half.com business plan - 1999

half.com

Business Plan – DRAFT 2.0November 1999

Copy #

half.com1100 E. Hector Street, Suite 425 Conshohocken, PA 19428

(877) 264-HALF fax (610) 567-3559

Confidential Information, Subject to Non-Disclosure Agreement

THIS IS NEITHER AN OFFER TO SELL NOR A SOLICITATION OF AN OFFER TO BUY ANY SECURITIES. AN OFFER IS MADE ONLY BY THE OFFICIAL, CONFIDENTIAL PRIVATE OFFERING MEMORANDUM IF, AND WHEN ISSUED BY THE

COMPANY

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TABLE OF CONTENTS

EXECUTIVE SUMMARY 1

INDUSTRY AND BUSINESS OVERVIEW 3 THE INDUSTRY 3THE PERSON-TO-PERSON MARKET 3AUCTIONS VERSUS STOREFRONT CATALOGS 4THE HALF.COM OPPORTUNITY 5WHAT ABOUT EBAY? 6THE HALF.COM BUSINESS MODEL 7

PRODUCT OVERVIEW 9 PRODUCT OFFERING 91. LISTING AN ITEM FOR SALE 92. BROWSING OR SEARCHING FOR AN ITEM 103. PURCHASING AN ITEM 11FEATURES & BENEFITS 111. FEATURES & BENEFITS FOR BUYERS 112. FEATURES & BENEFITS FOR SELLERS 12INVENTORY 13TECHNOLOGY AND INFRASTRUCTURE 14INTELLECTUAL PROPERTY 15LICENSED DATABASES AND CONTENT 15CUSTOMER SERVICE & FRAUD PROTECTION 15DIFFERENTIATION AND COMPETITION 16PRODUCT EXTENSIONS 17

MARKETING OVERVIEW 19 THE MARKETPLACE 19MARKETING STRATEGY 20PUBLIC RELATIONS 20DISTRIBUTION RELATIONSHIPS 201. HIGH TRAFFIC WEBSITE RELATIONSHIPS 202. SHOPPING AGENTS / SHOPPING BOTS 203. AFFILIATE PROGRAMS 21ONLINE ADVERTISING 21OFFLINE ADVERTISING 21PROMOTIONS 21VIRAL MARKETING CAMPAIGN 21

MANAGEMENT OVERVIEW 23 MANAGEMENT TEAM 23BOARD OF DIRECTORS 25

SUMMARY – KEY INVESTMENT CRITERIA 26

FINANCIAL OVERVIEW ERROR! BOOKMARK NOT DEFINED. 1999 – 2001 PRO-FORMA QUARTERLY INCOME STATEMENTS 271999 – 2001 PRO-FORMA QUARTERLY CASH FLOW STATEMENTS 28

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Half.com Business PlanNovember, 1999

Dave is 44 years old and an avid reader. Before leaving home on a recent vacation, he purchased four best-selling books. Dave finished all four books during his one-week vacation, and they now sit on his bookshelf – along with hundreds of other books that Dave will never read again.

Michael is a 19-year-old college student. He spends a significant portion of his free time hanging out with his friends and playing with his Sony PlayStation. Although he currently has a collection of over 20 games, he still buys a new game every month or two. Michael spends most of his time playing the new games – and has only played five of his 20 games during the last 6 months.

Susan is 28 years old. Susan has a compact disc collection of over 150 CDs. She buys over 15 discs a year. She often finds herself listening to the same CD over and over again – and has not listened to half of her CDs within the last year.

EXECUTIVE SUMMARY

Half.com (“the Company”) is a development-stage company established by a founder and several employees of Infonautics Corporation – a publicly traded Internet information company (NASDAQ: INFO). The Company was founded in June 1999 to create an organized and efficient aftermarket for mass-market products on the Internet. The company has quickly attracted twenty Internet “veterans” who have worked for such companies as America Online, CDnow, N2K, Oracle Corporation, Spree.com, MetaCreations and VerticalNet to round out its development and marketing teams. The Company has launched a preview version of its website on November 15th , connecting buyers and sellers of used consumer entertainment products, such as books, compact discs, DVDs, videos and video games. A nationwide marketing campaign will commence on January 15th.

By combining the person-to-person connectivity of Ebay, the storefront navigation of Amazon, and the ability to automatically price items for at least half off, Half.com seeks to become a leading marketplace for used consumer goods on the Internet. Sellers (such as Dave, Michael and Susan) will be able to place their used books, games and CDs into “inventory” by simply entering an ISBN or UPC number. Buyers will be able to search/browse through a structured store and purchase these items at a savings of at least 50%. The Company’s 24-hour-a-day, seven-day-a-week service will be fully automated, topically arranged, and easy to use. The Company has already filed for three U.S. patents related to its business model.

The Company already has relationships with dozens of merchants who have agreed to list over 1.5 million items on the site for half price. In addition, the Company has signed distribution and marketing relationships to position its inventory on several of the Internet’s top sites, including Yahoo!, Infoseek/Go, Looksmart, About.com, Deja.com, Go2Network.com, and Infospace. The Company has also entered into relationships with most of the leading price comparison agents (aka “shopping bots”) to display the Company’s inventory on those sites. The Company is also in contract negotiations with several of the leading music and book clubs including Columbia House and Audiobook Club.

The Company closed a seed round of funding in June from Infonautics and its first venture capital round in September from such investors as Venture Investment Management Company (VIMAC), Comcast Interactive Capital and Woodland Partners, along with angel

Half.com Business Plan – Draft 2.0 04/08/23CONFIDENTIAL

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investors Howard Morgan, General Partner of idealab!, and David Schlessinger, founder of Zany Brainy. The Company expects to generate over $10 million in net revenues in 2000, growing to over $85 million in 2002. The Company projects profitability in the fourth quarter of 2000.

2000 2001 2002

Gross Sales $51,712,000 $218,121,623 $478,870,480

Cost of Sales $41,368,209 $178,193,525 $393,560,137

Net Revenues $10,344,037 $39,928,098 $85,310,342

Operating Costs $23,952,495 $27,368,236 $30,558,034

Net Income $(13,608,459) $12,559,862 $54,752,309


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INDUSTRY AND BUSINESS OVERVIEW

The Industry

The Internet has emerged as a global medium enabling millions of people worldwide to share information, communicate and conduct business electronically. International Data Corporation estimates that the number of Web users will grow from approximately 150 million worldwide in 1998 to approximately 500 million worldwide by the end of 2003. This rapid adoption of the Web represents an enormous opportunity for businesses and consumers to conduct commerce over the Internet.

