OSS Telecom Technology
Financial Plan
The market and related entry strategy mentioned earlier in this Business Plan is reflected in the assumptions used to build the financial model and corresponding pro-forma financial statements.The management of OSS Telecom Technology, Inc. believes these projections to be on the conservative side and, therefore, very attainable.
7.1 Important Assumptions
Income Statement
The income statement presented here demonstrates the projected results of operations for the period FY 1999 through FY 2004 on a consolidated basis for OSS Telecom Technology and OSS Telecom Technology Taiwan.
Sources & Uses of Funds
There are two sources and uses of funds presented:
- Assuming no cash infusion, a minimum cash requirement is calculated demonstrating the shortfall.
- Assuming needed cash is raised in an initial private placement, what the cash position would be in each of the years.
Balance Sheet
There are two balance sheets presented which accompany the two above mentioned sources and uses of funds statements.
- Related to the scenario of no cash infusion, a negative impact on the balance sheet creates a company that cannot survive under the current aggressive growth plan.
- The balance sheet related to the projection of a $20 million private placement occurring in the first quarter of Fiscal Year (FY) 2001. This represents a company able to meet projections based upon its planned growth targets.
| General Assumptions | |||
| FY 2001 | FY 2002 | FY 2003 | |
| 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 | 25.00% | 25.00% | 25.00% |
| Other | 0 | 0 | 0 |
7.2 Key Financial Indicators
The following chart focuses on the key financial indicators of the company.
7.3 Break-even Analysis
The following chart and table illustrate the break-even requirements for the company.
| Break-even Analysis | |
| Monthly Revenue Break-even | $1,336,343 |
| Assumptions: | |
| Average Percent Variable Cost | 13% |
| Estimated Monthly Fixed Cost | $1,169,300 |
7.4 Projected Profit and Loss
The income statement presented here demonstrates the projected results of operations for the period FY 2001 through FY 2003 on a consolidated basis for OSS Telecom Technology and OSS Telecom Technology Taiwan.
License revenues consist of license fees for the company’s software. Service revenues consist of fees for customer-defined customization, installation, and product support services. In addition, other lesser service revenues are for maintenance fees and training fees. After establishing the necessary infrastructure in the first two years, Net Profit/Sales will grow in FY 2003.
Revenue recognition for the various sources of fees is as follows:
- License revenues for one-time license sales without customization are recognized upon delivery of the software to the customer.
- License revenues for license sales, which require customization of the software, are recognized over the estimated term of the installation of such software based on the percentage of completion method of accounting.
- Maintenance fees are recognized ratably over the term of the maintenance contract.
- Training fees are recognized as the training is performed.
- Service revenues performed for customization and installation of both the initial system and subsequent upgrades are accounted for over the estimated term of such services based on the percentage of completion method of accounting.
Revenues are projected to grow significantly from FY 1999 that ends on March 31, 1999, through FY 2003. This represents a comfortable growth rate through FY 2003. Revenues are broken down into two major classifications:
- License Sales
- Services
License revenues are classified as new license sales and upgrade license sales. These are further broken down between current Customer Care and Billing (CCB) solutions and planned new products of Prepaid IN and Short Message Service.
Cost of Goods Sold (COGS) consists primarily of salaries and related labor loadings associated with installation, customization, and product support activities. It also includes third party costs associated with system integrators and, to a lesser extent, costs related to providing software maintenance and end-user training to customers. COGS are expected to be a decreasing percentage of revenues in FY 2000 through FY 2003 as the number of subscribers per license sale grows and there is a corresponding decrease in the cost per subscriber.
Gross margin is projected to stay high from FY 1999 onward and grow in FY 2003 as the company attains economy of scale. The compound annual growth rate for gross margin in FY 2004 will outpace revenue growth.
Other Income and Expense are associated with debt service, amortization of excess acquisition costs and interest income.
