<PAGE>
Filed Pursuant to
Rule 424(b)(4)
Registration No. 333-93361
[LOGO OF LOUDEYE TECHNOLOGIES, INC.]
4,500,000 Shares
Common Stock
Loudeye Technologies, Inc. is offering 4,500,000 shares of its common stock.
This is our initial public offering and no public market currently exists for
our shares.
Our common stock has been approved for quotation on the Nasdaq National
Market under the symbol "LOUD."
---------------------
Investing in the common stock involves risks.
See "Risk Factors" beginning on page 7.
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Per Share Total
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Public Offering Price.................................... $16.00 $72,000,000
Underwriting Discounts and Commissions................... $ 1.12 $ 5,040,000
Proceeds to Loudeye...................................... $14.88 $66,960,000
</TABLE>
The Securities and Exchange Commission and state securities regulators have
not approved or disapproved these securities or determined if this prospectus
is truthful or complete. Any representation to the contrary is a criminal
offense.
Loudeye has granted the underwriters a 30-day option to purchase up to an
additional 675,000 shares of common stock to cover over-allotments.
FleetBoston Robertson Stephens Inc. expects to deliver the shares of common
stock to purchasers on March 20, 2000.
---------------------
Robertson Stephens Chase H&Q
CIBC World Markets
The date of this prospectus is March 15, 2000
<PAGE>
Inside Cover:
Towards top of page
Loudeye logo (originally encoding.com)
Enabling a new experience of audio and video on the Internet
Upper-section of page
Digital media services and applications to
encode, manage and distribute audio and video
Middle portion of page
Our customers are leading companies in these industries
Film Studios High Tech Industry
Record Labels Manufacturing
Stock Footage Houses Finance
Music and Video Distributors Education
Web Aggregators Government
New Media
We enable complete digital media solutions for
Online Promotions Corporate Communications
e-Commerce Education and Training
Content Acquisition and Management Marketing
Content Distribution Advertising
Gatefold:
Towards top of page
Loudeye (originally encoding.com)
Providing the digital media infrastructure to enable audio and video
on every Web page
Over 450,000 minutes of video encoded
Over 2 million audio files encoded
Upper section of page
Turning traditional media into digital media
Process Diagram - (illustrates parallels to traditional media and digital
media) (illustration to show the following being addressed by both Digital
media services and Digital media applications)
Starts with input source material symbols such as:
Compact disks, videos, floppy disk, tapes, cassettes, cameras
Digital Media Services
Encoding: signal acquisition, relational data capture, image capture,
encode to formats
Management: digital asset management, indexing, security, archival
storage
Distribution: e-commerce, syndication, rights management,
delivery
Digital Media Applications
Ends with content showing up on example Web pages
Towards bottom of page
Digital Media Services & Digital Media Applications
High quality, large volume, and quick turnaround
Complete digital media solutions
Format and platform independent
Flexible and reliable
1
<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 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 the
prospectus or of any sale of the common stock.
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TABLE OF CONTENTS
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Page
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Summary.................................................................. 4
Risk Factors............................................................. 7
Special Note Regarding Forward-Looking Statements........................ 23
Use of Proceeds.......................................................... 24
Dividend Policy.......................................................... 24
Capitalization........................................................... 25
Dilution................................................................. 27
Selected Financial Data.................................................. 29
Management's Discussion and Analysis of Financial Condition and Results
of Operations........................................................... 30
Business................................................................. 39
Management............................................................... 58
Certain Relationships and Related Transactions........................... 71
Principal Stockholders................................................... 73
Description of Capital Stock............................................. 75
Shares Eligible for Future Sale.......................................... 79
Underwriters............................................................. 81
Legal Matters............................................................ 84
Experts.................................................................. 84
Change in Independent Accountants........................................ 84
Additional Information................................................... 85
Glossary of Technical Terms.............................................. 86
Index to Financial Statements............................................ F-1
</TABLE>
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Loudeye and encoding.com are our service marks; mediaupgrade.com,
myslideshow, online media syndicator, media syndicator and media syndicator pro
are our trademarks. This prospectus also includes trade dress, trade names,
trademarks and service marks of other companies. Use or display by Loudeye of
other parties' trademarks, trade dress or products is not intended to and does
not imply a relationship with, or endorsement or sponsorship of Loudeye by, the
trademark or trade dress owners.
<PAGE>
SUMMARY
You should read the following summary together with the more detailed
information in this prospectus, including "Risk Factors," and our financial
statements and notes to those statements appearing elsewhere in this prospectus
regarding our company and the common stock being sold in this offering.
Loudeye Technologies, Inc.
We are a leading provider of Internet media infrastructure services and
applications that create a complete solution for the media, entertainment and
corporate markets. With the millions of hours of existing audio and video
content and the thousands of hours of new audio and video content created each
day, media owners have become increasingly aggressive in exploring new ways to
reach audiences and distribute their content. Our solution simplifies and
accelerates the process of delivering audio and video content to the Web. Our
proprietary technologies and processes enable high quality, high volume,
platform neutral processing of significant quantities of digital media. Our
customers include Atom Films, BMG Music, Disney Enterprises, Inc., EMusic.com
Inc., Hewlett-Packard Company, Kanakaris Communications, Inc., Microsoft
Corporation, Sony Music Entertainment, Inc. and Sony Trans Com.
The widespread acceptance of digital audio and video media is the next phase
in the evolution of the Internet. Media and technology companies are seeking to
leverage the Internet by creating a Web experience consistent with the quality
of traditional media such as compact disks, tapes, film, radio and television.
The development of numerous streaming media technologies, which are
technologies that allow audio and video content to be played in real-time over
the Internet, and the increased availability of high-speed access have helped
to create a viable platform for delivery of audio and video on the Internet.
However, a significant factor limiting the use of audio and video on the
Internet is the lack of software applications, facilities or processes for
transforming traditional media into Internet compatible streaming technologies
that can be distributed to end users in all formats.
Our digital media services and applications enable our customers to manage
their Web-based audio and video content. We offer complete digital media
services and applications that provide our customers with an end-to-end
solution encompassing the conversion, encoding, management and distribution of
digital media. The benefits of our solution include high quality, large volume,
accelerated time to market, format and platform independence, superior
reliability and flexibility.
We intend to enhance our leadership position in encoding technology and
services by continuing to develop superior technologies and processes through a
platform and format independent strategy. We plan to build on and expand our
capabilities to include software-based solutions that allow Web destinations
and media companies to offer complete digital media services and applications
to their end users in a complete Web environment. As new formats and
technologies emerge, we will quickly expand our services to incorporate these
new capabilities. In this way, we plan to continue to define an emerging
Internet media infrastructure layer that links audio and video content creators
and owners with millions of Internet users.
