1. TABLE OF CONTENTS
BUSINESS PLAN.......................................................................................................1
EXECUTIVE SUMMARY ............................................................................................3
MISSION STATEMENT..............................................................................................5
IMMEDIATE FINANCING NEEDS..............................................................................7
COMPANY GROWTH (STAFF)..................................................................................8
Creative Packaging .................................................................................................8
Sales and Marketing Staff........................................................................................8
Management ...........................................................................................................8
STAGE ONE SALES OBJECTIVES ...........................................................................9
Estimated Unit Sales ...............................................................................................9
Estimated Manufacturing Costs...............................................................................9
Estimated Pricing.....................................................................................................9
Payment ..................................................................................................................10
Stage Two ...............................................................................................................10
INDUSTRY OVERVIEW .............................................................................................11
COMPETITIVE STRATEGIES....................................................................................12
OPPORTUNITY..........................................................................................................13
MANUFACTURING, DISTRIBUTION, SALES & MARKETING...................................15
RETAIL PAYMENT AND COLLECTION..................................................................17
MARKETING STRATEGIES....................................................................................18
Trade Shows ...........................................................................................................18
Retail.......................................................................................................................18
Internet Market Potential..........................................................................................19
E-commerce Part 1..................................................................................................19
Search Engine Optimization ....................................................................................19
Online Marketing .....................................................................................................20
E-commerce Part 2..................................................................................................20
Linking Strategies....................................................................................................20
Banner Ads vs. TV Ads............................................................................................21
Advertising...............................................................................................................21
Direct Response Associates....................................................................................22
Outside Advertising Agency.....................................................................................22
Outsourcing Ad Sales: First Phase..........................................................................23
In-House Ad Sales: Second Phase..........................................................................23
Off Line Marketing ...................................................................................................23
Print Advertising ......................................................................................................25
Record Clubs...........................................................................................................25
Marketing Partners ..................................................................................................25
Member Incentives and Rebate Program ................................................................25
INFLUENCES.............................................................................................................27
RISK FACTORS.........................................................................................................28
2. Page 2
MANAGEMENT AND ORGANIZATION .....................................................................31
MANAGEMENT PERSONNEL...................................................................................32
MUSIC, INTERNET and E-COMMERCE INDUSTRY ANALYSIS ..............................35
E-commerce Emerges as Fastest-Growing Activity .................................................36
Online Becoming Central to Everyday Lives............................................................37
Web Site Design and Hosting..................................................................................39
Demographics ............................................................................................................41
Products. Pricing, and Profitability ..............................................................................42
Corporate Premiums and Bundling..........................................................................42
Retail Through Distribution ......................................................................................42
TV, Direct Response Marketing and Internet E-commerce......................................43
Catalog and Mail Order............................................................................................43
Audio books on Tape/CD.........................................................................................43
FINANCIAL STATEMENTS........................................................................................44
Start-up Funding and Use of Proceeds....................................................................44
Revenue Projections/Operating Expenses ..............................................................45
EXHIBIT A – DEAL MEMO LETTER EMI-CAPITOL...................................................47
EXHIBIT B – RECORD AGREEMENT DRAFT...........................................................48
3. Page 1
BUSINESS PLAN
This Summary has been prepared by Re-Q, Inc. (The ReQuest
Company), to provide a general introduction to the business of The
Company for prospective investors. It includes The Company’s business
model and strategy, target market, portfolio investment, services and
financial structure and performance projections. It is not intended to
provide a comprehensive understanding of The Company, its history and
prospects, and the risks associated with an investment in The Company.
This Summary does not constitute an offer to sell, or a solicitation of
an offer to buy, any securities of The Company. Rather, it is
intended to facilitate further discussions with parties indicating an
interest in pursuing an investment in The Company. Any such
investment will be preceded by an additional disclosure to be
provided by Re-Q, Inc. and presentations by The Company’s
management and advisors. Actual investment offers or solicitations
will only be made pursuant to applicable securities laws.
The Company will give to interested parties the opportunity to ask
questions and receive answers from The Company concerning all
elements of its business, and will obtain any additional information
requested to the extent it has such information or the information is
reasonably obtainable.
Statements made in this Summary are made as of the date hereof
unless otherwise stated and the delivery of this Summary shall not at
any time nor under any circumstances create an implication that the
information contained herein is correct as of any time subsequent to
its date.
Statements about The Company's future expectations, including
future revenues and earnings, and all other statements in this
document other than historical facts are "forward looking
statements". When used in this Plan, words such as "believes",
"expects", "plans", "anticipates", "estimates", "projects" and similar
expressions are intended to identify forward-looking statements,
although there may be certain forward-looking statements, not
accompanied by such expressions. The Company intends that such
forward-looking statements be subject to the safe harbors created
thereby.
All projections included in this Summary are based on estimates and
assumptions that are subject to operational and competitive
uncertainties beyond the control of The Company. There can be no
assurances that the projected results will be realized or those actual
4. Page 2
results will not differ materially from those projected. By accepting
delivery of this Summary, prospective investors and other parties
recognize and accept the need to conduct their own thorough
investigation and to exercise their own due diligence before
considering any investment in The Company.
Neither The Company, nor its officers, directors and agents makes
any representation or warranty with respect to the information
furnished in this Summary except for such representations and
warranties that may be made in a definitive agreement with respect
to an investment in The Company when if executed, is subject to
such limitations and restrictions as may be specified in any such
agreement.
Prospective investors who receive this Summary also agree that they will
hold the contents of this document and all enclosures, related documents
and supplemental documentation in the strictest confidence and that they
will not copy, reproduce or distribute any of these materials, in whole or in
part, or utilize the contents hereof for any purpose other than to evaluate
an investment in The Company, and will return all materials provided by
The Company within twenty (20) days if the recipient decides not to
pursue an investment with The Company.
5. Page 3
EXECUTIVE SUMMARY
The proposed business of The Company is the packaging, marketing
and selling of music, DVD and audio books-on-tape. This will be
accomplished through the establishment of several internal divisions.
Through Re-Q CD & Tapes (The Mid-line Label), a fully owned
private division of The Company, catalogs of popular recording
artists will be packaged into new compilations and reissues, and sold
in multiple markets. The catalogs will cover a wide variety of
categories, including Rock, Pop, Country, Easy Listening, Feel
Good, Rhythm & Blues (R&B), Rap/Hip-Hop, Dance, Classical,
Gospel and Classic Golden Oldies, and all artists will have attained
worldwide gold, platinum and diamond status.
The Label’s first focus will be to secure the licensing for music
catalogs owned by EMI-Capitol, Sony-CBS, Warner Brothers, BMG-
RCA, Dreamworks, Hollywood and Universal-MCA Special Markets
Divisions.
EMI-Capitol Music Special Markets has already agreed to enter into
a manufacturing and packaging agreement with The Label, which,
among other benefits, delivers music licensing clearances to The
Company. This agreement will serve as the model for similar
agreements that The Label will negotiate with the other major record
labels.
EMI’s Special Markets catalog contains such artists as Garth Brooks,
Frank Sinatra, Pink Floyd, Nat King Cole, Natalie Cole, Beach Boys,
Pat Benatar Judy Garland, Ella Fitzgerald, Kenny Rodgers Tina
Turner, Heart and David Bowie.
These collective artists have been recording and selling records in
their respective careers for more than 10 years, and have collectively
sold well over 100,000,000 (one hundred million) records in North
America alone. They represent just a few out of the possible 5000
artists combinations from the other major record labels special
markets divisions that The Label will pursue for packaging song
compilations and visual music DVD’s.
It is safe to assume that these artists with long established careers
offer substantial marketing opportunities for the Label.
In addition to packaging compilations and reissues for major labels
like those named above, The Label will also repackage catalogs from
smaller independent labels, producers, artists and distributors.
6. Page 4
Another division of The Company will concentrate on licensing older
catalog book titles from best-selling authors and publishing
companies.
