Client

Mr. Rupert Meghnot

Project Name

Simulation Entertainment Group, Inc.

Amount

$2,000,000 (Phased)

EXECUTIVE SUMMARY
Simulation Entertainment Group, Inc. is a brick-and-mortar high-tech company where you "Strap In! Shut up! And Hang On!". Our primary market, Family Entertainment Centers (FECs) and arcades, has seen explosive growth in the U.S.: from only 250 in 1990, to 8,400 today (a 3360% increase) - and they (as well as the military and general aviation sectors - our two other markets) crave new technology...
Our patented motion simulator system is at the heart of our simulator product lines, including our "full-motion video game" for entertainment: one or two players climb inside, and the entire system moves as you play - you don't just play the game, you experience it.

Unlike our competitors, who've tried to shoehorn their "cost-no-object" military technology into extremely cost-conscious markets, we've designed our systems from the ground up with our customers in mind. And they've responded...

FEC Distributors and Operators representing more than 10,000 locations have demonstrated our prototype, and have provided us with Letters of Interest and/or Intent for our first products. In addition, Chief Flight Instructors from various commercial flight schools, as well as defense contractors, have shown keen interest in our technology, and our ability to provide precisely what they need - low-cost, high-fidelity, full-motion Flight Training Devices and Full Flight Simulators. We know that we will dominate our markets within the next three years.

MISSION
SEG's mission is to develop and market our full-motion simulator systems to Family Entertainment Centers, commercial training facilities and defense markets worldwide. We will do this by thrilling our customers with the safest, most dependable, lowest cost, highest ROI systems available. We will thrill their customers with excitement, realism and utility that they cannot get anywhere else. We will thrill our employees with a great working environment. And, we will thrill our investors by exceeding their financial expectations.

MARKET
The arcade-based "coin-op" video game industry is hot. Estimates place the number of "street locations" (anyplace with a coin-operated video game) at up to 177,400 in the U.S. alone. Arcades, which range in size from 2000 sq.ft. "game rooms", to 100,000+ sq.ft. Family Entertainment Centers (FECs), number 8,400 (ten percent of these are looking to purchase a motion simulator this year). Over 36 million households in the U.S. spent an average of $114 visiting FECs in 1996 ($4.1 billion). That figure rose 63% - to $6.7 billion, in 2000. This market is clamoring for new product, and simulators are by far the fastest growing segment.

Our first production systems will be delivered within six months, placing 17 of them by the end of Year 1. Once our service program, and our systems' ROI are proven, we will experience strong sales growth: 358 units in place in Yr2, 630 in Yr3, 2010 in Yr4 and 4952 in Yr5 (Incredible Technologies has sold 12,000 of their Golden Tee games in just a few years).

Regarding the multi-billion-dollar Military market, we will sell our patented electro-mechanical motion bases (and operational controls) to Prime Contractors, who will integrate them into their static simulators. There are no low-cost, high-fidelity, full-motion flight sims available to this market. We will be the first. By the end of Year 1, we will also have at least six of our Part-Task Trainers in place, with another 88 within the next four years. Our top-of-the-line Full Flight Sims (FFS) will begin marketing in Year 2, with 31 of these sophisticated flight simulators in use by the end of Year 5.

Regarding the Commercial (General Aviation) market, there are 1231 flight schools in the U.S. (100 of which are rotary-wing - helicopter - schools). Again, there are no full-motion Flight Training Devices in this market, which would drastically reduce training costs (and accidents). Again, we will be the first. Within the first year, we will have eight systems in the field, with a total of 282 systems sold within five years.

Our entertainment placements will come primarily through coin-op distributors, who will either purchase our systems in lots of 3-8 units per sale, or place them as revenue-shared (RS) units at various locations within their territories. These RS units are placed at no charge to the facility operator, who provides us with 60% of the revenues (CASH) from the units on a weekly basis. The remaining 30% units placed will be direct to the facility operator.

We will introduce ten different products to this market (18 products overall), averaging a new one every three-to-four months (75% of the work in designing these systems was completed with our Beta prototype).