The e-commerce marketplace can be broken down into three segments:

business-to-business business-to-consumer person-to-person

Initially, most companies have focused on facilitating and conducting transactions between businesses over the Internet. Forrester Research expects the business-to-business market to reach $2.3 trillion by 2003.

The business-to-consumer market has also become a significant market and is rapidly growing. Indeed, according to A.C. Nielson/CommerceNet, over 20 million Americans have conducted an online e-commerce transaction. Business-to-consumer e-commerce companies typically use the Internet to offer standard products and services that can be easily described with graphics and text but do not require physical presence for purchase, such as books, CDs, videocassettes, automobiles, home loans, airline tickets and online banking and stock trading. The Internet gives these companies the opportunity to develop one-to-one relationships with customers worldwide from a central location without having to make the significant investments required to build an infrastructure associated with traditional direct marketing activities. While companies have generally focused on applying these benefits in business-to-business and business-to-consumer transactions, a significant market opportunity exists to apply these same advantages to facilitate person-to-person transactions over the Internet.

The Person-to-Person Market

The exchange of goods among individuals and small dealers – person-to-person transactions – historically has been conducted through trading forums such as classified advertisements, collectibles shows, garage sales and flea markets or through intermediaries, such as consignment stores and auction houses. These forums are highly inefficient for several reasons:

their fragmented, regional nature makes it difficult and expensive for buyers and sellers to meet, exchange information and complete transactions;


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they offer a limited variety and breadth of goods;

they often have high transaction costs from intermediaries; and

they are information inefficient, as buyers and sellers lack a reliable and convenient means of setting prices for sales or purchases.

Despite these inefficiencies, the Company believes that the market for traditional person-to-person transactions in the U.S., based upon estimates of the amounts spent through auctions, classified ads and on collectibles, exceeded $100 billion in goods sold in 1998.

The Internet offers for the first time the opportunity to create a compelling global marketplace that overcomes the inefficiencies associated with traditional person-to-person transactions while offering the benefits of Internet-based commerce to the consumer-to-consumer trading market. Clearly, the success of first-generation person-to-person e-commerce companies (such as Ebay) demonstrates the effectiveness of the Internet in brokering consumer-to-consumer transactions. Internet-based trading offers the following benefits:

facilitates buyers and sellers meeting, listing items for sale, exchanging information, interacting with each other and, ultimately, consummating transactions;

allows buyers and sellers to trade directly, bypassing traditional intermediaries and lowering costs for both parties;

is global in reach, offering buyers a significantly broader selection of goods to purchase and providing sellers the opportunity to sell their goods efficiently to a broader base of buyers;

offers significant convenience, allowing trading at all hours and providing continually updated information; and

fosters a sense of community through direct buyer and seller communication, thereby enabling interaction between individuals with mutual interests.

Auctions versus Storefront Catalogs

While there are tens of thousands of e-commerce websites targeting consumers, most e-commerce sites operate under one of two business models:

The “Retail Storefront” or CatalogThis model allows users to access an online catalog of products, browse or search through information and place orders online. While Amazon.com is probably the most famous of this category of sites, tens of thousands of other companies use this model – such as J Crew, Starbucks, Travelocity, Ticketmaster, Etoys and Macys.


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The Auction FormatOnline auction sites allow users to competitively bid for items. While Ebay is the “king of auction sites,” thousands of other sites use this model – including Yahoo Auctions, Amazon Auctions, Ubid, and Zdnet.

The Half.com Opportunity

The Company believes a significant opportunity exists to create a consumer-to-consumer marketplace using a storefront interface. The Company’s website will initially sell used mass-market entertainment products, such as books, prerecorded music, videos, games, and other “catalogable goods”.

Business-to-Business Business-to-Consumer Person-to-Person

Storefront / CatalogDell Computers

IBMCisco

VerticalNet

Amazon.comCDNow

TravelocityEtoys.com

HALF.COM

AuctionAdAuction

Manheim AuctionsOnsaleUBID

Bid.com

EbayAmazon AuctionsYahoo! Auctions

There are three key elements to Half.com’s strategy:

1. Consumers provide the inventory…Ebay has proven that consumers are willing to sell items over the Internet. Indeed, over three million new items are placed for sale on its website each week. However, Ebay requires sellers to key in all of the information about each item and charges users an upfront listing fee. Half.com will let users list items without an upfront listing fee – and the Company’s SpeedSell technology only requires sellers to enter an ISBN or UPC number. The Company has already entered into relationships with dozens of “power sellers”, who have agreed to list over 1.5 million items at launch.

2. …Half.com surrounds the inventory with information and navigation…By collecting standardized information, such as an ISBN or UPC number, the Company will place the inventory into a “storefront” interface. Buyers can search and browse through an easy-to-navigate product catalog just as they do at Amazon.com. Users can conduct fielded searches, view cover art, access best-seller lists, browse by subject, and access reviews. According to Jupiter Communications, the “searchability” of a website ranks right behind price in online purchasing decisions.

3. … and automatically prices all items at half off.According to Jupiter, 80% of all online purchase decisions are price driven. The growth of automated price comparison agents (also called “shopping bots”) and the


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ease with which consumers can click between competing Web sites makes comparison-shopping prevalent online. Half.com will capitalize on this price sensitivity by requiring all sellers to sell their items for at least half off. For example, if a new book’s list price is $28.00, the cheapest online merchant might offer it for $20.00. Half.com would recommend that sellers’ price their used copy for $10.00, and require a seller to list it for under $14.00.

What About Ebay?