We were formed as a limited liability company in Washington in August 1997
under the name encoding.com, LLC and incorporated in Delaware in March 1998 as
encoding.com, Inc. In December 1999, we changed our name to Loudeye
Technologies, Inc. Our principal executive offices are located at the Times
Square Building, 414 Olive Way, Suite 300, Seattle, WA 98101, and our telephone
number is (206) 832-4000. Our World Wide Web site is www.loudeye.com. The
information contained on our Web site is not part of this prospectus.
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Recent Developments
In December 1999:
. We acquired Alive.com, Inc., a digital media applications developer.
. We sold $47.8 million of preferred stock to a number of investors,
including AOL, CBS, Microsoft and NBC.
. We agreed to develop a digital media clip service for Valley Media and to
jointly commercialize this service.
In February 2000, we agreed to sell to Akamai Technologies, Inc. concurrent
with the closing of this offering a number of shares of our common stock equal
to $5.0 million divided by the price per share to be paid by our underwriters
in this offering. We also entered into an agreement with Akamai to promote each
other's services. See "Business--Strategic Relationships and Corporate
Investors."
The Offering
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Common stock offered by Loudeye......... 4,500,000 shares
Common stock offered in the concurrent
private placement ..................... 336,022 shares
Common stock to be outstanding after the 34,595,515 shares
offering...............................
Use of proceeds......................... We intend to use the net proceeds for
general corporate purposes, including
working capital and capital
expenditures. See "Use of Proceeds."
Nasdaq National Market symbol........... LOUD
</TABLE>
The number of shares of our common stock to be outstanding immediately after
the offering is based on the number of shares outstanding at December 31, 1999.
This number excludes outstanding or available options and outstanding warrants
to purchase an aggregate of 7,512,825 shares. See "Capitalization."
----------------
Except as otherwise noted, all information in this prospectus:
. reflects the automatic conversion of 21,063,236 shares of preferred stock
into common stock at the closing of the offering;
. assumes that the underwriters' option to purchase additional shares is
not exercised; and
. assumes the sale by us of 336,022 shares of our common stock at a price
of $14.88 per share to Akamai Technologies, Inc. in a private placement
concurrent with the closing of this offering.
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Summary Financial Data
The statements of operations data for the years ended December 31, 1997, 1998
and 1999 are derived from our audited financial statements appearing elsewhere
in this prospectus. The balance sheet data displayed in the "Pro Forma" column
reflects the following:
. the conversion of all shares of outstanding preferred stock into shares
of common stock upon the closing of this offering;
. the application of the net proceeds from the sale of 4,500,000 shares of
common stock offered by us at the initial public offering price of
$16.00 per share, after deducting the underwriting discount and
estimated offering expenses; and
. the receipt of $5.0 million from the sale of 336,022 shares of common
stock to Akamai Technologies, Inc., which we expect to sell in a private
placement concurrent with the closing of this offering at a price of
$14.88 per share.
See "Use of Proceeds" for a description of how we intend to use the net
proceeds of this offering and the concurrent private placement.
The summary financial data should be read in conjunction with our financial
statements and the related notes included elsewhere in this prospectus and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations." See Note 2 of notes to financial statements for an explanation of
the determination of the number of weighted average shares used to compute pro
forma net loss per share amounts.
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<CAPTION>
Period from
August 1997
(inception) Fiscal Year Fiscal Year
through Ended Ended
December 31, December 31, December 31,
------------ ------------ ------------
1997 1998 1999
------------ ------------ ------------
(in thousands, except per share data)
<S> <C> <C> <C>
Statements of Operations Data:
Net revenues............................ $ 10 $ 286 $ 2,645
Gross margin............................ (7) (218) (226)
Total operating expenses................ 88 1,465 10,698
Net loss................................ (95) (1,650) (10,902)
Basic and diluted pro forma net loss per
share.................................. n/a $ (0.17) $ (1.50)
Weighted average shares outstanding used
to compute basic and diluted pro forma
net loss per share..................... n/a 9,585,049 16,659,800
</TABLE>
<TABLE>
<CAPTION>
December 31, 1999
-------------------
Actual Pro Forma
------- -----------
(unaudited)
(in thousands)
<S> <C> <C>
Balance Sheet Data:
Cash and cash equivalents................................... $49,273 $120,152
Working capital............................................. 44,032 114,911
Total assets................................................ 76,775 148,030
Long-term obligations, less current portion................. 1,963 1,963
Total stockholders' equity.................................. 67,489 138,744
</TABLE>
6
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RISK FACTORS
Any investment in our shares of common stock involves a high degree of risk.
You should consider carefully the following information about these risks,
together with the other information contained in this prospectus, before you
decide to buy our common stock. If any of the following risks actually occur,
our business, results of operations and financial condition would likely
suffer. In these circumstances, the market price of our common stock could
decline, and you may lose all or part of the money you paid to buy our common
stock.
Risks Related to Our Operations
We have a limited operating history, making it difficult for you to evaluate
our business and your investment
Loudeye was formed as a limited liability company in August 1997 and
incorporated in March 1998. We therefore have a very limited operating history
upon which an investor may evaluate our operations and future prospects.
Because of our limited operating history, we have limited insight into trends
that may emerge and affect our business. In addition, the revenue and income
potential of our business and market are unproven. Because of the recent
emergence of the Internet media infrastructure industry, none of our executives
have significant experience in this industry. As a young company, we face risks
and uncertainties relating to our ability to implement our business plan
successfully, particularly due to the early stage of the streaming media
industry. Our potential for future profitability must be considered in light of
the risks, uncertainties, expenses and difficulties frequently encountered by
companies in their early stages of development, particularly companies in new
and rapidly evolving markets, such as the Internet media infrastructure
industry, using new and unproven business models.
Because we expect to continue to incur net losses, we may not be able to
implement our business strategy and the price of our stock may decline
We have incurred net losses from operations of $12.6 million during the
period August 12, 1997 (inception) through December 31, 1999. Given the level
of our planned operating and capital expenditures, we expect to continue to
incur losses and negative cash flows for the foreseeable future. To achieve
profitability, we must, among other things:
. successfully scale our current operations;
. introduce new digital media services and applications;
. implement and execute our business and marketing strategies;
. develop and enhance our brand;
. adapt to meet changes in the marketplace;
. respond to competitive developments in the Internet media infrastructure
industry;
. continue to attract, integrate, retain and motivate qualified personnel;
and
. upgrade and enhance our technologies to accommodate expanded digital
media service and application offerings.
