digital yflgibz/you/rw;5
`
`PROSPECTUS
`August 15, 1997
`
`digital yyivz“/vovmafi.
`
`2,977,825 Shares
`Digital Sight/Sound, Inc.
`Common Stock
`
`THESE SECURITIES ARE OFFERED AND SOLD PURSUANT TO EXEMPTIONS FROM REGISTRATION WITH
`THE UNITED STATES SECURITIES AND EXCHANGE COMMISSION. THE COMMON STOCK HAS NOT BEEN
`REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, AND, AS SUCH, CANNOT BE FREELY
`RESOLD ABSENT REGISTRATION UNDER SUCH ACT OR AN EXEMPTION FROM THE REGISTRATION
`REQUIREMENTS THEREUNDER. THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY
`THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
`SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
`ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
`CRIMINAL OFFENSE.
`
`THIS OFFERING INVOLVES AN UNUSUALLY HIGH DEGREE OF RISK THAT THE INVESTOR WILL LOSE
`THE INVESTOR’S ENTIRE INVESTMENT. SEE “RISKS FACTORS” COMMENCING ON PAGE 2 HEREOF.
`
`Digital Sight/Sound, Inc.
`$6.00 Price Per Share
`
`NO PERSON IS AUTHORIZED IN CONNECTION WITH THE OFFERING MADE HEREBY TO GIVE ANY
`INFORMATION OR TO MAKE ANY REPRESENTATIONS NOT CONTAINED IN THIS PROSPECTUS, AND, IF
`GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING
`BEEN AUTHORIZED BY THE COMPANY. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL
`OR A SOLICITATION OF AN OFFER TO BUY ANY SECURITIES. NEITHER THE DELIVERY OF THIS
`PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY
`IMPLICATION THAT THERE HAS BEEN NO CHANGE IN THE AFFAIRS OF THE COMPANY SINCE THE DATE
`HEREOF OR THAT THE INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT
`TO THE DATE HEREOF.
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`Apple Exhibit 4364
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`Apple v. SightSound Technologies
`CBM2013-00023
`
`Apple Exhibit 4364
`Apple v. SightSound Technologies
`CBM2013-00023
`Page 00001
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`digital Jéglbz/round
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`Table of Contents
`
`Prospectus Summary
`
`The Offering
`
`Risk Factors
`
`The Company
`
`Use of Proceeds
`
`Capitalization
`
`Dilution
`
`Dividend Policy
`
`Expected Financial Condition
`and Results of Operations
`
`The Business
`
`Management
`
`Principle Shareholders
`
`Description of Capital Stock
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`Prospectus
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`Prospectus Summary
`Digital Sight/Sound, lne. (the “Company“) is the first digital media company focused exclusively on the electronic sale of audio and video
`recordings in download fashion.
`In 1986, Arthur R. Ilair invented and filed for patent protection on a method and system to electronically sell
`and distribute digital video and digital audio recordings via telecommunications. This method and system formed the foundation ofwhat is now
`known as “Entertainment lj~Commerce.” On March 2, 1993, Mr. flair received United States Patent 5,191,573 protecting his invention and
`subsequently assigned this patent, and others which are pending. to Parscc Sight/Sound, Inc. (“Parsec Sight/Sound”). Since its invention in
`1986, Entertainment l;*Commerce was envisioned as a ‘platform change‘ to stimulate the growth ofthe music and movie industries, along with
`growing the marketplaces for owners ofother forms of audio and video recordings (collectively the “Clients") and provide the end customer (the
`“‘Customer") with audio and video entertainment in a highly efficient manner. The Company is currently executing a strategy focusing initial
`efforts on the development of unique content not available through physical distribution channels which is expected to accelerate the adoption of
`Entertainment E~Commercc by Customers.
`
`For 10-years. between 1986. and 1995, Mr. Hair and Scott C. Sander worked together to formulate strategies for the creation ofthe
`Entertainment E‘Commerce industry. The Company and Parsec Sight/Sound (collectively the "Company") were formally established on
`August 1, 1995, by Mr. Hair and Mr. Sander. The Company then set out to obtain Etitertaitiinent F.-Commerce agreements with independent
`artists and prove the viability of Entertainment E'Commerce through a limited demonstration. On August 18, 1995, the Company signed The
`(lat/ierizzg Field, to an electronic distribution contract and shortly thereafter, on September 27, 1995, the Company became the first company to
`practice Entertainment E~Commerce and offer for sale digital recordings in download fashion. Upon expiration of the Entertainment
`E-Commerce agreement with The (Eat/wring Field, the band signed a recording contract with PolyGram’s Atlantic Records.
