OnLinePhoto_ Inc

I ! l ! I PRIVATE PLACEMENT MEMORANDUM I I i i I i onli__ CONFIDENTIAL i ! I ! l Arnhold and S. Bleichroeder, Inc. I I ! I Private Placement Memorandum ONLINEPHOTO, . INC " I This Memorandum is being furnished to a limited number of parties who may be interested in submitting CONFIDENTIAL proposals to invest in OnLinePhoto, Inc. (the "Company"). This Memorandum has been assembled by The sole purpose of this Memorandum is to assist the recipient in deciding whether to proceed with an indepth investigation of the Company. This Memorandum may not be copied, reproduced or distributed to others at any time without the prior written consent of the CompanyInc. ("A&SB") with the assistance of investors for informational Company. Arnhold and S. Bleichroeder, and is being delivered to prospective the management of the purposes set forth above. The recipient will hold this Memorandum and all information herein, or obtained as a resultand opportunities for additional information made available hereunder, confidential for the purpose only of upon the express understanding that such prospective investors will use:it •only in accordance with the Confidentiality Agreement executed by the recipient for the benefit of the Company. , i i I none of the Company, A&SB or their respective affiliates, subsidiaries, agents, advisors or representatives make any representation or warranty, express or implied, concerning any such information, excepting only those representations and warranties that may be made to an investor in a subscription agreement With respect to all information furnished to any prospective investor in this Memorandum beor otherwise, when, as and if finally executed, and subject to such limitations and restrictions as may specified in management and reflect significant assumptions as to future results which may or may not pro'¢e correct. such agreement. be given that such projections in this Memorandum represent estimates by Company Assurance cannot The projections included will be achieved. requests will arrange all information should be submitted or directed to A&SB. Management of the A&SB for additional contacts for appropriate due diligence by potential investors. All inquiries or Company should not be contacted directly under any circumstances. I i All inquiries should be directed to: David E. Basner Vice President 1345 Avenue of the Americas •Arnhold York,S. Bleichroeder, Inc. New and NY 10105-4300 (212) 299-4410 fax •david.basner@asbinc.com (212) 698-3165 Copy Number: ! l ! i ONLINEPHOTO, INc. Table of Contents I l I I. EXECUTIVESUMMARY i II. The Market THE BUSINESS I 7 7 I Products Advantage Strategic and Services 11 9 f Content Licensing Sales and Marketing 21 16 Operational Infrastructure Ill. CORPORA TE STRUCTURE Photo-Personalization Technologies 24 29 23 I V. FINANCIAL I PROJECTIONS 33 30 IV. MANAGEMENT 1 ! i | _.,_._dd _,_'.54'..._N,ad_, ,.7,._. • . . ." _ . . . - : F4_ m p I . ° " '" ,] ,' , , . • " -. -• • ...... •., . . • .. • . . . -_ I NOIJ_D_S __2f / ! I I I including photo-personalized I I. EXECUTIVE SUMMARY OnLinePhoto, Inc. (the "Company") intends to become the dominant business-to-business provider to the online photo industry of photo-related hard goods and fulfillment services, media products featuring licensed entertainment content. •The Company has entered into strategic relationships with several of the leading !ntemet consumer imaging services, including America Online's "You've Got Pictures" and Eastman Kodak's I Photonet.com, to act as the photo-customized hard good fulfillment center for these sites, and is in discussions with other major online photo services. Additionally, the Company has I established the Intemet site Kideo.com to sell photo,personalized home videos, books, calendars, posters, and stickers direct to consumers, and the Company is developing the Internet I sites OnlinePhoto.com and FrameMyPhoto.com to market various photo-related products and I I online framing services, respectively. The Company currently has a $4 million revenue business selling photo-personalized through traditional sales channels, including direct mail and television, products and through its I I I Kideo.com website. Todate the Company, operating under the Kideo brand name, has focused on the market for photo-personalized children's products and has licensed certain characters on an exclusive basis for use in these products, including certain Disney characters and Barney the Dinosaur. The Company has negotiated exclusive• licensing agreements for various other popular entertainment properties with which it intends to aggressively expand the portfolio of products and services it offers to the online photo industry on both a branded and private label basis, and which it will offer direct to Intemet users under the Kideo.eom, I and FrameMyPhoto.eom brands. OnlinePhoto.eom I I The Company has •developed a proprietary, patented process for the high-volume manufacturing of photo-customized media products, and has patent claims pending for various other categories of photo-personalized consumer goods. The Company will leverage its existing manufacturing and fulfillment infrastructure and industry-leading experience in high=volume photo-customized product fulfillment to become the leading supplier to this rapidly expanding markeL I I i Page 1 ,-cl(','J_tda, -d<-,_ q p._&_ma_#, .ff_. ! I Photography industry analysts project that the migration of traditional consumer photography to a digital platform that is now under way will be accompanied by rapid growth in consumer I demand for new Internet-based applications for digital images, as well as for traditional photorelated products I established and services that are enhanced by the web. The Company has already particularly in the itself as a leader in the development of such applications, combining of online consumer images with popular entertainment I content. The Company anticipates that online consumer images will be integrated into, or associated with, a wide range of both online and hard good photo-personalized applications featuring popular licensed content, I including photo-personalized home video (linear analog, linear digital, non-linear digital), digital television broadcasting, interactive software and games, animated online greeting cards, I traditional greeting cards, books, posters, calendars, stickers, stationery, apparel, toys, and more. I Asthe digital tools and delivery systems necessary for increasingly sophisticated methods of • combining consumer images with popular content become available (e.g. photo-personalized I digital television programming), • the Company believes the market for photo-personalized products I and applications will expand even further. •The Company believes it possesses significant, and in certain cases proprietary, competitive advantages in this field, and that those advantages will allow the Company to capture and maintain a leadership position in this I category. I The target market for the Company's products and services, which consists of the combined markets for consumer photography ($14.2 billiona), home video ($17 billion2), children's books I I ($2 • billion3), greeting cards ($7.5 billion 4 ), and other categories of photo-related goods and services that the Company intends to offer, exceeds $40 billion. Imerge Consulting, a leading imaging research firm, projects that the revenues derived from film digitization will grow to $5.6 billion by 2003. Infotrends projects that the number of unique Internet users who store and share photos online will grow to more than 11.5 million by 2003, and more than 30 million digital I I 1Photo Markting Association ("PMA") 2 Video Software Dealers Assocation ("VSDA') 3 Assocation of Card Association 4 The Greeting American Publishers ("AAP") I I Page 2 J_,,. I : - ! I I cameras will be purchased in the same period. By 2002, Eastman Kodak projects that it will be digitizing 44 million rolls of film annually. The Company has no known competitors for several of its major product categories and enjoys exclusive ownership of various patented and/or patent-pending photo-personalization processes I and software applications. The Company also benefits from Kideo's five year operating history as the leading manufacturer of digitally photo-personalized media products, and currently has properties. The I I I uncontested licensing access to many of the most popular entertainment Company intends to exploit these competitive advantages by: (1) securing, where possible, long, term exclusive photo-personalization rights to the most popular content; (2) entering into strategic online marketing partnership with leading Intemet sources of consumer online images; (3) establishing the Company's online brands (,'OnLinePhoto.com .... Kideo.com" entertainment "FrameMyPhoto.com") I as the leading Internet sources of photo-personalized content and related services; and (4) continuing to develop industry leading processes and technologies necessary for the execution and fulfillment of photo-customized hard goods, home I entertainment media, online applications ' and related services. These factors will combine to present significant barriers to entry that the Company believes will protect its leadership position. I. I I I I i The Company currently possesses rights to develop and market photo-personalized products featuring certain Disney characters and Barney the Dinosaur. children's Current product categories include home videos (Barney), calendars (Barney), posters (Barney), and books rights for (Disney and Barney). The Company is currently negotiating for photo-personalization a wide variety of additional properties, as well as for additional categories of photo-personalized Disney and Barney products. Categories in the Company's anticipated portfolio of photo- personalized products include linear analog video, linear digital video, non-linear digital video, still photos, printed matter (books, photo-albums, greeting cards, calendars, stickers, posters, trading personalized applications such as screen-savers, interactive games and animated etc,, and online cards), various substrates transferable to apparel, ceramic, puzzles, buttons, greeting cards. I I I Page 3 d_(gLdS_.,._/_i_, g,.z. N ! N N As the methods for consumer uploading, storage and accessing of digital images on the Internet increased,• have recently the number of Intemet sites offering applications for those images have • begun to proliferate. Hewlett-Packard's PhotoCenter, They include AOL's "You've Got Pictures", Kodak's PhotoNet.com, Excite's Phot0Center, PhotoPoint.com, Wal-Mart's Ofoto.com, Cartogra.com, Intel's GatherRound.com, Snapfish.com, Shutterfly.com, PhotoAccess.com, and others. N PhotoLoft.com, Zing.com, eMemories.com, Each of •these services is seeking to distinguish itself from its competitors by offering applications for digital images that go beyond N basic storage, viewing, and photo sharing. The Company expects that as the leading, and in products and some cases exclusive, provider of several major categories of photo-related N services, it will be successful in establishing relationships with many of the major online imaging services who aim to attract online imaging consumers by offering compelling value-added N imaging applications. The Company has already entered into a strategic agreements with AOL's ! I I "You've Got Pictures", and with PictureVision, Inc., a division Of the Eastman Kodak Company, under which its products will be offered to online consumers through PictureVision's PhotoNet.com online imaging service. The Company is currently engaged in discussions with virtually all of the major online imaging services, and expects to enter into agreements with many of them in the near future. The Company also intends to apply its imaging-related fulfillment competencies to•various other photo-based services. One such area where the Company projects substantial Internet-related ! | growth, and where the Company again possesses significant competitive advantages, is photoframing. Photo-finisher based photo-framing in the U.S. is today a $600 million market 5, and the Company estimates that the overall U.S. photo-framing market is approximately Online consumer imaging will dramatically I simplify the photo-framing $2 billion. process, turning a complicated, time-consuming, and framed? Click to Order?"). "one-click" online impulse buy ("Would you like this photograph expensive process into a The Company expects that the convenience of online framing will induce online consumers to frame some significant percentage of the billions of consumer images that will be viewed online. n ! m 5pMA¸ n Page 4 ,,_d_zad_. __de4, _. ! ! i i The Company believes that thehighly fragmented photo-framing industry, which consists primarily of independent professional framers and large retailers of "off-the-shelf" photo frames (Wal-Mart, Pottery Barn, etc.) can be consolidated substantially by an online provider of a simple, fast, and affordable online framing service. The Company believes it can be that provider by aggressively establishing its FrameMyPhoto.com brand as the leading online ource of photo-framing Services, and by leveraging its strategic relationships with leading online sources of consumer imaging services. i i i i I i i i i i I ! ! l i Page5 ,._/-_da.