CASE—FIBERCOM APPLICATIONS, INC.

CASE—FIBERCOM APPLICATIONS, INC.
Preparation Questions
1. Evaluate the business opportunity, the business plan, and the start up strategy. How would you improve the business plan?
2. What should Smith and McCormack do now?
3. What fund raising strategy and sources of financing should they consider and not consider? Why?
4. As a private investor, what valuation would you accept, and what would your position be in negotiating with Fibercom? As a venture capitalist?
FIBERCOM APPLICATIONS, INC.
In late January 1985, Gary Smith contacted his former professor to seek some advice on his and his partners' efforts to launch a company in the rapidly emerging fiber optics industry. After catching up on the prior 10 years, Smith summarized their situation:
"My partner, Tom McCormack, and I had worked together at BIW Cable for several years, and had often talked about the idea of starting our own company. After BIW went public in 1983 the place seemed to slide into a fat 'n'hapw approach to the business. It was difficult to get top management interested in some niches in the market that Tom and I believed existed.
So last spring, we decided to put a business plan together, raise $750,000, and do it. Tom actually resigned in May of 1984 and began concentrating on this full time. The plan was for me to stay on until we raised the money. Tom, myself, and four other partners put up about $100,000 of seed money to enable us to raise the rest."
"When will you run out of cash?" the professor queried. After a considerable silence, and some modest clearing of the throat, Smith reckoned, with his eyes now glued to an apparent object on the floor, "We are about out now." He continued to explain that no other money was in sight, because
Raising money has turned out to be more challenging than we had anticipated. We have sent the business plan to 35 venture capital firms in the Boston area, as well to 30 New York venture capital firms. Not one of these 65 firms has shown any interest—which has been shocking to me. Why is it so difficult? What do you suggest that we do at this point?
"If I had a look at your business plan, I might have an idea or two," responded the professor. Smith reached into his pocket and handed the professor the latest version of the
23 Fuld, Competitor Intelligence, pp. 369~18.



110 The Opportunity / I
business plan, conspicuously dated January 1985. Attached is a copy of Fibercom Ap¬plications, Inc., business plan.
Fibercom Applications, Inc., Business Plan, January, 1985
Company
Fibercom Applications, Inc.
1625 Aero Drive
Raleigh, NC 27623
919 555 8200
Contact
Mr. Thomas J. McCormack, President
Business
Fibercom Applications was formed in May 1984 to manufacture fiber optic cables and cable assemblies for the data communication, process control, and other specialty markets.
Sales are forecast to grow to $50,000,000 within five years.
Manufacturing fiber optic cables requires special equipment and highly skilled, com¬petent, and experienced design, production, and management personnel. Fibercom Appli¬cations has proprietary knowledge of the design, manufacture, and marketing of fiber optic cables.
The company will make use of unique materials to custom design fiber optic cables for use by specific market segments. By choosing these segments, the management's experience is that the company can sell its products at higher margins than those available in other parts of the fiber optic cable market.
Only a small number of competitors are serving the company's target industries. The company will compete with these firms by offering a variety of cable types and by possessing an in depth knowledge of its customers' requirements. Because of the experience and specialized skills necessary to produce fiber optic cables it is difficult for other companies to readily enter the fiber optic cable business.
Selected Financial Data Dollars are in thousands:
Year 1 2 3 4 5
Sales 1,750 3,500 10,000 25,000 5O,OOO
Earnings ( 25) 244 1,017 3,507 7.394
Management
The company has three key managers. Together, they sold and produced more than $2,000,000 of specialty fiber optic cable in 1983, representing about 10 percent of the available market in that year. The management is exceptionally experienced in manufac¬turing specialty fiber optic cables.
Thomas J. McCormack, founder and president, has more than six years experience in specialty cable manufacturing, including four years in fiber optics. He has been general manager of the Fiber Optics Division of BIW Cable Systems, a specialty cable manufacturer, where he started their fiber optic efforts. He has sold to, and produced cable for, all of the company's targeted markets.



3 / Opportunity Recognition 111
Gary A. Smith, vice president of sales and marketing, has more than four years experience in the sales and marketing of specialty cables, including fiber optic cable. He has sold to all of the company's targeted markets. In 1983, at BIW Cable Systems, he was the top ranked sales manager in the country, increasing his territory's sales by 21 percent, to $7.1 million.
Clint M. Owens, vice president of engineering, has 20 years experience with wire and cable, including 6 years with fiber optics. He started the fiber optics group at Brand Rex Company, and directed the growth of his division to more than $2,000,000 in 1984. He has extensive experience in selling to, and producing fiber optic cables for, the company's targeted markets.
Funds Required
Fibercom Applications requires $750,000 of additional funding to begin operations. The company proposes to issue 300,000 shares of common stock, representing 10.7 percent ownership, for this funding. Alternate structuring will be considered.
Use of Funds The funds will be used as follows:
Capital equipment Working capital
$53O,OOO
220,000
Business Plan—Table of Contents
Title
Summary................................................................................................................................... Financing Requirements......................................................................................................... Business ... Market Size and Competition Sales Projections.....................
Section
.. 3




Years 1 5 Operations..............
Risk Factors..............................
Appendix A: Financial Projections...................
Appendix B: Management Resumes...................
1. Summary

10 11
Fibercom Applications (the "company") will design, manufacture, and market fiber optic cables and cable assemblies. Fiber optic cables use hair thin flexible glass fibers to transmit information as light pulses or as a modulated beam of light. Fiber optic cable assemblies have fiber optic connectors attached to the ends of the cable.
The company will serve selected segments of the rapidly growing fiber optic market. The company's targeted market segments are the computer interconnection/local area network and process control areas. These emerging market niches are not being adequately served by current suppliers and provide the best opportunities for highly profitable sales of the company's unique and proprietary cables.



112 The Opportunity I I
Manufacturing fiber optic cables requires special equipment, along with highly skilled, competent, and experienced design, manufacturing, and management personnel. Fibercom Applications has extensive experience in and possesses proprietary knowledge of the design, manufacture, and marketing of fiber optic cables.
Fibercom Applications will manufacture fiber optic cables for specialty applications. By providing custom engineered products, Fibercom Applications will be recognized as the technical expert in each market. Through its technical superiority, the company will be better able to anticipate market needs, to identify potential market niches, and to sell at premium margins.
The management of the company is exceptionally experienced in providing fiber optic cables to these markets. The company's three key employees have combined experience of more than 15 years in the design, manufacture, marketing, and selling of fiber optic cables to the target markets. Two of the key employees have previous experience in starting up a specialty fiber optic cable manufacturing operation. In 1983, the three key employees sold more than $2,000,000 of specialty fiber optic cables, representing about 10 percent of the available market.
The company will have a limited number of competitors in its target industries (see "Market Size and Competition," Section 4). Some of these competitors are larger than the company and have access to more financial resources than the company. Others, while having current sales in excess of the company's, do not possess the technical and marketing skills of Fibercom Applications. Because manufacturing fiber optic cables requires special equip¬pment and unique skills, it is very difficult for new manufacturers, including existing electrical wire and cable companies, to enter the market. The management of the company believes it can successfully compete with both existing and possible future manufacturers in its targeted markets on the basis of superior technology and variety of fiber products, and by providing outstanding service to its customers.
The company's sales are forecast to grow to $50 million in Year 5. To permit operations as outlined herein, $750,000 of capital is required immediately. This capital will be used for the following:
A. Purchase of equipment B. Working capital
Total
$530,000
220,000
$750,000
This capital will fund the company's operations for 18 months, when additional capital will be required. This additional capital may have to be raised by selling additional equity.
2. Financing Requirements
Fibercom Applications has completed seed financing totaling $150,000 and requires additional equity capital of $750,000. The company will use short term debt, provided by commercial banks, to meet cash flow requirements.
Fibercom Applications, a Delaware corporation, was incorporated in May 1984. The company has an authorized level of 2,000 shares of common stock, of which 1,250 shares are currently issued and outstanding and 110 shares are reserved for sale under existing warrant and option agreements.
Existing ownership of the company is as follows:



