Wireless Systems Integrator (Appendix)
Industry & Marketplace Analysis
Appendix
Appendix A: Check-in Procedures
Premise 1: End user purchases e-ticket prior to departure. The airline reservation system records the transaction.
Premise 2: Handheld device is used as an e-wallet for many other transactions.
- Enter check-in "zones" for Bluetooth handheld device users
- Connect to check-in system using handheld device
User is identified via e-wallet technology.
User confirms ID with log-in and password. - Accept or change ticketing information
To accept your seat or review any special requests you may have made when booking, touch the relevant buttons on your handheld device. - Change your seat with ease
If you want to amend your seat allocation, you will be linked to this screen. To change your seat, just touch an available seat and it's yours. - Check-in your baggage
If you have baggage to check in, just hand it to the airline customer service officer at the adjacent baggage drop-off counter. - Collect your boarding pass instantly
Once you finish check-in, your boarding pass is activated on your handheld device.
Proceed to the gate to board the plane.
Appendix B: Financial Statements and Assumptions
Income Statement
| Income Statement ($) | 2001 | 2002 | 2003 | 2004 | 2005 |
| Net Revenues | 261,667 | 4,390,000 | 17,580,000 | 46,600,000 | 59,520,000 |
| Cost of Goods Sold | 661,952 | 2,722,307 | 10,731,951 | 27,720,420 | 34,780,484 |
| Gross Profit | -400,286 | 1,667,693 | 6,848,049 | 18,879,580 | 24,739,516 |
| Operating Expenses | |||||
| Sales and Marketing | 571,500 | 845,275 | 1,503,039 | 2,060,691 | 2,685,700 |
| Research and Development | 459,500 | 631,975 | 1,439,574 | 2,011,152 | 2,706,185 |
| General and Administration | 654,125 | 920,825 | 1,622,466 | 2,045,265 | 2,593,640 |
| Total Operating Expenses | 1,685,125 | 2,398,075 | 4,565,079 | 6,117,108 | 7,985,526 |
| Earnings from Operations | -2,085,411 | -730,382 | 2,282,970 | 12,762,472 | 16,753,991 |
| Taxes | - | - | - | 4,891,860 | -6,701,596 |
| Net Earnings | -2,085,411 | -730,382 | 2,282,970 | 7,870,612 | 10,052,394 |
Balance Sheet
| Balance Sheet ($) | 2001 | 2002 | 2003 | 2004 | 2005 |
| Assets | |||||
| Current Assets | |||||
| Cash | 243,608 | 3,226,150 | 1,589,349 | 1,028,933 | 7,058,870 |
| Accounts Receivable | 65,417 | 1,097,500 | 4,395,000 | 11,650,000 | 14,880,000 |
| Inventories | 26,167 | 439,000 | 1,758,000 | 4,660,000 | 5,952,000 |
| Other Current Assets | 39,250 | 658,500 | 2,637,000 | 6,990,000 | 8,928,000 |
| Total Current Assets | 374,442 | 5,421,150 | 10,379,349 | 24,328,933 | 36,818,870 |
| Net Fixed Assets | 97,714 | 228,857 | 455,429 | 760,857 | 1,165,714 |
| Total Assets | 472,156 | 5,650,007 | 10,834,777 | 25,089,790 | 37,984,584 |
| Liabilities and Shareholders' Equity | ||||||
| Current Liabilities | ||||||
| Accounts Payable and Accrued Expenses | 39,250 | 658,500 | 2,637,000 | 6,990,000 | 8,928,000 | |
| Other Current Liabilities | 18,317 | 307,300 | 1,230,600 | 3,262,000 | 4,166,400 | |
| Total Current Liabilities | 57,567 | 965,800 | 3,867,600 | 10,252,000 | 13,094,400 | |
| Stockholders' Equity | ||||||
| Preferred Stock | 2,500,000 | 7,500,000 | 7,500,000 | 7,500,000 | 7,500,000 | |
| Retained Earnings | -2,085,411 | -2,815,793 | -532,823 | 7,337,790 | 17,390,184 | |
| Total Equity | 414,589 | 4,684,207 | 6,967,177 | 14,837,790 | 24,890,184 | |
| Total Liabilities and Equity | 472,156 | 5,650,007 | 10,834,777 | 25,089,790 | 37,984,584 | |
| Cash Flow Statement ($) | 2001 | 2002 | 2003 | 2004 | 2005 |