We might not be successful in achieving any or all of these objectives.
Failure to achieve any or all of these objectives could have a serious adverse
impact on our business, results of operations and financial position. Even if
we ultimately do achieve profitability, we may not be able to sustain or
increase profitability on a quarterly or annual basis. Additionally, we expect
to increase significantly
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our operating expenses in the near future as we attempt to expand our digital
media service and application offerings, grow our customer base, enhance our
brand image, improve our technology infrastructure and open new offices. We
expect the number of our employees to continue to grow significantly. These
higher operating costs will likely increase our quarterly net losses for the
foreseeable future. Accordingly, our ability to operate our business and
implement our business strategy may be hampered and the value of our stock may
decline.
Our quarterly financial results are subject to fluctuations which may make it
difficult to forecast our future performance and could cause our stock price to
decline
Our quarterly operating results have fluctuated in the past, and we expect
our revenues and operating results to vary significantly from quarter to
quarter due to a number of factors, including:
. variability in demand for our digital media services and applications;
. market acceptance of new digital media services and applications offered
by us and our competitors;
. introduction or enhancement of digital media services and applications
offered by us and our competitors;
. willingness of our customers to enter into volume purchase orders;
. the mix of distribution channels through which our products are licensed
and sold;
. changes in the growth rate of Internet usage;
. variability in average order size;
. changes in our pricing policies or the pricing policies of our
competitors;
. technical difficulties with respect to the use of our products;
. governmental regulations affecting use of the Internet, including
regulations concerning intellectual property rights and security
measures;
. the amount and timing of operating costs and capital expenditures
related to expansion of our business operations and infrastructure;
. general economic conditions such as fluctuating interest rates and
inflation; and
. economic conditions specifically related to the Internet such as
fluctuations in the costs of Internet access, hardware and software and
the profitability of the Internet businesses that are our customers.
Our limited operating history and new and unproven business model further
contribute to the difficulty of making meaningful quarterly comparisons. We
expect our operating expenses to increase significantly in absolute dollars.
Our current and future levels of operating expenses and capital expenditures
are based largely on our growth plans and estimates of future revenues. These
expenditure levels are, to a large extent, fixed in the short term. Thus, we
may not be able to adjust spending in a timely manner to compensate for any
unexpected shortfall in revenues and any significant shortfall in revenues
relative to planned expenditures could have an immediate adverse effect on our
business and results of operations. If our operating results fall below the
expectations of securities analysts and investors in some future periods, our
stock price will likely decline. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations" for more information on our
quarterly operating results.
8
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Historically, we have priced our digital media services based on the
customer's projected service volumes. In the future, we plan to provide digital
media services through volume purchase orders with prices determined by
customers committing to specific service volumes and schedules and paying
nonrefundable deposits. We plan to use those volume purchase orders to schedule
time in our production facilities, to staff our operations efficiently and to
forecast revenues and cost of revenues. If our customers are not willing to do
business with us on these terms or if they do not fulfill their commitments
under volume purchase orders, our ability to forecast revenues will be
adversely affected and could contribute to increased fluctuation in our
quarterly results which could seriously harm our business.
Although we have recently achieved significant percentage increases in our
quarterly revenues, this does not mean that future quarters can be expected to
show similar percentage revenue increases.
We are dependent on the development and rate of adoption of digital media and
the delay or failure of this development would seriously harm our business
The development of commercial applications for digital media content is in
its very early stages. If widespread commercial use of the Internet does not
develop, or if the Internet does not develop as an effective medium for the
distribution of digital media content to consumers, then we will not succeed in
executing our business plan. Many factors could inhibit the growth of
electronic commerce in general and the distribution of digital media content in
particular, including concerns about the profitability of Internet-based
businesses, bandwidth constraints, piracy and privacy.
Our success depends on users having access to the necessary hardware,
software and bandwidth, or data transmission capability, to receive high
quality digital media over the Internet. Congestion over the Internet and data
loss may interrupt audio and video streams, resulting in unsatisfying user
experiences. In order to receive digital media adequately, users generally must
have multimedia personal computers with certain microprocessor requirements and
a data transmission capability of at least 28.8 Kbps as well as streaming media
software. The success of digital media over the Internet depends on the
continued roll-out of broadband access to consumers on an affordable basis.
Users typically download digital media software and install it on their
personal computers. This installation may require technical expertise that some
users do not possess. Furthermore, some information systems managers block
reception of digital media over corporate intranets because of bandwidth
constraints. Widespread adoption of digital media technology depends on
overcoming these obstacles, improving audio and video quality and educating
customers and users in the use of digital media technology. If digital media
technology fails to overcome these obstacles, our business could be seriously
harmed.
We rely on strategic relationships to promote our services and for access to
licensed technology; if we fail to maintain or enhance these relationships, our
ability to serve our customers and develop new services and applications could
be harmed
Our ability to provide our services to users of multiple technologies and
platforms depends significantly on our ability to develop and maintain our
strategic relationships with key streaming media technology companies
including, among others, Apple Computer, Inc., Microsoft Corporation,
RealNetworks, Inc. and Terran Interactive, Inc. and hosting and distribution
companies including, among others, Digital Island, Inc., Enron Corp. and iBEAM
Broadcasting. We rely on these relationships for licensed technology to
maintain our ability to service RealNetworks RealMedia,
9
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Microsoft Windows Media and Apple Quicktime platforms and applications. Due to
the evolving nature of the Internet media infrastructure market, we will need
to develop additional relationships to adapt to changing technologies and
standards and to work with newly emerging companies with whom we do not have
preexisting relationships. We cannot be certain that we will be successful in
developing new relationships or that our partners will view these relationships
as significant to their own business or that they will continue their
commitment to us in the future. If we are unable to maintain or enhance these
relationships, we may have difficulty strengthening our technology development
and increasing the adoption of our brand and services.
If we are ineffective in managing our rapid growth, our business may be harmed
We have rapidly and significantly expanded our operations and anticipate that
further rapid expansion will be required to execute our business strategy. This
growth has accelerated since January 1, 1999; from January 1, 1999 to December
31, 1999, we have grown from 41 to 210 employees. In December 1999, we acquired
Alive.com. In addition, we have recently leased additional space and are in the
process of installing additional production equipment for our digital media
services. Integrating additional production facilities with our existing space
has placed a significant strain on our employees, management systems,
information systems, accounting systems, encoding systems and other resources.