`
`In 1996, 30% ofthe common stock ofthe Company was sold to
`Prior to 1996, all Seed Capital was provided by Mr. Hair and Mr. Sander.
`investors including Computer Sciences Corporation, Prophecy Partners (a Santa Monica based investment fund), Janus St. George Partnership (a
`Pennsylvania based investment bank‘). and several high net worth families. The Company commenced a campaign to assist the major record
`labels in the transition to Entertainment E‘Commcrcc. Today. the Company offers a variety of Entertainment E‘Commcree services to record
`labels making the transition to the digital future and is preparing to offer similar services to movie studios and to other Clients as well.
`
`The Offering
`The Company is offering for sale, only to Accredited lnvcstors, up to 2,977,825 shares of common capital stock ofthe Company at the
`price of $6.00 per share for an aggregate purchase price for all shares ofapproximately $17,866,950, The offering will commence not earlier
`than August 15, 1997, and will end on October 31, 1997, provided however that the Company, at its sole discretion, can extend the offering until
`December 31. 1997. The Company reserves the right to reject any subscription without having or stating any reason therefor.
`
`The authorized capital ofthe Company currently consists of 1t)(),00(),00() shares ofcommon capital stock. As ofAugust 15, 1997, a total of
`11,911,300 shares ofthe Company common capital stock were issued, outstanding and/or under option. As ofluly 31, 1997. the Company had
`a book value of approximately $636,144. Accordingly, each share of the Company purchased for $6.00 pursuant to this offering will have a
`post issuance book value of approximately $1.24 if$l7,866,950 in subscriptions 0,977,825 shares) are received. Subsequent issuances ofstock
`to raise required capital for the Company could result in further significant dilution.
`
`The document titled b’usiness Plan‘/‘art/2e Cmnpany (the “Business Plan”) is a confidential internal document and represents ajoint
`business effort between the Company and Parsce Sight/Sound. The Business Plan may be altered from time to time at the discretion ofthe
`Management or the Directors of the Company and/or Parsec Sight/Sound, respectively.
`
`Notwithstanding anything to the contrary contained in the Business Plan or in any statement made to the Investor, the Company has no
`contract or other legally binding arrangement with any other third party (other than the License Agreement) and the presence of materials in the
`Business Plan relating to other third parties does not itnply that they have approved or otherwise support this offering or any information
`provided by the Company to the lnvcstor.
`lfthe Company is unable to enter into contracts and legally binding arrangements ofthe type
`described in the Business Plan or as may be otherwise necessary or appropriate for the Company’s business, the business may fail and the
`Investor’s investment will be lost.
`
`Risk Factors
`In addition to the other information in this Prospectus, the following factors should be considered carefully in evaluating an investment in
`the Common Stock offered hereby. This Prospectus contains forward-looking statements that involve risks and uncertainties. The Companyis
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`actual results may differ materially from the results discussed in such forward—lool<ing statements. Factors that may cause such a difference
`include, but are not limited to, those discussed below and in the other sections ofthis Prospectus.
`
`Short Operating Histor r; History ofLosses; Unproven Busirwss; No Assurance o_/Profitability. The Company and Parsee Si ght/Sound
`were incorporated on August I, I995, commenced operations in October I995, and has incurred substantial net losses in each fiscal period since
`its inception. As of.luly 3 I , 1997, the Company had an accumulated deficit of about $489,058.
`In addition, 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. As a result, the Company expects to incur additional
`substantial operating and net 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 are widely accepted by Customers and
`Clients at prices that will yield a profit. The Company’s service is expected to be launched in the first quarter of I998, and there can be no
`assurance that it 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 or Clients with any degree of accuracy. There can be no assurance that the
`Company will be able to increase its Customer or Client base in accordance with its internal forecasts or the forecasts of industry analysts or to a
`level that meets the expectations ofthc Investor or other investors There can also be no assurance that the Company will ever achieve favorable
`operating results or profitability.
`
`it with copyrights,
`The Company regards its technology as proprietary and attempts to protect
`Intellectual Property; Litigation.
`trademarks, service marks trade secret laws, restrictions on disclosure and other methods.
