PRIVATE PLACEMENT MEMORANDUM
`APRIL 27, 1999
`
` SIGHTSCUNDIIOM
`
`SIGHTSDUND. CDIVI
`
`520,000,000
`
`10,000,000 SHARES
`SICHTSOUND.COM INCORPORATED
`COMMON STOCK
`
`$2.00 PER SHARE
`
`THESE SECURITIES ARE OFFERED AND SOLD PURSUANT TO EXEMPTIONS FROM REGISTRATION WITH
`THE UNITED STATES SECURITIES AND EXCHANGE COMMISSION.
`THESE SECURITIES HAVE NOT BEEN
`APPROVED OR DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
`COMMISSION NOR HAS ANY SUCH COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF ANY
`INFORMATION PROVIDED TO THE INVESTOR BY SIGHTSOUND INCORPORATED ANY REPRESENTATION TO
`THE CONTRARY IS A CRIMINAL OFFENSE. PURCHASE OF THESE SECURITIES PRESENTS AN UN USUALLY HIGH
`DEGREE OF RISK THAT THE INVESTOR WILL LOSE THE INVESTOR'S ENTIRE INVESTMENT.
`SEE ALSO "RISK
`FACTORS."
`
`SHARES OFFERED
`
`Number
`
`Price to Investors
`
`Cash Underwriting
`Discounts &
`
`of Shares
`I 0,000,000
`
`at S 2.00 ger share
`$20,000,000
`
`Cornmissionsu’
`50
`
`Proceeds to
`
`the Comoanx
`20,000,000
`
`THE INFORMATION CONTAINED HEREIN IS INTENDED SOLELY FOR THE USE OF THE INDIVIDUAL OR
`ENTITY N-"xi/IED BELOW IN EVALUATING THIS INVESTMENT. THIS PRIVATE PLACEMENT MEMORANDUM MAY
`NOT BE REPRODUCED OR RECORDED IN ANY MANNER OR USED FOR ANY OTHER PURPOSE.
`BY
`ACCEPTING THIS PRIVATE PLACEMENT MEMORANDUM, THE INDIVIDUAL OR ENTITY NAMED BELOW
`AGREES THAT HE OR IT Ii) WILL NOT USE IT FOR ANY PURPOSE OTHER THAN ASSISTING HIM OR IT IN
`EVALUATING THIS INVESTMENT,
`(ii) WILL NOT,
`IN WHOLE OR IN PART, REPRODUCE OR RECORD IN ANY
`MANNER ITS CONTENTS OR DIVULGE ITS CONTENTS TO ANY OTHER PERSON (OTHER THAN HIS OR ITS
`AUTHORIZED REPRESENTATIVES FOR THE SOLE PURPOSE OF ASSISTING HIM OR IT IN EVALUATING THIS
`
`IN\/ESTMENTI, EXCEPT WITH THE WRITTEN CONSENT OF SIGHTSOUNDCOM INCORPORATED AND (iii) WILL
`
`(II . Goldman Sachs & Co. may be paid an investment banking fee in the form of Common Stock in SIGHTSOUNDCOM INCORPORATED. See
`"Administrative « Contractuai Summaries — Investment Banking" and "Use of Proceeds."
`
`CONFIDENTIAL
`
`Apple Exhibit 4358
`Apple v. SightSound Technologies
`CBM2013-00023
`
`Page 00001
`SST-008421
`
`Apple Exhibit 4358
`Apple v. SightSound Technologies
`CBM2013-00023
`Page 00001
`
`

`
`PROMPTLY RETURN IT TO SICHTSOUNDCOM INCORPORATED SHOULD A DECISION BE MADE NOT TO
`
`INVEST IN THE SHARES OFFERED HEREUNDER.
`
`NO PERSON IS AUTHORIZED IN CONNECTION WITH THE OFFERING MADE HEREBY TO GIVE ANY
`INFORMATION OR TO MAKE ANY REPRESENTATIONS NOT CONTAINED IN THIS PRIVATE PL‘~\CEMENT
`MEMORANDUM AND THE SCHEDULES HERETOAND,
`IF GIVEN OR MADE, SUCH INFORMATION OR
`REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY SIGHTSOUNDCOM
`INCORPORATED NEITHER DELIVERY OF THIS PRIVATE PLACEMENT MEMORANDUM NOR ANY SALE MADE
`HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THERE HAS BEEN NO
`CHANGE IN THE AFFAIRS OF SICI-ITSOUNDCOM INCORPORATED SINCE THE DATE HEREOF OR THAT THE
`INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO THE DATE HEREOF.
