<PAGE>
As filed with the Securities and Exchange Commission on April 20, 2000
Registration No. 333-
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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM S-1
REGISTRATION STATEMENT UNDER
THE SECURITIES ACT OF 1933
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SIGHTSOUND.COM INCORPORATED
(Exact name of registrant as specified in its charter)
Pennsylvania 7841 25-1770698
(State or other (Primary Standard Industrial (I.R.S. Employer
jurisdiction of Classification Code Number) Identification No.)
incorporation or
organization)
733 Washington Road, Suite 400
Mt. Lebanon, PA 15228
(412) 341-1001
(Address, including zip code, and telephone number, including area code, of
registrant's principal executive offices)
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Scott C. Sander
President
Chief Executive Officer
SightSound.com Incorporated
733 Washington Road, Suite 400
Mt. Lebanon, PA 15228
(412) 341-1001
(Name, address, including zip code, and telephone number, including area code,
of agent for service)
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With copies sent to:
John R. Hempill, Esq. William J. Grant, Esq.
Morrison & Foerster LLP Willkie Farr & Gallagher
1290 Avenue of the Americas 787 Seventh Avenue
New York, New York 10104-0012 New York, New York 10019-6099
(212) 468-8000 (212) 728-8000
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Approximate date of commencement of the proposed sale to the public:
As soon as practicable after this registration statement becomes effective.
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If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. [_]
If this form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following
box and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [_]
If this form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [_]
If this form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [_]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
check the following box. [_]
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CALCULATION OF REGISTRATION FEE
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<TABLE>
<CAPTION>
Title of Each Class of Proposed Maximum Amount of
Securities to be Registered Aggregate Offering Price(1)(2)(3) Registration Fee
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<S> <C> <C>
Common Stock, $.00001 par
value $50,000,000 $13,200
</TABLE>
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(1) In accordance with Rule 457(o) under the Securities Act of 1933, the
number of shares of common stock being registered and the proposed maximum
offering price per share are not included in this table.
(2) Includes shares of common stock which the underwriters have the right to
purchase upon exercise of the over-allotment option.
(3) Estimated solely for the purpose of calculating the registration fee
pursuant to Rule 457(o) under the Securities Act of 1933.
The registrant hereby amends the registration statement on such date or
dates as may be necessary to delay its effective date until the registrant
shall file a further amendment which specifically states that the registration
statement shall thereafter become effective in accordance with Section 8(a) of
the Securities Act of 1933 or until the registration statement shall become
effective on such date as the Securities and Exchange Commission, acting
pursuant to said Section 8(a), may determine.
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<PAGE>
S U B J E C T TO C O M P L E T I O N, D A T E D A P R I L 20, 2 0 0 0
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shares of common stock $ per share
SightSound.com Incorporated
[Company Logo]
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This is our initial public SightSound.com
offering and no public market Incorporated
currently exists for our shares. 733 Washington Road,
The initial public offering price Suite 400
is $ per share. This price may Mt. Lebanon, PA 15228
not reflect the market price of
our shares after this offering.
Proposed Nasdaq
National Market
Symbol: SGHT
[HAMBRECHT LOGO]
<TABLE>
<CAPTION>
THE OFFERING PER SHARE TOTAL
<S> <C> <C>
Public Offering Price............ $ $
Underwriting Discount............ $ $
Proceeds to SightSound.com....... $ $
</TABLE>
We have granted the underwriters
the right to purchase up
additional shares within days
to cover any over-allotments. The
underwriters expect to deliver
shares of common stock to
purchasers on , 2000.
The method of distribution being
used by the underwriters in this
offering differs somewhat from
that traditionally employed in
firm commitment underwritten
public offerings. In particular,
the public offering price and
allocation of shares were
determined primarily by an
auction process conducted by the
underwriters and other securities
dealers participating in the
offering. A more detailed
description of this process,
known as an OpenIPO, is included
in "Plan of Distribution."
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This offering involves a high degree of risk. You should
purchase shares only if you can afford a complete loss of
your investment. See "Risk Factors" beginning on page 5.
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Neither the Securities and Exchange Commission nor any
state securities commission has approved or disapproved of
these securities or determined if this prospectus is
truthful or complete. Any representation to the contrary is
a criminal offense.
WR H A M B R E C H T+ C O
DLJdirect Inc.
The date of this prospectus is , 2000
The information in this prospectus is not complete and may be changed. We may
not sell these securities until the registration statement filed with the
Securities and Exchange Commission is effective. This prospectus is not an
offer to sell these securities and it is not soliciting an offer to buy these
securities in any state where the offer or sale is not permitted.
<PAGE>
[ARTWORK TO COME]
<PAGE>
[ARTWORK TO COME]
<PAGE>
[ARTWORK TO COME]
<PAGE>
You should rely only on the information contained in this prospectus. We
have not authorized anyone to provide you with information different from that
contained in this prospectus. We are offering to sell, and seeking offers to
buy, shares of our common stock only in jurisdictions where offers and sales
are permitted. The information contained in this prospectus is accurate only as
of the date of this prospectus, regardless of the time of delivery of this
prospectus or of any sale of our common stock.
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TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
Prospectus Summary....................................................... 1
The Offering............................................................. 3
Summary Financial Data................................................... 4
Risk Factors............................................................. 5
Special Note Regarding Forward-Looking Statements........................ 17
Use of Proceeds.......................................................... 18
Dividend Policy.......................................................... 18
Capitalization........................................................... 19
Dilution................................................................. 20
Selected Financial Data.................................................. 21
Management's Discussion and Analysis of Financial Condition and Results
of Operations........................................................... 23
Business................................................................. 30
Management............................................................... 43
Executive Compensation................................................... 45
Certain Transactions..................................................... 48
Principal Stockholders................................................... 49
Description of Capital Stock............................................. 50
Liability of Directors; Indemnification.................................. 52
Registration Rights...................................................... 52
Transfer Agent and Registrar............................................. 52
Shares Eligible for Future Sale.......................................... 53
Plan of Distribution..................................................... 54
Legal Matters............................................................ 60
Experts.................................................................. 60
Where You Can Find More Information...................................... 61
Index to Financial Statements............................................ F-1
</TABLE>
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SightSound.com and the SightSound.com logo are trademarks of SightSound.com
Incorporated. All other trademarks, tradenames or copyrights referred to in
this prospectus are the property of their respective owners.
<PAGE>
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by the more detailed
information and the financial statements and notes appearing elsewhere in this
prospectus. This summary may not contain all of the information that you should
consider before investing in our common stock. You should read the entire
prospectus carefully.
Our Business:
We have pioneered a revolutionary approach for the worldwide commercial
distribution of movies. Our service provides for the digital download of
feature films over broadband Internet connections. We enable content owners to
distribute their movies and other video content via the Internet without the
need for physical distribution. In turn, we enable consumers to download these
movies for rental or purchase over the Internet 24 hours a day, seven days a
week, for uninterrupted full-screen viewing.
We believe we were the first company to commercially distribute a feature
film via the Internet. We currently rent and sell movies for download from our
"virtual video store," www.sightsound.com. We also intend to expand the
locations from which consumers can rent and purchase downloadable movies to
include:
. official movie or studio websites, for consumers who know what movie
they want to watch; and
. banner ads triggering direct downloads, for impulse buyers from a
targeted audience.
We currently have the hardware capacity, based on even demand, to download
approximately 380,000 feature length movies per day, with the ability to
rapidly scale that amount as demand dictates. Through our service, a broadband
user who can sustain a one megabit per second Internet connection can download
a 90 minute feature film in less than 30 minutes. We believe this download time
will decrease with continuing improvements in technology. Additionally, all
movies offered through our service are rights managed, allowing us to:
. inhibit unauthorized duplication and piracy;
. rent movies by limiting the number of days the movies can be viewed;
. sell movies by granting unlimited viewing rights; and
. designate the countries in which a movie can be downloaded and viewed.
The viewing of motion pictures is one of the most popular forms of
entertainment in the United States and is becoming increasingly popular in
other parts of the world. In 1999, total U.S. revenue from major motion picture
ticket sales and various in-home viewing options, such as video purchase and
rental, cable TV, and pay-per-view exceeded $30 billion.
The current distribution channel for the rental and sale of videos imposes
substantial limitations on content owners and consumers. The process of
physically producing videos, coupled with reliance on video stores for
distribution, restricts the ability of content owners to distribute their
movies efficiently. "Brick and mortar" video stores carry a limited number of
titles and a limited number of copies of each title. These video stores also
have limited locations and limited hours of operation and consumers are forced
to leave their homes to rent and return movies.
We own three patents and have several pending patent applications covering
the method and system for delivering movies and other digital video and digital
audio recordings for commercial purposes via telecommunications lines,
including the Internet. We have developed and use proprietary software that
leverages Microsoft Windows Media Technologies and other commercially available
software to deliver
1
<PAGE>
movies. Movies downloaded through our service can be viewed using Microsoft
Windows Media Player, which is currently available for free. Forrester Research
estimates that there are currently over 40 million consumers who have Microsoft
Windows Media Player.
Our proprietary technology and patented method and system for delivering
movies, combined with the growth of Internet and broadband users, positions us
to provide a revolutionary method for the distribution of movies. Our service
provides content owners with a powerful, efficient, previously untapped
distribution channel and provides consumers with increased convenience and
selection.
Our goal is to become the leading distributor of movies and video content via
the Internet. In furtherance of our goal, we intend to:
. continue to create strategic relationships with movie content owners in
order to license movies that are the most desirable to consumers;
. promote the distribution of movies over the Internet and enhance
awareness of the SightSound brand;
. take advantage of technological advances to continue to deliver a high-
quality consumer experience;
. capitalize on global distribution opportunities through our rights
management technology;
. obtain distribution rights for other desirable video content, such as
sporting events and educational programming; and
. defend our intellectual property.
We recently have formed several strategic relationships with content owners.
In March 2000, we signed an agreement with Miramax under which Miramax granted
us the non-exclusive right to distribute at least 12 movies from Internet sites
controlled by Miramax or its affiliates. In February 2000, we entered into a
five-year exclusive license with Franchise Pictures that gives us the rights to
distribute all movies in their library to which they own the Internet
distribution rights. We also currently distribute movies from over 30
independent movie producers. In addition, we have established relationships
with owners of other types of video content as well, such as our agreement with
Showtime to distribute the Tyson/Norris boxing match.
We are a development stage company and have experienced net losses since our
inception in 1995. We intend to invest aggressively to implement our strategy,
and expect to continue to incur net losses for the foreseeable future.
2
<PAGE>
THE OFFERING
<TABLE>
<S> <C>
Type of security................................ Common stock
Common stock offered............................ shares
Common stock to be outstanding after the
offering....................................... shares
Use of proceeds................................. We intend to use the net proceeds for the
acquisition of additional content,
development and marketing of our own
original content, payment of litigation
expenses incurred in connection with
protecting our patents, continued
development of our technology and
infrastructure, expansion of our sales and
marketing activities and general corporate
purposes, including working capital. See
"Use of Proceeds."
Proposed Nasdaq National Market Symbol.......... SGHT
</TABLE>
References to "we," "us," "our," "SightSound" or "SightSound.com" shall
refer to SightSound.com Incorporated and all predecessor entities.
Except as otherwise noted, all information in this prospectus is as of March
31, 2000 and assumes:
. no exercise of the underwriters' over-allotment option; and
. no exercise of options to purchase shares of common stock remaining
outstanding after the completion of this offering, including 1,979,000
shares issuable upon exercise of outstanding options granted to
SightSound.com employees and directors pursuant to the 1999 Stock Option
Plan and 5,320,399 shares issuable upon exercise of outstanding options
granted to investors and content owners pursuant to stock option and
purchase agreements.
Our headquarters are located at 733 Washington Road, Suite 400, Mt. Lebanon,
PA, 15228 and our telephone number is (412) 341-1001. Information about
SightSound.com is available at www.sightsound.com. The information contained at
our website is not, and shall not be deemed to be, a part of this prospectus.
3
<PAGE>
SUMMARY FINANCIAL DATA
The table below sets forth summary historical and pro forma financial
information of SightSound.com for the periods indicated. It is important that
you read this information together with the section titled "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
our financial statements and the notes thereto included at the end of this
prospectus.
<TABLE>
<CAPTION>
August 1,
Nine Months Quarter Ended 1995
Year Ended December 31, Ended December 31, (inception) to
------------------------ September 30, ------------------------ December 31,
1997 1998 1999(/1/) 1998 1999(/2/) 1999
----------- ----------- ------------- ----------- ----------- --------------
<S> <C> <C> <C> <C> <C> <C>
Statement of Operations
Data:
Revenue................. $ -- $ 552 $ 3,179 $ 133 $ 2,743 $ 6,474
Gross profit............ -- 486 1,925 117 920 3,331
Operating loss.......... (568,827) (1,555,551) (3,064,049) (515,832) (2,853,721) (8,348,766)
Net loss................ (561,160) (1,706,240) (3,413,936) (577,266) (2,788,227) (8,773,250)
Basic and diluted loss
per common share....... $ (0.03) $ (0.07) $ (0.13) $ (0.02) $ (0.09) $ (0.40)
Weighted average common
shares outstanding--
basic and diluted...... 20,540,553 24,853,847 26,484,432 25,133,339 32,048,024 21,853,582
</TABLE>
<TABLE>
<CAPTION>
As of As of
December 31, As of December 31, 1999
------------------ September 30, ---------------------------------
1997 1998 1999(/1/)(/3/) Actual(/4/)(/5/) As adjusted(/6/)
-------- --------- -------------- ---------------- ----------------
<S> <C> <C> <C> <C> <C>
Balance Sheet Data:
Cash and cash
equivalents............ $225,679 $ 319,031 $ 9,017,705 $ 7,479,741 $
Working capital......... 224,995 (224,002) 8,922,847 4,007,242
Total assets............ 289,602 715,852 10,047,041 11,462,782
Long-term obligations... -- -- -- 1,262,063
Stockholders' equity.... 282,883 18,566 9,861,570 8,047,699
</TABLE>
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(1) In 1999, we changed our fiscal year end from December 31 to September 30.
(2) We recorded stock compensation expense of approximately $974,000 in the
quarter ended December 31, 1999 related to options granted to employees at
prices less than the deemed fair market value of the underlying common
stock.
(3) We completed a private placement of 5.0 million shares of common stock and
received proceeds of $10.0 million on September 19, 1999.
(4) Cash and cash equivalents includes restricted cash of $2.8 million, $1.4
million of which is non-current.
(5) We entered into a capital lease agreement for computer equipment in the
quarter ended December 31, 1999.
(6) As adjusted to give effect to the sale of shares in the offering
and the application of the estimated net proceeds therefrom. See "Use of
Proceeds."
4
<PAGE>
RISK FACTORS
You should carefully consider the following risks and all other information
contained in this prospectus before you decide to buy our common stock. We have
included a discussion of each material risk that we have identified as of the
date of this prospectus. If any of the following risks actually occur, our
business, financial condition or operating results could suffer. If this
occurs, the trading price of our common stock could decline, and you could lose
all or part of the money you paid to buy our common stock.
Risks Related to Our Business
Our business model is unproven, and depends on acceptance of Internet
distribution of movies by content owners and our access to desirable content.
Our model for conducting business and generating revenues is new and
unproven. Our business may not develop as we expect. Our primary business is to
offer content owners--the people who have the rights to distribute a particular
movie or other video content--a method to globally distribute their titles for
sale or rental by download via the Internet. The distribution rights to popular
video content are typically owned by one or more of the "top tier" studios--
Disney, Warner Bros., Fox, Universal, Sony, Paramount, Dreamworks, Miramax, New
Line and MGM. There are established methods for owners of popular content to
distribute their content such as movie theaters, video stores, pay-per-view,
premium subscription TV and broadcast and basic cable TV. In order for our
business to have the potential to generate significant revenue, content owners
will have to accept Internet distribution generally, and our service
specifically, for the rental and sale of their most popular titles.
In spite of our efforts to date, we have not obtained access to video content
of sufficient quality and quantity to achieve significant revenue growth or be
profitable.
We approached each of the "top tier" movie studios to obtain their video
content during 1999. We have had several discussions with each studio and, to
date, only Miramax has agreed to license any movies to us for distribution via
the Internet. Furthermore, other major studios may pursue a business strategy
similar to ours, such as the announced creation of FlixNetwork.com by Warner
Bros., Universal and Paramount. We have also received some video content from
"independent" producers but it does not consist of either enough titles or
sufficiently popular titles to generate sufficient revenue for us to become
profitable. We may not obtain licenses to the quality and quantity of video
content that we believe is necessary for us to generate significant revenues or
become profitable.
We are competing in a new market that may not develop or in which we may fail
to gain market acceptance for our service.
The market for the commercial distribution of video content via the Internet
is new. As a result, demand and market acceptance for our service exposes us to
a high degree of uncertainty and risk. Consumers may not be interested in
renting or purchasing video content using the Internet or they may rent or
purchase video content using another online service. If this new market fails
to develop, develops more slowly than expected or becomes saturated with
competitors, or our service does not achieve or sustain market acceptance, our
business will not succeed.
The success of our business is, in part, dependent on greater penetration of
broadband access to the Internet.
The increased availability of broadband Internet connectivity to consumers
is an essential component for the growth of our service. Because of the large
size of video files, it is impractical for a consumer to download a movie over
the Internet using our service if that consumer does not have broadband
Internet access. Broadband Internet connectivity is typically defined as a
connection of at least 128 kilobits per second. Broadband is currently
unavailable to many households. In order for our business to grow, broadband
infrastructure must improve and expand, and it must be priced so that it is
attractive to consumers. Failure of, or delay in, broadband being adopted by
consumers will adversely affect our business, operating results and financial
condition.
5
<PAGE>
We have a limited operating history that makes an evaluation of our business
difficult.
We were incorporated on August 1, 1995. Most of our operating activities
have consisted of non-revenue producing activities such as developing the
technology, know-how and infrastructure necessary to download video content via
the Internet as well as activities associated with content acquisition and
development. Our revenue from inception through December 31, 1999 was $6,474.
Our limited operating history and lack of revenue makes it difficult to
evaluate our current business and prospects. As a result of our limited
operating history, we do not have meaningful historical financial data upon
which to forecast quarterly revenue and results of operations. Before investing
in us, you should evaluate the risks, expenses and problems frequently
encountered by companies such as ours that are in the early stages of
development.
We have incurred losses since inception and we expect to incur losses for the
foreseeable future.
We have incurred net losses for every period since our inception. As of
December 31, 1999, our accumulated net losses were approximately $8.8 million.
We have not achieved profitability and we expect to continue to incur
substantial operating losses and negative cash flow for the foreseeable future.
We expect to incur increasing web operations expenses, general and
administrative expenses, and sales and marketing expenses, including costs
associated with acquiring and developing content. In addition, our litigation
costs associated with protecting our intellectual property may increase
significantly. As a result, we will need to significantly increase our revenue
to achieve profitability and to achieve positive cash flow.
We have initiated a lawsuit to protect our patents. If we lose this litigation,
our patents may be declared invalid.
In January 1998, we initiated litigation against N2K, Inc., which
subsequently was acquired by CDNow Inc. in March 1999, because we believe N2K,
Inc. had been infringing our patents relating to downloading audio recordings
via the Internet. On April 3, 2000, the court signed an order permitting us to
amend the complaint to add CDNow Inc. and CDNow Online, Inc. as additional
defendants and to add additional claims. This litigation is currently in the
discovery phase and the trial is scheduled to begin in September 2001. We
expect to incur significant expenses in connection with this litigation. It may
be determined in this litigation that one or more of the claims in our patents
is invalid. While we have separate claims relating to the downloading of video
content via the Internet, an adverse determination in this lawsuit may
adversely affect the strength of our video content claims. In that event,
others may be able to use our method for distributing video content via the
Internet. If that occurs, our business may be adversely affected.
We may not be able to compete effectively if we are not able to protect our
other intellectual property in addition to our patents.
Our success and ability to compete are also dependent on our other
intellectual property in addition to our patents. Our failure to protect this
intellectual property will harm our business. We pursue the registration of our
trademarks in the United States and apply for patents in the United States and
abroad. While we rely on patent, trademark, service mark, copyright and trade
secrets laws and restrictions in the United States and other jurisdictions,
together with contractual restrictions, to protect our proprietary rights,
these forms of protection may not be available in every jurisdiction in which
we conduct our business. Although we believe that the use of material on our
websites is protected under current provisions of copyright law, legal rights
to certain aspects of Internet content and eCommerce are not clearly settled.
We may not be able to maintain rights to information, including movies or sound
recordings, and artist, entertainment and other information.
We have generally entered into confidentiality agreements with our
employees, and where appropriate, consultants and corporate partners in order
to limit access to and distribution and disclosure of our proprietary
information. We cannot be guaranteed that this will adequately protect or
prevent misappropriation of our
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<PAGE>
proprietary rights, particularly in foreign countries where laws or law
enforcement practices may not protect our proprietary rights as fully as in the
United States. The proprietary technology that we use to run our business is
protected generally by restricting third-party access, entering into
confidentiality agreements with third parties who have access and relying on
privacy and trade secret law. Despite our precautions, third parties may
succeed in misappropriating our intellectual property or independently
developing similar intellectual property. If we fail to adequately protect our
intellectual property rights and proprietary information or if we become
involved in further litigation relating to our intellectual property rights and
proprietary technology, our business could be harmed. Any actions we take may
not be adequate to protect our proprietary rights and other companies may
develop technologies that are similar or superior to our proprietary
technology.
We may need to obtain additional funds to execute our business plan and if we
are unable to obtain such funds we will not be able to expand our business as
planned.
We believe that our existing capital resources together with the net
proceeds to us from this offering will be sufficient to fund our planned level
of operating activities, capital expenditures and other obligations for the
next 12 months. We may need to raise additional funds for:
. the acquisition of additional content;
. payment of litigation expenses in connection with initiating lawsuits to
protect our patents;
. the continued development of our technology and infrastructure;
. the expansion of our sales and marketing activities;
. response to competitive pressures;
. the acquisition of complementary businesses, technologies or products;
and
. participation in the development and marketing of original content for
distribution via the Internet.
Additional financing may not be available on terms favorable to us, or at
all. If adequate funds are not available or are not available on acceptable
terms, our ability to undertake any of the actions listed above would be
significantly limited. If we raise additional funds by issuing equity or
convertible debt securities, the percentage ownership of our then existing
shareholders will be reduced, and these securities may have rights, preferences
or privileges senior to those of our shareholders.
Our business model will make us dependent on the success of the movie industry,
which is subject to general economic trends.
We currently derive substantially all of our revenue from the rental and
sale of movies and we expect this to continue. The movie industry is sensitive
to general economic, business and industry conditions that can cause customers
to reduce or delay their renting or purchasing of movie products. Any event or
condition that results in decreased spending on movies, or consolidation within
the movie industry, could have a negative effect on our customers and
negatively impact our business, operating results and financial condition.
We expect competition to increase significantly in the future, and we may not
be able to compete successfully.
The market for the rental or sale of movies and other video content is very
competitive and rapidly changing. We face competition from a variety of other
distribution sources, including:
. movie theaters;
. video stores, particularly chains, such as Blockbuster and Hollywood
Video;
. content owners, such as "top tier" studios and "independent" producers;
. other electronic distribution channels, such as pay-per-view, premium
subscription TV and broadcast TV and basic cable;
. distributors of illegally obtained content;
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. providers of free online video content, such as Atom Films, IFilm and
Yahoo! Broadcast Services; and
. video delivery services, such as Kozmo.com, UrbanFetch.com and
NetFlix.com.
In addition, our existing competitors may collaborate to compete in the
market for the commercial distribution of video content via the Internet. For
example, Warner Bros., Universal/MCA and Paramount Studios have announced the
creation of FlixNetwork.com, a website where they claim a consumer will be able
to obtain movies via the Internet for full-screen viewing from a library of
20,000 films. Earlier this year, Blockbuster and MGM announced that they would
collaborate to offer MGM titles on a non-exclusive basis over a service to be
created by Blockbuster in which consumers would be able to view movies either
through download or streaming for a fee. Further, there are services such as
DIVA Systems, Intertainer and SpectraVision that offer pay-per-view movies on
demand over existing cable or other closed systems.
Many of our current and potential competitors have substantial advantages
over us, including:
. longer operating histories;
. significantly greater financial, technical and marketing resources;
. greater brand name recognition;
. larger existing customer bases; and
. more popular content.
These competitors may be able to respond more quickly to new or emerging
technologies and changes in customer requirements and devote greater resources
to the development, promotion and sale of their services than we can. Also, the
services offered by our existing and potential competitors may be perceived by
content owners and consumers as being superior to ours. Further, while we
believe that our patents protect our method and system for the download of
video over the Internet and while we will aggressively protect our patents,
certain competitors may be more able to engage in costly and protracted
litigation. As a result, we cannot be certain that our patents will protect us
from competitors using our method and system without a license. Additionally,
existing and future competitors could develop other methods to distribute video
content over the Internet that may be superior to ours or that might be
accepted by content owners and consumers because of the competitors' ability to
market their methods more effectively.
Our quarterly operating results are subject to fluctuations that make it
difficult to predict our future performance.
Our quarterly operating results may fluctuate significantly in the future as
a result of a variety of factors, many of which are not in our control. Factors
that may affect our quarterly operating results include the rate at which
consumers purchase movies and other video content offered by our service and
the prices customers are willing to pay for such content, the effectiveness of
our marketing efforts and other operations, and potential competition for
revenue. Other factors that could affect our quarterly operating results
include:
. access to commercially desirable content;
. acceptance of, and improvements to, broadband technology;
. improvements in compression technology;
. seasonal fluctuations in movie offerings, movie viewing habits and
promotional efforts by content owners;
. the amount and timing of capital expenditures and other costs relating
to the expansion of our service;
. the introduction of competitive services;
. technical difficulties or network downtime; and
. general economic conditions.
8
<PAGE>
In addition, our limited operating history makes it difficult for us to
accurately identify all of the possible factors and plan our operations
accordingly. Furthermore, because our operating expenses are based on our
expectations of future revenues and we have recently significantly increased
our operating expenses, unexpected quarterly fluctuations in revenue or a
failure to generate significant revenue from our business could significantly
harm our operating results.
Because of these factors, it is likely that our operating results in one or
more future quarters will fail to meet expectations of securities analysts and
investors. In that event, the price of our common stock could significantly
decline.
Third parties may claim that our service infringes on their intellectual
property, which could result in significant expenses for litigation or for
developing or licensing new technology.
Litigation regarding intellectual property rights is common in the Internet
and software industries. Although we are not currently aware of any claims
asserted by third parties that we infringe on their intellectual property that
would have a material adverse effect on our business, such claims may be
asserted in the future. If we are forced to defend against these types of
claims, whether they are with or without any merit or whether they are resolved
in our favor or not, we may face costly litigation, diversion of management's
attention and resources and be prevented from using certain technologies and
content. As a result of these disputes, we may have to develop costly non-
infringing technology, or enter into licensing agreements. These agreements, if
necessary, may not be available on terms acceptable to us, or at all, which
could increase our expenses or make our product less attractive to our
customers.
In addition, we have agreed, and may agree in the future, to indemnify
certain of our strategic partners against claims that our products infringe
upon the intellectual property rights of others. We could incur substantial
costs in defending ourselves and our partners against infringement claims. In
the event of a claim of infringement, we and our strategic partners may be
required to obtain one or more licenses from third parties. We cannot assure
you that we or our strategic partners could obtain necessary licenses from
third parties at a reasonable cost or at all.
We will need to retain key management and recruit, train and retain other
qualified personnel to successfully grow our business.
Our future success will depend in large part on our ability to retain key
management and recruit, train and retain experienced technical, sales and
marketing, customer service and administrative personnel. In particular, our
future success depends in part on the continued services of our current
executive officers, especially Scott C. Sander and Arthur R. Hair. We currently
maintain a $3.0 million "key man" life insurance policy on each of Scott C.
Sander and Arthur R. Hair.
If we do not attract and retain qualified personnel, we may not be able to
grow our business. Competition for qualified personnel is intense in our
industry. We are in a new market and there are a limited number of people with
the appropriate combination of skills needed to provide the services we need.
We expect competition for qualified personnel to remain intense, and we may not
succeed in attracting or retaining sufficient personnel. In addition, new
employees generally require substantial training, which requires significant
resources and management attention. Even if we invest significant resources to
recruit, train and retain qualified personnel, we may not be successful in our
efforts.
If we fail to adequately manage our growth, we may not be successful and we may
miss market opportunities.
We expect the scope of our operations and the number of our employees to
grow. In particular, we intend to hire additional technical, sales and
marketing, customer service, administrative and management personnel. Such
growth may place significant stress on our technology, operations, management
and employee base. Any failure to successfully address the needs of our growing
enterprise would harm our business.
9
<PAGE>
We are dependent on software developed by third parties.
We currently depend on Microsoft's Windows Media Technologies and Windows
Media Rights Manager software for our video and audio compression and
encryption capabilities. In addition, consumers must use Windows Media Player
in order to view video content available through our service. Our loss of, or
inability to maintain or obtain, any software necessary for our service could
require us to use substitute technology. This technology could be more
expensive or of lower quality or performance. Moreover, the software we license
from third-party providers is available to our competitors.
We are currently dependent on Exodus Communications for our data center
operations, and cannot be certain that we can replace Exodus on commercially
acceptable terms if they cease providing service to us.
Exodus Communications currently acts as our sole provider of data center
operations and broadband connectivity to the Internet. We own servers located
in Exodus' data centers in Boston, Chicago, Jersey City, Los Angeles, Santa
Clara, Seattle and Herndon, Virginia. Unexpected events such as natural
disasters, power losses and vandalism could damage our servers.
Telecommunications failures, computer viruses, electronic break-ins,
earthquakes, fires, floods, other natural disasters or other similar disruptive
problems could adversely affect the operation of our servers. Despite
precautions we have taken, unanticipated problems affecting our servers in the
future could cause interruptions or delays in the delivery of our service.
Furthermore, the failure of our telecommunications provider or Exodus, which
together provide us with our Internet connection, to provide sufficient and
timely data communications capacity and network infrastructure could cause
service interruptions or slower response times, and reduce customer demand for
our service. We do not currently have business interruption insurance.
As we grow, we may require additional data center services. Data center
services and broadband Internet connectivity are essential for our service. We
cannot be certain that we will be able to enter into additional agreements for
the provision of data center services or broadband Internet connectivity on
economic and other terms that we consider acceptable. Also, we cannot be
certain that, as our business grows, Exodus or any other data center we use,
will incur the necessary capital expenditures to upgrade their data center
infrastructure and to roll out and support our service. Our inability to enter
into or maintain satisfactory data center agreements with Exodus or another
third-party vendor of data center operations or broadband Internet connectivity
could negatively affect our planned development of our service and our ability
to increase our revenue and be profitable.
Persons from whom we license video content may not have the right to grant a
license for the distribution of that video content via the Internet.
The Internet is a comparatively recent channel for the distribution of video
content. Therefore, the right to distribute video content via the Internet is
not specifically contemplated in many agreements granting distribution rights.
As a result, we may enter into a license for video content from a content owner
who may not legally have the right to grant us a license to distribute that
video content via the Internet. In that event, we may be sued by the rightful
content owner of the video content distribution rights, and may incur
additional expense in the way of legal and licensing fees.
Any failure of our internal security measures could cause us to lose customers
and subject us to liability.
Our business is dependent on maintaining a database of confidential user
information, including credit card numbers. If the security measures that we
use to protect personal information are ineffective, we may lose customers and
our business would be harmed. We rely on security and authentication technology
licensed from third parties. With this technology, we perform real-time credit
card authorization and verification. We cannot predict whether new
technological developments could allow these security measures to be
circumvented.
In addition, our software, databases and servers may be vulnerable to
physical or electronic break-ins and similar disruptions. We may need to spend
significant resources to protect against security breaches or to alleviate
problems caused by any breaches and we may not be able to prevent all security
breaches. Protections against security breaches may not be available at a
reasonable price or at all. If a third party were able to
10
<PAGE>
circumvent our security measures and misappropriate our users' personal
information, it could cause interruptions to our retail website operation,
damage our reputation or subject us to claims by users. Any compromise of
confidential data during transmission via the Internet may harm our business.
Government regulation may adversely affect the way we do business.
Our service and our intellectual property are not directly subject to
current regulations of the Federal Communications Commission or any other
federal or state communications regulatory agency. However, changes in the
regulatory environment relating to commerce on the Internet, including
regulatory changes that affect telecommunications costs, limit the rental or
sale of video or audio recordings or increase the likelihood or scope of
competition from other companies, could affect the prices of content offered
using our service. We cannot predict the impact, if any, that future regulation
or regulatory changes might have on our business. It is possible that
governmental authorities may attempt to impose fees, taxes or regulations that
affect our service. To the extent we offer video for download into foreign
jurisdictions, we will be subject to additional governmental regulation.
We may be subject to potential liability for content distributed through our
service.
The law relating to liability of businesses for information or other content
disseminated through networks is currently unsettled. Legislation could subject
us to liability for information or other content we disseminate. Depending on
the outcome of certain lawsuits, a business such as ours might have liability
for defamatory speech and indecent materials. In that event, we may need to
take measures that would require the expenditure of substantial resources or
the discontinuation of certain products or service offerings or the termination
of the nonexclusive patent license agreement of a licensee. These measures or
liability or both could have a material adverse affect on our business,
operating results and financial condition.
As an Internet content provider, we could face some potential liability for
the actions of content owners using our service, including liability for
infringement of intellectual property rights, rights of publicity, defamation,
libel and criminal activity under the laws of the United States and foreign
jurisdictions. However, recent legislative enactments and court decisions have
eliminated the most serious threats of liability for such third party
activities. With regard to defamation, libel and slander actions, we are likely
to be regarded as a distributor of content, which under statute and judicial
precedent would render us not liable for the material of others unless we know
or have reason to know of the defamatory character of the content. A "Good
Samaritan" provision of the Telecommunications Act of 1996 directs that
interactive computer services should not be treated as liable for content
posted or created by a third party.
A similar provision granting limited immunity from liability has recently
been enacted with regard to copyright law. Until recently, a service provider
or website carrying content that infringes the intellectual property rights of
others would have been considered guilty of vicarious infringement, regardless
of whether the carrier was aware of the infringing nature of material. However,
the recently enacted Digital Millennium Copyright Act contains a provision
limiting the liability of websites for the mere passive transmission of
infringing content. Under this provision, websites that comply with certain
statutory regulations, such as registration of a designated agent to receive
notice of alleged infringement, will be exempt from liability for another
party's copyright infringement, so long as the site or service does not
knowingly carry infringing material. Like the immunizing provision of the
Communications Decency Act, the copyright legislation also provides protection
against suit from an alleged infringer who believes that we have wrongly
removed his or her material from our site because we believe it to be
infringing. Despite these limitations on our liability, however, we would
remain liable for transmission of any content that we know or have reason to
know is infringing. There have not yet been any court cases interpreting the
immunity provisions of the Digital Millennium Copyright Act. In addition, video
recordings downloaded by consumers using our service could possibly be copied
by third parties on the Internet. As a result, there may be claims made against
us for contributory copyright infringement under both U.S. and foreign law.
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<PAGE>
Other recent legislative enactments and pending legislative proposals aimed
at limiting the use of the Internet to transmit indecent or pornographic
materials could, depending upon their interpretation and application, result in
significant potential liability for us, as well as additional costs and
technological challenges in complying with any new statutory or regulatory
requirements. For example, in October 1999, Congress enacted a new version of
the Communications Decency Act, making it a crime to disseminate material
"harmful to minors" to anyone under the age of eighteen. The statute is
currently facing constitutional challenge; if it is upheld, it could require us
to develop extensive regulatory compliance procedures. In April 1999, the U.S.
Supreme Court upheld a provision of the Communications Decency Act of 1996,
which makes it a crime to transmit a communication which is obscene with intent
to annoy, abuse, threaten or harass another person. In addition, CompuServe
faced action by German authorities in response to which CompuServe temporarily
restricted the scope of the Internet access it provides to all subscribers,
both in the United States and internationally. A number of countries are
considering content restrictions based on factors that include political or
religious views, pornography and indecency. The operation of our online service
might expose us to this type of legislation, and to libel and defamation suits,
primarily because of the level of content being provided by or through our
website.
If our encryption software fails to prevent unauthorized viewing of video
content offered through our service, we could lose revenue and be liable for
infringement claims on the basis of information retrieved from us which is
replicated.
We use encryption software to help protect against the unauthorized viewing
of the content we deliver. However, if a third party circumvents our encryption
software, video content offered through our service will be able to be viewed
by people who have not paid to view that content. As a result, we will lose
revenue from the illegal distribution of this video content. Also, there may be
claims made against us for unauthorized reproduction under both U.S. and
foreign law on various legal grounds, including negligence or copyright or
trademark infringement.
Our international commerce is subject to additional risks.
A key component of our strategy is offering content in international
markets. To date, we have developed a relationship with Exodus which will
provide for access to international markets. There can be no assurance that we
will be successful in expanding our service into foreign markets. Also, there
are certain risks inherent in doing business internationally, such as
regulatory requirements (including the regulation of Internet access), legal
uncertainty regarding liability for information replicated in foreign
jurisdictions, defamation and indecent content laws, export and import
restrictions and controls, tariffs and other trade barriers, difficulties in
staffing and managing foreign operations, longer payment cycles, problems in
collecting accounts receivable, political instability, fluctuations in currency
exchange rates, seasonal reductions in business activity during the summer
months in Europe and certain other parts of the world and potentially adverse
tax consequences, which could adversely affect the success of our future
international operations. Additionally, if international instability, war, or
other situation results in the complete or partial disconnection of the
domestic Internet from all, or selected, global Internets by the U.S.
government, our access to certain international markets could be restricted or
terminated.
Computer viruses may disrupt our service.
Our systems may be vulnerable to computer viruses and other disruption
caused by unauthorized or illegal access to our systems. These could require us
to spend significant resources to protect against or correct. In addition,
eliminating computer viruses and alleviating other disruptive problems may
require interruptions, delays or changes in our delivery of services to our
clients. Online service providers have in the past experienced, and in the
future may experience, interruptions of service as a result of the accidental
or intentional actions of Internet users and current and former employees. We
cannot be certain that measures we take to prevent these problems will continue
to be protective in the future.
