c h a p s.

com
The precise information, when it is needed most

B USINESS P LAN

Table of contents
2. 3. 4. 5. EXECUTIVE SUMMARY ....................................................................................................... 3 COMPANY GENERAL PROFILE.......................................................................................... 4 PRODUCT DESCRIPTION..................................................................................................... 6 MARKETING PLAN ............................................................................................................... 6 5.1 MARKET SEGMENTATION ..................................................................................................... 6 5.2 TARGET MARKETING SEGMENT STRATEGY ........................................................................... 7 5.2.1 Market Needs.............................................................................................................. 8 5.2.2 Market Trends ............................................................................................................ 8 5.3 INDUSTRY ANALYSIS ........................................................................................................... 9 5.3.1 Industry Participants ................................................................................................ 10 5.3.2 Distribution Pattern .................................................................................................. 10 5.4 MARKETING STRATEGIES ................................................................................................... 10 5.4.1 Sales Strategy............................................................................................................ 11 5.4.2 Sales Forecast........................................................................................................... 11 5.4.3 Pricing Strategy ........................................................................................................ 11 5.5 ADVERTISING, PUBLIC RELATIONS, AND PROMOTION ......................................................... 12 5.6 DISTRIBUTION STRATEGY................................................................................................... 13 5.7 BRAND STRATEGY ............................................................................................................. 14 6. OPERATIONAL PLAN ......................................................................................................... 14 6.1 6.2 6.3 6.4 7. 8. LEGAL FEASIBILITY ............................................................................................................ 14 OPERATION OVERVIEW ....................................................................................................... 15 SALES PROCESS FLOW ........................................................................................................ 17 OPERATIONAL PROCESS FLOW ............................................................................................ 18

ORGANIZATIONAL STRUCTURE..................................................................................... 19 CAPITAL STRUCTURE ...................................................................................................... 20 8.1 8.2 PARTNERS PARTICIPATION ................................................................................................. 20 VENTURE CAPITAL FROM INVESTORS.................................................................................. 21

9.

FINANCE PLAN .................................................................................................................... 21 9.1 9.2 9.3 9.4 9.5 BREAK- EVEN ANALYSIS ..................................................................................................... 21 EXPENSE FORECAST ........................................................................................................... 22 LINKING SALES AND EXPENSES TO STRATEGY .................................................................... 22 CONTRIBUTION MARGIN .................................................................................................... 22 DETAILS OF THE FINANCIAL LINE ........................................................................................ 23 APPENDIX 1 APPENDIX 2 APPENDIX 3

10. 11. 12.

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2.

Executive summary

Chaps.com is an Internet service company specialized in providing information in a very unique way to the academic community and the general public. Chaps.com offers the possibility of purchasing one or more chapters from a vast variety of books in digital format, making it easier, cheaper and faster to access only the information needed. We realized that, very often, the faculty of any given university recommends several books to be studied during the course, while using only few chapters in each of the books. What follows is the inconvenience of making copies of the required material, and the tiresome work of waiting in long lines at the school copy centers. Those who prefer to buy the books face the cost s opportunity of using a small portion of what they have bought. Both situations-making copies and buying the books--in a way restrain the accessibility to the use of information, making it more difficult to conduct studies and research, or to prepare classes. In this way, the academic community or any user can access Chaps.com s web page, search for a specific subject, select which chapters within a book he or she is interested in purchasing, and then download the material into his/her personal computer. Yet for the general public interested only in one specific subject, he or she, so far, can find any service that would allow them to compose a customized t book according to his or her preferences. Chaps.com plans to capitalize on this opportunity by fulfilling the needs of students and the general public through this innovative service. We are able to electronically deliver chapters of books--or even entire books--direct to the client home. s Since there no similar service offered in our market, Chaps.com will take s advantage by being the first company to acquire the necessary exclusive rights of editors, writers and/or publishing companies, so they can provide the content of our service. By being partners with Chaps.com, the suppliers of content will have the opportunity to increase revenues that otherwise would not exist, since the copies taken at copy centers do not submit royalties to the copyright owner. We are proposing this new business aiming our strengths on the marketing component, and we are confident that a good and well-structured marketing strategy is fundamental to approach this segment in the best way. Chaps customers initially are related with business, economics and accounting areas, and can be divided into five groups: undergraduate students, graduate students, people who look for updating courses, professionals, and instructors. Since we are in tune with the so-called knowledge society, basically anyone looking for information is a potential customer. However, we will first concentrate our marketing efforts in the academic community, which is a fast-growing segment in our region. Our goal is to have 3,000 purchases in our site in the first year of operation, increasing to 25,000 purchases in year 2, 78,000 in year 3, 243,000 in year 4 and 450,000 in year 5.

