MEMORANDUM
`
`
`
`S|GHTSOUND.CDM
`
`TO:
`FROM:
`
`Files
`Alex LePore
`
`April 1 2, 2000
`DATE:
`
`RE: Company Stock Valuation
`
`Background:
`
`SightSound.com Incorporated (the “Company” or “SightSound.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 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. On
`March 2, 1993, Mr. Hair received United States Patent 5,191,573, “ Method for Transmitting a
`Desired Digital Video or Audio Signal". On October 7, 1997, Mr. Hair received United States
`Patent 5,675,734 as a continuation of Patent 5,191,573.
`
`The Company (formerly known as Parsec Sight/ Sound, Inc.) was incorporated on August 1,
`1995, with Mr. Hair and Scott C. 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. 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. 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, granting to Digital Sight/ Sound certain nonexclusive
`rights to the Patent claims. The Company then commenced a licensing program. On April
`1,1999, Digital Sight/ Sound was merged into the Company and the Company was renamed
`SightSound.com Incorporated.
`
`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 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 Wamer’s Atlantic Records.
`
`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 fonns
`of video and audio recordings, and to provide the end customer with video and audio
`entertainment in a highly efficient manner. The Company is a download distributor and
`retailer of video and audio content such as film and music
`
`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. The Company first began renting a full-length
`
`CONFIDENTIAL
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`Apple Exhibit 4361
`
`Apple v. SightSound Technologies
`CBM2013-00023
`Page 00001581011096
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`Apple Exhibit 4361
`Apple v. SightSound Technologies
`CBM2013-00023
`Page 00001
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`motion picture movie, “Pi”, on April 13, 1999, pursuant to a license agreement with Artisan
`Entertainment.
`
`As of February 1, 2000, the Company had approximately 135 films for sale or rental on its web
`site with over 90 additional titles under contract, being prepared for Internet distribution. The
`Company is currently in discussions with a number of companies about obtaining the rights to
`distribute other motion pictures over the Internet and anticipates that, through these
`discussions and the negotiation of additional license agreements, additional pictures will
`become available for sale on a continuing basis. The Company plans to issue a significant
`number of shares of its common stock in order to obtain such rights.
`
`The Company also sells music in download fashion. As of February 1, 2000, the Company has
`the right to sell music from over 40 different CDs featuring over 30 different artists. The
`Company intends to offer audio—only nonexclusive patent license agreements to potential
`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 is a development stage
`company and its business is new and evolving. There is no assurance that its business or any
`of its relationships or activities will be successful or profitable.
`
`Pre 1999 Business & Financing Activities:
`
`From March 1996 through March 1998 the company raised equity from a number of individual
`investors through a Private Placement Offering. The investments ranged from $0. 1 1 a share to
`$0.15 a share. It was clear over this period of time that the company’s value did not change
`dramatically. In fact, the company attempted to launch several different music distribution
`strategies from 1995 to 1998 only to realize less than $600 in gross revenue for the entire
`three—year period.
`'
`‘
`
`From its inception through 1998 the Company solely focused on the music business. It was
`clear from numerous meetings and proposals that the major industry players were not
`prepared to distribute their products in digital fashion. The music industry is relatively
`consolidated with 76% of global music sales controlled by the five major record labels:
`Universal/PolyGram, Time Warner, Sony, BMG, and El\/II. Thus, without an agreement to
`I distribute music for the major labels the company concluded that its ability to be successful
`was severely limited. The company’s attempt to become a successful music content retailer
`and DSP included pursuit of the following strategies;
`
`0 The company initially attempted to sign artists to agreements whereby the company
`would distribute the artist's music directly over the Internet. This did not prove
`successfulsince the only bands likely to enter such an agreement are bands that are
`not under contract with a record label. Successful artists are unlikely to distribute
`music directly to consumers since the traditional promotion and distribution clout
`offered by the recording industry is still very much valued and clearly needed to become
`a successful artist.