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<PAGE>
Certain provisions in our organizational documents and Pennsylvania law may
discourage acquisition proposals.
Our governing documents contain certain provisions that may have the effect
of discouraging, delaying or preventing a change in control or unsolicited
acquisition proposals that a shareholder might consider favorable. In addition,
certain provisions of Pennsylvania law may also have the effect of
discouraging, delaying or preventing a change in control or unsolicited
acquisition proposals. The anti-takeover effect of these provisions may also
have an adverse effect on the public trading price of our common stock.
Risks Related to Our Industry
Our business is dependent on the continued development and maintenance of the
Internet.
Our future success is substantially dependent upon continued growth in the
use of the Internet. The number of users on the Internet may not increase and
commerce over the Internet may not become more accepted and widespread for a
number of reasons, including:
. lack of broadband connections to the Internet;
. actual or perceived lack of security of information, including credit
card numbers;
. lack of access and ease of use;
. congestion of traffic on the Internet;
. inconsistent quality of service;
. possible disruptions due to computer viruses or other damage to Internet
servers or to users' computers;
. excessive governmental regulation; and
. uncertainty regarding intellectual property ownership.
Published reports have also indicated that growth in the use of the Internet
has resulted in users experiencing delays, transmission errors and other
difficulties. As currently configured, the Internet may not support an increase
in the number or requirements of consumers. In addition, there have been
outages and delays on the Internet as a result of damage to the current
infrastructure. The use of the Internet may also decline if there are delays in
the development or adoption of modifications by third parties that are required
to support increased levels of activity on the Internet. If none of the
foregoing changes occur, or if the Internet does not become a viable commercial
medium, our business, results of operations and financial condition could be
materially adversely affected.
Development of new technology and standards for delivery of video over the
Internet may threaten our business.
The electronic delivery of video content is characterized by rapid
technological developments, frequent new technology introductions and evolving
industry standards. The emerging nature and rapid evolution of this industry
will require that we continually improve the performance, features and
reliability of our service,
13
<PAGE>
particularly in response to competitive offerings. We may not be successful in
responding quickly, cost effectively and sufficiently to these developments.
Because of the development of technologies competing with ours, there may be a
limited opportunity for us to market our service, and we may not be successful
in achieving widespread acceptance of our service. Further, our failure to
adopt new standards in such things as encryption, compression and other
technologies necessary for the delivery of our service could adversely affect
the quality of our service and our ability to generate revenue. In addition,
new offerings or enhancements we offer may contain design flaws or other
defects that could negatively impact our business, operating results and
financial condition.
Our business is subject to U.S. and foreign government regulation of the
Internet.
Congress and various state and local governments, as well as the European
Union, have recently passed legislation that regulates various aspects of the
Internet, including online content, copyright infringement, user privacy,
taxation, access charges, liability for third-party activities and
jurisdiction. In addition, federal, state, local and foreign governmental
organizations are also considering legislative and regulatory proposals that
would regulate the Internet. Areas of potential regulation include libel,
pricing, quality of products and services and intellectual property ownership.
A number of proposals have been made at the state and local level that would
impose taxes on the sale of goods and services through the Internet. Such
proposals, if adopted, could substantially impair the growth of eCommerce and
could adversely affect our future results of operations and financial
condition.
The most recent session of the U.S. Congress resulted in Internet laws
regarding privacy and the protection of children, copyrights, taxation, and the
transmission of sexually explicit material. The European Union recently enacted
its own regulations regarding privacy, and it is unclear how a "safe harbor"
compromise negotiated by the U.S. Department of Commerce relating to these
regulations will impact United States companies seeking to collect or
disseminate user information in connection with non-American website users.
Other countries may adopt similar privacy restrictions in the future.
The law imposing a three-year moratorium on new taxes on Internet-based
transactions was enacted in the United States in 1998. This moratorium, which
expires on October 21, 2001, relates to new taxes on Internet access fees and
state taxes on eCommerce that discriminate against out-of-state websites. Sales
or use taxes imposed by those buying or selling products or services over the
Internet will not be affected by this moratorium. We have not yet been able to
determine how we will be affected by this moratorium. To the extent that the
moratorium provides a material benefit, its expiration after three years could
have a material adverse effect on our financial condition and results of
operations.
In addition, new laws may be adopted by the United States and in other
countries covering such issues as music licensing, broadcast licensing fees and
the characteristics and quality of Internet services. Laws regulating the
Internet, however, remain largely unsettled, even in areas where there has been
some legislative action. It may take years to determine whether and how
existing laws that govern intellectual property, privacy, libel and taxation
apply to the Internet. The development of laws governing these areas, or the
application to the Internet of existing laws not designed for the Internet, may
decrease the growth in the use of the Internet. In addition, the growth and
development of the e-commerce market may prompt calls for more stringent
consumer protection laws, both in the United States and abroad, that may impose
additional burdens on companies conducting business online. The adoption or
modification of laws or regulations relating to the Internet could adversely
affect our business.
Because these laws are relatively new and still in the process of being
implemented, it is not known how courts will interpret both existing and new
laws. Therefore, our management is uncertain as to how new laws or the
application of existing laws will affect our business. Increased regulation of
the Internet may reduce the use of the Internet, which could decrease the
demand for our service, increase our cost of doing business or otherwise have a
material adverse effect on our business, results of operations and financial
condition.
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<PAGE>
If we, or third parties on whom we rely, fail to achieve year 2000 compliance,
our business could be harmed.
The risks posed by the year 2000 problem could still adversely affect our
business in a number of ways. To date, we have not detected any disruptions in
our software applications used both internally and in our downloaded movies to
customers, arising from year 2000 issues.
Risks Related to this Offering
Investors will experience immediate and substantial dilution.
The public offering price is substantially higher than the pro forma net
tangible book value of each outstanding share of common stock. Accordingly,
purchasers of common stock in this offering will experience immediate and
substantial dilution of approximately $ per share in the net tangible book
value of the common stock based upon the public offering price. Investors will
incur additional dilution upon the exercise of outstanding stock options. Also,
as of the date of this prospectus, up to 14,583,363 shares may be issued in
connection with the acquisition of content and in connection with certain
preemption rights. If we issue these shares, investors will experience further
dilution.
Our management has broad discretion as to the net proceeds we receive from this
offering, and if we do not allocate these proceeds wisely, your investment
could suffer.
Our management will retain broad discretion in the use of proceeds from this
offering, and may fail to use such funds effectively to grow and achieve our
business goals. The failure of management to apply such funds effectively could
harm our business.
Our officers, directors and major shareholders will have control over
significant corporate matters.
Our executive officers, directors and major shareholders will have
significant control over us following completion of this offering as they will
beneficially own an aggregate of approximately % of our outstanding common
stock at that time. This could limit the ability of our other shareholders to
influence matters requiring approval by our shareholders, including the
election of directors and the approval of mergers or similar transactions.
Our stock price may decline after the offering and may be volatile in the
future.
Prior to this offering, there has been no public market for our common
stock. The initial public offering price will be determined through
negotiations between us and the underwriters, and may not be indicative of our
future market prices. As a result, you may not be able to resell any shares you
buy from us at or above the initial public offering price due to a number of
factors, including:
. actual or anticipated fluctuations in our operating results;
. changes in expectations as to our future financial performance or
changes in financial estimates of securities analysts;
. announcement of new products or product enhancements by us or
competitors;
. technological innovations by us or competitors; and
. the operating and stock price performance of other comparable companies.
In addition, the stock market in general has experienced extreme volatility
that often has been unrelated to the operating performance of particular
companies, especially in the case of companies whose operations rely on the
Internet, such as ours. These broad market and industry fluctuations may
adversely affect the trading price of our common stock, regardless of our
actual operating performance.
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<PAGE>
There may be an adverse effect on the market price of our common stock as a
result of a significant number of shares being available for future sale.
Future sales of a substantial amount of our common stock in the public
market, or the perception that these sales may occur, could adversely affect
the market price of our common stock from time to time. These future sales or
perceptions could also impair our ability to raise additional capital through
the sale of our equity securities after completion of the offering. Of the
shares of our common stock outstanding after this offering, initially
only the shares sold in this offering will be freely tradable.
Additionally, we have set aside 16,500,000 shares of our common stock to be
issued to participants as signing bonuses and payment for the licensing of
Internet movie distribution rights to SightSound.com. To date, we have issued
2,618,714 shares of this common stock. Shares issued from this 16,500,000 will
initially be restricted, but will eventually be freely tradable. The fact that
these shares will become freely tradable could depress the market price of our
common stock and could make raising capital more difficult.
16
<PAGE>
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
This prospectus contains forward-looking statements. These statements may
include statements regarding:
. our business strategy;
. plans for the marketing and growth of our service;
. plans for acquiring additional video content;
. adequacy of anticipated sources of funds, including the proceeds from
this offering; and
. other statements about our plans, objectives, expectations and
intentions contained in this prospectus that are not historical facts.
When used in this prospectus, the words "could," "may," "will," "should,"
"expect," "anticipate," "intend," "plan," "believe," "seek," "estimate" and
similar expressions are generally intended to identify forward-looking
statements. Because these forward-looking statements involve risks and
uncertainties, actual results could differ materially from those expressed or
implied by these forward-looking statements for a number of reasons, including
those discussed under "Risk Factors" and elsewhere in this prospectus.
Following this offering, we assume no obligation to update any forward-looking
statements contained in this prospectus.
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<PAGE>
USE OF PROCEEDS
The net proceeds to us from the sale of the shares of common stock we are
offering will be approximately $ based on the public offering price of
$ per share. If the underwriters fully exercise the over-allotment
option, the net proceeds of the shares sold by us will be approximately $ .
We will use the net proceeds for:
. the acquisition of additional content;
. participation in the development and marketing of original content for
distribution via the Internet;
. payment of litigation expenses in connection with initiating lawsuits to
protect our patents;
. the continued development of our technology and infrastructure; and
. the expansion of our sales and marketing activities.
We will use the balance of the net proceeds for general corporate purposes,
including working capital.
The timing and amount of our actual expenditures will be based on many
factors, including:
. the extent to which we have opportunities to acquire new content;
. the extent to which corporate branding opportunities present themselves;
and
. the rate at which we expand our sales and marketing efforts.
Our management will retain broad discretion in the allocation of the net
proceeds of this offering. Until we use the net proceeds of this offering, we
will invest the funds in short-term investment grade interest-bearing
securities.
DIVIDEND POLICY
We have never declared or paid any cash dividends on our common stock. We
anticipate that we will retain earnings to support operations and to finance
the growth and development of our business. Therefore, we do not expect to pay
cash dividends on our common stock in the foreseeable future.
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<PAGE>
CAPITALIZATION
The following table sets forth our capitalization as of December 31, 1999.
Our capitalization is presented:
. on an actual basis; and
. on an as adjusted basis to reflect our receipt of the net proceeds from
the sale of shares of common stock in this offering at an initial
public offering price of $ per share after deducting the underwriting
discount and assumed offering expenses.
<TABLE>
<CAPTION>
As of December 31, 1999
------------------------
Actual As Adjusted
----------- -----------
<S> <C> <C>
Long-term obligations, less current maturities....... $ 1,262,063 $
----------- -----------
Stockholders' Equity:
Common stock, $.00001 par value, 100,000,000 shares
authorized; 32,048,024 issued and outstanding,
actual; shares issued and outstanding, as
adjusted.......................................... 320
Additional paid-in capital......................... 19,743,697
Deferred compensation.............................. (2,923,068)
Accumulated deficit................................ (8,773,250)
----------- -----------
Total stockholders' equity......................... 8,047,699
----------- -----------
Total capitalization............................... $ 9,309,762 $
=========== ===========
</TABLE>
Common stock outstanding after this offering excludes 11,561,899 shares
issuable upon exercise of stock options outstanding as of December 31, 1999.
See "Selected Financial Data," "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and the financial statements
and notes thereto appearing elsewhere in this prospectus.
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<PAGE>
DILUTION
The net tangible book value (deficit) of our common stock as of December 31,
1999 was approximately $ million, or $ per share of common stock. Net
tangible book (deficit) value per share represents the amount of our total
tangible assets less its total liabilities, divided by the total number of
shares of common stock outstanding.
After giving effect to the offering and the receipt of an assumed $
million of net proceeds from the offering (based on an assumed initial public
offering price of $ per share), the pro forma net tangible book value of the
common stock as of December 31, 1999 would have been approximately $
million, or $ per share. This amount represents an immediate increase in net
tangible book value of $ per share to the existing stockholders and an
immediate dilution in net tangible book value of $ per share to purchasers of
common stock in the offering. Dilution is determined by subtracting pro forma
net tangible book value per share after the offering from the amount of cash
paid by a new investor for a share of common stock. The following table
illustrates such dilution:
<TABLE>
<S> <C>
Assumed initial public offering price per share............................ $
Net tangible book value per share at ................................. $
Increase in net tangible book value per share attributable to purchasers
in the offering(1)......................................................
---
Pro forma net tangible book value per share after giving effect to the
offering(1)...............................................................
---
Dilution per share to new investors........................................ $
===
</TABLE>
- --------
(1) After deduction of the underwriting discount and assumed expenses totaling
$ .
If the underwriters' over-allotment were exercised in full, the net tangible
book value per share after this offering would be $ per share, the
increase in net tangible book value per share to existing stockholders would be
$ per share and the dilution to persons who purchase common stock in this
offering would be $ per share.
The table below summarizes, on a pro forma basis, as of December 31, 1999,
the following differences between our existing shareholders and new investors
purchasing our common stock in this offering.
. the number of shares purchased from SightSound.com
. the aggregate cash consideration paid; and
. the average price per share paid.
<TABLE>
<CAPTION>
Shares Purchased Total Consideration
------------------- ---------------------- Average Price
Number Percent Amount Percent Per Share
-------- -------- --------- ------- -------------
<S> <C> <C> <C> <C> <C>
Existing stockholders .. % $ % $
New investors...........
-------- -------- --------- ---------
Total................. 100% $ 100%
======== ======== ========= =========
</TABLE>
This information is based on pro forma shares outstanding as of December 31,
1999 and excludes:
. 1,014,000 shares of common stock reserved for issuance pursuant to
outstanding options granted under our 1999 Stock Option Plan;
. 6,986,000 shares of common stock reserved for issuance pursuant to
future grants under our 1999 Stock Option Plan; and
. 16,500,000 shares of common stock reserved for possible issuance to
certain content owners.
20
<PAGE>
SELECTED FINANCIAL DATA
The following selected financial data should be read in conjunction with the
financial statements and the notes thereto and "Management's Discussion and
Analysis of Financial Condition and Results of Operations" included elsewhere
herein. The statement of operations data for the years ended December 31, 1997
and 1998, for the nine months ended September 30, 1999 and the balance sheet
data at December 31, 1998 and September 30, 1999 are derived from the financial
statements of the Company, which have been audited by Deloitte & Touche LLP,
independent auditors, and are included elsewhere in this Prospectus, and are
qualified by reference to such financial statements and the notes thereto. The
balance sheet data at December 31, 1995, 1996, 1997 and 1999 and the statement
of operations data for the period from August 1, 1995 (inception) to December
31, 1995, the year ended December 31, 1996, the quarters ended December 31,
1998 and 1999 and for the period from August 1, 1995 (inception) to December
31, 1999 are derived from financial statements of the Company, which in the
opinion of management include all adjustments, consisting only of normal
recurring adjustments, necessary for a fair presentation of the financial
information set forth therein. The interim financial information is not
necessarily indicative of the results that may be expected for any interim
period or for the full year.
<TABLE>
<CAPTION>
August 1, August 1,
1995 Nine months Quarter ended 1995
(inception) to Year ended December 31, ended December 31, (inception) to
December 31, ------------------------------------- September 30, ------------------------ December 31,
1995 1996 1997 1998 1999(/1/) 1998 1999(/2/) 1999
-------------- ----------- ----------- ----------- ------------- ----------- ----------- --------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Statement of
Operations Data:
Revenue.......... $ -- $ -- $ -- $ 552 $ 3,179 $ 133 $ 2,743 $ 6,474
Cost of revenue.. -- -- -- 66 1,254 16 1,823 3,143
----------- ----------- ----------- ----------- ----------- ----------- ----------- -----------
Gross profit..... -- -- -- 486 1,925 117 920 3,331
----------- ----------- ----------- ----------- ----------- ----------- ----------- -----------
Operating
expenses:
Sales and
marketing...... 115 25,182 139,482 319,862 868,405 83,205 353,160 1,706,206
Web operations.. 12,295 134,216 198,740 405,014 763,383 167,458 458,640 1,972,288
General and
administrative.. 6,918 127,892 230,605 831,161 1,434,186 265,286 1,068,485 3,699,247
Stock
compensation... -- -- -- -- -- -- 974,356 974,356
----------- ----------- ----------- ----------- ----------- ----------- ----------- -----------
Total operating
expenses........ 19,328 287,290 568,827 1,556,037 3,065,974 515,949 2,854,641 8,352,097
----------- ----------- ----------- ----------- ----------- ----------- ----------- -----------
Operating loss... (19,328) (287,290) (568,827) (1,555,551) (3,064,049) (515,832) (2,853,721) (8,348,766)
----------- ----------- ----------- ----------- ----------- ----------- ----------- -----------
Interest income
(expense)--net.. -- 2,931 7,667 (150,689) (349,887) (61,434) 65,494 (424,484)
----------- ----------- ----------- ----------- ----------- ----------- ----------- -----------
Net loss......... $ (19,328) $ (284,359) $ (561,160) $(1,706,240) $(3,413,936) $ (577,266) $(2,788,227) $(8,773,250)
=========== =========== =========== =========== =========== =========== =========== ===========
Basic and diluted
loss per common
share........... $ (0.00) $ (0.02) $ (0.03) $ (0.07) $ (0.13) $ (0.02) $ (0.09) $ (0.40)
=========== =========== =========== =========== =========== =========== =========== ===========
Weighted average
common shares
outstanding--
basic and
diluted......... 14,000,000 17,465,169 20,540,553 24,853,847 26,484,432 25,133,339 32,048,024 21,853,582
=========== =========== =========== =========== =========== =========== =========== ===========
</TABLE>
21
<PAGE>
<TABLE>
<CAPTION>
As of As of
December 31, As of December 31, 1999
----------------------------------- September 30, ---------------------------------
1995 1996 1997 1998 1999(/1/)(/3/) Actual(/4/)(/5/) As adjusted(/6/)
------- -------- -------- -------- -------------- ---------------- ----------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance Sheet Data:
Cash and cash
equivalents............ $ 618 $313,561 $225,679 $319,031 $ 9,017,705 $ 7,479,741 $
Working capital......... (57,557) 305,870 224,995 (224,002) 8,922,847 4,007,242
Total assets............ 38,929 385,622 289,602 715,852 10,047,041 11,462,782
Long-term obligations... -- -- -- -- -- 1,262,063
Stockholders' (deficit)
equity................. (19,328) 375,842 282,883 18,566 9,861,570 8,047,699
</TABLE>
- --------
(1) In 1999, we changed our fiscal year end from December 31 to September 30.
(2) We recorded stock compensation expense of $974,356 in the quarter ended
December 31, 1999 related to options granted to employees at prices less
than the deemed fair market value of the underlying common stock.
(3) We completed a private placement of 5.0 million shares of common stock and
received proceeds of $10.0 million on September 19, 1999.
(4) Cash and cash equivalents includes restricted cash of $2.8 million, $1.4
million of which is non-current.
(5) We entered into a capital lease agreement for computer equipment in the
quarter ended December 31, 1999.
(6) As adjusted to give effect to the sale of shares in the offering
and the application of the estimated net proceeds therefrom. See "Use of
Proceeds."
22
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion of our financial condition and results of
operations should be read together with the financial statements and related
notes that are included later in this prospectus. This discussion contains
forward-looking statements that involve risks and uncertainties. Our actual
results may differ materially from those anticipated in these forward-looking
statements as a result of various factors, including those set forth under
"Risk Factors" or in other parts of this prospectus.
Overview
SightSound.com was formed on April 1, 1999 by the merger of its predecessor
companies, Digital Sight/Sound, Inc. and Parsec Sight/Sound, Inc. The
predecessor companies, which were commonly controlled, were incorporated in
1995. Subsequent to the merger, we changed our fiscal year end to September 30.
From inception through December 31, 1999, our operating activities consisted
mainly of developing the necessary infrastructure to support and execute the
business of delivering video and audio content for rental and sale in download
fashion via the Internet. This has included securing our patents, acquiring
distribution rights for movies and video content and developing our delivery
network.
We believe we are positioned to become a leading distributor of film and
other video content rented or sold via the Internet. We rent movies over the
Internet by offering the customer the opportunity to view a movie for a limited
period of time. We also sell motion pictures and other video content in
download fashion to Internet users. We are currently in discussions with a
number of companies about obtaining the rights to motion pictures and other
video content for distribution via the Internet.
In 1999, we believe we became the first company to offer a full-length major
motion picture for download rental or sale over the Internet. During its one
month offering period, the motion picture "Pi" was rented from our website over
200 times. We have deployed a scalable eCommerce website for the download
rental or sale of video content.
Recent Developments
In the quarter ended March 31, 2000, we entered into a number of contracts
with content owners, including Miramax, that give us the right to distribute
certain movies and other video recordings using our service. In order to
encourage producers to distribute their content via the Internet using our
services, we have been willing to issue our common stock to them in exchange
for Internet distribution rights. Producers with whom we have contracted for
Internet distribution rights include:
<TABLE>
<S> <C> <C>
. Cinetel Films . Miramax . Troma
. Cutting Edge Entertainment . Promark Entertainment Group . Vanguard Entertainment
. Franchise Pictures . Pacific Trust/Concord . Vista Street Entertainment
. Metafilmics
</TABLE>
We are currently the executive producers of "Quantum Project," a movie
produced exclusively for Internet distribution. The cost to produce the movie
was approximately $2.9 million. We have also issued 143,714 shares of common
stock in connection with the production and promotion of "Quantum Project." In
addition, we have entered into agreements to produce three additional movies
for Internet distribution over the next 18 months, in order to demonstrate to
both content owners and consumers the viability of the Internet as a more
efficient and cost-effective global distribution channel. We project the costs
to produce these additional movies to be approximately $5.0 million combined.
Furthermore, we have agreed to issue up to 200,000 shares of common stock and
up to 100,000 options to purchase common stock in connection with the
production of these movies.
23
<PAGE>
Results of Operations
We are a development stage company and expect to emerge from the development
stage during fiscal year 2000. Through December 31, 1999, our revenue has been
minimal. We may experience significant fluctuations in operating results in
future periods due to a variety of factors, including:
. the availability of desired video content;
. the demand for downloadable video;
. introduction of new competitors;
. introduction of alternative methods for video distribution;
. introduction of new sites and services by our competitors;
. seasonal trends in Internet use and demand for video content;
. timing of capital expenditures and other costs related to the
development of our operations;
. technical difficulties or system downtime;
. the availability of broadband connectivity to the Internet;
. improvements in compression technologies;
. maintaining encryption security; and
. general economic conditions.
Revenue
To date, we have derived substantially all of our revenue from the rental
and sale of video downloads. We anticipate revenue to increase as additional
video content becomes available and the number of households with broadband
Internet connections increase. We currently do not collect advertising revenue
and do not permit sponsorship on our website. Video download revenue is
recognized upon the delivery to the customer of a unique license that is used
to provide access rights for the downloaded video. In a standard transaction,
the customer initially downloads the desired encrypted video file. Upon
successfully receiving the encrypted video file, the customer is then prompted
to complete a credit authorization form. Once the credit transaction is
validated, a unique license key is transferred to the customer's operating
system that allows the customer to view the encrypted file. In the case of a
rental transaction, the license will only permit the customer to view the
encrypted file for the stated rental period.
Cost of Revenue
Cost of revenue consists solely of licensing fees paid to video rights
holders. Typically, we enter into license agreements with video content
providers whereby we will pay a license fee to the copyright holder in an
amount ranging from 40% to 70% of the revenue we realize on a rental or sale.
Since inception, our average license fee cost has been approximately 50% of
revenue. We expect the average license fee cost to be in excess of 50% of
revenue in the future.
Sales and Marketing Expenses
Sales and marketing expenses consist primarily of compensation for our
marketing and business development personnel, advertising, trade show and other
promotional costs, design and creation expenses for marketing literature, and
any other costs incurred for the purpose of selling and marketing our service.
Total sales and marketing expenses since inception consist of the following:
. advertising and promotional expenses which account for approximately
half of our total sales and marketing expenses;
24
<PAGE>
. compensation for our marketing and business development personnel which
comprises a majority of the remainder; and
. travel expenses for marketing and business development personnel,
shipping expenses related to marketing, and other miscellaneous expenses
related to marketing and business development.
In April 1999, we granted options to purchase common stock to Artisan
Entertainment in consideration for obtaining movie rights to the movie "Pi" for
a one month period. The options are exercisable immediately at prices equal to
the fair value of the shares at the date of grant. The estimated fair value of
the options granted in connection with obtaining the movie rights was recorded
in sales and marketing expenses for the nine months ended September 30, 1999.
The fair value of these options at date of grant was $0.64 per share.
Due to our growth and our efforts to acquire additional content, we have
seen a steady increase in sales and marketing expenses over each period and
expect this to continue in future periods. Due to our recent activities in
obtaining content, we expect these costs to increase significantly in the
future. See "--Recent Developments."
Web Operations Expenses
Web operations expenses relate to salary and all other expenses associated
with the development and maintenance of our website. We have contracted with
Exodus Communications for data center operations and connectivity to the
Internet. Web operations expenses since inception are comprised of the
following:
. salaries of all personnel involved in the maintenance of our website
compose a majority of web operations expenses;
. expenses incurred from Exodus related to services for our data center
operations and broadband connectivity to the Internet, comprise
approximately half of the remaining web operations expenses; and
. all other miscellaneous expenses incurred that relate to the operations
of our service, such as the travel expenses of personnel to our various
data centers located throughout the United States for maintenance, as
well as the delivery of equipment from our main office to these centers.
Due to our continued growth through the addition of more data centers within
the United States, plans to expand internationally, and the increased traffic
to our website which necessitates greater bandwidth usage through our Exodus
relationship, we have experienced a steady increase in our web operations
expenses and expect this trend to continue in future periods.
General and Administrative Expenses
General and administrative expenses consist primarily of compensation for
personnel for general corporate functions, including finance, legal, human
resources and general management, fees for professional services, occupancy
expenses and depreciation expenses. Expenses associated with legal expenses and
in-house counsel comprise approximately half of general and administrative
expenses. A majority of our legal expenses have been incurred in connection
with filing our patents and aggressively defending our patents. Additional
legal expenses were incurred on entertainment matters and general corporate
matters. We expect to continue to defend our patents and incur significant
legal expenses, which may increase in future periods.
Interest Income and Interest Expense
Interest income primarily consists of earnings on our cash held in a money
market account. This amount did not fluctuate materially from inception through
September 30, 1999. Due to a significant investment during September 1999, as a
result of a private placement, interest income increased significantly in the
three months ended December 31, 1999 from prior periods. Furthermore, in the
quarter ended December 31, 1999, we entered into a capital lease agreement for
computer equipment which required us to place $2.8 million as collateral into
certificates of deposit with a bank to be evenly released quarterly over two
years. We collect additional interest on the certificates of deposit.
25
<PAGE>
Interest expense consists of expenses related to our financing obligations,
which includes a capital lease obligation at December 31, 1999. In May 1998, we
borrowed $200,000 under a line of credit agreement with a bank with interest
payable at the prime rate of interest, and also received proceeds from other
loans of $500,000 with interest payable at 12%. In May 1999, we borrowed
$250,000 under a short-term loan facility with a bank with interest payable at
the prime rate to repay a comparable portion of the $500,000 loans. All
remaining amounts borrowed under the line of credit and the other loans were
repaid with the proceeds from our private placement offering in September 1999.
We granted options and warrants to the lenders of the loans totaling
$500,000 and also granted options to an individual who guaranteed the repayment
of our credit facilities with banks. The $500,000 loans proceeds were allocated
to the loans, options and warrants based upon their estimated relative fair
values. The debt was accreted to its face amount over its term using the
interest method, with the accretion being recorded as interest expense. The
fair value attributable to the options granted in connection with guaranteeing
the credit facilities was recorded as deferred financing costs and amortized
over the term of the facilities as interest expense. The accretion related to
the $500,000 loans and the amortization of the deferred financing costs
comprise the majority of interest expense in the nine months ended September
30, 1999 and the year ended December 31, 1998. Interest expense for the three
months ended December 31, 1999 consists primarily of interest on the capital
lease obligation.
Stock Compensation Expense
In December 1999, we issued 1,014,000 stock options to employees at an
exercise price of $2.00 per share. As of December 31, 1999, employees had
vested in the right to acquire twenty-five percent of the total options
granted. We have recorded stock compensation expense in the amount of $974,356
in the three months period ended December 31, 1999. The expense represents the
difference between the estimated fair market value of the underlying common
stock and the options' exercise price to the employees. We expect to recognize
increasing stock compensation expenses in future periods.
Comparison of Period Operations
In the following discussion, we will compare the operating results of the
three months ended December 31, 1999 to the three months ended December 31,
1998. In 1999, we changed our fiscal year end to September 30. Therefore, we
will compare our nine-month fiscal year ended September 30, 1999 to the nine
months ended September 30, 1998. Further, we will also compare the results of
the fiscal year ended December 31, 1998 to the fiscal year ended December 31,
1997.
Revenue and Cost of Revenue. We are a development stage company. Our revenue
from inception through December 31, 1999, has been minimal. Furthermore, given
the direct variable nature of our cost of revenue previously explained, we have
not incurred any significant cost of revenue.
Sales and Marketing Expenses. Due to our growth and our efforts to acquire
additional content, we have seen a steady increase in sales and marketing
expenses in each period. For the three months ended December 31, 1999, sales
and marketing expenses increased by approximately $270,000, or 324%, compared
to the same period the previous year. This increase is primarily due to
increased advertising and business promotions and increased salaries. Expenses
associated with these activities increased by approximately $632,000, or 267%,
for the nine months ended September 30, 1999, compared to the same period the
previous year, which was primarily related to the fair value of options granted
for movie rights and salary expenses for increased personnel. The approximate
$180,000, or 129% increase, for the year ended December 31, 1998, compared to
the year ended December 31, 1997 was primarily related to increased salaries
and services rendered from outside advertising agencies.
Web Operations Expenses. Due to our growth, in both personnel and data
center use, and the increased traffic to our website which necessitates greater
bandwidth usage through our Exodus relationship previously explained, we saw an
increase in web operation expenses for the three months ended December 31, 1999
of approximately $291,000, or 174%, compared to the same period the previous
year. Web operations expenses
26
<PAGE>
increased by approximately $526,000, or 221%, for the nine months ended
September 30, 1999, compared to the same period the previous year, and
approximately $206,000, or 104%, for the year ended December 31, 1998, compared
to the year ended December 31, 1997, due to the same factors previously noted
for the increase in the three months ended December 31, 1999.
General and Administrative Expenses. Our growth has necessitated an increase
in our general and administrative expenses of approximately $803,000, or 303%,
for the three months ended December 31, 1999, compared to the same period the
previous year. The majority of this increase is due to increased legal expenses
associated with defending our patents, increased personnel costs necessary to
support our growth and increased depreciation expense as a result of increased
capital expenditures. General and administrative expenses increased by
approximately $868,000, or 153%, for the nine months ended September 30, 1999,
compared to the same period the previous year, and approximately $601,000, or
260%, for the year ended December 31, 1998, compared to the same period the
previous year due to the same factors previously noted for the increase in the
three months ended December 31, 1999.
Other Expense and Income. The increase of interest income net of interest
expense in the three months ended December 31, 1999 compared to the 1998 same
quarter is due to the effects of a private placement completed in September
1999. The $10.0 million proceeds were used to repay all outstanding loans and
resulted in higher cash balances being invested and earning interest in the
December 1999 quarter. The increase in interest expense net of interest income
in the nine months ended September 30, 1999 compared to the same period in the
previous year is primarily related to increased accretion related to our
$500,000 loans entered into in May 1998 and increased amortization of deferred
financing costs as discussed previously. The increase in interest expense net
of interest income in the year ended December 31, 1998 in comparison to the
year ended December 31, 1997 is due to our borrowings in May 1998 as discussed
previously.
Liquidity and Capital Resources
To date, our operations have principally been financed from private
placement investments and to a lesser extent bridge financing facilities. Our
most recent private placement was completed in September 1999, which raised
$10.0 million.
As of December 31, 1999, approximately $4.7 million in cash and cash
equivalents was available to fund operations and capital expansion.
Operating Activities
Net cash used in operating activities during the three months ended December
31, 1999 was approximately $1.1 million and consisted primarily of the
following:
. a net loss of approximately $2.8 million, adjusted for the effects of
the stock compensation expense of approximately $974,000 and
depreciation of approximately $262,000; and
. an increase in accrued liabilities of approximately $490,000 primarily
referred to late invoices received from our data center operator.
Net cash used in operating activities during the nine months ended September
30, 1999 was approximately $2.7 million and consisted primarily of our net loss
of approximately $3.4 million, adjusted for the effects of non-cash expenses of
approximately $722,000 for stock options granted to non-employees and accretion
of debt and amortization of deferred financing costs.
Investing Activities
Net cash used in investing activities during the three months ended December
31, 1999 and the nine months ended September 30, 1999 was approximately
$354,000 and $860,000, respectively, consisting of property and equipment
purchases. Our capital expenditures are expected to continue to increase in
future periods.
27
<PAGE>
Financing Activities
During the three months ended December 31, 1999, we entered into a capital
lease for approximately $2.8 million of computer equipment. The lease is
payable in 24 equal monthly principal installments of $111,191 plus interest of
7.5% and sales taxes. In conjunction with obtaining this lease, we were
required to place $2.8 million on deposit with a financial institution
determined by the lessor. An amount equivalent to three monthly installments is
released from this account every quarter to us.
Cash provided by financing activities during the nine months ended September
30, 1999 was $12.2 million and consisted of the following:
. proceeds from the sale of common stock and options of approximately
$12.9 million, offset by repayments of borrowings under line of credit
agreement of $200,000; and
. net repayments of loans of $500,000.
We expect that the proceeds from our initial public offering together with
cash on hand and held in escrow will allow us to continue to fund our growth
and operations, including capital needs. We also expect to continue to utilize
our common stock for the acquisition of content which reduces our need for cash
for these activities.
We currently anticipate that available funds as of December 31, 1999 will be
sufficient to meet our anticipated cash requirements for working capital and
capital expenditures through at least September 30, 2000. Should this offering
not close, we could alter our expenditures appropriately such that our current
available funds would be sufficient for us to continue as a going concern over
the next twelve months. However, we may need to raise additional funds sooner
if, for example, we pursue business or technology acquisitions or experience
operating losses that exceed our current expectations. If we raise additional
funds through the issuance of equity, equity related or debt securities, such
securities may have rights, preferences or privileges senior to those of the
rights of our common stock, and our stockholders may experience additional
dilution. We cannot be certain that such additional financing will be available
to us on favorable terms, or at all. If additional financing is not available
when required or is not available on acceptable terms, we may be unable to
develop or enhance our service. In addition, we may be unable to take advantage
of business opportunities or to respond to competitive pressures. Any of these
events could harm our business, financial condition or results of operations.
Year 2000 Disclosure
Many information technology products and systems were expected to experience
miscalculations, malfunctions or disruptions when attempting to process
information containing dates subsequent to December 31, 1999, if they were not
successfully remediated. These potential problems were collectively referred to
as the "Year 2000" problem.
We have not experienced any significant Year 2000 problems. Also, our
suppliers and customers have not experienced any significant Year 2000 problems
that have affected us.
Recent Accounting Pronouncements
In June 1998, the Financial Accounting Standards Board ("FASB") issued SFAS
No. 133, "Accounting for Derivative Instruments and Hedging Activities." SFAS
No. 133 requires that all derivatives be recognized at fair value in the
statement of financial position, and that corresponding gains or losses be
reported either in the statement of operations or as a component of
comprehensive income, depending upon the type of hedging relationship that
exists, and was initially effective for fiscal years beginning after June 15,
1999. In April 1999, the FASB delayed the effective date of SFAS No. 133 to
years beginning after June 15, 2000. SightSound.com does not currently hold
derivative instruments or engage in hedging activities and does not expect the
SFAS No. 133 to have an effect on its financial position or its results of
operations.
28
<PAGE>
Qualitative and Quantitative Market Risks
We do not believe it has significant exposure to market risk. Our primary
exposure to market risks arises from interest rate fluctuations, primarily
related to our short-term investments and its capital lease obligation at
December 31, 1999. Our short-term investments are classified as cash
equivalents for financial reporting purposes and we have minimal risk related
to interest rate declines due to the short maturity of these investments. An
increase in the present value of its capital lease obligation due to a decline
in interest rates of 10% would not be expected to be material. We do not have
derivative financial instruments.
29
<PAGE>
BUSINESS
Overview
We have pioneered a revolutionary approach for the worldwide commercial
distribution of movies. Our service provides for the digital download of
feature films over broadband Internet connections. We enable content owners to
distribute their movies and other video content over the Internet without the
need for physical distribution. In turn, we enable consumers to download these
movies for rental or purchase over the Internet 24 hours a day, seven days a
week, for uninterrupted full-screen viewing.
We believe we were the first company to commercially distribute a feature
film via the Internet. We currently rent and sell movies for download from our
own website, www.sightsound.com, allowing consumers to browse our "virtual
video store". We also intend to deliver downloadable movies from:
. official movie websites, for consumers who know what movie they want to
watch; and
. banner ads triggering direct downloads, for impulse buyers from a
targeted audience.