If we do not manage our growth effectively, our business, results of operations
and financial condition could be seriously harmed.
Our current systems are insufficient to accommodate our targeted level of
future operations. Effectively managing our expected future growth will
require, among other things, that we successfully upgrade our production
processes and systems, expand the breadth of products and services we offer,
improve our management reporting capabilities and strengthen internal controls
and accounting systems. We will also need to attract, hire and retain highly
skilled and motivated officers and employees. We must also maintain close
coordination among our marketing, operations, development and accounting
organizations. We plan to use a portion of the proceeds of this offering to add
sales offices and production facilities in New York, New York and Los Angeles,
California as well as internationally. This broad expansion will create
significant challenges for us. If we are unable to meet these challenges
effectively, our business could be harmed.
Technological advances may cause our services and applications to be
unnecessary
As more audio and video content is originally created in digital media
formats, the need for our encoding services may decrease. In addition the
enhancement of features in streaming media software applications from
Microsoft, RealNetworks and others may incorporate services and applications we
currently offer, or intend to offer, making our services or applications
unnecessary or obsolete. This could seriously harm our business.
If we are unable to scale our capacity sufficiently as demand increases, we may
lose customers which would seriously harm our business
The average volume of orders we have had to fulfill has been below our
designed capacity, and we cannot be certain that our facilities and employees
will be able to manage a substantially larger number of customer orders while
maintaining current levels of performance. If customer demand increases, our
failure to achieve or maintain high capacity for our production facilities may
cause us to lose customers or fail to gain new ones, reducing our revenues and
causing our business and financial results to suffer.
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The failure to retain and attract key technical personnel and other highly
qualified employees could harm our business
Because of the complexity of our services, applications and related
technologies, we are substantially dependent upon the continued service of our
existing product development personnel. In addition, we intend to hire
additional engineers with high levels of experience in designing and developing
software and rich media products in time-pressured environments. There is
intense competition in the Puget Sound region for qualified technical personnel
in the software and technology markets. New personnel will require training and
education and take time to reach full productivity. Our failure to attract,
train and retain these key technical personnel could seriously harm our
business.
As we continue to introduce additional applications and services, and as our
customer base and revenues continue to grow, we will need to hire a significant
number of qualified personnel in every other area of operations as well.
Competition for these personnel is also extremely intense, and we may not be
able to attract, train, assimilate or retain qualified personnel in the future.
Our failure to attract or retain qualified personnel could seriously harm our
business, results of operations and financial condition.
Finally, our business and operations are substantially dependent on the
performance of our executive officers and key employees, all of whom are
employed on an at-will basis and have worked together for only a short period
of time. We do not maintain "key person" life insurance on any of our executive
officers. The loss of Martin G. Tobias, our founder and chief executive
officer, could seriously harm our business, as could the loss of several other
key executives.
Competition may decrease our market share, revenues and gross margins which may
cause our stock price to decline
Our products and services are divided into digital media services, which is
the encoding of audio and video content for deployment over the Internet, and
digital media applications, which are applications that enable our customers to
employ digital media in their Web-based products and services.
The market for digital media services and applications is relatively new, and
we face competition from in-house encoding services by potential customers,
other vendors that provide outsourced digital media services and companies that
directly provide digital media applications. If we do not compete effectively
or if we experience reduced market share from increased competition, our
business will be harmed. In addition, the more successful we are in the
emerging market for digital media services and applications, the more
competitors are likely to emerge including turnkey Internet media application
and service providers such as Yahoo! Broadcast Services, InterVU, Inc. and V-
Stream; streaming media platform developers such as Apple, Microsoft,
RealNetworks and Liquid Audio, Inc.; and video post-production houses. Our
digital media services business may face competitive services from companies
such as Globix Corporation, Magnum Design, Sonic Foundry and STV Group, Inc.
Our digital media applications business may face competitive products from
companies like AudioSoft, AudioTruck, InterTrust Technologies Corporation,
Microsoft, RealNetworks, Versifi and Vignette Corporation.
We also may not compete successfully against current or future competitors,
many of which have substantially more capital, longer operating histories,
greater brand recognition, larger customer bases and significantly greater
financial, technical and marketing resources than we do. These competitors may
also engage in more extensive development of their technologies, adopt more
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aggressive pricing policies and establish more comprehensive marketing and
advertising campaigns than we can. Our competitors may develop products and
service offerings that are more sophisticated than our own. For these or other
reasons, our competitors' products and services may achieve greater acceptance
in the marketplace than our own, limiting our ability to gain market share and
customer loyalty and to generate sufficient revenues to achieve a profitable
level of operations.
Our business model is unproven, making it difficult to forecast our revenues
and operating results
Our business model is based on the premise that digital media content
providers and developers will outsource a large percentage of their encoding
services needs and content management needs. Our potential customers may rely
on internal resources for these needs. In addition, technological advances may
render an outsourced solution unnecessary, particularly as new media content is
created in a digital format. Market acceptance of our services will depend in
part on reductions in the cost of our services so that we may offer a more cost
effective solution than both our competitors and our customers doing the work
internally. Our cost reduction efforts may not allow us to keep pace with
competitive pricing pressures or may not lead to improved gross margins. In
order to remain competitive, we must reduce the cost of our services through
design and engineering changes. We may not be successful in reducing the costs
of our services.
Average selling prices of our services may decrease, which may harm our gross
margins
The average selling prices for our services may be lower than expected as a
result of competitive pricing pressures, promotional programs and customers who
negotiate price reductions in exchange for longer term purchase commitments or
otherwise. The pricing of services sold to our customers depends on the
duration of the agreement, the specific requirements of the order, purchase
volumes, the level of sales and service support and other contractual
agreements. We expect to experience pricing pressure in the future and
anticipate that the average selling prices and gross margins for our products
will decrease over product life cycles. We may not be successful in developing
and introducing on a timely basis new products with enhanced features that can
be sold at higher gross margins.
If we fail to enhance our existing services and applications products or
develop and introduce new digital media services, applications and features in
a timely manner to meet changing customer requirements and emerging industry
standards, our ability to grow our business will suffer
The market for Internet media infrastructure solutions is characterized by
rapidly changing technologies and short product life cycles. These market
characteristics are heightened by the emerging nature of the Internet and the
continuing trend of companies from many industries to offer Internet-based
applications and services. The widespread adoption of new Internet, networking,
streaming media or telecommunications technologies or other technological
changes could require us to incur substantial expenditures to modify or adapt
our operating practices or infrastructure. Our future success will depend in
large part upon our ability to:
. identify and respond to emerging technological trends in the market;
. develop and maintain competitive digital media services and
applications;
. enhance our products by adding innovative features that differentiate
our digital media services and applications from those of our
competitors;
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. acquire and license leading technologies;
. bring digital media services and applications to market on a timely
basis at competitive prices; and
. respond effectively to new technological changes or new product
announcements by others.