`
`0 The company approached record labels about outsourcing their Internet distribution
`' strategy by permitting SightSound.com to sell music digitally in exchange for a thirty
`percent royalty payment. Alternatively, the company offered the labels a license on the
`use of the company’s intellectual property. Some labels seriously considered the offer
`
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`but ultimately rejected the notion to have their content digitally distributed for several
`reasons. First, the labels were afraid that the encryption would be hacked resulting in
`the free distribution of illegal copies. Secondly, the companies did not believe that
`SightSound.com’s patent was valid. Third, the record labels prefer to distribute music
`without using a third party service provider.
`
`0 The last strategy the company pursued was to “produce” special music content, such as
`its Microshows®. Again, the company was not able to win the timely cooperation of the
`record labels or individual artists to successfully launch the strategy.
`
`In the meantime other companies emerged in the digital distribution business. These
`companies were clearly competitive threats and in many cases found to be infringing on the
`use of the company's intellectual property. SightSound.com offered the companies considered
`to be infringing a license agreement. No one agreed to become a licensee. The companies
`either believed SightSound.com’s patent claims did not apply to their specific method of doing
`business or that the patents were not valid.
`
`During this period the company did receive good news that it believed to improve its overall
`value. On October 7, 1997,'the company received notice of its second patent, “System for
`Transmitting a Desired Digital Video or Audio Signal.” Even though the patent was issued
`prior to certain equity transactions in early 1998 the share price of those transactions was
`unaffected for two reasons. First, the underlying private placement memorandum had been
`issued prior to notice. Secondly, the company needed to more fully understand the
`implications of the patent notice.
`
`Early in 1998 it became clear that the company had to aggressively protect its patents to
`protect its position in the industry. On January 23, 1998, SightSound.com filed a patent
`infringement suit against N2K, Inc. in Federal Court. Since that time, CDNow, Inc. has
`acquired N2K, Inc. SightSound.com anticipates that upon successful defense of its patent
`rights, other companies will eventually stop their infringing practices or, when appropriate, will
`execute a Nonexclusive Patent License Agreement to provide certain rights to legally practice
`Entertainment E-Commerce using the method and system protected by Patent 5,191,573 and
`Patent 5,675,734. However, in the event an infringer fails to execute a Nonexclusive Patent
`License Agreement, SightSound.com expects to defend its intellectual property vigorously,
`through litigation if necessary and will permanently enjoin such an infringer from practicing
`Entertainment E-Commerce.
`‘
`
`SightSound.com intends to offer Nonexclusive Patent License Agreement(s) to potential
`Licensees desiring to conduct Entertainment E-Commerce for audio only. SightSound.com
`does not currently have plans to offer Nonexclusive Patent License Agreement(s) to potential
`Licensees desiring to conduct Entertainment E-Commerce for video applications. This
`licensing program is part of an Intellectual Property Protection Program now being
`implemented by SightSound.com to protect and advance its intellectual property position in the
`emerging Entertainment E-Commerce industry.
`
`The company concluded in 1998 that the second patent greatly increased its value. The
`second patent was applied for in the form of a continuance of the original patent.
`The purpose of the second application was to request that the Patent and Trademark Office
`. Furthermore, when an application is submitted to the
`PTO in the form of a continuance the applicant must alert the PTO of any “prior art" submitted
`to the applicant by a party who believed the applicant’s patent to be invalid. Philips
`Electronics had notified the company of what it believed to be applicable prior art. The prior
`art was included with the company's application. The PTO considered the submission and
`
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`determined that the referenced items were inapplicable to the first patent. The PTO maintained
`that the original patent remained valid and issued the second patent.
`
`Late, in 1998 the company raised more equity to continue funding new music distribution
`strategies. Even though the company did not have any success with the record labels up to
`this point the company continued to believe that a deal with a major label might be feasible
`based on its intellectual property position and the technological architecture it developed to
`this point. Based on this assumption the company raised its share price to $1.50 a share for a
`private placement offering it held from November 1998 through March 1999.