We currently have the hardware capacity, based on even demand, to download
approximately 380,000 feature length movies per day, with the ability to
rapidly scale that amount as demand dictates. Through our service, a broadband
user who can sustain a one megabit per second Internet connection can download
a 90 minute feature film in less than 30 minutes. We believe this download time
will decrease with continuing improvements in technology. All movies offered
through our service are rights managed, allowing us to:
. inhibit unauthorized duplication and piracy;
. allow the customer to rent a movie by limiting the number of days it can
be viewed;
. permit a customer to buy a movie by granting unlimited viewing rights;
and
. designate the countries in which a movie can be downloaded.
We own three patents and have several pending patent applications covering
the method and system for delivering movies and other digital video and digital
audio recordings for commercial purposes via telecommunications lines,
including the Internet. In addition, we own a fourth patent and several pending
patent applications regarding related technology. We currently use Microsoft
Windows Media Technologies and other commercially available software to deliver
movies. Movies downloaded through our service are viewed using Microsoft
Windows Media Player, which is currently available without charge from
Microsoft. Forrester Research estimates that there are already over 40 million
computer users today who have the free Windows Media Player software and can
watch movies in the Windows Media Technologies format.
Industry Overview
The Movie Industry
The viewing of motion pictures remains one of the most popular forms of
entertainment in the United States and is becoming increasingly popular in
other parts of the world. According to the Motion Picture Association of
America, or MPAA, total revenue in the United States for major motion picture
ticket sales and various in-home viewing options, which include video cassette
sales and rental, pay-per-view, premium subscription TV, pay-per-view, and
broadcast and basic cable TV, exceeded $30 billion in 1999.
The typical distribution lifecycle for a feature film is: theatrical
release, video rental and sale, pay-per-view, premium subscription TV, and,
finally, free TV.
. Theatrical Releases. A typical U.S. feature film is first released in
domestic theaters. The number of theaters in which a feature film is
distributed and the duration of theatrical availability vary by film.
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<PAGE>
Large-budget productions may be distributed to thousands of theaters,
whereas small-budget productions may be rolled out to a limited number
of theaters in selected markets. The success of each film in drawing
paying customers to the box office determines the duration of theatrical
release and the extent and duration of international theatrical release.
Top-grossing films may be released in many countries around the world
and stay in theaters for as long as one year, although the duration of a
typical theatrical release is much shorter. According to the MPAA, in
1999, 461 feature films were released in theaters in the United States
and total revenue from U.S. ticket sales was approximately $7.4 billion.
. Video Rental and Sale. According to Adams Media Research, video rental
and sales have become the largest revenue stream for U.S. movie
producers, representing 52.5% of studios' domestic film revenue in 1998.
According to Paul Kagan Associates, the U.S. videocassette and DVD
rental and sales industry grew from $15.7 billion in 1997 to $17.1
billion in 1998, and is expected to reach $21.5 billion in 2002. As part
of a May 1998 survey, the Video Software Dealers Association and
Yankelovich Partners determined that each week 25% of all U.S. VCR
households make a trip to a video store, and each month 60% of all U.S.
VCR households rent at least one videocassette.
. Pay-per-view. Many cable and satellite television operators offer their
subscribers feature films on a pay-per-view basis allowing their
customers to view an offered film at a scheduled time for a set charge
per viewing. According to Paul Kagan Associates, 1998 pay-per-view film
revenue increased 36% to $732 million, as cable operators increased the
frequency of show times, making pay-per-view more competitive with
rentals in terms of title availability. Also, 1998 marked the first year
in which pay-per-view revenue from films represented more than 50% of
total pay-per-view revenue, which had previously been dominated by
boxing, concerts, and other special events.
. Premium Subscription TV. Premium cable channels such as HBO, Showtime
and Cinemax offer feature films as well as other programming, such as
sporting events and original programming, on a subscription basis.
According to Adams Media Research, studio revenue from premium
subscription TV was approximately $1.6 billion in 1998.
. Broadcast and Basic Cable TV. Many feature films are eventually
distributed via network broadcast, basic cable and TV syndication.
According to Adams Media Research, studio revenue from network
broadcast, basic cable and TV syndication totaled approximately $2.0
billion in 1998.
Development of the Internet and Broadband Industries
The Internet allows people to communicate, share information and conduct
business on a global basis. IDC estimates that the number of web users
worldwide will grow from approximately 144 million in 1998 to approximately 602
million by the end of 2003. During the same period, IDC estimates that the
number of web users worldwide who make purchases over the Internet will grow
from approximately 33 million to more than 229 million, or 47% of all Internet
users.
As the amount of information being transferred by businesses and consumers
over the Internet increases, the demand for faster connections to the Internet
continues to increase as well. Connections to the Internet at minimum speeds of
128 kilobits per second are referred to as "broadband." Examples of broadband
connections include T1, cable, satellite and DSL. According to Forrester
Research, it is expected that there will be approximately 5.7 million
subscribers for broadband Internet connectivity by the end of this year,
growing to 27.4 million by 2003 and 37.5 million by 2004.
Streaming versus Downloading
One of the reasons for the increasing need for broadband Internet
connectivity is the increasing demand for the transfer of large amounts of
data, such as video and audio files, via the Internet. Transferring, or
downloading, video files via the Internet can be time consuming, depending on
video compression technology
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and the availability of broadband access. For example, if not compressed, a 90
minute feature film can occupy more than 100 gigabytes of storage. Software has
been introduced which permits "streaming," or the ability to view a video file
as it is downloaded into a computer's temporary buffer memory without having to
wait for the entire file to be transferred. Although streaming is a form of
downloading, the term "downloading" now commonly refers to the specific process
of transferring a computer file which is saved to storage memory. The file can
then be viewed from storage memory without the computer being connected to the
Internet.
The greater penetration of broadband Internet connectivity and the
introduction of new video compression technology have made it more practical to
download video content. We use Windows Media Technologies, which can compress a
100 gigabyte video file to approximately 220 megabytes, or approximately
1/450th of its original size. Although this process causes some degradation of
the picture quality, we believe that the resulting viewing experience is near-
VHS quality. We believe that further technological advances in broadband
connectivity and video compression will result in the video quality offered by
our service exceeding that of VHS.
Our Opportunity
We believe that we have a significant business opportunity based on our
ability to capitalize on the following:
. Disadvantages to Content Owners of the Current Distribution System. The
process of physically producing video tapes coupled with reliance on
video stores for distribution restricts the ability of content owners to
distribute their movies efficiently. For example, physical distribution
requires content owners and video store owners to make inventory
decisions such as how many copies of a video tape should be manufactured
or purchased. There is also competition among content owners for limited
shelf space in video stores.
. Disadvantages to Consumers of the Current Distribution System. The
current distribution channel for the rental and sale of videos imposes
substantial limitations on the consumer. "Brick and mortar" video stores
carry a limited number of titles and a limited number of copies of each
title. Therefore, customers may not be able to rent or purchase a
desired title, especially if it is a new release. Video stores also have
limited locations and limited hours of operation. In addition, consumers
typically have to leave their homes to rent and return a movie. Finally,
even Internet based outlets, such as Amazon.com, rely on physical
inventory and delivery and, therefore, may take days to deliver a movie
to the consumer.
. Limitations of Streaming Video. We believe that streaming is inferior to
downloading as a method for distributing movies. If a high speed
connection is not sustained throughout the streaming of a movie, a
consumer is likely to experience freeze frames or halting picture
quality. On the other hand, a consumer who has downloaded a movie onto a
hard drive does not have to rely on an Internet connection to watch the
movie and, therefore, will not have the same problems as those
experienced with streaming. Also, a consumer with a downloaded movie has
greater control of that file, can choose whether to watch it in a single
viewing and can pause, rewind and fast forward the movie. Because of
this, we believe movies rented or sold using streaming video cannot
provide the quality and functionality customers receive with a movie
which has been downloaded.
. No Current Online Alternative to Piracy. Currently, illegally copied, or
pirated copies of popular movies are available via the Internet,
sometimes prior to or shortly after their theatrical release. People who
want to view these movies via the Internet download illegal copies, in
part, because studios have not yet embraced the Internet as a
distribution channel for feature films.
. Convergence of Technological Developments. The acceptance of the
Internet as a marketplace, the increasing penetration of broadband
Internet connections, improvements in video compression technology and
the ongoing development of television-based Internet access are creating
an excellent distribution channel for video content.
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The SightSound.com Solution
We believe the Internet will be the preferred medium for movie distribution.
We have pioneered the download sale of movies via the Internet, and we are
positioned to be the leader in this new and exciting market. We believe we were
the first company to commercially distribute a full-length motion picture via
the Internet. The movie was the independent film "Pi" which won the Director's
Award at the 1998 Sundance Film Festival. Furthermore, our method and system
for the commercial delivery of movies and other video content is covered by our
patents.
We currently have the hardware capacity, based on even demand, to download
approximately 380,000 movies per day, with the ability to rapidly scale that
amount as demand dictates. We offer benefits to both content owners and
consumers, including:
Benefits to Content Owners
Powerful Distribution Channel. Our method and system of distributing movies
via Internet download provides a powerful distribution solution for "top tier"
studios, and other owners of video content. The commercial download of movies
will enable content owners to achieve global distribution more quickly and
inexpensively than through physical distribution. We provide content owners a
viable and as yet untapped electronic distribution network and enable them to
target consumers globally in a variety of ways. Our rights management
capabilities allow us to control movie distribution on a country-by-country
basis. It is no more difficult for us to distribute a movie in one country than
it is for us to distribute that movie in every country.
Technology, Infrastructure and Know-How. We offer a complete online
distribution service to content owners. We can efficiently prepare a movie for
secure and efficient distribution over the Internet by encoding, compressing
and encrypting the video file. In addition, our technology allows us to control
into which countries the movie may be distributed. Further, we capitalize on
the technological advantages of the Internet by creating Internet previews and
distributing downloadable movie "trailers." We believe that our method and
system of downloading movies over the Internet for rental or sale is superior
to existing distribution alternatives, and is covered by our patents, trade
secrets and know-how.
Maximizing Revenue by Combating Piracy. We believe our service provides
content owners a way to stem the tide of movies pirated via the Internet while
at the same time realizing a revenue opportunity. Currently, illegally
downloaded movies vary in quality and typically have longer download times than
movies downloaded through our service. By making a wide variety of movies
legally and easily available for download to consumers, we believe that
consumers will choose our service over those featuring illegally obtained and
distributed content. Furthermore, through our use of rights management, content
owners can distribute their movies in any country in which they own the
distribution rights.
Lower Distribution Costs. We believe that our ability to take a single copy
of a feature film and make it available for worldwide Internet distribution in
one day allows us to offer content owners significantly lower distribution
costs than through traditional distribution channels. We believe the
efficiency, capacity and other advantages we can offer to content owners will
significantly decrease the need for, and the costs of, physical distribution of
movies.
Benefits to Consumers
Improved Availability. Customers have access to movies delivered through our
service 24 hours a day, seven days a week, with the assurance that no offered
title will ever be out-of-stock.
Convenience. Customers do not have to leave their homes to rent a movie or
to return it. There are no rewinding or late fees. Customers currently can view
a 10 to 20 second Internet preview, can read a description of the movie and can
download and watch the movie "trailer" before deciding whether to rent or
purchase a movie.
Increased Selection. Because we are not constrained by the limitations of
shelf space or a fixed broadcast schedule, we have the capacity to offer a
number of titles that greatly exceeds what is currently offered through "brick
and mortar" video stores, pay-per-view and premium subscription TV combined.
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Attractive Advantage over Piracy. We believe that pirated content is
characterized by unreliable picture quality, long waits to begin the download
of the most desirable titles and long download times. We believe we offer
consumers legally available content at all times with faster downloads and a
consistent standard of quality.
The SightSound.com Business Strategy
Our goal is to become the leading distributor of movies and video content
via the Internet. In furtherance of that goal, we intend to:
Create Strategic Relationships with Owners of Movie Content. We are
continuing to create relationships with movie content owners in order to offer
movies that are the most desirable to consumers. For example, we have entered
into an agreement with Miramax to facilitate the download of certain of their
movie titles from websites controlled by Miramax and its affiliates. Also, we
have the exclusive worldwide Internet distribution rights to certain movies in
the library of Franchise Pictures. We have films from seven "independent"
studios that are members of the American Film Marketing Association and we have
licensed movies from other independent filmmakers as well. We believe the
opportunity for additional revenues and cost-effective distribution will be a
compelling reason for content owners to use our service to distribute their
movies via the Internet. Because the service we offer these content owners is
highly scalable, we can expand to meet their needs while maintaining speed and
reliability. In addition, we offer content owners different options in
targeting consumers. These options include offering movies through our "virtual
video store" at www.sightsound.com, through an official movie website or
through banner ads triggering direct downloads, appearing where content owners
believe the desired consumers will see them.
Promote Internet Distribution of Movies and Enhance SightSound Brand
Awareness. We intend to make the SightSound brand synonymous with quality
distribution of movies over the Internet. When we support the distribution of a
movie through the official movie website or a banner ad download, we intend
that the customer will see our logo or another identifying mark of SightSound.
We believe that this will enhance consumer and content owner awareness that it
is our service supporting the download. In addition, by selectively
participating in the development of original content for Internet distribution,
we expect to be able to demonstrate to both content owners and consumers the
viability of the Internet as a more efficient and cost-effective global
distribution channel for feature films.
Continue to Capitalize on Technological Advances. We believe that continued
advances in compression and other technology will result in faster download
times and higher quality video. We are committed to providing a high-quality
consumer experience and we will continue to use the best technology available,
whether it is developed internally or by a third party. In considering the
adoption of new technology, we evaluate its functionality, reliability and,
where applicable, its availability to consumers.
Capitalize on Global Distribution. Our rights management capabilities allow
content owners to use our service in any country in which they have the right
to distribute a particular video recording. We intend to leverage this
capability in order to enable content owners to meet existing demand and create
new demand for their movies worldwide. We believe that this distinguishes us
from existing physical distribution channels.
Obtain Distribution Rights for Other Desirable Video Content. In addition to
creating relationships with movie content owners, we are creating relationships
with owners of other desirable video content, such as sporting events and
educational programming. For these content owners, Internet distribution may be
particularly attractive because they may not be able to cost-effectively take
advantage of existing distribution channels. We will provide these content
owners with an opportunity for additional revenue through the use of Internet
distribution. For example, we licensed the Tyson/Norris boxing match from
Showtime for distribution through our website, www.sightsound.com.
Defend Our Intellectual Property. Our method and system for distributing
digital video recordings (as well as digital audio recordings) for download
sale via telecommunications lines such as the Internet are covered by our
patents and other intellectual property. In addition, we continue to create and
protect intellectual property that improves our service. We believe this gives
us a significant advantage in establishing relationships with content providers
who wish to capitalize on the advantages of electronic distribution. As a
result, we intend to take the necessary steps to ensure that our intellectual
property rights are preserved.
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Our Operations
[GRAPHIC DEPICTING THE PROCESS FROM DIGITALIZATION TO DISPLAY IN CONSUMER'S
HOME]
We enable the download rental and sale of movies via the Internet using the
following process:
Licensing
A content owner must first execute a license agreement granting us the right
to distribute the content via the Internet, which may place limits on the
countries in which the content may be distributed. We also seek the right to
use the movie "trailer" as well as images from the movie in order to promote
the movie on the Internet. As a part of the license agreement, we typically
agree to pay a percentage of the revenues we receive from the rental and sale
of the titles. Typically, license fees range from 40% to 70% of the rental or
sale price. The percentage depends on the historical commercial appeal of the
movie, whether we have exclusive or nonexclusive rights, and the number of
titles involved. After the agreement has been reached, the content owner sends
us a single copy of each movie, typically in beta format.
Website Administration System
Each movie we receive is assigned a tracking number on our Website
Administration System, an internally developed website and software system.
This number allows us to track the progress of a video recording as it is
prepared for distribution on the Internet. As each department completes its
specified role in the preparation of the movie, that information is recorded in
the Website Administration System. In addition, information about the movie,
which allows our users to search our library by the title, actors and producers
is entered into the Website Administration System.
Encoding and Compression
While information is being entered into our Website Administration System,
the movie, and the "trailer," if any, are encoded using Microsoft Windows Media
Encoder. The process of encoding involves converting the movie into ASF format
(a computerized media file) and compressing it to facilitate download via the
Internet. We currently have the in-house capacity to encode 40 to 50 full-
length (90 minute) movies per encoding employee per eight-hour shift. This
capacity can be scaled to meet increased demand. Because we receive content in
various conditions (e.g., old movies which have poor quality negatives), our
encoding staff adjusts numerous settings to maximize the image quality of the
resulting video output.
Encryption and Digital Rights Management
After encoding a movie, we encrypt the movie to inhibit it from being played
without a license. We have developed proprietary technology to leverage the
capabilities of Windows Media Rights Manager to meet the unique requirements of
the motion picture industry. When a consumer attempts to rent or purchase a
movie using our service, we automatically perform an extensive "reverse DNS
lookup" (a proprietary method of identifying the country of origin of the
consumer) to substantiate that the consumer is in a country in which we are
permitted to distribute the movie. Additionally, as rentals or sales occur, our
Website Administration System is updated by our commerce servers, which record
each transaction.
Consumers can copy our encrypted movie and give it to someone else. However,
an individual consumer's license is not transferable and, therefore, each
consumer must acquire a license that contains the key to unlock the movie. When
a valid license is not detected on the consumer's computer, the consumer's web
browser opens our transaction page where the consumer is prompted for payment
information. Once the consumer's credit card has been validated and charged,
our commerce servers issue the license and the consumer can play the encrypted
movie. From this point on, the consumer can play the encrypted movie according
to the rights
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that are included in the license. Our digital rights management system allows
us to sell a movie or rent it for a limited period of time.
Web Based Promotion and Merchandising
When we obtain the rights to distribute content via the Internet, we also
typically obtain the right to use images from the content and the "box art"
(the text and images that appear on a movie's video box cover). When preparing
a movie for distribution through our service, we capitalize on these rights by
creating various promotions to be used solely in connection with Internet
distribution. For example, we have a standardized process to isolate audio and
images from content to use for our promotional efforts. Our multimedia
designers create Internet previews for all content sold through our service and
have the ability to create a "trailer" if none is available. A preview lasts
about 10 to 20 seconds, and is made up of images and audio from the content
that our multimedia designers select. The Internet preview begins to play
automatically when a customer arrives at the merchandising page of our website.
Our multimedia designers will also select images from the content and create
banner ads for use on our website and on other websites.
Rental and Sale of Video Content
Typically, we rent movies for either one day or five days. If the rental is
a one day rental, the price ranges from $2.95 to $3.95. For five day rentals,
the price ranges from $2.95 to $5.95. For a sale, the price range is typically
from $9.95 to $19.95. Most often, we determine the price of a rental or sale.
However, in some cases, the content owner may have a contractual obligation to
offer a movie at a particular price and, in that event, we will price the movie
accordingly.
We have developed proprietary software which leverages off-the-shelf
transaction processing software to process credit card transactions from movie
rentals and sales. Additionally, we plan to enhance this system with other
forms of personal payment. In the future, we intend to offer our customers
individual prepaid accounts and accept checks as well as credit cards. We are
also evaluating third-party micropayment services.
Network Operations
Our network operations are divided as follows:
. commerce servers, which process credit card transactions;
. media servers, which download media files (e.g., movies and other video
content); and
. web servers, which manage and promote the rental and sale of movies and
other video content from our website, www.sightsound.com.
This architecture allows us to scale any sector of our network separately as
demand in a given sector dictates and optimizes the performance of our servers
for their specific tasks.
We selected Exodus Communications for Internet data center services to
provide the physical environment necessary to operate our servers and to
provide Internet connectivity. Our servers are currently located in Exodus data
centers in Boston, Chicago, Jersey City, Los Angeles, Santa Clara, Seattle and
Herndon, Virginia to avoid downtime or delays due to geographic congestion on
the Internet or localized catastrophic failures across the Internet. This
hardware supports our website and supports eCommerce functions for other
websites which use our download services as well. These Internet data centers
are custom designed with raised floors, HVAC temperature control systems with
separate cooling zones, and seismically braced racks. They offer the widest
range of physical security features, including state-of-the-art smoke detection
and fire suppression systems, motion sensors, and secured access 24 hours a
day, 365 days a year, as well as video camera surveillance and security breach
alarms.
The Exodus network currently has a multi-gigabit serving capacity to the
Internet with redundant fiber optic paths from different vendors, so there is
no single point of failure in the Exodus backbone. Further protecting mission
critical eCommerce operations, our Internet serving hardware is comprised of
multiple
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commerce, media and web servers running in parallel and redundant within each
data center and redundant across each data center location. Currently, four of
seven data center locations are fully redundant and we expect the remaining
three locations to also be fully redundant by first quarter 2001.
Our system is backed up daily to minimize the risk associated with damage
from fires, power loss, telecommunication failures, break-ins, computer viruses
and other events beyond our control. Furthermore, our highly scalable and
dynamically changeable system is continuously and automatically monitored for
reliability and availability.
Sales and Marketing
Our sales and marketing efforts are aimed at content owners and consumers.
We engage in activities designed to raise awareness of the Internet as a
distribution channel for video content. Our primary efforts in this regard
include:
Industry Event Sponsorship and Participation. We believe that one of the
most effective ways to develop relationships with content owners is to appear
prominently in high-visibility film industry events and conferences. For
example, we were the official online sponsor of the American Film Market, the
annual conference of the trade association representing the independent film
and television industries. In addition, members of our executive management
regularly participate as guest speakers and panel participants at film
festivals and conferences, such as Yahoo! Online Film Festival, Digital
Hollywood, the National Association of Broadcasters and the conference of the
National Academy of Television Arts and Sciences.
Participation in Original Content Development. By selectively participating
in the development of original content for Internet distribution, we expect to
be able to demonstrate to both content owners and consumers the viability of
the Internet as a more efficient and cost-effective global distribution
channel. We are the executive producers of "Quantum Project," a movie produced
exclusively for Internet distribution, which is scheduled to be released on May
5, 2000. In addition, we have entered into agreements to produce three
additional movies for Internet distribution over the next 18 months, one with
the producer of "Dumb and Dumber" and "Beverly Hills Ninja," the second with
the producers of "American Pie" and the third with the producer of "Baby
Geniuses."
Value Creation Pool. In order to encourage "top tier" studios to distribute
their content via the Internet through our service, we have been willing to
issue our common stock to them in exchange for Internet distribution rights.
Specifically, we have designed a "Value Creation Pool" consisting of 10,000,000
shares of our common stock to be issued to participating "top tier" studios who
choose to use our service and 6,500,000 shares to be issued at our discretion,
including as signing bonuses for content owners. On March 31, 2000, Miramax
became the first "top tier" studio to join the Value Creation Pool. Miramax has
agreed to license a minimum of 12 titles to us. Currently, no other "top tier"
studio has joined the Value Creation Pool. The Value Creation Pool is intended
to reward participants for licensing the best motion pictures to us as early as
possible. Shares are allocated from the Value Creation Pool based on factors
including proximity of Internet release to theatrical release, revenue earned
in the theaters and relative revenues achieved through distribution from our
service. We intend to continue the Value Creation Pool until all 10,000,000
shares designated for "top tier" studios have been issued.
Leverage Promotions to Consumers by Content Owners. The theatrical release
of movies is often accompanied by well-orchestrated and sophisticated
promotional campaigns, including print, radio and television advertisements and
movie "trailers." We believe that this promotional activity creates demand that
will carry over to the Internet distribution of a particular film. In addition,
we are able to re-use many of the elements of these promotional campaigns in
promoting a movie on the Internet. For example, the movie "trailer" is
available for download using our service.
Industry Relationships
We have entered into a number of contractual relationships with content
owners, including Miramax, that give us the right to distribute certain movies
and other video recordings using our service. To date, our
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relationships have generally been with "independent" producers. Content owners
from whom we will seek movies and other content can generally be divided as
follows:
"Top Tier" Studios. According to the Motion Picture Association of America,
of the 461 feature films theatrically released in the United States in 1999,
over 200 were distributed by one of the "top tier" studios. These studios also
have vast libraries of movies that could be distributed using our service.
Miramax, one of the "top tier" studios, has agreed to license a minimum of 12
titles to us.
Independent Producers. Independent producers have granted us Internet
distribution rights to selected movies. Our arrangements with these producers
range from giving them a percentage of the rental or sale price of the movie we
distribute for them to the issuance of our common stock as signing bonuses.
Independent producers with whom we have contracted for Internet distribution
rights include:
. Franchise Pictures--We have entered into a five-year exclusive license
with Franchise Pictures that permits us to distribute all movies in the
Franchise Pictures library as of February 25, 2000, to which Franchise
Pictures owns the Internet distribution rights. We have already received
35 movies for Internet distribution from Franchise Pictures and
additional titles are expected.
. Cutting Edge Entertainment--We have licensed three films from Cutting
Edge Entertainment. The movies are "Fait Accompli" starring Rosanna
Arquette and Michael Madson, "For Which He Stands" starring William
Forsythe and Robert Davi, and "Final Decisions."
. Vanguard Entertainment--We have licensed over 40 movies from Vanguard
Entertainment.
. Troma--We have licensed 25 movies from Troma, including Matt Stone and
Trey Parker's "Cannibal the Musical," "The Chosen One" starring Carmen
Elektra, and cult movies such as "The Toxic Avenger."
We have also licensed movies from:
. Ann Gillis . Image Networks, Inc.
Productions . New Zealand . Promark
FilmCommission Entertainment Group
. Kemp Entertainment,
. Basic Pictures Inc. . Saturn Productions,
. No Picnic Inc.
. Cinetel Films . Majestic Productions
Entertainment . The Movie Sector,
. Greenlight Pictures . Paydirt LLC
Productions
. New City Releasing
. Homegrown Pictures
. Pacific Trust . Vista Street
Entertainment
Other Producers of Video Content. Other producers of video content from whom
we have licensed video content include:
. Drill 4 Skill . Guillermo Heredia
. Robert Steinfeld . Teton Gravity
. Dr. Stefano . Matchstick Productions Research
Dell'orto Productions . Showtime . Wellspring
Films
Examples of content we have licensed from these producers include the
Tyson/Norris boxing match from Showtime, the documentary "Eternal Memory:
Voices from the Great Terror" narrated by Meryl Streep and produced by
Wellspring Films, the extreme ski videos of Matchstick Productions, and sports
training videos such as "Nolan Ryan's Fast Pitch" from Robert Steinfeld
Productions.
Producers of Original Internet Programming. We have, and plan to,
selectively participate in the production of original internet programming. We
are the executive producers of "Quantum Project," a film by Metafilmics, the
producers of "What Dreams May Come." "Quantum Project" is directed by Eugenio
Zanetti, who won an academy award for art direction on the film "Restoration."
"Quantum Project" stars Stephen Dorff, Fay Masterson and John Cleese.
We have also reached agreements to participate in the making of three
additional original films with:
. Brad Krevoy and the Motion Picture Corporation of America, the producer
of "Dumb and Dumber" and "Beverly Hills Ninja;"
. Zide/Perry Productions, the producers of "American Pie;" and
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. Steven Paul of Crystal Sky, the producer of "Baby Geniuses."
Competition
The market for the rental or sale of movies and other video content is very
competitive and rapidly changing. We face competition from a variety of other
distribution sources, including:
. movie theaters;
. video stores, particularly chains, such as Blockbuster and Hollywood
Video;
. content owners, such as "top tier" studios and "independent" producers;
. other electronic distribution channels, such as pay-per-view, premium
subscription TV and broadcast and basic cable TV;
. distributors of illegally obtained content;
. providers of free online video content, such as Atom Films, IFilm and
Yahoo! Broadcast Services; and
. physical video delivery services, such as Kozmo.com, UrbanFetch.com and
NetFlix.com.
In addition, our existing competitors may collaborate to compete in the
market for the commercial distribution of video content via the Internet. For
example, Warner Bros., Universal/MCA and Paramount Studios have announced the
creation of FlixNetwork.com, a website where they claim a consumer will be able
to obtain movies over the Internet for full-screen viewing from a library of
20,000 films. Earlier this year, Blockbuster and MGM announced that they would
collaborate to offer MGM titles on a non-exclusive basis over a service to be
created by Blockbuster in which consumers would be able to view movies either
through download or streaming for a fee. Further, there are services such as
DIVA Systems, Intertainer and SpectraVision that offer pay-per-view movies on
demand over existing cable and other systems.
Many of our current and potential competitors have substantial advantages
over us, including:
. longer operating histories;
. significantly greater financial, technical and marketing resources;
. greater brand name recognition;
. larger existing customer bases; and
. more popular content.
These competitors may be able to respond more quickly to new or emerging
technologies and changes in customer requirements and devote greater resources
to the development, promotion and sale of their services than we can. Also, the
services offered by our existing and potential competitors may be superior to
ours. Further, while we believe that our patents protect our method and system
for the download of video over the Internet and while we will aggressively
protect our patents, certain competitors may be more able to engage in costly
and protracted litigation. As a result, we cannot be certain that our patents
will protect us from competitors using our method and system without a license.
Additionally, existing and future competitors could develop other methods to
distribute video content over the Internet that may be superior to ours or that
might be accepted by content owners and consumers because of the competitors'
ability to market their methods more effectively.
Intellectual Property
Patents
Our success and ability to compete are substantially dependent on our
patents. SightSound.com is currently the owner by assignment of four patents:
U.S. Patent No. 5,191,573 which issued on March 2, 1993, and is titled Method
for Transmitting a Desired Digital Video or Audio Signal; U.S. Patent No.
5,675,734 which issued on October 7, 1997, and is titled System for
Transmitting Desired Digital Video or Audio Signals; U.S. Patent No. 5,966,440
which issued on October 12, 1999, and is titled System and Method of
Transmitting Desired Digital Video or Digital Audio Signals; and U.S. Patent
No. 6,014,491 which issued on January 12, 2000, and is entitled Method and
System for Manipulation of Audio or Video Signals.
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The U.S. Patent No. 5,191,573 relates to a method for electronic sales and
distribution of digital audio or video signals which may be purchased via a
telecommunications network, such as, but not limited to, the Internet. Features
of the invention include digital storage devices of various styles, a
telecommunications network and the ability to manipulate digital audio or video
signals to effectuate the transfer of the digital signal in exchange for
electronic payment. As stated in the specification of the U.S. Patent No.
5,191,573, the source of the audio or video is the copyright holder or other
authorized entity and their agents, which controls the digital storage device
on which the digital audio or video is stored. A purchaser, located at a
position remote from the source, controls his or her own digital memory
equipment. The system of the U.S. Patent No. 5,191,573 allows the purchaser to
connect his or her digital memory device, via the telecommunications network,
to the digital storage device of the source in a manner that permits the
desired digital audio or video signal to pass there between. Money is
transferred electronically to the entity in control of the source as payment
for the purchaser to play the copyright material.
Where the source has a number of items stored in its memory, the purchaser's
system may have the ability to search the source for the desired audio or video
signal and select the desired signal for transmission to the purchaser's
memory. In one embodiment, payment is effectuated by transferring credit card
information. The specification and drawings of the U.S. Patent No. 5,191,573
elaborates on many of these features, by describing and depicting such elements
as control panels, control integrated circuit, a sales random access memory
chip, a hard disk, a video display unit, among other items, and by further
describing how the various elements cooperate to perform as desired
transactions.
Although the specification of the U.S. Patent No. 5,675,734 and U.S. Patent
No. 5,966,440 is similar to that of the U.S. Patent No. 5,191,573, each of the
patents have claims (that part of the patents which provides the legal scope of
protection) of different breadth and scope. For example, the U.S. Patent No.
5,191,573 has six claims, three claims directed to the transfer of digital
audio signals. All of the claims are method claims. The U.S. Patent No.
5,675,734 has thirty-four claims, including both method and system claims.
These claims define various features of the investing directed to transferring
video or audio signals. For example, the U.S. Patent No. 5,675,734 has claims
directed to coding the digital signal to prevent unauthorized reproduction.
Another example includes claims which provide for a playback random access chip
for temporarily storing signals to play the desired digital video or audio
signals stored on the purchaser's hard disk. U.S. Patent No. 5,966,440 adds
further claims addressing transfer of digital audio and digital video and
various playback options for the digital signal.
U.S. Patent No. 6,014,491 discloses a method and system for compressing
and/or converting digital video signals into a file format that significantly
reduces the size of the resulting coded video file, thereby reducing storage
space demands and permitting much faster transmission of the digital video
signal through a telecommunications network.
The above description is for informational purposes only and is not intended
to limit or otherwise affect the scope of claims in any one or more of the
aforementioned patents. The full scope of the inventions described in these
patents is defined by the claims and their equivalents. Nothing herein shall be
used for claims construction, infringement determination or for any another
purpose, except to apprise the reader of the general nature of the patents
described.
Other Intellectual Property
In addition to our patents, we rely on other internally developed
technology. We pursue the registration of our trademarks in the United States.
While we rely on patent, trademark, service mark, copyright and trade secrets
laws and restrictions in the United States and other jurisdictions, together
with contractual restrictions, to protect our proprietary rights, such patent,
trademark, service mark, copyright and trade secret protection may not be
available in every jurisdiction in which we distribute or make available our
audio or video content and technology through the Internet. Although we believe
the use of material on our websites is protected under current provisions of
copyright law, legal rights to certain aspects of Internet content and commerce
are not clearly settled. We may not be able to maintain rights to information,
including movies or sound recordings, and artist, entertainment and other
information. The failure to be able to offer such information would harm our
business.
40
<PAGE>
While we have generally entered into confidentiality and non-competition
agreements with our employees, and where appropriate, consultants and corporate
partners in order to limit access to and distribution and disclosure of our
proprietary information, we cannot guarantee that the steps we have taken will
adequately protect or prevent misappropriation of our proprietary rights,
particularly in foreign countries where the laws or law enforcement practices
may not protect our propriety rights as fully as in the United States. The
proprietary software that we use to run our business is protected generally by
restricting third party access, entering into confidentiality agreements with
third parties who do not have access and relying on copyright law. Despite our
efforts, unauthorized parties may attempt to copy or otherwise obtain and use
our products and technology. Policing unauthorized use is difficult.
There are no pending lawsuits against us regarding infringement of any
existing patents or other intellectual property rights or any material notices
that we are infringing the intellectual property rights of others. However,
there can be no assurance that such infringement claims will not be asserted by
third parties in the future. Any such claims could result in litigation
subjecting us to: significant liability for damages, the invalidation of our
intellectual property rights, or the issuance of preliminary or permanent
injunction requiring us to cease certain activities. Any such claims, without
merit, could be time consuming to defend, result in costly litigation, divert
management attention and resources, or require us to enter into royalty or
licensing agreements under terms which may be not be desirable.
Material Contracts
Miramax
On March 30, 2000, we entered into an agreement with Miramax Film Corp. As a
result of this agreement, Miramax granted us the non-exclusive right to
distribute at least 12 movies over Internet sites owned and operated by
Miramax.
The movies to be licensed to us by Miramax will be full-length motion
pictures which were initially released in at least 8 of the top 10 Areas of
Dominant Influence Markets (which measures the largest media markets) at some
time after 1980 and which have not previously been legally available in their
entirety on the Internet. Miramax will make the initial 12 motion pictures
available for distribution by SightSound.com by September 30, 2001.
In the event any movie we distribute for Miramax is at any time unavailable
on any of the sites designated by Miramax, we may distribute that movie from
our own website. We will have the right to distribute each movie for one year
after it is made available by Miramax.
We will pay to Miramax a license fee equal to 70% of all revenue on movies
distributed for Miramax within three years of their initial theatrical release
and 60% of all revenue on all others. In addition, we have agreed to issue to
Miramax 1,000,000 shares of our common stock from the 6,500,000 shares reserved
for issuance at management's discretion.
Franchise Pictures
In February 2000, we entered into a five-year exclusive license with
Franchise Pictures that gives us the rights to distribute via the Internet all
movies in their library to which they own the Internet distribution rights. We
agreed to issue 1,000,000 shares of our common stock to Franchise upon the
delivery of the master copies of the first 35 motion pictures by Franchise from
the 6,500,000 shares reserved for issuance as signing bonuses. Additionally, we
agreed to issue 250,000 additional shares to Franchise for each motion picture
which Franchise makes available for distribution by us, prior to commencement
of this offering, within three days of such picture's initial U.S. theatrical
release by a "major" studio.
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<PAGE>
Legal Proceedings
On January 16, 1998, SightSound.com filed a Complaint in the Western
District of Pennsylvania (Pittsburgh) against N2K, Inc., a Delaware
corporation, alleging infringement of patents held by SightSound.com (U.S.
Patent Nos. 5,191,573 and 5,675,734). The Complaint seeks monetary damages, and
a request that N2K be permanently enjoined from committing further acts of
infringement by making, selling, and using the method and system as defined in
the claims of the patents being asserted. SightSound.com has requested a jury
trial.
An Answer to the Complaint was filed by N2K, Inc. on May 26, 1998. The
Answer denies the allegations of infringement and asserts as a defense that the
patents asserted are invalid as either anticipated or obvious under the patent
statute (35 U.S.C. (S) 102 and (S) 103, respectively), invalid for other
reasons as set forth under 35 U.S.C. (S) 112 and unenforceable. The Answer
provides no basis or further elaboration to support these defenses. Fact
discovery is set to close on November 15, 2000 with trial set for September
2001.
During the discovery period N2K, Inc. was merged with CDNow, Inc., a
Pennsylvania corporation. This merger resulted in two wholly owned
subsidiaries, N2K, Inc. and CDNow Online, Inc., a Pennsylvania corporation, of
parent, CDNow, Inc. On March 24, 2000, the parties filed a stipulated motion
with the U.S. District Court for the Western District of Pennsylvania for leave
to amend the Complaint to add CDNow, Inc. and CDNow Online, Inc. as defendants
and add U.S. Patent No. 5,966,440 as a third patent alleged to be infringed. On
April 3, 2000, the court signed the Order permitting the Amended Complaint to
be filed and served.
Employees
We currently have 26 full-time employees, including 14 in engineering and
product development, seven in content acquisition and marketing, two in finance
and operations and three in other administrative functions. Our future success
depends, in part, on our ability to hire additional employees, including
programmers, web designers, network administrators, digital media encoders,
administrative assistants, attorneys, sales and marketing specialists,
financial analysts, and accountants. None of our employees are represented by a
collective bargaining unit, and we have never experienced a work stoppage. Our
relations with our employees are good.