We will not be competitive unless we continually introduce new services and
applications and enhancements to existing services and applications that meet
evolving industry standards and customer needs. In the future, we may not be
able to address effectively the compatibility and interoperability issues that
arise as a result of technological changes and evolving industry standards. The
technical innovations required for us to remain competitive are inherently
complex, require long development cycles and are dependent in some cases on
sole source suppliers. We will be required to continue to invest in research
and development in order to attempt to maintain and enhance our existing
technologies and products, but we may not have the funds available to do so.
Even if we have sufficient funds, these investments may not serve the needs of
customers or be compatible with changing technological requirements or
standards. Most development expenses must be incurred before the technical
feasibility or commercial viability of new or enhanced services and
applications can be ascertained. Revenue from future services and applications
or enhancements to services and applications may not be sufficient to recover
the associated development costs.
If our systems fail and cause interruption of our services, or if our facility
is damaged, our business could be seriously harmed
The performance of our server and networking hardware and software
infrastructure is critical to our business and reputation and our ability to
provide high quality customer service and attract and retain customers,
suppliers, users and strategic partners. Currently, our infrastructure and
production systems are located at one site in Seattle, Washington. We depend on
our single-site infrastructure and any disruption to this infrastructure
resulting from a fire, natural disaster or other event could result in an
interruption in our service, delays in responding to customers' orders and, if
sustained or repeated, could impair our reputation and the attractiveness of
our services. We have no mirror sites or redundant systems backing up our
infrastructure in the event of serious damage or destruction.
Our systems and operations are vulnerable to damage or interruption from
human error, natural disasters, power loss, telecommunications failures, break-
ins, sabotage, computer viruses, intentional acts of vandalism and similar
events. We do not have a formal disaster recovery plan, and we do not carry
sufficient business interruption insurance to compensate us for losses that
could occur. The occurrence of any of these conditions could seriously harm our
business.
We cannot be certain that we will be able to protect our intellectual property,
and we may be found to infringe proprietary rights of others, which could harm
our business
Our intellectual property is important to our business, and we seek to
protect our intellectual property through copyrights, trademarks, patents,
trade secrets, confidentiality provisions in our customer, supplier and
strategic relationship agreements, nondisclosure agreements with third parties,
and invention assignment agreements with our employees and contractors. We
presently have six provisional patent applications on file with the U.S. Patent
and Trademark Office and are currently in the process of preparing and filing
six patent applications that claim priority filing dates to those provisional
patent applications. We cannot assure you that any or all of the patent
applications will be granted. We cannot assure you that measures we take to
protect our intellectual property will be
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successful or that third parties will not develop alternative solutions that do
not infringe upon our intellectual property. In addition, we could be subject
to intellectual property infringement claims by others. These claims, and any
resultant litigation, should it occur, could subject us to significant
liability for damages including treble damages for willful infringement. In
addition, even if we prevail, litigation could be time-consuming and expensive
to defend and could result in the diversion of our time and attention. Any
claims from third parties may also result in limitations on our ability to use
the intellectual property subject to these claims unless we are able to enter
into agreements with the third parties making these claims. Further, we plan to
offer our digital media services and applications to customers worldwide
including customers in foreign countries that may offer less protection for our
intellectual property than the United States. Our failure to protect against
misappropriation of our intellectual property, or claims that we are infringing
the intellectual property of third parties could have a negative effect on our
business, revenues, financial condition and results of operations.
If we fail to successfully establish our new Loudeye name or brand or if we
incur significant expenses in promoting and maintaining our name or brand, our
business could be harmed
In December 1999, we changed our name from encoding.com, Inc. to Loudeye
Technologies, Inc. to better represent the diversity of our digital media
services and applications. The importance of brand and name recognition will
increase as more companies provide outsourced encoding solutions and content
management applications. If our efforts to build our brand and name identity do
not succeed, our business, financial condition and results of operations could
be seriously harmed. These efforts have required and will continue to require,
significant expense. We cannot assure you that these efforts will be
successful. Additionally, our new Loudeye brand and name may cause confusion to
current and potential customers, which may harm our business, financial
condition and results of operations. There can be no assurance that we will be
able to enforce rights related to the Loudeye Technologies, Inc. name and
brand, that we will be free to use the name in all jurisdictions, that there
will be no challenges to the use of that name or that we will not be required
to expend significant resources in defending the use of that name.
Any failure to integrate Alive.com into our business could compromise our
growth strategy and harm our business
On December 14, 1999, we completed our acquisition of Alive.com. To execute
our business plan, we must integrate Alive.com's and our operations and
services into a cohesive, combined entity. Our acquisition of Alive.com has
increased the size of our workforce and expanded the demand on our physical
facilities. These increased demands on our management of operations increase
the risk that we will fail to gather and communicate information and ideas
effectively, including technical knowledge and expertise, throughout our
organization which could have a harmful impact on our business. In addition,
our acquisition of Alive.com is being accounted for using the purchase method
of accounting. Because most software and professional services business
acquisitions involve the purchase of significant amounts of intangible assets,
acquisitions of these businesses also result in goodwill and significant
amortization charges and may also involve charges for acquired research and
development projects. For example, as a result of our acquisition of Alive.com,
we recorded an aggregate of $19.0 million in goodwill and other intangible
assets which will be amortized over a three-year period and will reduce our
earnings and profitability for the foreseeable future.
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If standards for the secure digital delivery of recorded music and video are
not adopted, our customers' piracy concerns might not be satisfied, and they
might not use our products and services
Because some streaming media formats do not contain mechanisms for tracking
the source or ownership of digital media, users are able to download and
distribute unauthorized or "pirated" copies of copyrighted media, including
music, over the Internet. We plan to release an application that deals with
encryption techniques and security measures that may have these problems. This
piracy is a significant concern to companies who might use our digital media
services and applications, and is the reason some record companies are
reluctant to digitally deliver their recorded music over the Internet. It is
not clear how existing laws governing issues such as property ownership,
retransmission of media, encryption and data protection apply to the Internet.