-ug'_. __a_y. _.U_. ! ! i SUMMARY FINANCIAL PROJECTIONS I i i Revenues Cost of Sales Gross Profit GrossMargin E_ Selling G&A Total OperatingIncome 6 MonthsEnded 31-Jul-00 $970,000 578,937 391,063 40.3% Year Ended 31-Jul-01 $17,918,770 10,157,276 7,761,494 43.3% 31-Jul-02 $47,740,227 26,376,975 21,363,252 44.7% I I I 1,582,464 2,007,618 3,590,082 ($3,199,019) 6,432,807 4,642,120 11,074,927 ($3,313,433) 12,974,104 6,831,086 19,805,190 $1,558,062 I I I I I I I I ! I Page 6 &C_da_/_. __,/z_. _. - . '. ., ,k • ,.. • . ", . r . . : 'k ¸ " . , . " ." ., .. _ " ,\,_ r '. "'," 4 ,. , ,. - . .... . .... , ,. . = H - .j • , t _ f _ 1I NOIJ.3c_S j : II. THE BUSINESS ! I I I The Market Consumer photography is being transformed by consumer adoption of digital means for capturing, storing and managing photographic images. While opinions differ with regard to the timeline for the complete digitization of consumer imaging, there is general agreement that within the next decade Consumer photography as we know it today will become a digital medium. PC Magazine columnist John Dvorak predicts the demise of the film camera "within five years." At such time, he goes on, "resolution and performance reaches a critical mass, and it's all over for film photography." I I I I . I I As consumer digital imaging grows, the Internet will be the primary tool for image storing, image sharing, and other imaging-related applications. The Internet will •enable sophisticated manipulation of consumer images, creating entirely new categories of photo-related consumer products. This migration will fundamentally and irreversibly redefine the ways in which consumers use images, and the Company expects that this will be accompanied by an explosion in demand for various new •digital photo applications. The Company intends to be a leading online provider of various categories of these applications that require the Company's expertise in the high-volume fulfillment of photo-customized products and services. i The migration of photography to the Internet is further evidenced by comments such as the following: i I "We're convinced that sharing photographs through computers is the next stage of the photographic industry. '" Chuck Wolf- President, Wolf Camera I i "In the We "re not there yet, been will soon be all digital." printers. last 10 months .wehavebut we closing our darkrooms and shutting down our machine Terry Corman, President, Firehouse Image Center • • I I Page 7 5_¢_,_da_/_. __a_r, ,.7_. | • ! I "As our customers become more comfortable with the use of home computers, we must develop our business to give them easy access for image manipulation and enhancement." Kevin Donohue, President, Fujicolor Processing n "Digital photography represents thefirst real change in photography in many years, and transforms the activity from passive _,iewing into active participation. " •I Barry Szabo, VP of Consumer Imaging, Kodak I ._ N Over 80 billion consumer images are captured annually, and that number is growing 2%-4% every year. Soon, virtually all of those images will be digital, and they will be stored and shared over the Intemet, a digital network that will eventually link virtually every household. N Today, 50% of American households are computer-equipped, •and 23%, or more than 70 million people, are online. By 2001, these numbers are expected to increase to 74% and 38%, I, respectively: 45% of computer owners have color scanners, 25% own digital cameras, and 40% are shopping on the Internet for photo services. Many digital cameras are now priced under I $200, and sales of digital cameras are projected to triple in the next year to over $3 billion. Accompanying the drop in prices •for digital cameras is an increase in image resolution, with 2 I' million pixel digital' cameras heading for the marketplace at prices approaching $200. I -m '_ I Over 50 million Americans became Internet users in the past five years. The number of web users in the U.S. is expected to increase from an estimated 52 million at the end of i998 to 135 million by 2002. In 1998, the value of goods and services bought online,• excluding cars and real estate, reached nearly $6 billion. Online sales are nearly doubling every 12 months and are projected to exceed $100 billion by 2003. I I Among all households, families with children are the most photo,active. Families with children under 21 years of age are twice as photo-active as those without children, and the younger the children in the household, the greater the photo-activity. More than half of households in which there are children under age 2 process film every month. I I Page 8 ! ! i Strategic Advantage what I The Company believes •it is uniquely positioned and qualified to exploit rapid and sustained Internet-related it projects will be growth in consumer demand for photo-related consumer I. goods sold over the Intemet. The Company's competitive advantages include: i • • First-to-market in online photo-personalization of licensed content Partnerships with leading Internet photo sharing sites Proprietary personalized manufacturing and fulfillment processes Five year digital photo-personalization operating history No current competitors for popular licensed content licensing relationships with major content •providers '1 I -I * • • I _ • I, • • Established photo-personalization • • Existing e-commerce infrastructure for photo-related hard good fulfillment Industry-leading product development organization I I I The Company's four immediate strategic objectives are: • • Entering into strategic partnerships with leading online imaging services/portals Establishment of online brands ("OnlinePhoto.com .... Kideo.eom" and "FrameMyPhoto.com") Acquisition of exclusive photo-personalization rights for the most popular content Expansion of infrastructure and development efforts • • ! By accomplishing these objectives, the Company believes it will Successfully establish itself as i the industry's leading developer, supplier and fulfiller services. The resulting barriers to entry will include: of ph0to-personalized products and I I r. • • Limited access to most attractive strategic online partners Limited access to most popular licensed content m Page 9 ! I • I • Patents protecting OnLinePhoto's manufacturing processes Difficulty of competing with established "first to market" online brands offering most popular content i • Large investment necessary to match manufacturing/fulfillment capabilities, infrastructure and product develo _ment of industry leader with five years of operating I history I . I _I With its leadership in the online photo-personalization positioned to substantially industry, the Company believes it will be expand its licensed content portfolio, as well as to enter into through which the Company can promote a continuously additional strategic partnerships increasing variety of photo-personalized products and applications throughout the Internet and i other digital channels. ! ! ! ! ! • ! ! ! i Page 10 d,,_fd_dSff_._a(_, _ff_. ! | I Products and Services ,. The Company's anticipated portfolio of photo-personalized products that feature licensed hard popular entertainment content can be divided into two categories - photo-personalized goods and photo-personalized online applications. | Photo-personalized I ultimately drop-shipped to the consumer, • hard goods • are those photo-personalized as opposed consumer products that are delivered. to being electronically Fulfillment of photo-personalized hard goods, which are individually customized, often requires i specialized order processing and manufacturing systems, and it is in this area that the Company has developed I unique high capacity photo-customization manufacturing and fulfillment competencies over the past five years. 