`In addition, the Company has secured United States
`’at<:nt 5,l9l ,573, filed two patent applications as continuation to USP 5,191,573 (one ofwhieh has been allowed by the United States Jatent
`and Trademark Office), and filed a patent application with respect to a digital audio and/or digital video compression algorithm and system.
`There can be no assurance that any patent will issue from the applications mentioned above or that, ifissucd, along with USP 5, I 9 I .573, any
`claims allowed will be sufficiently broad to protect the Company”s technology.
`In addition, there can be no assurance that any patents that may
`be issued will not be challenged, invalidated or circumvented, or that any rights granted thereunder would provide proprietary protection to the
`Company. Failure of any patents to provide protection to the Company’s technology may make it easier for the Company‘s competitors to offer
`technology equivalent or superior to the Company‘s technology. The Company also generally enters into confidentiality or license agreements
`with its employees and consultants. and generally controls access to and distribution ofits documentation and other proprietary information,
`Despite these precautions, it may be possible for a third party to copy or otherwise obtain and use the Company‘s products, services or
`technology without authorization. or to develop similar technology independently.
`In addition, effective copyright, trademark and trade secret
`protection may be unavailable or limited in certain foreign countries, and the global nature ofthe Internet makes it virtually impossible to
`control the ultimate destination of the Company’s content offerings. Policing unauthorized use ofthe Company”s content offerings is difficult.
`There can be no assurance that the steps taken by the Company will prevent misappropriation or infringement ofits technology.
`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 ofresources
`and could have a material adverse effect on the Company‘s business, operating results and financial condition
`
`From time to time, the Conipatiy may receive notice ofclaims of infringement ofother parties’ proprietary rights, including claims for
`infringement resulting from the downloading ofaudio and/or video recordings through services operated or facilitated by the Company. There
`can be no assurance that infringement or invalidity claims (or claims for indemnification 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 ofthe 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 effect 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.
`
`No Deployment. The Company’s products and services are expected to be deployed on a variety of computer hardware platforms and to be
`used in connection with a number of third-party software applications and programming tools. The Company have not yet deployed its
`offerings but expects to commence active deployment ofits products and services in the first quarter of 1998, however, there can also be no
`assurance that the Company will achieve this schedule or achieve favorable operating results or profitability related therefrom.
`
`Potential Fluctuations in Quarterly Operating Results. The Company‘s quarterly operating results may fluctuate significantly in the
`future as a result ofa variety of factors, many of which are outside the Company’s control. Factors that may affect the Company’s quarterly
`operating results attributable to its service include the timing of contracts Clients, the rate at which Customers purchase recordings offered by
`the Company and the prices Customers are willing to pay for such recordings, the effectiveness ofthe Company‘s marketing efforts and other
`
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`operations. and potential competition for revenue. Quarterly operating results attributable to the Company’s services are dependent on the
`timing ofupgrades ofthe Internet infrastructure, upgrades to Customer’s computer infrastructure, and rollouts ofthe recordings offered by the
`Company and the introduction of, demand for, and level ofacceptancc of, the Company’s value—added audio and video recordings. Additional
`factors that may affect the Company’s quarterly operating results generally include the amount and timing ofcapital expenditures and other
`costs relating to the expansion of the Company”s service, the introduction of new Internet and telecommuting services, price competition or
`pricing changes in the Internet, cable and telecommunications industries,
`technical difficulties or network downtime. general economic
`conditions and economic conditions specific to the Internet, Internet 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 term. There can be
`delays in the commencement and recognition ofrevcnue because the installation of telecommunication lines to implement certain services has
`lead times that are controlled by third parties. A significant portion ofthe Company’s expenses are fixed in advance based in large part on
`future revenue forecasts.
`lfrevenue is below expectations in any given quarter, the adverse impact ofthe shortfall on the Company’s operating
`results may be magnified by the Company’s inability to adjust spending to compensate for the shortfall. Therefore, a shortfall in actual revenue
`as compared to anticipated revenue would have an immediate adverse effect on the Company’s business, financial condition and operating
`results that could be material.
`In addition, the Company expects to increase operating expenses to fund additional research and development,
`sales and marketing. general and administrative activities and infrastructure. To the extent that these expenses are not accompanied by an
`increase in revenues, the Company’s business. operating results and financial condition could be materially adversely affected. Due to all of the
`foregoing factors, it is likely that the Company’s services and the Company’s operating results in one or more fine quarters will fail to meet or
`exceed the expectations ofthe Company, the Investor, other investors, or securities analysts.