This Re-Q Audio Books Division (The Audio Books Division) will
feature two-cassette, four-cassette, and CD lines of audio books at
value prices. These will be configured into floor-display packages
holding multiple quantities for point of purchase retail sales. The
Company will also sell for Direct Response Catalog and Mail order.
The establishment of an in-house Distribution Division (Re-Q
Distribution) The Company will provide sell through retail sales,
through our network of wholesale representatives. The Distribution
Company will directly sell to supermarkets, drugstores and mass
merchandise retail stores. The company will bring established retail
accounts into The Company. This will allow The Company to
expand its music, DVD and audio book products.
After securing recording catalog and audio book rights to properties and
manufacturing the compilations, reissues, and audio books, the first stage
of The Company’s marketing operation will focus on Corporate America,
which employs promotions and giveaways involving traditional brand
products, such as feature film and TV home entertainment products, and
pre recorded audio books and music, to help drive consumer awareness
campaigns and motivate consumers to purchase their products.
Also during the first stage, The Company will begin to market its audio
books-on-tape & DVD music collections for the sell through retail market.
The second stage of the operation will focus on packaging and direct
marketing The Company’s products to consumers using TV, catalog,
E-commerce, and direct response methods.
In the third stage of the operation, The Company will focus on marketing
its pre-recorded music compilations and reissues to special niche retail
accounts.
After the first stage has been implemented, The Company will reinvest
thirty percent (30%) of profits back into itself to sustain continued growth.
A small core staff of industry experts, The Company’s principals, will guide
the development of The Company through these stages. It should be
noted that this principal core staff, through its agreement with EMI-Capitol
Music Special Products, has already obtained the use of this major label's
infrastructure, manufacturing and credit services for The Company.
7. Page 5
MISSION STATEMENT
The Company’s mission is three-fold: 1) to license catalog material and
conduct its business at the lowest possible costs, 2) to sell, in a highly
competitive market, the greatest volume of its finished product at a fair
market price, and consequently, 3) to extract the most profit from its
operation through the volume of its sales.
The Company plans to accomplish its mission through a unique
operational strategy:
Part 1: Licensing catalog material and conducting business at the lowest
possible costs.
The Company’s principal core staff are experienced industry professionals
who will negotiate the best possible licensing terms for catalog material
recorded by major name artists or written by best selling authors.
Because of unique symbiotic agreements that The Company will negotiate
with major record labels, such as the one already negotiated with EMI-
Capitol, overhead costs, such as manufacturing, physical packaging and
credit/collection processing, will be kept low.
Through these agreements, The Company will obtain short 60 to 90 day
credit terms from the major record and book publishing companies for the
manufacture, packaging and clearing of their catalog items. The major
record and book publishing companies will only enter into arrangements
like these when experienced industry people with successful track
records, such as The Company’s principal core staff, run the operations,
and the operations themselves have sufficient funds to adequately
establish The Company in the marketplace.
Part 2: Selling, in a highly competitive market, the greatest volume of its
finished product at a fair market price
Currently and over the last few years, there is and has been a buying
frenzy in all markets for older collectible tapes and CDs of popular artists
and authors. Baby boomers and members of later generations are
snatching up newly released collections of older quality material so they
can own copies of the music and books that stirred and thrilled them in
earlier periods of their lives.
This trend is most noticeable in retail and direct response point-of-
purchase (p-o-p) impulse buy items, which is The Company’s product.
The numbers of sales outlets for these items have skyrocketed in recent
years.
8. Page 6
Part 3: Extract the most profit from its operation through the volume of its
sales
For p-o-p impulse buy items, the wholesale price is only about fifty percent
of the wholesale price of first-release top-line music and audio book
products. But, since the number of p-o-p outlets has skyrocketed in recent
years, the numbers of units sold have also skyrocketed, allowing healthy
profits for well-run companies offering these items.
Because it will be able to keep internal costs low, The Company is poised
to take advantage of this trend and maximize its profits in doing so.
This strategy is markedly different from the operation of a typical record
label or publisher. There are major costs associated with developing new
talent. Thus, there is need for constant hit singles or new best selling
audio books and high process costs in order to generate sales and profits.
9. Page 7
IMMEDIATE FINANCING NEEDS
As the sales projections suggest, The Company should be very profitable
in its first twelve (12) months of operation. However, it is essential that
financing be obtained and available for sales, marketing, advertising and
administrative costs. Indeed, this financing is a requirement for the
agreements with the major labels, such as EMI-Capitol, to take effect.
Additional funding must also be raised for credit term packaging and
manufacturing, catalog acquisitioning, and music and book licensing with
small independent labels and publishing companies that are unable or
unwilling to extend The Company credit terms like those obtained through
the major label agreements.
The Company is seeking working capital and a line of credit to launch its
Re-Q Records and Re-Q Audio Books labels, and to enable it to
manufacture and package music compilations, reissues and audio books
product lines within agreed contract terms with all the licensors. An
investment in The Company now will finance its start up.
10. Page 8
COMPANY GROWTH (STAFF)
The primary functional areas of The Company are creative packaging,
sales, marketing, research and management. The Company has planned
managed growth in these areas.
Creative Packaging
While in it's infancy, The Company will not require the full time in house
services of graphic artists to package the compilations, reissues and audio
books. Initially, it will use the creative services of EMI-Capitol Music
Special Markets for its catalog items. For independent catalog sources,
The Company will use a number of qualified independent contractors to
provide these services. As more agreements are signed with other major
record labels, the services of their art departments will also be used with
their products.
Sales and Marketing Staff
The Company will grow and evolve in such a way that will allow it to not
only maintain but also recruit capable and specialized sales and marketing
personnel. The first step in this growth will be to hire a top-producing
sales force with music and audio book sales and marketing experience.
Management
The principals of The Company will work individually and also in team to
manage the packaging of The Company’s products to insure their
competitive edge over the competition. Each of the principals will have
accountability to one another and the responsibility for integrating and
communicating their information throughout The Company.
The Company’s corporate offices are located in Los Angeles,
California where additional space is available to accommodate
growth. In addition, plans have been made to upgrade the phone
system and operating capabilities as staff and sales personnel are
added.
11. Page 9
STAGE ONE SALES OBJECTIVES
The Company has past buying experience in its markets and can safely
gage how many units will be ordered.
Estimated Unit Sales
Based on the sales performance experience of The Company’s
management, between 10,000 and 50,000 units is reasonable to expect to
ship to each premium and bundling client during The Company’s first
stage of operation.
With a conservative estimate of twenty (20) active corporate clients during
the first year, an average of 500,000 units can be sold.
By releasing 120 catalog music and book CD’s over a three year period,
The Company will enjoy consistent sales growth and cash flow, while
simultaneously promoting, marketing and selling its product line. An
estimated total of 5 million units from corporate sales is a reasonable
projection over these three years.
In addition to corporate sales, the CD compilations, reissues and audio
books can also be sold via retail sell-through, and TV, print catalog, mail
order and e-commerce direct response marketing in Stage 2.
Estimated Manufacturing Costs
Excluding Company overhead, all of The Company’s products can be
packaged and manufactured at a cost between $2.50 and $3.50 per unit.
The actual cost depends on the popularity of the music artist and book
authors, the packaging, the licensing fees, and how many CD units are
being manufactured.
Estimated Pricing
Based on similar items being sold today, the suggested retail price for
each unit ranges from $8.95 to $12.95. The premium and bundled
products for corporate sales will be priced between $3.00 and $5.00 per
unit. The exact price per unit will depend on the specific promotion and
how many units are purchased.
12. Page 10
Payment
As is standard industry practice, The Company is paid directly by the
corporate client upon delivery. There is no return policy. Returns are not
permitted.
Stage Two
Stage Two, direct consumer marketing and sales, will commence after
The Company has built sufficient cash flow from direct corporate sales.
13. Page 11
INDUSTRY OVERVIEW
The Record Industry Association of America (RIAA) reported in 2002 that
U.S. consumers spent $14 billion dollars on recorded music.