The Company believes that the Half.com approach has a number of advantages over existing person-to-person auction websites, such as Ebay. According to Ebay, the auction model is ideal for selling “unique items” with “uncertain future availability.” However, there are a number of limitations preventing the auction format from dominating the sale of consumer goods, such as books, CDs, and videos:

An auction format does not provide the buyer with a guaranteed purchase. Buyers need to wait up to two weeks to see if they submitted the winning bid. Moreover, a significant percentage of winning bids are placed during the last hour of an auction – forcing a buyer to log-on during a specific time to insure a winning bid. While consumers might be willing to tolerate these inconveniences for one-of-a-kind items, the Company has seen less consumer willingness to do so for mass-market items. Half.com will let users purchase an item “on the spot”.

Auction sites currently require the buyer and the seller to arrange for payment independently. In most cases, the buyer will send the seller a check (requiring 2-4 days). The seller then will go to the bank, deposit the check and contact the bank to insure that the check has cleared (5-7 days). After the check clears, the seller will then send the item to the buyer. In order to reduce the inconvenience of the current system, Half.com will act as an intermediary in the transaction process. The buyer will pay for the items with a credit card, and the seller will receive all their payments via one monthly check. This eliminates the hassle of sending and depositing multiple checks and provides for a simple, hassle-free shopping experience.

Another problem plaguing most auction sites is the requirement for the seller to calculate the postage costs, obtain packaging materials and make a trip to the post office. Half.com will provide all sellers with a Seller’s Kit containing packaging materials for their first few sales. And through a relationship with Stamps.com, Half.com will allow users to print out the required postage from their computers – eliminating a trip to the post office.

Auction sites typically offer very little navigation and search capabilities. Most auction sites are structured like online garage sales or flea markets, offering very little navigation and categorization of items. Items are typically displayed by time (i.e., how many days until the auction ends) rather than any standard catalog. Users can not search for specific authors or artists, browse by a structured catalog, see bestselling items or access supplemental information such as reviews or cover art. By leveraging a consistent information scheme, Half.com will provide users with an


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easy-to-navigate catalog of items.

The inventory on auction sites is inconsistent. Because auctions operate under a limited-time format, the chance of a site having a specific item is low. The Company believes this is why many users do not think of going to auction sites first when they want to purchase books or music. Using its SpeedSell technology, Half.com will allow sellers to quickly enter items into inventory – and keep those items listed until a sale.

Auction sites require sellers to enter all the information about an item for sale. Sellers must complete an extensive online form and sometimes scan in an image of the item in order to start an auction. The only information provided about an item for sale on an auction site is entered by the seller. The auction sites do not augment this information with any pre-existing third party content. Half.com does not require sellers to provide detailed information about the items for sale. Rather, Half.com licenses third party databases which already contain the required product descriptions.

Most of the large auction sites charge sellers an upfront listing fee, in addition to a percentage of the sale amount. Half.com does not charge any upfront listing fee to place an item into “inventory.”

Many auction sites have been plagued by individuals selling illegal items (firearms, tobacco products, alcohol, drugs, etc.) online. Indeed, Ebay is currently under investigation by the federal government regarding possible illegal transactions on their website. By only allowing users to list items in pre-specified categories, and by leveraging a trusted database (or “authority file”), the Company believes that it has significantly less business (and legal) risk.

The Half.com Business Model

Initially, Half.com will generate revenues from a number of sources:

The Company will earn transaction revenue from every sale. While the Company does not charge an upfront fee to list an item, the Company does receive two revenue streams after an item is sold. First, the Company will receive a 15% commission from the seller once an item is sold. For example, upon the sale of a $6 compact disc, the company will receive a 15% commission – i.e., 90 cents. Second, Half.com will receive a portion of the shipping and handling fee it charges the buyer. For example, upon the sale of a $6 compact disc, the company will charge the buyer a shipping and handling fee of $1.95. The actual cost of postage for that compact disc is approximately $1.14. The Company will provide the seller with a fee of $1.45 and retain $.50. Thus, upon the sale of a $6 compact disc, the Company will receive total revenues of $1.40 or 23.3%.


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The Company expects to generate affiliate revenue by participating in the affiliate programs of leading e-commerce websites, such as Amazon.com. When a Half.com user searches for a book, he or she might wish to purchase an item that is not currently in our “inventory.” If this occurs, the Half.com website will automatically search the leading online stores to find our user the cheapest price (i.e., launch a “shopping bot”). By participating in affiliate programs and referring users to other sites, Half.com expects to earn an average commission of 8% of the ultimate purchase price. Even though the Company does not have the item in inventory, it is still a win-win-win scenario: the consumer purchases the item for the cheapest price online; the third party e-commerce site generates revenue; and Half.com earns a commission. Furthermore, by integrating shopping bot technology into its website, the Company hopes to become the first place consumers visit while shopping online.

Another income source will come from the interest on the float. By acting as an intermediary in the transaction process, Half.com will process the buyers’ credit cards and send a monthly check to the sellers. In order to reduce fraud, the Company will add a minimum of a 15-day delay in between the purchase and seller payment. For example, on June 15th, the Company will pay sellers for all transactions that occurred between May 1 and May 31st. This will result in a maximum of a 45-day holding period and a minimum 15-day holding period. The Company will earn interest on the funds during this period.

The Company will also earn advertising and sponsorship revenue for sale of banner advertisements and sponsorships throughout the site. While not a major revenue source, the Company expects to generate a significant amount of web visits and page views. The Company currently plans to retain an outside advertising sales agency to sell banner ads and sponsorships.

Finally, the Company is considering the possibility of generating Premium Listing Revenues by allowing sellers to feature their items on the website. Items that have a premium listing might get featured placement on the top of search results list or receive prominent placement on the homepage of the site. Additionally, when there are multiple copies of the same item in “inventory,” any premium listed items are displayed first.


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PRODUCT OVERVIEW

Product Offering

Half.com seeks to foster an organized and efficient aftermarket for mass-market products on the Internet. Initially, Half.com will create an online storefront that connects buyers and sellers of used consumer entertainment products in a variety of categories, including:

Books (including audiobooks) Music (compact discs) Movies (videos and DVDs) Video Games (Sega, Nintendo and Sony)

The functionality of the Half.com website can be roughly divided into three components:

Listing an Item for Sale Browsing or Searching for an Item Purchasing an Item

1. Listing an Item for Sale

Users can list an item for sale using the Company’s proprietary “SpeedSell” technology or through manual entry. With SpeedSell technology, a seller only is required to enter either a 10-digit International Standard Book Number (ISBN) identifier or a 13-digit Universal Product Code (UPC) number. Virtually every consumer product created within the last 25 years has an ISBN or UPC number.