`
`THIS MEMORANDUM DOES NOT CONSTITUTE AN OFFER OR SOLICITATION TO ANYONE IN ANY ST,-\TE
`OR JURISDICTION IN WHICH SUCH AN OFFER OR SOLICITATION IS NOT AUTHORIZED.
`
`Statements contained herein as to the contents of any agreement or other documents are not necessariIy complete.
`AII such references to or summaries of rnateriaf terms of such documents are quaiified in their entireties by references
`to the completed documents. Copies of any document referred to herein,
`if not Furnished to prospective investors,
`may be obtained from SIGHTSOUNDCOM,
`INCORPORATED by any prospective investor or his authorized
`representative. Any questions or requests for additionaI
`information shouId be directed to SIGHTSOUNDCOM
`INCORPOIMTED.
`Each prospective investor
`is urged to make a further
`investigation of SICHTSOUNDCOM
`INCORPORATED before making any determination whether to invest.
`
`their
`inquiries from prospective investors and/or
`SICI-ITSOUNDCOM INCORPORATED wiII answer all
`authorized representatives concerning SIGHTSOUNDCOM INCORPORATED and any matters
`reiating to
`SICHTSOUND INCORPORATED, its business and its offer and sale of shares, and will afford all prospective investors
`and/or
`their authorized representatives
`the opportunity to obtain any additionai
`information (to the extent
`SICHTSOUND INCORPORATED possesses such information or can acquire it without unreasonable effort or
`expense) necessary to verify the accuracy of any representations or information set forth in this Private Piacement
`Memorandum.
`
`SIEHTSDUNDEDM INCORPORATED
`Scott C. Sander
`President
`Chief Executive Officer
`
`733 Washington Road
`Suite 400
`
`Mt. Lebanon, PA 13228
`(412)341-1003
`
`CONFIDENTIAL
`
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`

`
`TABLE OF CONTENTS
`
`INTRODUCTION ........................................................................................................................................................... .. I
`--
`COMPANY HISTORY .......................................................... --
`
`CURRENT ACTIVITIES ................................................................................................................................................ --
`I
`THE OFFERING --------------------------------------------------------------------------------------------------------------------------------------------------------- -A 2
`
`................................................................................... 3
`.....
`.......
`RISK FACTORS ....................................................
`SHORT OPERATING HISTORY; HISTORY OF LOSSES; UNPROVEN BUSINESS; NO ASSURANCE OF PROFITASILITY .................... .0 3
`INTELLECTUAL PROPERTY; LITIGATION ........... ..
`. ..................................................................................... .. 3
`PRODUCTS AND SERVICES RECENTLY DEPLOYED ........................................................................................................... .. 4
`
`
`
`POTENTIAL FLUCTUATIONS IN QUARTERLY OPERATING RESULTS .................................................................................... .. 4
`‘IO C=1M.I_.IIATIvE VOTIINC ......................................................................................................................................... .. 4
`DFPENDENCE ON EXODUS COMMUNICATIONS FOR DATA CENTER OPERATIONS .............................................................. .. -I
`
`
`DEPENDENCE oN HIGH-QUALITY VIDEO AND AUDIO CONTENT; VALUE ADDED ENHANCEMENTS ..................................... .. 3
`UNCERTAIN ACCEPTANCE AND MAINTENANCE OF THE "SIGHTSDUND.CDM“"‘" BRAND ................................................... .. 6
`IVIANAGEMEN I‘ OF EXPANDED OPERATIONS; DEPENDENCE ON KEY PERSONNEL ............... ..
`
`COMPETITION .......................................................................................................................................................... .. 6
`RISK OF I\IEwvO.RI: FAILURE ....................................................................................................................................... .. 7
`RISK OF SUPPLIER NETWORK FAILURE .......................................................................................................................... .. 7
`RISKS OF TECHNOLOGICAL CHANCE ........................................................................................................................... .. 8
`YEAR 2000 COMPLIANCE ....................................................................................