Competition consists primarily of a couple mid-size, well-funded simulation companies, who build everything from 2-seat passive ride systems, to 150-seat, multi-million dollar projects for theme parks. Then there are several much smaller firms that are trying to gain market share (from 30-350 units in place). The rest are bootstrapping start-ups (with few, if any, sales). Overall, there are 16 companies offering 25 different products directly competitive to our own (interactive, full-motion systems). The average price for these systems is $105,056, and the average footprint is nearly 250 sq.ft. Our system sells for less than $40,000, and has a 58.3 sq.ft. footprint. Less than 10% of the market can either afford, or have the room, for our competitors' systems, while our technology is available for everyone.

PRODUCT
Our first entertainment product, Interactive Helicopter Simulator (or, IHS) is at least two years ahead of our competitors in features, content, price and - most importantly - ROI capability. It is a two-seat-interactive, full-motion, coin-op, arcade-based video game. Two players climb in, and the entire helicopter cab moves according to the joysticks' inputs.

According to the industry's leading research group, "The VR sweet spot will reach a par with high value high return arcade games. We see this price point being $10,000 to $20,000/seat ... only at this price point will VR begin to be competitive with conventional arcade equipment." All of SEG's systems come under this target.

Though we have many advantages over our competition, some of the most important ones are:

Price - no other interactive simulator system can come close to our price per seat and be affordable to our target market;

Dual-Seat Interactivity - two fully interactive seats (an industry first) doubles our ROI capability;

Easy Installation - installation times measured in minutes (versus hours or days for our competitors);

Reliability - heavy-duty modular construction and remote diagnostics minimizes down time;

Presence - No one will mistake our full-size, fully themed capsule for anyone else's system;

Visuals - A 60", XGA resolution, 800 lumen screen offers the largest, clearest, brightest visual display in the industry;

Electric - just plug and play - put one in your living room;

Content - a world-class PC game (with an exclusive relationship with the publisher);

High ROI - at just 20% capacity, 75¢ per minute, and in an FEC that sees only 100,000 people a year, our systems will pay for themselves in less than six months (industry averages are 31.3%, $1.00/min. & 330K respectively).

No other entertainment simulator systems available to the world today, or in the foreseeable future, can (or will) offer this package of features. We know, we've ridden them all, are intimately familiar with our competitors, and know about their future products.

MANAGEMENT
The founder, Rupert Meghnot, is a nationally known M.B.A. with over 21 years experience as an entrepreneur and management consultant, specializing in high technology start-ups, and offering business, strategic & market planning and capital acquisition services.

Paul Jacobs, our Vice President of Sales and Marketing, has 33 years experience in coin-op distribution, operation, and manufacturing. Stints include successfully opening the U.S. subsidiaries of three Japanese video game developers: Universal Co., Ltd., CAPCOM CO., Ltd., and SNK Corporation, turning them each into large ($100M+) companies. He was also in charge of the manufacturing and sales of both coin-op video games and all consumer video software for play on Nintendo and Sega home systems in the U.S. He brings a WEALTH of coin-op contacts, sales experience, skills, and acumen to SEG, and will be a crucial part of our future success.

Operationally, we have: Tom Easter, our vice president of manufacturing, who took a start-up high-tech manufacturer to $33 million in four years, and won the prestigious Malcolm Baldridge Award for quality; Mike Pieo, our vice president of product development, has over 19 years experience in design, electrical engineering and the manufacturing of simulators for military projects worldwide. He also directed the manufacturing effort of a world leader in simulation for eight years; and, Wayne Fulford, our mechanical specialist, supervised the maintenance of $200M AWACS aircraft (earning numerous medals for his efforts) in the United States Air Force for ten years.

In addition, we have a panel of top-flight Advisors: president & CEO of one of the premier location-based entertainment consulting firms in the world; vice president of one of the top coin-op distributors in the U.S.; former general manager at another top U.S. coin-op distributor; AT&T's chief executive for Florida; and, chairman of the National Center for Simulation. Others include: the president of a consulting firm providing program (& bid) management, analysis and systems implementation to transitioning simulation & training companies; the outside patent counsel for NASA and the University of Central Florida; and, a leading public relations specialist in the location-based entertainment industry.

We have 25 accomplished professionals on our team, who represent many years experience in high-tech manufacturing, marketing, FECs, finance, and simulation & training. No question, these people have the capability to take this company from start-up to publicly traded firm.