Music is the world's universal form of communication. It touches every
person in every culture on the globe to the tune of $40 billion annually.
The U.S. recording industry accounts for fully one-third of the world
market. It employs thousands of people, including singers, musicians,
producers, sound engineers, record promoters, retail salespersons and
record company staff, to only name a few. The U.S. industry consists of
five major record companies and many smaller record labels of varying
sizes that are owned or distributed by these companies.
The five major record companies are Sony/CBS, Universal Music
Group/MCA, Warner Brothers, BMG/RCA and EMI-Capitol. Capitol
Records is owned by EMI of England, Universal Music Group/MCA is
owned by Vivendi Universal, a French company. BMG is German/Dutch
owned, Sony, Columbia, Epic and CBS Records are owned by one
Japanese company: SONY.
Each of these major companies produces and distributes product under
it’s own label and under one or more other affiliated labels which it owns
and operates.
As of the last five years, Dreamworks Records was formed under the SKG
Entertainment banner and distributed by Uni Distribution (Universal Music
Group/MCA). Hollywood Records was founded and owned by Disney
Corporation. Vivendi Universal that owns The Universal Music
Group/MCA has purchased Polygram and it’s group of companies: A&M,
Geffin, Interscope and Mercury records.
In addition to the above, the private label sector, in which Re-Q, Records
will operate, is vital to the success of these major music labels. The
strength of the special markets divisions catalog sales accounts for at
least a third of the major labels’ revenue.
At most labels, the catalog revenue generated from the special markets
divisions pays for the development of new artists and their failures.
14. Page 12
COMPETITIVE STRATEGIES
Although the record industry is highly competitive, The Company will
compete both directly and indirectly with companies possessing
substantial funding and marketing resources, and other private labels that
will release products through the same marketing outlets.
The Company will initially by-pass the majority of competitive hurdles
facing a new midline music and audio books label, by focusing its sales
efforts on corporate America for premiums and bundling promotions to
help sell their services and products.
For the retail market, The Company will develop a unique seasoned
catalog of well-known older performances, which will generate steady
sales and create a constant financial base.
The Company will have in release to retail locations, a respectable
number of catalog items that have a longer shelf life than newly released
products.
Once the music and audio book products are stocked at various retail
outlets at discounted retail prices, the products will be displayed as
impulse buy items in high traffic store locations. This will help to eliminate
returns.
In addition, The Company will benefit from its major label manufacturing
and packaging arrangements. The EMI-Capitol logo and address will be
on the packaging. Ingram and Anderson will appear on The Company’s
audio book line. Both names identify to retailers the top suppliers of
recorded music and audio books. As a result, The Company’s product will
command preferred placement in the bins and shelf space at the retail
locations.
Point-of-purchase promotional materials (posters, banners, other in-store
displays) provided by the major labels will reinforce the display of The
Company’s product.
15. Page 13
OPPORTUNITY
There is a lot of opportunity to help stimulate product spending now that
consumer spending is down as the result of recent stock market declines,
fueled in part by the 9/11 tragedy in 2001. In response, Corporate
America is now aggressively seeking relationships with entertainment
related companies for products to be used as giveaways, or bundled to
help improve the sales of their products.
It is also a known human reaction that when most people experience
reversals in their economic circumstances, they spend more money on
small luxuries such as food, clothing and entertainment related activities
such as music, videos, DVD’s, movie theatres, sports and home game
entertainment, to make themselves feel better.
In addition, the Federal Reserve has lowered bank interest rates to help
stimulate consumer spending and will continue through to 2003.
Because of these trends and others, The Company will benefit from such
opportunities as lower Cable TV advertising rates and a proliferation of
new cable networks and digital satellite technology, which has opened up
more program channels for advertising. Faster DSL connections for
streaming audio/video on demand allow television to interact with the
internet and e-commerce.
There has not been a better time than the present for the expansion of
consumer product sales through TV and internet e-commerce.
Infomercial/short format commercials and e-commerce spending has risen
to a multi billion dollar a year levels.
Online Internet and e-commerce companies want to wholesale, retail and
license downloadable music and audio book products over the Internet.
Companies on the internet from e-commerce shopping malls to well
established Websites, including those maintained by the super chain
stores Amazon.com and Wal-Mart, are positioning their inventory for home
entertainment and for all areas of future life.
Mergers and buyouts of e-commerce retail companies have reached an all
time high.
The foreign owned entertainment companies previously mentioned,
control 75% of the world market.
16. Page 14
After Vivendi’s recent purchase of Universal/MCA there are now only two
major American-controlled entertainment companies with record divisions,
AOL/Time Warner and The Disney Company.
These two companies along with other technical and communications
companies want to acquire music companies in order to control software
for their distribution outlets.
Thus, The Company will be in a position to go public or be acquired within
two or three years from its launch, based on its projected sales.
17. Page 15
MANUFACTURING, DISTRIBUTION, SALES & MARKETING
As a initial step, The Company will promote, market and place its first
music and audio book releases with established-client based
advertising agencies, and will sell directly to the marketing
departments of fortune 500 companies and franchise
establishments.
This step will introduce The Company’s products into a wide variety
of industries including miscellaneous services, food chains, sporting
franchises and entertainment venues, all of which have an interest in
marketing gift giveaways (premiums) and the bundling of
entertainment products with their own corporate products and
services.
Because market research has shown that there are more consumers
than ever before buying recorded music and audio books on tape,
The Company will also establish channels for direct response
marketing (TV/magazine catalogs and mail order), e-commerce and
retail mass merchandising accounts.
A large share of this consumer market consists of people over the age of
30. And, the products they are buying are nostalgia oriented. They are
the hits of the great artists they remember from earlier times in their lives,
music and books they’ve used to mark significant events they’ve
experienced.
On the other side of the coin from consumer demand, a major portion of
the growth in this market can easily be attributed to a heightened cultural
awareness of the internet and e-commerce, tools that The Company plans
to strongly utilize in its sales efforts.
To utilize these tools and reach this market, it is critical that sufficient
quantities of The Company’s products be manufactured, and a
well-functioning distribution system put into place.
A major effort within stage one will be the ramp up of manufacturing and
distribution to insure that an adequate supply of product is swiftly
introduced into the marketplace. Steps to accomplish this task begin with
meetings with key marketing executives and advertising companies to
introduce them to the use of The Company’s products in the marketing
and packaging of their gift giveaways and bundling campaigns for their
branded products.
18. Page 16
Once working relationships are established, The Company and client will
mutually select the number of units, the creative packaging and the
promotional direction for the campaigns.
The Company will then establish a delivery date that will be dependent on
the turnaround time to manufacture, package and clear the catalog
licensing for the products. The average manufacturing and delivery time
is three to six weeks.
In stage two, The Company will pursue TV, catalog, and mail order direct
response marketing, and e-commerce consumer sales.
Activities targeting these revenues sectors will help brand The Company’s
products to the public.
The Company will produce 60 second to two minute television
commercials, and write and create advertising and marketing materials for
catalog and mail order sales. Different versions of these materials will
target key demographic segments in major direct response categories.
During this time The Company will also build a Website for e-commerce
marketing, and will hire the services of a fulfillment center to pick, pack,
process and ship all direct response orders.
The fulfillment center will capture the credit card payments into The
Company’s merchant account, and provide a toll free number and sales
operators for consumers ordering the products. The sales operators will
be trained to make promotional up-sells that The Company will offer for its
advertised products.
Immediate payment for consumer sales is the rule, and the risk of returns
is minimal.
Other advertising, marketing and promotion that will be created include
focused catalog and mail order sell sheets for retail outlets.
The principals of The Company have had long relationships with small to
large size retail chains. This is a legacy from their marketing experience
with audio books on tapes and other consumer products.