1 The Company anticipates that its photo-personalized hard good product categories will include: I Photo-Personalized Home Videos (Currently Available) Subject's photo(s) appears throughout a home video episode of a •popular television or I theatrical property. Subject's name is also spoken by characters throughout video in the voice of popular character(s) (e.g. Barney, Winnie the Pooh). Will eventually feature subject being fully animated in either animated or live-action format. All packaging is ! i i fully personalized with subject's name. Photo-Personalized Books (Currently Available) Subject stars throughout book with licensed character(s ). Subject's photo(s) is featured throughout illustrated hard-cover book, and subject's name is featured in text of book. i I Photo-Personalized Calendars (Currently Available) Subject's photo(s) appears over each of twelve months in scenes featuring licensed property, and subject's photo is featured on major holidays. Subject's name is also featured throughout. I I . Page 11 _,_'da._,'_. _'_,_o_, _,¢_. ! ! I i I Photo-Personalized Posters (Currently Available) Subj ect's photo is integrated into scene with popular licensed character(s). Photo-Personalized Stickers (Currently Available in non-licensed format) Subject's photo(s) is printed onto adhesive, die-cut sticker stock alongside, or within border featuring, popular licensed character(s) I Photo-Personalized Greeting Cards (ln Development) Subject's photo(s) is printed on card featuring licensed content. Also features subject's I name and personalized greeting. I Photo-Personalized Apparel(In Development) Subject's photo(s) is printed onto heat-transferable substrate featuring licensed content, then transferred to apparel (t-shirts, bibs, etc.). Subject's name is featured. i I I • Photo-Personalized Puzzles (In Developmen 0 Subject's photo(s) is laminated onto substrate featuring licensed content, then cut into puzzle pieces. Subject's name is featured. I Photo-Personalized Photo Albums (In Development) Subject's photos are output to photographic stock, then bound in personalized photo I i album, accompanied by personalized photo captions and licensed content. Consumer can select layout, cover, etc. I Photo-Personalized Photo Borders (In Development) " • Consumer's photos are output to photographic paper featuring licensed characters on borders. I I Photo-Personalized Mugs (In Development) Subject's photo(s) is heat transferred to ceramic mug. Subject's name is featured. I I Page 12 ! ! Photo-Personalized Mouse Pads (In Development) I Subject's photo(s) is printed onto heat transferable substrate featuring licensed content, then transferred to mouse pad. Subject's name is featured. I The Company's photo-personalized online applications are expected to include: | Photo-Personalized Digital Television Programming (In Development) I Subject's photo(s) and spoken name are integrated into digital television programming featuring popular content. Will eventually feature subject being animated in live-action or I animated format. I Photo-Personalized Online Games (In Development) Subject's photo(s) is integrated into interactive online games, accompanied by subject's I spoken name. I Photo-Personalized Animated Greeting Cards (In Development) Subject's photo(s) is integrated into animated licensed content •featuring popular name and ! i I characters interacting with subject's photo. Consumer can add subject's personalized greeting. Photo-Personalized Screen Savers (In Development) Subject's photo(s) is integrated into downloadable popular licensed character(s): screensaver •featuring subject and Subject's name is, in some cases, spoken by licensed I character(s). ! I • ! ! I Page 13 d_da.o_£_'. _/-a-aea_, a'. ! ! I I I FrameMyPhoto. com The Company's imaging-related e-commerce, manufacturing and fulfillment capabilities• provide it with competitive advantages applications. that can be applied to a variety of online imaging-related as an industry where the The Company has targeted online photo-framing Company believes those advantages can lead to leadership in the market. I The Company intends to be a leader in online framing by: 1) entering into exclusive framing fulfillment agreements with leading Internet photo services; 2) establishing i FrameMyPhoto.com as the most recognized online brand for framing services; and 3) patenting various online framing-related technologies and processes. The Company currently has a variety I of online framing-related patents pending. I The • PMA estimates that the photo-finishing based market for photo-frames in 1999 is approximately $600 million. I This number represents photo-framing services sold to consumers at photo-finishing locations. While consolidated sales figures are not available for all U.S. photoframing services (including professional framing, non-photo-finishing retail• frame sales, etc.), frames of $2 billion I the Company estimates annual U.S. household spending on photo I ($20/household x 100 million households). i Traditional depending on whether or not the photomany as four retail visits or framed using the consumer, consumer photo-framing requires as is professionally framed on the part of an off-the-shelf photo frame purchased at retail, Framing typically involves the enlargement of the photo in question, the selection of an appropriate frame, the selection of a matte (for professional frames), and the assembly of the frame (by consumer or professional framer). This process is inconvenient, time-consuming, and in many cases expensive. These inhibiting factors often lead consumers to not follow through on intentions to frame favorite photos. I I I I Web-based photo-framing will eliminate Virtually all of •the inhibiting factors that keep consumers from framing as often as they would like. Online framing services will turn photoframing into an impulse purchase that provides the consumer with a greater selection of product I I Page 14 _a.gz_da.o_.__...._,6_a_y, ._ff_. ! ! options (frame/matte/price), I an advance preview of the finished product and home delivery of the The finished product as quickly as the next day, at a lower price than traditional framing. Company expects that the convenience of online framing will contribute to a significant increase I in average household framing-related spending. I The Company has developed software for its FrameMyPhoto.com service that is designed to software include: ! I b feature the advantages of online framing. Features of FrameMyPhoto.com • • • Photo uploading from any digital image capture device (digital camera, scanner, etc.) Importing of images from online photo-archiving service Customer selection of order specifications (off-the-shelf or professional frame, size of enlargement _price range, etc.) I •• 1] I • •• • • Scrolling through photo frames that each appear around customer photo Customer selection of matte size, color, pattern (including licensed content) Viewing of assembled components, including 3-D rotation Customer selection of shipping options (Overnight, 2 Day, USPS) ! I I The front-end of the Company's e-commerce architecture is ideally suited to accommodate online framing orders. Back-end fulfillment of framing orders will require the addition to the Company's fulfillment systems of various high-resolution photographic• output devices that will digitally print online photos. I The Company is designing a professional framing assembly environment designed to fulfill high daily volumes• of orders requiring professional framing. The Company is also in discussions with several of the major manufacturers of