`................................................... .0 8
`
`DEPENDENCE ON THE INTERNET ....................................................................... .; ........................................................ .. 8 _
`LIMITATIONS OF INTERNET ARCHITECTURE & BANDWIDTH ............................................................................................ .. 9
`
` SECURITY, ENCRYPTION & CREDIT CARD RISKS ............ .. ..
`
`GOVERNMENT REGULATION ...................................................................................................................................... .. 9
`POTENTIAL LIABILITY FOR DEFAMATORY OR INDECENT CONTENT .................................................................................. .. IO
`LIAEILITY FOR INFORMATION RETRIEVED AND REPLICATED; INFRINGEMENT LIABILITY ....................................................... .. IO
`RISKS ASSOCIATED wITH INTERNATIONAL OPERATIONS ............................................................................................... ., IO
`
` REQUIREMENT FOR ADDITIONAL CAPITAL........... .................................................................................................. .. II
`
`FAILURE TO SELL ALL SHARES; NO UNDERWRITER ....................................................................................................... .. II
`NO MARKET FOR COMMON STOCK; RESTRICTIONS ON TRANSFERS; UNCERTAINTY OF A FUTURE IPO ............................... Ah I I
`IMMEDIATE AND SUBSTANTIAL DILUTION .................................................................................................................. .. II
`
`THE OFFERING ............................................................................................................................................................ I2
`
`. . . .. I2
`USE OF PROCEEDS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
`DILUTION .............................................................................................................................................................. .. I2
`DESCRIPTION OF CAPITAL STOCK .............................................................................................................................. .. I2
`DIVIDEND POLICY .................................................................................................................................... .. I2
`FORVV.-\ ID I.OOI<ING STATEMENTS ............................................................................................................................ .. I2
`REVENUES ............................................... ..
`COSTS & EXPENSES. ............................................................................................................................................................... _, I3
`
`
`
`MANAGEMENT ........................................................................................................................................................... .. I4
`E:<ECUTI\/E OFFICERS & DIRECTORS ........................................................................................................................... .. I-I
`8I:>L?RN’HIES . . . . 4 . . . . I . . . . . . . . . . . . . . . . . . . . .
`. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
`. . . . _ . . . . . S . . . _ . . . _ _ S . . , .. I4
`ARI: IIIR R. HAIR. . . . . . . . . . . . .
`_ _ _ _ . _ _ _ _ . _ _ D . _ _ _ _ _ _ D _ _ ‘ . _ ‘ ‘ _ _ _ "I4
`SCOTT C. SANDER . . . . . . . . _ . . . .. . . . .. . .. . . . . . . . . . . . T . . . . . _ . . _ .
`, . _ _ _ _ _ _ _ _ _ , . . _ _ _ _ _ _ _ _ _ _ _ _ I _ , _ _ _ . _ __I4
`CHRISTOPHER J. REESE, ESQ. . . . . . . . . . . . . . . . . . . . . . . . . . . . .. .
`. . . . . . . . . . . T . . . . . . . .. I S
`ARIEL IZ.\/IANUEL . . ,
`. . . . S . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
`S . . . . . . . . . . . . . . . S . . .. I 5
`CHARLES R. ZAPPALA .................................................................. ..
`I 5
`CIIARI TS /\ COMUI KA .................................................................................... ..
`I 5
`II-\Y H. MIIIII ...................................................................................................................................................................... __I5
`
`
`
`..........................
`.........
`ADMINISTRATIVE .. .....................
`.............................................................. ..
`.. I 7
`
`PROFESSIONAL ADVISORS ________________________________________________________________________________________________________________________________________ ._ I 7
`EMPLOYEES ............................................................................................................................................................ .. I 7
`
`CONFIDENTIAL
`
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`

`
`TABLE OF CONTENTS
`
`FACILITIES .............................................................................................................................................................. .. I 7
`EMPLOYEE BENEFIT PLANS .......................................................................................................................... .. T 7
`FINANCIAL STATEMENTS .......................................................................................................................... .. 17
`
`EMPLOYMENT AGREEMENTS ..................................................................................................................................... ..17
`INDEMNIFICATION ............................................................................................................................ ..17
`CONTRACTUAL SUMMARIES ....................................................................................................................... .. I 7
`SOFTWARE ................................................................... ..
