,000
Dividends $0 $0 $0
Subtotal Cash Spent $1,898,811 $7,177,479 $16,280,440
Net Cash Flow $140,074 $2,750,747 $13,146,677
Cash Balance $140,074 $2,890,822 $16,037,499

7.6 Projected Balance Sheet

The balance sheet projects substantial growth in net worth by the end of fiscal year 2002.

Pro Forma Balance Sheet
Year 1 Year 2 Year 3
Assets
Current Assets
Cash $140,074 $2,890,822 $16,037,499
Accounts Receivable $398,465 $7,290,239 $20,098,122
Inventory $20,000 $20,000 $20,000
Other Current Assets $10,000 $10,000 $10,000
Total Current Assets $568,539 $10,211,060 $36,165,621
Long-term Assets
Long-term Assets $360,000 $1,360,000 $3,360,000
Accumulated Depreciation $36,000 $326,000 $1,116,000
Total Long-term Assets $324,000 $1,034,000 $2,244,000
Total Assets $892,539 $11,245,060 $38,409,621
Liabilities and Capital Year 1 Year 2 Year 3
Current Liabilities
Accounts Payable $64,762 $402,333 $1,054,756
Current Borrowing $190,000 $0 $0
Other Current Liabilities $0 $0 $0
Subtotal Current Liabilities $254,762 $402,333 $1,054,756
Long-term Liabilities $0 $0 $0
Total Liabilities $254,762 $402,333 $1,054,756
Paid-in Capital $1,337,500 $2,837,500 $2,837,500
Retained Earnings ($57,500) ($699,723) $8,005,228
Earnings ($642,223) $8,704,950 $26,512,137
Total Capital $637,777 $10,842,728 $37,354,865
Total Liabilities and Capital $892,539 $11,245,060 $38,409,621
Net Worth $637,778 $10,842,728 $37,354,865

7.7 Business Ratios

Standard financial ratios are shown below and indicate a plan for manageable yet aggressive growth. Industry profile ratios based on the Standard Industrial Classification (SIC) code 4899, Communications Services, nec., are shown for comparison.

Ratio Analysis
Year 1 Year 2 Year 3 Industry Profile
Sales Growth 0.00% 1729.58% 175.69% 4.80%
Percent of Total Assets
Accounts Receivable 44.64% 64.83% 52.33% 14.30%
Inventory 2.24% 0.18% 0.05% 2.50%
Other Current Assets 1.12% 0.09% 0.03% 46.50%
Total Current Assets 63.70% 90.80% 94.16% 63.30%
Long-term Assets 36.30% 9.20% 5.84% 36.70%
Total Assets 100.00% 100.00% 100.00% 100.00%
Current Liabilities 28.54% 3.58% 2.75% 43.60%
Long-term Liabilities 0.00% 0.00% 0.00% 26.30%
Total Liabilities 28.54% 3.58% 2.75% 69.90%
Net Worth 71.46% 96.42% 97.25% 30.10%
Percent of Sales
Sales 100.00% 100.00% 100.00% 100.00%
Gross Margin 64.36% 96.93% 98.19% 57.80%
Selling, General & Administrative Expenses 141.99% 40.24% 35.13% 35.50%
Advertising Expenses 32.24% 6.53% 4.74% 1.00%
Profit Before Interest and Taxes -74.00% 75.82% 84.16% 1.90%
Main Ratios
Current 2.23 25.38 34.29 1.17
Quick 2.15 25.33 34.27 0.95
Total Debt to Total Assets 28.54% 3.58% 2.75% 69.90%
Pre-tax Return on Net Worth -100.70% 107.05% 95.16% 4.20%
Pre-tax Return on Assets -71.95% 103.22% 92.55% 14.00%
Additional Ratios Year 1 Year 2 Year 3
Net Profit Margin -76.70% 56.82% 62.77% n.a
Return on Equity -100.70% 80.28% 70.97% n.a
Activity Ratios
Accounts Receivable Turnover 2.00 2.00 2.00 n.a
Collection Days 51 96 125 n.a
Inventory Turnover 0.00 0.00 0.00 n.a
Accounts Payable Turnover 11.20 12.17 12.17 n.a
Payment Days 27 17 21 n.a
Total Asset Turnover 0.94 1.36 1.10 n.a
Debt Ratios
Debt to Net Worth 0.40 0.04 0.03 n.a
Current Liab. to Liab. 1.00 1.00 1.00 n.a
Liquidity Ratios
Net Working Capital $313,778 $9,808,728 $35,110,865 n.a
Interest Coverage -27.39 1,222.75 0.00 n.a
Additional Ratios
Assets to Sales 1.07 0.73 0.91 n.a
Current Debt/Total Assets 29% 4% 3% n.a
Acid Test 0.59 7.21 15.21 n.a
Sales/Net Worth 1.31 1.41 1.13 n.a
Dividend Payout 0.00 0.00 0.00 n.a