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To accomplish effectively the company goals, Chaps.com management team, led by M. Hashimoto, Electronic Delivery Process Manager at Citibank, an expert in Information Technology, has assembled a staff of other leading executives in each relevant field of the company. Y. Y. Kim, using his past experience in consumer marketing, will be responsible for all the marketing matters. A. V. Bittar will take the financial responsibilities and decisions. J. W. Pimentel, an experienced engineer, will play an important role as the chief operational officer. A. A. Kubo, a former tax lawyer, will be the legal advisor, specially concerning contracts, copyrights and intellectual property issues. All the team members are MBA students at Fundao Getlio Vargas, in So Paulo, Brazil, a top business school in Latin America. Chaps.com will require a capital of US $650,000, requesting venture capital of US $550,000 for administration, overhead, and marketing expenses, besides the founder equity of US $100,000. The venture capital will be s requested as a long-term loan, divided in three quotas according cash necessities, providing the investor an internal rate of 40% per year. The main financial indicators are shown below:
US$ Net Sales Net Profit Cash Balance Profit Margin Year 1 51,304 (350,058) 167,500 (682 %) Year 2 398,307 (146,417) 22,943 (37 %) Year 3 1,217,986 74,466 67,349 6% Year 4 3,460,193 836,978 18,681 24 % Year 5 7,079,160 2,093,908 911,301 30 %

Chaps.com is a new business ready to be launched, a limited company (Ltda.) that aims to fulfill the needs of those looking for information. Chaps.com believes that will provide it in a very efficient and practical way. 3. Company general profile

The idea of the company has its beginning in the desire to break a current paradigm that restrains the efficiency and value creation in the relationship between information consumers and information makers. The information consumer can be defined as everyone who searches for any kind of information, and from this large group we selected three main segments: (1) the academic community, such as the faculty, students and researchers, (2) professionals longing for updated information, and (3) the general public who access the current media (e.g. books, magazines, newspapers, Internet). For the purpose of our business, we have divided the information makers into two main groups: (1) the academic community, and (2) the people who are linked to a publishing company (that have their work published in books, magazines, newspapers, etc.). We realized that those publishing companies of the industrial era play an important role, since whatever material to be published needs to pass through their hands before they reach the end consumer. Most of the time, the decision of publishing information is based solely in economics terms (in other words, will it be profitable?).

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In this way, many of the information makers cannot share their ideas with a larger number of people who would potentially be interested in such thoughts, simply because it is notprofitable enough to be published. And due to economic and physical limitations, it is difficult to customize information because the publishing companies are not able to sell pieces of information, such as chapters of books or a customized book containing several articles (of magazines and newspapers) or chapters (of books) about a specific subject. The customization is limited by the industrial era restrictions: economy of scale, low target public, high fixed costs of press activities. Chaps.com wants to offer digital information mainly by the Internet through partnerships with publishing companies and writers (the information makers), allowing search, download and customization of specific products: single chapters of books (instead of entire books), articles from magazines, papers, theses, researches or customized books about a specific issues (recipes with mango, for example). The kind of service provided by Chaps.com, which is based on Internet access, brings more efficiency and added value in the relationship among the parties: it gives the possibility of buying only the required material instead of purchasing lots of books and magazines, facilitates the search of a specific subject, saves time (libraries and book stores). New opportunities will emerge due to this change of paradigm: 1) Books sold the piece,enabling the digital purchase of chapters from a by wide variety of titles. 2) Easy search of articles and papers that can be downloaded and purchased direct from the Chaps.com site. 3) Deep change in the way people can obtain information. In the physical world, people have to take some actions which do not add value: spending time to go to libraries and bookstores, handling many books, purchasing a book when it will be only useful for a few chapters, facing lines in order to copy a couple of pages, etc. Chaps.com allows its consumers to consult our database, to search, select and purchase only the required information. Nothing more will be necessary. 4) Specific or specialized books, theses, papers that do not have enough economy of scale to be published, due to high cost or lack of interest by the publishers (a limitation of the physical world). However, Chaps.com can and will provide all the resources so the author will have his or hers work published through the internet.

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4.

Product description

Chaps.com will provide availability of information service and its main sources will be from books, essays, articles, thesis published or to be published. The emphasis will be on commercializing these products through electronic delivery, preferably through the Internet. Such information will be stored in a digital format at the company main database server and will be accessed from any Internet station connected to this web site. Some of the product variations are described below:
Individual chapters chapters of books can be sold individually. For

instance, someone can be interested in getting copies of chapters I, III, VI and XIV of a certain book and the chapters II, V and XXI of a second book. The final product to be delivered electronically or physically to this customer would be a collection of all the chapters extracted from these two books. Personalized Kits Chaps.com will have a special package offered directly to universities faculty prior to the beginning of the classes. This package will contain all the articles, essays, chapters of book and all the other materials that will be used by the professor along the course. This personalized material can be easily accessed by the student during the term. Theses and dissertations Each academic work generated within the university by the faculty or the students can be digitally stored into the company database and commercialized through the web site. Physical books Supposing that customers desire to have a traditional paper book, it will also be available for searching and purchasing through the same web site technology. Chaps.com fully respects all Brazilian laws regarding copyrights. Using our service is a way to not break the law by making unauthorized copies at copy centers. All the material will be distributed by Chaps.com, only under the author and/ or the publisher permission through a formal contract. s s 5. Marketing Plan 5.1 Market Segmentation

At first, Chaps.com customers will be from the business, economics and s accounting areas (applied sciences), and can be divided into five groups. The first group is undergraduate students who need a reference book and other support materials to complement their studying process. Support materials are mainly chapters of books and magazine articles, as the professors usually recommend. One of the features of this group is that they have more time available to search in libraries for the material needed. This is our most important market segment, with an estimated potential market of 400,000 undergraduate business-related students in Brazil alone. The second group is the graduate students who have the same needs of the first group but require more intensive research and specialized literature. This