After contact and penetration of these markets have been accomplished,
The Company will concentrate on stage three, which is the retail
distribution roll-out for major retail chains, such as Wal-mart, K-Mart,
Costco, Sams Club, Ralph’s, Republics, Walgreen’s, Meijer Inc., Ingram
Books, Baker & Taylor, Anderson Merchandisers, Charles Levy, and most
other generic music, DVD and audio-book distributors.
19. Page 17
In addition, The Company will place its audio book products into Borders,
Barnes and Noble (including Bookstar), Books-A-Million, and other leading
book retailers.
Domestically, the expansion of retail outlets has taken a quantum leap
forward as witnessed by the very successful Blockbuster video chain
expanding into record retailing. In addition, Wal-Mart/Sam’s Club recently
opened over 120 new stores across the U.S., all with specialty record and
audio book racks and departments.
In these outlets, The Company will not compete with major record
companies and publishing houses. They focus their marketing efforts on
top 10 hit radio artists and the newest book authors in audio releases.
They have long ago virtually abandoned efforts to market compilations
and reissues, leaving them to contracted third parties. And, third parties
have not attempted to attack this market as comprehensively as The
Company. Thus, there is now a great opportunity to carve out a
substantial niche in the retail market.
One thing the retail stores do want is multiple music and audio book titles
to stock the shelves. And, because it simplifies their accounting, they
would prefer to carry as many as possible from one company.
RETAIL PAYMENT AND COLLECTION
Typical retail industry invoiced payment terms for purchase orders run
between net 30 and net 90 days from the date products are shipped.
All mass merchandising retail chains have a return policy strictly enforced
by their corporate policies. The typical policy will allow the retail outlets to
ship back products that are not sold within the invoice term period. We, in
turn, will have a no return policy with the music and audio book companies
from which we obtain licenses. Therefore, some risk of return will exist
with The Company’s retail clients.
The Company plans to offset its risk of returns in a number of different
ways.
The Company’s products will be sold at an attractive discounted price to
wholesalers, so they can pass the savings on to their customers who can
then purchase at discounted retail price that will move more units and
thereby reduce returns.
20. Page 18
The Company can resell units that are returned to “cut out” companies,
who will usually take returns at manufacturing costs or for a few cents
below.
In addition, The Company can place returns into direct marketing
campaigns to the consumer.
MARKETING STRATEGIES
Trade Shows
The Company will not rely on traditional and impulse marketing
mechanisms to place product, but will also attend exhibition tradeshows to
meet and market directly to new buyers and clientele.
Retail
The Company will contract, as needed, with independent retail
representatives for specified territories and retail accounts.
These independent representatives will earn 10% of the wholesale
price for restocking and servicing the account, as long as the
account is still active.
Within retail outlets, The Company will utilize niche marketing to appeal to
the interests of specialized market segments. Such a strategy has been
proven to move more units than a more generalized strategy. For
example, as Sam Goody, Tower and Virgin Superstores continue to grow,
they and all major grocery store chains have displayed product bins at
different locations in their stores for compilations and reissues. These
bins are located next to other products offered to the same demographic
segments.
The Company will also form partnerships with retail outlets in other niche
industries such as those that are fitness, leisure and sports related. These
industries have been growing at a rate of 3% a year for the past five years.
With a heightened awareness of the benefits of exercise and healthier
living, more men and woman are participating in these activities and
purchasing products at related retail outlets. The Company hopes to
introduce its products into these outlets.
21. Page 19
Internet Market Potential
The internet is a marketing and sales medium that has the potential to surpass
retail outlets.
It is estimated that at least 80% of the total Internet population falls into one of
The Company’s target demographics, as described in the section, MUSIC,
INTERNET AND E-COMMERCE INDUSTRY ANALYSIS, near the end of this
document.
The latest estimate from CommerceNet/Nielsen Media Research sets the
number of adults online in the U.S. at 60 million. That’s about 35% of the
country, or 40% of the population over the age of 16. In Canada, the number of
adults online is 41 million.
E-commerce Part 1
In addition to becoming familiar with The Company’s products in retail
locations, the consumer will have the continued benefit from our e-
commerce web site that will be ever changing and up-dated with new
promotions and titles.
There will also be related links to other popular web and e-commerce sites
that will carry our products. Content on these other sites will provide a
second opportunity to sell the consumer.
Search Engine Optimization
Some of the most visited web sites report receiving 20% to 90% of
their traffic from search engines, particularly the 15 best-known high
traffic search engines.
Since search engine placement is both a complex art and science
that requires constant attention, The Company will contract with well-
known and highly respected search engine experts to ensure a
priority placement in the top 15 search engines, for all the keywords
that apply to the entertainment and recorded music industry.
Additionally, The Company will bid aggressively for top 10 positions
on search engines such as Yahoo, Google, Lycos, MSN, NBCi,
Dog-Pile, AltaVista, etc.
The Company will develop keyword-rich feeder articles about its
music products and audio book titles
22. Page 20
The Company can submit about 30 of such feeder articles to the
search engines in an effort to maximize our searchability.
Online Marketing
Approximately 30% of the advertising budget will be devoted to online
marketing and the remaining 70% will be devoted to offline marketing such as
television, catalog, and direct mail direct response marketing.
The Internet is now the third most popular advertising and promotion medium
for the business markets next only to the Yellow Pages and newspapers
according to the Kelsey Group and ConStat.
E-commerce Part 2
The Company’s marketing strategy will provide e-commerce
solutions for its customers.
By hosting and maintaining a web site The Company will have a
refreshable marketing tool updated daily. Customers will be led to
the site by via the web site address, which will appear on all of The
Company’s direct response marketing materials.
The web site can also simplify payment for purchases. When the
site captures a customer’s credit card at the time of purchase The
Company receives payment.
Additional income will also accrue from other advertisers’ banner ads
and links that wish to market their products and services on the
Company’s web site.
From these examples, it is evident that online marketing is flexible and online
sales are measurable. In no other medium can an advertiser run a campaign in
which real-time results can be so accurately measured and immediate changes
made based on what is and is not working, thus preventing the dilution of
advertising dollars' in terms of their effectiveness.
Linking Strategies
Another way to market online is through linking strategies. It is also one of the
most powerful and cost-effective.
23. Page 21
Most web sites receive the majority of their traffic from links in other web sites.
The Company should have little difficulty in convincing other non-competing
web sites to link to its site because of its popular catalog content.
However, the process of locating potential links can be long and tedious. To
this end, The Company will acquire two software programs that facilitate and
automate the securing of 31-35 links per day.
In addition, The Company will contract with a linking service that guarantees
that its links will appear on thousands of web sites.
The more web sites linked, the more visitors and product sales can be
expected, and the higher the ranking The Company’s site will command in
search engines.
The Company also plans to place banner advertising on high-traffic sites such
as e*trade, Playboy, Amazon.com, Yahoo, Netscape, and MSN, as well as on a
multitude of other frequently visited specialty sites with content specific to the
demographics of the customer we are trying to reach. These sites will be
chosen from a list of web sites that report 15 million page views per month or
more.
Banner Ads vs. TV Ads
According to a joint study by the advertising research firm Ipsos-ASI and AOL,
consumers are as likely to remember an online banner ad as a television
commercial, i.e. banner ads and TV ads are equally memorable after a single
viewing.
Considering that banner ads and TV ads are on equal footing, coupled by the
fact that TV advertising is far more expensive than banner ads, and that TV ads
waste on-line advertising dollars because 60% of the audience they reach is
not connected to the Internet, more ad dollars will be dedicated to banner
advertising.
Advertising
Advertising on all web sites, just as advertising in other media will be
carefully monitored for its contribution to The Company’s profitability. In
the recent past, typical .com companies, which were cash rich from
venture capital funding or IPO proceeds, had a tendency to squander
capital by overspending on untargeted, inefficient and untraceable national
advertising in an effort to gain Internet visibility and brand awareness.
24. Page 22
As a result, many advertising dollars were wasted, and the only parties to
benefit were the advertising media and the agencies that placed the ads.
