Financial Plan Zif Medical Devices

Zif Medical Devices
Financial Plan

Capital Investment Strategy
Commercial option #1 (License) will require an initial capital investment of $400,000 for patent protection, FDA approval, field testing, prototype development, and promotion. See page 26 for an itemized budget listing.

Commercial option #2 (Manufacture) will require an initial capital investment of $400,000 for promotion, prototype development, and field testing, and an additional $1.47 million for the implementation of the first production line. The Option #2 capital summary¹³ (in thousands of dollars) is as follows:

			Year
	Cost	Life-Yrs¹⁴	1	2	3	4	5
No. of Production Lines			0	1	1	2	2
Proprietary Groundwork:
Prototype Molds (2)	120	0	120			120
Patent Costs	10	10	10
FDA Application	10	0	10			10
Field Tests	10	0	10			10
Molds:
48 Cavity Barrel Mold	200	10		200		200
48 Cavity Plunger Mold	180	10		180		180
48 Cavity Sheath Mold	200	10		200		200
Assembly:
Spring Windings	250	10		250		250
Special Assembly Equip.	n/a	10		255		255
Office Equipment	n/a	4		15		5
Total Capital			150	1,100	0	1,230	0

All capital expenditures beyond the first two years will be financed through retained earnings. Zif plans to grow through the investment of retained earnings, thus no dividends are expected to be paid out in the first six years of operations. A friendly acquisition or an initial public offering will be made by year six to allow initial investors to divest from Zif.

In general, Zif will invest very conservatively to minimize risk and so as not to outgrow its resources or capacity to expand. Based on investor opinions, company resources, and realized profits, Zif may grow faster than outlined below through the acquisition of debt beyond the 10% debt to equity established in this plan.

Equity Offering

	Equity Investment	Equity Share
Option #1 (License)	$400,000	20%
Option #2 (Manufacture)	$1,870,000	30%

Financial Analysis
Option #1 - License
Cash flow statements (page 23) show that Zif will have positive cash beginning in year 2. Income statements (page 23) show profit growth from $27,000 in year two, to $4.8 million in year 6. Balance sheets (page 23) show a strong return on equity, and no debt will be incurred with this option.

	Optimistic	Most Likely	Pessimistic
Product Price ($)	0.18	0.16	0.14
NPV (mil $)¹⁵	1.7	1.3	0.94
IRR	152%	135%	115%
ROE (5 yr avg.)	72%	71%	60%
Return on Initial Investment¹⁶	198%	191%	182%
5 Year Multiple of 20% Equity	61	49	37

Option #2- Manufacture
Cash flow statements (page 25) show that Zif will create positive cash flows within two years of operation. Income statements (page 25) show geometric profit growth from $(7,000) in year two, to $9.3 million in year 6. Balance sheets (page 24) show strong return on equity, and no debt will be incurred.

	Optimistic	Most Likely	Pessimistic
Product Price ($)	0.18	0.16	0.14
Contracted Cost per unit ($)¹⁷	.067	.072	.08
Dist. Mark-up (% Sales)	15%	20%	25%
NPV (mil $)¹⁸	6.1	4.4	2.3
IRR	92%	84%	71%
ROE (5 yr avg.)	38%	33%	23%
Debt/Equity (year 6)	0%	0%	0%
Return on Initial Investment¹⁹	186%	176%	160%
5 Year Multiple of 30% Equity	41	30	17

Based on the scenarios above, all cases provide excellent financial results with minimal leverage.

Risks
The risks associated with this plan are as follows:

Design Problems (5%) This will be minimized through extensive prototyping and field testing.
Patent Infringement / Litigation (15)% Several firms have patented safety syringe ideas, but none are identical or very close to the Zif design. Litigation based on prior art may cost the firm in terms of a licensing fee settlement which would hurt profitability, but most likely allow the firm remain profitable. Additionally, frivolous litigation may be initiated by a competitor as a means of predatory action. The cost of this litigation is unknown.
Manufacturing Failure (5%) Proven technology will be used to manufacture this product. The major risk involved here is in the combination of these technologies feeding one directly into the other without buffer zones. This may pose initial startup difficulties as machine outputs may suffer.
Poor Market Reaction (5%) Zif must market itself effectively and provide a sense of product quality, security and reliability. If the market is negatively effected by competitive "propaganda" or initial quality problems, Zif could quickly lose hold in the marketplace. This is a small risk because the large pent-up demand for safe syringes will encourage users to try new brands. Additionally, Zif will focus on initial and ongoing product quality as a way of doing business to ensured its products meet the strictest user requirements.
FDA Rejection (5%) Due to the safe nature of this product, tremendous market demand, existing manufacturing technology, and soon to be established field results, this risk is small.

Overall, the combined risk assessment is 35%. This risk can have an impact on the initial profitability, however, these setbacks, if realized, are expected to be minimized and eventually eliminated within the first five years of operation.

13 Does not include marketing expenses and salaries
14 See page 26 for Depreciation schedule
15 Calculated with a discount rate of 50%.
16 Compounded annual return of 20% equity stake. Based on industry average P/E Multiple of 20.
17 Variation based upon negotiated contract.
18 Calculated with a discount rate of 30%.
19 Compounded annual return of 30% equity stake. Based on industry average P/E Multiple of 20.

Detailed Financial Statements

Zif Medical Devices
Table of Contents	Appendices
0. Executive Summary 1. Product Design 2. Market Analysis 3. Commercial Options 4. Marketing Strategy 5. Manufacturing Plan 6. Organization 7. Corporate Vision, Mission 8. Financial Plan	Depreciation Schedule S&A Budgets Sales Forecast Focus Group Summaries Testimony Management Resumes Patent Attorney's Opinion FDA Consultant's Option
© 1996 Zif Medical Devices. All rights reserved.