`.
`............................................................ .. I 7
`OFFICE LEASE . . . . . . . . . . . . . . . .. . . . . . . . . . . . . . . . . . . . . . . . . . . .
`. . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . T , . . ._ T 8
`DATA CENTER OPERATIONS ................................................................................................................ .. I8
`CONVERTIBLE DEBT ....... ..
`PEBLIC RELATIONS ..... ..
`INVESTMENT BANKING ................................................................................................................................. .. I9
`
`AGREEMENT TO LICENSE PATENTS ..................................................................................... ..
`I9
`LEGAL REPRESENTATION ............................................................................................... ..
`I 9
`ARTISAN ENTERTAINMENT .................................................
`.19
`AVERY DENNISON ............................................................................................................................. ,_ I 9
`
`_____________________________________________ __ I 9
`OWNERS OF MOTION PICTURES AND OTHER VIDEO AND/OR AUDIO RECORDING:
`LEGAL PROCEEDINGS .................................................................................................................................. H19
`
`
`
`SHAREHOLDERS AND OPTION HOLDERS ......................................................
`
`................................... ..; ........................ .. 20
`
`SCHEDULE A - SUBSCRIPTION AGREEMENT
`
`SCHEDULE B - OPERATING BUDGET SUMMARY
`
`II
`
`CONFIDENTIAL
`
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`
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`

`
`SIGHTSOUND. CDIVI
`
`INTRODUCTION
`
`COMPANY HISTORY
`SICHTSOUND INCORPORATED (the "Company" or "S|GHTSOUND.COM") electronically sells films, music,
`and other video and audio recordings over the Internet ("Entertainment E~Commerce") as a retailer and Download
`Service Provider ("DSP").
`In 1995, SIGHTSOUNDCOM became the first
`in history to offer music for sale in
`download fashion over the World Wide Web.
`In 1999, SIGHTSOUNDCOM again made history by becoming the
`first to offer a full length major motion picture for download sale.
`In 1988, Arthur R. Hair filed for patent protection on a method and system to electronically sell and distribute
`digital video and digital audio recordings via telecommunications lines. This method formed the foundation of
`Entertainment E~Commerce. Mr. Hair and Scott C. Sander worked together to formulate strategies for the creation of
`the Entertainment E-Commerce industry. Meanwhile, on March 2, 1993, Mr. Hair received United States Patent
`5,191,573 protecting his invention ("Patent 5,191,573"), and on October 7, 1997, Mr. Hair received United States
`Patent 5,675,734 ("Patent 5,675,734") as a continuation of Patent 5,191,573.
`The Company was incorporated on August 1, 1995, with Mr. Hair and Mr. Sander as the sole shareholders. Also
`on August 1, 1995, Mr. Hair assigned Patent 5,191,573 and Patent 5,675,734, to the Company. The Company then
`entered into an Exclusive Patent License Agreement with Digital Sight/Sound, Inc. (”Digital Sight/Sound") granting to
`Digital Sight/Sound certain exclusive rights to Patent 5,191,573 and Patent 5,675,734. Digital Sight/Sound was also
`incorporated on August 1, 1995, with Mr. Hair and Mr. Sander as the sole shareholders. As a limited demonstration
`of Entertainment E~Commerce, Digital Sight/Sound signed the band, The Gathering Field, to an electronic distribution
`contract on August 18, 1995, and, on September 27, 1995, Digital Sight/Sound became the first company to practice 7
`Entertainment E-Commerce and offer for sale digital recordings in download fashion via the Internet. Upon expiration
`of the Company's contract with The Gathering Field,
`the band signed a recording contract with Time Warner’s
`Atlantic Records. Effective as of August 15, 1997, Digital Sight/Sound and the Company terminated the Exclusive
`Patent License Agreement, as amended, and replaced it with a Nonexclusive Patent License Agreement (the "License
`Agreement"), granting to Digital Sight/Sound certain nonexclusive rights to the Patent claims. The Company then
`commenced the licensing program discussed below. On April 1,1999, Digital Sight/Sound was merged into the
`Company and the Company was renamed SICHTSOUND INCORPORATED.