`In such event, the value ofthe Common Stock
`would likely be materially adversely affected.
`
`Control by Mr. Hair & Mr. Sander. The purchasers of Comtnon Stock in this offering will not have sufficient collective voting power to
`elect any members of the Company’s Board ofDircctors (the “Board”). Following this offering, l\/lr. Hair and Mr. Sander will control
`approximately 52.28% ofthe voting power ofthe Company and will have the power to jointly elect the members ofthe Board and the power to
`jointly control all matters requiring the approval ofthe holders ofthe Company’s Common Stock. The collective ownership of Mr. Ilair and
`Mr. Sander ('7,000,0t)t’) shares of Common Stock) will no longer constitute a majority voting position upon the earlier ofil) exercise of certain
`stock options held by Jay II. Lustig, Director, in the amount of at least 6l3.000 shares of the 1,500,200 shares so optioned; or (2) the
`of an
`additional GI 3,000 shares of Common Stock not contemplated by this Prospectus. As a result, Mr. Hair and Mr. Sander, acting both through
`thcirjoint influence on the Board and through their collective ownership ofvoting securities, will have the power to jointly control the
`Company, subject, however, to any fiduciary duties that they, as the controlling shareholders. may owe to the other shareholders ofthe
`Company under Pennsylvania law, the fiduciary duties that all directors ofthe Company owe to shareholders ofthe Company to act in the best
`interests of the shareholders.
`
`Dependence on Computer Sciences Corporationfor Data Center Operations. Computer Sciences Corporation (“CSC”) is expected to
`provide, through certain of their data centers globally, the principal server hardware and principal broadband connectivity to the Internet
`necessary for the Company to provide its electronic warehousing (“E-Warehousing”) services and electronic distribution (“E-Distribution”)
`services. CSC currently owns 85,800 shares of Common Stock of the Company. Given the fact that the extent ofthe business relationship
`between CSC and the Company is in the form of a strategic alliance, the interests ofCSC may not always coincide with the interests ofthe
`Company, and conflicts ofinterest concerning the “per transaction fee structure” and other matters may develop between the Company and
`CSC. Prior to this offering, the Company and CSC have not entered into a Data Center Agreement whereby CSC will provide computer server
`capabilities and broadband Internet connectivity for the Company, which is essential for the Company to offer its Erwarchousing services and
`E-Distribution services to Clients. The economic and other terms of the Data Center Agreement may be less favorable to the Company than
`anticipated by the forward—lool<ing statements included in this Prospectus. Because the Company does not yet have contracts with Clients, it is
`not yet possible to determine whether the revenue and the other economic aspects ofthe Company’s services will be sufficiently attractive to
`encourage the continued participation of CSC in the Strategic Alliance, or to encourage CSC to incur substantial capital expenditures required to
`upgrade their Data Center infrastructure and to roll out and vigorously support the Company’s service.
`In addition, the Data Center Agreement
`and any other agrecm ents between the Company and CSC may contain provisions that permit CSC to change certain aspects of their Data
`Centers without the approval ofthe Company.
`
`Dependence on Developers of Enabling Soflware; Uncertain A vailability and Timing of Upgrades. The Company currently depends on
`a limited number ofsuppliers for key enabling technologies used to support and manage its audio related E‘Warehousing and E*Distribution
`services.
`In particular, the Company depends on AT&T Labs for Secure Music Management Tools. Although the Company believes that there
`are alternative suppliers for this technology. it could take a significant period oftime to establish relationships with alternative suppliers and
`substitute their technologies into the Company’s Erwarehousing and I:*Distribution services. The loss of any of the Company”s relationships
`with a supplier could have a material adverse effect on the Cotnpany”s business, operating results and financial condition. Alternative suppliers
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`of key enabling technologies, similar to that ofAT&T Labs, is SOFTBANK Net Solutions, a Buffalo, New York based company which can be
`visited at http://www.sbnctsolutions.eom1 Liquid Audio, a California based company which can be visited at http://www.liquidaudio.com; and
`Cerberus. a British based company which can be visited at http://www.cdj.com. Because ofthe very substantial capital cost of developing
`Entertainment ‘E'Commerce software, no assurances can be given that the aforementioned companies will be able to continue to finance the
`development and upgrading of their enabling software. Since the Company’s service is dependent on such enabling software, the Company’s
`service and revenue derived therefrom could be materially adversely affected if the encryption features ofthe enabling software used by the
`Company is rendered unsccure (ie., if Internet software ‘“hackers“ were to break the encryption protection provided by the enabling software).