After a seller enters the UPC or ISBN number, the site displays our catalog entry for the item they entered (containing fields such as title, author/artist, publisher, cover art image, etc.). Users will be asked to (a) confirm the accuracy of the catalog entry; (b) enter the condition of the item, and (c) enter the price they wish to sell it for. The default pricing option will automatically price the item at 50% off the lowest online price. However, a seller is free to raise or lower the price – as long as their new price is less than 50% off list. There will be no upfront charge for a seller to list an item on the site. The Company will only charge a seller a commission when the item is sold.

The Company also offers a variety of sellers’ tools to allow sellers to review (and modify) their listed items and to review their recent sales activity.

The Company has recently signed a deal several leading inventory management software companies. These companies provide software to manage the inventories for used bookstores, music stores, video stores and games stores. For example, the Company has recently signed a deal with UBIC (Used Book Inventory Controls) Systems. UBIC is the leading provider of inventory management software to the used bookstore market. Under the terms of our multi-year agreement, Half.com has built a module for the UBIC software which uploads a complete list of a store’s inventory to the Half.com website and provides us with frequent inventory updates. UBIC has also agreed to make Half.com the exclusive online partner for their


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software. The Company has already signed deals with over 24 bookstores that use the UBIC software.

2. Browsing or Searching for an Item

Prospective buyers are presented with an easy-to-use interface, allowing them to search or browse through the product categories. After selecting a category (books, movies, music or games), a user can either search for a specific entry or browse through the product catalog.

Users can search by a variety of fields, including:

Books Music Videos

Title Album Title TitleAuthor Song Title ActorKeyword / Subject Performer / Artist DirectorISBN/UPC Recording Label Keyword / SubjectFormat (hardcover, paperback, etc.)

Format (compact disc, DVD, etc.)

Format (VHS, DVD, etc.)

Seller Keyword / Subject SellerSeller

Users can also browse through the catalog in numerous ways, such as:

Books Music Videos

Three-Tiered Subject Hierarchy

Style / Genre ListingsTop 100 CDs

Genre ListingsTop 100 VHS

Top 100 Sellers Top 100 DVDs Top 100 DVDsBest-Selling Authors Best-Selling Artists Best-Selling MoviesNew Arrivals New Arrivals New Arrivals“Must Haves” “Must Haves” “Must Haves”Third Party Bestseller Lists (NY Times, etc.)

Third Party Charts (Blockbuster, etc.)

Chartbusters

Once a user finds an item of interest (either through searching or browsing), the user is next taken to an Item Information Screen. This screen contains the following information:

Product Information (Title, Author/Actor/Artist, Publisher, Year, Pages, ISBN, Format, etc.)

In Inventory? (Yes / No) Scanned cover art image (if available) Prices (List Price, Shopping Bot Prices, Half.com’s Price) Seller Info (Username, Community Feedback/Rating)


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If the user wishes to purchase an item that is not currently in our “inventory,” the Half.com website will automatically search the leading online sites to find our user the cheapest price (i.e., launch a “shopping bot”).

3. Purchasing an Item

When a user has found an item in inventory that he or she wishes to buy, the item can easily be purchased using a credit card. Items can be placed into a shopping cart or immediately purchased using a “Speedy Checkout” feature. When there are several copies of the same item in inventory, the site will recommend a “Quick Pick” based upon an algorithm which factors price, condition and seller rating. However, a buyer can always review all the items in inventory and purchase a specific copy.

A buyer can also view a seller’s Community Rating Profile before making a purchase decision. The Company believes that the Community Rating Profile feature will play an important role in making users feel more comfortable in dealing with an unknown trading partner of the Web. As pioneered by Ebay, the community rating mechanism establishes reputations within the user community. By encouraging individuals to record comments about their trading partners on Half.com, every registered will have a feedback profile. This profile will contain compliments, criticisms and other comments by users who have conducted business or interacted with a user.

Once a buyer purchases an item, an e-mail is sent to the seller. Once the seller confirms that he/she will ship the item, the buyer receives a confirmation e-mail and their credit card is charged by Half.com. A follow-up e-mail will be sent to the buyer 10 days after the transaction to insure that the item was received. The seller will receive a monthly check from Half.com containing their proceeds (minus the Company’s commission)

Features & Benefits

1. Features & Benefits for Buyers

PRICE…PRICE…PRICEBy automatically pricing every item at half off, the Company expects to offer the best price on the Internet. According to Jupiter Communications, 80% of all online purchase decisions are price driven.

ONE-STOP SHOPPINGBy integrating a price-comparison agent (or shopping bot) into the service, the Company hopes to become the first place a buyer visits. If we have the item in inventory, buyers can purchase it for less than anywhere else online; if we don’t have the item in inventory, we will direct the user to the cheapest source online.

TRUSTED INFORMATIONBy structuring the product around standardized identifiers (UPC/ISBN), the Company will augment product listings with structured databases and trusted information. This will provide buyers with an easy-to-navigate and


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information-rich shopping environment.

EASE OF USEBy combining two well-known models (the consumer-to-consumer model of Ebay and the storefront model of Amazon), the Company’s website will leverage well established user interface paradigms. Users will not be forced to learn a new interface.

QUICK RE-LISTThe Company has built a patent-pending technology to provide buyers the ability to automatically re-list the items they purchase. For example, a person who purchases an audio-book at Half.com could choose to automatically re-list the item in two months for the same price. After the video is sold again, the buyer has owned the movie for two months for less than the cost of an overnight movie rental (i.e., the buyer would only have to pay shipping upon buying the video and the Half.com commission upon selling it).

2. Features & Benefits for Sellers

GENERATE CASH FROM THEIR BOOKSHELF AND CD RACKBy simply entering an ISBN or UPC number, a consumer can turn their unused books, CDs and videos into free cash. A person who lists just 50 books could make over $400.

CONVENIENCESelling an item at Half.com is quick and easy. Using the Company’s SpeedSell and batch listing capabilities, sellers can quickly and easily list their items on our website without typing in long product descriptions or scanning images.