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group does not have the same free time as the first group, meaning that they have less time available to search for materials in libraries and spend time at the copy center. The use of the Internet allows them to save time: instead of moving into the library, the student can search the material using Chaps.com and have it downloaded in a digital format. This group is estimated to be as large as 5,000 students. The third group is comprised of people who participate in updating courses (time duration ranging from one to a few months, usually partial time). Most of those people work and are looking for knowledge improvement, basic knowledge in other areas or state-of-the-art information in specific areas. In general, this is the case where the instructors require all the material needed. This group has been estimated to be about 20,000 people. The fourth group is composed of professionals who are not attending any course, but need specialized information to help in their work assignments. These people will not be regular customers, but will need a more friendly site design to help him find what they need. There is no published data about the size of this group, but we are confident in saying that it is the largest group, although it will not be the source of our most relevant customers in the first 5 years of Chaps.com. The last group, faculty and researchers, is composed of members who usually have a shorter amount of time to work with, and are continuously under pressure to read a lot of materials. They will use Chaps.com in two ways: 1) As a place to find single chapters and reference materials so they can update a specific topic, write papers, and prepare courses, presentations and support their consulting. 2) As the most convenient way to indicate their program reference material s to their students. At the same time, the students will have all the readings, avoiding wasting time at the school copy center and spending money on s a whole book while using only part of it.

5.2

Target Marketing Segment Strategy

Chaps.com is going to be the first-mover in a niche market in Brazil, focusing first on business-related academic communities. Unlike a typical e-business that sells whole books, Chaps.com will provide a unique channel where people who want to access specialized business literature, initially in Portuguese, will have the opportunity to buy just what they need it. Our company intends to attract people who use the information highway as a means of getting the precise information they need to accomplish their academic and professional activities, in a fast, personalized and trustful way.

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5.2.1 Market Needs Since our target market is a service seeker, the most important market needs are availability and service, in that order. One of the key points of our strategy is to focus on target segments that are willing to pay to fulfill their needs of information. All users of Chaps.com will want the requested information available in diverse forms, at the right time and with appropriate services to support them. Factors such as the current fast-growing trend in the use of Internet and historical sales data on books sold by the web, ensure that the high demand for correlated material will increase over the next five years in Brazil. The fast growth of the Internet and online services that has been witnessed worldwide is only beginning in Brazil. In the next five years, the market for supplying specialized information through the web is sure to experience tremendous growth (Brazil alone has 55% of Latin American web users). Being the first provider of very customized and focused material for the seekers of business, economics, and accounting areas in Brazil will assure that Chaps.com will enjoy the first-mover advantages of name recognition and customer loyalty. Initially, Chaps.com will hold a 100 percent share of this market in Brazil. In the next five years, competitors will enter the market. Chaps.com has set a goal to maintain greater than a 50 percent market share.

5.2.2 Market Trends An important trend observed in the market is the increase of electronic material available as a part of material supplied for education. Currently, we see major publishers offering specialized books, journals and magazines available at special prices in digital format. A second trend follows-- the appearance of various brands of electronic book-reading devices that will have advantages over the paper format, such as distribution, mobile information access, organizing, searching, filtering and supporting different modes of reading. We can take advantage of both trends. Printing, distribution and retailing are a considerable expense to publishers. Electronic distribution of books and related materials is both timely and cost effective. Protecting intellectual propriety is one of the problems, but there are technical solutions appearing, such as designing a unique decryption key into each reading terminal or appliance. A market survey was conducted in one of the top business schools in Brazil. Key questions were asked to 300 potential customers. Some key findings include: 1. 60% of the respondents said they would be willing to pay a little more to access customized material. 2. Among those above, the majority considered reasonable to pay 50% more than the price of a regular copy.

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5.3

Industry Analysis

Information is becoming the most precious product of the new economy, and its volume is still growing exponentially. On the supply side, the amount of information sources are growing on the same pattern, either through physical or electronic means books, magazines, newspapers, videos and through the Internet. We are part of the book, magazine, newsletter and business information business, which supplies academia and professionals, and includes several kinds of businesses: 1. Libraries: as a major vehicle for the mass distribution of printed material to readers, libraries have stood the test of time and are, with copy shops, the main competitors of Chaps.com, since they have a large variety of monographs (books) and serials (or journals, magazines, newspaper, etc), the collections are tailored to the demographic, needs and interests of the readers they serve, and in most cases, the access to the goods is free. Disadvantages are that people need to spend a lot of time there to find the material they need, the material is sometimes out of the library, and if they want to keep the book they have to return to the library to renew the loan. 2. Bookstores (traditional or Internet): traditional bookstores are usually places where the only option for people is to buy the book or the magazine they want to read or consult for any specific reason. Some of them offer very good support, but space and cost limit them in the number of titles they have to offer to the local. Most often the public has the option to put a reservation on a given material and the bookstore can order it for the client. They are very good places to buy general business books on impulse. Internet bookstores have the advantage over the traditional bookstore on the number of titles that are offered, but the client has to pay for delivery and has to wait at least 24 hours to have the book. Two disadvantages compared with the traditional bookstore is that it is not possible to look at the book someone is buying and the intellectual and leisure atmosphere that some people like about traditional bookstores is not there. 3. Publishing companies: they are responsible for contacting authors and publishing their work. The channels they use to distribute the books they print are mainly bookstores. Some of them have web sites, where they sell their books, but as there are a lot of publishing houses, when people want to buy through Internet they usually go to web bookstores where they can find titles from many different origins. Publishing companies are responsible for offering specialized magazines that people have access to mainly through subscription. 4. Copy shops: copy shops are the main source of non-authorized copies of books and magazines. The main advantages here are price, when compared with the price of a book or a magazine; specificity, since people can copy only what they need; and dissemination, as it is possible to find them everywhere. Copy shops are the main enemies of authors and publishing companies since they pay no copyright . A disadvantage of copy shops is the quality of the