`The Company envisions Entertainment E-Commerce as a "platform change" to stimulate the growth of the movie
`and music industries as well as the marketplaces for owners of other forms of video and audio recordings (collectively,
`the "Clients"), and to provide the end customer (the "Customer"l with video and audio entertainment in a highly
`efficient manner. The Company is a download retailer of video and audio content such as film and music.
`It is also
`actively marketing Entertainment E-Commerce services, such as electronic warehousing and electronic distribution via
`the Internet, to companies which own or control video and audio content. Additionally, the Company is planning to
`offer services to potential Clients in other industries currently using physical distribution channels to distribute
`recorded video and audio products such as instructional videos and download news.
`'
`Trie Company offers its Clients a fully integrated Entertainment E-Commerce solution.
`The Company has
`"contracted with Exodus Communications for data center operations and connectivity to the Internet. As growth
`dictates, the Company also expects to utilize the data center services of Computer Sciences Corporation ("CSC"), a
`shareholder of the Company. The Company is one of the first to begin using Windows Media Technologies -1.0, a
`new multimedia software package from Microsoft Corporation, which was officially released on April 13, 1999. The
`software, along with Windows Media Rights Manager, enables the Company to compress and encrypt audio and
`video files. The Company uses Microsoft Site Server Commerce Edition to facilitate the sale of the compressed and
`encrypted audio and video files. The Company also focuses on the invention, development and protection of
`intellectual property related to the electronic sale and distribution of video and audio recordings. The Company
`currently seeks to license certain rights pertaining to its proprietary intellectual property for the electronic sale of
`digital video and digital audio recordings in download fashion.
`
`CURRENT ACTIVITIES
`
`The Company sells motion pictures in download fashion to Internet users. The Company also "rents" films over
`the Internet by offering the customer the opportunity to view a film a limited number of times or for a limited time
`period. For example, a film might be downloaded into impermanent buffer memory so that it could be viewed only
`
`EIGHTSCJUNDCOM INCORPOFIATED
`
`_
`
`- I -
`
`PRIVATE PLACEMENT lvlE\iC-R.-\..\iDUM
`
`CONFIDENTIAL
`
`Page 00005
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`
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`

`
`SlGl-lTSOUND. COM
`
`once or it might be downloaded for multiple viewings, but only foria limited time period such as five days. The
`Company first began renting a full-length motion picture movie, “Pi”, on April 13, 1999.
`"Pi" is Owned by Afiisafl
`Entertainment. The Company also has the right to distribute an Ann Gillis Productions project,
`the independent
`parody film titled "Films That Suck.” The Company is currently in discussions with a number of companies about
`obtaining the rights to distribute other motion pictures over the Internet. The Company plans to issue a significant
`number of shares of its common stock in order to obtain such rights (See Administrative - COF1IF3CiUal 5UmmaFi€5 -
`Owners of Motion Pictures and Other Video and/or Audio Recordings).
`the pOlr1t-Of—SalE
`The Company also sells music in download fashion and produces digital programming for
`promotion of music. These "MicroShows”5M feature Els5"‘
`(Electronic Jockeys)
`in 2-3 minute programs which
`incorporate sight, sound, print and the opportunity to purchase full recordings. The Company intends to offer audio-
`only nonexclusive patent
`license agreements
`(hereinafter
`referred to as "Nonexclusive Audio Patent License
`Agreement(sl") to potential licensees (the "Licensees”) desiring to conduct Entertainment E-Commerce involving audio
`recordings. This licensing program is part of an Intellectual Property Protection Program now being implemented by
`the Company to protect and advance its intellectual property position in the emerging Entertainment E~Commerce
`music industry.
`The Company's business is new and evolving. There can be no assurance that its business will be successful or
`profitable.
`
`THE OFFERING
`
`The Company is offering for sale, only to accredited investors (as defined in Securities and Exchange Commission
`Regulation D, 17 CFR §230.501(a)) ("Investors"), up to 10,000,000 shares of common capital stock of the Company
`(the "Shares") at the price of $2.00 per share for an aggregate purchase price for all shares of $20,000,000 (the ,
`"Offering"). The closing date of the Offering is May 30, 1999, provided however that the Company,
`in its sole
`discretion, can extend the closing date of the Offering.
