Xd productions Corporate Summary December 2006 The Company

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  The Virtual Tales series, which began with the production of a feature-length pilot for the series entitled ‘Little Moses’, and was followed by the 44 minute 3D animated TV special ‘The True Story of Pinocchio’ and the 90 minute 3D animated feature ‘Merlin the Enchanter’.
  
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  Creation, production and delivery of character animation for 40 13-minute episodes of ‘Tribal X’, a 3D series for TF1.
  
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  Development of the first 3D special series ‘1001 Nights’ consisting of 4 90-minute episodes.
  
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  Production of the first TV series hosted by realistic human clones, a scientific news primetime program ‘Rayons X” in 200 3-minute episodes plus 5 90-minute TV specials.
  

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  The number of DVDs sold to US dealers for sell-through in 2005 was 1,114.2 million units (Motion Picture Association of America).
  
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  In 2005, 4 of the top 5 selling DVDs in the United States were animated features. (Motion Picture Association of America)
  
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  Total consumer spending on DVDs in 2005 was $23.32 billion. (Adams Media Research)
  
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  US computer and video game dollar sales in 2005: $7.0 billion. (Entertainment Software Association)
  

1. 
   Expansion of its core production business through a Cyberdome Network and international co-productions resulting in a 100% increase in annual studio revenue by 2008;
   
2. 
   B to B technology sales: penetration of the worldwide professional 3D animation studio market with the Cyberdome motion capture system followed by expansion into the video studio market with the release of the world’s first virtual video cloning software in Q1 2008;
   
3. 
   Complete development of a B to C toy by Q4 2008 – Animakit – for interactive gaming, interactive television and interactive virtual communication and education.
   

Through Animakit, children all over the world will be able to tell and share their own stories by creating their own animation and interact in a new generation of online games. Online and console video games represent a multi-billion dollar market. Animakit is well positioned to take advantage of the latest trends in this market, in particular, the trend away from the standard push-button controller interface to greater participation and interactivity as witnessed in the release of accessories such as Sony’s Eye-Toy for their Playstation consoles and even more significantly, by Nintendo’s tack towards interactivity as the core differentiator of their systems. Nintendo’s success with its DS system, which allows children to draw and touch the screen of the handheld device, followed by the release of the Wii system in 2006 with its unique remote control that, for example, invites players in a tennis game to swing the remote as though they were swinging a racket, demonstrate the growing importance of more interactive interfaces and games.

The fact that Animakit is not simply a gaming console, but is also in essence a home studio, means that children can create their own animation content. By enabling children to create their own animation, a new market for child-produced, interactive television is born both for internet transmission and conventional broadcasting. With falling broadcaster license fees and the growing number of regional and niche broadcasters, the possibility of having children produce their own television is attractive from both a cost point of view, since production costs are effectively eliminated, and from a ratings point of view, given the success of television shows such as American Idol which are driven by audience participation. Animakit takes the concept of audience participation to a whole new level, where people do not simply vote or respond to what is presented, but author the show themselves. Children will be excited to see their work broadcast on television, creating a new creative phenomenon.

A further application of Animakit will be to cross-cultural communication and virtual education. Children will be able to interact with their counterparts all over the world in virtual online communities through the universal language of animation. Where there are no teachers or schools, virtual teachers may teach through the Animakit technology. Simple phone line connectivity (not even broadband) is all that is required to enable communication in virtual spaces through Animakit. For only a few hundred dollars, a virtual school may be set up instantaneously, provided there is only a telephone line and adequate electricity, overcoming the years it will take for many children still today to be able to see the inside of a real school with a real teacher.

XD Productions is the most cost-effective producer of high-quality 3D animation in the world and well established as a leading studio in Europe. The company’s latest 3D feature, ‘Merlin the Enchanter’ was produced for a budget of 2 million Euro compared to the average budget for a 2D feature in France of 4 million Euro and a budget of $60 million for ‘Shrek’.

The main competitor for Cyberdome in the motion capture market is the Vicon system, which relies on tracking markers placed on an actors body. The marker-based approach is capable of producing accurate data but requires a large amount of data cleaning to correct instances of marker occlusion which occur during a capture session. This cleaning translates into high operating costs. Data obtained through the markerless approach of Cyberdome requires significantly less clean-up resulting in a lower operating cost. The marker-based approach of the Viccon system also requires mapping of markers and reflected beams at every frame, 24 times a second. While they have software specifically designed for this mapping, the large amount of processing that is required cannot be bypassed. The much ‘lighter’ capture of Cyberdome which uses silhouettes, enables the system to run in true real-time, a key feature which enables a higher quality of capture as the actor and director have immediate feedback and visualization.

There are currently no virtual video systems in the world and XD Productions will be the first to create the new virtual video market. It is expected that the virtual video market will become highly competitive but XD Productions will be able to exploit its first-mover advantage.

Animakit will create a new interactive television market for children and redefine the level of interactivity in computer and video games. It will not compete directly against the main video game consoles of Sony, Microsoft and Nintendo but be an alternative type of interface and user experience, marketed to parents with a strong educational aspect, creating a gaming brand synonymous with content that is safe and suitable for young children and which encourage pro-active creativity and problem-solving. Animakit also has the potential to serve as a communication and education tool. There is currently no comparable product to Animakit.

The main risks with production are over-costs and production delays. These are largely mitigated by XD Productions’ Mamie software, specifically designed to manage high volumes of animation production across international co-production partners and by management’s extensive production experience.

There are no technical risks as the system utilizes standard HD video cameras and PCs. Similarly, there is no maintenance risk or risk of obsolescence. The commercial risks are limited to market acceptance and competition within a well-structured market. Warranties are available from French state agencies Coface or IFCIC.

The system utilizes standard HD video equipment and PCs, limiting the maintenance risk and risk of obsolescence. Hardware limits may affect the resolution capability of the system, but this does not pose a significant threat to the commercial viability of the system. The Virtual Video market has not yet been established. It will likely be very competitive owing to its potential size, with competing solutions likely appearing on the market. Further development is required, the risk of which will be mitigated through XD Productions’ management and experience in R&D planning.

Animakit requires 18 months of development. There are significant scientific and technical risks. Technical milestones may not be achieved. For every technological deliverable defined in the Animakit development plan, at least one alternative approach has been identified. There are also significant financial risks in the event of delays and over-costs. These will be mitigated by a well-defined governance and oversight structure put in place from the beginning of the project. Work package leaders, the project coordinator, the project executive committee, the scientific council and the project’s governing board will have clearly defined responsibilities and communication, conflict-resolution and decision-making activities will be facilitated through a system of internal reporting established at the outset of the project. There are also significant financial and commercial risks associated with the final exploitation of the product owing to market competition from large companies well established in the gaming industry, market acceptance, and potential financing needs associated with manufacturing, distribution and marketing.