Facilities
We are currently headquartered at 733 Washington Road, in Mt. Lebanon,
Pennsylvania in approximately 8,125 square feet pursuant to two lease
agreements.
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MANAGEMENT
Directors and Executive Officers
Our executive officers and directors and their respective ages and positions
are as follows:
<TABLE>
<CAPTION>
Name Age Position
---- --- --------
<S> <C> <C>
Arthur R. Hair....... 39 Chairman of the Board and Chief Technology Officer
Scott C. Sander...... 40 President, Chief Executive Officer and Director
Christopher J.
Reese............... 36 Executive Vice President and General Counsel
Alexander LePore..... 41 Secretary, Treasurer and Chief Financial Officer
James H. Miller...... 51 Executive Vice President, Programming
Frank J. Biondi,
Jr.................. 54 Director
Ariel Z. Emanuel..... 38 Director
Jay H. Lustig........ 45 Director
Charles R. Zappala... 50 Director
</TABLE>
Arthur R. Hair, a founder of SightSound.com, has served as Chairman of the
Board, Chief Technology Officer and has been a director since August 1, 1995.
Mr. Hair served as our Corporate Secretary and Treasurer from August 15, 1997
to October 5, 1999. Mr. Hair began his career at the Defense Electronics
division of Texas Instruments as a Manufacturing Engineer of electro/optic
components for night vision equipment controlling advanced weapon systems for
the Department of Defense. Mr. Hair is experienced in the manufacture of
printed circuit boards, cryogenics, specialty optics and ballistic metals. From
1990 to 1996, Mr. Hair was Vice President for Lincoln Property Company, a
national real estate development firm. Mr. Hair received a B.S. degree in
Industrial Management with a minor in Aeronautical & Astronautical Engineering
from Purdue University.
Scott C. Sander, a founder of SightSound.com, has served as President and
Chief Executive Officer since August 15, 1997 and has been a director since
March 31, 1996. From 1993 through 1997, Mr. Sander served as Chairman,
President and Chief Executive Officer of the Kinetic Workplace (formerly Realty
Kinetics) in Pittsburgh, Pennsylvania, a change management consultancy
specializing in workplace innovation. Mr. Sander obtained a B.S. in Business
Administration from the University of Denver.
Christopher J. Reese, has served as our Executive Vice President and General
Counsel since June 2, 1999. He began his career with SightSound.com as Senior
Vice President on November 1, 1997. From 1995 to 1997, Mr. Reese served as the
personal manager of the rock band The Gathering Field, which, during his
tenure, was signed to Atlantic Records and Polygram Publishing. From 1993 to
1994, Mr. Reese was a litigator with the law firm of Kirkpatrick & Lockhart.
From 1990 to 1993, Mr. Reese was a Federal Prosecutor for the U.S. Attorney's
Office for the District of Columbia. Mr. Reese received a B.A. with distinction
in American Government and received a Juris Doctor and a Masters in American
Government from the University of Virginia.
Alexander LePore has served as Chief Financial Officer of SightSound.com
since September 17, 1999. Prior to joining our company, Mr. LePore was a
Partner with Deloitte & Touche LLP. Mr. LePore was with Deloitte & Touche LLP
from 1981 to 1999. Most recently, Mr. LePore served as a business unit leader
in the Growth Company Services group for the Deloitte & Touche Pittsburgh
office. Mr. LePore received a B.S. degree in Accounting from Duquesne
University.
James H. Miller has served as Executive Vice President, Programming of
SightSound.com since October 1, 1999. From 1997 to 1999, Mr. Miller was Senior
Vice President of Programming at DIVA Systems, Inc. From 1995 to 1997, Mr.
Miller was self-employed as an Entertainment Consultant. His clients included
Orion Pictures, ITC, and the National Football League. From 1979 to 1995, Mr.
Miller worked at Showtime Networks, where he was promoted to Executive Vice
President of Programming in 1991. Mr. Miller graduated from Columbia University
with a B.A. degree in Economics.
43
<PAGE>
Frank J. Biondi, Jr. has served as a director of SightSound.com since
October 5, 1999. Mr. Biondi currently serves as Senior Managing Director of
Waterview Advisors, LLC. Mr. Biondi most recently served as Chairman and Chief
Executive Officer of Universal Studios from April 1996 through November 1998.
Previously, he was President and Chief Executive Officer of Viacom, Inc., from
July 1987 to January 1996 and Chairman and Chief Executive Officer of Home Box
Office in 1984. Mr. Biondi received an A.B. from Princeton University and a
M.B.A. from Harvard University Graduate School of Business Administration. Mr.
Biondi currently serves on the Boards of Directors of the Bank of New York,
Vail Resorts, Inc. and About.com in addition to a number of private companies
and non-profit organizations.
Ariel Z. Emanuel has served a director of SightSound.com since December 22,
1998. In March 1995, Mr. Emanuel was one of four founding partners who created
the Endeavor Agency, which represents writers, directors, filmmakers,
production companies, producers, and actors. Prior to founding Endeavor, Mr.
Emanuel was an agent with International Creative Management for three years. He
has also been a partner at Intertalent and he began his career as an agent-in-
training at Creative Artist Agency. Mr. Emanuel graduated from McAlester
College in Saint Paul Minnesota with a B.S. in Economics.
Jay H. Lustig has served as a director of SightSound.com since since
September 17, 1996. Mr. Lustig manages the Santa Monica-based Prophecy
Partners, L.P., a hedge fund established in early 1996. Mr. Lustig has also
been the president of Equibond, Inc., an investment firm based in Santa Monica,
since 1994 and the chairman and chief executive officer of NBI, Inc., a
manufacturer of consumer glassware located in Longmont, Colorado, since 1992.
Mr. Lustig has served as chairman of the board of National Bancshares
Corporation of Texas since 1992. He is a graduate of the University of Southern
California with a B.S. in Business.
Charles R. Zappala has served as a director of SightSound.com since
September 17, 1996. Mr. Zappala is a principal of Janus St. George Partnership.
Since 1978, Mr. Zappala has been the Chairman of Russell, Rea, Zappala &
Gomulka Holdings, Inc., a Pennsylvania-based investment banking holding
company. Mr. Zappala is a magna cum laude graduate of the University of Notre
Dame with a B.A. in Government, and has a L.L.B. from Georgetown University Law
Center. Mr. Zappala currently serves on the Board of Directors of Three Rivers
Bancorp Inc. in addition to a number of private companies and non-profit
organizations.
Election and Compensation of Directors
Our bylaws provide that the number of members of our board of directors
shall be not less than one nor more than fifteen, all of whom shall be elected
by the shareholders. The number of directors is currently six. The term of each
director shall cease when his successor is elected by the shareholders.
Vacancies in the board of directors are filled only through election by the
shareholders.
Directors may receive cash compensation for their services as directors or
members of committees of the board of directors, and are reimbursed for
reasonable expenses incurred in attending meetings of the board. On March 24,
2000 the board of directors approved the grant of an option to purchase 37,500
shares of common stock to each of our four outside directors: Frank J. Biondi,
Jr., Ariel Z. Emanuel, Jay H. Lustig and Charles R. Zappala.
Board Committees
We have established an audit committee and a compensation committee. The
audit committee, which currently consists of Messrs. Lustig, Biondi and
Zappala, reviews our internal accounting procedures, corporate financial
reporting and consults with and reviews the services provided by our
independent auditors. The compensation committee, which currently consists of
the entire board of directors, reviews and recommends to the board of directors
the compensation and benefits of our executive officers, establishes and
reviews general policies relating to our compensation and benefits and
administers our stock plans. Members of the compensation committee shall
receive such compensation for their services as determined by the board. The
board of directors may appoint such standing or temporary committees, composed
of at least two directors, as the board of directors shall determine from time
to time to be necessary or convenient to the management of the company.
Vacancies in any committee are filled only by the board of directors.
Compensation Committee Interlocks and Insider Participation
None of our executive officers has served as a member of a compensation
committee or board of directors at any other entity which has an executive
officer serving as a member of the board of directors.
44
<PAGE>
EXECUTIVE COMPENSATION
The following table sets forth certain compensation information with respect
to SightSound.com's Chief Executive Officer and our two other most highly
compensated executive officers (collectively, the "Named Officers") during the
last three fiscal years.
Summary Compensation Table
<TABLE>
<CAPTION>
Long-Term
Compensation
Awards
------------------------
Securities
Other annual Underlying All other
Name and Principal Position Year Salary($) compensation($) Options(#) compensation
- --------------------------- ---- --------- --------------- ----------- ------------
<S> <C> <C> <C> <C> <C>
Scott C. Sander........... 1999(/1/) 187,500 2,700 -- --
President and Chief
Executive Officer 1998 250,000 -- -- --
1997 121,250(/2/) -- -- --
Arthur R. Hair............ 1999(/1/) 187,500 2,700 -- --
Chief Technology Officer 1998 250,000 -- -- --
1997 187,500 -- -- --
Christopher J. Reese...... 1999(/1/) 105,980 -- -- --
Executive Vice President
and 1998 110,000 -- -- --
General Counsel 1997 18,333(/3/) -- -- --
</TABLE>
- --------
(1) In October 1999, SightSound.com changed its fiscal year from December 31
to September 30. Therefore, the 1999 fiscal year contains only amounts
earned from January 1, 1999 through September 30, 1999.
(2) Of this amount, $29,333 was paid to Mr. Sander as an independent
contractor prior to his full-time employment with SightSound.com which
began in September of 1997.
(3) Although Mr. Reese began working for SightSound.com in November 1, 1997,
he worked as an independent contractor until January 1, 1998, when he
became a full-time employee.
Employment and Non-Competition Agreements
Prior to the effectiveness of this registration statement, SightSound.com
intends to enter into employment agreements with its Chief Technology Officer,
Mr. Hair, and its President and Chief Executive Officer, Mr. Sander which will
include confidentiality and non-competition agreements. In addition,
SightSound.com intends to enter into confidentiality agreements with its
General Counsel, Mr. Reese and its Chief Financial Officer, Mr. LePore. With
the exception of the aforementioned management, currently, all of
SightSound.com's employees have entered into or will be entering into
confidentiality and non-competition agreements.
Benefit Plans
1999 Stock Option Plan
General
In December of 1999, SightSound.com's board of directors adopted the 1999
Stock Option Plan. The 1999 Stock Option Plan provides for the issuance of a
total of up to 8,000,000 shares of common stock. Generally, shares shall not be
deemed to have been issued for purposes of determining the maximum aggregate
number of shares which may be issued under the plan if they are subject to
expiration, cancellation, settlement or forfeiture under the 1999 Stock Option
Plan.
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<PAGE>
Awards Under the 1999 Stock Option Plan
Awards under the 1999 Stock Option Plan may be made in the form of
incentive stock options and non-qualified stock options. Awards may be granted
to employees or independent directors (non-employee directors) as the
compensation committee (or the board of directors in the case of options
granted to independent directors) shall select. Each award shall be evidenced
by a written stock option agreement entered into by SightSound.com and the
grantee. The compensation committee (or the board of directors in the case of
options granted to independent directors) determines the terms and provisions
of each award granted under the 1999 Stock Option Plan (subject to the
applicable limitations of the plan), including whether each option granted
will be an incentive stock option or a non-qualified option, repurchase
provisions, the option term, rights of first refusal, transfer restrictions,
forfeiture provisions and form of payment, payment contingencies. The vesting
schedule is also determined by the compensation committee, provided that each
option shall become exercisable no later than 5 years after such option is
granted and all options of a current employee or independent director shall
automatically become fully exercisable upon the occurrence of a change in
control.
The exercise price of awards also is established by the compensation
committee, and, in the case of incentive stock options and options intended to
qualify as performance-based compensation, the exercise price must be equal to
at least 100% of the fair market value of a share of the common stock on the
date of grant. In the case of incentive stock options granted to an individual
who owns more than 10% of the total combined voting power of all classes of
issued and outstanding stock of SightSound.com or any of its subsidiaries,
such price shall not be less than 110% of the fair market value of a share of
common stock on the date of grant. The exercise price is payable in cash;
however, the compensation committee may allow payment in whole or in part by
surrender of shares of common stock having a fair market value on the date of
the exercise equal to the exercise price, by the sale of the shares through a
broker-dealer or by any combination of the foregoing methods of payment.
As of the date of this prospectus, 1,979,000 options were outstanding under
the 1999 Stock Option Plan.
Administration
The 1999 Stock Option Plan is administered by the compensation committee
(for the board of directors in the case of options granted to independent
directors). The compensation committee is authorized to construe, interpret
and implement the provisions of the 1999 Stock Option Plan, to select the
employees to whom awards will be granted, to determine the terms and
provisions of awards and, with the consent of the grantee, to amend the terms
of any outstanding award. The determinations of the compensation committee are
made in its sole discretion and are conclusive.
Upon the termination of employment or directorship with SightSound.com or
any of its subsidiaries for cause or at the election of the employee or
director, as the case may be, an award granted pursuant to the 1999 Stock
Option Plan may be exercised to the extent provided in the award agreement. In
the event an employee dies, becomes disabled or is involuntarily terminated
for any reason other than cause, unvested options accelerate and become fully
vested.
Other Features of the 1999 Stock Option Plan
The compensation committee may, without shareholder approval, amend,
interpret, suspend or terminate the 1999 Stock Option Plan at any time or from
time to time, unless shareholder approval is required by law or the amendment,
suspension or termination affects awards that have already been granted. In
its absolute discretion, the board may at any time and from time to time
exercise any and all rights and duties of the compensation committee under the
plan, except with respect to matters governed by Rule 16b-3 of the Securities
Act or Section 162(m) of the Internal Revenue Code of 1986, as amended. Unless
sooner terminated by the compensation committee or the board of directors, the
provisions of the 1999 Stock Option Plan terminate on December 21, 2009, the
tenth anniversary of the adoption of the 1999 Stock Option Plan by the board
of directors. No amendment, suspension or termination of this plan shall,
without the consent of the optionee, alter or impair any rights or obligations
therefore granted or awarded, unless the award itself expressly so provides.
46
<PAGE>
Subject to any action that may be required by our shareholders, the
compensation committee may, in its discretion, proportionately adjust the
number and price of outstanding awards, and the number of shares authorized for
issuance under the 1999 Stock Option Plan, in the event of a stock dividend,
stock split, recapitalization, reclassification, reorganization, merger,
consolidation, split-up, spin-off, combination, liquidation, dissolution,
transfer, exchange or other disposition of all or substantially all of the
assets of sightsound.com or other similar corporate transaction or event. In
addition, the compensation committee may at any time offer to buy out for cash
or shares of common stock any outstanding award.
Tax Consequences
The following description of the tax consequences of awards under the 1999
Stock Option Plan is based on present federal tax laws, and does not purport to
be a complete description of the tax consequences of the 1999 Stock Option
Plan.
There are generally no federal tax consequences either to the optionee or to
SightSound.com upon the grant of an option. On the exercise of an incentive
stock option, the optionee will not recognize any income, and SightSound.com
will not be entitled to a deduction for tax purposes, although such exercise
may give rise to liability for the optionee under the alternative minimum tax
provisions of the Internal Revenue Code of 1986, as amended. However, if the
optionee disposes of shares acquired upon the exercise of an incentive stock
option within two years of the date of grant or one year of the date of
exercise, the optionee will recognize ordinary income, and SightSound.com will
be entitled to a deduction for tax purposes in the amount of the excess of the
fair market value of the shares of common stock on the date of exercise over
the exercise price (or the gain on sale, if less). The remainder of any gain,
and any loss, to the optionee will be treated as capital gain or loss. If the
shares are disposed of after the foregoing holding periods are met,
SightSound.com will not be entitled to any deduction, and the entire gain or
loss will be treated as a capital gain or loss to the optionee. On exercise of
a non-qualified stock option, the amount by which the fair market value of
common stock on the date of exercise exceeds the exercise price will generally
be taxable to the optionee as ordinary income and will generally be deductible
for tax purposes by SightSound.com. The disposition of shares upon exercise of
a non-qualified option will generally result in capital gain or loss to the
optionee but will have no tax consequences to SightSound.com.
Section 162(m) of the Internal Revenue Code of 1986, as amended, limits the
deduction which SightSound.com may take for otherwise deductible compensation
payable to certain executive officers to the extent that compensation paid to
such officers for a year exceeds $1.0 million, unless such compensation meets
certain requirements. Although SightSound.com believes that compensation
realized from options that have been granted under the 1999 Stock Option Plan
generally will satisfy the requirements of Section 162(m), there is no
assurance that such awards will satisfy such requirements. The deduction for
compensation resulting from a restricted stock award will be subject to the
limitation imposed by Section 162(m).
401(K) Plan
SightSound.com expects to establish a participating 401(K) plan for its
employees in the near future.
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<PAGE>
CERTAIN TRANSACTIONS
Intertainment A.G.
SightSound.com entered into an agreement with Intertainment A.G. on
September 19, 1999, pursuant to which SightSound.com issued to Intertainment an
option to purchase 5,000,000 shares of SightSound.com's common stock at $2.00
per share payable in common stock of Intertainment. Intertainment exercised
that option on December 22, 1999. The agreement also granted to Intertainment a
preemptive right to acquire an additional amount of shares of SightSound.com
common stock necessary to maintain its percentage of ownership immediately
prior to the stock issuance that triggered the preemptive right. The preemptive
right applies, however, only to private placements of common stock by
SightSound.com in which the consideration received by SightSound.com is all or
substantially all cash. It applies to issuances prior to and after our initial
public offering, except that the right exists after the initial pubic offering
only for private placements in which other shareholders of SightSound.com are
allowed to participate.
On February 25, 2000, SightSound.com and Intertainment entered into an
amendment to the agreement which modified Intertainment's preemptive rights. As
a result of the amendment, Intertainment's preemptive right is triggered by any
issuance of common stock by SightSound.com prior to its initial public offering
irrespective of whether the consideration for the stock is cash.
Agreements with Ariel Emanuel, one of our Directors
Stock Option and Purchase Agreements
We have entered into three agreements with Mr. Emanuel whereby we have
issued him options to purchase our common stock.
In the first Stock Option and Purchase Agreement, dated as of January 20,
1999, SightSound.com grants Mr. Emanuel an option to purchase 116,666 shares of
common stock of SightSound.com at a purchase price of $15.00 per share. The
option is exercisable on or before the earlier of January 20, 2004 or 30 days
after written notice by SightSound.com to Mr. Emanuel that we intend to
commence an initial public offering.
In the second Stock Option and Purchase Agreement, dated as of June 1, 1999,
SightSound.com grants Mr. Emanuel an option to purchase 116,666 shares of
common stock of SightSound.com at a purchase price of $2.00 per share. The
option is exercisable on or before the earlier of May 1, 2001 or 30 days after
written notice by SightSound.com to Mr. Emanuel that we intend to commence an
initial public offering.
In the third Stock Option and Purchase Agreement, dated as of October 5,
1999, SightSound.com grants Mr. Emanuel an option to purchase 50,000 shares of
common stock of SightSound.com at a purchase price of $2.00 per share. The
option is exercisable on or before the earlier of May 1, 2001 or 30 days after
written notice by SightSound.com to Mr. Emanuel that we intend to commence an
initial public offering.
As of this date, Mr. Emanuel has not exercised any of the options granted to
him pursuant to these agreements.
Letter Agreement
SightSound.com entered into a letter agreement with Mr. Emanuel on March 22,
2000 pursuant to which we would issue to Mr. Emanuel 100,000 shares of common
stock if we entered into a licensing agreement with Miramax on or before March
31, 2000. Because we entered into that agreement with Miramax, we have issued
these shares to Mr. Emanuel in consideration for certain advisory services he
provided in connection with facilitating our agreement with Miramax.
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<PAGE>
PRINCIPAL STOCKHOLDERS
The following table sets forth certain information regarding the beneficial
ownership of common stock as of March 31, 2000 and as adjusted to reflect the
sale of the common stock offered hereby by:
. each person (or group within the meaning of Section 13(d)(3) of the
Securities Exchange Act of 1934) known by SightSound.com to own
beneficially 5% or more of the common stock;
. our directors and Named Executive Officers; and
. all directors and executive officers of SightSound.com as a group.
Percentage of ownership is calculated as required by the Securities and
Exchange Commission. Except as indicated in the footnotes to this table, the
persons named in the table have sole voting and investment power with respect
to all shares of common stock shown as beneficially owned by them. The table
below includes all shares outstanding on March 31, 2000 plus the number of
shares underlying options which are exercisable within 60 days from March 31,
2000. For purposes of calculating each person's or group's percentage
ownership, stock options exercisable within 60 days after March 31, 2000 are
included for that person or group, but not the stock options of any other
person or group. On that basis, 45,841,887 shares of common stock were
outstanding as of March 31, 2000. Unless otherwise indicated, the address of
each of the beneficial owners is 733 Washington Road, Suite 400, Mt. Lebanon,
PA 15228.
<TABLE>
<CAPTION>
Percentage of
Shares
Outstanding
Number of -----------------
Shares Before After
Beneficially the the
Name and address of beneficial owner Owned Offering Offering
- ------------------------------------ ------------ -------- --------
<S> <C> <C> <C>
Scott C. Sander............................. 5,343,750(/1/) 11.66% %
Arthur H. Hair.............................. 9,755,884(/2/) 21.28
Christopher J. Reese........................ 121,512(/3/) *
Prophecy Partners L.P.(/6/)................. 3,429,200 7.48
333 Castle Drive
Belle Vernon, PA 15012
Frank J. Biondi, Jr......................... 287,500(/4/) *
Intertainment, A.G.......................... 10,000,000 21.81
Widenmayerstrasse 49
D-80538 Munich
Germany
Charles R. Zappala.......................... 895,000(/5/) 1.95
Jay H. Lustig............................... 7,333,768(/6/) 16.00
Ariel Z. Emanuel............................ 606,166(/7/) 1.32
All directors and executive officers as a
group...................................... 24,456,893(/8/) 55.35
</TABLE>
- --------
* Less than 1%
(1) Includes 700,000 shares owned by the Sander Children Trust of which Lisa
Chiesa is the trustee. Mr. Sander disclaims beneficial ownership of these
shares. Includes 93,750 shares of common stock subject to options that are
exercisable within 60 days of the date of this prospectus.
(2) Includes 8,750,000 shares owned by A.R. Hair L.P., of which Mr. Hair is
the general partner (Mr. Hair retains the voting power with respect to
these shares); 456,067 shares owned by Mr. Ronald A. Hair, Mr. Hair's
father, and 456,067 shares owned by Sara J. Hair, Mr. Hair's mother. Mr.
Hair disclaims beneficial ownership of the shares held by Mr. Ronald A.
Hair and Sara J. Hair. Includes 93,750 shares of common stock subject to
options that are exercisable within 60 days of the date of this
prospectus.
(3) Includes 54,844 shares of common stock subject to options that are
exercisable within 60 days of the date of this prospectus.
(4) All of Mr. Biondi's 287,500 shares of common stock are subject to options
that are exercisable within 60 days of the date of this prospectus.
(5) Includes 37,500 shares of common stock subject to options that are
exercisable within 60 days of the date of this prospectus.
(6) Includes 2,237,900 shares of common stock subject to options that are
exercisable within 60 days of the date of this prospectus. Also includes
3,429,200 shares which are owned by Prophecy Partners L.P. Prophecy
Partner's general partner is Equibond L.L.C., a limited liability company
that is wholly owned by Mr. Lustig. Mr. Lustig only controls the voting
power with respect to 47,755 shares (or 1.39%) of the 3,429,200 shares
owned by Prophecy Partners L.P., and the voting power of the remaining
shares is distributed on a pro rata basis to the limited partners of
Prophecy Partners L.P. Mr. Lustig disclaims beneficial ownership with
respect to those remaining 3,381,445 shares owned by Prophecy Partners
L.P.
(7) Includes 83,334 shares owned by Ariel Z. Emanuel Trust and 320,832 shares
subject to options that are exercisable within 60 days of the date of this
prospectus. Includes 102,000 shares of common stock issued to Endeavor
Agency, a talent agency in which Mr. Emanuel is a principal.
(8) Includes (a) 700,000 shares owned by the Sander Children Trust, the
beneficial ownership of which is attributed to but disclaimed by Mr.
Sander, (b) 8,750,000 shares owned by A.R. Hair L.P., of which Mr. Hair is
the general partner (Mr. Hair retains the voting power with respect to
these); 456,067 shares owned by Mr. Ronald A. Hair, Mr. Hair's father, and
456,067 shares owned by Sara J. Hair, Mr. Hair's mother, the beneficial
ownership of which is attributed to but disclaimd by Mr. Hair, (c) 83,334
shares owned by Ariel Z Emanuel Trust, (d) an aggregate of 3,126,076
shares of Common Stock subject to options that are held by the directors
and executive officers and are currently exercisable or exercisable within
60 days of the date of this prospectus and (e) 3,429,200 shares held by
Prophecy Partners L.P., the beneficial ownership of which is attributed to
but disclaimed by Mr. Lustig with respect to all but the 47,775 shares
upon which Mr. Lustig retains the voting power.
49
<PAGE>
DESCRIPTION OF CAPITAL STOCK
Authorized Capital Stock
The articles of incorporation authorize 100,000,000 shares of capital common
stock. Of the shares of common stock, shares are being offered hereby.
Immediately following the closing of the offering, shares of common stock
( shares if the underwriters exercise their over-allotment option in full)
will be outstanding. All of the shares of common stock that will be outstanding
immediately following the closing of the offering, including the shares of
common stock sold in the offering, will be validly issued, fully paid and
nonassessable. The following summary description of our capital stock of
SightSound.com is qualified by reference to our articles of incorporation and
bylaws filed as exhibits to the registration statement of which this prospectus
is a part.
Common Stock
The common stock is entitled to one vote per share on all matters submitted
to a vote of the shareholders, including the election of directors. Except as
otherwise required by law, the holders of common stock will possess all voting
power. Generally, all matters to be voted on by shareholders must be approved
by a majority (or, in the case of election of directors, by a plurality) of the
votes entitled to be cast by all shares of common stock that are present in
person or represented by proxy. Except as otherwise provided by law, amendments
to the articles of incorporation generally must be approved by a majority of
the votes entitled to be cast by all outstanding shares of common stock. The
articles of incorporation do not provide for cumulative voting in the election
of directors.
Dividends. The holders of shares of common stock will be entitled to such
cash dividends as may be declared from time to time by the board from funds
available therefor. See "Dividend Policy."
Liquidation. Upon liquidation, dissolution or winding up of SightSound.com,
the holders of shares of common stock will be entitled to receive pro rata all
assets of SightSound.com available for distribution to such holders.
Other Rights. Generally, in the event of any merger or consolidation of
SightSound.com with or into another company in connection with which shares of
common stock are converted into or exchangeable for shares of stock, other
securities or property (including cash), all holders of common stock will be
entitled to receive the same kind and amount of shares of stock and other
securities and property (including cash). However, Sections 1922(d)(4) and 1906
of the PBCL permit a plan of merger or consolidation or an amendment to the
articles of incorporation to provide for the classification of shareholders of
a corporation into different groups of shareholders by reference to facts or
circumstances that are not manifestly unreasonable and to provide for
materially different treatment of shares held by members of one group or class
of shareholders from the treatment accorded to shares held by members of
another group or class of shareholders. Such classification requires approval
by both (a) a majority of the votes cast by all shareholders entitled to vote
on the plan or amendment and (b) a majority of the votes cast by any class or
series of shares any of the holders of which are so classified into groups;
however, such approvals are not required if a court finds that under all the
facts and circumstances the special treatment is undertaken in good faith,
after reasonable deliberation and is in the best interests of the corporation.
Such classification also requires that either (i) the plan or amendment require
approval by a majority of the votes cast by each group of shareholders who are
to receive the same special treatment under the plan or amendment or (ii) the
shareholders of any such group which is not granted such approval rights shall
have the right to object to the plan or amendment and exercise the rights and
remedies of dissenting shareholders provided by the PBCL including the right to
demand fair payment for the holder's shares.
Certain Anti-Takeover Effects. Certain provisions of the articles of
incorporation, summarized in the following paragraphs, may be considered to
have an anti-takeover effect and may delay, deter or prevent a tender offer,
proxy contest or other takeover attempt that a shareholder might consider to be
in such shareholder's best interest, including such an attempt as might result
in payment of a premium over the market price for shares held by shareholders.
50
<PAGE>
SightSound.com's articles of incorporation provide that the shareholders
shall not be entitled to cumulate their votes for election of directors, or for
any other purpose. This means that in each election of directors a majority of
the shareholders who vote in that election can elect all of the directors to be
elected in that election. The absence of cumulative voting may have the effect
of limiting the ability of minority shareholders to affect changes in the board
of directors and, as a result, may have the effect of deterring a hostile
takeover or delaying or preventing changes in control or management of
SightSound.com.
Anti-takeover effects of Pennsylvania Law
Section 2538 of the PBCL provides that the following transactions with an
"interested shareholder" require the affirmative vote of a majority of the
shareholders entitled to vote, not including the interested shareholder: (1)
any transaction relating to merger, consolidation, share exchanges and sale of
assets between a corporation or its subsidiary and a shareholder of the
corporation; (2) any transaction relating to division of the corporation in
which the interested shareholder receives a disproportionate amount of any of
the shares or other securities of any corporation surviving or resulting from
such division; (3) any transaction relating to voluntary dissolution and
winding up of the corporation in which a shareholder is treated differently
from other shareholders of the same class, other than dissenting shareholders;
and (4) any reclassification pursuant to an amendment of articles of
incorporation in which the percentage of voting or economic share interest in
the corporation of a shareholder is materially increased relative to
substantially all other shareholders.
An affirmative vote of a majority of the shareholders entitled to vote is
not required if a transaction has been approved by a majority vote of the board
of directors without counting the vote of directors who are directors or
officers of, or have a material equity interest in, the interested shareholder,
or were nominated for election by the interested shareholder, and first elected
as directors, within 24 months of the date of the vote on the proposed
transaction.
Similarly, an affirmative vote of a majority of the shareholders entitled to
vote is not required if the consideration to be received by the shareholders in
a transaction for the shares of any class of shares owned by the interested
shareholder is greater than the amount paid by the interested shareholder in
acquiring shares of the same class. Finally, an affirmative vote of a majority
of the shareholders entitled to vote is not required if (a) the transaction is
a merger or consolidation, and (b) immediately prior to adoption of the plan of
merger or consolidation, and until its effective date, the corporation (the
"Controlling Corporation") owns 80% or more of the outstanding shares of each
class of the other corporation which is a party to the merger or consolidation
and (c) the board of directors of the Controlling Corporation approves the
merger or consolidation.
An "interested shareholder" includes the shareholder who is a party to the
transaction or who is treated differently from other shareholders and any
person, or group of persons, that is acting jointly or in concert with the
interested shareholder and any person who, directly or indirectly, controls, is
controlled by or is under common control with the interested shareholder. An
interested shareholder does not include any person who in good faith and not
for the purpose of circumventing these rules, is an agent, bank, broker,
nominee or trustee for one or more other persons, to the extent that the other
person or persons are not interested shareholders.
Under certain circumstances, Section 2538 makes it more difficult for a
person who would be an interested shareholder to effect, directly or
indirectly, various business combinations with a corporation. The provisions of
Section 2538 may encourage persons interested in acquiring or otherwise dealing
with SightSound.com to negotiate in advance with its board of directors, since
the shareholder approval requirement would be avoided if a majority of the
directors, determined as discussed above, approves the transaction. Such
provisions also may have the effect of preventing changes in the management of
SightSound.com. It is possible that such provisions could make it more
difficult to accomplish transactions that SightSound.com's shareholders may
otherwise deem to be in their best interests.
51
<PAGE>
LIABILITY OF DIRECTORS; INDEMNIFICATION
The bylaws provide that, except for responsibility or liability of a
director pursuant to any criminal statute or for failure to pay taxes pursuant
to local, state or federal law, a director of SightSound.com is not personally
liable for monetary damages for any action taken or any failure to take any
action unless (a) such director has breached or failed to perform his fiduciary
duties as provided in the bylaws; and (b) the breach or failure to perform
constitutes self-dealing, willful misconduct, or recklessness.
The bylaws also permit SightSound.com to advance funds to its directors and
officers to enable them to defend against actions and proceedings.
SightSound.com intends to purchase standard policies of directors' and
officers' insurance but at present does not have any directors and officers
insurance.
At present, there is no pending or threatened litigation or proceeding
involving any director or officer, employee or agent of SightSound.com where
such indemnification will be required or permitted.
REGISTRATION RIGHTS
As of the date of this registration statement, SightSound.com has not
entered into any registration rights agreements with any party or otherwise
granted any registration rights to any party. Should SightSound.com enter into
any registration rights agreements with senior management or any other party in
the future, Miramax Films will be accorded similar rights, pursuant to its
agreement with SightSound.com dated March 31, 2000. We have not granted any
registration rights.
TRANSFER AGENT AND REGISTRAR
will be the transfer agent and registrar for the common stock.
52
<PAGE>
SHARES ELIGIBLE FOR FUTURE SALE
Of the shares of common stock to be outstanding on the closing of the
offering ( shares if the underwriters exercise their over-allotment option in
full) the shares of common stock sold in the offering ( shares if the
underwriters exercise their over-allotment option in full) will be freely
tradable without restriction under the 1933 Act, except for any such shares
which be may acquired by an affiliate of SightSound.com, as that term is
defined in Rule 144 promulgated under the 1933 Act. Persons who may be deemed
to be affiliates generally include individuals or entities that control, are
controlled by, or are under common control with, SightSound.com and may include
directors and certain officers of SightSound.com as well as significant
shareholders of SightSound.com. Persons who are affiliates will be permitted to
sell the shares of common stock that are issued in the offering only pursuant
to an effective registration statement under the 1933 Act or an exemption from
the registration requirements of the 1933 Act, including exemptions provided by
Rule 144. On the closing of the offering, will own shares of
common stock which will constitute % of the outstanding shares of common
stock ( % if the underwriters exercise their over-allotment option in full).
We expect each of our directors, executive officers, holders of 5% or more
of our outstanding capital stock and certain content providers to agree to
certain restrictions on their ability to sell, offer, contract or grant any
option to sell, pledge, transfer or otherwise dispose of shares of our common
stock for a period of 180 days after the date of this prospectus, without the
prior written consent of WR Hambrecht + Co.
. Shares subject to 180-day lockup agreements:
. Shares eligible for sale 180 days after commencement of this offering
subject to the requirements of Rule 144:
We may grant options to purchase shares of common stock to our employees,
non-employee directors and independent contractors pursuant to the 1999 Stock
Option Plan. See "Management--Benefit Plans" for more details regarding the
1999 Stock Option Plan. We currently expect to file promptly following the
offering closing date a registration statement under the 1933 Act to register
shares reserved for issuance under the 1999 Stock Option Plan. Shares issued
pursuant to the 1999 Stock Option Plan after the effective date of such
registration statement (other than shares issued to affiliates) generally will
be freely tradable without restriction or further registration under the 1933
Act.
53
<PAGE>
PLAN OF DISTRIBUTION
In accordance with the terms of an underwriting agreement among us, W.R.
Hambrecht + Co., LLC and DLJdirect Inc., as representatives of the
underwriters, the underwriters will purchase from us the following respective
number of shares of common stock at the public offering price less the
underwriting discounts and commissions described on the cover page of this
prospectus.
<TABLE>
<CAPTION>
Number
of
Underwriter Shares
----------- ------
<S> <C>
W.R. Hambrecht + Co., LLC ............................................
DLJdirect Inc. .......................................................
------
Total ................................................................
======
</TABLE>
The underwriting agreement provides that the obligations of the underwriters
are subject to conditions, including the absence of any material adverse change
in our business, and the receipt of certificates, opinions and letters from us
and our counsel and independent accountants. Subject to those conditions, the
underwriters are committed to purchase all shares of our common stock offered
if any of the shares are purchased.
The underwriters propose to offer the shares of our common stock directly to
the public at the offering price set forth on the cover page of this
prospectus, as this price is determined by the OpenIPO process described below,
and to certain dealers at this price less a concession not in excess of $
per share. Any dealers that participate in the distribution of our common stock
may be deemed to be underwriters within the meaning of the Securities Act, and
any discounts, commissions or concessions received by them and any provided by
the sale of the shares by them might be deemed to be underwriting discounts and
commissions under the Securities Act. After completion of the initial public
offering of the shares, the public offering price and other selling terms may
be changed by the underwriters. The underwriters have informed us that they do
not intend discretionary sales to exceed 5% of the shares of the common stock
offered by this prospectus.
The following table shows the per share and total underwriting discount to
be paid to the underwriters by us in connection with this offering. The
underwriting discount will be determined through negotiations between us and
the representatives of the underwriters, and will be calculated as a percentage
of the offering price. These amounts are shown assuming both no exercise and
full exercise of the over-allotment option.
<TABLE>
<CAPTION>
Per No Full
Share Exercise Exercise
----- -------- --------
<S> <C> <C> <C>
Public Offering Price ...............................
Underwriting Discounts ..............................
Proceeds, before expenses, to us ....................
</TABLE>
The expenses of the offering, exclusive of the underwriting discounts, will
be approximately $ . These fees and expenses are payable entirely by us.
These fees include, among other things, our legal and accounting fees, our
printing expenses, our expenses incurred in connection with meetings with
potential investors, the filing fees of the Securities and Exchange Commission,
and the listing fees of The Nasdaq National Market.
The Auction Process
The method of distribution being used by the underwriters in this offering
is known as the OpenIPO process. It differs from that traditionally employed in
underwritten public offerings. In particular, the public offering price will be
based primarily on an auction conducted by the underwriters. The allocation of
shares of our common stock will be determined entirely by the auction process.
54
<PAGE>
The following describes how the auction process works:
. Before the registration statement relating to this offering becomes
effective, the underwriters and participating dealers will solicit bids
from prospective investors through the Internet, telephone and
facsimile. The bids will specify the number of shares of our common
stock the potential investor proposes to purchase and the price the
potential investor is willing to pay for the shares. These bids may be
above or below the range set forth on the cover page of this prospectus.