3 / Opportunity Recognition 113
Shareholder
Thomas J. McCormack
Gary A. Smith
Clint M. Owens
All others (total = 6 people)
Reserved for issue
Total
Number of Shares
325
325
100
500
110
1,360
Prior to raising the additional capital, the company intends to split its stock at a ratio of 2,000 new shares for each currently existing share, to reserve 250,000 shares for an incentive stock plan for future employees, and to raise the company's authorized level of stock to 5 million shares.
The company proposes to raise $750,000 by selling 300,000 shares of newly issued common stock at a price of $2.50 per share. After issuing these shares, the company's capitalization will be:
2.8 million shares of common stock, issued and outstanding: Par value, $0.01 per share Additional paid in capital
Total capital
$ 28.000
827,000
$900,000
The ownership of the company will then be:
Existing shareholders 2,500,000 $150,000
New shareholders 300,000 750,000
Total 2,800,000 $900,000
3. Business
Fibercom Applications designs, manufactures, and markets fiber optic cables to a select number of market segments. In the broadest sense, fiber optic cables are used by two distinct markets—the telephone industry and specialty markets. These two areas are different, both technically and commercially. While cables for the telephone industry offer state of the art optical performance, the cables are sold as a commodity at low margins. In the specialty market, the cables may have less stringent optical requirements, but other performance needs must be met. Fibercom Applications will serve selected areas of the specialty market. The company will treat each market niche independently, both in terms of cable design and in selling techniques. Fibercom Applications will be recognized as the expert in each segment, will be able to anticipate market needs, and will identify and participate in the profitable niches of each.
Communication technology has rapidly changed in the last decade. The increasing use of telephone systems, computers, and other systems that utilize low power digital signals, in place of systems where high power analog signals convey information, has imposed stringent new requirements on the communication media.
For these modern systems, conventional electrical interconnections may not be satisfactory without extensive equipment modification or costly installation changes, or both. The low power digital signals are particularly susceptible to electromagnetic interference. Further, all electronic equipment radiates electromagnetic noise, and the US government



3 / Opportunity Recognition 113
Shareholder
Thomas J. McCormack
Gary A. Smith
Clint M. Owens
All others (total = 6 people)
Reserved for issue
Total
Number of Shares
325
325
100
500
110
1 ,360
Prior to raising the additional capital, the company intends to split its stock at a ratio of 2,000 new shares for each currently existing share, to reserve 250,000 shares for an incentive stock plan for future employees, and to raise the company's authorized level of stock to 5 million shares.
The company proposes to raise $750,000 by selling 300,000 shares of newly issued common stock at a price of $2.50 per share. After issuing these shares, the company's capitalization will be:
2.8 million shares of common stock, issued and outstanding: Par value, $0.01 per share Additional paid in capital
Total capital
$ 28,000
827,000
$900,000
The ownership of the company will then be:
Existing shareholders 2,500,000 $150,000
New shareholders 300,000 750,000
Total 2,800,000 $900,000
3. Business
Fibercom Applications designs, manufactures, and markets fiber optic cables to a select number of market segments. In the broadest sense, fiber optic cables are used by two distinct markets—the telephone industry and specialty markets. These two areas are different, both technically and commercially. While cables for the telephone industry offer state of the art optical performance, the cables are sold as a commodity at low margins. In the specialty market, the cables may have less stringent optical requirements, but other performance needs must be met. Fibercom Applications will serve selected areas of the specialty market. The company will treat each market niche independently, both in terms of cable design and in selling techniques. Fibercom Applications will be recognized as the expert in each segment, will be able to anticipate market needs, and will identify and participate in the profitable niches of each.
Communication technology has rapidly changed in the last decade. The increasing use of telephone systems, computers, and other systems that utilize low power digital signals, in place of systems where high power analog signals convey information, has imposed stringent new requirements on the communication media.
For these modern systems, conventional electrical interconnections may not be satisfactory without extensive equipment modification or costly installation changes, or both. The low power digital signals are particularly susceptible to electromagnetic interference. Further, all electronic equipment radiates electromagnetic noise, and the US government



114 The Opportunity / I
has recently established strict limits on the amount of radiation that can be emitted from electronic equipment. Electrical interconnecting cables accentuate this emission problem. Fiber optic communication systems overcome this and other problems associated with electrical equipment.
~ Fiber optics is a relatively new technology offering a number of advantages over the traditional electrical method of transmitting information. Fiber optic systems (see "Fiber Optic Systems," below) can carry more information than electrical systems and are immune to electromagnetic and radio frequency interference. Fiber optic cables do not radiate electromagnetic signals as electrical cables do. Fiber optic cables are smaller and lighter than electrical cables, thereby reducing installation costs. Fiber optic cables also have lower losses than the electrical cables they replace, and can therefore transmit signals of a given strength over longer distances than electrical cables.
Fiber Optic Markets
The market for fiber optic cables is expected to grow to $1 billion by 1990 (see "Market Size and Competition," Section 4). Fibercom Applications has divided the total market into four segments.
1. Telecommunications. The telecommunications market may be subdivided into two areas.
(a) Long Haul Communications. This market segment is characterized by high¬capacity, high fiber count cables. These cables usually contain over 24 signal mode fibers. The cables are installed with long distances between terminals, so the cables must be produced in the longest practical lengths, 2 km or more. Optical performance of these cables is state¬of the art, and cable performance is the most important evaluation criterion.
(b) Subscriber Loop. This part of the telephone market uses cables with relatively high fiber counts, ranging from 6 to 24 fibers per cable. The cables contain either single mode or high performance graded index fibers. These applications are growing rapidly as terminal equipment, connecting devices, and splicing equipment become more readily available.
The telephone market segment is by far the largest, accounting for up to 75 percent of the total market. There are seven suppliers to this market area, and the company does not intend to capture a significant part of this market. It is likely that the company will have limited sales to the telephone industry, in those applications where special performance is needed, or where a special design is required.
2. Computer Interconnection/Local Area Networks. The interconnection of main¬frame, minicomputers, microcomputers, and peripherals by local area networks is predicted to grow explosively in the next few years. The success of the "office of the future" depends upon reliable, secure, and high speed transmission of data between the CPU and peripheral devices.
Electrical interconnections are limited in their ability to meet these criteria. Electrical cable is limited in the amount of data that can be carried and in the distance the data can be sent without amplification. The data also is subject to error from interference picked up by the cable, and the cables themselves radiate electromagnetic noise. Fiber optics eliminates these problems.
The cables for this market have relatively low fiber counts, ranging from 2 to 12 fibers per cable, and are installed in a wide variety of environments. The cables typically use larger core fibers than the telecommunications products.
The management of Fibercom Applications has experience in serving this market area. The company has designed and developed a unique product for interoffice connections and intends to aggressively promote this product to the computer interconnection market. The company intends to fully serve this market. Competitors and market size are discussed in Section 4.



3 / Opportunity Recognilio,' 115
3. Process Control. With the expanding use of microproccssor bascd control sys¬tems and programmable controllers in factory and plant environments, fiber optics is making significant inroads into the process control industry primarily because of its noise immunity and high data transfer capacity.
The cables for this market usually have low fiber counts, from 1 to 12 fibers per cable, and must be custom designed for each application. For example, a process control system may have a basic requirement for a two channel cable. If the control system is being instal¬led in a nuclear generating station, the cable must be radiation resistant, while if the con¬trol system is being installed in a chemical refinery, the cable may have to withstand exposure to hazardous vapors. While the same basic design may be used for each cable, different materials may have to be used in each application to meet the specific environmental re¬quirements.
The management of Fibercom Applications has extensive experience in serving many different parts of the process control industry. Using its specialized knowledge of materials and constructions, the company has designed a number of unique cables for use in industrial environments. The company will supply a significant portion of the fiber optic cable used in this market.
The size and competition in this market segment are discussed in Section 4.
4. Military. The military market presents a variety of applications. The cables are characterized by low fiber counts, 1 to 12 fibers, and frequently use special radiation resistant large core fibers. The cables are subject to stringent performance requirements, including low temperature, severe bending and twisting, and fungus attack.
The company intends to serve the military market where special performance is needed. The company will provide extremely rugged, gas and/or water blocked cables, and cables suitable for performance over a wide temperature range. Competition and market size are discussed in Section 4.
In each of its target markets, the company's management has successful prior experience in designing, manufacturing, and selling cables. The target markets are growing rapidly, as shown in Section 4. In the target markets, the management's experience is that higher gross margins are available, and that the company's extensive knowledge of special materials and cable design can be sold at a premium.
Fiber Optics Systems
Fiber optic cable is one part of an overall fiber optic system. Fiber optic communications requires a system consisting of three parts—an optical transmitter, an optical fiber cable, and an optical receiver. The transmitter takes incoming electrical signals and converts them to optical pulses. The fiber optic cable carries the light pulses from the transmitter to the receiver. The receiver reverses the process, converting the optical pulses back to electrical signals. Operational failure of any one part of the system is catastrophic. Any individual part is useless unless the other parts are functional. Transmitters and receivers with outstanding reliability are now commercially available at low cost. Cable technology, however, has not been highly developed for nontelephone applications. Fibercom Applications will provide the highly reliable cables that will assure high system reliability.
Great progress has been made in designing and manufacturing optical fiber, the primary component of the cable. Cost reductions of 90 percent and more have been made over the last three years, while, during the same time, quality and performance of the fiber has improved.
Because of their delicate structure, optical fibers cannot be used without the protection of properly designed cable. Fiber optic cable development efforts have been limited to cables used for long distance telecommunications. The design of cables containing optical fibers for specialty market applications has not progressed.