| Pro Forma Profit and Loss | |||
| FY 2001 | FY 2002 | FY 2003 | |
| Sales | $17,148,730 | $26,994,200 | $40,752,700 |
| Direct Cost of Sales | $2,143,593 | $3,374,276 | $5,094,088 |
| Production Payroll | $712,800 | $784,100 | $862,600 |
| Other | $0 | $0 | $0 |
| Total Cost of Sales | $2,856,393 | $4,158,376 | $5,956,688 |
| Gross Margin | $14,292,337 | $22,835,824 | $34,796,012 |
| Gross Margin % | 83.34% | 84.60% | 85.38% |
| Operating Expenses | |||
| Sales and Marketing Expenses | |||
| Sales and Marketing Payroll | $5,586,000 | $7,299,600 | $9,742,560 |
| Advertising/Promotion | $946,800 | $1,098,000 | $1,185,000 |
| Travel | $3,060,000 | $3,186,000 | $3,297,000 |
| Total Sales and Marketing Expenses | $9,592,800 | $11,583,600 | $14,224,560 |
| Sales and Marketing % | 55.94% | 42.91% | 34.90% |
| General and Administrative Expenses | |||
| General and Administrative Payroll | $2,382,000 | $2,620,300 | $2,882,400 |
| Sales and Marketing and Other Expenses | $0 | $0 | $0 |
| Depreciation | $26,400 | $27,500 | $28,700 |
| Rent | $54,000 | $59,000 | $64,000 |
| Depreciation | $276,000 | $316,000 | $398,000 |
| Leased Equipment | $158,400 | $159,700 | $164,300 |
| Utilities | $27,600 | $28,400 | $29,600 |
| Payroll Taxes | $0 | $0 | $0 |
| Total General and Administrative Expenses | $2,924,400 | $3,210,900 | $3,567,000 |
| General and Administrative % | 17.05% | 11.89% | 8.75% |
| Other Expenses: | |||
| Other Payroll | $1,430,400 | $1,573,500 | $1,730,900 |
| Contract/Consultants | $84,000 | $78,000 | $69,000 |
| Total Other Expenses | $1,514,400 | $1,651,500 | $1,799,900 |
| Other % | 8.83% | 6.12% | 4.42% |
| Total Operating Expenses | $14,031,600 | $16,446,000 | $19,591,460 |
| Profit Before Interest and Taxes | $260,737 | $6,389,824 | $15,204,552 |
| EBITDA | $287,137 | $6,417,324 | $15,233,252 |
| Interest Expense | $97,584 | $88,000 | $78,000 |
| Taxes Incurred | $40,788 | $1,575,456 | $3,781,638 |
| Net Profit | $122,365 | $4,726,368 | $11,344,914 |
| Net Profit/Sales | 0.71% | 17.51% | 27.84% |
7.5 Projected Cash Flow
The primary assumption on the Sources and Uses Statement is that cash would be raised in an initial private placement.
| Pro Forma Cash Flow | |||
| FY 2001 | FY 2002 | FY 2003 | |
| Cash Received | |||
| Cash from Operations | |||
| Cash Sales | $4,287,183 | $6,748,550 | $10,188,175 |
| Cash from Receivables | $12,538,878 | $18,995,975 | $28,818,173 |
| Subtotal Cash from Operations | $16,826,060 | $25,744,525 | $39,006,348 |
| 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 | $20,000,000 | $0 | $0 |
| Subtotal Cash Received | $36,826,060 | $25,744,525 | $39,006,348 |
| Expenditures | FY 2001 | FY 2002 | FY 2003 |
| Expenditures from Operations | |||
| Cash Spending | $10,111,200 | $12,277,500 | $15,218,460 |
| Bill Payments | $8,432,054 | $9,715,680 | $13,815,602 |
| Subtotal Spent on Operations | $18,543,254 | $21,993,180 | $29,034,062 |
| Additional Cash Spent | |||
| Sales Tax, VAT, HST/GST Paid Out | $0 | $0 | $0 |
| Principal Repayment of Current Borrowing | $0 | $0 | $0 |
| Other Liabilities Principal Repayment | $0 | $0 | $0 |
| Long-term Liabilities Principal Repayment | $100,000 | $100,000 | $100,000 |
| Purchase Other Current Assets | $0 | $0 | $0 |
| Purchase Long-term Assets | $0 | $0 | $0 |
| Dividends | $0 | $0 | $0 |
| Subtotal Cash Spent | $18,643,254 | $22,093,180 | $29,134,062 |
| Net Cash Flow | $18,182,806 | $3,651,345 | $9,872,287 |
| Cash Balance | $1,410,806 | $5,062,151 | $14,934,438 |
7.6 Projected Balance Sheet
The Balance Sheet presented accompanies the above mentioned sources and uses of funds statement, with the assumption of a projection of a $20 million private placement occurring in the first quarter of FY 2001. This represents a company able to meet projections based upon its planned growth targets.