The minimum size of any bid is 100 shares.
. The shares offered by this prospectus may not be sold nor may offers to
buy be accepted prior to the time that the registration statement filed
with the Securities and Exchange Commission becomes effective. A bid
involves no obligation or commitment of any kind prior to its acceptance
after the effective date. Bids can be modified or revoked at any time
prior to the closing of the auction.
. Approximately two business days prior to the registration statement
being declared effective, prospective investors will receive, by e-mail,
phone or facsimile, a request to reconfirm their bid. On or after time,
WR Hambrecht + Co may provide to its website on estimate of the clearing
price.
. All bids that are not confirmed before the time specified by the
underwriters, or if the time is not specified, by the close of the
auction, will be deemed withdrawn.
. Once a potential investor affirmatively confirms its previous bid, the
confirmation will remain valid for seven days from the time the request
for confirmation was sent by the underwriters unless subsequently
withdrawn by the potential investor. Potential investors will be able to
withdraw their bids at any time before the close of the auction by
notifying WR Hambrecht + Co or a participating dealer.
. After the registration statement relating to this offering becomes
effective, the underwriters and participating dealers will contact
potential investors who have submitted bids by e-mail, telephone or
facsimile. Potential investors will be advised that the registration
statement has been declared effective and will be provided with
instructions as to how to withdraw their bids if they seek to do so.
. If the public offering price range is changed before or after a
potential investor affirmatively confirms a bid, or if the public
offering price is outside the public offering range previously provided
to the potential investor in the prospectus, the underwriters and
participating dealers will notify potential investors of the change and
that offers will not be accepted until the potential investor has again
re-confirmed its bid regardless of whether the potential investor's
initial bid was above, below or at the public offering price.
. The auction will close after the registration statement becomes
effective at a time agreed to by us and WR Hambrecht + Co. The actual
time at which the auction closes will be determined by us and WR
Hambrecht + Co based on general market conditions during the period
after the registration statement becomes effective. After the
registration statement has been declared effective, the public offering
price of our common stock may be set at a price that is outside of the
range set forth on the cover of this prospectus.
. Following the closing of the auction, WR Hambrecht + Co will determine
the highest price at which all of the shares offered, including shares
that may be purchased by the underwriters to cover any overallotments,
may be sold to potential investors. This price, which is called the
"clearing price," will be determined based on the results of all valid
bids at the time the auction is closed. The clearing price will not
necessarily be the public offering price, which will be set as described
in "Determination of Public Offering Price" below. The public offering
price will determine the allocation of shares to potential investors,
with all bids submitted at or above the public offering price receiving
a pro rata portion of the shares bid for.
55
<PAGE>
. Once the auction closes and a clearing price is set as described below,
WR Hambrecht + Co will accept the bids from those bidders whose bid is
at or above the public offering price but may allocate to a prospective
investor fewer shares than the number included in the investor's bid.
. WR Hambrecht + Co or a participating dealer will notify successful
bidders by e-mail, phone or fax that the auction has closed and that
their confirmed bids have been accepted. Other bidders will be notified
that their bids have not been accepted.
. Potential investors may at any time expressly request that all, or any
specific, communications between them and the underwriters and
participating dealers be made by specific means of communication,
including telephone and facsimile.
Determination of Public Offering Price
The public offering price for this offering will ultimately be determined by
negotiation between the underwriters and us after the auction closes and will
not necessarily bear any direct relationship to our assets, current earnings or
book value or to any other established criteria of value, although these
factors were considered in establishing the initial public offering price
range. Prior to the offering, there has been no public market for our common
stock. The principal factor in establishing the public offering price will be
the clearing price resulting from the auction.
The clearing price is the highest price at which all of the shares offered,
including the shares that may be purchased by the underwriters to cover any
overallotments, may be sold to potential investors, based on the valid bids at
the time the auction is run.
Factors considered in determining the initial public offering price range
included an assessment of our management, operating results, capital structure
and business potential and the demand for similar securities of comparable
companies. Changes, if any, in the public offering price range will be based
primarily on the bids received.
The public offering price may be lower, but will not be higher, than the
clearing price based on negotiations between the underwriters and us. The
public offering price will always determine the allocation of shares to
potential investors. Therefore, if the public offering price is below the
clearing price, all bids that are at or above the public offering price will
receive a pro rata portion of the shares bid for. If sufficient bids are not
received, or if we do not consider the clearing price to be adequate, or if we
and the underwriters are not able to reach agreement on the public offering
price, then we and the underwriters will either postpone or cancel this
offering. Alternatively, we may file a post-effective amendment to the
registration statement in order to conduct a new auction.
The following simplified example illustrates how the public offering price
will be determined through the auction process:
Company X offers to sell 100 shares in its public offering through the
auction process. WR Hambrecht + Co, on behalf of Company X, receives five bids
to purchase, all of which are kept confidential until the auction closes.
The first bid is to pay $10 per share for 20 shares. The second bid is to
pay $9 per share for 30 shares. The third bid is to pay $8 per share for 60
shares. The fourth bid is to pay $7 per share for 40 shares. The fifth bid is
to pay $6 per share for 80 shares.
Assuming that all of these bids are confirmed and not withdrawn or modified
before the auction closes, and assuming that no additional bids are received,
the clearing price used to determine the public offering price would be $8 per
share, which is the highest price at which all 100 shares offered may be sold
to potential investors who have submitted valid bids. However, the shares may
be sold at a price below $8 per share based on negotiations between the
underwriters and Company X.
56
<PAGE>
If the public offering price is the same as the $8 per share clearing price,
the underwriters will confirm bids at or above $8 per share. Because 110 shares
were bid for at or above the clearing price, each of the three potential
investors who bid $8 per share or more would receive approximately 90% of the
shares for which bids were made. The two potential investors whose bids were
below $8 per share would not receive any shares in this example.
If the public offering price is $7 per share, the underwriters will confirm
bids that were made at or above $7 per share. No bids made at a price of less
than $7 per share will be accepted. The four potential investors with the
highest bids would receive a pro rata portion of the 100 shares offered, based
on the 150 shares they requested, or two-thirds of the shares for which bids
were made. The potential investor with the lowest bid would not receive any
shares in this example.
The following table illustrates the example described above, assuming that
the initial public offering price is set at $8.00 per share. The table also
assumes that these bids are the final bids, and that they reflect any
modifications that have been made to reflect any prior changes to the offering
range, and to avoid the issuance of fractional shares.
Initial Public Offering of Company X
<TABLE>
<CAPTION>
Bid Information Auction Results
--------------------------- -------------------------------------
Approximate
Cumulative Allocated
Shares Shares Bid Shares Requested Clearing Amount
Requested Requested Price Allocated Shares Price Raised
--------- ---------- ------ --------- ----------- -------- ------
<S> <C> <C> <C> <C> <C> <C> <C>
20 20 $10.00 18 90% $8.00 $144
30 50 $ 9.00 27 90% $8.00 $216
Clearing Price (right
arrow) 60 110 $ 8.00 55 90% $8.00 $440
40 150 $ 7.00 0 0%
80 230 $ 6.00 0 0%
--- ----
Total: 100 $800
=== ====
</TABLE>
Requirements for Valid Bids
Valid bids are those that meet the requirements, including eligibility,
account status and size, established by the underwriters or participating
dealers. In order to open a brokerage account with WR Hambrecht + Co, potential
investors must deposit $2,000 in their account. This brokerage account will be
a general account subject to WR Hambrecht + Co's customary rules, and will not
be limited to this offering. In addition, once the registration statement
becomes effective and the auction closes, a prospective investor submitting a
bid through a WR Hambrecht + Co brokerage account must have an account balance
equal to or in excess of the amount of its bid or its bid will not be accepted
by WR Hambrecht + Co. However, other than the $2,000 described above,
prospective investors will not be required to deposit any money into their
accounts until after the registration statement becomes effective. No funds
will be transferred to the underwriters, and any amounts in excess of $2,000
may be withdrawn, at any time until the acceptance of the bid and the
subsequent closing of this offering. Conditions for valid bids, including
eligibility standards and account funding requirements of other underwriters or
participating dealers other than WR Hambrecht + Co, may vary.
The Closing of the Auction and Allocation of Shares
The auction will close on a date estimated and publicly disclosed in advance
by the underwriters on the web site of WR Hambrecht + Co at www.wrhambrecht.com
or www.openipo.com. The shares offered hereby, or shares if
the underwriters' overallotment option is exercised in full, will be purchased
from us by the underwriters and sold through the underwriters and participating
dealers to investors who have submitted bids at or higher than the public
offering price. These investors will be notified by e-mail, telephone, voice
mail, facsimile or mail as soon as practicable following the closing of the
auction that their bids have been accepted.
57
<PAGE>
Each participating dealer has agreed with the underwriters to sell the
shares it purchases from the underwriters in accordance with the auction
process described above, unless the underwriters otherwise consent. The
underwriters reserve the right to reject bids that they deem manipulative or
disruptive in order to facilitate the orderly completion of this offering, and
they reserve the right, in exceptional circumstances, to alter this method of
allocation as they deem necessary to ensure a fair and orderly distribution of
the shares of our common stock. For example, large orders may be reduced to
ensure a public distribution and bids may be rejected or reduced by the
underwriters or participating dealers based on eligibility or creditworthiness
criteria. In addition, the underwriters or the participating dealers may reject
or reduce a bid by a prospective investor who has engaged in practices that
could have a manipulative, disruptive or otherwise adverse effect upon the
offering.
Price and volume volatility in the market for our common stock may result
from the somewhat unique nature of the proposed plan of distribution. Price and
volume volatility in the market for our common stock after the completion of
this offering may adversely affect the market price of our common stock.
We have granted to the underwriters an option, exercisable no later than 30
days after the date of this prospectus, to purchase up to an aggregate of
additional shares of our common stock at the offering price, less the
underwriting discount, set forth on the cover page of this prospectus. To the
extent that the underwriters exercise this option, the underwriters will have a
firm commitment to purchase the additional shares, and we will be obligated to
sell the additional shares to the underwriters. The underwriters may exercise
the option only to cover over-allotments made in connection with the sale of
shares offered. The underwriting agreement provides that we will indemnify the
underwriters against specified liabilities, including liabilities under the
Securities Act, or contribute to payments that the underwriters may be required
to make.
We have agreed not to offer, sell, contract to sell, or otherwise dispose of
any shares of common stock, or any options or warrants to purchase common stock
other than the shares of common stock or options to acquire common stock issued
under our stock option plans and stock purchase plan, for a period of 180 days
after the date of this prospectus, except with the prior written consent of WR
Hambrecht + Co. Each of our directors, executive officers and additional
holders of approximately shares of our outstanding capital stock has
agreed to restrictions on his or her ability to sell, offer, contract or grant
any option to sell, pledge, transfer or otherwise dispose of shares of our
common stock for a period of 180 days after the date of this prospectus,
without the prior written consent of WR Hambrecht + Co.
In connection with the offering, persons participating in the offering may
purchase and sell shares of common stock on the open market. These transactions
may include short sales, stabilizing transactions in accordance with Rule 104
of Regulation M under the Securities Exchange Act of 1934, as amended, and
purchases to cover positions created by short sales. Short sales involve the
sale by the underwriters of a greater number of shares than they are required
to purchase in the offering which creates a syndicate short position.
Stabilizing transactions consist of certain bids or purchases made for the
purpose of preventing or retarding a decline in the market price of the common
stock. The underwriters also may impose a penalty bid. This occurs when a
particular underwriter repays to the underwriters a portion of the underwriting
discount received by it because the representative has repurchased shares sold
by or for the account of that underwriter in stabilizing or short covering
transactions. These activities by the underwriters may stabilize, maintain or
otherwise affect the market price of our common stock. As a result, the price
of our common stock may be higher than the price that otherwise might exist in
the open market. If these activities are commenced, they may be discontinued by
the underwriters at any time. These transactions may be effected on The Nasdaq
National Market, in the over-the-counter market or otherwise.
Persons participating in this offering may also engage in passive market
making transactions in our common stock on The Nasdaq National Market. Passive
market making consists of displaying bids on The Nasdaq National Market limited
by the prices of independent market makers and affecting purchases limited by
such prices and in response to order flow. Rule 103 of Regulation M promulgated
by the SEC limits the amount of net purchases that each passive market may make
and the displayed size of each bid.
58
<PAGE>
Passive market making may stabilize the market price of our common stock at
a level above that which might otherwise prevail in the open market and, if
commenced, may be discontinued at any time.
WR Hambrecht + Co currently intends to act as a market maker for our common
stock following this offering. However, WR Hambrecht + Co is not obligated to
do so and may discontinue any market making at any time.
WR Hambrecht + Co is an investment banking firm formed in February 1998. In
addition to this offering, WR Hambrecht + Co has engaged in the business of
public and private equity investing and financial advisory services since its
inception. The manager of WR Hambrecht + Co, William R. Hambrecht, has 40 years
of experience in the securities industry.
59
<PAGE>
LEGAL MATTERS
Certain legal matters with respect to the validity of the common stock
offered hereby will be passed upon for SightSound by Morrison & Foerster LLP,
New York, New York. Certain legal matters relating to the offering will be
passed upon for the underwriters by Willkie Farr & Gallagher.
EXPERTS
The financial statements as of September 30, 1999 and December 31, 1998 and
for the nine months ended September 30, 1999, the years ended December 31, 1998
and 1997 and for the period from August 1, 1995 (date of inception) to
September 30, 1999, included in this prospectus, have been audited by Deloitte
& Touche LLP, independent auditors, as stated in their report appearing herein,
and have been so included in reliance upon the report of such firm given upon
their authority as experts in accounting and auditing.
Legal matters with respect to information contained in this prospectus under
the captions "Risk Factors--Third parties may claim that our service infringes
on their intellectual property, which could result in significant expenses for
litigation or for developing or licensing new technology," "Risk Factors--We
have initiated a lawsuit to protect our patents. If we lose this litigation,
our patents may be declared invalid," Risk Factors--We may not be able to
compete effectively if we are not able to protect our other intellectual
property in addition to our patents," "Business--Legal Matters" and "Business--
Patents and Other Intellectual Property" will be passed upon for SightSound by
Kenyon & Kenyon, patent counsel to SightSound.com.
60
<PAGE>
WHERE YOU CAN FIND MORE INFORMATION
SightSound.com has filed with the Securities and Exchange Commission a
registration statement on form S-1 under the 1933 Act with respect to the
common stock offered. This prospectus does not contain all of the information
set forth in the registration statement, certain portions of which are omitted
as permitted by the rules and regulations of the Securities and Exchange
Commission. For further information pertaining to SightSound and the common
stock offered hereby, reference is made to the registration statement,
including the exhibits thereto and the financial statements, notes and
schedules filed as a part thereof. Statements contained in this prospectus
regarding the contents of any contract or other document referred to herein or
therein are not necessarily complete, and in each instance reference is made to
the copy of such contract or other document filed as an exhibit to the
registration statement or such other document, each such statement being
qualified in all respects by such reference.
On the closing of the offering, we will be subject to the informational
requirements of the Securities Exchange Act of 1934, as amended, and, in
accordance therewith, will file reports, proxy statements and other information
with the Securities and Exchange Commission. Such reports, proxy statements and
other information, as well as the registration statement and the exhibits and
schedules thereto, may be inspected, without charge, at the public reference
facility maintained by the Securities and Exchange Commission at Room 1024,
Judiciary Plaza, 450 Fifth Street, NW, Washington, D.C. 20549, and at the
Commission's regional offices located at Seven World Trade Center, New York,
New York 10048 and Northwestern Atrium Center, 500 West Madison Street, Suite
1400, Chicago, Illinois 60661-2511. Copies of such material may also be
obtained from the Public Reference Section of the Securities and Exchange
Commission at 450 Fifth Street, N.W., Washington, D.C. 20549, at prescribed
rates. Such materials can also be inspected on the Securities and Exchange
Commission's site on the Internet at http://www.sec.gov.
61
<PAGE>
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<S> <C>
Independent Auditors' Report............................................. F-2
Balance Sheets At September 30, 1999 And December 31, 1998............... F-3
Statements of Operations For The Nine Months Ended September 30, 1999,
Years Ended December 31, 1998 and 1997 and For The Period From August 1,
1995 (inception) To September 30, 1999.................................. F-4
Statements of Stockholders' Equity For The Nine Months Ended September
30, 1999, Years Ended December 31, 1998 And 1997 And For The Period From
August 1, 1995 (inception) To September 30, 1999........................ F-5
Statements of Cash Flows For The Nine Months Ended September 30, 1999,
Years Ended December 31, 1998 and 1997 and For The Period From August 1,
1995 (inception) To September 30, 1999.................................. F-6
Notes To Financial Statements............................................ F-7
Unaudited Interim Financial Statements
Condensed Balance Sheet As of December 31, 1999.......................... F-14
Condensed Statements of Operations For The Three Months Ended December
31, 1999 and 1998 and For The Period From August 1, 1995 (inception) To
December 31, 1999....................................................... F-15
Condensed Statements of Cash Flows For The Three Months Ended December
31, 1999 and 1998 and For The Period From August 1, 1995 (inception) To
December 31, 1999....................................................... F-16
Notes To Condensed Financial Statements.................................. F-17
</TABLE>
F-1
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Board of Directors of
SightSound.com Incorporated:
We have audited the accompanying balance sheets of SightSound.com Incorporated
(a development stage company) (the "Company") as of September 30, 1999 and
December 31, 1998 and the related statements of operations, stockholders'
equity, and cash flows for the nine months ended September 30, 1999, the years
ended December 31, 1998 and 1997 and for the period from August 1, 1995
(inception) to September 30, 1999. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards in the United States of America. Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, such financial statements present fairly, in all material
respects, the financial position of the Company at September 30, 1999 and
December 31, 1998 and the results of its operations and its cash flows for the
nine months ended September 30, 1999, the years ended December 31, 1998 and
1997 and for the period from August 1, 1995 (inception) to September 30, 1999,
in conformity with generally accepted accounting principles in the United
States of America.
/s/ Deloitte & Touche LLP
Deloitte & Touche LLP
Pittsburgh, Pennsylvania
March 31, 2000
F-2
<PAGE>
SIGHTSOUND.COM INCORPORATED
(A Development Stage Company)
BALANCE SHEETS
<TABLE>
<CAPTION>
December 31, September 30,
1998 1999
------------ -------------
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents......................... $ 319,031 $ 9,017,705
Deferred financing costs--net..................... 39,098 --
Prepaid expenses and other current assets......... 115,155 90,613
----------- -----------
Total current assets............................ 473,284 9,108,318
PROPERTY AND EQUIPMENT--net......................... 242,568 938,723
----------- -----------
TOTAL ASSETS........................................ $ 715,852 $10,047,041
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable.................................. $ 70,028 $ 142,123
Accrued liabilities............................... 41,532 43,348
Advanced sponsorship fees......................... 225,000 --
Revolving credit facility......................... 200,000 --
Short-term debt................................... 160,726 --
----------- -----------
Total current liabilities....................... 697,286 185,471
----------- -----------
COMMITMENTS (NOTE 9)
STOCKHOLDERS' EQUITY:
Common stock, $0.00001 par, 100,000,000 shares
authorized; 32,048,024
and 25,449,212 shares issued and outstanding in
1999 and 1998.................................... 255 320
Additional paid-in capital........................ 2,649,398 15,846,273
Common stock subscription receivable.............. (60,000) --
Deficit accumulated during the development stage.. (2,571,087) (5,985,023)
----------- -----------
Total stockholders' equity...................... 18,566 9,861,570
----------- -----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY.......... $ 715,852 $10,047,041
=========== ===========
</TABLE>
See notes to financial statements.
F-3
<PAGE>
SIGHTSOUND.COM INCORPORATED
(A Development Stage Company)
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Period from
Year Ended Nine Months August 1, 1995
December 31, Ended (inception) to
----------------------- September 30, September 30,
1997 1998 1999 1999
---------- ----------- ------------- --------------
<S> <C> <C> <C> <C>
REVENUE.................. $ -- $ 552 $ 3,179 $ 3,731
COST OF REVENUE.......... -- 66 1,254 1,320
---------- ----------- ----------- -----------
GROSS PROFIT............. -- 486 1,925 2,411
---------- ----------- ----------- -----------
OPERATING EXPENSES:
Sales and marketing.... 139,482 319,862 868,405 1,353,046
Web operations......... 198,740 405,014 763,383 1,513,648
General and
administrative........ 230,605 831,161 1,434,186 2,630,762
---------- ----------- ----------- -----------
TOTAL OPERATING
EXPENSES................ 568,827 1,556,037 3,065,974 5,497,456
---------- ----------- ----------- -----------
OPERATING LOSS........... (568,827) (1,555,551) (3,064,049) (5,495,045)
---------- ----------- ----------- -----------
OTHER INCOME (EXPENSE):
Interest expense....... -- (159,528) (363,673) (529,927)
Interest income........ 7,667 8,839 13,786 39,949
---------- ----------- ----------- -----------
OTHER INCOME (EXPENSE)--
net..................... 7,667 (150,689) (349,887) (489,978)
---------- ----------- ----------- -----------
NET LOSS................. $ (561,160) $(1,706,240) $(3,413,936) $(5,985,023)
========== =========== =========== ===========
LOSS PER COMMON SHARE--
Basic and diluted....... $ (0.03) $ (0.07) $ (0.13) $ (0.28)
========== =========== =========== ===========
WEIGHTED AVERAGE COMMON
SHARES
OUTSTANDING--basic and
diluted................ 20,540,553 24,853,847 26,484,432 21,236,956
========== =========== =========== ===========
</TABLE>
See notes to financial statements.
F-4
<PAGE>
SIGHTSOUND.COM INCORPORATED
(A Development Stage Company)
STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
Common Stock
-----------------------
Deficit
Common Accumulated
Additional Stock During the Total
Number Paid-in Subscription Development Stockholders'
of Shares Amount Capital Receivable Stage Equity
----------- ----------- ----------- ------------ ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
BALANCE, AUGUST 1,
1995 (inception)....... -- $ -- $ -- $ -- $ -- $ --
Sales of shares of
common stock
and options during:
August 1995........... 14,000,000 140 665 -- -- 805
April to August 1996.. 5,964,600 60 678,664 -- -- 678,724
Net loss............... -- -- -- -- (303,687) (303,687)
----------- ----------- ----------- ----------- ----------- -----------
BALANCE, DECEMBER 31,
1996................... 19,964,600 200 679,329 -- (303,687) 375,842
Exercise of stock
options in August
1997.................. 857,600 9 100,073 -- -- 100,082
Sales of shares of
common stock and
options during
November and December
1997.................. 2,500,336 25 368,094 -- -- 368,119
Net loss............... -- -- -- -- (561,160) (561,160)
----------- ----------- ----------- ----------- ----------- -----------
BALANCE, DECEMBER 31,
1997................... 23,322,536 234 1,147,496 -- (864,847) 282,883
Sales of shares of
common stock
and options during:
January and February
1998................. 1,633,338 16 244,985 -- -- 245,001
November 1998......... 493,338 5 762,060 (60,000) -- 702,065
Issuance of stock
options to
non-employees in May
1998................. -- -- 494,857 -- -- 494,857
Net loss............... -- -- -- -- (1,706,240) (1,706,240)
----------- ----------- ----------- ----------- ----------- -----------
BALANCE, DECEMBER 31,
1998................... 25,449,212 255 2,649,398 (60,000) (2,571,087) 18,566
Sales of shares of
common stock
and options during:
March 1999............ 539,996 5 809,991 -- -- 809,996
May 1999.............. 203,816 2 407,630 -- -- 407,632
June 1999............. 745,000 7 1,467,930 -- -- 1,467,937
July and August 1999.. 110,000 1 219,999 -- -- 220,000
September 1999, net of
costs of $52,192 in
connection with a
private placement.... 5,000,000 50 9,947,758 -- -- 9,947,808
Payment of common stock
subscription
receivable............ -- -- -- 60,000 -- 60,000
Issuance of stock
options to
non-employees in April
and May 1999.......... -- -- 343,567 -- -- 343,567
Net loss............... -- -- -- -- (3,413,936) (3,413,936)
----------- ----------- ----------- ----------- ----------- -----------
BALANCE, SEPTEMBER 30,
1999................... 32,048,024 $ 320 $15,846,273 $ -- $(5,985,023) $ 9,861,570
=========== =========== =========== =========== =========== ===========
</TABLE>
See notes to financial statements.
F-5
<PAGE>
SIGHTSOUND.COM INCORPORATED
(A Development Stage Company)
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Period From
Year Ended Nine Months August 1, 1995
December 31, Ended (inception) to
---------------------- September 30, September 30,
<S> <C> <C> <C> <C>
1997 1998 1999 1999
--------- ----------- ----------- -----------
CASH FLOWS FROM OPERATING
ACTIVITIES:
Net loss................. $(561,160) $(1,706,240) $(3,413,936) $(5,985,023)
Adjustments to reconcile
net loss to net cash
used in operating
activities:
Depreciation............. 12,084 26,235 163,409 214,252
Other non-cash
expenses................ -- 116,485 721,939 838,424
Changes in operating
assets and liabilities:
Prepaid expenses and
other current assets... (3,946) (78,551) 24,542 (90,613)
Advanced sponsorship
fees................... -- 225,000 (225,000) --
Accounts payable........ (4,722) 64,970 72,095 142,123
Accrued liabilities..... 1,661 39,871 1,816 43,348
--------- ----------- ----------- -----------
Net cash used in
operating activities.. (556,083) (1,312,230) (2,655,135) (4,837,489)
--------- ----------- ----------- -----------
CASH FLOWS FROM INVESTING
ACTIVITIES--
Purchase of property and
equipment............... -- (241,484) (859,564) (1,152,975)
--------- ----------- ----------- -----------
Cash used in investing
activities............ -- (241,484) (859,564) (1,152,975)
--------- ----------- ----------- -----------
CASH FLOWS FROM FINANCING
ACTIVITIES:
Proceeds from sale of
common stock and
options................. 468,201 947,066 12,913,373 15,008,169
Borrowings under line-of-
credit agreement........ -- 200,000 -- 200,000
Repayments of borrowings
under line-of-credit
agreement............... -- -- (200,000) (200,000)
Proceeds from short-term
loans with options and
warrants................ -- 500,000 250,000 750,000
Repayments of short-term
loans................... -- -- (750,000) (750,000)
--------- ----------- ----------- -----------
Net cash provided by
financing activities.. 468,201 1,647,066 12,213,373 15,008,169
--------- ----------- ----------- -----------
NET (DECREASE) INCREASE IN
CASH AND CASH
EQUIVALENTS.............. (87,882) 93,352 8,698,674 9,017,705
CASH AND CASH EQUIVALENTS,
BEGINNING OF PERIOD...... 313,561 225,679 319,031 --
--------- ----------- ----------- -----------
CASH AND CASH EQUIVALENTS,
END OF PERIOD............ $ 225,679 $ 319,031 $ 9,017,705 $ 9,017,705
========= =========== =========== ===========
SUPPLEMENTAL DISCLOSURE OF
CASH FLOW INFORMATION
Cash paid for interest... $ -- $ 2,261 $ 94,218 $ 103,205
========= =========== =========== ===========
</TABLE>
See notes to financial statements.
F-6
<PAGE>
SIGHTSOUND.COM Incorporated
(A Development Stage Company)
NOTES TO FINANCIAL STATEMENTS
1. ORGANIZATION
SightSound.com Incorporated ("SightSound" or the "Company") was formed on
April 1, 1999 by the merger of Parsec Sight/Sound, Inc. ("Parsec") and Digital
Sight/Sound, Inc. ("Digital"). Prior to the merger, Parsec and Digital were
companies under common ownership and control. Parsec and Digital were
incorporated on August 1, 1995 (inception) each with a December 31 fiscal year
end. Subsequent to the merger, the Company changed its fiscal year end to
September 30. The merger was accounted for as a combination of entities under
common control ("as if pooling") and the financial statements of the Company
have been presented as if Parsec and Digital were combined from the date of
inception.
SightSound is a development stage company which electronically sells films,
music and other video and audio recordings over the Internet in download
fashion. Since inception, SightSound has principally been securing patents
related to its planned operations, developing its technology, building
infrastructure, securing audio and video distribution rights, and raising
capital, and accordingly, the financial statements of the Company have been
presented in accordance with Statement of Financial Accounting Standards
("SFAS") No. 7, "Accounting and Reporting by Development Stage Enterprises."
Further business development and growth of the Company will be financed from
$10,000,000 proceeds of a private placement offering of 5,000,000 shares of
common stock, together with options, completed on September 19, 1999. The
principal risks faced by the Company at this stage of its development are
securing audio and video distribution rights, establishing a customer base and
raising additional capital. Management of the Company expects SightSound to
emerge from the development stage during the fiscal year ending September 30,
2000.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The Company prepares its financial statements in accordance with generally
accepted accounting principles in the United States of America. Following is a
description of the Company's significant accounting policies.
a. Cash Equivalents--Cash equivalents are only those investments that are
highly liquid, readily convertible to cash and have original maturities
of three months or less.
b. Property and Equipment--Property and equipment are stated at cost less
accumulated depreciation. Depreciation of furniture and office
equipment and computer equipment and software is calculated using the
straight-line method based on the estimated useful lives of the assets
which range from three to seven years. Leasehold improvements are
depreciated using the straight-line method over the lesser of the
useful life or the term of the lease. The cost of repairs and
maintenance is expensed as incurred.
c. Patent Costs--Patent costs include costs associated with the filing,
registration and defense of the Company's patents. Such costs have been
expensed as incurred.
d. Research and Development Costs--Research and development costs are
expensed as incurred and amounted to $270,014, $275,324, $154,138 and
$804,638 for the nine months ended September 30, 1999, the years ended
December 31, 1998 and 1997 and for the period from August 1, 1995
(inception) to September 30, 1999, respectively.
e. Use of Estimates in the Preparation of Financial Statements--The
preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and
liabilities and disclosures of contingent assets and liabilities at the
date of the financial statements and the reported amounts of revenue
and expenses during the reporting period. Actual results could differ
from those estimates.
f. Revenue Recognition--Revenue from motion picture downloads is
recognized in the period in which download occurs.
F-7
<PAGE>
SIGHTSOUND.COM INCORPORATED
(A Development Stage Company)
NOTES TO FINANCIAL STATEMENTS--(Continued)
g. Advanced Sponsorship Fees--The Company entered into a five year
sponsorship agreement with a media company during July 1998; payments
received were deferred and were being recognized over the term of the
agreement. The agreement was terminated in June 1999 and the amount
paid to the Company was refunded to the media company.
h. Segment Information--Effective for the year ended December 31, 1998,
the Company has adopted the provisions of SFAS No. 131, "Disclosures
about Segments of an Enterprise and Related Information." SFAS No. 131
establishes annual and interim reporting standards for an enterprise's
operating segments and related disclosures about its products,
services, geographic areas and major customers. During all periods
presented, the Company operated in a single business segment, marketing
a repertoire of motion picture offerings for renting and purchasing to
consumers by direct file transfer, or "downloading," over the Internet.
Through September 30, 1999, foreign operations have not been
significant.
i. Stock Options--The Company has applied SFAS No. 123, "Accounting for
Stock-Based Compensation" in accounting for stock option transactions
with non-employees.
j. Stock Based Compensation--The Company has elected to account for any
options to be granted to employees in accordance with APB Opinion No.
25, "Accounting for Stock Issued to Employees," and related
interpretations.
k. Fair Values of Financial Instruments--The carrying values of the
Company's financial instruments, primarily short-term debt, approximate
their fair values due to their relatively short maturities.
l. Income Taxes--Income taxes are accounted for using the asset and
liability method which requires the recognition of deferred tax assets
and liabilities for the future tax consequences of events that have
been recognized in the Company's financial statements or tax returns.
The measurement of current and deferred tax assets and liabilities is
based on provisions of enacted tax law; deferred tax assets are reduced
by a valuation allowance, if necessary, to the amount that, based on
available evidence, management expects to be realized.
m. Loss Per Common Share--The weighted average shares used to compute
basic loss per common share include outstanding shares of common stock
from the date of issuance. The calculation of diluted loss per common
share for all periods presented excludes shares of common stock
issuable upon exercise of stock options as their effect would be
antidilutive. Therefore, the weighted average number of shares used in
the calculation of basic and diluted loss per common share is the same.
n. Comprehensive Net Loss--There were no differences between net loss as
reported for any of the periods reported herein and comprehensive loss,
as defined by SFAS No. 130, "Reporting Comprehensive Income."
o. Reclassifications--Certain previously reported amounts have been
reclassified to conform to the financial statement presentation format
herein.
p. Recent Accounting Pronouncements--In June 1998, the Financial
Accounting Standards Board ("FASB") issued SFAS No. 133, "Accounting
for Derivative Instruments and Hedging Activities." SFAS No. 133
requires that all derivatives be recognized at fair value in the
statement of financial position, and that corresponding gains or losses
be reported either in the statement of operations or as a component of
comprehensive income, depending upon the type of hedging relationship
that exists, and was initially effective for fiscal years beginning
after June 15, 1999. In April 1999, the FASB delayed the effective date
of SFAS No. 133 to years beginning after June 15, 2000. The Company
does not currently hold derivative instruments or engage in hedging
activities.
F-8
<PAGE>
SIGHTSOUND.COM INCORPORATED
(A Development Stage Company)
NOTES TO FINANCIAL STATEMENTS--(Continued)
3. PROPERTY AND EQUIPMENT
Property and equipment as of December 31, 1998 and September 30, 1999
consists of the following:
<TABLE>
<CAPTION>
December 31, September 30,
1998 1999
------------ -------------
<S> <C> <C>
Computer equipment and software................... $168,628 $ 855,378
Furniture and office equipment.................... 10,673 152,237
Leasehold improvements............................ 114,110 145,360
-------- ----------
293,411 1,152,975
Less accumulated depreciation..................... 50,843 214,252
-------- ----------
Property and equipment--net....................... $242,568 $ 938,723
======== ==========
</TABLE>
Depreciation expense for the nine months ended September 30, 1999 and the
years ended December 31, 1998 and 1997 was $163,409, $26,235 and $12,084,
respectively. From August 1, 1995 (inception) to September 30, 1999
depreciation expense totaled $214,252.
4. STOCK OPTIONS
The Company has not granted options to employees from inception through
September 30, 1999.
The Company has granted options to purchase common stock to non-employees in
consideration for obtaining movie rights for a one month period and for
guaranteeing financing. The options are exercisable immediately at prices equal
to the fair value of the shares at the date of grant. The estimated fair value
of the options granted in connection with obtaining the movie rights in April
1999 was recorded in sales and marketing expenses in the statements of
operations for the nine months ended September 30, 1999 and for the period
August 1, 1995 (inception) to September 30, 1999. The fair value of these
options at date of grant was $0.64 per share. The estimated fair value
attributable to the options granted in connection with guaranteeing financing
obtained in May 1998 and 1999 (See Note 5), was recorded as deferred financing
costs and amortized over the lives of the financings as interest expense. The
weighted average fair value of these options at the date of grant was $0.47 per
share.
A cumulative summary of options issued to non-employees is presented below.
This table does not include options and warrants issued to lenders discussed in
Note 5:
<TABLE>
<CAPTION>
Number Weighted
of Shares Average
Subject to Exercise
Options Price
---------- --------
<S> <C> <C>
Options outstanding and exercisable at August 1, 1995
and December 31, 1996 and 1997....................... -- $ --
Granted in 1998...................................... 160,000 1.25
------- -------
Options outstanding and exercisable at December 31,
1998................................................. 160,000 1.25
Granted in 1999...................................... 729,167 1.54
------- -------
Options outstanding and exercisable at September 30,
1999................................................. 889,167 $ 1.49
======= =======
</TABLE>
F-9
<PAGE>
SIGHTSOUND.COM INCORPORATED
(A Development Stage Company)
NOTES TO FINANCIAL STATEMENTS--(Continued)
All options issued to non-employees are exercisable at the date of grant.
The following table summarizes options granted to non-employees outstanding and
exercisable at September 30, 1999:
<TABLE>
<CAPTION>
Range of Exercise Prices Number Average Remaining Weighted Average
Per Share of Shares Contractual Life Exercise Price Per Share
------------------------ --------- ----------------- ------------------------
<S> <C> <C> <C>
$ 1.25 160,000 4.6 yrs $1.25
1.50 666,667 1.2 yrs 1.50
2.00 62,500 4.6 yrs 2.00
---------- ------- ------- -----
$1.25-2.00 889,167 2 yrs $1.49
========== ======= ======= =====
</TABLE>
The fair value of all options granted to non-employees was determined using
the Black Scholes Option Pricing model with the following weighted average
assumptions used:
<TABLE>
<S> <C>
Risk-free interest rate.......................................... 5.4%
Expected life of options (contractual life)...................... 2.7 years
Expected volatility.............................................. 82%
Expected dividend yield.......................................... --
</TABLE>
The Company has entered into various transactions with third parties
providing for the sale of the Company's common stock and the granting of
options to purchase common stock in consideration for the investment in the
Company. The options are exercisable immediately generally at prices equal to
the fair value of the shares on the date of the grant. The Company has
accounted for options granted in conjunction with sales of common stock by
allocating the proceeds from the sales of common stock among common stock and
additional paid-in capital. The weighted average fair value of these options
was $0.20 per share.