FINANCIAL
We are seeking first-round financing of $2 million. This will enable us to achieve our first year's goals: ramp up operations; complete development of our first seven products; place at least 31 simulator systems, and 79 component systems, in the field (entertainment, commercial and military); implement our aggressive marketing plan; and bring aboard those professionals who will insure our growth. We will also form Strategic Partnerships with top video game publishers, coin-op distributors, highly visible vendors and military Prime Contractors.

Our first simulator will be generating revenue within seven months. Within twelve, 12 systems (including three of our second product) will be generating an average of $1250 (each) cash flow per week. All system components will be outsourced, and assembled in-house. Current capacity is at eight systems per month. Within two months, a leased facility will offer up to 65 units/mo capacity.

With 5359 simulator systems (and 889 component systems) placed, SEG will dominate the U.S. coin-op, general aviation and military simulator markets, within five years. Nearly two-thirds of our entertainment sims (3390) will be yielding between $900 & $2000 per week cash flow. We will generate close to $3.5 million in revenues in Yr1, and multiply to more than $182 million in Yr5. Each product has a market expansion plan which will allow us to make absolutely sure our service network (and products) are bullet-proof.

We will invest 24.9% of our revenues into marketing, and over $12 million in R&D over the five-year period. This will generate an EBIT averaging 34.3%. Net Income will grow from $189.5K in Yr1, up to $45.9M in Yr5 (averaging 21.3%).

Our gross margins (entertainment: 30% for Units 1-10, 40% for Units 11-50, 55% for Units 51-100, and 67.5% thereafter; military & commercial: 50%, 60%, 70%, and 80% respectively; - per product) will average 73.7%, mainly due to our efficient design, and manufacturing processes. This is KEY. Our proprietary technology allows us to build higher performance systems, at far less cost, than our competitors. This is yet another sustainable competitive advantage (in addition to the exclusive game publisher and distributor relationships previously mentioned). Our exit strategy is to go public within five years.

CONCLUSION
We have the team, a superior product, and three dynamic markets that are hungry for what we offer. We are in a position to dominate these markets within a short period of time. We have the business, strategic, product and marketing plans to succeed. We will build a highly substantive organization, which will generate profits quickly, and reliably. We have the vision to make this all work. All we need is the capital.

	Year 1	Year 2	Year 3	Year 4	Year 5
Income ($000)
Revenues	3,453	20,867	42,383	88,749	182,047
CGS	1,640	9,627	15,254	22,608	41,030
Gross Margin	1,813	11,240	27,129	66,141	141,017
Expenses
Administration	421	1,244	3,633	6,195	9,508
Operations	221	1,152	2,086	3,848	6,924
Marketing	562	3,488	10,878	23,457	45,784
Product Development	236	1,116	2,337	3,648	4,723
TOTAL	1,440	7,000	18,934	37,148	66,939
EBIT	373	4,240	8,195	28,993	74,078
Employees
Employees	16	77	144	236	355

INDUSTRY COMMENTS
Family Entertainment Centers "are still the fastest-growing segment of the amusement industry. Overall, while the industry's meteoric growth rate has slowed, the fact that Entrepreneur magazine named FECs one of its top ten hottest businesses for three years in a row indicates a continuing interest in development."
- Vending Times magazine

"... the virtual-reality market is sizzling ... annual sales of virtual reality systems could reach $300 billion by 2006..."
- Electronics Industries Association

"Rides based on motion cues from fixed platforms are in. Motion sells ..."
- 4th Wave, Inc. (industry think tank)

"Clearly, the addition of a good virtual reality attraction can make the difference in the bottom line for an arcade."
- Family Entertainment Center magazine

"... there's a trend towards larger simulator games - it's something you can't get at home." "... clients willing to pay up to $250,000 apiece."
- Tourist Attractions & Parks magazine

"... quite impressive ... the concept is great!"

"We found the system to be outstanding ... there is a place for such games in our market place." "SEG has the most innovative full-motion systems ... science centers and museums would want to make them available to their visitors."

"After the demo flight, I am more anxious than ever to have it installed!"

"... the best out there of any we have tried. The motion envelope is great, a job well done!"

"We feel you have a very interesting product, and are on the right track ... We are seriously interested in distributing your 'Chopper Assault!' full motion video game system."
- Letters from Distributors & Operators