Cash Flow Statement
| Operating Activities | |||||
| Net Earnings | -2,085,411 | -730,382 | 2,282,970 | 7,870,612 | 10,052,394 |
| Depreciation | 16,286 | 40,857 | 85,429 | 150,571 | 243,143 |
| Working Capital Changes | |||||
| (Increase)/Decrease Accounts Receivable | -65,417 | -1,032,083 | -3,297,500 | -7,255,000 | -3,230,000 |
| (Increase)/Decrease Inventories | -26,167 | -412,833 | -1,319,000 | -2,902,000 | -1,292,000 |
| (Increase)/Decrease Other Current Assets | -39,250 | -619,250 | -1,978,500 | -4,353,000 | -1,938,000 |
| Increase/(Decrease) Accounts Payable & Accrued Expenses | 39,250 | 619,250 | 1,978,500 | 4,353,000 | 1,938,000 |
| Increase/(Decrease) Other Current Liabilities | 18,317 | 288,983 | 923,300 | 2,031,400 | 904,400 |
| Net Cash Provided by Operating Activities | -2,142,392 | -1,845,458 | -1,324,801 | -104,416 | 6,677,937 |
| Investing Activities | |||||
| Plant and Equipment | -114,000 | -172,000 | -312,000 | -456,000 | -648,000 |
| Net Cash Used in Investing Activities | -114,000 | -172,000 | -312,000 | -456,000 | -648,000 |
| Financing Activities | |||||
| Increase/(Decrease) Preferred Stock | - | 5,000,000 | - | - | - |
| Net Cash Provided/(Used) by Financing | - | 5,000,000 | - | - | - |
| Increase/(Decrease) in Cash | -2,256,392 | 2,982,542 | -1,636,801 | -560,416 | 6,029,937 |
| Cash at Beginning of Year | 2,500,000 | 243,608 | 3,226,150 | 1,589,349 | 1,028,933 |
| Cash at End of Year | 243,608 | 3,226,150 | 1,589,349 | 1,028,933 | 7,058,870 |
This page left intentionally blank to accommodate tabular matter following.
Income Statement ($)
| Jan | Feb | Mar | Apr | May | |
| Net Revenues | - | - | - | - | - |
| Cost of Goods Sold | 7,107 | 7,107 | 7,107 | 7,107 | 7,107 |
| Gross Profit | -7,107 | -7,107 | -7,107 | -7,107 | -7,107 |
| Operating Expenses | |||||
| Sales and Marketing | 95,375 | 27,042 | 30,375 | 77,042 | 30,375 |
| Research and Development | 77,875 | 23,708 | 47,875 | 23,708 | 47,875 |
| General and Administration | 54,510 | 54,510 | 54,510 | 54,510 | 54,510 |
| Total Operating Expenses | 227,760 | 105,260 | 132,760 | 155,260 | 132,760 |
| Earnings from Operations | -234,868 | -112,368 | -139,868 | -162,368 | -139,868 |
| Taxes | - | - | - | - | - |
| Net Earnings | -234,868 | -112,368 | -139,868 | -162,368 | -139,868 |
Cash Flow Statement ($)
| Operating Activities | Jan | Feb | Mar | Apr | May | Jun |
| Net Earnings | -234,868 | -112,368 | -139,868 | -162,368 | -139,868 | -117,368 |
| Depreciation | 1,357 | 1,357 | 1,357 | 1,357 | 1,357 | 1,357 |
| Working Capital Changes | ||||||
| (Increase)/Decrease Accounts Receivable | - | - | - | - | - | - |
| (Increase)/Decrease Inventories | - | - | - | - | - | - |
| (Increase)/Decrease Other Current Assets | -3,271 | -3,271 | -3,271 | -3,271 | -3,271 | -3,271 |
| Increase/(Decrease) Accounts Payable and Accrued Expenses | 3,271 | 3,271 | 3,271 | 3,271 | 3,271 | 3,271 |
| Increase/(Decrease) Other Current Liabilities | 1,526 | 1,526 | 1,526 | 1,526 | 1,526 | 1,526 |
| Net Cash Provided by Operating Activities | -231,984 | -109,484 | -136,984 | -159,484 | -136,984 | -114,484 |
| Investing Activities | - | - | - | - | - | - |
| Plant and Equipment | -82,000 | -2,909 | -2,909 | -2,909 | -2,909 | -2,909 |
| Net Cash Used in Investing Activities | -82,000 | -2,909 | -2,909 | -2,909 | -2,909 | -2,909 |
| Financing Activities | - | - | - | - | - | - |
| Increase/(Decrease) Preferred Stock | - | - | - | - | - | - |
| Net Cash Provided/(Used) by Financing | - | - | - | - | - | - |