both professional framing supplies and off-the-shelf frames. I ! I I While the current average resolution of photos available online is in many cases inadequate for framing, the Company projects that within 2-3 years the average resolution will increase to a level that will ensure that the majority of online photos can be output by the Company at resolutions acceptable for framing. n Page 15 d_g-_/d_z/S_. _-__, _. I I I I I I I Sales and Marketing Online Sales The Company's online sales strategy targets five major Internet sales channels: • • • • • Intemet portal imaging services Non-portal imaging•services OnLinePhoto websites Content provider websites Online retail sites I Internet Portal Imaging Services. As consumer online imaging has grown, major Intemet portals I (e.g. AOL, Yahoo, Excite) have moved to provide online imaging services within their sites (AOL's "You've Got Pictures", Excite's "PhoteCenter") in order to exploit the fact that a user of I a particular one of these services is likely to remain loyal to that service because that is where the user's images reside. These services are ideal channels through which the Company's products I and services can be promoted t0an audience that is accessing or viewing •online images at the I I i I I I time they are offered the Company's products. The Company anticipates that these services will provide users with a variety of applications for their online images, using a series of icons that appear adjacent to the image(s) the user is viewing. The'Company expects that its products will be represented by several of these icons, • can be each representing a particular brand of licensed content (Disney; Nickelodeon, etc.)that applied to the users' image. The user can click on any of those icons and immediately order any of the related products. The user's image will be automatically attached to the order. The Company is currently in discussions will all of the major portal imaging services, and expects to enter into commercial agreements with selected partners in the near future. The Company expects that these agreements will include a revenue sharing component that will provide for the portal to receive a percentage of sales generated Viatheir imaging service. | I Page 16 &C_a/eo/da,dSf'. _,_g,_m._e J,_. I ! I Non-Portal Imaging Services. portals, I In addition to the imaging services being offered on Intemet on the Intemet of non,portal based consumer there has been a recent proliferation imaging services that offer similar services such as online archiving, photo-sharing and online photo albums. Some of these services are owned and operated by parent companies I Photonet.com, Hewlett-Packard's Cartogra.com, Intel's GatherRound.com, (Kodak's Excite's PhotoCenter, Wal-Mart's I Snapfish.com, eMemories.com). •I PhotoCenter), and others are Internet start-ups (e.g. Shutterfly.com, PhotoPoint.com, Ofoto.com, PhotoLofl.com, Zing.com, PhotoAccess.com, The Company is engaged in discussions with each of these services, and believes that it will be successful in placing its products and services, or links to the Company's online services, on at least half of these major services. I I I i The Company has entered into a two-year strategic agreement with the PictureVision division of Kodak under which the Company's products will be offered online on Kodak's PhotoNet.com site and on the sites of PhotoNet affiliates, which includes companies such as Wolf Camera and Mystic Photo. The Company will also provide its own online customers with access to consumer images stored on Kodak PhotoNet online. The • Company has also entered into a Memorandum of Understanding to supply America The Company I Online's "You've Got Pictures" with a variety of photo-customized products. i expects its,products will launch on "You've Got Pictures" during the summer of 2000. i OnLinePhoto Websites. The Company currently offers its products productsvia Kideo.eom, the leading e-commerce site dedicated to photo-personalized children's online featuring licensed popular content. Features of the Kideo.eom site include photo-uploading and personalized •shopping. The •Company intends for this site to remain the primary venue for its photopersonalized children's products. I I I The Company plans to develop an additional online site, OnLinePhoto.eom, where additional photo-personalized products targeting a non-child audience ("South Park","The Simpsons")will .. I I Page 17 &C_:_d_,_/2_.,._N_,_a_4 ,_ffa.c,. ! ! be offered. I The. Company also intends to offer additional photo-related services via OnLinePhoto.com and FrameMyPhoto.com. I The Company will promote its sites using offiine media vehicles (print, radio, TV, mail), links to partners, and Intemet affiliate marketing programs such as Linkshare. m Linkshare is the largest Internet affiliate marketing network, with over 65,000 affiliatesl The Company will post banners linking to the Company's sites on the sites of approved Linkshare affiliates. The Company will I pay a negotiated sales commission to sites from which purchasing customers are forwarded. I Content Provider Websites. The most qualified online consumers of any particular licensed brand of the Company's products will be those consumers who visit the websites that are n dedicated to that brand (e.g. Disney, Barney, Nickelodeon). The Company's Kideo.com website is currently linked to both the Disney and Barney website, and the Company expects to be linked m similarly to the sites Of most of the content providers With whom it enters into licensing agreements. I These links will allow, for instance, a visitor to the Blue's Clues section of the Nickelodeon website to click on a "Be a Blue's Clues Star?" icon that will bring that visitor to the photo-personalized Blue's Clues section on the Company's site. m m m i The Company includes a request for a link to the content provider's licensing rights. site in all proposals for Online Retail Sites. As consumer online imaging grows, more and more consumers will have immediate online access to images they have stored on their hard-drives. This access will make it practical for the Company's products to be offered by retail e-commerce sites such as Amazon.corn and Etoys.com, where the consumer can order the Company's products by filling out an online order form and attaching an image stored on the customer's hard-drive. m | I -_ The Company is in discussions with several of the largest online retailers of videos, books, toys and gifts. The Company is proposing to online retailers the establishment of photopersonalization shops within their retail sites where consumers can select from a variety of photo-personalized products featuring popular licensed content. These shops would feature an I Page18 _¢y,_(_/_'_. 