Sadly enough, the majority of .com companies have closed their doors
unprofitable with reported quarterly and annual losses. They overspent on
ineffective advertising, which neither made an impact in consumers'
memories nor produced a significant surge in web site visits leading to
sales.
On the other hand, according to statistics published by the Intermarket
Group of New York, the top 100 web sites invested an average of 8.6
million dollars on building their online brand and driving traffic to their site.
Following the lead of the top 100, The Company will have a similar detailed
plan to spread its advertising and promotional costs effectively across all of its
target demographics.
The Company’s plan will guide its consumer marketing advertising to both
brand its products and generate substantial sales revenue through on line and
off line marketing efforts.
Direct Response Associates
Besides advertising and marketing its products to consumers
through its own direct response efforts, The Company will utilize the
relationships of its management with other direct response
companies that have strong infrastructures targeting consumers.
The Company will contract with these “Direct Response Associates”
to provide additional direct response services to supplement its own
in-house efforts.
Outside Advertising Agency
As part of The Company’s advertising plan, an outside advertising
agency specializing in direct response and internet marketing, as
well as selected offline marketing, will be selected to manage The
Company’s advertising and sales efforts.
Its goal will be to maximize web site product sales and build enough
web site traffic to make The Company’s site attractive to other
advertisers, and thus build revenues from their ads on The
Company’s site.
25. Page 23
The Company will manage the agency in two phases.
Outsourcing Ad Sales: First Phase
The Company will actively negotiate a contract with an agency that
not only specializes in ad sales but also offers media placement as
part of its specialized services.
Although The Company may not necessarily utilize the media
placement services, these services indicate the agency can reach a
pool of advertisers seeking to reach the same demographic target.
Outsourcing advertising will take place in the first several months of
launch to insure the accrual of maximum advertising revenues during
the cash intensive start-up months. This would also negate the
necessity of immediately developing of an in-house staff to sell
advertising.
In-House Ad Sales: Second Phase
With the assistance of The Company’s outside advertising agency,
The Company will identify revenue opportunities from categories of
advertisers seeking to reach our specific demographic targets.
The Company will contact these advertisers within these categories
and develop innovative beyond-the-banner opportunities for them
and for The Company through soft dollar trade-off and transactions.
These opportunities will include pre-defined sponsorship
opportunities and give-aways unique to industry-related content, or
calendar-based promotions.
The Company will also seek out Cost per Click (CPC) opportunities,
which pay only for results that can be measured.
Off Line Marketing
Highly selective offline national advertising will complement online
marketing. Although not the primary focus of The Company’s
strategy, this advertising will support direct response marketing
campaigns utilizing TV and print media.
26. Page 24
TV and print advertising have traditionally been an expensive
medium for driving traffic to web sites for the simple reason that only
60% of viewers and readers have computers or internet access.
The remaining 40% represent a segment of the target market that we
cannot reach via web media. However, advertising to reach this
segment can be tailored to effectively drive customers from the other
60% to The Company’s web site. Two simple considerations can
accomplish this.
The first is to feature The Company’s web site address during and at
the end of all televised commercial spots. All of The Company’s
direct response commercial spots will both announce and show the
address.
The second is to feature direct response advertising in selected
programs that reach one or more of our market demographics, but
only in 6 p.m. to 11 p.m. time slots when the advertising message
would likely be converted into a visit to our web site.
A recent research study surveying 3,000 U.S. households, found that
11 percent of surfers who used the Internet between 6 p.m. and
11p.m. said they visited a web site that night as a result of TV
advertising.
After testing in 5 metropolitan and secondary markets, the
anticipated number of commercial spots The Company will produce
and televise in national markets is 20 per week, or 80 per month.
This volume of commercial spots will generate an anticipated
640,000 consumer hits to The Company web site on a monthly
basis, and approximately 7,200,000 consumer hits on an annual
basis.
At a modest conversion rate of 5% for a single package CD selling at
$12.95, this volume of hits in The Company’s first year of operation
should generate modest revenues of just over $4 million from
television-driven customer purchases. Similar figures seem possible
in the second and third years.
As part of The Company’s advertising plan, it will also buy television
advertising directly through cable networks and through advertising
brokers such as Adelphia, Petry, Ad-Net, Katz and New Day
Marketing that purchase blocks of advertising time.
27. Page 25
Print Advertising
It is common marketing knowledge that print advertising supports
televised advertising. In an offering to any substantial market, the
most support is obtained when print ad placements are made in
media outlets that best reach the desired male and female target
demographics separately.
To take advantage of this effect, The Company will select male and
female oriented publications and purchase direct response ads that
will include toll fee numbers and pre-addressed tear-off credit card
mail coupons.
This will be done in as many cities nationwide as the print advertising
direct response budget allows.
Record Clubs
Other customer outlets are the several national mail order record clubs.
The Columbia House Record Club is the largest and most successful.
BMG Record Club and Time-Life are others.
The Company's product will be licensed to these record catalog clubs.
Each license will generate non-returnable advance income. The clubs
then manufacture, advertise, and sell the product, paying a negotiated
royalty for the units sold.
Marketing Partners
The Company also envisions substantial on-line sales from marketing
partners in closely related industries.
One example of an ideal partner would be a computer content provider,
like Napster, who offers software programs to allow customers to access
and download video and audio on demand from the internet and from e-
commerce sites via subscription base platforms.
Member Incentives and Rebate Program
Most of the marketing strategies discussed to this point will be
employed during the first stage of The Company’s operation.
28. Page 26
During the second stage and beyond, The Company will develop a
program for the web site that offers web dollars or discounts to new
purchasing customers and members which can be applied to the
purchase of other music and audio book products.
A certain number of points or web dollars are earned by signing up
for an annual membership. This is a win-win proposition for both The
Company and the members. The Company gains retail revenues
from the sale of the products, and the members win by getting a
sliding scale of discounts off their purchases.
29. Page 27
INFLUENCES
The shelf life and musical foundation of music from the 50s through
the 80s and even into the early 90s are timeless and are still fresh in
the minds and hearts of the American people.
Commercial radio stations, TV Networks and Cable Networks such
as the ever-popular VH1, MTV and A&E and many other outlets are
forever playing and programming shows around the great songs and
artists whose works The Company will offer in its products.
These popular artists have influenced a whole new generation of
consumers and musicians, while the baby boomer generation
remembers these great songs like it was yesterday.
Most new and traditional record store chains have no room for this
music. There are so many new releases by so many new artists that
these chains must use all their available space to stock the newest
releases.
Without The Company and others like it packaging reissues and
compilations for alternative markets, customers would not be able to
purchase and collect these well-known artists and songs for home
music libraries.
30. Page 28
RISK FACTORS
There is a serious degree of financial risk when any company begins
operations. However, the operational risk is reduced for The Company for
four major reasons:
The Company already sells audio books and consumer
products in the retail market place.
The Company will develop and package only well known,
already-established catalog items.
The catalog special markets divisions of the major record
labels that own the catalogs will support The Company’s
products.
The principal core staff of The Company has vast
marketing experience in the music and publishing
industries.
Given these reduced risk factors, it’s more likely The Company’s success
will be dependent upon the personal efforts and abilities of the principals
and other management personnel, and the management of its marketing
and sales.
The following are some of these management related risks:
While The Company will solicit marketing and sales
business through its principals, there can be no
assurance as to the volume of business that The
Company may obtain.
Although there are many factors that will determine
the overall success of The Company, its principals
feel very strongly that with proper planning and
effective execution, any negative effects can be
anticipated and counteracted before any financial
damage would materialize.
The future success of The Company is, in part,
dependent upon its ability to attract and maintain
additional talented management and sales and
marketing personnel.
31. Page 29
The Company's Officers, Directors, or key
personnel may make unwise business decisions,
which could adversely affect the business.
The loss of any of the members of The Company's
management team listed under "Management"
could have a material, adverse effect on the
business of The Company, at least in the short
term.
The death, insanity, illness, or disability may affect
key people and adversely affect the business.