FREE TO LISTThere is no upfront cost to list an item at Half.com. Sellers only pay a commission to the Company if (and when) they get paid.

FREE PERSONALIZED WEBSITEIn addition to listing a sellers items within the Half.com website, the Company provides sellers with a free website which will serve as their personal storefront. Visitors to a sellers’ website can only access the seller’s inventory – creating a private-label storefront. This is special value to independent booksellers, small bookstores and other volume sellers.

PROMOTIONS AND INCENTIVESThe Company expects to offer a variety of promotions and incentives to drive frequent use of the website. At launch the Company expects to offer a variety of promotions, including free shipping on first orders, T-shirts for customer referrals, and online coupons for listing items at Half.com. Another promotion will be a contest targeting prospective buyers whereby entrants


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will have to complete a comical “quiz” comparing our prices to those of other online merchants. The Company also is in discussions with several online incentive programs (such as MyPoints and CyberGold) about providing loyal users with “points” that can be redeemed for a variety of goods and services.

Inventory

The Company believes that significant quantity of the inventory listed on the site will be from individual users. However, in order to insure that the shelves aren’t empty when the store opens, the Company has pursued an aggressive merchant outreach strategy. Indeed, the Company has already entered into relationships with dozens of merchants who have agreed to list their over 2 million books, cds, dvds, videos and games for at least half price. The Company is confident that this level of inventory will position it as the leading person-to-person source of these items at launch.

Current Inventory Levels at Leading Person-to-Person Sites

Books Music Movies GamesEbay 163,179 159,152 79,145 12,701Yahoo 86,405 54,836 31,656 48,713Fairmarket 4,331 4,468 338 554Amazon Auctions 66,877 5,227 11,997 543HALF.COM 1,700,000 135,000 150,000 15,000

Data as of 11/30/99

Current Half.com merchants include:

Inventory Management Software Customers – The Company has entered into an agreement with several of the leading inventory management software companies to make Half.com the integrated online reseller. By installing a free software module we provide, their customers (i.e., store owners) can instantly list all their items at Half.com. This provides the Company with a captive audience of used bookstores, cd stores, and movie/game stores for merchants.

Existing Internet merchants – There are dozens of small, independent merchants who currently sell cds, videos and games on the Internet but don’t have the funding for marketing. The Company has conducted a major outreach program to these merchants, encouraging them to list their inventory on the Half.com website.

Used and remainder shops – The Company has also entered into relationships with a number of large used and remainder distributors. For example, Tartan Books is the leader in book “rentals” to the library market. By buying bestselling books in quantity, Tartan is able to receive significant discounts from the publisher. Tartan then rents copies to libraries for a period of 3-9 months until they are returned to Tartan. Half.com and Tartan have reached an agreement


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for Tartan to list all their returned bestsellers at Half.com.

Technology and Infrastructure

The Half.com technology is composed of a robust, scalable user interface and transaction processing system that leverage a combination of internally developed proprietary software and commercial-off-the-shelf software. This system takes advantage of existing technologies in electronic commerce while introducing several new features. The development organization consistently seeks optimize for the following four goals:

Offer features and functionality that enhances user experience Maintain high performance and availability of the service Insure quick time-to-market and be responsive to changing user needs Insure low cost-of-service with optimal resource utilization

The Half.com service is be available to users 24 hours a day and seven days a week. Scheduled maintenance windows have been created and are not expected to exceed a total of four hours per week. The Company's system runs on a cluster of Sun database servers running Oracle’s 8i relational database management system and Thunderstone’s Texis search engine. A suite of Pentium-based web application servers running the Windows NT operating system provide a horizontally scaling and low-cost webserver farm. The Company uses a hardware-based load balancing system and its own redundant servers to provide for fault tolerance. The service is co-located at Nextlink’s Philadelphia-based facility and connected via closed-loop connection to InterNap’s national network. InterNap, which is also used by Yahoo and Amazon.com, has peering relationships with virtually every major Internet Service Providers, resulting in the least network latency to customers. In addition to the above “production” network the Company operates a “corporate” and “development” infrastructure that is housed within the Company’s offices in Philadelphia.

In addition to the front-end functionality (described in the “PRODUCT OVERVIEW” section), there are several “back end” service, such as:

Data warehouses that provide reporting and decision support services;

Catalog management tools that manage the integration of several third party databases into the “catalog”;

E-commerce billing systems (using Signio software) that interact with credit card transaction processing companies and the data warehouse;

Systems and network management tools to monitor the service performance and availability; and


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Customer care management systems that will allow the Company to respond to customer questions by e-mail and telephone.

Intellectual Property

The Company has already filed U.S. trademark applications for the Half.com brand and has filed for three U.S. patents on both its technology and business methods. The inventions included in these patents include:

Pricing methodology Automatic relisting upon purchase of an item Method for connecting buyers and sellers

Licensed Databases and Content

Management has years of experience in licensing content and databases for Internet-based services. Indeed, at Infonautics Corporation, Mr. Kopelman was responsible for establishing relationships with dozens of the nations’ leading publishers and database providers. The Company has entered into relationships with several leading database suppliers to provide product data for the website, including Muze, RR Bowker, Ingram and others. These providers currently provide data to several of the leading e-commerce storefronts, including Amazon.com, Borders, Barnesandnoble.com, and CDNow.

In addition, the Company has leveraged its database experience to create proprietary databases. For example, there currently is no readily licensable database for video game (Sega, Nintendo, etc.) products. Through a variety of licenses and agreements the Company has compiled its own database of videogames which includes cover-art, multiple screen shots, and product reviews.

Customer Service & Fraud Protection

The Company believes that excellent customer service is a critical requirement in order to succeed in the consumer-to-consumer marketplace. The Company expects to devote significant resources to providing personalized, timely customer service and support. The Company expects that most customer support inquires will be handled via e-mail, with customer e-mail inquiries typically being answered within 24 hours of submission.