`
`Business & Financing Activities Since January 1999:
`
`January to April Unfortunately, the music industry opportunity never materialized. The
`music industry was being undermined by illegal distribution of music recordings via the
`Internet. SightSound.com had worked behind the scenes with major record labels from 1995,
`through 1998, in an attempt to educate them on the benefits of digital distribution and
`convince them to embrace Internet distribution as a method of choice for music. By early 1999
`their refusal to adopt electronic commerce methods promoted by SightSound.com led to an
`explosion of piracy of musical recordings using the now popular MP3 format and numerous
`competitors leveraged interest in this music piracy to enter the music industry as “new record
`labels."
`
`SightSound.com believes that over the next several years, order will be restored to the global
`music industry as intellectual property and copyright laws catch up with the capabilities of the
`Internet as a distribution medium. In the meantime, SightSound.com turned its attention and
`focus to providing the motion picture industry with its first line of defense againstlnternet
`piracy of motion pictures. Namely, the widespread availability of legitimate motion picture
`downloads to provide consumers with a legal alternative to Internet piracy.
`
`In early 1999, SightSound.com was approached by the Microsoft Corporation, which disclosed
`the capabilities of its new video compression algorithm to compress video recordings to a size,
`which provides the same opportunity for digital distribution of movies that had previously been
`enjoyed by music. SightSound.com recognized a substantial risk that the motion picture
`industry would succumb to large-scale piracy just as the recorded music industry had. To
`preempt this possibility, SightSound.com dedicated significant resources to the development of
`a massively scalable electronic commerce capability for motion pictures.
`In essence, the
`company, believing a tremendous music distribution opportunity was available since it had
`received the second patent, found instead that it basically had to mortgage its future on a video
`distribution strategy that did not exist until the Microsoft discussions occurred.
`
`From late January to April 12, 1999 the SightSound.com dedicated itself to becoming the first
`company to offer a full-length major motion picture for download sale. On April 13, 1999 the
`company achieved its mission when it made the movie
`a film owned by Artisan
`Entertainment, available for rent or sale in download fashion over the intemet. Artisan entered
`into a one—month distribution agreement. The company had slightly over 200 orders for the
`movie. The availability of a movie for download sale was designed to coincide with the April 13
`release of Windows Media Technologies 4.0. The event drew tremendous attention from the
`entertainment industry and marked a definitive change in the Company's strategic direction.
`
`May to August 1999 Immediately after the movie launch the company set out to raise
`additional capital. The setback it had suffered in not securing distribution or license
`
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`agreements in the music industry was offset by the new opportunity that presented itself in
`video content distribution. The company had exhausted nearly all of its resources in preparing
`for the April 13th trial. The company determined that it would aggressively pursue the movie
`distribution strategy.
`
`The company set out to raise twenty million dollars in a May 1999 Private Placement offering.
`The share price increased to $2.00 per share. The company felt this was an appropriate
`valuation. Even though a commercial music distribution industry as envisioned by the
`company had not yet materialized, the company believed the movie‘ distribution opportunity
`that now emerged had greater economic potential. The Company also believes that an
`opportunity on the music side will materialize if the current piracy practices are properly dealt
`with.
`
`SightSound.com recognized a substantial risk that the motion picture industry would succumb
`to large-scale piracy just as the recorded music industry had. To preempt this possibility,
`SightSound.com concluded it had to dedicate significant resources to the development of a
`massively scalable electronic commerce capability for motion pictures. The company estimated
`that it needed at least twenty million dollars to begin executing on its plan.
`
`From May through the end of 1999 the company raised slightly over twelve million dollars. The
`proposed use of the funds included
`
`0
`0
`0
`
`the expansion of its next generation technological architecture
`the defense of its intellectual property
`the ongoing cash burn rate for the sales, marketing, and administrative costs
`
`Early in the offering period approximately $2.2 million was raised. Investors clearly
`understood the market potential and the quality of the SightSound.com solution. Many
`potential investors were concerned about the lack of available compelling content. The
`company designed a valuable technology solution. With consumer technology (i.e. high speed
`intemet access, faster PCs, initial development of “smart TVs”) well on the way available
`content was the key missing ingredient.