A portion of the proceeds of this offering will be
used to retain, hire, and employ these key
personnel, along with additional A&R and sales and
marketing staff members.
Certain Board members or members of The
Company could own a substantial amount of the
outstanding common stock outstanding that could
constitute a majority voting position. This could
affect the outcome of Company business that would
require a stockholder vote.
Several other risks are related to the will and ability of The Company
to stay current in several industries:
The software and hardware industries on which The
Company is dependent are emerging and evolving
industries. These industries are characterized by
rapid change, and there is risk that any given
innovation and technology in the industries may be
rendered obsolete or noncompetitive by future
discoveries and developments.
The Company's success in these industries will be,
to some degree, dependent upon its ability to
maintain and exploit its products in state-of-the-art
hardware technologies, and its business would be
adversely affected if it did not, or could not, maintain
such expertise on a current basis.
Similarly, these emerging industries are subject to
other particular risks, including uncertainties
concerning the protection of intellectual property
32. Page 30
and technologies, exposure to product liability and
other casualties and applications or future
government regulations. For example, Some
branch or level of government may stop the music
and audio-books catalog licensors and licensing
companies from marketing and developing
additional products, or playing or participating for
monetary compensations or for any number of
reasons.
There are many other factors that will determine the overall success of
The Company. These include:
Labor disputes, fluctuating interest rates, distribution
costs, promotional costs, general economic conditions
and acts of God.
Projections may not materialize. They were
prepared by The Company and not by an outside
accountant or CPA, and should only be viewed as a
guideline. The assumptions made to calculate profit
projections might prove to be substantially in error,
out-of-date, or unrealistic during or after this
business outline.
All statements and projections made or implied in
whole or in part relating to this document are
illustrated in favor of The Company.
No guarantees are made or implied that the
investment will earn the money or have the values
illustrated.
The United States could experience a recession or
depression, which could adversely affect the consumer
purchases of these kinds of software packages that this
company promotes, markets and distributes.
33. Page 31
MANAGEMENT AND ORGANIZATION
The Company’s management team consists of personnel with a
broad background in entertainment, marketing and business
management professions.
The core principal management staff will consist of Louis Nathan,
Chief Executive Officer and Clive Fox, President
An outside Board of Directors, and an Advisory Board of highly
qualified business and industry professionals, will be established to
counsel management to make the best decisions and take the most
effective action.
The Directors and advisors will not be responsible for management
decisions, but will provide guidance and direction to the principal
management.
34. Page 32
MANAGEMENT PERSONNEL
Louis Nathan has been involved with the development of musical
properties, entertainment film/TV licensing and marketing properties for 25
years. Mr. Nathan started Nathan Enterprises, Inc., as an consulting and
marketing company for the purpose of developing key entertainment
properties. It provided consulting, sales, marketing and acquisitions to a
number of top entertainment and consumer-oriented clients including
Kevis Rejuvenation Systems Hearst, King Features Syndicate, AC-Sports,
Wang Film Productions, Rhino Entertainment, Game Tech, Anchor Bay
Whamo Film Distribution and Liberty International.
Mr. Nathan, will be responsible for the development of creative packages
and overseeing all operations including ongoing relationships with major
record labels’ special markets divisions along with all other licensing
categories, for distribution.
Prior to Mr. Nathan’s commitment with the consulting company he worked
for Nu Ventures Home Video as their Vice President, and successfully
packaged classic TV series, such as The Fugitive, Mod Squad, and The
Rifleman, for Television direct response and the rental and sell-through
markets.
After his tenure at Nu Ventures, Mr. Nathan founded Unica Entertainment,
Inc., a start-up multi-media entertainment corporation with divisions for
record and publishing labels, artist management, and film and TV project
development.
At Unica, Mr. Nathan produced and placed “The Hollywood Pops” with
Sony Music along with developing television and educational properties.
Earlier in his career, he was COO of Cinescore Entertainment Inc. There,
he successfully negotiated and secured contracts for major songwriters,
producers, and motion picture composers.
In 1977, Mr. Nathan founded Flight Productions, Inc., which was involved
in all facets of the music business from artist management, to music
publishing and the promotion of live events.
Operating on the East Coast, Flight Productions promoted special event
shows including G.L.O.W. at the Philadelphia Civic Center, Moscow On
Ice (North American Tour), The Buddy Holly Syndicated 50th Anniversary
Radio Special and countless national music acts from Cheap Trick to the
Police.
35. Page 33
It also represented artists such as Bruce Foster (Millennium/Casablanca
Records), Richie Sambora, Essra Mohawk (Reprise Records) who wrote
“Change of Heart” for Cindi Lauper, Lawrence Hud (Writer for April Wine -
A&M records), Karen Young (“Hot Shot” – a number one disco record) and
worked with the legendary Nashville producer Pete Drake while
developing country artists.
Clive Marc Fox was born in New York City, and was influenced at an
early age by the world of music.
Mr. Fox’s father founded The Harry Fox Agency, the largest music
publishing licensing organization in the music business.
Growing up in such an entrepreneurial and music-oriented family, it was
only a matter of time before the music bug bit Clive, as it did his uncle.
Victor Blau, who served for 10 years as President of Warner Brothers
Music.
In his responsibilities with Re-Q Inc, Mr. Fox will oversee the Audio-Books
label and all retail operations, as well as client relations while securing
new store retail accounts. He will also develop packaging concepts for
niche retail markets.
In the mid-sixties, Mr. Fox spent summers cutting his teeth on general
administrative duties at the Harry Fox Agency.
Also during this time, Mr. Fox Graduated with a Business Degree from
Michigan State University.
After spending 3 years in the US ARMY, Mr. Fox worked for The Harry
Fox Agency for another two years before moving to California to work for
the soundtrack division of MGM.
Soon, he was promoted to West Coast Sales and Promotion Manager for
MGM Records. In that position, Mr. Fox traveled the country co-
coordinating radio promotion and tour support for The Animals, Herman's
Hermits, The Lovin Spoonful, Richie Havens, The Blues Project, Stan
Getz, Astrud Gilberto, Bill Evans, Wes Montgomery, Janis Ian, Laura
Nero, Hank Williams Jr., Mel Tillis and many others.
Mr. Fox was promoted to VP-General Manager of the MGM Record Label
Division and President of the Independent Label division of MGM/
Polygram Records. The independent labels in that division included
Stormy Forest, Lionel Records, Sunflower Records, Verve Records,
Marina Records and others.
36. Page 34
During his tenure at MGM/Polygram, Mr. Fox registered 17 Gold Records
and generated an average of $11 million in sales per year to become the
most profitable division of The Company.
Next, Mr. Fox exited the MGM Record division to become Vice President
and General Manager of Chappell Music, developing Chappell’s first
production agreements with major labels.
For 5 years, Mr. Fox and Chappell consummated independent label/artist
deals with CBS, Polygram, United Artists, Motown and Warner Brothers
Records.
In 1980, Mr. Fox formed Concord Video and released over 250 Special
Interest Video Cassettes. He also developed Concord Children's
Entertainment Company, which he sold to Oklahoma Industries.
IN 1992, he joined Dove/NewStar Entertainment as Audiobook and Music
Administrator. While at Dove/New Star he development the Dove Jazz
and Dove Blues record labels.
Today, Mr. Fox heads the Audiobook Division at Media Books, the number
one volume leader of mid-priced audio books.
37. Page 35
MUSIC, INTERNET and E-COMMERCE INDUSTRY
ANALYSIS
The pre-recorded music entertainment marketplace has undergone
rapid change in the past several years as awareness and knowledge
of the Internet and e-commerce online purchasing has increased.
The latest wave in the forefront of this process, is the availability of new
electronic hardware and software programs, which allow the customers
themselves to download pre-recorded music, audio books and video
entertainment.
Just as there are many ways to download these products, there are many
ways to purchase them from Internet providers.