| Pro Forma Balance Sheet | |||
| FY 2001 | FY 2002 | FY 2003 | |
| Assets | |||
| Current Assets | |||
| Cash | $1,410,806 | $5,062,151 | $14,934,438 |
| Accounts Receivable | $2,176,670 | $3,426,345 | $5,172,696 |
| Other Current Assets | $1,511,000 | $1,511,000 | $1,511,000 |
| Total Current Assets | $5,098,476 | $9,999,496 | $21,618,134 |
| Long-term Assets | |||
| Long-term Assets | $8,917,000 | $8,917,000 | $8,917,000 |
| Accumulated Depreciation | $1,720,400 | $1,747,900 | $1,776,600 |
| Total Long-term Assets | $7,196,600 | $7,169,100 | $7,140,400 |
| Total Assets | $12,295,076 | $17,168,596 | $28,758,534 |
| Liabilities and Capital | FY 2001 | FY 2002 | FY 2003 |
| Current Liabilities | |||
| Accounts Payable | $571,711 | $818,863 | $1,163,887 |
| Current Borrowing | $0 | $0 | $0 |
| Other Current Liabilities | $0 | $0 | $0 |
| Subtotal Current Liabilities | $571,711 | $818,863 | $1,163,887 |
| Long-term Liabilities | $930,000 | $830,000 | $730,000 |
| Total Liabilities | $1,501,711 | $1,648,863 | $1,893,887 |
| Paid-in Capital | $21,667,000 | $21,667,000 | $21,667,000 |
| Retained Earnings | ($10,996,000) | ($10,873,635) | ($6,147,267) |
| Earnings | $122,365 | $4,726,368 | $11,344,914 |
| Total Capital | $10,793,365 | $15,519,733 | $26,864,647 |
| Total Liabilities and Capital | $12,295,076 | $17,168,596 | $28,758,534 |
| Net Worth | $10,793,365 | $15,519,733 | $26,864,647 |
7.7 Business Ratios
The following is a summarized list of key business ratios for the company. The final column of the table, Industry Profiles, shows important ratios from the communications services industry, as defined by the Standard Industry Classification (SIC) Index code 4899, Communications Services, NEC (not elsewhere classified).
| Ratio Analysis | ||||
| FY 2001 | FY 2002 | FY 2003 | Industry Profile | |
| Sales Growth | 48.95% | 57.41% | 50.97% | 5.92% |
| Percent of Total Assets | ||||
| Accounts Receivable | 17.70% | 19.96% | 17.99% | 18.27% |
| Other Current Assets | 12.29% | 8.80% | 5.25% | 41.72% |
| Total Current Assets | 41.47% | 58.24% | 75.17% | 63.98% |
| Long-term Assets | 58.53% | 41.76% | 24.83% | 36.02% |
| Total Assets | 100.00% | 100.00% | 100.00% | 100.00% |
| Current Liabilities | 4.65% | 4.77% | 4.05% | 26.17% |
| Long-term Liabilities | 7.56% | 4.83% | 2.54% | 25.88% |
| Total Liabilities | 12.21% | 9.60% | 6.59% | 52.05% |
| Net Worth | 87.79% | 90.40% | 93.41% | 47.95% |
| Percent of Sales | ||||
| Sales | 100.00% | 100.00% | 100.00% | 100.00% |
| Gross Margin | 83.34% | 84.60% | 85.38% | 54.99% |
| Selling, General & Administrative Expenses | 84.55% | 66.91% | 56.20% | 34.50% |
| Advertising Expenses | 5.11% | 3.64% | 2.50% | 1.31% |
| Profit Before Interest and Taxes | 1.52% | 23.67% | 37.31% | 2.80% |
| Main Ratios | ||||
| Current | 8.92 | 12.21 | 18.57 | 1.89 |
| Quick | 8.92 | 12.21 | 18.57 | 1.53 |
| Total Debt to Total Assets | 12.21% | 9.60% | 6.59% | 63.38% |
| Pre-tax Return on Net Worth | 1.51% | 40.61% | 56.31% | 3.49% |
| Pre-tax Return on Assets | 1.33% | 36.71% | 52.60% | 9.54% |
| Additional Ratios | FY 2001 | FY 2002 | FY 2003 | |
| Net Profit Margin | 0.71% | 17.51% | 27.84% | n.a |
| Return on Equity | 1.13% | 30.45% | 42.23% | n.a |
| Activity Ratios | ||||
| Accounts Receivable Turnover | 5.91 | 5.91 | 5.91 | n.a |
| Collection Days | 59 | 51 | 51 | n.a |
| Accounts Payable Turnover | 12.05 | 12.17 | 12.17 | n.a |
| Payment Days | 36 | 25 | 26 | n.a |
| Total Asset Turnover | 1.39 | 1.57 | 1.42 | n.a |
| Debt Ratios | ||||
| Debt to Net Worth | 0.14 | 0.11 | 0.07 | n.a |
| Current Liab. to Liab. | 0.38 | 0.50 | 0.61 | n.a |
| Liquidity Ratios | ||||
| Net Working Capital | $4,526,765 | $9,180,633 | $20,454,247 | n.a |
| Interest Coverage | 2.67 | 72.61 | 194.93 | n.a |
| Additional Ratios | ||||
| Assets to Sales | 0.72 | 0.64 | 0.71 | n.a |
| Current Debt/Total Assets | 5% | 5% | 4% | n.a |
| Acid Test | 5.11 | 8.03 | 14.13 | n.a |
| Sales/Net Worth | 1.59 | 1.74 | 1.52 | n.a |
| Dividend Payout | 0.00 | 0.00 | 0.00 | n.a |
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