116 The Opportunity / I
.
The designer of cables for use in the specialty markets must consider many parameters, including installation conditions, environmental temperatures, flame retardancy, radiation resistance, water resistance, and chemical resistance. In fact, to maximize cable reliability, specific and unique cables must be designed for each application.
The lack of properly designed cables has impeded the use of fiber optics in the nontelephone market. For instance, local area networking of computers is an application that can benefit from using fiber optics. In recognition of this need, the American National Standards Committee has formed a working group to write a standard for fiber optics in the local area network (LAN). This committee is of national stature, and its work will accelerate the use of fiber in LANs. In reporting on the committee's work, the Electronic Engineering Times, of May 14, 1984, quotes the committee as saying "the lack of satisfactory commercially available fiber optic cable" is the main reason for slow implementation of fiber optics in this application.
Once a suitable cable has been developed, it may not be usable for all applications in a market. In one system the fiber optic cable may be installed beneath carpets, in air handling ducts, in walls, in conduits, in cable trays, and under floors. The cable design must be tailored to make the cable suitable for each application. This entails selecting alternative materials, changing the relative position of the fibers, or varying the strength characteristics.
Fiber Optic Cable Design
The design of fiber optic cables is similar to that of electrical cables, but with several significant differences. In most electrical cables no consideration is given to the physical strength of the cable, since the electrical conductor provides sufficient strength. Electrical cables are simply designed to provide a dielectric covering over the conductor by using an insulating material applied to the conductor, by physically separating the conductors, or by combining both methods.
In comparison, many factors must be considered when designing a fiber optic cable. The glass optical fiber has little inherent strength and is easily damaged by external forces. Therefore, a fiber optic cable must be designed to maximize the protection of the fiber. Excessive coiling or stretching will damage the fiber. Thermal expansion and contraction of the other cable materials relative to the optical fiber may damage the fiber. Materials must be selected in view of their physical and thermal performance, and the fiber must be precisely located in the cable to achieve maximum isolation from its environment.
Fibercom Applications has designed cables with a variety of materials that are thermally compatible with the optical fiber and that provide a high level of protection to the fiber. These designs provide a higher level of protection than that provided by our competitors' cables.
Fibercom Applications will custom design fiber optic cables to meet its customers' service requirements. The company will provide features in its products that are unavailable from its competitors, including:
1. Unique Applications of Materials
Fibercom Applications will manufacture cables using the widest variety of materials available in the fiber optic market.
Every material must be processed in a different manner, and small variations in processing will cause scrap. Process development for each material is both costly and time¬consuming and requires considerable experience both in extrusion and in fiber optics. For this reason, most companies do not offer a wide range of materials.
The management of Fibercom Applications has extensive experience in processing a variety of materials. The company is experienced in developing methods and techniques to utilize many materials in fiber optic cables, and the company will continue to develop these processes. Where practical, the company will seek to protect its processes with patents.



3 / Opportunity Recognition 117
2. Heavy Wall Loose Tubes
The company's targeted markets demand cables that are extremely rugged and highly reliable.
To provide these features, Fibercom Applications will manufacture fiber optic cables that have a thick, loose tube protecting the fiber. Extruding thick, loose tubes over optical fibers is very difficult and requires careful attention to processing. All the residual stress in the materials must be eliminated, and the loose tubes must be made under precise and controlled conditions. Moreover, the company will manufacture these tubes in a variety of materials.
The heavy wall loose tube feature makes the cable slightly more expensive to build, but its higher reliability permits it to be sold at a higher price.
The management of the company has experience in designing and building cables with heavy wall loose tubes. This experience will be used to efficiently produce this product with little or no scrap.
3. Flame Retardancy
Many of the company's target markets demand cables with a high degree of flame retardancy. The company will manufacture highly flame retardant cables for "plenum" use at a lower cost than its competition. The company, therefore, can achieve a higher profit margin on this product.
Fibercom Applications also will manufacture cables that meet the stringent flame test requirements for Type TC cable, allowing the company's product to be used in the same way as electrical cables and without the extra costs associated with installing a separate cable mounting system.
Other companies produce flame retardant fiber optic cables. However, their choice of materials is very limited. To differentiate its products, Fibercom Applications will work with the customer to select a material that achieves all the customer's needs and will try to persuade the customer to specify the company's unique materials for its cables.
4. Specialization in Large Core Fibers
Fibercom Applications will manufacture cables with large core optical fibers. Large¬core fibers are used extensively in short distance applications typical of many of the company's targeted markets. Large core fibers are very susceptible to damage from handling; therefore, manufacturing cables incorporating these fibers is more difficult than making cables with small core fibers. Because of the manufacturing difficulties, many manufacturers of fiber optic cables do not offer cables with large core fibers.
The management of Fibercom Applications has extensive experience in successfully building cables with large core fibers. The company is experienced with these fibers and in selecting machinery and processes compatible with them. By choosing the proper equipment, and specializing in making these cables, the company will be more efficient than others and therefore more profitable.
Fibercom Applications will also provide many other features in its products. The company's management has many years of experience in designing and manufacturing fiber optic cables. The company has already designed cables that consider these properties for specific applications, and it has perfected techniques to economically manufacture the cables. These products include:
1. Undercarpet cables. The company has designed and built a fiber optic cable for use in undercarpet office applications. This special design uses a unique material and construction that has been successfully tested by a major supplier of undercarpet systems.
2. Molded cable assemblies. The company has designed an assembly with connectors molded to the end of the cable that promises to be more rugged, durable, and reliable



118 The Opportunity / I
than existing assemblies. The company believes this product will have great acceptance in the computer interconnection market and in the process control industry.
3. Plenum cables. The company has designed a series of plenum cables using less¬expensive materials than other cables of this type. Prototype cables must be built and tested to make this product commercial.
Manufacturing
Fiber optic cable manufacturing differs significantly from making electrical cables. Because the fiber is delicate and cannot be reclaimed if damaged, properly designed, operated, and maintained equipment must be used in making fiber optic cables. This equipment must have precise tension controls, along with other sensitive control mechanisms, to achieve a high quality thermally stable covering over the fiber. Profitability depends upon error free manufacturing with little scrap.
Satisfactory performance of the finished cable depends upon achieving a uniform material over the optical fiber. The uniformity of the material depends on many factors, but of primary importance is the proper extrusion process. Control of the entire extrusion process is critical. Extrusion tool design must be tailored to the material and its dimensions. Temperature of the melting extrudate must be precisely controlled to avoid residual stress. Cooling characteristics must be tailored to each material. These controls are not normally imposed or needed for electrical cable manufacturing.
Fiber optic cables must be manufactured in a cleaner environment than electrical cables. Moreover, fiber optic cables cannot be made in the same area with electrical cables. Any airborne contaminants that come in contact with the optical fiber may damage it, with resulting scrap.
The company has developed a unique method of manufacturing one and two channel optical cables more efficiently than its competitors. Both cable types are widely used in many of the company's targeted markets, and the company expects to capture a large portion of this business.
Fibercom Applications will only manufacture fiber optic cables. The company will be expert in the handling of optical fiber. It will enforce housekeeping and cleanliness standards that could not be enforced in a plant making both electrical and optical cables.
The management of the company has combined experience of more than 10 years in building fiber optic cables and in designing and installing the proper equipment to make them efficiently. The company's specialization, experience, and efficiency will be its competitive advantage.
Marketing and Sales
Fibercom Applications will market its products primarily on the basis of technical superiority. The company will establish a reputation of supplying a high quality product that is delivered on time.
A major goal of the company's marketing plan is to produce the company's products as specified by its customers. To accomplish this, it will identify specific customers in each target market area and work closely with each customer's engineers in preparing per¬formance specifications for their cables.
Repeat orders from a customer are an important part of the company's growth philosophy. To promote goodwill and allegiance and, thereby, to obtain repeat orders, the company will organize and direct its efforts to provide outstanding service to its customers.
To achieve brand recognition, the company will actively promote its products through advertising and trade show participation. The company plans regular mailings of informational literature to its customers.
Fibercom Applications will sell its products through an integrated network of direct salespeople, manufacturers' agents, and distributors.