`
`In June 1999 the emphasis on raising capital was reduced and the company's CEO, Scott
`Sander moved to California for the summer. From June through August Mr. Sander pursued
`countless business deals to secure the digital distribution rights to motion pictures. By
`September 1999 the company had slightly over 100 titles under contract. The titles were
`largely unknown productions from independent film producers. Although we did not have high
`expectations that the films would sell well, any sale was important to the company since it
`proved our business model:
`that consumers would pay for content. This is a radically different
`notion than having the content available for free through an advertising supported sight. While
`an advertising model might be more “financially successful” in the short term it is clear to the
`company that a revenue model that looks more like traditional Video stores is better in the long
`term. Thus, we initially expected few sales that would teach the model. In fact, from
`September through December 1999 the company had a total of 960 sales that generated
`$3,179 in gross revenue.
`
`Mr. Sander’s summer long pursuit yielded titles to jumpstart the September relaunch of our
`website and inroads with all of the major studios. While negotiations with most of the major
`studios appeared to progress well it was also clear that we would not receive compelling studio
`produced content for quite some time.
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`In September the Company resumed its capital raising activities in
`September to December
`earnest. Believing it would be difficult to raise twenty million dollars the company replaced the
`earlier PPM with a new PPM for ten million dollars. The share price remained at $2.00. Based
`on previous investor meetings and the content prospects that unfolded since April 1301 it was
`difficult to conclude that the offering share price should be increased.
`
`In addition,
`The company redirected its capital raising efforts toward more strategic investors.
`Goldman Sachs-had been retained to assist the company in approaching strategic partners on
`its behalf. Goldman was not successful in finding an investment partner. On September 19”‘
`the company reached an agreement with Benglon Trading to invest ten million dollars. The
`Chairman and CEO of Intertaimant AG, a German based aggregator of Pan European movie
`distribution rights controls Benglon Trading.
`°
`
`Intertainment understood the company’s original need for twenty million dollars.
`Intertainment also believed the company would quickly be back in the capital markets for
`- additional funding. Thus Benglon offered to invest ten million dollars on the condition that
`Intertainment be granted an option until December 31, 1999 to acquire an additional five
`million shares at $2.00 per share. Furthermore, the agreement called for Intertainment to use
`its own stock, which is traded on the Frankfurt, Germany exchange, in exchange for
`SightSound.com stock.
`
`Intertainment met the strategic investor criteria. The company also agreed with
`Intertainmenfs assessment about SightSound.com's financial needs. The company would be
`raising additional capital by September 2000. And a number of significant events would have
`to occur to justify an increase in the share price. Thus, the company agreed to the terms.
`
`By December the company estimated that it would need to begin raising additional capital by
`April 2000. In general, the cash burn rate exceeded the budget. Marketing and promotional
`costs and legal costs related to patent defense and patent filings were significantly over the
`original budget. Most importantly, the company determined that it had to fund compelling
`original programming for exclusive Internet distribution
`
`In the early days of any new distribution channel, unique programrning is required to compel
`the audience to choose that channel over traditional channels. To that end, SightSound.com
`has implemented a strategy of periodic exclusive world premiers of video recordings not
`available through any other distribution channel. The first of these projects is “Quantum
`Project", a productionlof Metafilmics, Academy Award winning producers of “What Dreams May
`Come.” The “Quantum Project,” scheduled for release in May of 2000. The production will cost
`approximately $3.0 million.
`
`In late 1999 the company held discussions with a number of strategic partner candidates. The
`most serious discussions occurred with Showtime, Inc., a subsidiary of Viacom, Inc. that
`operates a premium cable network, and NBC Internet, Inc. (NBCi), a subsidiary of National
`Broadcasting Company, Inc.(NBC),that operates as a holding company for the TV network’s
`Internet interests. -
`-
`
`The company tried to more aggressively price its stock in discussions with these companies.
`The premise for a valuation increase was based on the fact that the company possessed the
`capital and plans to build its next generation technology architecture that would serve 380,000
`movie downloads per day. Showtime and NBCi'disagreed with a valuation increase since the
`company’s available content remained the same and it did not appear that quality content
`would be made available any time soon. Showtime never made a formal offer. In deal
`discussions, NBCi offered to invest $10.0 million at $2.0 per share. The offer was comprised of
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`$3.0 million in cash and $7.0 in promotion time. The company did not accept the offer
`primarily due to the non—cash component of the deal. The promotion time aspect of the offer
`effectively made the offer worth less than $2.00 per share since the company did not have
`anything specific to promote. We do not plan to seriously brand the website until sufficient
`quality content is available. The company does nominal branding and some specific target
`marketing but not at a level sufficient to utilize $7.0 million in major network advertising.