| Increase/(Decrease) in Cash | -313,984 | -112,393 | -139,893 | -162,393 | -139,893 | -117,393 |
| Cash at Beginning of Month | 2,500,000 | 2,186,016 | 2,073,623 | 1,933,730 | 1,771,337 | 1,631,443 |
| Cash at End of Month | 2,186,016 | 2,073,623 | 1,933,730 | 1,771,337 | 1,631,443 | 1,514,050 |
| Jun | Jul | Aug | Sep | Oct | Nov | Dec |
| - | - | - | 230,417 | 10,417 | 10,417 | 10,417 |
| 7,107 | 7,107 | 7,107 | 196,274 | 136,274 | 136,274 | 136,274 |
| -7,107 | -7,107 | -7,107 | 34,143 | -125,857 | -125,857 | -125,857 |
| 32,042 | 80,375 | 27,042 | 32,375 | 77,042 | 35,375 | 27,042 |
| 23,708 | 47,875 | 23,708 | 47,875 | 23,708 | 47,875 | 23,708 |
| 54,510 | 54,510 | 54,510 | 54,510 | 54,510 | 54,510 | 54,510 |
| 110,260 | 182,760 | 105,260 | 134,760 | 155,260 | 137,760 | 105,260 |
| -117,368 | -189,868 | -112,368 | -100,618 | -281,118 | -263,618 | -231,118 |
| - | - | - | - | - | - | - |
| -117,368 | -189,868 | -112,368 | -100,618 | -281,118 | -263,618 | -231,118 |
| Jul | Aug | Sep | Oct | Nov | Dec |
| -189,868 | -112,368 | -100,618 | -281,118 | -263,618 | -231,118 |
| 1,357 | 1,357 | 1,357 | 1,357 | 1,357 | 1,357 |
| - | - | -57,604 | -2,604 | -2,604 | -2,604 |
| -4,361 | -4,361 | -4,361 | -4,361 | -4,361 | -4,361 |
| -3,271 | -3,271 | -3,271 | -3,271 | -3,271 | -3,271 |
| 3,271 | 3,271 | 3,271 | 3,271 | 3,271 | 3,271 |
| 1,526 | 1,526 | 1,526 | 1,526 | 1,526 | 1,526 |
| -191,345 | -113,845 | -159,699 | -285,199 | -267,699 | -235,199 |
| - | - | - | - | - | - |
| -2,909 | -2,909 | -2,909 | -2,909 | -2,909 | -2,909 |
| -2,909 | -2,909 | -2,909 | -2,909 | -2,909 | -2,909 |
| - | - | - | - | - | - |
| - | - | - | - | - | - |
| - | - | - | - | - | - |
| -194,254 | -116,754 | -162,608 | -288,108 | -270,608 | -238,108 |
| 1,514,050 | 1,319,796 | 1,203,042 | 1,040,434 | 752,325 | 481,717 |
| 1,319,796 | 1,203,042 | 1,040,434 | 752,325 | 481,717 | 243,608 |
Financial Assumptions
Revenue
Revenue projections assume that the first airline contract will include the sale of 50 access points. This number will increase to 100 access points per airline in 2002, 200 access points per airline in 2003, and 400 access points per airline in 2004 and 2005. The number of access points steadily increases as our clients move from using our service in European airports to both European and North American airports. The number of access points per airline is based on the average number of gates and major airports served by several of our target airline customers. A breakdown of our revenue projections can be seen below:
| Revenue | 2001 | 2002 | 2003 | 2004 | 2005 |
| Revenue from sale of access point | 100,000 | 400,000 | 1,600,000 | 4,000,000 | 4,800,000 |
| Revenue from system integration | 120,000 | 240,000 | 480,000 | 600,000 | 720,000 |
| Revenue from installation | 0 | 3,000,000 | 12,000,000 | 30,000,000 | 36,000,000 |
| Revenue from hardware support | 16,667 | 300,000 | 1,400,000 | 4,800,000 | 7,200,000 |
| Revenue from software license | 25,000 | 450,000 | 2,100,000 | 7,200,000 | 10,800,000 |
| Total | 261,667 | 4,390,000 | 17,580,000 | 46,600,000 | 59,520,000 |
2001 revenue projections assume that we will not be receiving revenue from the installation of the 50 access points for our first client. SpongeShark will be funding this initial installation to lower the financial barriers for an airline testing our service. In addition, we will only be receiving revenue from the hardware support and software license contracts for four months since we will be acquiring this customer at the beginning of Q4. Our pricing structure can be found in the Marketing Plan.