3 / Opportunity Recognition 119
The company will hire direct salespeople to serve several areas where the use of agents and distributors is impractical. They will be responsible for sales to computer manufacturers (IBM, DEC, Wang), to process control manufacturers (Honeywell, Foxboro), and to other large customers (architect engineers, electric utilities).
Manufacturers' agents will sell to all of our other accounts, particularly those that buy smaller quantities of cable and those that do not require continuous technical sales efforts. The vice president of sales and marketing will supervise these agents and monitor their progress. The company expects that it will take at least a year to complete a representative network.
The company also will support distributor sales to those industries that prefer to buy in this way.
The company does not intend to serve all the targeted markets at once. The company will concentrate its efforts in the process control and computer markets. These markets promise the fastest returns on the sales efforts, for several reasons. First, the company's management has extensive experience in selling to both the process control and computer markets. Second, both areas are currently purchasing sufficient volumes of cable to permit the company's revenue targets to be met. Third, the markets are not being adequately served by the existing suppliers.
4. Market Size and Competition
Fibercom Applications will serve selected areas of the market for specialty fiber optic cable assemblies. The company's target markets include the computer interconnection, process control, military, and broadband markets.
All areas of the fiber optic cable market are experiencing extremely high growth rates that are expected by many market research firms to continue for the next decade. Several market research organizations (Kessler Marketing Intelligence, Gnostic Concepts, A. D. Little, Frost and Sullivan) have made predictions about the growth. These studies estimate that the total market for fiber optic cables in 1984 was about $240 million. The studies also indicate that the telephone industry accounted for about 80 percent of the 1984 market and that the market for the company's products was between $40 and $60 million in 1983.
The company believes that in 1984 the market for its products was approximately $48 million, up 85 percent from 1983. The company's estimate was determined by consolidating internal estimates with the published figures of several sources. The internal estimates were made by personal knowledge of the market, evaluating competitors' size, and discussions with fiber manufacturers.
The market for fiber optic cables is growing at a rapid pace. Published growth rates range from 40 65 percent per year. The company's own estimate is on the conservative end of this range; Fibercom Applications estimates that its targeted markets will grow at an annual rate of 40 percent. The size of the company's market is shown in Table 4 A.
Competition
Fibercom Applications will have several competitors for the nontelephone market. The three largest competitors are Siecor, Belden, and ITT.
siecor. Siecor is a joint venture of Corning Glass Works and the Siemens Corporation. Corning is the second largest supplier of optical fiber in the United States (after AT&T Technologies) and Siemens is a German based cable manufacturer. With the exception of AT&T Technologies, Siecor is the largest manufacturer of fiber optic cables in the United States.
Siecor concentrates its efforts in the telephone business, but with excess cable capacity to date, it is also the largest supplier of nontelephone cables. The explosive growth of sales



120 The Opportunity / I
Table 4 A
Projected Size of the Company's Market
Year
1983 1984 1985 1986 1987 1988 1989 1 990
Estimated Target Market
$ 26,000,000 48,000,000 70,000,000 1 00,000,000 160,000,000 220,000,000 300,000,000 400,000,000
to the telephone market, however, has impaired Siecor's ability to serve the specialty market and opens this part of their business to invasion by other manufacturers.
Siecor offers a variety of cables and currently competes in many of Fibercom's targeted markets. Siecor builds both loose and tight buffered cables and uses a relatively large number of materials in its cables. However, Fibercom Applications believes it can compete with Siecor on the basis of customer service and delivery.
Belden. Belden is a unit of Cooper Industries. It does not manufacture fiber optic cables for the telephone industry but concentrates its efforts in markets similar to Fiber¬com's. Belden's fiber optic sales in 1984 were between $5 million and $8 million. Belden is well known in the fiber optic cable business.
Belden produces both tight and loose buffered cables but uses only a small number of materials. Therefore, it is at a disadvantage when competing with Fibercom Applications. It has an established sales and distribution network, which will help it in competing with Fibercom.
ITT. ITT acquired Valtec Corporation, which was a division of US Philips, in September 1984. Combined with its own fiber optic cable business, ITT became a major supplier of fiber optic cable. Valtec concentrates its major sales efforts in the telephone industry, with lesser efforts in the military and computer interconnection markets. Prior to its acquisition, Valtec had several ownership changes in the last few years, and the continuity of management, necessary in the specialty business, has been difficult to maintain. Fibercom Applications estimates Valtec's total sales in 1984 to be $15 million, with nontelephone sales of between $4 million and $6 million. ITT had nontelephone sales of between $1 million and $2 million in 1984, so the combined company has nontelephone sales of between $5 million and $8 million.
ITT will concentrate its efforts in the long distance telecommunications field, with a lesser effort in the military area. Fibercom Applications does not expect to compete directly against ITT in the data communications or process control markets.
Other Competitors. Several other companies sell fiber optic cables to the company's targeted markets. These companies include Times Fiber Communications, Phalo (a division of Transitron), Mohawk (a division of Conductron), BIW Cable Systems, Brand Rex, Pirelli, General Cable, Anaconda Ericcson, Optical Cable Corporation, and Whitmore. While the exact size of each company is unknown, Fibercom's estimates of 1984 sales for each are shown in Table 4 B. Based on this analysis, the total size of the company's targeted nontelephone markets was between $37 million and $59 million.
Of these companies, General Cable and Anaconda Ericcson continue to concentrate their sales efforts in the telephone industry and will play ever smaller roles in the specialty markets. Fibercom's superior market knowledge and variety of materials will be used in competing with these companies. Brand Rex, BIW Cable Systems, Phalo, Mohawk, and



3 / Opportunity Recognition 121
Table 4 B Sales to the Nontelephone Markets
1984 Estimated Sales
Company Low High
Siecor $15,000,000 $20,000,000
ITT Valtec 5,000,000 8,000,000
Belden 5,000,000 8,000,000
General Cable 2,000,000 4,000,000
Times Fiber 2,000,000 3,000,000
Brand Rex 1,500,000 2,000,000
Phalo 1,000,000 2,500,000
Mohawk 1,000,000 2,000,000
Maxlight 1,000,000 2,000,000
Pirelli 1,000,000 2,000,000
Anaconda Ericcson 1,000,000 2,000,000
Optical Cable 750,000 1,500,000
BIW Cable 250,000 500,000
Whitmore 250,000 500,000
Others 500,000 1,000,000
Total $37,250,000 $59,000,000
Whitmore have not made the commitment of manufacturing and engineering resources that is necessary to compete in the fiber optic market. Brand Rex and BIW have extensive skills in processing many materials. However, unless they make major investments in plant and personnel for the fiber optic business, they will not be able to challenge Fibercom on a performance basis. Of the other companies, Phalo and Whitmore do not possess the technical or material processing skills of the company. Mohawk has withdrawn from the fiber optic business. Fibercom Applications will use its knowledge and experience in fiber optics to compete against these companies.
Optical Cable Corporation (OCC) is a relatively new company, formed in 1983, and by virtue of its spec~ahzation in fiber optics, it will be a factor in Fibercom's markets. The management of Fibercom Applications has more experience in the company's target mar¬kets, however, and their specialized marketing skills will be used in competition with OCC.
At the present time, the company is aware of only three other potential competitors, Madison Wire and Cable, Berk Tek, and Celwave Technologies. The company anticipates that one or more of these companies could become a major competitor.
5. Sales Projections
S A):
Fibercom Applications has established the following five year sales forecast (see Table
Table 5~A
Sales Forecast
Year
2
3
4
5
Fibercom Applications
Forecast
$ 1,750,000 3,500,000 1 0,000,000 25,000,000 50,000,000



122 The Opportunity / I
.
This is a compound annual growth rate of more than 130 percent and requires substantial investment in plant, the hiring of extremely talented personnel, and an effective sales effort.
The sales projections result in a Year 5 market penetration of more than 10 percent. This market share can be achieved within the company's marketing and manufacturing resources. The availability of trained design engineers and qualified sales personnel may make it difficult to attain higher growth rates in the specialty markets.
The company's potential customers range from large industrial and utility companies with multibillion dollar revenues, to small privately owned companies with sales under $1 million. These potential customers will be contacted through an integrated marketing and sales campaign, including space advertising, trade show participation, and direct sales contact. More information concerning the company's marketing and sales efforts are in Section 3.
6. Capital Equipment Requirements
Special equipment must be employed to produce the highest quality fiber optic cables. Of particular importance, tension controls must be present on all fiber handling equipment to avoid damaging the fiber.
FibercomApplications has extensive capital equipment requirements. Initial capital expenditures include the following:
1. A small plastic extrusion line, approximately 1.5 inches, for the primary application of buffering material over the fiber. The extruder must be able to process high temperature fluoropolymer materials. Support equipment includes a water bath, fiber payoff and tensioning equipment, extrusion tools, pullout equipment, and a traversing take up. A medium size plastic extrusion line for secondary extrusion of cable jackets. This equipment also must be able to handle fluoropolymer resins, plus conventional jacketing materials. Support equipment similar to that on item 1 is required.
A fiber optic cabler, capable of stranding 18 fibers in one operation. Each payout bay must have precise tension controls. The line also will include taping equipment to apply both metallic and nonmetallic coverings over the cable's core.
A serving head, for use in the cabling machine or in the extrusion lines, to apply strength members to the cable.
Test equipment for performing bandwidth, attenuation, numerical aperture, and pulse dispersion measurements on optical fiber. Mechanical testing equipment, to test both cables and cable materials, and an optical time domain reflectometer are also needed.
2.
3.
4.
5.
The primary extrusion equipment (item 1, above) and test equipment (item 5, above) will be purchased as new equipment. Used equipment suitable for these purposes is not available. A used jacket extrusion line and cabler will be purchased for the initial operations.
The lead time for the equipment ranges from one to four months. The first equipment that must be installed is the small, primary extrusion line. After this line is installed, the secondary extrusion line and the fiber optic cabler will be installed.
With the use of overtime and multiple shifts, the initial equipment will support shipments through Year 1. To support the projected sales in Years 2 through 5, additional equipment is needed.
7. Year 0 Operations
The company's initial year (ending July 31, 1985) is an organizational year. Because
of the high growth rates the company will experience, it is essential that proper systems and procedures be implemented immediately to achieve the financial goals that have been