`
`The company believed producing “Quantum Project” was the only meaningful promotional
`activity it should consider. While producing a film is not conventional promotion the company
`finds itself in a unique position in a unique industry. The company required approximately
`$3.0 million to underwrite the production. Thus, the company concluded that its interests
`would be best served if Intertainment exercised its option at $2.00 per share. The company
`approached Intertainment in early December about their willingness to exercise the option.
`
`About the same time the company began to explore options that the investment banking
`community could provide. On December 13 & 14 the company extended invitations to 14
`investment banks to meet with the company to discuss capital raising needs. Specifically, the
`company sent each bank a package containing financial statements, financial projections, and
`a media kit. The banks invited to visit our offices in January to discuss their ability to assist
`the company. The company was specifically interested in understanding its prospects for an
`initial public offering or for a strategic private placement.
`
`The company did have an existing relationship with Goldman Sachs. Goldman had provided
`the company with corporate financial advice and specifically represented the company in
`certain equity raising efforts. Goldman was not successful in securing any investor
`commitments. All of the equity raised by the company was a result of management’s efforts.
`
`.On December 22, 1999 Intertainment exercised its option to exchange $10.0 million of its
`shares for 5 million shares of SightSound.com. The agreement required the transaction to
`close within ten days subject to any requisite regulatory approval. It was subsequently
`determined that the transaction had to be approved by the Federal Trade Commission. The
`FTC approved the transaction on March 3, 2000.
`
`Business & Financing Activities Since January 2000:
`
`Since January 1 the company has focused exclusively on developing the “Quantum Project”,
`striking strategic content relationships, implementing its new technology, and defending its
`intellectual property.
`In mid January the Company began earnest discussions with a number
`of investment banking firms about future capital raising options.
`
`After much consideration the company concluded that it was important to approach the public
`capital markets. Serious discussions were held with more than ten investment banking firms,
`namely to assess the prospects of conducting an initial public offering. The banks generally
`believed that the timing was premature. While the banks were extremely impressed with the
`system SightSound.com built most agreed that the Company needed major studio content;
`some stated that the company also had to demonstrate it had a proven revenue model. Most of
`the banks believed the company should currently seek capital from strategic partners and defer
`going public until certain transaction or revenue milestones were achieved. The banks
`challenged management to explain the need to go public notwithstanding the business
`concerns the banks raised.
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`The company believes that it should conduct an IPO for two reasons.
`
`First, each major studio received a proposal that involved the issuance of up to 16,500,000
`shares of SightSound.com Common Stock to those owners of major motion pictures, and/ or
`film catalogues who agree to grant a license to the Company to distribute their motion pictures
`and/or film catalogues over the Internet. As of Marchl, 2000, no company agreed to the
`proposal. The company views the offer as a very important vehicle in motivating the studios to
`license first run movies. The company believes that most of the studios will not react to the
`proposal until the company registers a public offering.
`
`Secondly, and more importantly, the company believes that the organization that becomes
`public first in this newborn industry will begin to define what movies over the Internet means.
`For example, Atom Films, a company that currently specializes in distributing independent and
`animated film shorts, has been mentioned as a company with IPO prospects. We believe if a
`company like Atom captures the public’s attention first, consumers are likely to equate movies
`over the Internet with short films. The reaction to supporting a SightSound.com offering would
`be affected if the public believes movies over the Internet is a niche type offering and not a
`broad offering that will be widely available soon. The public may perceive that the widespread
`ability to effectively download feature length movies may be farther into the future than is real.
`
`Generally, the banks understood the defensive strategy that the company should go public in
`its early business stage. Most of the banks we met with were considered top tier investment
`banking firms. As a practical matter, the banks could not underwrite an offering with our
`revenue profile. From August 1, 1995 through February 29, 2000 the company recognized less
`than $10,000 in gross revenue.