The vast majority of such laws were adopted prior to the advent of the Internet
and related technologies and do not address the unique issues associated with
the Internet and related technologies. Changes to such laws could create
uncertainty in the marketplace that could reduce demand for our products and
services, increase our costs of doing business or otherwise impair our finance
or business prospects. If standard formats for secure digital delivery of
digital media are not adopted, pirated copies of recorded music and other media
may continue to be available on the Internet and reduce the willingness of
content providers to utilize our products and services.
We depend on a limited number of large customers for a majority of our revenues
so the loss or delay in payment from one or a small number of customers could
have a significant impact on our revenues and operating results
A limited number of large customers have accounted for a majority of our
revenues and will continue to do so for the foreseeable future. During the year
ended December 31, 1998, two customers, National Emergency Training Center and
Microsoft Corporation, accounted for 14% and 12% of our revenues, respectively.
In the year ended December 31, 1999, Kanakaris and Microsoft accounted for 13%
and 11% of our revenues, respectively. We believe that a small number of
customers may continue to account for a significant percentage of our revenues
for the foreseeable future. Due to high revenue concentration among a limited
number of customers, the cancellation or delay of a customer order or our
failure to timely complete or deliver a project during a given quarter is
likely to significantly reduce revenues for the quarter. If we were to lose a
key customer, our business, financial condition and operating results could
suffer. In addition, if a key customer fails to pay amounts it owes us, or does
not pay those amounts on time, our revenues and operating results could suffer.
If we are unsuccessful in increasing our customer base, our business could be
harmed.
The length of our sales cycle is uncertain and therefore could cause
significant variations in our operating results
Our largest customers are typically large corporations that often require
long testing and approval processes before making a purchase decision.
Therefore, the length of our sales cycle--the time between an initial customer
contact and completing a sale--has been and may continue to be unpredictable.
The time between the date of our initial contact with a potential new customer
and the execution of a sales contract with that customer ranges from less than
two weeks to more than six months, depending on the size of the customer, the
application of our solution and other factors. Our sales cycle is also subject
to delays as a result of customer-specific factors over which we have little or
no control, including budgetary constraints and internal acceptance procedures.
During the sales cycle, we may expend substantial sales and management
resources without generating corresponding revenues. Our expense levels are
relatively fixed in the short term and are based in part on our
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expectations of future revenues. As a result, any delay in our sales cycle
could cause significant variations in our operating results, particularly
because a relatively small number of customer orders represents a large portion
of our revenues.
The technology underlying our services and applications is complex and may
contain unknown defects that could harm our reputation, result in product
liability or decrease market acceptance of our services and applications
The technology underlying our digital media services and applications is
complex and includes software that is internally developed and software
licensed from third parties. These software products may contain errors or
defects, particularly when first introduced or when new versions or
enhancements are released. We may not discover software defects that affect our
current or new services and applications or enhancements until after they are
sold. Furthermore, because our digital media services are designed to work in
conjunction with various platforms and applications, we are susceptible to
errors or defects in third-party applications that can result in a lower
quality product for our customers. Because our customers depend on us for
digital media management, any interruptions could:
. damage our reputation;
. cause our customers to initiate product liability suits against us;
. increase our product development costs;
. divert our product development resources;
. cause us to lose sales; and
. delay market acceptance of our digital media services and applications.
We do not possess product liability insurance, and our errors and omissions
coverage is not likely to be sufficient to cover our complete liability
exposure.
We plan to expand our business into international markets which will require
significant resources and will subject us to new risks that may limit our
return from our international sales efforts
One of our strategies to increase our sales is to add an international sales
force and operations. This expansion will involve a significant use of
management and financial resources, particularly because we have no previous
experience with international operations. We may not be successful in creating
international operations or sales. In addition, international business
activities are subject to a variety of risks, including:
. the adoption of laws detrimental to our operations such as legislation
relating to the collection of personal data over the Internet or laws,
regulations or treaties governing the export of encryption related
software;
. currency fluctuations;
. actions by third parties such as discount pricing and business
techniques unique to foreign countries;
. political instability; and
. economic conditions including inflation, high tariffs or wage and price
controls.
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We do not possess "political risk" insurance, and any of these risks could
restrict or eliminate our ability to do business in foreign jurisdictions.
Any acquisitions we make, including our recent acquisition of Alive.com, could
disrupt our business and harm our financial condition
We may attempt to acquire businesses, technologies, services or products that
we believe are a strategic fit with our business. Except for the acquisition of
Alive.com, which was completed in December 1999, we currently have no
commitments or agreements with respect to any material acquisition and no
material acquisition is currently being pursued. If we do undertake any
transaction of this sort, the process of integrating an acquired business,
technology, service or product may result in unforeseen operating difficulties
and expenditures and may absorb significant management attention that would
otherwise be available for ongoing development of our business. Moreover, we
cannot assure you that the anticipated benefits of any acquisition will be
realized. Future acquisitions could result in potentially dilutive issuances of
equity securities, the incurrence of debt, contingent liabilities, or
amortization expenses related to goodwill and other intangible assets and the
incurrence of large and immediate write-offs, any of which could seriously harm
our business, results of operations and financial condition.
In addition, recent changes in the Financial Accounting Standards Board and
SEC rules for merger accounting may affect our ability to make acquisitions or
be acquired. For example, elimination of the "pooling" method of accounting for
mergers increases the amount of goodwill that we would be required to account
for if we acquire another company, which would have an adverse financial impact
on our future net income. Further, the reduced availability of write-offs for
in-process research and development costs under the purchase method of
accounting in connection with an acquisition could make an acquisition more
costly for us.
We have in the past experienced returns of our customers' encoded content, and
as our business grows we may experience increased returns, which could harm our
reputation and negatively affect our operating results
In the past, we have had on occasion difficulty monitoring the quality of our
service. A limited number of our customers have returned encoded content to us
for our failure to meet the customer's specifications and requirements. It is
likely that we will experience some level of returns in the future and, as our
business grows, the amount of returns may increase. Also, returns may harm our
relationship with potential customers and business in the future. If returns
increase, our reserves may not be sufficient and our operating results would be
negatively affected.
We may be liable to third parties for music, software and other content that we
encode, distribute or make available on our site
We may be liable to third parties for the content that we encode, distribute
or make available on our site:
. if the content violates third party copyright, trademark or other
intellectual property rights;
. if our customers violate the intellectual property rights of others by
providing content to us or by having us perform digital media services;
or
. if content that we encode or otherwise handle for our customers is deemed
obscene, indecent or defamatory.