3 / Opportunity Recognition 123
established. Efforts in this year will be concentrated in seven key areas:
1.
2.
3.
4.
5.
6.
7
Obtaining capital. Recruiting key personnel. Locating manufacturing space. Purchasing and installing equipment. Manufacturing trial products for internal and external evaluation. Designing and executing an advertising campaign. Obtaining initial production orders.
Meeting the sales forecast depends upon meeting several milestones in the initial year, shown in Table 7 A. Failure to meet these milestones may have an adverse effect on later operations.
Initial sales of the company will be produced by other manufacturers on a private label basis. These sales will generate cash flow and establish Fibercom Applications in the marketplace. However, because others will be manufacturing the product, none of the company's proprietary cables can be sold at this time.
Year 0 operating expenses are in four areas:
1. Salaries of executive officers. 2. Design and implementation of an advertising campaign. 3. Salaries of start up production and test personnel. 4. Materials used in product trial manufacturing.
Pro forma financial statements for Year 0 are included in Section 10.
8. Years 1 5 Operations and Organization
Section 10 contains pro forma financial statements for Years 1 through 5. These projections have been made using the assumptions outlined below.
A. Cost of Goods Sold
The actual material costs for the assumed product mix were calculated. Also from the product mix, machine loadings were calculated and the labor necessary to operate the machinery was determined.
B. Operating Expenses
Engineering. Engineering and R&D are the responsibility of, and under the direction of, the vice president of engineering.
The vice president of engineering is responsible for all technical operations of the company and fulfills five functions. First, he or she maintains contact with chemi¬cal, compound, and other raw material suppliers to be aware of new materials as they become available. Second, he or she is responsible for all cable designs. Third, he or she recruits, trains, and supervises all application and process engineers. Fourth, he or
Table 7 A
1985 Milestones (Year O)
Date
March 1
March 1
May 1
June 1
June 30
Milestone
Receive start up capital
Begin advertising campaign
Install primary extruder
Begin trial extrusions
Produce initial production orders



124 The Opportunity / 1
she recruits, trains, and supervises all test personnel. Last, because the marketing of the company's products will be technically oriented, he or she has extensive customer contact.
The company initially will employ an experienced process engineer. He or she will report to the vice president of engineering and be responsible for all process development. This person must be highly skilled, with a strong technical background in plastic extrusion and possess hands on experience with extrusion equipment. He or she also will participate in the company's development efforts to evaluate new materials and their applicability to fiber optic cables.
Test personnel and application engineers will be added as needed to support the production and sales efforts. By Year 5, the company expects to employ 56 engineers and technicians.
Sales. The vice president—sales and marketing is responsible for the sales, marketing, and customer service operations of the company.
The vice president of sales and marketing is technically knowledgeable about fiber optics and is experienced with the sales and marketing of products by manufacturers' agents, direct sales personnel, and distributors.
The vice president recruits and trains all sales personnel. He or she plans and directs the company's marketing plan, including an aggressive advertising campaign. He or she writes sales literature, prepares technical and commercial proposals, and sets price levels.
The company's initial sales efforts will be made through a network of manufacturers' agents, directed and coordinated by the vice president. The vice president is directly responsible for sales to the larger customers until a direct sales force is put in place.
Advertising and trade show participation are important parts of the company's sales efforts. Brand recognition will be gained by regular advertising in user oriented industrial trade publications and by participation in trade shows.
The company will employ direct salespeople as quickly as possible. The vice president will coordinate the efforts of both the direct salespeople and the manufacturer's agents. Inside sales efforts will be organized and staffed to complement the outside sales efforts.
By Year 5, the company expects to employ 35 people in sales and have a national network of manufacturer's agents.
Administrative. Administrative overhead includes manufacturing management, ac¬counting, bookkeeping, purchasing, and production coordination.
Initially, the president will directly supervise the administrative and manufacturing efforts. A vice president of manufacturing is added to the company in Year 1, who will be responsible for all manufacturing operations.
Additional overhead expenses include telephone and telex service, office expenses (copying, postage, stationery, etc.), legal and accounting services, and insurance costs.
Depreciation. Depreciation is calculated on a five year, straight line basis.
9. Risk Factors
There are several risk factors to consider in making an investment in the company.
No Operating History
Fibercom Applications is a start up company and has no operating history. All financial statements presented herein are estimates of future operations. If anticipated revenues are not received, if actual costs exceed projections, or if delays are encountered in developing the company's products, additional financing may be necessary.
To minimize this risk, strict controls will be imposed over material costs, labor costs, inventories, and other costs. Operations will be managed to maximize cash flow.



3 / Opportunity Recognition 125
Limited Management Experience
The management of the company, while experienced in the manufacturing and sales of fiber optic cables, has no experience in organizing and starting up a new venture.
Mr. McCormack's experience with his former employer, where he started a fiber optics
division, and Mr. Owens's experience with his former employer, where he started a fiber optics manufacturing operation, will be used to offset this risk. Both of these people have extensive contacts in the fiber optics and cable manufacturing business, and this experience
will be used to the company's benefit. Additionally, outside directors and advisors will be sought to provide management guidance and assistance.
Market Growth
The success of the company depends on the projected growth of the overall market for fiber optic systems.
To minimize this risk, the company has based its projections on the low end of the projected growth of the industry. If this growth level is not achieved, a higher level of market share, sales to other markets, and sales of other specialty cables will be sought.
Raw Material Availability
The company will depend on outside sources for its major raw material, optical fiber. Disruption of this supply will adversely affect the company's ability to produce its products.
The company will attempt to negotiate annual supply contracts for optical fiber with one or more suppliers. There is no assurance that these contracts can be negotiated, or that they can be made on terms favorable to the company. Alternatively, significant additional investments will have to be made in both equipment and personnel to manufacture optical fiber.
Dependence upon Key Employees
The success of the company depends upon the continued employment of Messrs. McCormack, Smith, and Owens. Employment and noncompetition agreements will be negotiated with each to assure this continuity.
Other key employees must be hired, and the company will offer favorable compensation programs to attract and retain these employees.
10. Appendix A: Financial Projections
The financial projections were made using the following assumptions:
Income Statement
Sales. Sales projections were made based upon the company's estimate of the current market size and its growth projections. Conservative estimates were made of the company's market share.
Cost of Goods. Cost of goods was calculated from actual cable constructions. Material costs were determined from suppliers of these materials. Labor costs were estimated at current labor rates, increased at 5 percent per year to represent a real increase. Inflation has not been considered.
Operating Expenses. The actual staffing needed to produce the estimated sales was determined, and actual labor costs were used to determine expenses in each category. Labor costs were escalated at 5 percent per year, as above.
Depreciation. Depreciation on all equipment was calculated on a five year, straight¬line basis.
balance.
InterestIncome. Interest income was calculated at 5 percent of the previous year's cash
Taxes. Taxes were calculated at 46 percent of pre tax income, less investment tax credits and operating loss carryforwards.