The traditional means is to buy packaged pre-recorded products through
E-commerce sales, one purchase at a time.
However, fees have become an increasingly popular way to purchase a
volume of products over time. For example, monthly subscription fees for
downloadable products can be charged to customers, as well as a per title
or CD transaction fee.
These new revenue plans have spawned new promotional models for
recorded products. For example, through a computer the consumer can
listen to sample tracks and decide to purchase the entire CD or only
certain songs.
Under these conditions, the Library of Congress and the RIAA are
lobbying for new copyright legislation that will further protect artists and
their publishing rights in the electronic marketplace.
Concern with copyright infringement became evident in 1999 when
Napster, an online music service, made a downloadable database of
popular music titles available to the public. A small percentage of
consumers, mostly teenagers and college students, downloaded the
music and copied (burned) their own CD’s for free by these methods.
Despite this abuse, the RIAA reports that a large percentage of
consumers want to own and collect packaged music CD’s that include
artist information.
The RIAA further reports that in recent years these new methods of
purchasing and downloading music products have helped to heighten
awareness of all sources of product. This trend was documented by a
38. Page 36
10% increase of music products sold in stores, through catalogs and
through direct response marketing TV and radio ads.
These music purchases are from a demographic group between the ages
of 18 to 65, of which 40% are men and 60% are women.
The North American market for entertainment software is approaching
70% of the total entertainment market. The other 30% is focused on
computer and electronic hardware and devices.
E-commerce Emerges as Fastest-Growing Activity
E-commerce has emerged as the fastest growing internet activity. It has
also become central to the internet consumer, as evidenced in the
following article.
“Experience According to 2002 America Online/Roper Starch
Cyberstudy:
“New York, NY, November 11, 2002 - “Making purchases” has
emerged as the fastest growing online activity, as the e-
commerce category becomes central to the Internet consumer
experience, according to a study released at a media briefing
today by America Online, Inc. and Roper Starch Worldwide,
one of the nation’s largest marketing research and consulting
firms.
“The second annual America Online/Roper Starch
Cyberstudy, a sample of approximately 1,000 adult Americans
who use online or Internet services from home, reveals how
and why they use the medium, how it is affecting their lives
and society, what prompts their activity online, and their
thoughts about its future impact.
“The 2002 Cyberstudy found that shopping scored the most
dramatic climb among Internet activities. Forty-eight percent
of Internet consumers say they regularly or occasionally make
a purchase online, compared to 35% in the 2000 study -- an
increase of one-third. That increase was fueled in part by 54%
more women -- 37% compared to 24% in 1999 -- shopping
online this year.
“Illustrating how the medium becomes increasingly embedded
in consumers’ daily lives over time, the 2002 study found that
Internet users connected three years or longer engage in
39. Page 37
more everyday activities online than newcomers -- those
online one year or less. These include getting information
about and buying products, checking local entertainment
information, booking travel, communicating with business
associates, trading stock, tracking portfolios, and banking
online.
“In a new question asked this year, over half (52%) of Internet
consumers say they have moved furniture to accommodate
using their household computer -- marking how central the
medium is becoming to their home lives. This trend recalls
how people rearranged their households around the television
set over a half-century ago.
“This year’s survey also demonstrates that Internet
consumers are becoming more mainstream as more older
Americans and people of more moderate incomes and
educational backgrounds went online over the past year. Even
with this gradual demographic shift, however, online
consumers remain decidedly more affluent and educated than
the population at large. And, just as in 2001, more women
(55%) than men (45%) this year were new to the interactive
experience.
“New this year, the America Online/Roper Starch Youth
Cyberstudy -- which sampled approximately 500 online youths
-- examined the attitudes and activities of 9 to 17 year-olds.
This study shows that 63% of youngsters prefer going online
to watching television, while 55% chose online to talking on
the telephone.”
Online Becoming Central to Everyday Lives
Bob Pittman, America Online’s/Warner Brothers Chief Operating
Officer, who exited the company in 2002 said:
“The 2002 Cyberstudy provides powerful evidence that the
online experience is becoming more and more embedded in
our society and our lives. Out of all online activities, ‘making
purchases’ shot up the most this year. One-third more Internet
consumers say they are shopping online, with women
shoppers increasing by over 50%. We are seeing the online
population become more like the mass market, with women
again coming online faster than men. Overall, the fact that the
40. Page 38
more time people spend online the more this medium’s future
will continue to grow.”
Marshall Cohen, America Online Senior Vice President of Brand
Development and the person responsible for his company’s
consumer research, added:
“AOL has always believed that understanding online
consumers and how their use of the medium impacts their
lives is critical to our work. With the second annual
Cyberstudy and the new Youth Cyberstudy, we are growing
that understanding, and gaining new insights into the ways in
which online use is reshaping people’s home, work, school,
and community lives.”
Edward Keller, President of Roper Starch Worldwide, said:
“Just as the 2001 Cyberstudy tracked how the interactive
medium is changing the lives of adults, the first-ever Youth
Cyberstudy opens a window on how our children are
experiencing the online phenomenon. What we are seeing is
that young people clearly believe that going online is good for
them, and they prefer it to the telephone and television. And,
just as we see with adults, youngsters use the medium more
as they become more experienced.”
Underscoring how essential the interactive experience is becoming
to the lives of online users, the 2002 Cyberstudy found that:
Two-thirds (66%) say that if they were alone on a desert
island, they would prefer a computer connected to the Internet
to either a telephone or television
83% says that if they no longer had online access, they would
miss it
Three-fourths (75%) say that being online has made their life
better
Almost 8 in 10 (77%) report that they have encouraged family
or friends to join them online
Three-fourths (73%) say it is important for adults to know how
to go online and use the Internet
Online commerce accelerates, while online shopping is most popular
among more experienced users. It has increased among all online
groups, including Internet newcomers.
41. Page 39
But, in addition to revealing the rapid growth of e-commerce this
year, the Cyberstudy contains evidence that e-commerce will
continue to grow rapidly in years to come. Thirty-seven percent of all
consumers say they will increase the number of purchases they
make online in the next few years. This year’s survey shows that just
over half (53%) of those who have been online three years or more
engaged in online shopping, compared to 28% of those who are new
to the medium.
The Youth Cyberstudy reveals that young people (9 to 17 years old)
go online more frequently as they grow older. On average, 9 to 11
year-olds go online 2.8 days per week compared to 4.5 days per
week for 15 to 17 year-olds. Communication tops the list of favorite
youth activities online -- led by writing letters or notes to friends
(59%), and using instant messages (52%). Among younger children,
ages 9 to11, game playing is the most common activity, with 58% of
them participating.
The study also shows that online kids share their parent’s eagerness
to embrace new online technologies. Seventy-eight percent of the 9
to 17 year-olds surveyed are interested in sending or receiving
pictures online, 76% in downloading music, 70% in having live video
conferences with friends, and 63% in watching short cartoons or
video clips online.
Among the benefits young people see for themselves from the online
medium are increased interest in current events (44%), and
improvements in the quality of their friendships (39%), their writing or
language skills (36%), and their performance as students (33%)
Web Site Design and Hosting
To be competitive, every business today must have an online
presence, even if the business core market is not typically found on
the Internet. And, every business, from a small mom and pop
operation to a mainstream corporation, has its own persona and
company profile. It’s vital to capture their special flavor via a well-
designed web site.
To insure The Company’s special flavor is captured, it plans to hire a
top web design company with an experienced creative technology
team to design its web site and provide a customized hardware
solution. It will also retain the web design company for continued
web master duties.
42. Page 40
The web site envisioned will be as comprehensive and as well
designed as the top e-commerce web sites, such as Columbia
House, Time-Life, and Amazon.
The site will be hosted via super servers leased through an internet
server service company that has enough capacity to handle the
projected web site traffic, and the merchant-shopping cart processing
and handling.