`The authorized capital of the Company currently consists of 100,000,000 shares of common capital stock, par
`value 0.00001¢ per share ("Common Stock"). As of March 31, 1999, a total of 30,972,941 shares of the Company's
`common capital stock were issued and outstanding or under option. As of March 31, 1999, the Company had a net
`tangible book value of $224,045.20, or 50.0072 per share based on 30,972,941 shares outstanding or under option.
`Accordingly, each Share of the Company purchased for $2.00 pursuant to this Offering will have a substantially
`diluted post issuance book value. Subsequent issuances of Common Stock or other securities to raise required capital
`for the Company could result in further significant dilution.
`An investor can invest only by completing and executing, and delivering to the Company a Subscription
`Agreement
`in
`the form attached hereto as Schedule A,
`together with, a check payable to "SIGHTSOUND
`WCORPORATED" for the purchase price for the number of Shares the Investor wishes to purchase. The Company
`reserves the right to reject any subscription for its shares without having or stating any reason therefor. The investor's
`Cit-fClx'w' shall,
`if the Investor's subscription is received and accepted by the Company, be deposited to the account of
`the Company, and shall be nonrefundable.
`
`SIGHTSOUNDCCM lNCClFlPORATED
`
`- 2 -
`
`PRivA'it PLACEMENT ME.\.1OR.—\r~1DL.'M
`
`CONFIDENTIAL
`
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`

`
`SIGHTSCUND COlVl
`
`RISK FACTORS
`the following factors should be
`in addition to the other information in this Private Placement Memorandum,
`considered carefully in evaluating an investment in the Shares offered hereby. This Private Placement Memorandum
`contains forward-looking statements that involve risks and uncertainties. The Company's actual results may differ
`materially from the results discussed in such forward-looking statements. Factors that may cause such a difference
`include, but are not
`limited to,
`those discussed below and in the other sections of
`this Private Placement
`Memorandum.
`
`SHORT OPERATING HISTORY; HISTORY OF LOSSES; UNPROVEN BUSINESS; No ASSURANCE or PROFITABIUTY
`The Company was incorporated on August 1, 1995, commenced operations in October 1995 and has incurred
`substantial net losses in each fiscal period since its inception. See also "The Offering - Forward Looking Statements."
`The Company currently intends to increase its capital expenditures and operating expenses in order to expand its
`operations in existing and future markets and to market and provide the Company's services to a growing number of
`potential Clients and Customers.
`in addition, the Company currently intends to market its intellectual property,
`to
`locate and monitor potential
`infringers of
`its
`intellectual property and,
`if necessary,
`to proactively protect
`its
`intellectual property through litigation against infringers of its intellectual property. As a result, the Company expects
`to incur additional substantial losses for the foreseeable future. The profit potential of the Company's business model
`is unproven and, to be successful, the Company must, among other things, develop and market products and services
`that will be widely accepted by Customers and Clients at prices that will yield a profit and execute Nonexclusive
`Audio Patent License Agreements with licensees i”Licensees”) interested in conducting Entertainment E'Commerce in
`whole or in part from, through, and/or to the United States of America. There can be no assurance that such services -
`will achieve broad Customer or Client acceptance. Because of the foregoing factors, among others, the Company is
`unable to forecast its revenues or the rate at which it will add new Customers, Clients, or Licensees with any degree of
`accuracy. There can be no assurance that the Company will be able to establish and increase its Customer, Client, or
`Licensee base in accordance with its internal forecasts or to a level that meets the expectations of investors. There can
`also be no assurance that the Company will ever achieve favorable operating results or profitability.
`
`INTELLECTUAL PROPERTY; LITIGATION
`The Company regards its technology and/or intellectual property as proprietary and intends to protect it with
`parents, copyrights, trademarks, service marks, trade secret treatment, restrictions on disclosure and other methods.
`The Company has secured Patent 5,191,573 and Patent 5,675,734. There can be no assurance that the patents wiil
`not be challenged,
`invalidated or circumvented. For example, on January 23, 1998, the Company filed a patent
`infringement suit against i\l2K, Inc.
`in Federal Court. NZK, inc. has since been merged into CDNow,
`inc. and the
`litigation continues against CDNow, inc. The Company expects that there will be infringers of its intellectual property
`and plans to defend its intellectual property vigorously, through litigation if necessary, however,
`there can be no
`assurance that the Company will prevail in such litigation. Furthermore, if the Company fails in an_y litigation, such a
`f;iiii..i'e will have a material adverse affect on the Company's business, operating results and financial condition.