Cost of Goods Sold
The cost of system integration and the software license contracts is assumed to include the salaries of the software engineers working on these projects. We are assuming that the cost per access point will be $1,200, which includes the cost of one server for every fifty access points. The cost of installation will average $10,000 per access point based on the assumption of approximately $200 per hour labor charge and 50 hours of labor. The cost of hardware support is $1,000 per access point based on a $100 per hour labor charge and 10 hours of labor.
Operating Expenses
Sales and marketing expenses can be seen in the chart below:
| Sales and Marketing | 2001 | 2002 | 2003 | 2004 | 2005 |
| Commissions | 2,000 | 8,000 | 32,000 | 80,000 | 96,000 |
| Travel and Entertainment | 20,000 | 40,000 | 80,000 | 100,000 | 120,000 |
| Advertising and Promotion | 40,000 | 80,000 | 160,000 | 200,000 | 240,000 |
| Exhibitions | 200,000 | 250,000 | 312,500 | 390,625 | 488,281 |
| Brochures and Literature | 20,000 | 40,000 | 80,000 | 100,000 | 120,000 |
| Market research | 15,000 | 15,000 | 15,000 | 15,000 | 15,000 |
| Recruiting and Relocation | 10,000 | 0 | 10,000 | 0 | 0 |
| Total | 307,000 | 433,000 | 689,500 | 885,625 | 1,079,281 |
Commissions are assumed to be 2 percent of the sale of access points. Travel and entertainment expenses are $20,000 per new airline client. Advertising and promotion expenses are $40,000 per new airline client. Exhibition and trade show expenses are $200,000 in 2001 and grow at 25 percent per year. Brochures and literature are $20,000 per new airline client. Recruiting and relocation includes $10,000 per relocated executive employee.
Sales and marketing salaries, benefits, and headcount for this department can be seen below:
| Sales and Marketing | |||||
| Salaries | 2001 | 2002 | 2003 | 2004 | 2005 |
| Total Salaries | 230,000 | 358,500 | 707,425 | 1,021,796 | 1,396,886 |
| Benefits (15% of salary) | 34,500 | 53,775 | 106,114 | 153,269 | 209,533 |
| Headcount | 3 | 5 | 10 | 15 | 21 |
Research and development expenses can be seen in the chart below:
| Research and Development | 2001 | 2002 | 2003 | 2004 | 2005 |
| Relocation and recruitment | 30,000 | 10,000 | 20,000 | 10,000 | 10,000 |
| Travel and Entertainment | 20,000 | 30,000 | 45,000 | 67,500 | 101,250 |
| Other Expenses | 145,000 | 222,250 | 503,363 | 698,031 | 924,932 |
| Total | 195,000 | 262,250 | 568,363 | 775,531 | 1,036,182 |
Relocation and recruitment includes $10,000 per relocated executive employee. Travel and entertainment is assumed to be $20,000 in 2001 with a 50 percent annual growth. Other expenses were assumed to be 50 percent of the research and development salary budget.