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material reproduced. They are the main competitor for the products offered by Chaps.com with an estimated market of US $200 million in Brazil.

5.3.1 Industry Participants 1. The copy facilities at or near school libraries are a growing presence. They benefit from ready availability of the book or the material that is brought by the customer, local advertising, economies of scale and do not exercise the obligation to pay copyrights. 2. Bookstores tend to be part of small or large retail businesses. These bookstores focus on selling bestseller business books. Margins are very good as they are established by the publishing companies, but the books are very expensive when the medium earning of the population is taken in account, and most of the students prefer to copy what they need. Internet bookstores have customers that can pay more for the books they want and represent only a small fraction of the market. Still they have to buy the books in the traditional paper format.

5.3.2 Distribution Pattern The nature of Chaps.com faces competition on two levels. We will compete not only with copy shops, but also with bookstores. The good news is that Chaps.com doesn't currently face any competition on the specialized offer of chapters of books, focus kits and in the future, thesis and dissertations in Portuguese.

5.4

Marketing Strategies

Chaps.com has three main strategies. The first strategy focuses on attracting undergraduate students of business schools who are novice Internet users for education purposes or have been not Internet users at all, as well as people who are attending updating courses and professionals who are not attending any course, but need specialized literature to help in their work assignments. By providing a very friendly environment and very useful help for studying support, Chaps.com hopes to educate and train a loyal customer base. The second strategy focuses on building a learning environment in business and related areas for Chaps.com customers. A learning environment that provides knowledge skill building in business related areas will serve to attract customers that wouldn't normally think about using the Internet for this purpose. Once on location at the Chaps.com web site, these customers that came for the more standard book offerings will realize the potential learning value the Internet can provide. The third and most important strategy focuses on attracting heavy Internet users. Heavy Internet users are extremely familiar with the Internet and its offerings, mainly instructors, undergraduate students of top business schools and graduate students in general. This group of customers serves an
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important function at Chaps.com. Heavy users have knowledge and webbrowsing experience, that new Internet users find attractive and exciting, and need a large volume of specialized material for their use.

5.4.1 Sales Strategy We need to sell the concept of having a time-saving way of getting the right information needed for our target customers and not only the products. We will give them an opportunity to get a diversified package of products to improve their knowledge and help them at the right time on their business school or work assignments. We have to sell our service and support. We need to serve our customers with what they really need.
Yearly Total Sales (US$)
8.000.000 6.000.000 4.000.000 2.000.000 0 Year 1 Year 2 Year 3 Year Year 4 Year 5 Sales

The Yearly Total Sales chart summarizes our sales forecast. We expect sales to increase from US $51.3 thousands at the end of the year 1 to US $7.1 million at the end of the fifth year, a huge increment in five years.

5.4.2 Sales Forecast The important elements of the sales forecast are shown in the Total Sales by Month for years 1 and 2 in appendix 3. 5.4.3 Pricing Strategy We must charge appropriately for the utility and high-quality service we offer. Our revenue structure has to match our cost structure, so the royalties we are going to pay to assure high-quality material offer must be balanced by the revenue we charge. Therefore, we must make sure that we deliver and charge for the services we supply. All the products offered must be readily available and priced to sell and deliver revenue. We are a business that is positioned for providing specialized products for the well-informed customer, but we

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expect some impulse buying, therefore it is important that we maintain a flexible pricing strategy. Our pricing strategy for conventional books will be based on competitive parity guidelines. We will not exceed competitors' prices by more than 10%, and if a customer sees a price elsewhere for less, we will give it to them for that price. The pricing strategy for our main products, book chapters, articles, focus kits, theses and dissertations will be charged for the niche market we supply. We will not sell those products for less than the price the material would have if it were part of an equivalent material bought in a regular paper printed form. Price says a lot about a product. The products that are innovative, exclusive and not available elsewhere in the region will be marked up to meet the demand curve. We are not afraid of premium pricing a premium product.