`in addition, a third party may copy or otherwise obtain and use the Company's products, services and/or
`intellectual property without authorization, or develop similar intellectual property independently.
`In addition,
`effective copyright, trademark and trade secret protection may be unavailable or limited in certain foreign countries,
`and the global nature of the Internet makes it virtually impossible to control the ultimate destination of the Company's
`procliicts and/or services. Policing unauthorized use of the Company's intellectual property is difficult. There can be
`no assurance that the steps taken by the Company will prevent misappropriation or infringement of its intellectual
`property.
`in addition, litigation may be necessary in the future to enforce the Company's intellectual property rights,
`to protect the Company's trade secrets or to determine the validity and scope of the proprietary rights of others. Such
`litigation could result in substantial costs and diversion of resources. There can be no assurances that the Company
`will have the financial resources to engage in such litigation or that the Company will be successful in such litigation.
`Siittii
`litigation could have a material adverse affect on the Company's business, operating results and financial
`Ci)iltllilOf1.
`
`From time to time, the Company may receive notice of claims of infringement of other parties’ proprietary rights,
`including claims for infringement resulting from the downloading of audio and/or video recordings through services
`operated or facilitated by the Company._ There can be no assurance that infringement or invalidity claims (or claims
`
`SEHTSUUND-CUM lNC0RF’UR/“ED
`
`- 3 -
`
`PRIVATE Pl.r\CEMENi i\/lEi\.'\CR.-\i\4CL;i‘.\
`
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`
`SIGHTSOUNI. COM
`
`for mdemnification resulting from infringement claims) will not be asserted or prosecuted against the Company or that
`any assertions or prosecutions will not materially adversely affect the Company's business, operating results and
`financial condition.
`irrespective of the validity or the successful assertion of such claims, the Company would incur
`significant costs and diversion of management time and resources with respect to the defense thereof, which could
`have a material adverse affect on the Company's business, operating results and financial condition.
`if any claims or
`actions are asserted against the Company, the Company may seek to obtain a license under a third party's intellectual
`property rights. There can be no assurance, however, that under such circumstances a license would be available on
`commercially reasonable terms, or at all.
`
`Pizooucrs AND SERVICES RECENTLY DEPLOYED
`
`The Company is now selling video and audio recordings from its own web site and is deploying its DSP offerings
`of products and services to others, however, sales have been minimal and there can be no assurance that
`the
`Company wiii acme‘/e favorable operating results or profitability from those offerings.
`
`PotENtiAt FLUCTUATIONS iN QUARTERLY OPERATING RESULTS
`The Company's quarterly operating results may fluctuate significantly in the future as a result of a variety of
`factors, many of which are outside the Company's control. Factors attributable to the Company's services that may
`afiect its C{'i_!;_ii'TE3l'l‘y/ operating results include the timing of contracts with Clients, the rate at which Customers purchase
`recordings offered by the Company and the prices Customers are willing to pay for such recordings, the execution of
`Nonexclusive Audio Patent License Agreements,
`the rate at which Customers purchase recordings offered by
`Licensees and the prices Customers are willing to pay for such recordings,
`the effectiveness of the Company's
`marketing efforts and other operations, and potential competition for revenue. Quarterly operating results attributable _
`to the Company's services are dependent on the timing of upgrades of the Internet
`infrastructure; upgrades to
`Customer's computer infrastructure; rollouts of the recordings offered by the Company and Licensees; the introduction
`of, demand for, and level of acceptance of the Company's valueadded products and/or services; and the introduction
`oi, demand for, and level of acceptance of the Client's video and/or audio recordings. Additional factors that may
`affect the Company's quarterly operating results generally include the amount and timing of capital expenditures and
`other costs
`relating to the expansion of
`the Company's
`services;
`the introduction of new lnternet
`and
`telecommunications services; price competition or pricing changes in the lnternet, cable and telecommunications
`industries; technical difficulties or network downtime; general economic conditions and economic conditions specific
`to the lnternet,
`lnternet media, corporate intranet, and cable and telecommunications industries. The Company
`operates with no backlog, and quarterly sales and operating results are difficult to forecast even in the short