Research and Development salaries, benefits, and headcount for this department can be seen below. These totals include the salaries of the software engineers that are figured as cost of goods sold.
| Research and Development Salaries | 2001 | 2002 | 2003 | 2004 | 2005 |
| Total Salaries | 290,000 | 444,500 | 1,006,725 | 1,396,061 | 1,849,864 |
| Benefits (15% of salary) | 43,500 | 66,675 | 151,009 | 209,409 | 277,480 |
| Headcount | 4 | 7 | 15 | 22 | 29 |
General and administrative expenses can be seen in the chart below:
| General and Administrative | 2001 | 2002 | 2003 | 2004 | 2005 |
| Rent and Utilities | 100,000 | 125,000 | 500,000 | 625,000 | 781,250 |
| Legal and Accounting | 50,000 | 75,000 | 112,500 | 168,750 | 253,125 |
| Telephone, Fax, Networking (total) | 15,000 | 22,500 | 33,750 | 50,625 | 75,938 |
| Travel and Entertainment | 50,000 | 75,000 | 112,500 | 168,750 | 253,125 |
| Insurance | 50,000 | 75,000 | 112,500 | 168,750 | 253,125 |
| Supplies and Postage | 1,000 | 1,500 | 2,250 | 3,375 | 5,063 |
| Total | 266,000 | 374,000 | 873,500 | 1,185,250 | 1,621,625 |
The increase in rent and utilities in 2003 is based on the assumption that SpongeShark will move into a larger facility in this year. All other general administrative expenses grow at an annual rate of 50 percent.
General and administrative salaries, benefits, and headcount for this department can be seen below:
| General and Administrative Salaries | 2001 | 2002 | 2003 | 2004 | 2005 |
| Total | 337,500 | 475,500 | 651,275 | 747,839 | 845,231 |
| Benefits (15% of salary) | 50,625 | 71,325 | 97,691 | 112,176 | 126,785 |
| Headcount | 6 | 7 | 9 | 10 | 11 |
Balance Sheet
Balance sheet assumptions were based on an analysis of comparable companies and industry data from the computer-related services and wireless communication industries. SpongeShark's cash account is inflated in 2005 because we intend to use this cash to fund development and deployment of our service in other areas of the travel ribbon. In addition, our accounts receivables are above average based on the assumption that our installations will take roughly three months to complete at which time we will receive payment from our clients. Also, our inventory requirements are above average as we will require an inventory of access points to satisfy our customer's expansion plans and to realize economies of scale when purchasing the access points from outside vendors. The balance sheet accounts as a percent of revenues can be seen in the chart below:
| SpongeShark | Industry | |
| Accounts Receivable | 25.00% | 17.90% |
| Inventory | 10.00% | 1.00% |
| Other Current Assets | 15.00% | 14.00% |
| Accounts Payable and Accrued Expenses | 15.00% | 16.30% |
| Other Current Liabilities | 7.00% | 6.90% |
Property, plant, and equipment assumptions can be seen below:
| Plant Assumptions | 2001 | 2002 | 2003 | 2004 | 2005 |
| RedM server | $3,200 | ||||
| Bluetooth development kit | 2,000 | ||||
| Bluetooth analyzer software | 500 | ||||
| Bluetooth PCMCIA card | 500 | ||||
| Bluetooth phone | 200 | ||||
| Other | 3,600 | ||||
| Development equipment | 10,000 | 20,000 | 40,000 | 80,000 | 160,000 |
| Office equipment, computers, and software | 104,000 | 152,000 | 272,000 | 376,000 | 488,000 |
| Total | $114,000 | $172,000 | $312,000 | $456,000 | $648,000 |
| Depreciation Rate: Years | 7 | 7 | 7 | 7 | 7 |
Development equipment requirements will grow 100 percent per year from the initial amount of $10,000. Office equipment, computers, and software are assumed to be $8,000 per person.
