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Mindshaker – Financials

Financial Overview
Based on this business plan, management anticipates sales of $2.2 million to $22.0 million from 1999 – 2003. EBITDA in the year 2003 is expected to reach $3.2 million. The table below illustrates management estimates of the Company’s performance from 1999 – 2003.

1999 2000 2001 2002 2003
Net Revenues 2,164,837 10,173,327 14,586,852 18,293,956 22,001,060
% Growth 369.9% 43.4% 25.4% 20.3%
Gross Profit 93,302 1,726,134 3,350,396 4,439,720 5,543,547
As a % of Net Revenues 4.3% 17.0% 23.0% 24.3% 25.2%
EBITDA (228,416) 513,967 1,734,754 2,436,794 3,164,538
As a % of Net Revenues -10.6% 5.1% 11.9% 13.3% 14.4%
Net Income (229,583) 251,582 908,586 1,347,443 1,838,303
As a % of Net Revenues -10.6% 2.5% 6.2% 7.4% 8.4%

The Company will begin operations by targeting the 20 graduate and professional schools. Management plans to add 55 schools in the year 2000 and 25 schools annually over the next three years. By the year 2003, management expects to have an established presence in 150 colleges and universities throughout the country. In order to avoid overextending the business and achieving the best “bang for our buck”, we have limited the number of schools added in 2001-2003. Management believes that if we remain focused on 150 schools we can capture a greater share of the market. Other schools will be added earlier if the business can support further expansion.

Market penetration rates are based on the assumption that the Company can capture five percent of its target market in the first year. Over the next four years, market penetration rates are estimated to be twelve percent and ten percent in existing schools and new schools, respectively.

Because of the nature of the business, expenses are driven by transaction costs as opposed to volume. The chart below depicts cost of goods sold in terms of product acquisition, distribution, and technology expenses.

1999 2000 2001 2002 2003
Product Expense 1,696,114 8,024,443 10,653,464 13,136,792 15,612,693
Distribution Expense 75,154 365,950 526,192 660,644 788,021
Technology Expense 300,267 56,800 56,800 56,800 56,800
Total COGS 2,071,535 8,447,193 11,236,456 13,854,236 16,457,514

Product expense is comprised of the direct cost of textbooks and study aids, as well as procurement costs required to deliver the products to Mindshaker’s warehouse. Gross margin improvement from 1999 to 2000 will result from a full year of operations, improved inventory management, and the elimination of one-time start-up costs. The gross margin increase from 17.0 percent in 2000 to 25.2 percent in 2003 is due to improvement in inventory management through a reduction in safety stock from 20 percent over anticipated market share in 1999 to two percent over anticipated market share in 2003.

EBITDA margins are forecast to improve due to the increase in gross margins and the constant level of operating expenses from 1999 – 2003. The major component of operating expenses is related to product sales and includes commission compensation for the on-campus and regional representatives. Advertising expenses are included in product selling expenses. The chart below provides a break down of operating expenses from 1999 – 2003.

1999 2000 2001 2002 2003
Selling 227,979 996,691 1,391,467 1,770,050 2,1318,633
General 69,417 169,100 177,800 186,500 194,000
Administrative 25,490 49,176 49,176 49,176 49,176
Total Operating Exp. 322,885 1,214,967 1,618,443 2,005,726 2,381,809

The electronic commerce aspect of the business translates to minimal capital expenditure requirements for Mindshaker. Management expects to lease warehouse space as well as office space. Technical equipment on hand will be sufficient to support Mindshaker through the start-up phase.

Use of Funds
Management intends to support the business launch with an aggregate investment from the four owners of $20,000. Presently, management is seeking $500,000 in venture capital investment to fund the start-up costs and working capital needed to begin operations. This investment represents the first round of venture capital funding management intends to seek. During the second year, management anticipates adding a line of credit to the capital structure secured by the company’s receivables and inventory. Management is likely to seek additional funding over the next several years, but has decided to wait until the need arises rather than hold the money on Mindshaker’s balance sheet. Based on a valuation after five years assuming the initial investment grows at a 50 percent hurdle rate, investors can expect to own approximately 23 percent of Mindshaker with management owning the remaining portion, This translates to an internal rate of return on invested capital of 66 percent. Please see Exhibit 6 for a valuation analysis supporting these figures.

Management estimates the current market value of equity for Mindshaker to be approximately $18.5 million. This valuation is based on applying a conservative multiple of six times to EBITDA in 2003. In determining the valuation, management utilized several methodologies and performed sensitivity analyses to arrive at a reasonable valuation for the company. Please see Exhibit 6 for more information on the valuation and investor ownership.

Exit Strategies
Management anticipates two possible exit strategies for the owners of Mindshaker. Management feels that the most realistic option is to sell out to a competitor in educational services or alternative e-commerce business (e.g. or Barnes & Noble) after Mindshaker expands nationally. Alternatively, management and investors may choose to take advantage of the IPO market and take the company public after five years. This strategy remains a possibility due to the current wave of Internet IPOs. However, it appears unlikely Mindshaker will have realized enough growth to achieve a size suitable for accessing public markets. This scenario depends on market factors.

Table of Contents Appendices
1. Executive Summary
2. Market Analysis
3. Company Description
4. Marketing & Sales
5. Products & Services
6. Operations
7. Management
8. Financials
Initial Programs
Industry Analysis
Management Biographies
Board CV Summaries
Valuation Analysis
Balance Sheets
Income Statements
Competitor Analysis
All information herein is confidential and belongs to Mindshaker

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