5.5

Advertising, Public Relations, and Promotion

Chaps.com will implement a pull strategy in order to build consumer awareness and demand. We will be using local college newspaper advertising to launch the initial campaign, together with local displays and instructors. The main marketing tools are described below: Local displays: in order to reach the target customers and make the Chaps.com known, the first contact with some must be done personally. The idea is to build a display in the main schools of the city, which will contain a computer with Internet access, where we can show to the students and professors the easiness of using Chaps.com. Instructor Representative: there will be one person responsible for the first contact with instructors and teachers in the best schools of the city. As this group is very sensible to intellectual copyright issues, this person will explain that Chaps.com does not break the law, and the authors and publishers of the materials receive the right pay for their contribution. He will develop longterm relationships with these instructors. Printed Materials: the printed materials include flyers and literature distributed in business schools, which will be used to communicate to all school members the availability of a new type of academic service. Local College Newspaper: as there are some colleges that have their own newspaper, we can reach a large amount of students through this advertising. Press Release: it is a powerful marketing awareness tool, mainly in the first months of the company, when specialized professionals and journalists will talk about Chaps.com in newspapers and magazines. Banners: advertising in banners can be an integrative tool between Chaps.com and his main partners, mainly the publish companies. There are some potential businesses companies in the educational industry that may have interest in advertising on our site.
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 Local Newspapers: newspaper ads will give us a vehicle for consistently getting our message/brand in front of a large share of potential customers. We believe this vehicle will get two segments: professionals who need specialized literature to help in their work assignments, and colleges that cannot be visited personally in the first moment (located in other cities and states). In addition, the business section will provide us with a means for communicating with our business customers. Customer Satisfaction Representative: this employee will monitor the level of satisfaction with Chaps.com customers. He will be responsible for developing customer satisfaction programs, monitoring service levels, responding to customer concerns, and the general well being of every Chaps.com customer. Magazine Advertising: we intend to advertise in magazines like Informtica Exame , Revista Web , Voc S.A. in order to make our brand known by our , target segments. Direct mail: we can have a direct action to some specific publics, getting addresses of students and teachers, in order to reach new customers outside the area of So Paulo. We will be developing our core positioning message: The precise information, when it is needed most to present our service. In addition to depend on newspaper advertising to reach new customers outside the area of So Paulo, direct mail, and media executions, public relations exposure will benefit Chaps.com awareness significantly. Promotion strategy for advertising through colleges to their students includes a donation of business books to the collegeslibraries.

5.6

Distribution Strategy

The customers will buy our products directly through our web site and its secure server and the products will be immediately downloaded, or we will ship the ordered products. All telephone orders will be taken at our main office through either our single line or the local number. Mail orders will be processed at the main office in So Paulo and shipped from our partners warehouses and stores. All debits and credits, order transactions, charge backs, and price discounts will be accounted for on the main system at the So Paulo office but physical distribution will begin at our partnersstores. Printed electronic books, chapters, issues, essays, articles, focus kits, theses and dissertations are projected at less than 20% of our sales volume. All direct sales through the Internet or telephone orders are booked at full revenue and are billed to credit cards. Future distribution is planned to be exclusively through the Internet from the Chaps.com web site.

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5.7

Brand Strategy

Chaps.com is appearing in the market as the first one to provide this kind of service. It is extremely necessary to communicate massively to our target segments the real potentiality of this service. Besides, it is really important that the communication campaign makes a connection between this type of service and the brand Chaps.com in order to reduce the power of any other company which would like to follow this new business. The marketing budget will consistently equal approximately 20% of sales. The brand building capability is one of the main targets of the advertising campaign, and the aggressive marketing budget is a reflection of the importance we attribute to our marketing activities. The consequence of a good brand communication can be reverted as exposure of other companies in our web site through the use of banners, and increase significantly our revenues. Publishing companies, bookstores and libraries are the companies that can have interests of displaying their image in our site, because they want to reach some customers segments that are common with Chaps.com customers. Their sites can be accessed through our web site, linked by the banners. 6. 6.1 Operational Plan Legal feasibility

When we first proposed the concept of Chaps.com, one of our main concerns was related to the legal feasibility of the project. As our target market is located, initially, inside the Brazilian jurisdiction, we then studied the Brazilian copyright law to check how this subject would interfere with our wishes to proceed with our company. The Brazilian legal system declares that the author rights object of protection s extends to his intellectual work. It is not the idea that originated his work that has legal protection, but the way it is expressed. This is the understanding of the current jurisprudence. Yet, the original holder of the author rights can only be s an original creator, or in other words, an individual. However, to perpetuate his work and be compensated for its originality, the author, very often, has to be associated with a legal entity to make his work public. The law, in this particular matter, says that the relationship of the author to his work is so close that he will be able to handle it or authorize its publication in the way he considers best. Our very Constitution, guided by the author rights private nature principle, s gives exclusive rights of use to the author intellectual work, demanding that s the author authorization, license, transfer, and its limitations to the holder is s mandatory. In Brazil, usually the author associates with the publishing companies to publicize his work, and the company pays him a percentage of his book sales. One of the important negotiation points with the authors would be how we could pay the authors and the publishing company.
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Since the digitalization of books is possible, as well as the distribution of only parts of it, we would need to foresee in our contract with the writers, authors, and publishing companies a specific clause that would allow the digitalization and the distribution of only parts of the book, either by electronic archive or physical means. Finally, considering our copyrights laws, the legal aspects analyzed make Chaps.com feasible, under Brazilian jurisdiction, only if the author (and the publishing co. if this happens to be the case) gives the proper consent. 6.2 Operation overview