9_r, _. ! ! imaging-oriented ordering process, co-developed by the Company and the retailer, which would I •facilitate the online ordering of photo-personalized goods. ! ! I Offline Sales and Marketing The Company expects that traditional ("offiine") direct-to-consumer sales will initially represent the majority of revenues. As consumer online imaging and overall e-commerce grows, the Company expects that offiine sales will decrease commensurate with that growth. ! I I The two major sources of offline sales projected by the Company are (1) direct-to-consumer mail, TV, print, radio, and (2) co-op direct-to-consumer marketing between the Company and content licensors. Mail, TV, Print, Radio. The Company's offiine media advertising will provide consumers with I the option of ordering online or through offiine channels (telephone, mail). In the event that a consumer does not have Internet access, that consumer has the option of placing on order by phone or mail. In the event of a phone order, the consumer provides all necessary order information over the phone, then mails the necessary photo(s) to the Company. I ! A typical offline promotion for the Company's products will feature the Company's I sites ! I I ("Come to Kideo.com and make your child a Disney star!"), but offer the option of an offline order (". •. or call 888-88KIDEO"). The Company plans to mail a catalog of its products to the Company's housefile and outside lists several times per year. That catalog will encourage customers to order over the Company's websites at special•prices, but will also allow for customers to mail in an enclosed order form. m• m • I Page 19 _¢rrJ_/'da._. _,_z_, _,¢_,_. I, I Co-op I Promotions. When entering into licensing agreements with content providers, the Company typically agrees to develop cooperative marketing programs with the licensor that promote the Company's i home video buyers)via products to the licensor's customers (e.g. Barney non-personalized inserts in product packaging, trailers on videos, etc. The Company expects to engage in such co-op promotions with the majority of content providers it has I targeted. These programs generally have low costs and yield high returns on investment due to the highly qualified nature of the audience. ! ! ! ! ! ! I ! ! ! ! ! I 1 Page 20 _,-J_ofd_,_/_ _.__a_, J_',,_. ! I I Content Licensing The Company views its ownership of photo-personalization rights for popular entertainment content asboth the most substantial barrier to entry for potential competitors, and as the most effective means of achieving the Company's online branding objectives. I I I The Company aims to have its online brands recognized by consumers as the leading source of photo-personalized online products and services featuring popular entertainment content. In order to accomplish this goal, the Company must secure long-term photo-personalization rights to as many of the most popular and well-respected entertainment properties as possible. Successful execution of this strategy will severely limit the ability of a potential competitor to establish a competing brand as a significant source of photo-personalized products. I I The Company believes, based on its experience to date, that it will be successful in securing long-term photo-personalization rights to the majority of the properties it has targeted due to several competitive advantages: I I • • • No known competitors in the photo-personalization category Desire of licensors for incremental revenues generated by a new licensing category The Company's demonstrated history of successful development and marketing photo- ! I personalized products featuring popular licensed content (Disney, Barney) • Ability to generate exposure for a property via extensive online promotion of photopersonalized products and strategic online partnerships I The Company has already secured photo-personalization I rights for various Disney and Barney personalized products (home video, books, calendars, posters), and the Company is currently negotiating to extend the terms of those agreements an additional five years, as well as to add to I those agreements additional categories of photo-personalized products. I i. Under the terms of the Barney License, the Company has the exclusive fight to market one photo-personalized Barney video title for the five year period ending June 30, 2002. The I Page21 ,_a(_cC_da_o.d_. _-_(_,_a_ _. ! ! l I I m I Company's license for three photo-personalized Barney books runs through September 30, 2002. Both licenses apply to Canada and the United States and its territories and possessions. The Company makes quarterly royalty payments subject •to a specified minimum royaltyper sold. unit The Company's licensing agreement with The Disney Publishing Group provides for Kideo to produce four English language photo-personalized books. These books feature Disney standard characters (Mickey Mouse, Minnie Mouse, Donald Duck, Pluto and Goofy) as well as two characters from "The Lion King" and "Toy Story". The license for these four books runs through i April 30, 2000 and extends to Canada and the United States and its territories and possessions. Although Kideo holds exclusive rights to the books it creates under the Disney license, Disney I can choose to license these characters to other parties to create photo-personalized books. i Other properties the Company is pursuing rights for include Arthur, Teletubbies, Nickelodeon (Blue's Clues, Rugrats), Sesame Street, South Park, The Simpsons, Star Wars, Pokemon, I Peanuts, Barbie, Dilbert, Wamer Bros. characters, and major sports leagues. Photo-personalized i _ i i categories for which the video, still photos, printed matter (books; photo-albums, greeting digital video, non-linear digital Company is seeking rights include linear analog video, linear cards, calendars, stickers, posters, trading cards), various substrates transferable to apparel, ceramic, puzzles, buttons, etc., online photo-framing systems, photo' borders, photo albums, and online personalized applications such as screen-savers, interactive games and animated greeting cards. i The Company seeks licensing terms that provide a minimum of five years of exclusivity in the photo-personalization category. Typical terms provide for a royalty of 10-15% of the Company's gross revenue generated by a licensed product and a guaranteed minimum royalty-for the term of the agreement. In most cases a percentage of the minimum guaranteed royalty will be payable as an advance upon signing of the agreement. The Company projects that the average licensing and product development expense associated with each new licensed property will be approximately $450,000. ill i i ! I Page22 SC,-Judda.,d'Sf'. _,_h,J,_-o_a_, N. ! I I I Photo-Personalization Technologies The Company possesses patented technologies related to digital media personalization that it believes pose substantial obstacles to potential competitors. automated The Company's technology and patent rights can be broadly applied to any process that merges consumer specific variable data: for example a photograph supplied by a consumer I with a standardized template of data, where the variable consumer data is inserted into, or merged with, the template data based on a prescribed set of coordinates or insertion points, i thereby resulting in a customized end product featuring the combined variable and template data. l The customization applications of the Company's technology and patent rights include linear analog video, linear digital video, non-linear digital video, stil ! photos, printed matter (books, I