126 The Opportunity I I
Balance Sheet
Accounts Receivable. Accounts receivable were estimated at 3.75 times the average monthly sales. With sales growing at a large annual rate, this is reasonable because the monthly sales at year end are much larger than the average monthly sales. Consequently, the receivables on a current basis will be more reasonable.
Inventory. Inventory is estimated at three times the average monthly fiber and other materials.
Plant, Property, and Equipment. Equipment costs are in accordance with those shown in capital equipment.
Accounts Payable. Accounts payable are estimated at one month of the average monthly cost of goods sold, plus one week's operating expenses.
Accrued Expenses. Accrued expenses were estimated.
FIBERCOM APPLICATIONS, INC.
Protected Income Statement
Years Ending July 31, 1985 1990
1985
(7 months)
$ 146,500
Sales
Cost of goods sold:
Fiber
Other material
Direct labor
Indirect labor
Space
Benefits
Purchased products
Total cost of goods sold 141,278
Gross profit
1986 1987 1988 1989 1990
$1,750,000
12,000 3,238
3,033 10,250 21,000
2,657 89,100
5,222
583,333 157,407 110,673 51,000 40,000 32,335
o
974 748
775,252
$3,500,000
1,166,667
314,815
265,356
53,550
40,000
63,781
o
1,904,169
1,595,831
$10,000,000 $25,000,000
3,333,333
899,471
588,206
145,530
40,000
146,747
o
5,153,287
4,846,713
8,333,333
2,248,677
1,414,618
482,730
80,000
79,469
o
12,638,827
12,361,173
$50,000,000
16,666,667
4,497,354
2,825,323
1,050,197
80,000
775,104
o
25,894,645
24,105,355
Operating expenses:
Engineering 31,975 161,815 280,050 495,772 993,702 1,859,440
Sales 42,513 221,362 452,575 902,861 1,750,760 3,O07,343
Lease costs 5,018 60,217 60,217 60,217 60,217 60,217
Administration 78,900 219,280 377,363 720,028 1,195,356 1,965,908
Depreciation 21,625 102,252 166,000 401,000 1,061,000 2,266,000
Total operating expenses 180,031 764,926 1,336,205 2,579,878 5,061,035 9,158,908
Operating profit (174,809) 10,326 259,627 2,266,835 7,300,138 14,946,447
Interest expense (income) (11,663) 33,156 14,704 384,171 504,864 1,253,177
Net income before taxes (163,146) (22,830) 244,923 1,882,664 6,295,274 13,693,270
Taxes 0 0 27,116 866,025 2,987,826 6,298,904
NetincomeaRer taxes $(163,146) $ (22,830) $ 217,807 $ 1,016,639 $ 3,807,448 $ 7,394,366



Projected Cash Flow
Years Ending July 31, 1985 1990
1985
(7 months)
1986 1987 1988 1989 1990
Sources of cash:
Increase in equity $ 750,000 $ 0 $ 0 $5,000,000 $ 0 $ 0
Increase in debt 0 0 240,000 940,000 (1,180,000) 0
Net income (163,146) (22,830) 217,808 1,016,639 3,507,448 7,394,366
Depreciation 21,625 102,252 166,000 401,000 1,061,000 2,266,000
Increase in current 109,635 408,619 494,331 1,785,078 4,155,616 6,934,111
liabilities
Total sources 718,114 488,041 1,118,139 9,142,717 7,544,064 16,594,477
Uses of cash:
Capital expenditures 325,000 200,000 450,000 1,175,000 3,300,000 6,025,000
Increase in accounts 30,000 470,000 593,750 2,031,250 4,687,500 7,812,500
receivable
Increase in inventory 50,794 62,434 257,142 687,831 1,587,302 2,645,503
Total uses 405,794 732,434 1,300,892 3,894,081 9,574,802 16,483,003
Cash flow 312,320 (244,393) (182,753) 5,248,636 (2,030,738) 111,474
Beginning cash 70,000 382,320 137,927 (44,827) 5,203,809 3,173,071
Ending cash $382,320 $137,927 $ (44,827) $5,203,809 $3,173,071 $ 3284545
. .
Protected Balance Sheet
July 31, 1985 1990
1985 1986 1987 1988 1989 1990
Assets
Current assets:
Cash $382,320 $ 137,927 $ (44,827) $ 5,203,809 $ 3,173,071 $ 3,284,545
Accounts receivable 30,000 500,000 1,093,750 3,125,000 7,812,500 15,625,000
Inventory 50,794 113,228 370,371 1,058,201 2,645,503 5,291,005
Total current assets 463,114 751,155 1,419,294 9,387,010 13,631,074 24,200,550
Property, plant, and
equipment:
At cost 330,000 530,000 980,000 2,155,000 5,455,000 11,480,000
Less accumulated
depreciation 21,625 123,877 289,877 690,877 1,751,877 4,017,877
308,375 406,123 690,123 1,464,123 3,703,123 7,462,123
Total assets $ 771,489 $1,157,278 $2,109,417 $10,851,133 $17,334,197 $31,662,673
Llabilltlea and Shareholders' Equity
Current liabilities:
Accounts payable $ 69,238 $ 211,640 $ 260,525 $ 686,062 $ 1,694,278 $ 3,369,386
Accrued expenses 0 0 20,000 20,000 30,000 60,000
Short term debt 40,397 306,614 732,060 2,091,601 5,229,001 10,458,003
Total current liabilities 109,635 518,254 1,012,585 2,797,663 6,953,279 13,887,389
Long term debt 240,000 1,180,000
Shareholders' equity:
Contributed capital 870,000 870,000 870,000 5,870,000 5,870,000 5,870,000
Retained earnings (208,146) (230,976) (13,168) 1,003,470 4,510,918 11,905,284
Total shareholders' equity 661,854 639,024 856,832 6,873,470 10,380,918 17,775,284
Total liabilities and
shareholders' equity $ 771,489 $1,157,278 $2,109,417 $10,851,133 $17,334,197 $31,662,673
127



Protected Income Statement
Seven Months Ending July 31, 1985
Jan. Feb. March April May June July
Sales $ 3,500 $ 7,500 $ 13,500 $ 28,500 $ 23,500 $ 20,000 $ 50,000
Cost of goods sold:
Fiber 2,000 10,000
Other material 540 2,698
Direct labor 1,517 1,517
Indirect labor 1,750 4,250 4,250
Space 3,000 3,000 3,000 3,000 3,000 3,000 3,000
Benefits 350 1,153 1,153
Purchased products 0 3,600 9,000 22,500 18,000 13,500 22,500
Total cost of goods sold 3,000 6,600 12,000 25,500 23,100 25,960 45,118
Gross profit 500 900 1,500 3.000 400 (5,960) 4,882
Operating expenses:
Engineering 4,525 4,525 4,525 4,525 4,525 4,575 4,775
Sales 5,888 5,888 5,888 5,888 5,888 6,438 6,638
Lease costs 0 0 0 0 0 0 5,018
Administration 8,850 10,850 10,850 10,850 12,500 12,500 12,500
Depreciation 83 83 83 5,292 5,292 5,292 5,500
Total operating expenses 19,346 21,346 21,346 26,555 28,205 28,805 34,431
Operating profit (18,846) (20,446) (19,846) (23,555) (27,805) (34,765) (29,549)
Interest expense (income) (350) (309) (278) (4,028) (2,545) (2,236) (1,919)
Net income before taxes (18,496) (20,137) (19,568) (19,527) (25,260) (32,529} (27,630)
Taxes 0 0 0
Net income after taxes $(18,496) $(20,137) $(19,568) $(19,527) $(25,260) $(32,529) $(27,630)
Protected Cash Flow
Seven Months Ending July 31, 1985
Feb. March A,ori/ May June July
Sources of cash:
Increase in equity $ 0 $ 0 $750,000 $ 0 $ 0 $ 0 $ 0
Increase in debt 0 0 0 0 0 0 0
Net income (18,496) (20,137) (19,568) (19,52n (25,260) (32,529) (27,630)
Depreciation 83 83 83 5,292 5,292 5,292 5,500
Increase in current 10,250 13,851 19,250 33,385 (22,792) 17,794 37,897
liabilities
Total sources (8,163) (6,203) 749,765 19,150 (42,760) (9,443) 15,767
Uses of cash:
Capital expenditures 0 0 0 312,500 0 0 12,500
Increase in accounts 0 0 0 0 0 5,000 25,000
receivable
Increase in inventory 0 0 0 1,270 7,619 16,508 25,397
Total uses 0 0 0 313,770 7,619 21,508 62,897
Cash flow (8,163) (6,203) 749,765 (294,620) (50,379) (30,951) (47,130)
Beginning cash 70,000 61,837 55,635 805,400 510,780 460,401 429,450
Ending cash $ 61,837 $ 55,634 $805,400 $ 510,780 $460,401 $429,450 $382,320
128



Projected Balance Sheet
Seven Months Ending July 31, 1985
Feb. Mar.
Apr. May
Assets
June Ju/.
Current assets:
Cash $ 61,837 $ 55,635 $805,400 $510,780 $460,401 $429,450 $382,320
Accounts receivable 5,000 30,000
Inventory 1,270 8,889 25,397 50,794
Total current assets 61,837 55,635 805,400 512,050 469,290 459,847 463,114
Property, plant, and
equipment:
At cost 5,000 5,000 5,000 317,500 317,500 317,500 330,000
Less accumulated
depreciation 83 167 250 5,542 10,834 16,125 21,625
4,917 4,833 4,750 311,958 306,666 301,375 308,375
Totalassets $ 66,754 $ 60,468 $810,150 $824.008 $775,956 $761,222 $771,489
Liabilities and Shareholders' Equity
Current liabilities:
Accounts payable $ $ 3,600 $ 12,600 $ 35,100 $ 49,500 $ 56,540 $ 69,238
Accrued expenses
Accrued salaries 10,250 20,500 30,750 41,000
Short term debt 635 4,444 15,198 40,397
Total current liabilities 10,250 24,100 43,350 76,735 53,944 71,738 109,635
Shareholders' equity:
Contributed capital 120,000 120,000 870,000 870,000 870,000 870,000 870,000
Retained earnings (63,496) (83,632) (103,200) (122,727) (147,988) (180,516) (208,146)
Total shareholders' 56,504 36,368 766,800 747,273 722,012 689,484 661,854
equity
Total liabilities and
shareholders' equity $ 66,754 $ 60,468 $ 810,150 $ 824,008 $ 775,956 $ 761,222 $ 771 489
129