A cumulative summary of options issued in connection with sales of common
stock is as follows:
<TABLE>
<CAPTION>
Number of Weighted
Shares Average
Subject to Exercise
Options Price
---------- --------
<S> <C> <C>
Options outstanding at August 1, 1995 and December
31, 1995............................................ -- $ --
Granted in 1996.................................... 3,858,000 0.12
--------- -----
Options outstanding at December 31, 1996............. 3,858,000 0.12
Exercised in 1997.................................. (857,600) 0.12
--------- -----
Options outstanding at December 31, 1997 and 1998.... 3,000,400 0.12
Granted in 1999.................................... 5,358,332 2.28
--------- -----
Options outstanding at September 30, 1999............ 8,358,732 $1.51
========= =====
</TABLE>
All options issued in connection with sales of common stock are exercisable
at the date of grant. The following table summarizes options issued in
connection with sales of common stock outstanding and exercisable at September
30, 1999:
<TABLE>
<CAPTION>
Range of Exercise Prices Number Average Remaining Weighted Average
Per Share of Shares Contractual Life Exercise Price Per Share
------------------------ --------- ----------------- ------------------------
<S> <C> <C> <C>
$ 0.12 3,000,400 1.8 yrs $0.12
2.00 5,241,666 0.3 yrs 2.00
15.00 116,666 4.3 yrs 15.00
------------ --------- ------- -----
$0.12-$15.00 8,358,732 0.9 yrs $1.51
============ ========= ======= =====
</TABLE>
F-10
<PAGE>
SIGHTSOUND.COM INCORPORATED
(A Development Stage Company)
NOTES TO FINANCIAL STATEMENTS--(Continued)
Options for 5,000,000 shares were issued at $2.00 per share to a foreign
company, whose shares are publicly traded on a foreign exchange, in connection
with the private placement in September 1999 (See Note 1). The options are
exercisable in shares of common stock of the foreign company. The terms of the
option agreement provide that such common shares obtained by SightSound may not
be sold without the consent of the foreign company, which may not be
unreasonably withheld. SightSound's restriction on the sale of the foreign
company's common stock ceases upon an initial public offering of SightSound's
common stock. The term of the option was through December 31, 1999 (See Note
10).
5. BORROWINGS
In May 1998, the Company borrowed $200,000 under a line of credit agreement
with a bank with interest payable at the prime rate, and also received proceeds
from other loans of $500,000 with interest payable at 12%. In May 1999, the
Company borrowed $250,000 under a short-term loan facility with a bank with
interest payable at the prime rate which was used to repay a comparable amount
of the $500,000 loans. All remaining amounts borrowed under the line of credit
and the other loans were repaid with the proceeds from the Company's private
placement offering in September 1999 (See Note 1).
The Company entered into stock option agreements with an individual to be
the guarantor for the $200,000 line of credit and the $250,000 short-term loan
(See Note 4).
In connection with the $500,000 loans entered into in May 1998, 500,000
options and 500,000 warrants were issued to the lenders to purchase the
Company's stock at prices determined by a formula specified in the loan
agreements. These options and warrants were exercisable from the date of the
loan agreements. The warrants have an exercise price of $1.00 and expire on May
14, 2000 and September 20, 2000. The options have an exercise price of $1.00
and expire on July 31, 2003.
The $500,000 loans proceeds were allocated to the loans, options and
warrants based upon their estimated relative fair values. The fair value of the
options and warrants was recorded as additional paid-in capital. The debt was
accreted to its face amount over its term using the interest method with the
accretion being recorded as interest expense.
6. LOSS PER COMMON SHARE
The following table summarizes the computation of basic and diluted loss per
common share:
<TABLE>
<CAPTION>
Period From
Year Ended Nine Months August 1, 1995
December 31, Ended (inception) to
------------------------ September 30, September 30,
1997 1998 1999 1999
----------- ----------- ------------- --------------
<S> <C> <C> <C> <C>
Basic and Diluted Loss
Per Common Share:
Numerator:
Net loss attributable
to common
stockholders.......... $ (561,160) $(1,706,240) $(3,413,936) $(5,985,023)
Denominator:
Weighted average common
shares outstanding.... 20,540,553 24,853,847 26,484,432 21,236,956
----------- ----------- ----------- -----------
Basic and diluted loss
per common share...... $ (0.03) $ (0.07) $ (0.13) $ (0.28)
=========== =========== =========== ===========
Outstanding options to
purchase common
stock................. 3,000,400 4,160,400 10,247,899 10,247,899
=========== =========== =========== ===========
</TABLE>
7. INCOME TAXES
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes, and of net operating
loss carryforwards.
F-11
<PAGE>
SIGHTSOUND.COM INCORPORATED
(A Development Stage Company)
NOTES TO FINANCIAL STATEMENTS--(Continued)
At September 30, 1999, the Company had approximately $5.4 million of federal
and $5.6 million of state net operating loss carryforwards available to offset
future taxable income, which will begin to expire in 2011 and 2006,
respectively. Under the Tax Reform Act of 1986, the amounts of and benefits
from net operating loss carryforwards may be impaired or limited in certain
circumstances. Events which cause limitations in the amount of net operating
losses that the Company may utilize in any one year include, but are not
limited to, a cumulative change in ownership. SFAS No. 109, "Accounting for
Income Taxes," requires that a valuation allowance be established for deferred
tax assets if, based on the weight of evidence, it is more likely than not that
some portion or all of the deferred tax assets will not be realized. The
ultimate realization of deferred tax assets is dependent upon the generation of
future taxable income during periods in which those temporary differences
become deductible. The Company has recorded a valuation allowance for all of
its net deferred tax asset amounting to $1,058,000 and $2,445,000 at December
31, 1998 and September 30, 1999, respectively.
The following table summarizes the sources of deferred income tax items and
the effects of temporary differences between amounts of assets and liabilities
for financial reporting purposes and such amounts as measured by tax laws.
Deferred income tax assets are as follows:
<TABLE>
<CAPTION>
December 31, September 30,
1998 1999
------------ -------------
<S> <C> <C>
Deferred Income Tax Assets:
Net operating loss carryforwards................ $ 921,000 $ 2,225,000
Intangible assets............................... 98,000 172,000
Property and equipment.......................... 39,000 48,000
----------- -----------
1,058,000 2,445,000
Valuation allowance............................. (1,058,000) (2,445,000)
----------- -----------
Deferred income tax asset--net.................. $ -- $ --
=========== ===========
</TABLE>
The Company's effective tax rate differs from the expected statutory rate of
34% due to state income taxes of 6% and the effects of the valuation allowances
for the nine months ended September 30, 1999, the years ended December 31, 1998
and 1997 and for the period from August 1, 1995 (inception) to September 30,
1999.
8. STOCKHOLDERS' EQUITY
The Company has created a "Value Creation Pool" consisting of 16,500,000
shares of its common stock reserved for issuance for content acquisition and
development. Of the 16,500,000 shares, 10,000,000 shares will be issued to
participating "top tier" studios who choose to use SightSound's service based
on certain guidelines established for the Value Creation Pool and 6,500,000
shares to be issued at management's discretion as signing bonuses.
In the event the Company issues additional common stock, the terms of the
investment in September 1999 (See Note 1) provide preemptive rights to the
investor to purchase from the Company an amount of common stock to allow the
investor to maintain an undiluted ownership percentage equal to its ownership
prior to such issuance, at a price equal to the consideration the party
acquiring the additional common stock paid.
9. LEASES AND OTHER AGREEMENTS
The Company leases its office space under a lease expiring August 31, 2003.
Rental expense for the nine months ended September 30, 1999, the years ended
December 31, 1998 and 1997 and for the period from August 1, 1995 (inception)
to September 30, 1999 was $111,867, $53,222, $8,680 and $174,783, respectively.
F-12
<PAGE>
SIGHTSOUND.COM INCORPORATED
(A Development Stage Company)
NOTES TO FINANCIAL STATEMENTS--(Continued)
Future minimum lease payments for this lease are as follows:
<TABLE>
<CAPTION>
Year Ending
September 30,
-------------
<S> <C>
2000............................................................ $125,730
2001............................................................ 125,730
2002............................................................ 125,730
2003............................................................ 115,253
</TABLE>
The Company has entered into various licensing agreements for Internet
distribution rights for audio and video material. Under the terms of the
licensing agreements, the Company is obligated to pay the licensors licensing
fees based on specified percentages of revenue generated by SightSound's
distribution of the licensed materials. Licensing fees are reflected as cost of
earned revenue in the statements of operations and have been insignificant
through September 30, 1999, as the Company has yet to generate significant
revenue.
10. SUBSEQUENT EVENTS
The Company adopted the 1999 Stock Option Plan (the "Plan") on December 21,
1999 and has reserved 8,000,000 shares of common stock for issuance of options
to employees and directors through 2009. Options granted under the Plan vest
over a period not to exceed five years, set at the discretion of the
Compensation Committee of the Board of Directors. In December 1999, the Company
issued 1,014,000 options to employees at an exercise price of $2.00 per share
under the Plan and recorded stock compensation expense of $974,356 for the
difference between the exercise price and the estimated fair market value of
the Company's common stock at the date of grant. The Company granted an
additional 815,000 options to employees in March 2000. Employee options issued
in December 1999 and March 2000 under the Plan vest 25% upon issuance and 25%
per year until fully vested. The Company also issued 150,000 options under the
Plan to non-employee directors in March 2000 which vest immediately.
In addition, in October 1999 the Company granted 300,000 options to certain
directors for board service prior to the adoption of the Plan. The options have
an exercise price of $2.00 per share which was equivalent to the market price
of the Company's common stock at the date of grant.
In March 2000, the Company granted 20,000 options to acquire certain movie
content.
On December 22, 1999 a foreign company, whose shares are publicly traded on
a foreign exchange, gave notice to the Company of its intention to exercise its
5,000,000 options (See Note 4).
In conjunction with its Value Creation Pool, at March 31, 2000 the Company
has committed to issue or specifically reserve for issue up to 3,320,791 shares
of its common stock for content acquisition purposes and certain preemptive
rights (See Note 8).
* * * * * *
F-13
<PAGE>
SIGHTSOUND.COM INCORPORATED
(A Development Stage Company)
CONDENSED BALANCE SHEET (UNAUDITED)
<TABLE>
<CAPTION>
December 31,
1999
------------
<S> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents....................................... $ 4,679,741
Restricted cash................................................. 1,400,000
Prepaid expenses and other current assets....................... 80,521
-----------
Total current assets.......................................... 6,160,262
-----------
PROPERTY AND EQUIPMENT--net....................................... 3,877,987
RESTRICTED CASH--non-current...................................... 1,400,000
OTHER ASSETS...................................................... 24,533
-----------
TOTAL ASSETS...................................................... $11,462,782
===========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Account payable................................................. $ 161,875
Accrued liabilities............................................. 532,160
Current portion of long-term obligations........................ 1,458,985
-----------
Total current liabilities..................................... 2,153,020
-----------
LONG-TERM OBLIGATIONS--less current maturities.................... 1,262,063
-----------
COMMITMENTS
STOCKHOLDERS' EQUITY
Common stock, $0.00001 par, 100,000,000 shares authorized;
32,048,024 shares issued and outstanding....................... 320
Additional paid-in capital...................................... 19,743,697
Deferred compensation........................................... (2,923,068)
Deficit accumulated during the development stage................ (8,773,250)
-----------
Total stockholders' equity.................................... 8,047,699
-----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY........................ $11,462,782
===========
</TABLE>
See notes to condensed financial statements.
F-14
<PAGE>
SIGHTSOUND.COM INCORPORATED
(A Development Stage Company)
CONDENSED STATEMENTS OF OPERATIONS (UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended
December 31,
-----------------------
Period from
August 1, 1995
(inception)
1998 1999 to December 31, 1999
---------- ----------- --------------------
<S> <C> <C> <C>
REVENUE......................... $ 133 $ 2,743 $ 6,474
COST OF REVENUE................. 16 1,823 3,143
---------- ----------- -----------
GROSS PROFIT.................... 117 920 3,331
---------- ----------- -----------
OPERATING EXPENSES:
Sales and marketing........... 83,205 353,160 1,706,206
Web operations................ 167,458 458,640 1,972,288
General and administrative.... 265,286 1,068,485 3,699,247
Stock compensation............ -- 974,356 974,356
---------- ----------- -----------
TOTAL OPERATING EXPENSES........ 515,949 2,854,641 8,352,097
---------- ----------- -----------
OPERATING LOSS.................. (515,832) (2,853,721) (8,348,766)
INTEREST (EXPENSE) INCOME--net.. (61,434) 65,494 (424,484)
---------- ----------- -----------
NET LOSS........................ $ (577,266) $(2,788,227) $(8,773,250)
========== =========== ===========
LOSS PER COMMON SHARE--
Basic and diluted............. $ (0.02) $ (0.09) $ (0.40)
========== =========== ===========
WEIGHTED AVERAGE COMMON SHARES
OUTSTANDING--basic and
diluted........................ 25,133,339 32,048,024 21,853,582
========== =========== ===========
</TABLE>
See notes to condensed financial statements.
F-15
<PAGE>
SIGHTSOUND.COM INCORPORATED
(A Development Stage Company)
CONDENSED STATEMENTS OF CASH FLOWS (UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended Period from
December 31, August 1, 1995
----------------------- (inception) to
1998 1999 December 31, 1999
---------- ----------- -----------------
<S> <C> <C> <C>
NET CASH USED IN OPERATIONS......... $ (460,321) $(1,057,484) $(5,894,973)
---------- ----------- -----------
CASH FLOWS FROM INVESTING
ACTIVITIES--
Purchase of property and
equipment........................ (140,687) (354,421) (1,507,396)
---------- ----------- -----------
Cash used in investing
activities..................... (140,687) (354,421) (1,507,396)
---------- ----------- -----------
CASH FLOWS FROM FINANCING
ACTIVITIES:
Proceeds from sale of common stock
and options...................... 702,065 -- 15,008,169
Borrowings under line of credit
agreement........................ 200,000 -- 200,000
Repayments of borrowings under
line of credit agreement......... -- -- (200,000)
Repayments of capital lease
obligations...................... -- (126,059) (126,059)
Proceeds from short-term loans
with options and warrants........ -- -- 750,000
Repayments of short-term loans.... -- -- (750,000)
Restricted cash placed on
deposit.......................... -- (2,800,000) (2,800,000)
---------- ----------- -----------
Net cash provided by (used in)
financing activities........... 902,065 (2,926,059) 12,082,110
---------- ----------- -----------
NET INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS................... 301,057 (4,337,964) 4,679,741
CASH AND CASH EQUIVALENTS, BEGINNING
OF PERIOD.......................... 17,974 9,017,705 --
---------- ----------- -----------
CASH AND CASH EQUIVALENTS, END OF
PERIOD............................. $ 319,031 $ 4,679,741 $ 4,679,741
========== =========== ===========
NON-CASH TRANSACTIONS--
Acquisition of computer equipment
under capital lease.............. $ -- $ 2,847,107 $ 2,847,107
========== =========== ===========
</TABLE>
See notes to condensed financial statements.
F-16
<PAGE>
SIGHTSOUND.COM INCORPORATED
(A Development Stage Company)
NOTES TO CONDENSED FINANCIAL STATEMENTS (UNAUDITED)
1.BASIS OF PRESENTATION
In the opinion of management, the unaudited condensed financial statements
included herein have been prepared on a basis consistent with the audited
financial statements and include all material adjustments, consisting of normal
recurring adjustments, necessary to fairly present the information set forth
therein. Certain information and footnote disclosures normally included in the
financial statements have been condensed or omitted pursuant to rules and
regulations of the Securities and Exchange Commission, although we believe that
the disclosures in the unaudited interim financial statements are adequate to
ensure that the information presented is not misleading. The unaudited interim
financial statements presented herein should be read in conjunction with the
audited financial statements and the notes thereto included elsewhere in this
document.
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ materially from those
estimates.
2.LOSS PER COMMON SHARE
The following table summarizes the computation of basic and diluted loss per
common share:
<TABLE>
<CAPTION>
Period from
Three Months Ended August 1, 1995
December 31, (inception) to
------------------------ December 31,
1998 1999 1999
----------- ----------- --------------
<S> <C> <C> <C>
Basic and Diluted Loss per Common
Share:
Numerator:
Net loss attributable to common
stockholders.................... $ (577,266) $(2,788,227) $(8,773,250)
----------- ----------- -----------
Denominator:
Weighted average common shares
outstanding..................... 25,133,339 32,048,024 21,853,582
----------- ----------- -----------
Basic and diluted loss per common
share........................... $ (0.02) $ (0.09) $ (0.40)
=========== =========== ===========
</TABLE>
In addition, 11,561,899 and 4,160,400 options were outstanding at December
31, 1999 and 1998, respectively, and were excluded from the above calculation
as their effect would be antidilutive for the purposes of calculation of
diluted earnings per share.
3.CAPITAL LEASE AND RESTRICTED CASH
During the three months ended December 31, 1999, the Company entered into a
capital lease for approximately $2.8 million of computer equipment. The lease
is payable in 24 equal monthly principal installments of $111,191 plus interest
at 7.5% and sales taxes. In conjunction with obtaining this lease, the Company
was required by the lessor to place $2.8 million on deposit with a financial
institution determined by the lessor. An amount equivalent to three monthly
principal installments is to be released from this account to the Company every
quarter.
4.STOCK OPTION PLAN
On December 21, 1999, the Company adopted the 1999 Stock Option Plan (the
"Plan") and has reserved 8,000,000 shares of common stock for issuance to
employees and directors through 2009. 1,014,000 options were issued to
employees under this plan in December 1999 at an exercise price of $2.00 per
share. The options granted in December 1999 vest 25% upon issuance and 25% per
year until fully vested.
F-17
<PAGE>
NOTES TO CONDENSED FINANCIAL STATEMENTS--(Continued)
The Company accounts for options granted under APB Opinion No. 25 and
related interpretations. Accordingly, compensation is recorded for options
granted based on the difference between the exercise price and the fair value
of the Company's common stock at the date of grant. Compensation, if any, is
deferred and recorded as an expense over the vesting period. The Company
recorded deferred compensation of $3,897,424 for the options granted in
December 1999, of which $974,356 was charged to stock compensation expense in
the three months ended December 31, 1999 and the period from August 1, 1995
(inception) to December 31, 1999.
* * * * * *
F-18
<PAGE>
[BACK COVER]
shares of common stock
[LOGO TO COME]
WR H A M B R E C H T+ C O
DLJdirect Inc.
Until , 2000, which is 25 days after the date of this prospectus,
all dealers that buy, sell, or trade SightSound.com's common stock, whether or
not participating in this distribution, may be required to deliver a
prospectus. This delivery requirement is in addition to the obligation of
dealers to deliver a prospectus when acting as underwriters and with respect to
their unsold allotments or subscriptions.
<PAGE>
[ARTWORK TO COME]
<PAGE>
PART II
INFORMATION NOT REQUIRED IN THE PROSPECTUS
Item 13. Other Expenses of Issuance and Distribution
Other expenses in connection with the issuance and distribution of the
securities to be registered hereunder, all of which will be paid by the
registrant, will be substantially as follows:
<TABLE>
<CAPTION>
Item Amount
---- -------
<S> <C>
SEC registration fee............................................. $13,200
NASD filing fee.................................................. 5,500
Nasdaq National Market listing fee............................... *
Accounting fees and expenses..................................... *
Legal fees and expenses.......................................... *
Printing costs................................................... *
Miscellaneous.................................................... *
-------
Total........................................................ $ *
=======
</TABLE>
- --------
* To be filed by amendment.
Item 14. Indemnification Of Directors and Officers
Sections 1741-1743 of the Pennsylvania Business Corporation Law of 1988
(PBCL) provide that a corporation has the power to indemnify any person
("representative") who was or is a party to any threatened, pending or
completed action or proceeding, whether civil, criminal, administrative or
investigative (other than an action by or in the right of the corporation, a
"derivative action"), by reason of the fact that he is or was a representative
of the corporation or is or was serving at the request of a corporation as a
representative of another entity or enterprise, against expenses (including
attorneys' fees), judgments, fines and amounts paid in settlement actually and
reasonably incurred in connection with the action or proceeding, if he acted in
good faith and in a manner he reasonably believed to be in or not opposed to
the best interests of the corporation, and, with respect to any criminal action
or proceeding, if he had no reasonable cause to believe his conduct was
unlawful. A similar standard is applicable in the case of derivative actions,
except that indemnification only extends to expenses (including attorneys'
fees) incurred in connection with the defense or settlement of such actions,
and the statute requires court approval before there can be any indemnification
where the representative has been found liable to the corporation. Section 1743
of the PBCL and SightSound.com's bylaws provide for mandatory indemnification
of a representative for expenses (including attorneys' fees) actually and
reasonably incurred by the representative to the extent the representative is
successful on the merits or otherwise in defense of an action or proceeding or
of any claim, issue or matter in an action or proceeding. Section 1746 of the
PBCL provides that indemnification provided or granted under the PBCL is not
exclusive of other indemnification that may be granted by a corporation's
bylaws, agreement, shareholder vote, disinterested director vote or otherwise.
SightSound.com's bylaws generally provide for indemnification as required by
Section 1743 and as permitted by Sections 1741 and 1742. The bylaws also permit
SightSound.com to advance funds to its directors and officers to enable them to
defend against such actions and proceedings. However, SightSound.com's bylaws
prohibit indemnification in the case of derivative actions where the
representative is adjudged liable for willful misconduct or recklessness in the
performance of his duty to SightSound.com.
The PBCL permits a corporation to provide in its bylaws that a director of
the corporation shall not be personally liable, as such, for monetary damages
for any action taken unless (i) the director has breached or failed to perform
the duties of his office under Sections 1711-1718 of the PBCL and (ii) the
breach or failure to perform constitutes self-dealing, willful misconduct or
recklessness. This protection from personal liability does not apply to the
responsibility or liability of a director pursuant to any criminal statute or
the liability of a director for the payment of taxes pursuant to federal, state
or local law.
II-1
<PAGE>
SightSound.com's bylaws contain a provision designed to limit a director's
liability to the extent permitted by the PBCL. Specifically, directors will not
be held liable to SightSound.com or its shareholders for monetary damages for
any breach of or failure to perform his fiduciary duty as a director unless the
breach or failure to perform constitutes self dealing, willful misconduct or
recklessness.
Item 15. Recent Sales of Unregistered Securities
On March 31, 2000, SightSound.com agreed to issue 10,000 shares to Cinetel
Films, Inc. in connection with Cinetel's grant to SightSound.com of certain
Internet distribution rights to certain motion pictures. Exemption from
registration for this transaction was claimed pursuant to Regulation D
promulgated under the Securities Act regarding transactions by the issuer not
involving a public offering, in that the transaction was made, without general
solicitation or advertising, to a sophisticated investor with access to all
relevant information necessary to evaluate this investment and who represented
to SightSound.com that the shares were being acquired for investment.
On March 31, 2000, SightSound.com agreed to issue 2,500 shares to Promark
Entertainment Group in connection with Promark's grant to SightSound.com of
certain Internet distribution rights to certain motion pictures. Exemption from
registration for this transaction was claimed pursuant to Regulation D
promulgated under the Securities Act regarding transactions by the issuer not
involving a public offering, in that the transaction was made, without general
solicitation or advertising, to a sophisticated investor with access to all
relevant information necessary to evaluate this investment and who represented
to SightSound.com that the shares were being acquired for investment.
On March 30, 2000, SightSound.com agreed to issue 1,000,000 shares to
Miramax Film Corp. in connection with Miramax's grant of the non-exclusive
right to electronically distribute over certain Internet sites 12 motion
pictures. Exemption from registration for this transaction was claimed pursuant
to Regulation D promulgated under the Securities Act regarding transactions by
the issuer not involving a public offering, in that the transaction was made,
without general solicitation or advertising, to a sophisticated investor with
access to all relevant information necessary to evaluate this investment and
who represented to SightSound.com that the shares were being acquired for
investment.
On March 30, 2000, SightSound.com agreed to issue 10,000 shares to Troma
Entertainment, Inc. in connection with Troma's grant to SightSound.com of
certain Internet distribution rights to certain motion pictures. Exemption from
registration for this transaction was claimed pursuant to Regulation D
promulgated under the Securities Act regarding transactions by the issuer not
involving a public offering, in that the transaction was made, without general
solicitation or advertising, to a sophisticated investor with access to all
relevant information necessary to evaluate this investment and who represented
to SightSound.com that the shares were being acquired for investment.
On March 22, 2000, SightSound.com agreed to issue 100,000 shares to Ariel
Emanuel in the event SightSound.com consummated a certain licensing transaction
with Miramax prior to March 31, 2000. SightSound.com consummated such licensing
agreement with Miramax as of March 30, 2000. Exemption from registration for
this transaction was claimed pursuant to Regulation D promulgated under the
Securities Act regarding transactions by the issuer not involving a public
offering, in that the transaction was made, without general solicitation or
advertising, to a sophisticated investor with access to all relevant
information necessary to evaluate this investment and who represented to
SightSound.com that the shares were being acquired for investment.
On March 22, 2000, SightSound.com agreed to issue up to 100,000 shares to
Steven Paul in partial consideration of Crystal Sky's production services in
connection with a certain audiovisual production intended for initial
transmission and exhibition by means of the Internet--50,000 upon commencement
of development services and 50,000 upon delivery of the production. Exemption
from registration for this transaction was claimed pursuant to Regulation D
promulgated under the Securities Act regarding transactions by the issuer not
involving a public offering, in that the transaction was made, without general
solicitation or advertising, to a sophisticated investor with access to all
relevant information necessary to evaluate this investment and who represented
to SightSound.com that the shares were being acquired for investment.
II-2
<PAGE>
On March 22, 2000, SightSound.com agreed to issue 100,000 to Guy O'Seary in
consideration of O'Seary's future efforts to assist SightSound.com in securing
and attaching talent to future audiovisual project to be distributed over the
Internet. Exemption from registration for this transaction was claimed pursuant
to Regulation D promulgated under the Securities Act regarding transactions by
the issuer not involving a public offering, in that the transaction was made,
without general solicitation or advertising, to a sophisticated investor with
access to all relevant information necessary to evaluate this investment and
who represented to SightSound.com that the shares were being acquired for
investment.
On March 22, 2000, SightSound.com agreed to issue 100,000 shares to Endeavor
Agency in consideration of Endeavor's future efforts to assist SightSound.com
in securing and attaching talent to future audiovisual project to be
distributed over the Internet. Exemption from registration for this transaction
was claimed pursuant to Regulation D promulgated under the Securities Act
regarding transactions by the issuer not involving a public offering, in that
the transaction was made, without general solicitation or advertising, to a
sophisticated investor with access to all relevant information necessary to
evaluate this investment and who represented to SightSound.com that the shares
were being acquired for investment.
On March 14, 2000, SightSound.com agreed to issue up to 100,000 shares to
Bradley Krevoy in partial consideration of CME's production services in
connection with a certain audiovisual production intended for initial
transmission and exhibition by means of the Internet--50,000 upon commencement
of development services and 50,000 upon delivery of the production. Exemption
from registration for this transaction was claimed pursuant to Regulation D
promulgated under the Securities Act regarding transactions by the issuer not
involving a public offering, in that the transaction was made, without general
solicitation or advertising, to a sophisticated investor with access to all
relevant information necessary to evaluate this investment and who represented
to SightSound.com that the shares were being acquired for investment.
On March 6, 2000 and March 29, 2000, SightSound.com agreed to issue 2,500
and 7,500 shares, respectively, to Vanguard International Cinema in connection
with Vanguard's grant to SightSound.com of Internet distribution rights to
certain motion pictures. Exemption from registration for this transaction was
claimed pursuant to Regulation D promulgated under the Securities Act regarding
transactions by the issuer not involving a public offering, in that the
transaction was made, without general solicitation or advertising, to a
sophisticated investor with access to all relevant information necessary to
evaluate this investment and who represented to SightSound.com that the shares
were being acquired for investment.
On February 28, 2000, SightSound.com agreed to issue 2,500 shares to Vista
Street Entertainment in connection with Vista's grant to SightSound.com of
certain Internet distribution rights to certain motion pictures. Exemption from
registration for this transaction was claimed pursuant to Regulation D
promulgated under the Securities Act regarding transactions by the issuer not
involving a public offering, in that the transaction was made, without general
solicitation or advertising, to a sophisticated investor with access to all
relevant information necessary to evaluate this investment and who represented
to SightSound.com that the shares were being acquired for investment.
On February 25, 2000, Sightsound.com agreed to issue 1,000,000 shares to
Franchise Pictures, LLC in consideration of Franchise's grant to SightSound.com
of exclusive, worldwide Internet distribution rights to at least 35 motion
pictures. Exemption from registration for this transaction was claimed pursuant
to Regulation D promulgated under the Securities Act regarding transactions by
the issuer not involving a public offering, in that the transaction was made,
without general solicitation or advertising, to a sophisticated investor with
access to all relevant information necessary to evaluate this investment and
who represented to SightSound.com that the shares were being acquired for
investment.
On March 28, 2000, SightSound.com agreed to issue 15,000 shares to each of
David Glasser and Adam Stone in connection with Cutting Edge Entertainment
Inc.'s grant to SightSound.com of non-exclusive, worldwide Internet
distribution rights to the motion pictures "Fait Accompli" and "For Which He
Stands." Exemption from registration for this transaction was claimed pursuant
to Regulation D promulgated under the Securities Act regarding transactions by
the issuer not involving a public offering, in that the transaction was
II-3
<PAGE>
made, without general solicitation or advertising, to a sophisticated investor
with access to all relevant information necessary to evaluate this investment
and who represented to SightSound.com that the shares were being acquired for
investment.
On March 31, 2000, SightSound.com agreed to issue 10,000 shares to Pacific
Trust in connection with its grant to SightSound.com of non-exclusive,
worldwide Internet distribution rights to 20 motion pictures. Exemption from
registration for this transaction was claimed pursuant to Regulation D
promulgated under the Securities Act regarding transactions by the issuer not
involving a public offering, in that the transaction was made, without general
solicitation or advertising, to a sophisticated investor with access to all
relevant information necessary to evaluate this investment and who represented
to SightSound.com that the shares were being acquired for investment.
On February 22, 2000, SightSound.com agreed to issue 13,714 shares to
Eugenio Zanetti in connection with certain services Mr. Zanetti is providing to
Quantum Project, Inc. Exemption from registration for this transaction was
claimed pursuant to Regulation D promulgated under the Securities Act regarding
transactions by the issuer not involving a public offering, in that the
transaction was made, without general solicitation or advertising, to a
sophisticated investor with access to all relevant information necessary to
evaluate this investment and who represented to SightSound.com that the shares
were being acquired for investment.
On February 22, 2000, SightSound.com agreed to issue 4,750 shares to each of
Gunnar Erickson and Mark Halloran in connection with certain services Mssrs.
Erickson and Halloran are providing to Metafilmics, who is providing certain
services for Quantum Project, Inc. Exemption from registration for this
transaction was claimed pursuant to Regulation D promulgated under the
Securities Act regarding transactions by the issuer not involving a public
offering, in that the transaction was made, without general solicitation or
advertising, to a sophisticated investor with access to all relevant
information necessary to evaluate this investment and who represented to
SightSound.com that the shares were being acquired for investment.
On February 29, 2000, SightSound.com agreed to issue 25,000 shares to
Stephen H. Dorff, 2,000 to Endeavor Talent Agency, LLC and 1,000 to each of
Ernst & Young LLP, Industry Entertainment, LLC and Bloom, Hergot, Diemer & Cook
LLP in connection with certain services Mr. Dorff is providing to Quantum
Project, Inc. Exemption from registration for each of these transactions was
claimed pursuant to Regulation D promulgated under the Securities Act regarding
transactions by the issuer not involving a public offering, in that the
transaction was made, without general solicitation or advertising, to a
sophisticated investor with access to all relevant information necessary to
evaluate this investment and who represented to SightSound.com that the shares
were being acquired for investment.
On March 21, 2000, SightSound.com agreed to issue 5,000 shares to David
Aaron Cohen in connection with certain services Mr. Cohen is providing to
SightSound.com. Exemption from registration for this transaction was claimed
pursuant to Rule 701 promulgated under the Securities Act regarding issuances
by the issuer to a natural person who has provided bona fide services to the
issuer and such services are not in connection with the offer or sale of the
issuer's securities and do not promote or maintain a market for the issuer's
securities.
On March 21, 2000, SightSound.com agreed to issue 42,750 shares to Barnet
Bain in connection with certain services Mr. Bain is providing to
SightSound.com. Exemption from registration for this transaction was claimed
pursuant to Rule 701 promulgated under the Securities Act regarding issuances
by the issuer to a natural person who has provided bona fide services to the
issuer and such services are not in connection with the offer or sale of the
issuer's securities and do not promote or maintain a market for the issuer's
securities.
On March 21, 2000, SightSound.com agreed to issue 8,550 shares to Gay
Hendricks in connection with certain services Mr. Hendricks is providing to
SightSound.com. Exemption from registration for this transaction was claimed
pursuant to Rule 701 promulgated under the Securities Act regarding issuances
by the issuer to a natural person who has provided bona fide services to the
issuer and such services are not in connection with the offer or sale of the
issuer's securities and do not promote or maintain a market for the issuer's
securities.
II-4
<PAGE>
On March 21, 2000, SightSound.com agreed to issue 34,200 shares to Stephen
Simon in connection with certain services Mr. Simon is providing to
SightSound.com. Exemption from registration for this transaction was claimed
pursuant to Rule 701 promulgated under the Securities Act regarding issuances
by the issuer to a natural person who has provided bona fide services to the
issuer and such services are not in connection with the offer or sale of the
issuer's securities and do not promote or maintain a market for the issuer's
securities.
On September 19, 1999, SightSound.com issued 5,000,000 shares of common
stock to an accredited investor at a price of $2.00 per share. Exemption from
registration for this transaction was claimed pursuant to Regulation D
promulgated under the Securities Act regarding transactions by the issuer not
involving a public offering, in that the transaction was made, without general
solicitation or advertising, to a sophisticated investor with access to all
relevant information necessary to evaluate this investment and who represented
to SightSound.com that the options were being acquired for investment.
In May 1999 to August 1999, SightSound.com issued 1,058,816 shares of common
stock to various accredited investors at a price of $2.00 per share. Exemption
from registration for this transaction was claimed pursuant to Regulation D
promulgated under the Securities Act regarding transactions by the issuer not
involving a public offering, in that the transaction was made, without general
solicitation or advertising, to a sophisticated investor with access to all
relevant information necessary to evaluate this investment and who represented
to SightSound.com that the options were being acquired for investment.
In March 1999, Parsec Sight/Sound and Digital Sight/Sound (Sightsound.com's
predecessor entities) issued an aggregate of 539,996 shares of common stock to
various accredited investors at a price of $1.50 per share. Exemption from
registration for this transaction was claimed pursuant to Regulation D
promulgated under the Securities Act regarding transactions by the issuer not
involving a public offering, in that the transaction was made, without general
solicitation or advertising, to a sophisticated investor with access to all
relevant information necessary to evaluate this investment and who represented
to SightSound.com that the options were being acquired for investment.
In November 1998, Parsec Sight/Sound and Digital Sight/Sound
(Sightsound.com's predecessor entities) issued an aggregate of 493,338 shares
of common stock to various accredited investors at a price of $1.50 per share.
Exemption from registration for this transaction was claimed pursuant to
Regulation D promulgated under the Securities Act regarding transactions by the
issuer not involving a public offering, in that the transaction was made,
without general solicitation or advertising, to a sophisticated investor with
access to all relevant information necessary to evaluate this investment and
who represented to SightSound.com that the options were being acquired for
investment.
In November 1997 to February 1998, Parsec Sight/Sound and Digital
Sight/Sound (Sightsound.com's predecessor entities) issued an aggregate of
4,133,674 shares of common stock to various accredited investors at a price of
$0.15 per share. Exemption from registration for this transaction was claimed
pursuant to Regulation D promulgated under the Securities Act regarding
transactions by the issuer not involving a public offering, in that the
transaction was made, without general solicitation or advertising, to a
sophisticated investor with access to all relevant information necessary to
evaluate this investment and who represented to SightSound.com that the options
were being acquired for investment.
In August 1997, Parsec Sight/Sound and Digital Sight/Sound (Sightsound.com's
predecessor entities) issued an aggregate of 857,600 shares of common stock in
connection with the exercise of stock options to various accredited investors
at a price of $0.12 per share. Exemption from registration for this transaction
was claimed pursuant to Regulation D promulgated under the Securities Act
regarding transactions by the issuer not involving a public offering, in that
the transaction was made, without general solicitation or advertising, to a
sophisticated investor with access to all relevant information necessary to
evaluate this investment and who represented to SightSound.com that the options
were being acquired for investment.
II-5
<PAGE>
Item 16. Exhibits and Financial Statements Schedules
<TABLE>
<CAPTION>
Exhibit No. Description
----------- -----------
<C> <S>
1.1 Form of Underwriting Agreement.*
3.1 Articles of Incorporation of SightSound.com Incorporated (the
"Company"), as amended.
3.2 By-laws of the Company.
4.1 Specimen Common Stock Certificate of the Company.
5.1 Form of Opinion of Morrison & Foerster LLP.*
5.2 Form of Opinion of Kenyon & Kenyon.*
5.3 Form of Opinion of Ansel Schwartz, Esquire.*
10.1 The 1999 Stock Option Plan.
10.2 Employment Agreement, dated , 2000, between the Company and
Arthur R. Hair.*
10.3 Employment Agreement, dated , 2000, between the Company and
Scott C. Sander.*
10.4 Confidentiality and Non-disclosure Agreement, dated , 2000,
between the Company and Christopher J. Reese.*
10.5 Confidentiality and Non-disclosure Agreement, dated , 2000
between the Company and Alexander LePore.*
10.6 Agreement, dated February 25, 2000, between the Company and
Franchise Pictures LLC.*
10.7 Agreement, dated March 31, 2000, between the Company and
Miramax.**
23.1 Consent of Ansel Schwartz, Esquire.*
23.2 Consent of Deloitte & Touche LLP.
23.3 Consent of Kenyon & Kenyon.*
23.4 Consent of Morrison & Foerster LLP (set forth in Exhibit 5.1).*
24.1 Power of Attorney (set forth on the signature page to the
Registration Statement).
27.1 Financial Data Schedule.
</TABLE>
- --------
* To be filed by amendment.
** To be filed by amendment. Confidential treatment is requested with respect to
certain portions of this Exhibit. Omitted portions will be filed separately
with the Commission.
Item 17. Undertakings.