`Furthermore, as the Company commences its video offerings, the Company will depend on suppliers for key enabling technologies used to
`support and manage its video related E~Warchousing and E-Distribution services. At this time, commercially available software does not exist
`supporting Fntertainment F.-Commerce of video recordings, and in the event such software does not become commercially available within the
`time frame anticipated by the Company, it would have a material adverse effect on the Company‘s business, operating results and financial
`condition. Therefore, in addition to the Company’s business being subject to general economic and market conditions and factors relating to
`developers of Entertainment E»Commerce enabling software, the success and future growth ofthe Company"s business will also be subject to
`economic and other factors affecting the enabling software industry generally, particularly its ability to finance substantial capital expenditures.
`
`Dependence on High-Quality A ndio and Video Content; Value Added Enhancements. A key component of the Company’s strategy is to
`provide E~Warehousing and E-Distribution services to the major owners ofaudio and video recordings. Historically, the major owners ofsuch
`recordings possess those recordings most demanded by the Customer. The Company’s success is dependent on its ability to motivate the major
`owners of audio and video recordings to purchase the Company‘s E-Warehousing and E‘Distribution services. The Company also believes that
`certain types ofaudio and video recordings, such as instructional videos or download news, can be repurposed and enhanced to provide a more
`compelling audio and/or video product. The Company will be pioneering the development of this market for repurposcd and enhanced audio
`and video recordings anti there can be no assurance that the Company will be successful in these endeavors. Additionally, the Company may be
`required by certain, if not all, Clients to pay for rights to l:“Warchouse and l;"Distributc audio and/or video recordings.
`lfthe market fails to
`develop or develops more slowly than expected; or ifcompetition increases; or if the cost ofacquiring rights for Client recordings is excessive,
`or not available at any price; or ifthe Company’s offerings do not achieve and/or sustain market acceptance, the Company”s business, operating
`results and financial condition will be materially adversely affected.
`
`Dependence on Unique Web Spaces. A key component of the Company’s strategy is to provide value added web spaces to aggregate and
`promote the sale or E~Distribution of audio and video recordings 1i>Warcl1ouscd by the Company. The Company believes that, in addition to
`providing Clients with massive capacity E‘Warehousing and high—spccd E’Distribution services via the Internet,
`it must also develop and
`promote unique web spaces which aggregate content for the convenience ofthe Customer. but more importantly, entertain the Customer up to
`the “moment of purehasc.’There can be no assurance that the Company will be successful in these endeavors. In addition, the market for high—
`quality web spaces has only recently begun to develop. If the market fails to develop or develops more slowly than expected, or if competition
`increases, or ifthe Company’s content offerings do not achieve or sustain market acceptance, the Company’s business. operating results and
`financial condition will be materially adversely affected.
`
`Uncertain Acceptance and Maintenance ofthe “Digital Sight/Sound” ” Brand. “Digital Sight/Sound‘““‘ is a trademarkand service mark of
`the Company, all rights reserved. The Company believes that establishing and maintaining the “Digital Sight/Soundm” brand is critical to its efforts
`to sell E-Warehousing and E‘Distribution services to potential Clients. Promotion of the “Digital Sight/Sotinti'“"’ brand will depend, among
`other things, on the Company’s success in providing massive capacity E~Warehousing and high—spced E~Distribution services via the Internet.
`its marketing efforts to Customers and Clients, and the reliability ofCSC’s Data Center Operations, none of which can be assured. The
`Company has no control over the reliability of CSC‘s Data Centers and broadband connection to the Internet.
`If Customers and Clients do not
`perceive the Com pany’s existing products and services to be ofhigh quality, or ifthe Company introduces new products or services or enters
`into new business ventures that are not favorably received by Customers and Clients, the Company will be unsuccessful in promoting and
`maintaining its brand.
`Furthermore.
`in order to attract and retain Customers and Clients, and to promote and maintain the
`“Digital
`Sight/Sound”‘” brand in response to competitive pressures, the Company may find it necessary to increase substantially its financial commitment
`to creating and maintaining a distinct brand loyalty among Customers and Clients. [fthe Company is unable to establish or maintain the
`“Digital Sight/Sound‘"” brand successfully, or ifthe Company incurs excessive expense in an attempt to improve its offerings or promote and
`maintain its brand, the Company’s business, operating results and financial condition would be materially adversely affected.