The customer will navigate through the virtual store by using a modern interface that includes an interactive floating shopping basket. This interface allows the user to rapidly locate the sections and provide information about his choices. A partnership will be established with a technical software provider. SGL Commerce has been selected, based on its previous experience with other ecommerce projects (see appendix 2). By using SGL services, Chaps.com s has assured all the technical issues, including web designing, software and database maintenance, hardware servers, security and telecommunication infrastructure, including the proper environment maintenance. Commitment over this partnership relation is guaranteed through a sales participation offered to SGL and its third party providers. By using this commercial agreement, Chaps.com will always be up-to-date with current market technologies, being in line with all current environments, most recent operational systems available to potential users and provided with the usual plug-ins and technical interfaces delivered by the main system providers. The web site project proposed by SGL Commerce includes: the best place within the Internet; classification; directory and sub-directories; home main page; utilization of search engines with Boolean logic; domain registration; host server, firewall, DNS and proxies entries and protection levels; public opened e-mail address; backup engines and operational settings. Additionally, SGL Commerce will be responsible for keeping storage capacity enough for the growing titles availability, maintaining communication speed under acceptable rates, safekeeping all user profile data under the proper accessibility control restrictions, programs, plug-ins and other interfaceslegal licensing, links execution, announcement on other related sites, automatic procedures, catalog of the site on the most popular general search engines and constant improving of the web design art and organization. s Each downloaded file processed by the customer will have a software protection to guarantee no authorized duplication, integrity of contents and certificate of origin. This software is known as Entrust and is one of the best providers of this kind of software in the USA. Entrust has three main features: file encryption, to protect the file content against unauthorized access; destination authentication, that allows the file to be unencrypted by the designated owner only; and Signature verification, that certifies that the file was generated by Chaps.com only. Besides that, all downloaded files are
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write- and edit-protected to avoid manipulation and modification not allowed by end users. The user is allowed only to print and read the material. By using these methods of protection, Chaps.com makes it difficult to freely distribute file contents to other people, minimizing the problem of breaking License Legal agreements. We also believe that the cost of the purchased materials is so low that would not estimulate great efforts to justify breaking the security codes of Entrust. And finally, it is common sense that not everybody would accept buying a exclusive material and distribute it freely to other people. The attached templates indicate how the user will use the web site to conduct the buying process. Other links will be available not only for supplementary services offered by Chaps.com company but also to other publication sites. Among such features, the following ones deserve some special attention, as described below: Best sellers (Mais vendidos): Brings information about the main sold items within Chaps.com page, other related pages, market view and in the perspective of the main bookstores. Showcase (Vitrine): Shows the latest titles coming to be available at Chaps.com, with the respective information including the front page, summary of the contents, author profile, category, price, number of pages and other related information. Search by subject (Busca por assunto): Allows the user to find books by selecting the desired subject: Administration, Economics, Accounting, Finance, Human Resources, Technology, Information Systems, Legal, Engineering and others. Events (Eventos): In this page, the user will have access to all current events taking place in the main centers of the country related to book launches, author interviews, special reports, essays and others. Partners (Parceiros): Here is where any visitor can have information regarding the current Chaps.com partners, including the delivery service, printing, home page administration, advertising, job opportunities and about Chaps.com itself. First visit (Primeira Visita): This is where initial visitors should first enter to have a guided tour into the site and get familiarized with the services provided by the home page. It drives the visitor to the main basics on the processes of chapter buying and personal book customization. Direct line (Linha direta): This is where the Chaps.com shows its face to their customers. By accessing this site, visitors can send direct messages to the customer service, and get special and other subjects-related information as well as giving their opinion of the site and hints on how to improve our services. Freight table (Tabela de frete): For the customers located in other regions than So Paulo city area, this table gives them information on how much they would be charged for their printed orders.

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Members (Scios): This is the special entrance door to registered customers. By entering here, users will have a personalized attendance, best buy indications based on past acquisitions behavior and customized offerings. Universities (Universidades): For groups of students with special indication from their teachers, this part of the site will provide them special pre-defined kits of purchases, including pre-recorded recommendations of books and chapters as per indication of their teachers, with special price and additional offerings. Promotions (Promoes): Time by time, Chaps.com comes with special offers and promotions by making sales discounts on some general subjects. This is merely intended to incentive public visitors to have some attraction by the commodity of having their books or part of their books acquired through this innovative mechanism. Site map (Mapa do site): This page is mainly designed to locate the user within the site. By searching this tool, user can rapidly access the part of the site he needs to get the information required. Home: From any part of the site, the user can select this option to return to the main page. Advanced search (Busca avanada): Sophisticated Boolean logic is available in this feature that allows the customer to make a very complicated search by using several distinct categories and a wide variety of logic combination of criteria. Get your registration (Seu cadastro): Here is the page where the visitor can register himself in order to receive special treatment by Chaps.com, or for current registered users to modify or alter their information. By keeping this information updated, users can receive frequent information on new releases, launches, special events and other news regarding subjects of special interest. Your purchases (Suas compras): Any user can easily and rapidly have access to the current status of his purchases. At any time, the customer is free to abandon the buying process or to check its account out. 6.3 Sales Process flow
Search Engines Product Selection Delivery System Payment Process

Customer Access

The attachments that follow in Appendix 1 illustrate a typical transaction through Chaps.com, simulating the screen navigation of a typical transaction.