The Registrant hereby undertakes the following:
(1) Insofar as indemnification for liabilities arising under the
Securities Act may be permitted to directors, officers and controlling
persons of the registrant pursuant to the foregoing provisions, or
otherwise, the registrant has been advised that in the opinion of the
Commission such indemnification is against public policy as expressed in
the Securities Act and is, therefore, unenforceable. In the event that a
claim for indemnification against such liabilities (other than the payment
by the registrant of expenses incurred or paid by a director, officer or
controlling person of the registrant in the successful defense of any
action, suit or proceeding) is asserted by such director, officer or
controlling person in connection with the securities being registered, the
Registrant will, unless in the opinion of its counsel the matter has been
settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against
public policy as expressed in the Securities Act and will governed by the
final adjudication of such issue.
(2) For purposes of determining any liability under the Securities Act,
the information omitted from the form of prospectus filed as part of this
registration statement in reliance upon Rule 430A and contained in a form
of prospectus filed by the registrant pursuant to Rule 424(b)(1) or (4) or
497(h) under the Securities Act shall be deemed to be part of this
registration statement as of the time it was declared effective.
II-6
<PAGE>
(3) For the purpose of determining any liability under the Securities
Act, each post-effective amendment that contains a form of prospectus shall
be deemed to be a new registration statement relating to the securities
offered therein, and the offering of such securities at that time shall be
deemed to be the initial bona fide offering thereof.
(4) The undersigned registrant hereby undertakes to provide to the
underwriters at the closing specified in the Underwriting Agreement
certificates in such denominations and registered in such names as required
by the underwriters to permit prompt delivery to each purchaser.
II-7
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended, the
registrant has duly caused this registration statement to be signed on its
behalf by the undersigned, thereunto duly authorized, in the City of
Pittsburgh, State of Pennsylvania, on April 20, 2000.
SIGHTSOUND.COM INCORPORATED
By: /s/ Scott C. Sander
___________________________________
Scott C. Sander
President and Chief Executive
Officer
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears
below constitutes and appoints and hereby authorizes Scott C. Sander, such
person's true and lawful attorney-in-fact, with full power of substitution or
resubstitution, for such person and in such person's name, place and stead, in
any and all capacities, to sign on such person's behalf, individually and in
each capacity stated below, any and all amendments, including post-effective
amendments to this registration statement and to sign any and all additional
registration statements relating to the same offering of securities as this
registration statement that are filed pursuant to Rule 462(b) of the Securities
Act of 1933, and to file the same, with all exhibits thereto, and other
documents in connection therewith, with the Securities and Exchange Commission,
granting unto said attorney-in-fact, full power and authority to do and perform
each and every act and thing requisite or necessary to be done in and about the
premises, as fully to all intents and purposes as such person might or could do
in person, hereby ratifying and confirming all that said attorney-in-fact, or
his substitute or substitutes, may lawfully do or cause to be done by virtue
hereof.
Pursuant to the requirements of the Securities Act of 1933, this
registration statement has been signed by the following persons in the
capacities and on the dates indicated.
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<S> <C> <C>
/s/ Scott C. Sander President, Chief Executive April 20, 2000
____________________________________ Officer and Director
Scott C. Sander
/s/ Arthur R. Hair Chief Technology Officer and April 20, 2000
____________________________________ Chairman of the Board
Arthur R. Hair
/s/ Alexander LePore Secretary, Treasurer and April 20, 2000
____________________________________ Chief Financial Officer
Alexander LePore
/s/ Ariel Z. Emanuel Director April 20, 2000
____________________________________
Ariel Z. Emanuel
</TABLE>
II-8
<PAGE>
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<S> <C> <C>
/s/ Jay H. Lustig Director April 20, 2000
____________________________________
Jay H. Lustig
/s/ Frank J. Biondi, Jr. Director April 20, 2000
____________________________________
Frank J. Biondi, Jr.
/s/ Charles R. Zappala Director April 20, 2000
____________________________________
Charles R. Zappala
</TABLE>
II-9
<PAGE>
EXHIBIT 3.1
Filed with the Department of State
Microfilm Number on AUG 01, 1995
---------------
Entity Number 2649623
------------------ ------------------------------------
Secretary of the Commonwealth
ARTICLES OF INCORPORATION FOR PROFIT
DSCB:15-1306/2102/2303/2702/2903/7102A (Rev 90)
Indicate type of domestic corporation (check one):
<TABLE>
<CAPTION>
<S> <C>
X Business-stock (15 Pa.C.S. (S) 1306) ___ Management (15 Pa.C.S. (S) 2702)
- --
Business-nonstock (15 Pa.C.S. (S) 2102) ___ Professional (15 Pa.C.S. (S) 2903)
- --
Business-statutory close (15 Pa.C.S. (S) 2303) ___ Cooperative (15 Pa.C.S. (S) 7102A)
- --
</TABLE>
In compliance with the requirements of the applicable provisions of 15
Pa.C.S. (relating to corporations and unincorporated associations) the
undersigned, desiring to incorporate a corporation for profit hereby state(s)
that:
1. The name of the corporation is: Parsec Sight/Sound, Inc.
------------------------
2. The (a) address of this corporation's initial registered office in this
Commonwealth or (b) name of its commercial registered office provider and
the county of venue is:
(a) 1518 Allison Drive Upper St. Clair PA 15241 Allegheny
---------------------------------------------------------------------------
Number and Street City State Zipcode County
(b) c/o: N/A
-----------------------------------------------------------------------
Name of Commercial Registered Office Provider County
For a corporation represented by a commercial registered office provider,
the county in (b) shall be deemed the county in which the corporation is
located for venue and official publication purposes.
3. The corporation is incorporated under the provisions of the Business
Corporation Law of 1988.
4. The aggregate number of shares authorized is: 100,000 (other provisions, if
-------
any, attach 8 1/2 x 11 sheet).
5. The name and address, including street and number, if any, of each
incorporator is:
1
<PAGE>
Name Address
Joan E. Marshall 1300 Oliver Building
- ------------------------------ ---------------------------------
Pittsburgh, PA 15222
---------------------------------
6. The specified effective date, if any, is:
N/A
----------------------------------------------------------------
month day year hour, if any
7. Any additional provisions of the articles, if any, attach an 8 1/2 x 11
sheet.
8. Statutory close corporation only: Neither the corporation nor any
shareholder shall make an offering of any of its shares of any class that
would constitute a "Public Offering" within the meaning of the Securities
Act of 1933 (15 U.S.C. (S) 77A et seq.).
9. Cooperative corporations only: (Complete and strike out inapplicable term)
The common bond of membership among its members/shareholders is: N/A
---
IN TESTIMONY WHEREOF, the incorporator has signed these Articles of
Incorporation this 1st day of August, 1995.
/s/ Joan E. Marshall
--------------------
Joan E. Marshall
2
<PAGE>
DOCKETING STATEMENT BUREAU USE ONLY:
DSCB: 15-134A (Rev 90) Dept. of State Entity Number___________
DEPARTMENTS OF STATE AND REVENUE
Revenue Box Number_____________________
FILING FEE: NONE Filing Period ______ Date 3 4 5 _____
SIC__________ Report Code ________
This form (file in triplicate) and all accompanying documents shall be mailed
to:
COMMONWEALTH OF PENNSYLVANIA
DEPARTMENT OF STATE
P.O. BOX 8722
HARRISBURG, PA 17105-8722
Check proper box:
<TABLE>
<CAPTION>
<S> <C> <C>
X Pa.Business-stock ___ Pa.Business-nonstock ___ Pa.Business-Management
- --
___ Pa.Professional ___ Pa.Business-statutory close ___ Pa.Business-cooperative
___ Pa.Nonprofit-stock ___ Pa.Nonprofit-nonstock ___ Foreign-business
___ Foreign-nonprofit ___ Motor Vehicle for Hire
___ Foreign-Certificate of Authority to D/B/A ________________________________
</TABLE>
Corporation registering as a result of (check box):
<TABLE>
<CAPTION>
<S> <C> <C>
X Incorporation (PA) ___ Domestication ___ Consolidation
- ---
___ Authorization of a ___ Division ___ Summary of Record
foreign corporation
</TABLE>
1. Name of corporation Parsec Sight/Sound, Inc.
-------------------------------------------------------
2. Location of (a) initial registered office in PA or (b) the name and county
of the commercial registered office provider:
(a) 1518 Allison Drive Upper St. Clair PA 15241 Allegheny
---------------------------------------------------------------------------
Number and Street City State Zipcode County
/RD Number and Box
(b) c/o: N/A
-----------------------------------------------------------------------
Name of Commercial Registered Office Provider County
3. State or County of Incorporation: Pennsylvania
------------
4. Specified effective date, if applicable: N/A
3
<PAGE>
5. Federal Identification Number: Applied For
-----------
6. Describe principal PA activity to be engaged in, within one year of this
application date: Licensing of Patents
------------------------------------------------------
7. Names, residences and social security numbers of the chief executive
officer, secretary and treasurer:
Name and Address Title
Arthur R. Hair
1518 Allison Drive
Upper St. Clair, PA 15241 President
----------------------------------------------------------------
Scott C. Sander Vice President/
851 Valleyview Road Secretary/
Mt. Lebanon, PA 15243 Treasurer
----------------------------------------------------------------
If professional corporation, include officer's professional license numbers
with the respective Pennsylvania Professional Board.
8. Location of principal place of business:
1518 Allison Drive Upper St. Clair PA 15241
--------------------------------------------------------------------------
Number and Street City State Zipcode
/RD Number and Box
9. Mailing address if different than #8 (Location where correspondence, tax
report form, etc. are to be sent:
N/A
--------------------------------------------------------------------------
Number and Street City State Zipcode
10. Act of General Assembly or authority under which you are organized or
incorporated (Full Citation of statute or other authority; attach a separate
sheet if more space is required): Business Corporation Law of 1988, Act of
December 21, 1988, P.L. 1444, as amended.
11. Date and state of incorporation or organization (foreign corporation only):
N/A
---------------------------------------------------------------------------
12. Date business started in PA (foreign corporation only): N/A
---------------------
13. Is the corporation authorized to issue capital stock? X YES _____ NO
___
14. Corporation's fiscal year ends: December 31
--------------------------------------------
This statement shall be deemed to have been executed by the individual who
executed the accompanying submittal. See 18 PA C.S. (S) 4904 (relating to
unsworn falsification to authorities).
4
<PAGE>
EXHIBIT 3.2
BY-LAWS OF
PARSEC SIGHT/SOUND
ARTICLE I - NAME AND REGISTERED OFFICE OF CORPORATION
-----------------------------------------------------
Section 1.1. Name. The name of the Corporation is Parsec Sight/Sound, Inc.
----
Section 1.2. Registered Office. The registered office of the Corporation
-----------------
shall be at such location as is stated in the Articles of Incorporation and any
amendments thereto. The Corporation shall maintain a principal place of business
at such location as the Board of Directors shall determine.
ARTICLE II - MEETINGS OF SHAREHOLDERS
-------------------------------------
Section 2.1. Place of Meetings. All meetings of the shareholders shall be
-----------------
held in the registered office of the Corporation or at such other place as the
Board of Directors shall determine.
Section 2.2. Annual Meetings. The annual meeting of the shareholders shall
---------------
be on the third Friday in August at 10:00 A.M., local time or at such other date
and time as the Board of Directors shall determine. If said date is a state or
national legal holiday, then the annual meeting hall be held on the next
business day.
Section 2.3. Special Meetings. Special Meetings of the shareholders may be
----------------
called by the Board of Directors, the Chief Executive Officer, the Chairman of
the Board or shareholders holding at least twenty (20%) percent of the
outstanding shares of stock of the Corporation.
Section 2.4. Notice. Notice of each meeting shall be given by the
------
Secretary, or other person authorized by the Chief Executive Officer or the
Chairman of the Board, by sending a written notice of the meeting at least ten
(10) days before the time of the meeting to each shareholder to his last known
address.
Section 2.5. Action By Partial Written Consent. Any action required or
---------------------------------
permitted to be taken at a meeting of the shareholders may be taken without a
meeting upon the written consent of shareholders who would have been entitled to
cast the minimum number of votes that would be necessary to authorize the action
at a meeting at which all shareholders entitled to vote thereon were present and
voting. Each such consent shall be filed with the Secretary.
ARTICLE III - BOARD OF DIRECTORS
--------------------------------
Section 3.1. Number and Election. There shall be no less than one (1) nor
-------------------
more than fifteen (15) Directors of the Corporation all of whom shall be elected
by the shareholders. The term of each Director shall cease when his successor is
elected by the shareholders.
Section 3.2. Meetings. Meetings (including special meetings) of the Board
--------
of Directors maybe called by the Chief Executive Officer, the Chairman of the
Board, or at least forty, percent (40%) of the Directors on one (1) day's
written notice to each Director.
Section 3.3. Majority Vote. The acts of a majority of the Directors taken
-------------
at a duly called meeting of the Board of Directors shall be the act, of the
Board of Directors.
1
<PAGE>
Section 3.4. Vacancies. Vacancies in the Board of Directors shall be filled
---------
only by election by the shareholders.
Section 3.5. Telephone Conference Meetings. One or more Directors may, with
-----------------------------
the consent of the Chief Executive Office, or the Chairman of the Board,
participate in a meeting of the Board of Directors by means of conference
telephone or similar communications equipment if all persons participating in
the meeting can hear each other. In the event a meeting is called upon less than
five (5) days' notice, each Director shall have the right to participate in such
meeting by such means and subject to such conditions.
ARTICLE IV - COMMITTEES
------------------------
Section 4.1. Committees. The Board of Directors may appoint such standing
----------
or temporary committees, composed of at least two (2) Directors, as the Board of
Directors shall determine from time to time to be necessary or convenient to the
management of the Corporation. Vacancies in any committee shall be filled only
by the Board of Directors. Each committee shall keep regular minutes of its
proceedings and report such proceedings periodically to the Board of Directors.
ARTICLE V - SHARES OF STOCK
----------------------------
Section 5.1. Form of Certificates. Certificates presenting shares of stock
--------------------
of the Cooperation shall be in the form approved by the Board of Directors. All
certificates for shares shall be signed, unless otherwise directed by the Board
of Directors by (i) the Chief Executive Officer or, the Chairman of the Board;
and (ii) by the Secretary or Treasurer.
Section 5.2. Lost Certificate. The holder of any shares of stock of the
----------------
Corporation shall notify the Corporation of any loss, destruction or mutilation
of any certificate therefor, and the Board of Directors may, in its discretion,
cause to be issued to him a new certificate or certificates.
Section 5.3. Transfer Restriction
--------------------
(a) Except to the extent otherwise provided in these By-Laws or in a
separate written agreement by and among the Corporation and one or more of its
shareholders, no shareholder shall sell, transfer, exchange, assign, gift,
bequeath, pledge or otherwise dispose of or encumber (collectively and
separately, "transfer") all or any of such shareholder's shares of stock of the
Corporation, unless he shall have first obtained the approval of the Board of
Directors or shall have complied with the provisions of Sections 5.3(b) or
5.3(c) below.
(b) Any shareholder desiring to sell all or any part of his shares of
stock of the Corporation shall first offer, in a writing sent by certified mail,
return receipt requested, to the Chairman of the Board and to the Chief
Executive Officer of the Corporation, to sell said shares to the Corporation, or
its assignee, at the same price and upon the same terms and conditions offered
to him bona fide by any other person. Said offer shall remain open for a period
of thirty (30) days from the date of mailing (the "Offering Period"). Closing of
the purchase and sale of said shares shall occur within thirty (30) days after
expiration of the Offering Period. If the Corporation, or its assignee, rejects
or fails to accept said offer within the Offering Period, then the selling
shareholder shall have the right to sell said shares to any person whomever
offering the same terms and conditions as aforesaid for a period of sixty (60)
days after the expiration of the Offering Period. If said shares are not sold
within such sixty (60) day period, the shares may not be sold or transferred
without again complying with all of the terms and conditions of this Section
5.3.
2
<PAGE>
(c) Any shareholder who is a natural person shall have the right to
transfer shares of stock of the Corporation to (i) the shareholder's spouse;
(ii) the shareholder's lineal descendant(s); or (iii) a trust, partnership or
other legal entity owned and controlled entirely by the shareholder, the
shareholder's spouse, and/or the shareholder's lineal descendant(s).
(d) Any transfer of shares, voluntarily or involuntarily, in violation
of this Section 5.3 shall not be recorded upon the books of the Corporation and
the purchaser, assignee, transferee or holder shall not be a shareholder of the
Corporation and shall have no rights or privileges of a shareholder of the
Corporation.
(e) A reference to the provisions of this Section 5.3 shall be printed
on the face or on the reverse side of the certificate or certificates
representing the shares of stock of the Corporation.
(f) As used herein, "shares" shall include shares of stock of the
Corporation and rights, such as warrants or options, to acquire shares of stock
of the Corporation.
ARTICLE VI - OFFICERS
----------------------
Section 6.1. Designation. The officers of the Corporation shall consist of
-----------
a Chairman of the Board, a Chief Executive Officer, a President, a Chief
Technology Officer, one or more Vice Presidents of such rank as the Board of
Directors shall from time to time determine, a Secretary, a Treasurer, and such
other officers as the Board of Directors shall from time to time determine.
Section 6.2. Election and Vacancies. The officers of the Corporation shall
----------------------
be elected by the Board of Directors. Any vacancies occurring in offices shall
be filled only by the Board of Directors.
Section 6.3. Chairman of the Board. The Chairman of the Board shall preside
---------------------
at all meetings of the shareholders and of the Board of Directors, except as
otherwise provided by law or by these By-Laws. He shall act in an advisory
capacity to the Board of Directors on matters of importance to the Corporation,
including without limitation the development of Corporation policies and
business plans. He shall perform such other duties as shall be assigned to him
by the Board of Directors.
Section 6.4. Chief Executive Officer. The Chief Executive Officer shall be
-----------------------
the head of the Corporation and, during the recess of the Board of Directors,
shall have the general control and management of its business and affairs,
subject, however, to the regulation of the Board of Directors. In the absence of
the Chairman of the Board, he shall have the power and may perform the duties of
the Chairman of the Board. He shall perform such other duties as shall be
assigned to him by the Board of Directors or by the Chairman of the Board.
Section 6.5. President. The President shall be the chief operating officer
---------
of the Corporation and shall manage the day to day business of the corporation,
subject, however, to the regulation of the Board of Directors and the Chief
Executive Officer. In the absence of the Chief Executive Officer, he shall have
the power and may perform the duties of the Chief Executive Officer. He shall
perform such other duties as shall be assigned to him by the Board of Directors,
by the Chairman of the Board, or by the Chief Executive Officer.
Section 6.6. Chief Technology Officer. The Chief Technology Officer shall
------------------------
perform such duties as shall be assigned to him by the Board of Directors, by
the Chairman of the Board, or by the Chief Executive Officer.
3
<PAGE>
Section 6.7. Vice President(s). The Vice President(s) shall perform such
-----------------
duties as shall be assigned to them by the Board of Directors, by the Chairman
of the Board, by the Chief Executive Officer or by such one or more officers as
shall be authorized by the Board of Directors to assign duties to them.
Section 6.8. Secretary. The Secretary shall keep the minutes of the
---------
meetings of the Board of Directors and all committees thereof, and the minutes
of the meetings of the shareholders. He shall see that due and proper notice is
given of all meetings of the shareholders and of the Board of Directors. He
shall have custody of and affix the seal of the Corporation, if any, to all
certificates of stock and to such other papers and documents when directed to do
so by the Chairman of the Board, the Chief Executive Officer, the President or
any Vice President. He shall perform such duties as shall be assigned to him by
the Board of Directors, by the Chairman of the Board, by the Chief Executive
Officer or by such one or more officers as shall be authorized by the Board of
Directors to assign duties to him. In case of his inability to act, a Secretary
pro tem, who shall have the authority to exercise like powers and perform the
duties of a Secretary, may be appointed by the Board of Directors, the Chairman
of the Board or the Chief Executive Officer.
Section 6.9. Treasurer. The Treasurer shall have the care and custody of
---------
the funds and securities of the Corporation, and shall keep full and accurate
accounts of the receipts and expenditures of all Corporation funds in books
belonging to the Corporation, and shall deposit all moneys and valuable effects
in the name and to the credit of the Corporation in such depositories as may be
designated by the Board of Directors. He shall disburse the funds of the
Corporation by order of the Board of Directors, take proper vouchers for such
disbursements, and shall render to the President and Board of Directors, at the
annual meeting of the Board, or whenever it may be required, an account of all
of his transactions as Treasurer, and the financial condition of the
Corporation. He shall perform such other duties as shall be assigned to him by
the Board of Directors, by the Chairman of the Board, by the Chief Executive
Officer or by such one or more officers as shall be authorized by the Board of
Directors to assign duties to him.
ARTICLE VII - LIABILITY OF DIRECTORS
-------------------------------------
Section 7.1. Liability of Directors. Except for responsibility or liability
----------------------
of a Director pursuant to any criminal statute or for failure to pay taxes
pursuant to local, state or Federal law, a Director of the Corporation shall be
not be personally liable for monetary damages for any action taken or any
failure to take any action unless (a) such Director has breached or failed to
perform his fiduciary duties as provided in Section 7.2 hereof; and (b) the
breach or failure to perform constitutes self-dealing, willful misconduct or
recklessness.
Section 7.2. Director's Fiduciary Duties. A Director of the Corporation
---------------------------
shall stand in a fiduciary relation to the Corporation and shall perform his
duties as a Director (including duties as a member of any committee of the
Board) in accordance with the standards set forth in Section 512(a) of the
Associations Code, 15 Pa. C.S.A. (S)512(a), as the same may be amended from time
to time.
ARTICLE VIII - Indemnification of officers and directors
----------------------------------------------------------
Section 8.1. Right to Indemnification. In the event a representative was,
------------------------
is or is threatened to be made a party to any threatened, pending or completed
action or proceeding, whether civil, criminal, administrative or investigative,
because he is or was a representative of the Corporation or because he is or was
serving at the request of the Corporation as a representative of another
domestic or foreign corporation for profit or not-for-profit, partnership, joint
venture, trust employee benefit plan or otherwise enterprise, the Corporation
(a) shall indemnify the representative if he has been successful on the merits
or otherwise in defense of any such action or proceeding or in defense of any
claim, issue or matter therein, against expenses (including attorneys'
4
<PAGE>
fees) actually and reasonably incurred by him in connection therewith; (b) may
indemnify a representative against expenses (including attorneys' fees),
judgments, fines and amounts paid in settlement actually and reasonably incurred
by him in connection with the action or proceeding even if he has not been
successful on the merits in other than a derivative suit, if he acted in good
faith and in a manner he reasonably believed to be in or not opposed to the best
interests of the corporation (and, in the case of a criminal proceeding, had no
reason to believe his conduct was unlawful); and (c) may indemnify a
representative for expenses (including attorneys' fees) actually and reasonably
incurred by him in defense or settlement of an action by or in the right of the
Corporation (derivative suit) even if he is unsuccessful on the merits, if he
acted in good faith and in a manner he reasonably believed to be in or not
opposed to the best interests of the Corporation and is not adjudged to be
liable for willful misconduct or recklessness in the performance of his duty to
the Corporation.
Section 8.2. Required Determination. Any indemnification under Section 8.1
----------------------
(unless ordered by a Court) shall be made by the Corporation only upon a
determination that the indemnification of the representative is proper in the
circumstances because he has met the applicable standard of conduct set forth in
Section 8.1. Such determination shall be made (a) by the Board of Directors by a
majority vote of a quorum consisting of Directors who were not parties to such
action or proceeding; (b) if such a quorum is not obtainable, or, even if
obtainable if such a quorum so directs, by independent legal counsel in a
written opinion; or (c) by the shareholders.
Section 8.3. Advances for Expenses. Expenses (including attorneys' fees)
---------------------
incurred by or imposed upon a representative in defending any civil action or
proceeding under Section 8.1 above may be paid by the Corporation in advance of
the final disposition of such action or proceeding upon receipt of an
undertaking by or on behalf of the representative to repay such amount if it
shall ultimately be determined that he is not entitled to be indemnified by the
Corporation as authorized in this Article.
Section 8.4. Nonexclusivity and Nonduplication. The indemnification and
---------------------------------
advancement of expenses provided by this Article shall not be deemed exclusive
of any other rights to which any person seeking indemnification or advancement
of expenses may be entitled under any other bylaw, agreement, vote of
shareholders or disinterested Directors or otherwise, both as to action in his
official capacity and as to action in another capacity while holding such
office. Notwithstanding any other provisions set forth in this Article, the
indemnification authorized and provided hereby shall be applicable only to the
extent that any such indemnification shall not duplicate indemnity or
reimbursement which such person has received or shall receive otherwise than
under this Article.
Section 8.5. Preservation of Rights. No amendment or repeal of this Article
----------------------
shall adversely affect any right or protection extended to a representative
hereunder for an act or failure to act occurring prior to the time of such
amendment or repeal. Each representative shall be deemed to act in such capacity
in reliance upon the rights of indemnification and advancement of expenses
hereunder. The rights to indemnification and advancement of expenses hereunder
shall continue as to a person who has ceased to be a representative and shall
inure to the benefit of the heirs and personal representatives of such person.
Section 8.6. Insurance or Other Funding. The Corporation may create a fund
--------------------------
of any nature which may, but need be, under the control of a trustee, or
otherwise secure or insure in any manner its indemnification obligations,
whether arising hereunder or otherwise. The Corporation may purchase and
maintain insurance on behalf of any person who is or was a representative of the
Corporation or is or was serving at the request of the Corporation as a
representative of another domestic or foreign corporation for profit or not-for-
profit, partnership, joint venture, employee benefit plan, trust or other
enterprise against any liability asserted against him and incurred by him in any
such capacity or arising out of his status as such, whether or not the
Corporation would have the power to indemnify him against such liability under
the provisions of this Article or otherwise, upon such terms and conditions as
the Corporation may deem requisite.
5
<PAGE>
Section 8.7. Definitions. As used in this Article, references to the
-----------
"Corporation" include all constituent corporations in a consolidation, merger or
division, as well as the surviving or new corporations surviving or resulting
therefrom, so that any person who is or was a representative of such a
constituent, surviving or new corporation, or is or was serving at the request
of such constituent, surviving or new corporation as a representative of another
domestic or foreign corporation for profit or not-for-profit, partnership, joint
venture, employee benefit plan, trust or other enterprise, shall stand in the
same position under the provisions of this Article with respect to the surviving
or new corporation as he would if he had served the surviving or new corporation
in the same capacity. As used herein, references to a "representative" shall
include without limitation any Director, officer, employee or agent.
ARTICLE IX - INTERESTED PARTY TRANSACTIONS
------------------------------------------
Section 9.1. Transactions with Directors and Officers. No contract or
----------------------------------------
transaction between the Corporation and one or more of its Directors or officers
or between the Corporation and any other corporation, partnership, association,
or other organization in which one or more of its Directors or officers are
directors or officers or have a financial interest, shall be void or voidable
solely for such reason, or solely because the Director or officer is present at
or participates in the meeting of the Board of Directors which authorizes the
contract or transaction, or solely because his or their votes are counted for
such purpose, if: (a) the material facts as to the relationship or interest and
as to the contract or transaction are disclosed or are known to the Board of
Directors and the Board in good faith authorizes the contract or transaction by
the affirmative votes of a majority of the disinterested Directors even though
the disinterested Directors are less than a quorum; (b) the material facts as to
his relationship or interest and as to the contract or transaction are disclosed
or are known to the shareholders entitled to vote thereon, if any, and the
contract or transaction is specifically approved in good faith by vote of such
shareholders; or (c) the contract or transaction is fair as to the Corporation
as of the time it is authorized, approved or ratified by the Board of Directors
or the shareholders. Common or interested Directors may be counted in
determining the presence of a quorum at a meeting of the Board which authorizes
a contract or transaction specified above.
ARTICLE X - AMENDMENTS
----------------------
Section 10.1. Amendments. These By-Laws may be altered, amended, or added
----------
to by the affirmative vote of the majority of the issued and outstanding shares
of stock of the Corporation.
ARTICLE XI - MISCELLANEOUS
--------------------------
Section 11.1. Ratification. Any transaction questioned in any shareholders'
------------
derivative suit on the ground of lack of authority, defective or irregular
execution, adverse interest of a Director, officer or shareholder,
nondisclosure, miscomputation, or the application of improper principles or
practices of accounting may be ratified before or after judgment, by the Board
of Directors or by the shareholders in case less than a quorum of Directors is
qualified, and, if so ratified, shall have the same force and effect as if the
questioned transaction had been originally duly authorized, and said
ratification shall be binding upon the Corporation and its shareholders, and
shall constitute a bar to any claim or execution of any judgment in respect of
such questioned transaction.
Section 11.2. Fiscal Year. The fiscal year of the Corporation shall begin
-----------
on January 1 and end on December 31 of each year.
6
<PAGE>
Section 11.3. Name and Gender. Whenever used herein, the singular shall
---------------
include the plural, the plural the singular, and the use of any gender shall be
applicable to all genders.
ARTICLE XII - SEAL
---------------------
Section 12.1. Seal. If required by the Board of Directors, the Corporation
----
shall have a seal containing the name of the Corporation, its year of
incorporation and a statement that it is a Pennsylvania business corporation.
7
<PAGE>
EXHIBIT 4.1
Certificate No. For Shares Issued to
----------- ----------- ---------------------
Transferred from / /
---------------------- --- --------
No. Original Certificate No. Original Shares No. Of Shares Transferred
- ------------------------ ------------------- -------------------------
Dated Receipt acknowledged
--------------------------------- ---------------
NUMBER INCORPORATED UNDER THE LAWS OF SHARES
Pennsylvania
SEE TRANSFER
RESTRICTIONS ON
REVERSE
SIGHTSOUND.COM INCORPORATED
100,000,000 Shares Common Stock
Authorized
This Certifies that is the owner of
------------------------------------------
- --------------------------------------------------------------- fully paid
and non-assessable Shares of the Capital Stock of the above named Corporation
transferable only on the books of the Corporation by the holder hereof in person
or by duly authorized Attorney upon surrender of this Certificate properly
endorsed.
In Witness Whereof, the said Corporation has caused this Certificate to be
signed by its duly authorized officers and its Corporate Seal to be hereto
affixed this day of A. D.
-------------------- ---------------------- --------------
- ------------------------ ----------------------- -----------------------
TREASURER/SECRETARY PRESIDENT
<PAGE>
EXPLANATION OF ABBREVIATIONS
The following abbreviations, when used in the inscription of ownership on
the face of this certificate, shall be construed as if they were written out in
full according to applicable laws or regulations. Abbreviations, in addition to
those appearing below, may be used.
<TABLE>
<S> <C> <C> <C>
JT TEN As joint tenants with right of survivorship and TEN ENT As tenants by the entireties
not as tenants in common UNIF GIFT MIN ACT Uniform Gifts to Minors Act
TEN COM As tenants in common CUST Custodian for
</TABLE>
For Value Received, hereby sell, assign and transfer unto
------------
PLEASE INSERT SOCIAL SECURITY OR OTHER
IDENTIFYING NUMBER OF ASSIGNEE
- ------------------------------------------------------------------------------
- ---------------------------------------------- Shares represented by the within
Certificate, and do hereby irrevocably constitute and appoint
- ------------------------------------------------------------------ Attorney
to transfer the said Shares on the books of the within named Corporation with
full power of substitution in the premises.
Dated
-------------------------------------
In presence of
- ------------------------------------------- --------------------------
CERTIFICATE NO.
CERTIFICATE
FOR
[ ]
SHARES
OF
SIGHTSOUND.COM
INCORPORATED
Issued to
-------------------
Dated
-------------------
Transfer of this Certificate and the stock represented herein is subject to the
terms and conditions of Section 5.3 of the By-Laws of the Corporation and also
that certain dated as of the day of , ,
------------------- ------- ----------- ----
by and between and
-------------------------- -------------------------------- .
<PAGE>
EXHIBIT 10.1
THE 1999 STOCK OPTION PLAN
OF
SIGHTSOUND.COM INCORPORATED
<PAGE>
THE 1999 STOCK OPTION PLAN
OF SIGHTSOUND.COM INCORPORATED
SightSound.com Incorporated, a Pennsylvania corporation (the
"Company"), has adopted The 1999 Stock Option Plan of SightSound.com
Incorporated (the "Plan"), effective December 21, 1999, for the benefit
of its eligible employees and directors.
The purpose of this Plan is to enable the Company to obtain and retain
the services of selected executives and other key employees ("Employees") and
directors considered essential to the long range success of the Company by
offering them an opportunity to own stock in the Company which will reflect the
growth, development and financial success of the Company.
<PAGE>
ARTICLE I
DEFINITIONS
Whenever the following terms are used in this Plan they shall have the
meanings specified below, unless the context clearly indicates otherwise.
1.01 Board. "Board" shall mean the Board of Directors of the
-----
Company.
1.02 Change of Control. "Change of Control" shall mean any of the
-----------------
following:
(a) the acquisition, after the date of the adoption of the Plan
by the Board, directly or indirectly, by any person, entity or "group" within
the meaning of Section 13(d)(3) or 14(d)(2) of the Exchange Act (other than by
the Company or any of its Subsidiaries or any employee benefit plan of the
Company or any of its Subsidiaries) of beneficial ownership (within the meaning
of Rule 13d-3 promulgated under the Exchange Act) of 50% or more of either the
then-outstanding shares of Common Stock or the combined voting power of the
Company's then-outstanding voting securities entitled to vote generally in the
election of directors ("Voting Power"); except that, for purposes hereof, no
such person, entity or group shall be deemed to have acquired:
(i) any securities acquired by the Company or a Subsidiary
or any employee benefit plan (or any related trust) of the Company or
any Subsidiary,
(ii) any securities acquired pursuant to a benefit plan of
the Company or a Subsidiary,
(iii) any securities issuable pursuant to an option, warrant
or right owned by such person, entity or group as of the close of
business on the business day immediately preceding the date of the
adoption of the Plan by the Board,
(iv) any securities that were otherwise beneficially owned
by such person, entity or group as of the close of business on the
business day immediately preceding the date of the adoption of the Plan
by the Board, and
(v) any securities issued in connection with either:
(A) a stock split, stock dividend or similar
recapitalization or reorganization with respect to shares owned
immediately prior to the date of the adoption of the Plan by the
Board, and
(B) any shares covered by the foregoing exceptions;
-2-
<PAGE>
provided, however, that no Change of Control shall be deemed to
have occurred solely by reason of any such acquisition by a corporation
with respect to which, after such acquisition, more than 50% of both the
then-outstanding common shares of such corporation and the Voting Power of
such corporation are then- beneficially owned, directly or indirectly, by
the persons who were the beneficial owners of the Stock and voting
securities of the Company immediately before such acquisition in
substantially the same proportions as their respective ownership,
immediately before such acquisition, of the then-outstanding shares of
Stock or the Voting Power of the Company, as the case may be; or
(b) The approval by the stockholders of the Company of:
(i) a merger, reorganization or consolidation with respect to
which persons who were the respective beneficial owners of the Stock
and Voting Power of the Company immediately before such merger,
reorganization or consolidation do not, immediately thereafter,
beneficially own, directly or indirectly, more than 50% of,
respectively, the then-outstanding common shares and the Voting Power
of the corporation resulting from such merger, reorganization or
consolidation,
(ii) a liquidation or dissolution of the Company or,
(iii) the sale or other disposition of all or substantially all
of the assets of the Company; provided, however, that for the purposes
of this subsection (b) the votes of all Section 16 Persons shall be
disregarded in determining whether stockholder approval has been
obtained.
Notwithstanding the foregoing, (1) Change of Control shall be
deemed not to have occurred with respect to any Section 16 Person if such
Section 16 Person is, by agreement (written or otherwise), a participant on such
Section 16 Person's own behalf in a transaction which causes the Change of
Control to occur and (2) an IPO shall not be deemed to be a Change of Control.
1.03 Code. "Code" shall mean the Internal Revenue Code of 1986, as
----
amended from time to time.
1.04 Committee. "Committee" shall mean the Compensation Committee of
---------
the Board, or another committee of the Board, appointed as provided in Section
7.01. In the absence of any Compensation Committee or other committee appointed
by the Board, "Committee" shall mean the members of the Board.
The Chairman of the Board is authorized to implement decisions under
this Plan in behalf of the Board; provided, however, that the Chief Executive
Officer of the Company shall act in behalf of the Board in matters affecting the
Chairman as an Optionee under the Plan.
-3-
<PAGE>
1.05 Common Stock. "Common Stock" shall mean the common stock of the
------------
Company, nominal par value per share, and any equity security of the Company
issued or authorized to be issued in the future, but excluding any preferred
stock and any warrants, options or other rights to purchase Common Stock. Debt
securities of the Company convertible into Common Stock shall be deemed equity
securities of the Company.
1.06 Company. "Company" shall mean SightSound.com Incorporated, a
-------
Pennsylvania corporation.
1.07 Director. "Director" shall mean a member of the Board.
--------
1.08 Disability. "Disability" shall mean, for purposes of the
----------
exercise of an Incentive Stock Option after Termination of Employment, a
permanent and total disability within the meaning of Section 422(e)(3) of the
Code, and for all other purposes, a mental or physical condition which, in the
opinion of the Committee, renders an Optionee unable or incompetent to carry out
the job responsibilities which such Optionee held or the tasks to which such
Optionee was assigned at the time that the disability was incurred, which
condition is expected to be permanent or continues for a period of time of at
least one (1) year.
1.09 Independent Director. "Independent Director" shall mean a
--------------------
member of the Board who is not an Employee of the Company.
1.10 Employee. "Employee" shall mean any officer or other employee
--------
(as defined in accordance with Section 3401(c) of the Code) of the Company, or
of any corporation which is a Subsidiary.
1.11 Exchange Act. "Exchange Act" shall mean the Securities Exchange
------------
Act of 1934, as amended.