Ratio Analysis
A summary of the key financial ratios and profitability and return percentages can be seen below. The industry numbers are constructed from a compilation of ratios from comparable companies and industry averages from the computer-related services (SIC 7379) and the communication services (SIC 4899) industries.
| Ratios | 2001 | 2002 | 2003 | 2004 | 2005 | Industry |
| Current ratio | 6.5 | 5.61 | 2.68 | 2.37 | 2.81 | 1.31 |
| Debt to Capital | 0 | 0 | 0 | 0 | 0 | 0.41 |
| Profitability | ||||||
| Gross Profit % | 37.99% | 38.95% | 40.51% | 41.57% | 45.76% | |
| Net Earnings % | 12.99% | 16.89% | 16.89% | 14.62% | ||
| Returns | ||||||
| Return on Assets | 21.07% | 31.37% | 26.46% | 16.47% | ||
| Return on Equity | 32.77% | 53.04% | 40.39% | 44.60% |
Our current ratio is larger than the industry average because we are anticipating above average accounts receivables. This is a result of the assumption that our installation process will take approximately three months at which time we will receive payment from our airline client. SpongeShark expects to have an all equity capital structure throughout the five-year period.
SpongeShark's return on assets is above the industry average based on the assumption that we will be outsourcing the manufacturing aspects of the business and will not be an asset intensive company. The average gross profit, net earnings, and return on equity for 2003 through 2005 is near the industry average for each figure.
Valuation Calculation
The assumptions and calculations utilized to determine the returns to the investor and capitalization structure can be seen below:
| Assumptions | ||
| Months until exit | 60 | |
| Forecast annualized earnings at exit | $10,052,394 | |
| P/E ratio at exit | 20 | |
| Valuation at exit | $201,047,886 | |
| Investment Round | First | Second |
| Month of Investment | 0 | 12 |
| Investor required IRR | 80% | 70% |
| Amount of Investment | $2,500,000 | $5,000,000 |
| Required Monthly IRR | 6.67% | 5.83% |
| Duration of Investment | 60 | 48 |
| Returns | First | Second |
| Required FV for Investor at exit | $47,239,200 | $41,760,500 |
| Individual Investor's Share | 23.50% | 20.80% |
| Individual Investor's ROI | 1890% | 835% |
| Individual Investor's IRR | 80% | 70% |
| Capitalization Table | ||
| Investors' Share | 44.30% | |
| Founders' Share | 55.70% |
Appendix C: Detailed Description of Product and Service
Handset Technology
Mobile phones and PDAs do have limitations. Wireless Internet currently receives negative reviews due to the difficulty in typing words. To type, mobile phones force a user to use the number pad, which often means pressing multiple buttons just to type a single letter. Prototype phones have attempted to eliminate this problem by including a keyboard, but the small buttons are often difficult to use. Understanding this limitation, SpongeShark will offer an easy to use menu-like interface to reduce the amount of keystrokes necessary for an end-user.
Menu and icon driven pages will be the most effective on mobile phone displays. The resolution of the screens will allow for creativity similar to current web design, which is also designed for point-and-click navigation. As a result, airlines have the ability to use their preexisting e-commerce site templates. Not only can this expedite integration, but it can work in tangent with the airline's e-commerce site to build brand recognition for their online services.
Legacy Integration
Converting the travel information into the appropriate format for this new service will require a "transcoding" process which involves filtering and adapting content developed in standard markup languages (which enable browser applications to interpret and display data) to be better suited to end-user devices.
SpongeShark will write a JAVA application to translate the airline's travel-related information into the Wireless Markup Language (WML): a format that can be presented on Wireless Application Protocol (WAP) enabled devices. The resulting WML content will then pass through our wireless access points via Bluetooth to phones and PDA's supporting WAP. The WAP browser has become the standard for mobile Internet use and therefore will not require any pre-installation or purchase by the passenger.
Following is a graphical representation of how SpongeShark's software application translates data into a presentable form for the passenger:
CRS Database SpongeShark GUI Bluetooth (Sabre, Oracle, etc.) (JAVA, WML, WAP) PDA, Phone, Notebook
Authentication
To ensure a user's identity, SpongeShark plans to provide a two-level security system. Currently, self-serve kiosks ask for a credit card swipe of the credit card used to make the initial ticket purchase. This is an example of single level security. Every mobile phone and PDA, regardless of manufacturer, carries a unique identification string. SpongeShark will associate this ID with the user for a primary security. Additionally, SpongeShark will ask each user to create a unique username and password for login purposes. An airline using SpongeShark as part of their customer loyalty program could have the username be the frequent flyer membership number of that passenger. Future options in security include biometrics such as voice recognition or digital signatures.