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6.4

Operational Process flow

Editors

Magazine s

Authors

Libraries

SGL Commerce

Graphics

Universities

Delivery

Bookstores Students

Chaps.com internal operational procedures include: Reception of material from outsourcers Generation of chapter summaries to be inserted into the home page Digitalization of paper material Downloading of digital material into the data server Preparation of teacher kits s Outsourcers and third parties payment User profiles building, recommendations preferences analysis and personalized

Sending and monitoring of graphic services Sending and monitoring of delivery services Request opening for bookstores Contracts to outsourcers, third parties and partnership maintenance

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7.

Organizational structure

Board of directors: CEO Chief Executive Officer; Information Technology Director Marcos Hashimoto, 36 Graduated in Technology at Mackenzie University in 1983, specialized at System Analysis in 1985 and Enterprise Planning in 1991. MBA at EAESP- FGV in 1999, worked with technology since 1983 and is currently in charge of electronic delivery process at Citibank Brazil, Cash Management area. Among his duties within the company, Marcos will be responsible for establishing and maintaining the technological partners interrelationship. All technological enhancements, modifications and updating will be prepared and implemented by his area. Additionally, he will be responsible for keeping the company aligned with current market IT behavior, by assuring that third parties are committed to maintain the technological environment up to date to the market state-of-art products. Marketing and Sales Director Yoon Young Kim, 31 Graduated in Marketing at ESPM, major in business administration and specialization in international business California USA, MBA at EAESP-FGV. Business experience in consumer marketing for 4 years and 4 years in business-to-business market basket. New product launch changing the customer behavior with quite success. The background will allow leading marketing and sales process within Chaps.com changing how enduser can access different way of purchase. Yoon will also establish relationship and partnership with education centers and teachers. Additionally, he will be analyzing the customer database to define new marketing strategies based on consumer behavior. Financial and Capital Director Alexandre de Vicente Bittar, 29 - Graduated in Civil Engineering at Escola Politcnica of USP, with specialization in Business Administration (CEAG) at EAESP/FGV. MBA at EAESP/FGV. Experience: 4 years of experience in the construction industry as trainee and construction manager, 2 years working in the commercial area (marketing and sales of lighting systems), and 3 years experience in purchasing activities (electronics components). Worked with accounting services for construction projects, managing treasury, payables and collections services. At Chaps.com, Alexandre will manage the accounting process, including cash inflows and outflows, service provider s payments, customer receivables and investment opportunities. s

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Legal and Human Resource Director Adam Akihiro Kubo, 28 - Graduated from Pontificia Universidade Catolica School of Law in Sao Paulo, specialized in International Law, from University of California and MBA at EAESP - FGV. He is currently the general manager of his family business, including tourism, hotels and transportation. Among his duties at Chaps.com, Adam will manage the contracts with third parties and partners (Printing services, IT services, editors and marketing agencies). The agreement and negotiation with editors and publishers is a special role that will be part of his main responsibility. Operations and Development director Jose Wilson Pimentel, 41 Chemical engineer, graduated in 1980 at Federal University of Fortaleza, specialized in industrial operation in Kansas USA. MBA at EAESP - FGV. 4 years experience as Quality management advisor, 12 years in product development, moreover 4 years as operational manager. At Chaps.com, Wilson will be in charge of keeping the operational relationship with partners and service providers. Wilson will also manage the background operations like delivery of materials to customers, manual typing of chapter abstracts and inclusion of new titles. s At the first phase, all the Chaps.com partners will dedicate 30% of their time exclusively to conduct the company operation, except Mr. Kim and Mr. s Pimentel who will be fully dedicated to personally manage and implement the operations of the company. After the initial 6 months of operation, the remaining partners will join the group to formally assume their duties and responsibilities full time. 8. Capital structure

Chaps.com is a very viable business, and the final results projected by the end of year 5 reflects this profitability. The total funding for the corporation is approximately US $650,000, which will be obtained from two main sources: founder equity of US $100,000, and a long-term loan of US $550,000 which s will be provided by investors. Our fixed costs is relatively small, so we have a low degree of operating leverage. Chaps.com will not handle with fixed assets, preferring to lease or rent all necessary fixed assets. In this way, considering all the risk involved in our project, we developed the ideal capital structure as follows: 8.1 Partners Participation

Each partner will contribute with equal share of participation summing up the majority of voting shares, granting the rights to define the strategic direction of the company.