photo-albums, greeting cards, calendars, stickers, posters, trading cards), various substrates I | I transferable to apparel, ceramic, puzzles, buttons, etc., online photo-framing systems, and online personalized applications such as screen-savers, interactive games and animated greeting cards. These applications lend themselves to the use of popular licensed content, such as Disney characters or Barney, for example, for which the Company has existing contracts. The Company believes that it is unlikely that a potential competitor will be able to execute competing products without violating the Company's patent rights. The Company's existing and I pending patents cover the automatic scaling and merging of personalized content with standardized template data, and protects the business and financial aspects of offering such I customized services online. I I It should be emphasized that the Company's process is protected regardless of the output device/media (DVD, online, etc.), thereby ensuring a long-term protection regardless of future changes/innovations in delivery mechanisms, media, etcl I I. • I Page23 d_.oCoeeda_/_. e_/o_a_a_ee'._. _ ! I I I I Operational Infrastructure E-Commerce The Company has adopted an e-commerce strategy that features robust, flexible, and proven technologies that are scalable, versatile, and can accommodate the specific strategic requirements of the Company's unique imaging-oriented business model. I i The Company applies a data-driven approach to all web and application development efforts. The use of data driven web development techniques allows for: i • Highly personalized online shopping experience (e.g. automated web content personalization) Instant modification of site content Centralized website administration Simplified online partner and affiliate integration Rapid scaling of site capacity I • • • • I | The Company's advanced, fully secured data centerresides I .. in New York City at the newly installed facilities of Globix Networks, a high-bandwidth, state-of-the-art data center featuring: I • Redundant, tri-ringed SONET network connections through OC-12 (155 Mbit backbone) from AT&T, MCI, and Sprint, private peering relations with >100 networks, including AOL l • I • • I • • I • Backup, diesel-generator equipped, fully line conditioned UPS power systems Fully secured data center with state-of-the-art biometric security access features Fully fire-secured data center with FM-200 fire-suppression and oxygen vacuums 24x7 war room monitoring, plus 24x7 onsite access to your server farm 100 M-bit capable, redundant ports switch access with flexible and burstable bandwidth Full port-level monitoring, as well as port level security at the Cisco 7000 router level I I Page24 _,_¢da¢_/_. _,_¢_d_, ,.5_rw. I I The following diagram illustrates the Company's I featuring load-balancing, co-hosted Intemet hardware configuration, high-speed RAID drive arrays, and data backup and redundancy capabilities: I Loc_lDirect_ eadbalancer L i I_d.iant 1850RWebServers I / i /, I// I Cat5Cables I I Storagdh'orks T1_881 Mini.Library DLT i Ccmpaq PrcLiant 8,,_OR 1 _4 paqRAIDArra/4(00 I I Manufacturing and Fulfillment I Inherent in the Company's fully digital custom manufacturing and fulfillment operations, an environment in which each product is digitally photo-customized for each customer, is the need to successfully receive, route, process and track the complex multi-dimensional relational data and image data that constitute each order transaction, •Utilizing internally developed client/server database applications to manage the complex variable dataused in its operations, the Company is uniquely skilled in image-based digital custom manufacturing and fulfillment. These competencies are the foundations of the Company's web-centric business model, and they are what drives its operations and .distinguishes it from potential competitors. I I I | I Page 25 • . _,'z,(,_ccd'a,,-d'--_- J__&_-,/o_-a_, I I The following is a diagram of the Company's Order Receiving, Routing and Fulfillment I architecture: I Order Taking I I t Te'ev's'°n I _ _:_t2 '2__J I 'nterne' I I i I t-_°° _ I I _-_°° , I _'1 [Mer°'antt°M°rcha°tl I '_'iat°N°_°_ _ I -I _e°s't° I i-I Itions I _,_, Ope.r;Kt( _,o Order Fulfillment Prodl iction I Sener & I I Re Jter I i V,d_o,Au_io Photo'maga I I I I I Vidao Video CD Streaming I I prints all sizes Storage Stickers l va"ab'eP"nt I I Calendars P.oto-writer on.he _aserP._ter: Co.or o,gi_,Press: D_: P E-books I DVD Video 1 ! i ] Order Delivery Package Framing 1 US Mail FEDEX Delivery Shipping & ' Delivery Internet I i I _ I ! I | I Page 26 &Cy,-ugafda,_d_'_. ,._a_. Jz'a_. m | This order processing and fulfillment architecture has been designed to accommodate a wide I range of photo-customized products. New product categories can easily be integrated into this architecture with the addition of the necessary output device(s)to the workflow. ! While the manufacturing of certain photo-customized hard goods combines both automated and i manual manufacturing processes, the Company expects that its fulfillment of most online photopersonalized products and services will ultimately be fully automated and fulfilled in real time. I i Online photo-personalized applications (e.g. photo-personalized animated screen-savers) follow the same fulfillment process, but end at step #4, where the finished product is delivered electronically to the consumer's desktop. ! i I I I ! I I ! ! I i Page 28 5_z.gofdao, g',__. _ea(_, g_. • -L ,_ • " . "'r!'_;.ir .... . "... i-'' • i_'II:" _i ........... _''_ k • . • _" .. _ _'I r _ _ - • " _ _,1 _ . ¸ • _..-r • .- • . ." . _ _ _ \ ' .",._.. .... _,' .• I. k ..... "-_.. •...-,.__ii_. _--.;,L.,__ ,_ . __._k'_. _...... ....._.,_, .. i _ " k-.• _.. ,, " • • _- " . .. . .";!_ • - .i_'- • • I , = ._ • .., .,. ... . . • - • • "' • , • . • ! ! I I I III. CORPORATE STRUCTURE In order to fully exploit online opportunity, Kideo Productions, Inc. (the "Parent") has organized a new subsidiary, OnLine Photo, Inc. (the "Company"). The Parent has contributed substantially all of its assets to the Company including: I a) All patents and patent applications b) All trademarks c) Internet domains Kideo.com, OnLine Photo.com, FrameMyPhoto.com, MyArt.com, PhotoPersonalized.com and ephotosonline.com Frame I I d) All material licenses including the Lyons Partnership (Barney) and The Disney Publishing Group licenses e) Agreements with PictureVision, Inc. and "You've Got Pictures" f) All other material contracts, rights, technology and other assets I I I In addition, all employees and their employment Company. agreements have been transferred to the I The Parent Company will act strictly as a publicly traded holding company. I The Parent will receive a royalty fee from the Company in order to pay for the costs associated with its continued, limited operation including its public filing fees and accounting costs. These costs are l not expected to exceed $200,000 per year. I I I I I Page 29 &g_daz_. _.