In addition to Community Rating Profiles (discussed above), the Company expects to offer a fraud protection program designed to make users more comfortable with transacting with an unknown person over the Web. The Company plans to implement several of the successful programs initiated by Ebay, including a consumer protection program which provides guidelines for buyers and sellers, helps provide information to resolve user disputes and responds to reports of misuses of the Half.com service. The Consumer Protection group will investigate all users’ complaints and take appropriate action, including issuing warnings to users or suspending users


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from buying or selling items. The staff will also provide information to assist users with disputes over the quality of the goods sold or other fraudulent activity and upon receipt of an officially filed, written claim of fraud from a user, will generally suspend the offending user from Half.com.

Differentiation and Competition

The e-commerce marketplace is new, rapidly evolving and intensely competitive. Barriers to entry are relatively low, and current and new competitors can launch new sites at a relatively low cost. The Company believes the auction sites (such as Ebay, Yahoo! Auctions, Amazon Auctions, and Excite Auctions) are the primary alternatives for people who want to sell items and that e-commerce sites (such as Amazon.com, Barnesandnoble.com, CDNow, and Reel.com) will be competing to reach the same buyers. Other competitors include used bookstores and used music stores operating online (the most significant of which are Powells Books and ABE Books).

However, the Company believes that it will successfully compete and uniquely differentiate itself in the marketplace in several ways:

Lowest Prices OnlineThe “halfoff” business model provides the Company with instant differentiation from its competition. Given the tremendous price sensitivity of online shoppers, the Company believes that its prices will be the lowest on the Internet. Moreover, the growth of shopping bots augurs favorably for Half.com, as more prospective buyers are exposed to the Company’s price advantage.

Focus on Used ProductsWhile there are hundreds of e-commerce storefronts on the Internet selling new books, music and videos, there are few significant players in the used product marketplace. A few e-commerce stores have partnerships with third parties to provide used merchandise, but in almost all cases the used products are not heavily marketed. By focusing on used mass-market entertainment products, the Company hopes to differentiate itself from the competition.

Strong Brand NameThe Company believes that “Half.com” is a powerful and extensible brand name and plans to allocate a significant amount of marketing resources towards building the Half brand. The Half brand name appeals directly to an online shopper’s primary consideration – price. Furthermore, the Half brand name can easily be extended to sell any other product online – such as computer hardware, automobiles, collectibles, electronic appliances, and other “catalogable” items.

Unique Business ModelThe Company believes it will be the first major website to create a consumer-to-consumer marketplace using a storefront interface. By combining (a) the power of Ebay’s consumer-to-consumer marketplace with (b) the convenience and ease-of-use


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of Amazon.com’s storefront interface and (c) prices that are guaranteed to be half off, the Company believes its business model will differentiate it from the competition.

Business-to-Business

Business-to-Consumer Person-to-Person

Storefront / CatalogDell Computers

IBMCisco

VerticalNet

Amazon.comCDNow

TravelocityEtoys.com

HALF.COM

AuctionAdAuction

Manheim AuctionsOnsaleUBID

Bid.com

EbayAmazon AuctionsYahoo! Auctions

SpeedSell and No-Fee ListingThe Company believes that its proprietary SpeedSell technology will provide sellers with a much easier way to list items for sale. Furthermore, Half.com provides (a) batch listing tools for users who want to list a large volume of items; and (b) a tool to allow used book and music stores to upload data to Half.com from standard inventory management software (such as Homebase and IBID). In addition, sellers are not be forced to pay an upfront fee to list items on Half.com. Ebay, for example, currently charges a listing fee ranging from $1 to $3 to list a $25 item – regardless of whether the item is sold.

Product Extensions

Half.com is committed to rapid product iteration and enhancement. Indeed, while employed at Infonautics Corporation, the Half.com Management Team spearheaded the Company Sleuth project – delivering five major enhancement releases within six months.

The Company has already identified dozens of ways to enhance and extend the Half.com website, including:

Additional Product Categories / UPC extensionsHalf.com can easily be extended to sell any other product online – such as computer hardware, automobiles, collectibles, electronic appliances and other “catalogable” items. The Company has identified several UPC database providers who could provide access to enhanced category-specific databases. Current plans call for the addition of one new product category per quarter, starting with PDAs in the second quarter of 2000, followed by cameras/camcorders and portable audio devices in Q3, and video game consoles and laptops on Q4.

Collaborative FilteringBy incorporating collaborative filtering technology (sometimes referred to as “automatic recommendation technology”), the Company can recommend items to


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buyers based on their previous purchases.

Telephone SpeedSellBy allowing users to enter items for sale over the telephone (using UPC or ISBN numbers), the Company believes it can significantly improve its ability to get users to list items for sale.

Premium Listing FeesThe Company can generate additional revenues through “Premium Listing Fees.” Sellers who purchase a premium listing would receive featured placement on the top of search results lists or on the homepage of the Company’s site.


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MARKETING OVERVIEW

The Marketplace

The Company’s website will initially sell used mass-market entertainment products, such as: books, music, and videos.

BooksAccording to Veronis Suhler, the U.S. consumer book market was $15.4 billion in 1997 and is expected to grow to $16.4 billion by the year 2000. Used books account for just 3% of total sales. While online sales represent a small percentage of the overall book market today, Forrester Research estimates that U.S. online sales of books will grow to nearly $3 billion in 2002. Over one billion books are sold to consumers each year – and more than half of all sales are fiction books. The Company believes that this represents a significant opportunity, as fiction books are typically read once and have limited reference value. For example, over 1,000,000 copies of John Grisham’s latest bestseller, The Testament, were sold within the first month of release. Research has shown that most fiction books are read within the first 2 – 3 weeks of purchase. This would provide the Company with an extremely large inventory pool within weeks of publication. The Company believes that consumers’ bookshelves represent an incredible inventory opportunity.

MusicAccording to the International Federation of the Phonographic Industry, worldwide sales of music and music videos in 1997 were approximately $38.1 billion, of which one-third was in North America. Used music represents less than 1% of sales. Online music retailers currently account for a small (1.1%) but growing portion of total sales. Jupiter Communications estimates that sales of pre-recorded music over the Internet will grow on a worldwide basis from approximately $47 million in 1997 to $1.6 billion in 2002.

VideosAccording to Video Flash, total consumer expenditures on home video rentals and purchases exceeded $21.8 billion last year. This total was comprised of consumer spending of $11.45 billion on the rental of 4.23 billion prerecorded tapes plus consumer spending of $10.38 billion on the purchase of 735.1 million prerecorded tapes. Forrester Research estimates that US online video sales will reach approximately $1 billion in 2002.