`
`Management 0_fExpam1ed Operations; Dependence on Key Personnel. The Company may not be equipped to successfully manage any
`future periods ofrapid growth or expansion, which could be expected to place a significant strain on th e Company’s managerial, operating,
`financial and other resources. To date, the Company has depended entirely on the efforts ofthc Board ofDirectors and the two current
`employees ofthc Company to position the Company for a major growth phase requiring the infusion of capital contemplated by this Prospectus.
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`The five current Directors are Arthur R. llair, Chairman: Scott C. Sander; Charles R. Zappala; Charles A. Gomulka; and Jay ll. Lustig. The two
`current employees ofthc Company are Arthur R. Hair, Chairman & ChiefTecl1nology Officer and Scott C. Sander, Chief Executive Officer &
`President. The Company's future performance will depend, in part, upon the ability ofsenior management to manage growth effectively, which
`will require the Company to implement additional management information systems capabilities; to develop further its operating, administrative,
`financial and accounting systems and controls; to maintain close coordination among engineering, accounting, finance, marketing, sales and
`operations; and to hire and train additional technical and marketing personnel. There is intense competition for senior management, teelmical
`and marketing personnel in the areas ofthe Company’s activities. The loss ofthc services of any ofthc Company”s senior management team or
`the failure to attract and retain additional key employees could have a material adverse effect on the Company’s business. operating results and
`financial condition. The Company maintains a key—person life insurance policy on Aithur R. llair, Chairman & ChiefTcchnology Officer.
`
`Competititm. The Entertainment E’Commcrce industry is in its infancy, however, the Company expects that competition will intensify in
`the near future. The Company’s most direct competitors in this market are NZK lnc., Global Music Outlet, CD Now, the Knitting Factory
`Works, and music.co.jp. N2l<. Inc. has not executed a nonexclusive license agreement with Parsec Sight/Sound and may be in violation of the
`intellectual property owned by Parsec Sight/Sound.
`lfso, the Company intends to vigorously enforce its intellectual property rights. NZK
`began offering a limited selection of music recordings for sale via the Internet in download fashion on July 17, 1997. NZK Inc. can be visited at
`http://www.n2k.com. Global Music Outlet has conducted Entertainment FxCommercc since June l997, and utilizes the suite of software tools
`created by AT&T Labs. Global Music Outlet has not executed a nonexclusive license agreement with Parsec Sight/Sound and may be in
`violation ofthe intellectual property owned by Parsec Sight/Sound.
`lfso, the Company intends to vigorously enforce its intellectual property
`rights. Global Music Outlet can be visited at http://www.globalmusiecom. CD Now is currently in the business of“drop shipping” a CD via
`express mail to its Customers. CD New has inferred that it plans to conduct Entertainment E~Commcrce. CD New has not executed a
`nonexclusive license agreement with Parsec Sight/Sound and in the future may be in violation of the intellectual property owned by Parsec
`Sight/Sound.
`If so,
`the Company intends
`to vigorously enforce its
`intellectual property rights.
`CD Now can be visited at
`http://www.cdnow.coni. As the Entertainment l:“~Commcrce industry grows, demand for Entertainment E-Commerce services, similar to those
`offered by the Company and its competitors, will create opportunities for existing and startup companies to offer Entertainment E-Commerce
`services and compete with the Company for a share of this growing market. Record labels, Internet service providers, website design firms, etc.,
`all possess some of the capabilities and knowledge necessary to offer Entertainment E-Commerce services and. with a sound strategy, can
`become formidable competition to the Company and may be in violation ofthe intellectual property owned by Parsec Sight/‘Sound, If so, the
`Company intends to vigorously en force its intellectual property rights. There can, however, be no assurance that any ofthc competitors ofthe
`Company will execute a nonexclusive license with Parsec Sight/Sound, thereby materially adversely affecting the Company’s business,
`operating results and financial condition.
`tn the event the major owners of audio and video recordings elect not to use the services ofthe
`Company and become competitors of the Company and provide their own Eiwarchousing and l3‘Distribution services, such potential
`competitors have substantially greater financial, technical and marketing resources, larger Customer ba