Promotional materials for The Company’s product line will be
designed from the promotional copy and stunning digital images of
the musical artists on the product packaging. The promotional
materials and the product packaging will be created together so that
both complement each other, and a unified image is created to drive
customers, marketing partners and advertisers to buy The
Company’s products and services.
The Company will offer many web-related services to all three
groups, including e-commerce, advertising and promotions, and links
to other popular entertainment sites that are interested in synergistic
relationships. To take advantage of these services, marketing
partners and advertisers will simply submit a menu or brochure,
and/or advertisements with key graphics and/or text.
43. Page 41
Demographics
Key demographics for target customers of Re-Q, Inc. fall into three
main categories.
The first is young adults between the ages of 15 to 25 years of age.
This group is in school, college or just joining the work force.
They rely heavily on focus and concentration for studying and job
hunting.
This group enjoys sports, fitness, and all forms of entertainment.
The second target group is middle aged couples that are mostly blue
collar and white collar professionals. They make up the nations’
work force; and they really enjoys life’s comforts to help them
through everyday life challenges.
This group also enjoys sports, fitness, and all forms of entertainment.
The last target group is older individuals and retired couples.
Since this age group tends to live with their spouse, family members,
and in retirement homes, it would be beneficial to give an
encouraging senior citizen discount to them, in The Company’s
printed catalog and mail order advertising campaigns.
44. Page 42
Products. Pricing, and Profitability
The Company’s primary products are 9 to 12 song compilations,
reissues, DVD’s and audio books on tape that will be sold and
marketed in single, double and in some instances triple, five, ten and
twelve volume CD packaged sets.
The music will be delivered in clear plastic shrink-wrapped jewel
boxes, and long thin cardboard packages. The DVD and audio books
on tape will be delivered in molded clamshells.
Music cassettes will also be packaged on a per order basis only.
In today’s marketplace, the most popular format for purchasing
music products is the compact disc (CD), and the compact disc
player is the most popular music and audio delivery device.
The Company will offer its products in various forms and
combinations, which will all be very affordable to its customers.
The costs to manufacture and package, however, vary depending on
volume. In the first-run stages they are relatively higher. Once
artwork is created and the product packaged, the 2nd and 3rd runs will
be lower in cost and the pricing will help offset marketing,
advertising, and administrative costs.
The following are The Company’s costs and suggested pricing,
presented by marketing channel and product:
Corporate Premiums and Bundling
1. Single Package CD Compilation - wholesale
Manufacturing cost $2.50/$3.50 - One time premium sale:
$3.00 to $5.00
2. Double CD Package - wholesale
Manufacturing cost $3.00/$4.00 - One time premium sale:
$5.00 to $7.00
3. 5 CD’s Box Set Package - wholesale
Manufacturing cost $5.00/$6.00 - One time premium sale:
$7.00 to $9.00
Retail Through Distribution
1. Single Package CD Compilation - wholesale $5.00/retail $8.95
45. Page 43
2. Double CD Package - wholesale $6.00 /retail $12.95
3. 5 CD’s Box Set Package - wholesale $11.95 /retail $19.95
TV, Direct Response Marketing and Internet E-commerce
1. Single Package CD’s - fulfillment costs - $3,00 retail $12.95 –
Plus Postage $3.50
2. Double CD Package - fulfillment costs - $3.50 retail $14.95 –
Postage $4.00
3. 5 CD’s Box Set Package - fulfillment costs - $5.00 retail $19.95 –
Postage $6.95
Catalog and Mail Order
1. Single Package CD Compilation - wholesale/$6.50 retail/$12.95
2. Double CD Package - wholesale/$8.00 retail/$14.95
3. 5 CD’s Box Set Package - wholesale/$14.00 retail/$24.95
Audio books on Tape/CD
The Company will target most National Accounts.
1. Two-cassette – wholesale/$4.00 retail/$7.95
2. Four-cassette – wholesale/$6.50 retail/$12.99
3. Two CD’s – wholesale/$5.50 retail/$11.99
4. Four CD’s – wholesale/$7.50 retail/$15.99.
CD/DVD Home Entertainment
1. One-Digital CD - wholesale/$5.00 retail/$9.95
2. One-Digital CD -5.1 Interactive -wholesale/$6.50 retail/$12.95
3. Double Box Set - wholesale/$8.00 retail/$14.95
4. Double Box Set - 5.1 Interactive -wholesale/$11.00 retail/$24.95
46. Page 44
FINANCIAL STATEMENTS
Start-up Funding and Use of Proceeds
Re-Q, Inc. is requesting start-up funding in the amount of
$3,500,000. The table below reflects a breakdown of allocation of
proceeds for the first year of operations.
Item Amount
Software and Equipment………………………….... ...…30,000
Promotion and Direct Response Advertising…….. ..2,400,000
Personnel to Support Sales Staff………………….. ….100,000
Principal Salaries…………………………………….
Licensing & Audio Books Manufacturing………….
….225,000
….500,000
Web Site Production & Web Master ..................... .…..75,000
General and Administrative Costs…………………. …...75,000
Travel & Entertainment……………………………… .…..35,000
Legal Fees……………………………………………. …...25,000
Accounting/Audit Fees……………………………… …...25,000
Misc…………………………………………………… ……10,000
Total $3,500,000
47. Page 45
Revenue Projections/Operating Expenses
Year 1 Year 2 Year 3 Year 4 Year 5 Total
Revenues
TV Short Format
Infomercials
- 14,400,000 14,400,000 14,400,000 14,400,000 57,600,000
E-Commerce Internet - 12,150,000 12,150,000 12,150,000 12,150,000 48,600,000
Record & Video Clubs 950,000 950,000 950,000 950,000 950,000 4,750,000
Magazine and Catalog
Mail Order
- 5,775,000 5,775,000 5,775,000 5,775,000 23,100,000
Shipping and Handling
(.95)
- 387,600 387,600 387,600 387,600 1,550,400
Retail Chains - 5,356,500 5,356,500 5,356,500 5,356,500 21,426,000
Premiums and Bundling 3,285,000 3,714,750 3,714,750 3,714,750 3,714,750 18,144,000
Off Set Returns 20% - 1,077,300 1,077,300 1,077,300 1,077,300 4,309,200
Total Revenues 4,235,000 43,811,150 43,811,150 43,811,150 43,811,150 179,479,600
Manufacturing Costs
Direct Costs- Prem. &
Bund.
2,190,000 2,476,500 2,476,500 2,476,500 2,476,500 12,096,000
Direct Costs- Retail
Outlets
- 859,500 859,500 859,500 859,500 3,438,000
Direct Costs- Direct Sales - 6,630,000 6,630,000 6,630,000 6,630,000 26,520,000
Fulfillment & Merchant
Cost
- 1,224,000 1,224,000 1,224,000 1,224,000 4,896,000
Total Manufacturing
Costs
2,190,000 11,190,000 11,190,000 11,190,000 11,190,000 46,950,000
Gross Profit 2,045,000 32,621,150 32,621,150 32,621,150 32,621,150 132,529,600
Salaries & Related
Costs
Salaries-Management 225,000 300,000 350,000 400,000 500,000 1,775,000
Salaries-Sales 100,000 125,000 150,000 175,000 175,000 725,000
Salaries-Administrative 38,400 50,000 60,000 60,000 70,000 278,400
Payroll taxes/benefits 58,144 76,000 89,600 101,600 119,200 444,544
Total Salaries & Related
Costs
421,544 551,000 649,600 736,600 864,200 3,222,944
Operating Expenses
Advertising- TV - 2,592,000 2,592,000 2,592,000 2,592,000 10,368,000
Advertising- Catalog - 300,000 300,000 300,000 300,000 1,200,000
Returns & Allowance - 2,154,600 2,154,600 2,154,600 2,154,600 8,618,400
Returns & Allowance-
Direct Sales
- 3,366,260 3,366,260 3,366,260 3,366,260 13,465,040
Shipping Costs 10,950 53,180 53,180 53,180 53,180 223,670
Commissions - 538,650 538,650 538,650 538,650 2,154,600