Video GamesAccording to NPD Group, the domestic market for console-based video games will exceed $15 billion in 1999.


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Marketing Strategy

Half.com’s marketing strategy is to promote its brand and attract buyers and sellers to the Half.com service. Management believes that effective marketing does not need to be expensive marketing. (Indeed, while at Infonautics Mr. Kopelman was able to build Encyclopedia.com into the second most visited encyclopedia on the Internet – even ranking ahead of Encyclopedia Britannica – while spending less than $200,000 in marketing). To attract users to its website, the Company will utilize the following marketing tactics:

Public Relations

The Company believes that with the intense media focus on Internet-related topics, new and innovative products (such as Half.com) have the ability to garner significant media exposure. At Infonautics, for example, Mr. Kopelman was responsible for managing public relations activities surrounding the launch of Homework Helper, Electric Library and Company Sleuth. All of those products have received significant amounts of media exposure, including feature stories in almost every major venue, including the Today Show, The Wall Street Journal, Newsweek, Business Week, CBS, CNNfn, USA Today, the Washington Post and CNBC.

Distribution Relationships

Business development deals will play a major role in driving traffic to Half.com. The Company plans to conduct an aggressive business development program targeting high traffic websites, shopping agents, and affiliate programs.

1. High Traffic Website RelationshipsBy entering into distribution relationships with high traffic websites, the Company

expects to generate a significant amount of traffic to its website. To date, the Company has already entered into several relationships to integrate the Company’s inventory on six of the top 20 Media Metrix-ranked websites:

Yahoo Shopping Infoseek / Go About.com Looksmart Go2Network Infospace Inktomi

2. Shopping Agents / Shopping BotsAccording to Zona Research, “shopping agents” or “shopping bots” which allow

shoppers to find the best price online will be the most important e-commerce development in 1999. Indeed, some web merchants report that shopping bots account for over 25% of all sales. The Company expects to enter into relationships with most of the major shopping agent services,


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and has already signed deals with BottomDollar.com, MySimon, and BestBookBuys.com and PriceScan.

3. Affiliate ProgramsAccording to Jupiter Communications Inc., affiliate programs will generate over 11% of

all consumer e-commerce transactions over the Web this year, and that figure should grow to 24% by 2002. Affiliate programs use a revenue-share model, where an “affiliate site” drives traffic to an “e-commerce site” in exchange for a percentage of the revenue generated by the affiliate. The Company will launch a major affiliate acquisition campaign at launch.

Online Advertising

The Company will use strategic purchases of online advertising to place advertisements in which it can reach its target audience. By leveraging existing management relationships with large advertising sales networks (such as DoubleClick, Flycast, RealMedia and 247 Media), the Company believes it will be able to purchase online advertising on a cost-per-action basis. Moreover, the Company plans to enter into cross-promotional barter relationships with select properties.

Offline Advertising

The Company also expects to engage in a number of marketing activities in traditional media. The Company has retained Odiorne, Wilde, Narraway & Partners (a San Francisco full-service advertising agency) to serve as its agency of record. OWNP has launched several successful “dot.com” brands, including Salon.com, Springstreet.com and Fogdog.com.

The Company currently expects to spend in approximately $15 million in 2000 on offline advertising, with the majority focused on cable TV and radio.

Promotions

At launch, the Company will unveil a variety of promotions and incentives to drive frequent use of the website. One promotion will offer prospective sellers up to $10 in online credit for listing up to 100 items at Half.com. Sellers will also be able to reduce the commission paid to Half.com by referring other people who become sellers. Another promotion will be a contest targeting prospective buyers whereby entrants will have to complete a comical “quiz” comparing our prices to those of other online merchants. The Company also expects to partner with an online incentive program (such as CyberGold) providing loyal sellers/buyers with “points” that can be redeemed for a variety of goods and services.

Viral Marketing Campaign

Some of the most successful websites (such as Ebay and Hotmail) have generated most of their traffic by word-of-mouth referrals. Viral marketing is a method of getting customers to propagate a product on behalf of the company that creates it. It has been so successful that Newsweek Magazine called it “one of the cheapest and most effective Internet marketing


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schemes ever.” Shortly after product launch, Half.com plans to introduce a viral marketing tool by offering registered sellers the ability to create e-mail based coupons. This tool would allow sellers to submit the e-mail addresses of their friends, past customers, etc. and would automatically send them an e-mail offering a special discount.


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MANAGEMENT OVERVIEW

Management Team

In addition to the two founders, the Company is actively searching for additional members of the management team. The Company expects to add a Vice President of Marketing and a Chief Financial Officer before the end of the year.

1. Joshua Kopelman, President and CEO

Joshua Kopelman is the founder of Half.com and has been an active leader in the Internet industry since its commercialization. Prior to founding Half.com, Josh was co-founder and Executive Vice President of Infonautics Corporation, an Internet information company based in Wayne, PA. Josh co-founded Infonautics in 1992, while he was a student at the Wharton School of the University of Pennsylvania. Since then, Infonautics has grown to employ almost 200 people and, in 1996, Infonautics went public on the NASDAQ stock exchange. According to the December 29th 1998 Philadelphia Inquirer, Infonautics was the “the second-best-performing stock” for the Philadelphia region in 1998. Revenues for 1998 were approximately $15 million, up from under $7 million in 1997.

Josh served as Infonautics’ General Manager for the Electric Library business unit, growing the bookings of this educational online information service from less than $3 million in 1996 to over $18 million in 1998. In this role, Mr. Kopelman oversaw a team of over 100 people in a variety of areas, including marketing, sales, business development, product management, and software development. Under his leadership, Electric Library became one of the top consumer subscription sites on the Internet (with over 75,000 paying subscribers) and the fastest growing online reference product in the K-12 marketplace (with over 15,000 schools licensing the product). Mr. Kopelman was also responsible for the creation and launch of Encyclopedia.com – the second most popular encyclopedia site on the Internet. All told, by 1999 Infonautics’ web properties received almost two million unique visitors each month. According to the February 1999 Media Metrix Web Report, the reach of the Infonautics Network placed it in the top 75 web properties on the Internet – with more unique visitors than the New York Times, Etrade, CBS Marketwatch and Dow Jones Interactive.