1.12 Fair Market Value. "Fair Market Value" of a share of Common Stock
-----------------
as of a given date shall be:
(a) as of any applicable date (other than on the IPO Date):
(i) the closing price of a share of Common Stock on the
principal exchange on which shares of Common Stock are then trading, if
any (or as reported on any composite index which includes such
principal exchange), on the trading day previous to such date, or if
shares were not traded on the trading day previous to such date, then
on the next preceding date on which a trade occurred; or
(ii) if Common Stock is not traded on an exchange but is quoted
on NASDAQ or a successor quotation system, the mean between the closing
representative bid and the asked prices for the Common Stock on the
trading day previous to such date as reported by NASDAQ or such
successor quotation system; or
-4-
<PAGE>
(iii) if Common Stock is not publicly traded on an exchange and
not quoted on NASDAQ or a successor quotation system, the Fair Market
Value of a share of Common Stock shall be established by the Committee
acting in good faith.
(b) as of the IPO Date, the price to the public pursuant to the
form of final prospectus used in connection with the IPO, as indicated on the
cover page of such prospectus or otherwise.
1.13 Incentive Stock Option. "Incentive Stock Option" shall mean an
----------------------
option which conforms to the applicable provisions of Section 422 of the Code
and which is designated as an Incentive Stock Option by the Committee.
1.14 Involuntary Termination. "Involuntary Termination" shall mean
-----------------------
when either the employee-employer relationship or the Director-employer
relationship between an Optionee and the Company or any Subsidiary is terminated
by choice of the Company (and not the Optionee) and is not a Termination for
Cause.
1.15 IPO. "IPO" shall mean an initial public offering of Common
---
Stock.
1.16 IPO Date. "IPO Date" shall mean the effective date of the
--------
underwriting agreement between the Company and the underwriters of the IPO.
1.17 Non-Qualified Stock Option. "Non-Qualified Stock Option" shall
--------------------------
mean an Option which is not designated as an Incentive Stock Option by the
Committee.
1.18 Option. "Option" shall mean a stock option granted under
------
Article III of this Plan. An Option granted under this Plan shall, as
determined by the Committee, be either a Non-Qualified Stock Option or an
Incentive Stock Option, provided, however, that Options granted to Independent
Directors shall be Non-Qualified Stock Options.
1.19 Option Shares. "Option Shares" shall mean shares of Common
-------------
Stock acquired by Optionees through the exercise of Options under this Plan.
1.20 Optionee. "Optionee" shall mean an Employee or Independent
--------
Director who is granted an Option under this Plan.
1.21 Person. "Person" shall mean a corporation, an association, a
------
partnership, a trust, a limited liability company, an organization, a business
or an individual.
1.22 Plan. "Plan" shall mean The 1999 Stock Option Plan of
----
SightSound.com Incorporated.
1.23 Public Offering. "Public Offering" shall mean the registration
---------------
of an offering of shares of at least ten million dollars ($10,000,000) of Common
Stock under the Securities Act which becomes effective (other than by a
registration on Form S-8 or any successor or similar forms).
-5-
<PAGE>
1.24 Related Person. "Related Person" shall mean, in the event of a
--------------
Person's death, such Person's executors, administrators, testamentary trustees,
legatees or beneficiaries or the executors, administrators, testamentary
trustees, legatees or beneficiaries of a Person who has become a holder of
Options or Option Shares in accordance with the terms of this Plan.;
1.25 Rule 16b-3. "Rule 16b-3" shall mean that certain Rule 16b-3
----------
under the Exchange Act, as such rule may be amended from time to time.
1.26 Section 16 Person. "Section 16 Person" means a person, whether
-----------------
or not a Grantee, who is potentially subject to liability under Section 16(b) of
the Exchange Act with respect to transactions involving equity securities of the
Company, irrespective of whether such person was subject to such liability at
the time of the grant of any particular award.
1.27 Securities Act. "Securities Act" shall mean the Securities Act
--------------
of 1933, as amended.
1.28 Subsidiary. "Subsidiary" shall mean any corporation in an
----------
unbroken chain of corporations beginning with the Company if each of the
corporations other than the last corporation in the unbroken chain then owns
stock possessing fifty percent (50%) or more of the total combined voting power
of all classes of stock in one (1) of the other corporations in such chain.
1.29 Termination of Directorship. "Termination of Directorship"
---------------------------
shall mean the time when an Optionee who is an Independent Director ceases to be
a Director for any reason, including, but not by way of limitation, a
termination by resignation, failure to be elected, death, Disability or
retirement. The Board, in its sole and absolute discretion, shall determine the
effect of all matters and questions relating to Termination of Directorship with
respect to Independent Directors.
1.30 Termination of Employment. "Termination of Employment" shall
-------------------------
mean the time when the employee-employer relationship between an Optionee and
the Company or any Subsidiary is terminated for any reason, with or without
cause, including, but not by way of limitation, a termination by resignation,
discharge, death, Disability or retirement; but excluding
(a) terminations where there is a simultaneous reemployment or
continuing employment of an Optionee by the Company or any Subsidiary in a
similarly responsible position,
(b) at the discretion of the Committee, terminations which
result in a temporary severance of the employee-employer relationship, and
(c) at the discretion of the Committee, terminations which are
followed by the simultaneous establishment of a consulting relationship by the
Company or a Subsidiary with the former employee which is satisfactory to the
Employee.
-6-
<PAGE>
The Committee, in its absolute discretion, shall determine the effect
of all matters and the questions relating to Termination of Employment,
including, but not by way of limitation, the question of whether a Termination
of Employment is a Termination for Cause, or an Involuntary Termination and all
questions of whether particular leaves of absence constitute Terminations of
Employment; provided, however, that unless otherwise determined by the Committee
in its discretion, a leave of absence, change in status from an employee to an
independent contractor or other change in the employee-employer relationship
shall constitute a Termination of Employment if, and to the extent that, such
leave of absence, change in status or other change interrupts employment for the
purposes of Section 422(a)(2) of the Code and the then applicable regulations
and revenue rulings under said Section.
Notwithstanding any other provision of this Plan, the Company or any
Subsidiary has an absolute and unrestricted right to terminate an Employee's
employment at any time for any reason whatsoever, with or without cause, except
to the extent expressly provided otherwise in writing.
1.31 Termination for Cause. "Termination for Cause" shall mean the
---------------------
time when either the employee-employer relationship or the Director-employer
relationship between an Optionee and the Company or any Subsidiary is terminated
on account of:
(a) conviction of the Optionee of a felony;
(b) the violations by the Optionee of policies of the Company or
a Subsidiary;
(c) the gross negligence by the Optionee in the performance of
the Optionee's duties to the Company or a Subsidiary;
(d) engaging in any activity in competition with the Company; or
(e) the willful and intentional action or omission to act in
connection with the Optionee's duties to the Company or a Subsidiary resulting,
in the opinion of the Committee, in injury to the Company or a Subsidiary.
-7-
<PAGE>
ARTICLE II
SHARES SUBJECT TO PLAN
2.01 Shares Subject to Plan. The shares of stock subject to Options
----------------------
shall be Common Stock. The aggregate number of such shares for which Options
may be granted under the Plan shall not exceed:
. 3,000,000 for the 1999 calendar year, and
. 500,000 per calendar year for calendar years 2000 through 2009.
To the extent that the above limit is not used entirely for a
particular calendar year, the unused portion of the limit may be carried over
and added to the 500,000 share limit that would otherwise apply to any one of
the succeeding calendar years 2000 through 2009.
Furthermore, if and to the extent that an Option shall expire or
terminate for any reason without having been exercised in full, or shall be
forfeited, without, in either case, the Optionee having enjoyed any of the
benefits of stock ownership (other than dividends that are likewise forfeited or
voting rights), the number of shares of Common Stock associated with such Option
shall be added to the 500,000 share limit otherwise applicable for any future
calendar year 2000 through 2009.
The shares of Common Stock of the Company issuable upon exercise of
such options may be either previously authorized but unissued shares or treasury
shares. The limits under this section shall be adjusted pursuant to Section
8.03.
No Options may be granted after the date of the tenth (10th)
anniversary of the adoption of this Plan by the Board (or by the Company
shareholders, if earlier).
-8-
<PAGE>
ARTICLE III
GRANTING OF OPTIONS
3.01 Eligibility. Any Employee or Independent Director selected by
-----------
the Committee (or the Board in the case of Options granted to Independent
Directors) pursuant to Section 3.04(a)(i) shall be eligible to be granted an
Option.
3.02 Disqualification for Stock Ownership. No person may be granted
------------------------------------
an Incentive Stock Option under this Plan if such person, at the time the
Incentive Stock Option is granted, owns stock possessing more than ten percent
(10%) of the total combined voting power of all classes of issued and
outstanding stock of the Company or any then existing Subsidiary (in accordance
with the principles of Section 422 of the Code) unless such Incentive Stock
Option conforms to the applicable provisions of Section 422 of the Code.
3.03 Qualification of Incentive Stock Options. No Incentive Stock
----------------------------------------
Options shall be granted to any person who is not an Employee.
3.04 Granting of Options.
-------------------
(a) Subject to Sections 3.02 and 3.03, the Committee (or the Board in
the case of Options granted to Independent Directors) shall from time to time,
in its absolute discretion, and subject to applicable limitations of this Plan:
(i) Determine which Employees and Independent Directors should be
granted Options;
(ii) Determine the number of shares to be subject to such Options
granted to the selected Employees and Independent Directors;
(iii) Subject to Section 3.02, determine whether such Options
are to be Incentive Stock Options or Non-Qualified Stock Options and
whether such Options are to qualify as performance-based compensation as
described in Section 162(m)(4)(C) of the Code; and
(iv) Determine the terms and conditions of such Options,
consistent with this Plan; provided, however, that the terms and conditions
of Options intended to qualify as performance-based compensation as
described in Section 162(m)(4)(C) of the Code shall include, but not be
limited to, such terms and conditions as may be necessary to meet the
applicable provisions of Section 162(m) of the Code.
(b) The Committee (or the Board in the case of Options granted to
Independent Directors) may, in its discretion and on such terms as it deems
appropriate, require as a condition on the grant of an Option to an Employee or
Independent Director that such Employee or Independent Director surrender for
cancellation some or all of the unexercised
-9-
<PAGE>
Options or other rights which have been previously granted to such Employee or
Independent Director under this Plan or otherwise. An Option, the grant of which
is conditioned upon such surrender, may have an option price lower (or higher)
than the exercise price of such surrendered Option or other award, may cover the
same (or a lesser or greater) number of shares as such surrendered Option or
other award, may contain such other terms as the Committee (or the Board in the
case of Options granted to Independent Directors) deems appropriate, and shall
be exercisable in accordance with its terms, without regard to the number of
shares, price, exercise period or any other term or condition of such
surrendered Option or other award.
(c) Any Incentive Stock Option granted under this Plan may be modified
by the Committee with the consent of the Employee to disqualify such option for
treatment as an "Incentive Stock Option" under Section 422 of the Code.
-10-
<PAGE>
ARTICLE IV
TERMS OF OPTIONS
4.01 Option Agreement. Each Option shall be evidenced by a written
----------------
Stock Option Agreement, which shall be executed by the Optionee and an
authorized officer of the Company and which shall contain such terms and
conditions as the Committee (or the Board in the case of Options granted to
Independent Directors) shall determine, consistent with this Plan. Stock Option
Agreements evidencing Options intended to qualify as performance-based
compensation as described in Section 162(m)(4)(C) of the Code shall contain such
terms and conditions as may be necessary to meet the applicable provisions of
Section 162(m) of the Code. Stock Option Agreements evidencing Incentive Stock
Options shall contain such terms and conditions as may be necessary to meet the
applicable provisions of Section 422 of the Code.
4.02 Option Price. The price per share of the shares subject to each
------------
Option shall be set by the Committee (or the Board in the case of Options
granted to Independent Directors); provided, however, that:
(a) In the case of Incentive Stock Options and Options intended to
qualify as performance-based compensation as described in Section 162(m)(4)(C)
of the Code, such price shall not be less than one hundred percent (100%) of the
Fair Market Value of a share of Common Stock on the date the Option is granted;
and
(b) In the case of Incentive Stock Options granted to an individual
then owning (within the meaning of Section 424(d) of the Code) more than ten
percent (10%) of the total combined voting power of all classes of issued and
outstanding stock of the Company or any Subsidiary such price shall not be less
than one hundred and ten percent (110%) of the Fair Market Value of a share of
Common Stock on the date that the Option is granted.
4.03 Option Term. The term of the Option shall be set by the
-----------
Committee (or the Board in the case of Options granted to Independent Directors)
in its discretion; provided, however, that:
(a) No Option may have a term that extends beyond the expiration of
ten (10) years from the date the Option was granted;
(b) In the case of Incentive Stock Options, the term shall not be more
than ten (10) years from the date the Incentive Stock Option is granted, or five
(5) years from such date if the Incentive Stock Option is granted to an
individual then owning (within the meaning of Section 424(d) of the Code) more
than ten percent (10%) of the total combined voting power of all classes of
issued and outstanding stock of the Company or any Subsidiary;
(c) Except as limited by requirements of Section 422 of the Code and
regulations and rulings thereunder applicable to Incentive Stock Options, the
Committee (or the Board in the case of Options granted to Independent Directors)
may extend the term of any
-11-
<PAGE>
outstanding Option in connection with any Termination of Directorship or
Termination of Employment of the Optionee, or amend any other term of condition
of such Option relating to such termination; and
(d) In the event of an Optionee's Termination of Directorship or
Termination of Employment for any reason except Disability (as defined by
Section 22(e)(3) of the Code) or Termination for Cause, the Optionee shall have
up to three (3) months from the date of such Termination of Directorship or
Termination of Employment to exercise the Option, and in the event of an
Optionee's Termination of Directorship or Termination of Employment due to the
Optionee's Disability (as defined by Section 22(e)(3) of the Code), the Optionee
shall have up to one (1) year from the date of such Termination of Directorship
or Termination of Employment to exercise the Option. Notwithstanding the
foregoing, if an Optionee's Termination of Directorship or Termination of
Employment also qualifies as a Termination for Cause, the Company, in its
discretion, may terminate the Optionee's right to exercise his or her Options on
the date of such termination or such other time as the Committee (or the Board
in the case of Options granted to Independent Directors), in its discretion,
shall deem appropriate. Notwithstanding the foregoing, an Optionee's right to
exercise an Option shall cease if he engages in any activity in competition with
the Company.
4.04 Option Vesting.
--------------
(a) The period during which the right to exercise an Option in whole
or in part vests in the Optionee shall be set by the Committee (or the Board in
the case of Options granted to Independent Directors) and the Committee (or the
Board in the case of Options granted to Independent Directors) may determine
that an Option may not be exercised in whole or in part for a specified period
after it is granted; provided, however, that, subject to Section 4.04(b):
(i) each Option shall become exercisable no later than five (5)
years after such Option is granted and such Option shall become exercisable
with respect to at least twenty percent (20%) of the shares of Common Stock
subject to such Option, as determined by the Committee (or the Board in the
case of Options granted to Independent Directors) in its sole discretion,
on each anniversary of the date of the grant of such option;
(ii) unless the Committee (or the Board in the case of Options
granted to Independent Directors) otherwise provides in the terms of the
Stock Option Agreement or this Plan otherwise so dictates, no Option shall
be exercisable by any Optionee who is then subject to Section 16 of the
Exchange Act within the period ending six months and one day after the date
the Option is granted;
(iii) upon the occurrence of a Change of Control, each outstanding
Option of a current Employee or Independent Director shall automatically
become fully exercisable for all of the shares of Common Stock subject to
such Option; and
-12-
<PAGE>
(iv) if an Employee or Independent Director has an Involuntary
Termination or dies or has a Disability while employed by the Company or a
Subsidiary, each outstanding Option of such Employee or Independent
Director shall automatically become full exercisable for all of the shares
of Common Stock subject to Such option.
(b) No portion of an Option which is unexercisable at Termination of
Directorship or Termination of Employment shall thereafter become exercisable,
except as may be otherwise provided by the Committee (or the Board in the case
of Options granted to Independent Directors) either in the Stock Option
Agreement or by action of the Committee (or the Board in the case of Options
granted to Independent Directors) following the grant of the Option.
(c) To the extent that the aggregate Fair Market Value of Common Stock
with respect to which "Incentive Stock Options" (within the meaning of Section
422 of the Code, but without regard to Section 422(d) of the Code) are
exercisable for the first time by an Optionee during any calendar year (under
the Plan and all other Incentive Stock Option plans of the Company and any
Subsidiary) exceeds $100,000, such Options shall be treated as Non-Qualified
Options to the extent required by Section 422 of the Code. The rule set forth
in the preceding sentence shall be applied by taking Options into account in the
order in which they were granted. For purposes of this Section 4.04(c), the
Fair Market Value of Common Stock shall be determined as of the time the Option
with respect to such Common Stock is granted.
-13-
<PAGE>
ARTICLE V
EXERCISE OF OPTIONS
5.01 Partial Exercise. An exercisable Option may be exercised in
----------------
whole or in part. However, an Option shall not be exercisable with respect to
fractional shares and the Committee (or the Board in the case of Options granted
to Independent Directors) may require that, by the terms of the Option, a
partial exercise be with respect to a minimum number of shares.
5.02 Manner of Exercise. All or a portion of an exercisable Option
------------------
shall be deemed exercised upon delivery of all of the following to the Secretary
of the Company or such Secretary's office.
(a) A written notice complying with the applicable rules established
by the Committee (or the Board in the case of Options granted to Independent
Directors) stating that the Option, or a portion thereof, is exercised. The
notice shall be signed by the Optionee or other person then entitled to exercise
the Option or such portion;
(b) Such representations and documents as the Committee (or the Board
in the case of Options granted to Independent Directors), in its absolute
discretion, deems necessary or advisable to effect compliance with all
applicable provisions of the Securities Act and any other federal or state
securities laws or regulations. The Committee (or the Board in the case of
Options granted to Independent Directors) may, in its absolute discretion, also
take whatever additional actions it deems appropriate to effect such compliance
including, without limitation, placing legends on share certificates and issuing
stop-transfer notices to agents and registrars;
(c) In the event that the Option shall be exercised pursuant to
Section 8.01 by any person or person other than the Optionee, appropriate proof
of right of such person or persons to exercise the Option; and
(d) Full cash payment to the Secretary of the Company for the shares
and for payment of any applicable withholding or other applicable employment
taxes with respect to which the Option, or portion thereof, is exercised.
However, the Committee (or the Board in the case of Options granted to
Independent Directors), may in its discretion:
(i) allow payment, in whole or in part, through the delivery of
shares of Common Stock owned by the Optionee, duly endorsed for transfer to
the Company with a Fair Market Value on the date of delivery equal to the
aggregate exercise price of the Option or exercised portion thereof;
(ii) allow payment, in whole or in part, through the surrender of
shares of Common Stock then issuable upon exercise of the Option having a
Fair Market Value on the date of Option exercise equal to the aggregate
exercise price of the Option or exercised portion thereof;
-14-
<PAGE>
(iii) allow payment, in whole or in part, through the delivery of
a notice that the Optionee has placed a market sell order with a broker
with respect to shares of Common Stock then issuable upon exercise of the
Option, and that the broker has been directed to pay a sufficient portion
of the net proceeds of the sale to the Company in satisfaction of the
Option exercise price and any applicable withholding or other employment
taxes; or
(iv) allow payment through any combination of the consideration
provided in the foregoing paragraphs (i), (ii), or (iii).
5.03 Conditions to Issuance of Stock Certificates. The Company shall
--------------------------------------------
not be required to issue or deliver any certificate or certificates for shares
of Common Stock purchased upon the exercise of any Option or portion thereof
prior to fulfillment of all of the following conditions:
(a) the admission of such shares to listing on all stock exchanges, if
any, on which such class of stock is then listed;
(b) the completion of any registration or other qualification of such
shares under any state or federal law, or under the rulings or regulations of
the Securities and Exchange Commission or any other governmental regulatory body
which the Committee or the Board shall, in its absolute discretion, deem
necessary or advisable;
(c) the obtaining of any approval or other clearance from any state or
federal government agency which the Committee or the Board shall, in its
absolute discretion, determine to be necessary or advisable;
(d) the lapse of such reasonable period of time following the exercise
of the Option as the Committee or the Board may establish from time to time for
reasons of administrative convenience; and
(e) the receipt by the company of full payment for such shares,
including payment of any applicable withholding tax.
5.04 Rights as Shareholders. The holders of Options shall not be, nor
----------------------
have any of the rights or privileges of, shareholders of the Company in respect
of any shares purchasable upon the exercise of any part of an Option unless and
until certificates representing such shares have been issued by the Company to
such holders.
-15-
<PAGE>
ARTICLE VI
RIGHTS AND RESTRICTIONS WITH RESPECT TO OPTION SHARES
6.01 Transfer Restrictions. No Optionee may transfer, assign, pledge
---------------------
or otherwise encumber any Option Shares except as expressly provided otherwise
in this Article VI and the corporate by-laws of the Company; provided, however,
that Option Shares may be transferred at any time to a Related Person, provided
that the Related Person agrees in writing to be bound by the terms of this Plan.
Also, the Optionee may transfer Option Shares as part of his or her estate
planning if and only if the Committee provides written approval of such
transfer.
6.02 Lapse of Stock Restrictions and Rights. The transfer
--------------------------------------
restrictions set forth in Section 6.01 shall terminate and cease to be of any
further force or effect upon the completion of a Public Offering, or a series of
Public Offerings, which result in public ownership of Common Stock of the
Company possessing at least ten percent (10%) of the total combined voting power
of such Common Stock (or such lesser percentage as dictated by applicable
securities laws).
6.03 Ownership and Transfer Restrictions. The Committee (or the Board
-----------------------------------
in the case of Options granted to Independent Directors), in its absolute
discretion, may impose additional restrictions on the ownership and
transferability of the Option Shares purchasable upon the exercise of an Option
as it deems appropriate. Any such restriction shall be set forth in the
respective Stock Option Agreement and may be referred to on the certificates
evidencing such shares.
6.04 Legend. Each certificate representing Option Shares shall be
------
endorsed with the following legend, which legend shall be removed upon
termination of the stock restrictions set forth in this Article 6. Also see the
last sentence of Section 6.05.
THE SALE OR TRANSFER OF THE SECURITIES REPRESENTED BY THIS
CERTIFICATE IS SUBJECT TO THE TERMS AND CONDITIONS OF THE
CORPORATE BY-LAWS AND A CERTAIN 1999 STOCK OPTION PLAN OF
SIGHTSOUND.COM. INCORPORATED. COPIES OF THE CORPORATE BY-LAWS
AND SUCH STOCK OPTION PLAN MAY BE OBTAINED UPON WRITTEN REQUEST
TO THE SECRETARY OF THE CORPORATION.
6.05 Disposition of Shares. Notwithstanding and in addition to the
---------------------
foregoing, each Optionee shall be required to give the Company prompt notice of
any disposition of shares of Common Stock acquired by exercise of an Incentive
Stock Option either:
(i) within two (2) years from date of granting such Option to
such Optionee or
-16-
<PAGE>
(ii) within one (1) year after the transfer of such Option
Shares to such Optionee.
Certificates evidencing shares acquired by exercise of an Incentive
Stock Option shall refer to such requirement to give prompt notice of
disposition.
-17-
<PAGE>
ARTICLE VII
ADMINISTRATION
7.01 Committee. Prior to the Company's initial registration of Common
---------
Stock under Section 12 of the Exchange Act, the Committee shall consist of the
entire Board, provided, however, that the Board does hereby appoint the
Compensation Committee (per Section 1.04) to administer this Plan as soon as
such committee has been created. Following such registration, the Committee may
(if so decided by the Board) consist solely of two or more Independent Directors
appointed by and holding office at the pleasure of the Board, each of whom is
both a "non-employee director" as defined by Rule 16(b)-3 and an "outside
director" for purposes of Section 162(m) of the Code. Appointment of Committee
members shall be effective upon acceptance of appointment. Committee members
may resign at any time by delivering written notice to the Board. Vacancies in
the Committee may be filled by the Board.
7.02 Duties and Powers of Committee. It shall be the duty of the
------------------------------
Committee to conduct the general administration of this Plan in accordance with
its provisions. The Committee shall have the power to interpret this Plan and
the agreements pursuant to which Options are granted or awarded, and to adopt
such rules for the administration, interpretation, and application of this Plan
as are consistent therewith and to interpret, amend or revoke any such rules.
Notwithstanding the foregoing, the full Board, acting by a majority of its
members in office, shall conduct the general administration of the Plan with
respect to Options granted to Independent Directors. Any such grant or award
under this Plan need not be the same with respect to each Optionee. Any such
interpretations and rules with respect to Incentive Stock Options shall be
consistent with the provisions of Section 422 of the Code. In its absolute
discretion, the Board may at any time and from time to time exercise any and all
rights and duties of the Committee under this Plan except with respect to
matters which under Rule 16b-3 or Section 162(m) of the Code, or any regulations
or rules issued thereunder, are required to be determined in the sole discretion
of the Committee.
7.03 Majority Rule; Unanimous Written Consent. The Committee shall
----------------------------------------
act by a majority of its members in attendance at a meeting at which a quorum is
present or by a memorandum or other written instrument signed by all members of
the Committee.
7.04 Compensation; Professional Assistance; Good Faith Actions.
---------------------------------------------------------
Members of the Committee shall receive such compensation for their services as
members as may be determined by the Board. All expenses and liabilities which
members of the Committee incur in connection with the administration of this
Plan shall be borne by the Company. The Committee may, with the approval of the
Board, employ attorneys, consultants, accountants, appraisers, brokers, or other
persons. The Committee, the Company and the Company's officers and Directors
shall be entitled to rely upon the advice, opinions or valuations of any such
persons. All actions taken and all interpretations and determinations made by
the Committee or the Board in good faith shall be final and binding upon all
Optionees, the Company and all other interested persons. No members of the
Committee or Board shall be personally liable for any actions, determinations or
interpretation made in good faith with respect to this Plan or Options,
-18-
<PAGE>
and all members of the Committee and the Board shall be fully protected by the
Company in respect of any such action, determination or interpretation.
-19-
<PAGE>
ARTICLE VIII
MISCELLANEOUS PROVISIONS
8.01 Not Transferable. Options under this Plan shall be subject to
----------------
the corporate by-laws and may not be sold, pledged, assigned, or transferred in
any manner other than by will or the laws of descent and distribution unless and
until such options have been exercised, or the shares underlying such Options
have been issued, and all restrictions applicable to such shares have lapsed.
No Option or interest or right therein shall be liable for the debts, contracts
or engagements of the Optionee or the Optionee's successors in interest or shall
be subject to disposition by transfer, alienation, anticipation, pledge,
encumbrance, assignment or any other means whether such disposition be voluntary
or involuntary or by operation of law by judgment, levy, attachment, garnishment
or any other legal or equitable proceedings (including bankruptcy), and any
attempted disposition thereof shall be null and void and of no effect, except to
the extent that such disposition is permitted by the preceding sentence.
During the lifetime of the Optionee, only such Optionee may exercise
an Option (or any portion thereof) granted to such Optionee under the Plan.
After the death of the Optionee, any exercisable portion of an Option may, prior
to the time when such portion becomes unexercisable under the Plan or the
applicable Stock Option Agreement or other agreement, be exercised by the
Optionee's personal representative or by any person empowered to do so under the
deceased Optionee's will or under the then applicable laws of descent and
distribution.
8.02 Amendment, Suspension or Termination of this Plan. Except as
-------------------------------------------------
otherwise provided in this Section 8.02, this Plan may be wholly or partially
amended or otherwise modified, suspended or terminated at any time or from time
to time by the Board or the Committee; provided, however, that without approval
of the Company's shareholders given within twelve months before or after the
action by the Board or the Committee, no action of the Board or the Committee
may, except as provided in Section 8.03, increase the limits imposed in Section
2.01 on the maximum number of shares which may be issued under this Plan, and no
action of the Board or the Committee may be taken that would otherwise require
shareholder approval as a matter of applicable law, regulation or rule. No
amendment, suspension or termination of this Plan shall, without the consent of
the holder of Options, alter or impair any rights or obligations under any
Options theretofore granted or awarded, unless the award itself otherwise
expressly so provides. No Options may be granted or awarded during any period
of suspension or after termination of this Plan, and in no event may any
Incentive Stock Option be granted under this Plan after the first to occur of
the following events:
(a) The expiration of ten (10) years from the date the Plan is adopted
by the Board; or
(b) The expiration of ten (10) years from the date the Plan is
approved by the Company's shareholders under Section 8.04.
-20-
<PAGE>
8.03 Changes in Common Stock or Assets of the Company, Acquisition or
----------------------------------------------------------------
Liquidation of the Company and Other Corporate Events.
- ------------------------------------------------------
(a) Subject to Section 8.03(c)
(i) in the event that the Committee (or the Board in the case
of Options granted to Independent Directors) determines that any dividend
or other distribution (whether in the form of cash, Common Stock, other
securities, or other property), recapitalization, reclassification,
reorganization, merger, consolidation, split-up, spin-off, combination,
repurchase, liquidation, dissolution, or sole, transfer, exchange or other
disposition of all or substantially all of the assets of the Company, or
exchange of Common Stock or other securities of the Company, issuance of
warrants or other rights to purchase Common Stock or other securities of
the Company, or other similar corporate transaction or event, in the
Committee's sole discretion (or the Board in the case of Options granted to
Independent Directors), affects the Common Stock such that an adjustment is
determined by the Committee (or the Board in the case of Options granted to
Independent Directors) to be appropriate in order to prevent dilution or
enlargement of the benefits or potential benefits intended to be made
available under the Plan or with respect to an Option, or
(ii) in the event of any stock split or reverse stock split,
the Committee (or the Board in the case of Options granted to Independent
Directors) shall, in such manner as it may deem equitable, adjust any or
all of:
(A) the number and kind of shares of Common Stock (or
other securities or property) with respect to which Options may be
granted under the Plan, (including, but not limited to, adjustments of
the limitations in Section 2.01 on the maximum number and kind of
shares which may be issued),
(B) the number and kind of shares of Common Stock (or
other securities or property) subject to outstanding Options, and
(C) the grant or exercise price with respect to any
Option.
(b) Subject to Section 8.03(c) and 8.08, the Committee (or the Board
in the case of Options granted to Independent Directors) may, in its discretion,
include further provisions and limitations in any Option as it may deem
equitable and in the best interest of the Company.
(c) With respect to Incentive Stock Options and Options intended to
qualify as performance-based compensation under Section 162(m), no adjustment or
action described in this Section 8.3 or in any other provision of the Plan shall
be authorized to the extent that such adjustment or action would cause the Plan
to violate Section 422(b)(1) of the Code or would cause such option to fail to
so qualify under Section 162(m), as the case may be, or any successor provisions
thereto. Furthermore, no such adjustment or action shall be authorized to the
extent such adjustment or action would result in short-swing profits liability
under Section 16 or violate
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<PAGE>
the exemptive conditions of Rule 16b-3 unless the Committee (or the Board in the
case of Options granted to Independent Directors) determines that the Option is
not to comply with such exemptive conditions. The number of shares of Common
Stock subject to any Option shall always be rounded to the next whole number.
8.04 Approval of Plan by Shareholders. This Plan will be submitted
--------------------------------
for the approval of the Company's shareholders within twelve months after the
date of the Board's initial adoption of this Plan. Options may be granted prior
to such shareholder approval, provided that such Options shall not be
exercisable prior to the time when this Plan is approved by the shareholders,
and provided further that if such approval has not been obtained at the end of
said twelve-month period, all Options previously granted under this Plan shall
thereupon be canceled and become null and void.
8.05 Tax Withholding. The Company shall be entitled to require
---------------
payment in cash or deduction from other compensation payable to each Optionee of
any sums required by federal, state or local tax law to be withheld with respect
to the issuance, vesting or exercise of any Option. The Committee (or the Board
in the case of Options granted to Independent Directors) may in its discretion
and in satisfaction of the foregoing requirement allow such Optionee to elect to
have the Company withhold shares of Common Stock otherwise issuable under such
Option (or allow the return of shares of Common Stock) having a Fair Market
Value equal to the sums required to be withheld.
8.06 Loans. The committee may, in its discretion, extend one (1) or
-----
more loans to key Employees in connection with the exercise or receipt of an
Option granted under this Plan. The terms and conditions of any such loan shall
be set by the Committee (or the Board in the case of Options granted to
Independent Directors) who shall prescribe the form of any promissory note used
for this purpose and the security to be given for such note. The Option may not
be exercised, however, by delivery of a promissory note or by a loan from the
Company when or where such loan or other extension of credit is prohibited by
law.
8.07 Forfeiture Provisions. Pursuant to its general authority to
---------------------
determine the terms and conditions applicable to awards under the Plan, the
Committee (or the Board in the case of Options granted to Independent Directors)
shall have the right (to the extent consistent with the applicable exemptive
conditions of Rule 16b-3 and to the extent permitted under applicable state law)
to provide, in the terms of Options made under the Plan, or to require the
recipient to agree by separate written instrument, that
(a) any proceeds, gains or other economic benefit actually or
constructively received by the recipient upon any receipt or exercise of an
Option, or upon the receipt or resale of any Common Stock underlying such Option
must be paid to the Company, and
(b) the Option shall terminate and any unexercised portion of
such Option (whether or not vested) shall be forfeited, if
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<PAGE>
(i) a Termination of Directorship or Termination of
Employment occurs prior to a specified date, or within a specified time
period following receipt or exercise of the Option,
(ii) the recipient at any time, or during a specified time
period, engages in any activity in competition with the Company, or which
is adverse, contrary or harmful to the interests of the Company, as further
defined by the Committee (or the Board in the case of Options granted to
Independent Directors), or
(iii) the Optionee has a Termination for Cause at any time,
or during a specified time period.
8.08 Limitation Applicable to Section 16 Persons and Performance-Based
-----------------------------------------------------------------
Compensation. Notwithstanding any other provision of this Plan, this Plan, and
- ------------
any Option granted to any individual who is then subject to Section 16 of the
Exchange Act, shall be subject to any additional limitations set forth in any
applicable exemptive rule under Section 16 of the Exchange Ace (including any
amendment to Rule 16b-3 of the Exchange Act) that are requirements for the
application of such exemptive rule. To the extent permitted by applicable law,
the Plan and Options granted or awarded hereunder shall be deemed amended to the
extent necessary to conform to such applicable exemptive rule. Furthermore,
notwithstanding any other provision of this Plan, any Option intended to qualify
as performance-based compensation as described in Section 162(m)(4)(C) of the
Code shall be subject to any additional limitations set forth in Section 162(m)
of the Code (including any amendment to Section 162(m) of the Code) or any
regulation or rulings issued thereunder that are requirements for qualification
as performance-based compensation as described in Section 162(m)(4)(C) of the
Code, and this Plan shall be deemed amended to the extent necessary to conform
to such requirements.
8.09 Effect of Plan Upon Options and Compensation Plans. The adoption
--------------------------------------------------
of this Plan shall not affect any other compensation or incentive plans in
effect for the Company or any Subsidiary. Nothing in this plan shall be
construed to limit the right of the Company
(a) to establish any other forms of incentives or compensation
for Employees or Directors of the Company or any Subsidiary or
(b) to grant or assume options or other rights otherwise than
under this Plan in connection with any proper corporate purpose including but
not by way of limitation, the grant or assumption of options in connection with
the acquisition of purchase, lease, merger, consolidation or otherwise of the
business, stock or assets of any corporation, partnership, limited liability
company, firm or association.
8.10. Compliance with Laws. This Plan, the granting and vesting of
--------------------
Options under this Plan and the issuance and delivery of shares of Common Stock
and the payment of money under this Plan or under Options granted hereunder are
subject to compliance with all applicable federal and state laws, rules and
regulations (including but not limited to state and federal securities law and
federal margin requirements) and to such approvals by any listing, regulatory or
governmental authority as may, in the opinion of counsel for the company, be
-23-
<PAGE>
necessary or advisable in connection therewith. Any securities delivered under
this Plan shall be subject to such restrictions, and the person acquiring such
securities shall, if requested by the Company, provide such assurances and
representations to the Company as the Company may deem necessary or desirable to
assure compliance with all applicable legal requirements. To the extent
permitted by applicable law, the Plan and Options granted or awarded hereunder
shall be deemed amended to the extent necessary to conform to such laws, rules
and regulations.
8.11 Titles. Titles are provided herein for convenience only and are
------
not to service as a basis for interpretation or construction of this Plan.
8.12 Governing Law. This Plan and any agreements hereunder shall be
-------------
administered, interpreted and enforced under the internal laws of the
Commonwealth of Pennsylvania(or the laws of the state in which Company is
incorporated) without regard to conflicts of law thereof.
-24-
<PAGE>
I hereby certify that the foregoing Plan was duly adopted by the Board
of Directors of SightSound.com Inc. on December ____________, 1999.
Executed on this ______________ day of ________________, _____.
----------------------------------------
Secretary
plans\sightsound\stock option plan
-25-
<PAGE>
EXHIBIT 23.2
INDEPENDENT AUDITORS' CONSENT
We consent to the use in this Registration Statement of SightSound.com Inc. on
Form S-1 of our report dated March 31, 2000, appearing in the Prospectus, which
is part of this Registration Statement.
We also consent to the reference to us under the headings "Selected Financial
Data" and "Experts" in such Prospectus.
/s/ DELOITTE & TOUCHE LLP
DELOITTE & TOUCHE LLP
Pittsburgh, Pennsylvania
April 20, 2000
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<PERIOD-TYPE> 9-MOS 12-MOS 12-MOS 3-MOS 3-MOS
<FISCAL-YEAR-END> SEP-30-1999 DEC-31-1998 DEC-31-1997 SEP-30-2000 DEC-31-1998
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<SALES> 3,179 552 0 2,743 133
<TOTAL-REVENUES> 3,179 552 0 2,743 133
<CGS> 1,254 66 0 1,823 16
<TOTAL-COSTS> 1,254 66 0 1,823 16
<OTHER-EXPENSES> 3,065,974 1,556,037 568,827 2,854,641 515,949
<LOSS-PROVISION> 0 0 0 0 0
<INTEREST-EXPENSE> 363,673 159,528 0 25,885 62,391
<INCOME-PRETAX> (3,413,936) (1,706,240) (561,160) (2,788,227) (577,266)
<INCOME-TAX> 0 0 0 0 0
<INCOME-CONTINUING> (3,413,936) (1,706,240) (561,160) (2,788,227) (577,266)
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