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In addition, we face the risk of our customers misrepresenting to us that
they have all necessary ownership rights in the content for us to perform our
encoding services. Any alleged liability could harm our business by damaging
our reputation, requiring us to incur legal costs in defense, exposing us to
awards of damages and costs and diverting management's attention which could
have an adverse effect on our business, results of operations and financial
condition. Our customers for encoding services generally agree to hold us
harmless from claims arising from their failure to have the right to encode the
content given to us for that purpose. However, customers may contest this
responsibility or not have sufficient resources to defend claims and we have
limited insurance coverage for claims of this nature.
Because we host audio and video content on our Web site and on other Web
sites for customers and provide services related to digital media content, we
face potential liability for negligence, infringement of copyright, patent, or
trademark rights, defamation, indecency and other claims based on the nature
and content of the materials that we host. Claims of this nature have been
brought, and sometimes successfully pressed, against Internet content
distributors. In addition, we could be exposed to liability with respect to the
unauthorized duplication of content or unauthorized use of other parties'
proprietary technology. Any imposition of liability that is not covered by
insurance or is in excess of insurance coverage could harm our business.
We cannot assure you that third parties will not claim infringement by us
with respect to past, current or future technologies. We expect that
participants in our markets will be increasingly subject to infringement claims
as the number of services and competitors in our industry segment grows. In
addition, these risks are difficult to quantify in light of the continuously
evolving nature of laws and regulations governing the Internet. Any claim
relating to proprietary rights, whether meritorious or not, could be time-
consuming, result in costly litigation, cause service upgrade delays or require
us to enter into royalty or licensing agreements, and we can not assure you
that we will have adequate insurance coverage or that royalty or licensing
agreements will be available on terms acceptable to us or at all.
We would lose revenues and incur significant costs if our systems or material
third-party systems are not year 2000 compliant
Many computer programs have been written using two digits rather than four
digits to define the applicable year. This could pose a problem at the end of
the century because these computer programs may recognize a date using "00" as
the year 1900, rather than the year 2000. This in turn could result in major
system failures or miscalculations and is generally referred to as the Year
2000 problem.
As a technology company, we are dependent, to a very substantial degree, on
the proper functioning of our computer systems. The very way in which we do
business depends not only on the proper functioning of our computer systems,
but those of all of our customers as well. Any problems associated with the
Year 2000 problem that impede our systems or those of our customers or the
Internet in general could seriously harm our business, results of operations
and financial condition.
We cannot assure you that our own systems, or those of our customers or those
of the Internet network providers or Internet service providers, will be Year
2000 compliant in a timely manner. Moreover, we cannot assure that costs
related to Year 2000 compliance will not be significant. We also cannot assure
you that customers will be able to access our Web site or other Web sites
without serious disruptions arising from the Year 2000 problem. Given the
pervasive nature of the Year 2000 problem, disruptions may occur to the
Internet as a whole or to specific industries or market segments in the entire
economy.
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Risks Related to the Internet
Our success depends on the continued growth of our customers' Internet-based
businesses and any failure of Internet-based commercial activities to continue
to grow at the rates currently anticipated would seriously harm our business,
results of operations and financial condition
Our business model depends on our customers developing successful businesses
based on the Internet and digital media. For our business to succeed, the use
of the Internet must continue to grow and gain widespread acceptance in order
that our customers' businesses succeed. Many factors could inhibit this growth
of the Internet including inadequate network infrastructure, inconsistent
quality of service, and unavailability of cost-effective, high-speed access to
the Internet. The failure of Internet-based commercial activities to continue
to grow at the rates currently anticipated would seriously harm our business,
results of operations and financial condition.
We could face additional burdens associated with government regulation of and
legal uncertainties surrounding the Internet
We are not currently subject to direct regulation by any governmental agency
other than laws and regulations generally applicable to businesses, although
certain U.S. export controls and import controls of other countries, including
controls on the use of encryption technologies, may apply to our products. Few
existing laws or regulations specifically apply to the Internet. However, it is
likely that a number of laws and regulations may be adopted in the United
States and other countries with respect to the Internet. These laws may relate
to areas such as content issues (such as obscenity, indecency and defamation),
copyright and other intellectual property rights, caching of content by server
products, encryption concerns, including export controls, electronic
authentication or "digital signatures," personal privacy, advertising,
taxation, electronic commerce liability, email, network and information
security and the convergence of traditional communication services with
Internet communications, including the future availability of broadband
transmission capability. Other countries and political organizations are likely
to impose or favor more and different regulation than that which has been
proposed in the United States, thus furthering the complexity of regulation.
The adoption of such laws or regulations, and uncertainties associated with
their validity and enforcement, may affect our ability to provide our products
and services and increase the costs associated with our products and services,
and may affect the growth of the Internet. These laws or regulations may
therefore harm our business.
We do not know for certain how existing laws governing issues such as
property ownership, copyright and other intellectual property issues, taxation,
illegal or obscene content, retransmission of media and personal privacy and
data protection apply to the Internet. The vast majority of such laws were
adopted before the advent of the Internet and related technologies and do not
address the unique issues associated with the Internet and related
technologies. Most of the laws that relate to the Internet have not yet been
interpreted. Changes to or the interpretation of these laws could:
. limit the growth of the Internet;
. create uncertainty in the marketplace that could reduce demand for our
digital media services and applications;
. increase our cost of doing business;
. expose us to significant liabilities associated with content distributed
or accessed through our products or services; or
. lead to increased product and applications development costs, or
otherwise harm our business.
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Risks Related to this Offering
Because the Nasdaq stock market is likely to experience extreme price and
volume fluctuations, the price of our stock may decline even if our business is
doing well
Although the initial public offering price was determined based on several
factors, the market price for our common stock will vary from the initial
offering price after this offering. The market price of our common stock may
fluctuate significantly in response to a number of factors, some of which are
beyond our control, including:
. quarterly variations in operating results;
. changes in financial estimates by securities analysts;
. announcements by us or our competitors, of new products, significant
contracts, acquisitions or strategic relationships;
. publicity about our company, our digital media services and applications,
our competitors, or electronic commerce in general;
. additions or departures of key personnel;
. any future sales of our common stock or other securities; and
. stock market price and volume fluctuations of publicly-traded companies
in general and Internet-related companies in particular.
The trading prices of Internet-related companies have been especially
volatile and many are at or near historical highs. Investors may be unable to
resell their shares of our common stock at or above the offering price. In the
past, securities class action litigation has often been brought against a
company following periods of volatility in the market price of its securities.