.
o
i
Prolected Income Statement
Twelve Months Ending July 31, 1986
Aug. Sept Oct. Nov. Dec. Jan. Feb. Mar. Apr. May June Ju/.
Sales $ 50,000 $100,000 $150,000 $150,000 $150,000 $150,000 $165,000 $165,000 $170,000 $165,000 $165,000 $170,000
Cost of goods sold:
Fiber 16,667 33,333 50,000 50,000 50 000 50,000 55 000 55,000 56,667 55,000 55,000 56,667
Other materials 4,497 8,995 13,492 13,492 13 492 13,492 14 842 14,842 15,291 14,842 14,842 15,291
Direct labor 2,687 5,373 10,053 10,053 10,053 10,053 10,053 10,053 11,093 10,053 10,053 11,093
Indirect labor 4,250 4,250 4,250 4,250 4,250 4,250 4,250 4,250 4,250 4,250 4 250 4,250
Space 3,333 3,333 3,333 3,333 3 333 3,333 3 333 3,333 3,333 3,333 3 333 3 333
Benefits 1,387 1,925 2,861 2,861 2 861 2,861 2 861 2,861 3,069 2,861 2,861 3 069
Total cost of goods sold 32,821 57,209 83,989 83,989 83,989 83,989 90,339 90,339 93,703 90,339 90,339 93,703
Gross profit 17,179 42,791 66,011 66,011 66,011 66,011 74,661 74,661 76,297 74,661 74,661 76,297
Operating expenses:
Engineering 11,330 11,829 13,767 13,766 13,766 13,766 13,916 13,916 13,966 13,915 13,915 13 966
Sales 9,618 12,889 18,660 18,910 19,160 19,410 19,810 20,060 20,360 20,560 20,810 21 110
Administration 15,484 17,984 18,484 18,484 18,484 18,484 18,634 18,634 18,684 18,634 18,634 18,657
Lease cost 5,018 5,018 5,018 5,018 5,018 5,018 5,018 5,018 5,018 5,018 5018 5018
Depreciation 8,208 8,208 8,208 8,417 8,417 8,417 8,625 8,625 8,625 8,834 8 834 8 834
Total operating expenses 49,658 55,928 64,137 64,595 64,845 65,095 66,003 66,253 66,653 66,961 67,211 67,585
Operating prom (32,479) (13,137) 1,874 1,416 1,166 916 8,658 8,508 9,644 7,700 7,450 8 712
Interest expense (income) (1,012) 340 1,147 2,461 3,275 3,669 3,704 3,827 3,891 3,955 3,965 3 935
Net income before taxes (31,467) (13,477) 727 (1,045) (2,109) (2,753) 4,954 4,581 5,753 3,745 3,485 4,777
Taxes 0 0 0 0 0 0 0 0 0
Net income aRer taxes $(31,467) $ (13,477) $ 727 $ (1,045) S (2,109) S (2,753) S 4,954 $ 4,581 S 5,753 $ 3,745 S 3,485 $ 4,777



.
l
Protected Cash Flow
Twelve Months Ending July 31, 19e6
Aug. Sept Oct. Nov. Dec. Jan. Feb. Mar. Apr. May June JuL
Sources of cash:
Increase in equity S O $ 0 S O S O $ 0 $ 0 S O $ 0 $ 0 S O S O $ 0
Increase in debt O O O O O O O O O O O O
Net income (31,467) (13,477) 727 (1,045) (2,109) (2,753) 4,954 4,581 5,753 3,745 3,485 4,m
Depreciation 8,208 8,208 8,208 8,417 8,417 8,417 8,625 8,625 8,625 8,834 8,834 8,834
Increase in current
liabilities 39,804 71,870 103,294 92,328 47,752 3,174 14,378 14,378 17,407 528 1,587 2,116
Total sources 16,545 66,601 112,229 99,700 54,060 8,838 27,957 27,584 31,785 13,107 13,906 15,727
Uses of cash:
Capital expenditures 162,500 0 0 12,500 0 0 12,500 0 0 12,500 0 0
increase in accts. rec. 50,000 70,000 150,000 100,000 50,000 0 15,000 15,000 20,000 0 0 0
Increase in inventory 23,279 21,164 0 0 3,175 6,349 1,058 1,058 (2,116) 1,058 3,175 4,233
Total uses 235,779 91,164 150,000 112,500 53,175 6,349 28,558 16,058 17,884 13,558 3,175 4,233
Cash flow (219,234) (24,563) (37,771) (12,800) 885 2,489 (601) 11,526 13,901 (451) 10,731 11,494
Beginning cash 382,320 163,086 138,523 100,752 87,952 88,837 91,326 90,725 102,251 116,152 115,701 126,432
Ending cash $163,086 $138,523 S100,752 S 87,952 $88,837 S91,326 S90,725 $102,251 $116,152 S115,701 S126,432 $137,926




.
rid
i
Protected Balance Sheet
Twelve Months Ending July 31, Lowe
Aug. Sept Oct. Nov. Dec. Jan. Feb. Mar. Apr. May June Jul.
Assets
Current assets:
Cash $ 163,086 S 138,523 S 100,752 $ 87,952 $ 88,837 $ 91,326 S 90,725 $ 102,251 $ 116,153 $ 115,702 $ 126,433 $ 137,927
Accounts receivable 80,000 150,000 300,000 400,000 450,000 450,000 465 000 480,000 500,000 500,000 500 000 500,000
Inventory 74073 95238 95238 95,238 98,413 104,762 105820 106,878 104,763 105,820 108995 113,228
,
Total current assets 317,159 383,761 495,990 583,190 637,250 646,088 661,545 689,129 720,916 721,522 735,428 751,155
Property, plant, and
equipment:
At cost 492,500 492,500 492,500 505,000 505,000 505,000 517,500 517,500 517,500 530,000 530,000 530,000
Less accumulated
depreciation 29,833 38,042 46,250 54,667 63,084 71,501 80,126 88,751 97,377 106,210 115,044 123,877
462,667 454,458 446,250 450,333 441,916 433,499 437,374 428,749 420,123 423,790 414,956 406,123
Totalassets S779,826 S838,219 $924,240 $1,033,523 $1,079,166 $1,079,587 $1,098,919 $1,117,878 $1,141,039 $1,145,312 $1,150,384 $1,157,278
Llabillties and Shareholders' Equity
Current liabilities:
Accounts payable $ 72,402 S 98,690 $ 126,984 $ 169,312 $ 190,477 $ 190,476 $ 196,825 $ 203,175 $ 211,640 $ 211,640 $ 211,640 $ 211,640
Accrued expenses O O O O O O O O O O O O
Short term debt 77,037 122,619 197,619 247,619 274,206 277,381 285,410 293,439 302,381 302,910 304,497 306,614
Total current liabs. 149,439 221,309 324,603 416,931 464,683 467,857 482,235 496,614 514,021 514,550 516,137 518,254
Shareholderst equity:
Contributed capital 870,000 870,000 870,000 870,000 870,000 870,000 870,000 870,000 870,000 870,000 870,000 870,000
Retained earnings (239,613) (253,090) (252,363) (253,408) (255,517) (258,270) (253,316) (248,736) (242,982) (239,238) (235,753) (230,976)
Total equity 630,387 616,910 617,637 616,592 614,483 611,730 616,684 621,264 627,018 630,762 634,247 639,024
Total liabilities and
shareholders" equity $779,826 $838,219 $942,240 $1,033,523 $1,079,166 $1,079,587 $1,098,919 $1,117,878 $1,141,039 $1,145,312 $1,150,384 $1,157,278