`
`One bank believed it was uniquely positioned to underwrite the company’s strategy. W.R.
`Hambrecht, a San Francisco based investment—banking firm, employs its OpenIPO system for
`offerings in which the bank is the lead underwriter.
`OpenIPO is a new way to take companies public that opens up access to IPOs. Based on a Dutch
`auction system designed by Nobel Prize—winning economist William Vickrey, OpenIPO uses a
`mathematical model that treats a bid from an individual the same as a bid from a large institution.
`This means OpenIPO offering prices are set by the market. The result is a price that reflects what
`people are truly willing to pay for the stock and the likely allocation of shares to long-terrn investors
`rather than speculators.
`.
`As in a typical auction, the highest bidders win. But there are two important differences. In th
`OpenIPO auction, bidding is completely secret, and winning bidders all pay the same price——the
`amount of the lowest bid at which the deal can be completed
`
`WRH and the company believe that the Dutch auction model is a viable option for companies in
`an early business stage that are likely prospects for a public offering. After evaluating the pros
`and cons of a strategic private offering versus an IPO in an auction system, the company
`determined it was in its best interest to engage W.R. Hambrecht to underwrite an IPO.
`
`Initially, an WRH analyst estimated that the company’s IPO market cap would be in the range
`of $350 — $400 million. However, as WRH did further due diligence, the bank began to
`question whether Sightsound could sustain a successful IPO. The analyst who originally
`evaluated the company resigned from WRH. Other analysts questioned the original valuation
`based on additional research and analysis.
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`To have a successful IPO WRH believed the company needed to enter some meaningful
`transactions.
`In February the company finalized its plan to underwrite the production of the
`“Quantum Project”. A May 2000 release date was set for the 40-minute production. While the
`company believes the release will increase the notion that “SightSound.com equals movies over
`the intemet” with consumers and within the movie industry, the banks generally agreed that it
`was too speculative to create significant value in the public markets.
`
`On February 25, 2000 the company and Franchise Pictures entered into a five—year exclusive,
`worldwide Internet distribution deal. Under the terms of the deal Franchise Pictures agrees to
`distribute at least 35 movies from its library through SightSound.com in exchange for an
`equity stake in the company. Although Franchise Pictures is not a major studio, as a prolific
`producer Franchise is the most significant movie industry player to date that has entered such
`an Internet distribution agreement. The transaction is expected to close by March 31, 2000.
`
`During March 2000, the company we entered into a number of contractual relationships with
`content owners, including Miramax Films, that give us the right to distribute certain movies
`and other video recordings using our service. In order to encourage these producers to
`distribute their content via the Internet using our services, we issued our common stock to
`them in exchange for Internet distribution rights. Independent producers with whom we
`recently contracted for Internet distribution rights include:
`
`Franchise Pictures
`
`Cutting Edge Entertainment
`Vanguard Entertainment
`Troma
`Cinetel Films
`
`Pacific Trust / Concord
`
`Promark Entertainment Group
`Vista Street Entertainment
`
`Based on these developments WRH believes the company has a current market capitalization
`between $250 — $300 million.
`
`Observations on Valuation from Inception to 1999:
`
`A careful examination of the company’s history strongly suggests that its share value moves in
`a lockstep fashion. From 1996 to early 1998 the share price remained in a tight range of
`$0.11 to $0.15 per share. The company operated with three employees. The original equity was
`raised simply on the strength of the original patent.
`
`By early 1998 the company was still in a start up stage. The only significant, enterprise value-
`creating event to occur was the issuance of the second patent. It is the company’s opinion that
`the second patent added considerable value. The company increased its share price to $1.50
`reflecting a post money enterprise value of roughly $50.0 million. More than anything this
`reflected what the company believed someone would have to pay to acquire it. At the time the
`company believed that the commercial viability of movies over the Internet was 10 years away
`but an immediate opportunity in music distribution was well within its grasp.
`
`By late 1999 the company was still in a developmental stage but repositioned to execute on a
`movies over the Internet strategy. Technological