__r, _,Ta, c. j _sF_c_ioNiv \ __ m, ! ! i I i IV. MANAGEMENT Directors, Executive Officers and Key Personnel The names and ages, along with certain biographical information, of the directors and executive officers of the Company are as follows: i Name Age Position i •RichardA. Gravitz Steven L. Bulman 35 37 Chairman of the Board and President Chief Information Officer i Brad Dahl Thomas Griffin Michael D. Bulman Richard B. Solovay 40 60 40 63 Vice President of Development Director Director and Secretary Director I I i •Richard L. Bulman is the founder of Kideo Productions and has served as the Company's Chairman of the Board and President since its inception in August 1993. Mr. Bulman was the original developer of the patented manufacturing technologies utilized in the Company's manufacturing processes. Prior to founding Kideo, Mr. Bulman was Director of Application Development at Targa Systems Corporation, the multimedia software development firm, where he was responsible for the •design and development of PC-based multimedia software systems for Fortune 500 clients. Prior to his employment at Targa, Mr. Bulman was a principal in Bulman Consulting, an international marketing consulting firm based in Milan, Italy, where he oversaw development of international marketing programs for various multinational Clients including Montedison and Instrumentation Laboratories. Richard L. Bulman is the son of Richard D. Bulman, a director of the Company. I ^4 I t I I I Steven A. Gravitz is the Chief Information Officer of K_ideo, and has •overall responsibility for technology development and internet strategy. Prior to being named CIO, Mr. Gravitz served as I I Page 30 _¢_,,Jagda.ud_. _X._, ,7. ! ! Manager i of Information Services, responsible for all application soft-ware and database development. tools Mr. Gravitz has 15 years of experience working extensively with client/server development and building enterprise resource planning and back-end fulfillment systems. Previous to joining Kideo, Mr. Gravitz was Programming Manager at EMR Systems Communication, a leading i ! i i digital pre-press and digital printing organization, where he was responsible for the design, implementation and management of all corporate and production software application s. whose Prior to EMR, Mr. Gravitz was a principal in the consulting firm of Gravitz and Lau, clients included Conde Nast publications, Bell and Howell, SD Warren, Market Metrics, and I Amnesty Intemational. Additionally, he served as Manager of Programming Services for ! i i --- Micrognosis, and was employed by Epson as a Software/System s Engineer. Brad DaM is the Company's Vice President of Development. Mr. Dahl has 18 years of multi- disciplinary experience in fields including product development, systems architecture, e-business strategy, and intellectual property management. He is Currently responsible for all product Mr. Dahl technology and manufacturing systems development, automation and implementation. also acts as technical liaison for 3rd party hardware and software systems development. I i Prior to joining the Company, Mr. Dahl was Creative Director for Interactive Videosystems in Vancouver, B.C. from 1993 to and There he was responsible Kideo purchased digital video customization technology 1995. product content. In 1995, for the developmenttheofproduct rights and technology assets of Interactive Videosytems, at which time Mr. Dahl was named to I his current position, I -at I From 1984 to 1990, Mr. Dalai was President of Alphatel Videotex Directories Ltd. in Edmonton, Alberta, where he was a leading developer of videotex and online Yellow Pages for in-home •interactive television applications for telephone companies and government agencies. Mr. Dahl's pioneering work in this field has been published in various trade journals. I Page31 ! ! I Thomas Griffin is the Co-Chairman of Griffin Bacal, Inc., an advertising agency he founded in 1978. I Griffin Bacal focuses on the advertising and marketing of entertainment products and services for children and adults. Mr. Griffin is also the founder of Sunbow Entertainment, Inc., a company I that produces for children. and distributes animated and live action dramatic television programming Mr. Griffin also serves as a director of both DDB Needham Mr. Worldwide and the Eastern Region of the American Association of Advertising Agencies. I Griffin has been a director of Kideo since 1996. i Michael B. Solovay is a founding stockholder of the law firm Solovay Edlin & Eiseman, P.C. From i986 through 1991 Mr. Solovay was associated with Skadden Arps Slate Meagher & i Flom. Mr. Solovay has been a director of Kideo since 1996. i Richard D. Buhnan is the Acting Chief Financial Officer and Secretary of Kideo and is From March 1988 through January 1991, Mr. Bulman was . Chairman of Targa Systems Corp. I Vice President and General Manager for the International Market Network (IMNET), a joint venture between IBM and Merrill Lynch & Co. For the preceding 30 years, Mr. Bulman held various positions at IBM, including Group Director and Chief Financial Officer of the U.S. I i Product Group, Group Director of the of the Marketing andBureau Corporation. Mr. Bulman has Chief Financial Officer and Treasurer U.S. IBM Service Services Group, and Vice President, also served as President of Bedford Associates, a subsidiary Of British Airways, Chairman and I Ii Chief Executive Officer of Information Systems, Inc., a techriology outsourcing company, and a conSultant to various venture capital firms. Mr. Bulman has been a director of Kideo since its inception in 1993. Richard D. Bulman is the father of Richard L. Bulman, the Chairman of the I Board and President of the Company. ! | ! i Page32 d,-,Judda.-_5_._hd-o_od_, ,.q_. " " ' - " • - J "- • .. , - , . - . . . • - - IE _ _ . ., • • ,,- \ . • • • . - • ,I , • . . ." • • • .., • ..... 1 ". . m m m m m m m m m u m mm m n m m m m m Online Photo, Inc. ProjectedStatementof Operationsand Cashflow Six Months Ended 7/31100 $ 970,000 578,937 391,063 Fiscal Year Ended 7131101 7131/02 17,918,770 $ 47,740,227 10,157,276 26,376,975 7,761,495 21,363,251 Sales Cost of GoodsSold Gross Profit Expenses Selling General and Administrative Total Expenses Net Income (loss) from Operations Add: Depreciation Amortization Cashflow from Operations Less: Manufacturing Equipment Leasehold Improvements Working Capital " Royalty Advance Licensed Product Capital Content Cost Licensed Product Online Photo Setup Costs $ 1,582,464 2,007,618 3,590,082 (3,199,019) 39,000 204,000 243,000 (2,956,019) 6,432,807 4,642,120 11,074,927 (3,313,432) 98,000 431,250 529,250 (2,784,182) 12,974,104 6,831,086 19,805,190 1,558,062 251,333 1,293,750 1,545,083 3,103,145 999,999 3,009,700 450,000 450,000 " 1,000,000 5,909,699 (8,865,718) 120,000 999,999 179,188 450,000 2,250,000 3,999,187 (6,783,369) 510,000 999,999 477,402 600,000 1,200,000 3,787,401 (684,256) Net Cashflow Net Cash from Investment Cash Available $ 18,400,000 9,534,282 $ 2,750,913 $ 2,066,657 mm m mm m m mmm m m mm m mm m m n m mm m mm Online Photo, Inc. ProjectedStateloentof Operationsand Cashfiow February-00 Sales Cast of GoodsSold Gross profit Expenses Selling General and Admi+list r'=ltive TotalExpenses Net Income(loss) fromOperations Add: Depreciation Amortization Cashflowfrom Operations Less: ManufacturingEquipment LeaseholdImprovements Wod