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Application Technologies Inc.
Executive Summary

Application Technologies, a California C-corporation founded in January 1999, specializes in the development of unique packaging delivery systems. The company owns a unique patent pending unit dose applicator technology called the Appli-K pouch, and plans to operate primarily by licensing the design, tooling, and production processes in medical categories while serving as a private label manufacturer in categories where the contents of the pouch is a commodity (i.e. alcohol swabs).

The Product

The Appli-K pouch can range in size from something similar to the pouches of antibiotic ointment that you might expect to find in a travel size first aid kit to something as large as a sandwich bag that might be used to dispense and apply car wax. The product's unique advantage is that it serves not only as a unit dose container, but also as a dispenser and applicator. When the end of the pouch is opened two wings are exposed the inner linings of which can be used to apply the contents of the pouch to a given surface. A tremendous benefit is the ability to apply the contents in a single step directly from the pouch without contaminating either the surface being treated or the hands of there person holding the pouch. Such a capability is extremely valuable for medical applications such as the treatment of burns, wounds and skin infections,

Opportunity and Strategy

The overall market for flexible packaging and primary containers is $51 billion. Packaging in consumer products such as Coke accounts for 48% of the product cost. The company's own primary research consisting of focus groups and expert interviews shows that there is good consumer understanding of the product's key benefits and that there is a willingness to pay as much a 38% premium for the value it provides.

Although many applications for its technologies exist, the company's initial plans focus on the personal skin care and high sterility health care markets where its unique technology provides the greatest added value. Specific initial target markets include prescription and over-the-counter acne treatment, vitamin-based skin care, pharmaceutical topical drugs, alcohol swabs and surgical cleansers, burn and wound treatments, and exfoliating scrubs.

Competition

A competing technology to the Appli-K pouch is the R.P. Sherer Gel Cap. Sales of products in the Gel Cap totaled over $620 million in 1998. Yet the Appli-K pouch offers several benefits over Gel Cap technology. The Gel Cap requires that you use your fingers or a swab to apply its contents. The Appli-K pouch can be manufactured with dual chambers with contents that are only mixed at the time of application ensuring maximum freshness. The pouch can easily be made opaque for storing light sensitive materials such as RetinolTm. The pouch is flat so that it can easily be printed with advertising, instructions, or bar codes, or inserted as a promotional sample in mailings or magazines.

Management Team

The management team provides over 50 years of new product development, marketing, and management experience:

Progress to Date

In January 1999 the firm raised $230,000 to cover start-up costs through the development production prototypes. In April another $225,000 was raised to allow the management to come on board full time. Patent searches have been performed and a patent application with over 26 claims (for applications ranging from shoe polish to hospital environments) has been filed and should issue in the next few months. Since January 1999 4 additional patents for packaging products completely different from the Appli-K pouch have also been filed. Design and manufacturing partners have been secured including Product Solutions, Inc. (tooling specifications), South Asia Inc. (tool development) and Allied Mold (filling and production).

Financial Projections

Operations commence in June 1999 with the goal of securing a total of $375,000 in down payments in licensing agreements across three initial product categories by the end of 1999. Most of year 2000 involves product and manufacturing development. Initial volume production for most lines begins between Q3 2000 and Q1 2002. Self-sustaining operation with positive cash flow should occur in Q4 2000. In 2003 the company expects to generate sales of about $36.6 million, profits of $11.6 million and have $20.8 million in cash on hand.

$ in thousands

1999 2000 2001 2002 2003

Sales

375 3,184 15,287 26,264 36,553

Variable Costs

64 541 2,332 3,935 5,592

Gross Margin

251 2,154 11,565 20,213 27,998

Fixed Costs

777 2,087 4,298 6,470 8,643

Net Income

(526) 40 4,360 8,245 11,613

ROE

- - 164% 311% 437%
Table 1 - Financial Highlights

The plan and financials shown reflect only the initial round of products introduced in a focused set of core markets during the first two years of operation. Substantial opportunity exists to introduce additional products in the following years. Management's experience indicates that during the years shown only the early adopter markets will have been penetrated and that mass consumer adoption of products utilizing the Appli-K technology will occur in the fifth or sixth year after they are introduced.

The company is offering a 40% equity position for a $2.2 million investment to cover the costs of tooling, marketing, and operations into volume production. Based on a price/earnings ratio of 10 (industry range: 11 to 40), the initial investment will be worth approximately $46.5 million in 2003. The five-year internal rate of return is 84% with a net present value of $18.2 million, assuming a 15% risk adjusted discount rate. Possible exit strategies for the investor include a leveraged buyout by management, the sale of technology rights for certain non-core markets, the sale of the entire company to a major consumer or medical packaging firm, or taking the company public.


Application Technologies Inc.
Table of ContentsAppendices
1. Executive Summary
2. Business Description
3. Management Team
4. Market Analysis
5. Marketing Strategy
6. Operations Strategy
7. Critical Risks
8. Deal Structure
Notes on Financials
Financials
All information herein is confidential and belongs to Application Technologies Inc.