3 / Opportunity Recognition 133
11. Appendix B: Management R6sumes
Professional Experience
BIW Cable Systems, Inc. July 1983 May 1984
General Manager, Fiber Optics Division
Thomas J. McCormack
Promoted to general manager—Fiber Optics Division in July 1983. Managed all efforts of the company in fiber optics. Prepared and executed a business plan that saw sales grow from less than $150,000 in 1982 to over $400,000 in 1983. Purchased and supervised the installation of initial extrusion lines and cabling equipment. Hired and trained test technician and production personnel. Managed all engineering, marketing, and sales activities of the company's fiber optic products. Developed new product for interoffice data communications.
Worked closely with the national sales manager, vice president—marketing, and marketing managers to set sales targets and direct the sales efforts.
Had full P&L responsibility beginning in January 1984. Prior to this time, I had complete control over the fiber optics operations, but the division operations were not separately stated. I worked closely with the controller in determining and instituting procedures to define the division operation.
In this position, I worked closely with major fiber suppliers to determine acceptable products. Met with major foreign manufacturers to determine potential license arrange¬ments.
1978 1983
Marketing Manager, Utility and Fiber Optic Products
Responsible for all marketing activities of the company for both electrical products to electric utility companies and for fiber optic products to all of the company's customers.
Utility Products
Doubled the company's sales of all products to electric utility companies, while at the same time increasing the gross margin from 30 percent to over 50 percent. Responsible for developing and executing yearly marketing plans, setting five year sales goals, outlining new product needs, producing sales literature, setting price levels, supervising application engineering activities, monitoring development of new materials and products, preparing quotations, and administering contracts. Introduced three major lines of new products, including standard cables that came to account for 50 percent of utility sales. Decreased utility related overhead by 25 percent. Expanded customer base from only architect¬engineers to include direct sales to major utilities. Negotiated the largest contract in the company's history. As a matrix organization, participated with manufacturing in production planning for both short and long term needs. Supervised the utility sales efforts of 10 district sales managers.
Fiber Optic Products
Participated in company task force in 1979 80 to determine potential involvement with fiber optic products. Recommended to president to proceed with fiber optic business on a limited basis. The recommendation was accepted and I was designated to spend part time in continuing investigation, and to secure limited initial orders. Sold first fiber optic cable in 1981. Recommended increased marketing activities in 1982 and planned initial capital



134 The Opportunity I I
expenditures made in 1982. Wrote company's first marketing plan in 1982, identifying target markets and setting five year sales projections. Supervised the engineering and development efforts in fiber optics. Directed the sales activities of district sales managers. Made direct sales presentations to all categories of customers—process control, television networks, electric utilities, computer OEMs, and so on. Prepared sales literature, set price levels, and wrote sales quotations. Had production, sales, marketing, and engineering people reporting to me on a matrix basis.
Public Service Electric and Gas Company
1970 1978
Senior Staff Engineer, Systems Engineering Group
Worked in Systems Engineering for a large, integrated utility company. Varied technical responsibilities, including:
re and Cable
Determined acceptable materials and construction for all low voltage cables used in power generating stations. Acted as consultant to operating division to investigate problems or service failures. Performed engineering studies related to cable materials and design features (ampacity, temperature rating, environmental qualification). Prepared specifica¬tions for purchase.
Determined acceptable vendors and evaluated bids. Purchased materials worth approximately $5 million per year.
Worked closely with purchasing, legal, and construction departments within the com¬pany, and with manufacturers, other utilities, and architect engineers outside the company.
Major accomplishments included expansion of acceptable vendors list, with an estimated cost savings of over $1 million in 1976 77, and qualified alternate constructions with estimated cost savings of over $500,000 per year.
Power Transformers
Similar duties and responsibilities as for wire and cable. Performed engineering studies to determine acceptable parameters and designs. Prepared specifications and evaluated manufacturer's proposals. Worked closely with operating departments regarding field service problems, and with the construction department on installation of large transformers.
Purchased and installed more than $10 million of power transformers per year.
Major accomplishments included the expansion of the acceptable vendors list, with subsequent savings of over $1 million per year. Specified and purchased the largest power transformers installed in the United States.
Other Responsibilities
Prepared general construction specifications for labor and materials. Prepared the general terms and conditions required for purchase of all engineered equipment. Performed special studies regarding power system operations.
Education
Rensselaer Polytechnic Institute, Troy, New York Master of Electrical Engineering, 1970
Philip Sporn Fellowship
Bachelor of Science, Electrical Engineering, 1969 Eta Kappa Nu



3 / Opportunity Recognition 135
Personal
Member—IEEE
—IEEE Power Engineering Society
—IEEE Industry Applications Society
—IEEE Communications Society
Voting Member—IEEE PES Insulated Conductors Committee
Chairman—IEEE Working Group 12 32
—IEEE Standard 383
—Qualification of Nuclear Power Plant Cables
Chairman—IEEE Working Group 14 2
—Fiber Optics in Power Plants
Professional Experience
BIW Cable Systems
Manufacturing, Boston, Massachusetts
May 1982 present
District Sales Manager
Gary A. Smith
Reporting to the vice president of sales and marketing, responsible for sales of all product lines in seven state region, including New England and New York State (1983 sales $7.1 million). Direct interface with target markets and accounts. Establish forecasts, set key accounts, and formulate overall strategy for various product classes in territory. Supervise and manage three representative agencies (nine field salespeople).
March 1980 May 1982
Inside Sales Manager, Utility and Fiber Optic Products
Complete responsibility for proposals, contract administration, and customer service for market segment with $6 7 million in annual sales.
Supervise support personnel with dotted line responsibility for customer service department.
Review proposals, establish pricing levels and directions. Establish programs for major contracts and monitor performance of various internal disciplines until completion. Interface with customers on all contract related matters and advise and direct engineering, manufacturing, and quality assurance departments.
RCA Corporation, Automated Systems Division
Manufacturing, Burlington, MA
January 1979 March 1980
Senior Level Product Specialist
Responsible for procuring of $1 2 million annually of highly specialized optical and precision fabricated components for combat and field support devices.
Texas Instruments Inc.
Manufacturing, Attleboro, MA
June 1976 January 1979



136 The Opportunity / I
Buyer
Responsible for procuring $4 5 million annually of contracted services for Facilities Group, electromechanical components and capital equipment. Direct interaction with engineering and manufacturing. Preparation of technical specifications. Responsible for vendor selection and development, contract negotiation, quality and delivery assurance, and cost reduction programs.
Education Northeastern University, Boston, Massachusetts
Master of Business Administration/Finance awarded June 1976 Bucknell University, Lewisburg, Pennsylvania
Bachelor of Science in Civil Engineering awarded June 1974
Clint M. Owens
Qualifications in Brief
Successful development and marketing of new Fiber Optic products. Successfully managed the production scale up of new ideas developed in the laboratory.
Extensive experience in solving engineering problems in high temperature wire and cable, including Kapton and Teflon insulations.
Employment
1975 1984
Brand Rex Company
Willimantic, Connecticut
1975 1976
R&D Engineer—Responsible for new product development, principally high temperature wire and cable.
1976 1982
Senior Product Engineer—Developed new products, principally for the military market. During this time, products developed accounted for an increase in sales from $1 million to $10 million per year.
1978 1982
Fiber Optics
Product Engineer—Was the company leader in their entry into fiber optics. Planned, had funds authorized, purchased equipment, and set up the fiber optics operations. Designed and sold fiber optic cables for the data communications industry. Current annual sales over $2 million. Hold a patent for transmission cable aimed at the computer market.
1982 1984
New Product Marketing Manager, Fiber Optics—Promoted to marketing manager while retaining my engineering responsibilities. Work closely with customers in new designs, determine if new products can be made. Thrust is toward proprietary products. Designed and marketed a major new product for LAN use.
1972 1975
Hitemp Wires, Inc.,
Happauge, New York



3 / Opportunity Recognition 137
Director, Technical Services—Principally charged with maintaining an accurate material usage versus estimated costs. Established cost accounting, manufacturing engineering specifica¬tions, and departmental procedures. Twenty five percent of the time was spent with sales, reporting to the vice president of sales and engineering. My sales experience involved working closely with customers on new products. Developed many new products, including Power Buss Assembly (extruded Tefzel bonded to flat cable), Shurheat Heater Cable, Fire Alarm Cable (NY Law 5), and Ullage Cable (Tefzel insulated cable for measuring amount of oil in tankers).
Experience in screw extrusion, cabling, cable assembly, braiding, and quality control.
1972
Dor Flex Electronics of California
Santa Ana, California
Director of Engineering—Designed new equipment for maximum efficiency for polyimide dispersions, taping, sealing, and etching. Maintained liaison with equipment manufacturers and production group to maximize production output. Dor Flex purchased Carolina Wire and Cable in December 1971.
1969 1971
Carolina Wire and Cable, Inc.
Santa Ana, California
Wire & Cable Engineer—Developed new Teflon dispersion, high speed Liquid II applications, new taping methods, and instituted new QC test methods. Designed the power cable system for the Grumman F 14. Also developed the cables used by Sperry Flight Systems and TRW on the Pioneer spacecraft. All polyimide insulations used by General Dynamics, Fort Worth, Texas, for Aerojet (GTR 22) were my developments.¬
1965 1969
E. I. Dupont de Nemours & Co., Inc.
Wilmington, Delaware
Senior Technical Assistant—Worked directly for Dr. Lewis on the development and testing of Kapton. The airframe wiring used by Lockheed on the L 1011 was the primary project. I performed all testing for the "Orange" report. Developed new splice methods for Kapton. Also worked on electrical applications of films, including Mylar, polypropylene, fluorocar¬bons, and so on.
Education Penn Morton College Completed two and one half years of general engineering