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8.2

Venture Capital from Investors

Investors will provide a long-term loan of US $550,000, and its requirement is divided according to cash necessities in order to cover initial expenses: US $200,000 in the start up, US $200,000 after six months, and US $150,000 after eighteen months. The long-term loan is payable after the initial development period that is expected to happen at the end of year 2. An interest rate of 40% per year is accrued on the long-term loan to the debt holder, which will receive principal and interests according the following pattern: US$ Payments (end of year) Year 1 Year 2 100,000 Year 3 10,000 Year 4 800,000 Year 5 1,077,552

The investors will be given an option to acquire a stake of the company s shareholder equity for the full amount of principal and interest at the end of fifth operational year. An option to the investors will also be offered to redeem their investment before the end of the five year period. There will be an escape rule provision granting investors the right to receive the principal amount invested, plus a lower remuneration after three years. 9. Finance plan

The main financial figures for the start up and first five years are summarized as follows: US$ Year 1 Year 2 Year 3 Year 4 Year 5 Net Sales 51,304 398,307 1,217,986 3,460,193 7,079,160 Cost of Sales 7,103 69,116 304,122 951,900 2,187,218 Gross Margin 86,0 % 82,6 % 75,0 % 72,5 % 69,1 % Operating Net Profit Profit expenses Margin 430,720 (350,058) (682 %) 475,082 (146,417) (37 %) 819,024 74,466 6% 1,385,699 836,978 24 % 2,284,525 2,093,908 30 %

In the appendix 3 the main financial reports for the next five years are presented, detailing projected profit and losses, statement of cash flow and balance sheet.

9.1 Break-even Analysis Chaps.com will be operating in an industry capable of supporting high gross margins. Variable costs in relationship to per-unit revenues are low. Variable costs of downloadable pages are equal to roughly 33% of per-units revenues. It is our hope that as we move into the future and continue to build relationships with our suppliers, this value will decrease further, approaching a value of 25%.
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In the first year, fixed costs for Chaps.com equal almost US $16,900. Fixed costs include: payment of rent, utilities, contracts with SGL and accountant, which Chaps.com must maintain on a monthly basis. These costs are fixed and aren't impacted by an increase or a decrease in sales. Currently, Chaps.com will break even at a monthly sales point of US $55,000. 9.2 Expense Forecast

The marketing budget will consistently equal approximately 20% of sales after year three. One of our strongest strengths is our marketing and brand-building capabilities, and the aggressive marketing budget is a reflection of the importance we attribute to our marketing activities. Currently, the marketing budget during the first two years will represent an extra effort, and beyond year three remains set at 20% of sales. We will have an investment of US $200,550 in the first ten months of operation. 9.3 Linking Sales and Expenses to Strategy

Our marketing expenses are tied directly to our sales revenue. As sales increase, the marketing expenses will increase. Our marketing expenses will equal roughly 20% of sales, and we hope to increase that value in the future. Our programs will be monitored for efficiency and return on investment. This component of our marketing budget is expensive, and we want to track the value of the program to make sure we are optimizing our budget. Periodically, we will survey our customers to determine the effectiveness of our programs, and we will adjust the marketing mix appropriately based on our findings. 9.4 Contribution Margin

The Contribution Margin chart and table presents a strong outlook for Chaps.com first year of operations: s a. Sales increase an average of 30% per month in the first year, and 20% per month in the second year. Then we consider a 5% increase after the third year. b. Contribution margin runs at roughly 86%, and tends to 75% as the service of downloadable pages becomes the main source of revenue. c. The marketing budget is based on 20% of total revenue after the third year. d. A strong focus on local newspaper and college visits is apparent in the expense breakdown.

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9.5

Details of the financial line

Sales: Chaps.com is projecting their first year sales on an approach with graduated courses, specifically in the main business schools of So Paulo. After this implementation period, we can start communicating our site in other colleges outside our region, and in other segments already specified. Cost of Goods Sold: The cost of goods sold (downloadable pages) is basically composed of the royalties and commission that must be paid to the authors or publishing companies. This cost may represent 33% of the selling price. Fixture Costs: Chaps.com decided not to handle with fixed assets, so fixture costs associated with starting Chaps.com represents only leasing expenses of 20 computers, 3 laser prints, 1 communication equipment and furniture, as detailed in the appendix. Salary Expense: Founders of Chaps.com who will work exclusively in the company will each receive a salary of US $3,880 per month in the first years, and part-time founders will each receive a salary of US $1,100. Payroll Expense: Chaps.com intends to hire employees, basically library specialists, translators and typists, who will receive US $350 and US $250 respectively. The total cost of employing eight translators & typists and two library specialists is about US $4,340 per month, considering taxes that must be paid by the company (70% of the salary). Rent Expense: Chaps.com will lease a 30 square foot office at approximately $2,20/sq. foot. The lease specifies that we must pay US $667 per month for a total of 12 months. At the end of the first year, the lease is open for negotiations and Chaps.com may or may not re-sign the lease depending on the demands of the leasing company. Utilities Expense: this includes the payment of utilities (real estate taxes, electrical, phone bill), which is about $220 per month. Marketing Expense: Chaps.com will allocate US $355,000 for promotional expenses at the first two years. This amount will be used for visiting colleges, promoting the brand with displays in the colleges, local newspapers and advertising in magazines in order to build consumer awareness. Legal and Consulting Fees: The cost of obtaining legal consultation in order to draw up the paper work necessary for opening the company is about US $600. After that, it is necessary to pay US $150 per month in order to pay an accountant firm. Contract with SGL: The costs of Chaps.com site implementation is about s US $12,000. It will be necessary to pay US $280 per month as a continuity of the services, and we forecasted an increase in this tax beyond year three as our sales increase.

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