In his last role at Infonautics, Mr. Kopelman was the visionary and leader behind the development of Infonautics’ newest Internet products, Company Sleuth and Job Sleuth. Launched in October, 1998 Company Sleuth is one of the fastest-growing personal finance sites on the Internet, receiving PC Magazine’s prestigious “Top 100 Web Site” award in April, 1999.

Prior to founding Infonautics, Mr. Kopelman worked in corporate development at Telebase Systems, Inc. (which later merged to become N2K and is now a part of CDNow). Before that, he worked at the New York venture capital firm Poly Ventures, LP, conducting financial analysis, business plan screening and due diligence investigations of high-technology startup firms.


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In 1999, Mr. Kopelman was awarded the “40 under 40” award by the Philadelphia Business Journal, as one of forty individuals under the age of forty who have made the biggest impact on the Philadelphia region.

Mr. Kopelman holds five United States patents in connection with his work in Internet technology and information retrieval. Mr. Kopelman is often quoted in industry trade journals and national newspapers, has appeared on numerous television shows, and is a frequent speaker at industry-wide conferences on the future of information services.

Josh earned a Bachelor of Science degree cum laude in Entrepreneurial Management and Marketing from The Wharton School of the University of Pennsylvania. He lives with his wife, Rena, in Wynnewood, Pennsylvania.

2. Srinivas (“Sunny”) Balijepalli, Vice President of Technology

Sunny Balijepalli is a co-founder and Vice President of Technology of Half.com. He is responsible for leading the technology divisions that will deliver and maintain the Company’s e-commerce services.

Prior to founding Half.com, Sunny was the Manager of Information Systems at Infonautics Corporation, which he joined in 1994. During the last year, he was primarily responsible for developing the Sleuth concept, technology platform and architecture. He led a cross-functional team of engineers to build and deliver the award winning Company Sleuth. The first release of CompanySleuth was delivered in record time and was followed up by five major releases within the following six months. Shortly after releasing CompanySleuth, Infonautics launched JobSleuth, the Internet’s first personalized, push capable job search. During the development of the Sleuth platform Sunny’s focus has been clear: rapid time to market, high quality and low cost of service.

Prior to running the Sleuth technology division at Infonautics, Sunny oversaw the production services of all properties on the Infonautics Network including the Electric Library. He was responsible for incorporating an enterprise systems and network management system that brought about increased levels of service availability.

Sunny has experience with a wide spectrum of technologies including – relational databases, web application servers, content and document management systems, messaging, information retrieval, etc. In addition, he has a strong background in information systems management.

Sunny has a Bachelors degree in Computer Science. He will shortly be completing the Masters in Information Systems program at Drexel University. He lives in Devon, Pennsylvania.

3. Chris Fralic, Vice President of Business Development


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4. Mark Hughes, Vice President of Marketing

5. George Leimer, Vice President of Operations

Board of Directors

The current directors are:

Joshua Kopelman , President, CEO and Chairman of the Board of Half.com

Van Morris , President and CEO of Infonautics CorporationMr. Morris has more than 20 years of experience in management and marketing at high technology companies, serving in such capacities at Legent Corporation, Goal Systems International and UCCEL before joining Infonautics in September 1995.

David Sclessinger, founder Encore Books and Zainy Brainy

Bob Roeper, Managing Director of VIMAC


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SUMMARY – KEY INVESTMENT CRITERIA

Half.com is led by a strong, experienced management team. Joshua Kopelman, the Company’s President and Chief Executive officer, has been in the Internet/Online services industry since 1992. Working together with Sunny Balijipalli at Infonautics Corporation, Josh has created, built and marketed a number of leading web properties.

The Company has a unique business model. By combining (a) the power of Ebay’s consumer-to-consumer marketplace with (b) the convenience and ease-of-use of Amazon.com’s storefront interface and (c) prices that are guaranteed to be half off Amazon.com’s price, the Company believes its business model will differentiate it from the competition.

The Company makes money by moving bits – not books. Unlike most major e-commerce companies, the Company never take possession of an item being sold or the buyer’s payment for the item. Rather, the Company generates revenues by connecting buyers and sellers. This low-cost structure provides significant competitive advantage against both traditional retailers (who have to maintain retail stores) and online retailers (who incur expenses by maintaining warehouses, inventory, and employees).

The Half.com brand is a powerful and memorable brand name. The Company believes that “Half.com” is a powerful and extensible brand name and plans to allocate a significant amount of marketing resources towards building the Half brand. The Half.com brand name appeals directly to the primary consideration of online shoppers – price – while maintaining a level of elegance and mystery.

The Internet is experiencing dramatic growth in the number of users and is changing the way people shop. IDC estimates that the number of Web users will grow from approximately 150 million worldwide in 1998 to approximately 500 million worldwide by the end of 2003. This rapid adoption of the Web represents an enormous opportunity for businesses and consumers to conduct commerce over the Internet. Indeed, according to A.C. Nielson/CommerceNet, over 20 million Americans have conducted an e-commerce transaction.

Half.com will offer users the ability to purchase goods at the lowest price available online. According to Jupiter Communications, 80% of all online purchase decisions are price driven. The Half.com website will automatically price items at half off the Amazon.com’s price. The Company believes that its prices will be the lowest on the Internet.

The Company is forecasting dramatic revenue growth and cash flow break-even within the first two years of operation. The Company expects to generate over $3.5 million in revenue within the first 18 months of operation, growing to over $16 million in 2001. The Company projects cash-flow break-even in the first quarter of 2001.

There is strong potential for product extension. The Half brand name can easily be

extended to sell any other product online – such as computer hardware, automobiles,


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collectibles, electronic appliances and other “catalogable” items.


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FINANCIAL OVERVIEW2000 – 2002 Pro-Forma Quarterly Income Statements(Detailed Income Statements available upon request)


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2000 – 2002 Pro-Forma Quarterly Cash Flow Statements(Detailed Cash Flow Statements available upon request)


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2000 Pro-Forma Monthly Income Statement


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half.com business plan - 1999

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