We may be the target of similar litigation in the future. Securities litigation
could result in substantial costs and divert management's attention and
resources, which could seriously harm our business and operating results.
Because there has been no prior public market for our common stock, we cannot
be certain that our stock price will not decline after this offering
Prior to this offering, there has not been a public market for our common
stock. We cannot predict the extent to which a market will develop or how
liquid that market might become. The initial public offering price for the
shares of our common stock was determined by negotiations between us and the
representatives of the underwriters and may not be indicative of the prices
that will prevail in the market following this offering.
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Because our principal stockholders and management may have the ability to
control stockholder votes, the premium over market price that an acquiror might
otherwise pay may be reduced and any merger or takeover may be delayed
Upon completion of this offering and the concurrent private placement, our
officers and directors will, in the aggregate, beneficially own approximately
56% of our outstanding common stock. As a result, these stockholders, acting
together, will have the ability to control substantially all matters submitted
to our stockholders for approval, including:
. the election or removal of our board of directors;
. the amendment of our certificate of incorporation or bylaws; and
. the adoption of measures that could delay or prevent a change in control
or impede a merger, takeover or other business combination involving us.
These stockholders will have substantial influence over our management and
our affairs. Accordingly, this concentration of ownership may have the effect
of impeding a merger, consolidation, takeover or other business consolidation
involving us, or discouraging a potential acquirer from making a tender offer
for our shares. This concentration of ownership could also adversely affect our
stock's market price or lessen any premium over market price that an acquiror
might otherwise pay.
Our management has broad discretion in using the proceeds from this offering
and the concurrent private placement, which might not be used in ways that
increase our operating results or market value
We estimate the net proceeds from this offering and the concurrent private
placement will be approximately $70.9 million, after deducting estimated
expenses of the offering. Our management will have broad discretion in how we
use the net proceeds of this offering, including uses which do not increase our
operating results or market value. We currently expect to use these proceeds
for general corporate purposes, including capital expenditures and working
capital. We also may use a portion of the net proceeds for the future
acquisition of companies, technology or services that complement our business,
or for strategic alliances with, or investments in, companies that provide
complementary products and services. You will not have the opportunity, as part
of your investment decision, to assess whether the proceeds are being used
appropriately. See "Use of Proceeds."
We may need to raise additional capital in the future, and if we are unable to
secure adequate funds on terms acceptable to us, we may be unable to execute
our business plan
We believe that the net proceeds of this offering and the concurrent private
placement, together with our other existing and available funds, will be
sufficient to meet our anticipated needs for working capital, capital
expenditures and business expansion through at least the next 18 months.
Thereafter, we may need to raise additional funds. We may have to raise funds
even sooner in order to fund more rapid expansion, to develop new or enhanced
services or products, to respond to competitive pressures, to acquire
complementary products, businesses or technologies or otherwise to respond to
unanticipated requirements. If additional funds are raised through the issuance
of equity or convertible debt securities, the percentage ownership of our
stockholders will be reduced. If we raise capital through debt financing, we
may be forced to accept restrictions affecting our liquidity, including
restrictions on our ability to incur additional indebtedness or pay dividends.
We cannot assure you that additional financing will be available on favorable
terms or at all. If adequate funds
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are not available or are not available on acceptable terms, we may not be able
to fund our ongoing operations and planned expansion, take advantage of
unanticipated acquisition opportunities, develop or enhance services and
applications or respond to competitive pressures. This inability could
seriously harm our business, results of operations and financial condition.
We have certain anti-takeover defenses that could delay or prevent our
acquisition which could reduce the value of an investment in us
Certain provisions of our certificate of incorporation and bylaws and the
provisions of Delaware law could have the effect of delaying, deferring or
preventing an acquisition of Loudeye, even if an acquisition would be
beneficial to our stockholders. See "Description of Capital Stock" for more
information on our charter and by-law provisions.
A substantial number of our shares of common stock are eligible for future
sale, and the sale of these shares may depress our stock price, even if our
business is doing well
Sales of a substantial number of shares of common stock after this offering
could adversely affect the market price of our common stock and could impair
our ability to raise capital through the sale of additional equity securities.
Upon completion of this offering and our concurrent private placement, we will
have 34,595,515 shares of common stock outstanding with 35,270,515 shares
outstanding if the underwriters' option to purchase additional shares is
exercised in full. The 4,500,000 shares of common stock sold in this offering,
which would be 5,175,000 shares if the underwriters' option to purchase
additional shares is exercised in full, will be freely tradable without
restriction or further registration under the Federal securities laws unless
purchased by our "affiliates" as that term is defined in Rule 144. The
remaining 30,095,515 shares of common stock outstanding upon completion of this
offering will be "restricted securities" as that term is defined in Rule 144.
All of our stockholders, option holders and warrant holders are subject to
agreements that limit their ability to sell their shares of common stock. These
securityholders cannot sell or otherwise dispose of any shares of common stock
for a period of at least 180 days after the date of this prospectus without the
prior written approval of FleetBoston Robertson Stephens Inc. or us in certain
cases. When these agreements expire, these shares and the shares underlying the
options will become eligible for sale, in some cases only pursuant to the
volume, manner of sale and notice requirements of Rule 144.
Because the initial public offering price will be substantially higher than the
book value per share of our outstanding common stock, new investors will incur
immediate and substantial dilution in the amount of $12.58 per share based on
the initial public offering price of $16.00
The initial public offering price will be substantially higher than the book
value per share of our common stock outstanding immediately after this offering
based on the total value of our assets less our total liabilities. Therefore,
if you purchase common stock in this offering, you will experience immediate
and substantial dilution of approximately $12.58 per share in the price you pay
for the common stock as compared to its book value. Furthermore, investors
purchasing common stock in this offering will own only 14% of our shares
outstanding even though they will have contributed 56% of the total
consideration received by us in connection with our sales of common stock. To
the extent outstanding options to purchase common stock are exercised, there
will be further dilution. Our current shareholders will incur an unrealized
gain of $1.82 per share as a result of this offering.
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SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
This prospectus contains forward-looking statements. These statements relate
to future events or our future financial performance. In some cases, you can
identify forward-looking statements by terminology such as may, will, should,
expect, plan, anticipate, believe, estimate, predict, potential or continue,
the negative of terms like these or other comparable terminology. These
statements are only predictions. Actual events or results may differ
materially. In evaluating these statements, you should specifically consider
various factors, including the risks outlined in "Risk Factors" above. These
factors may cause our actual results to differ materially from any forward-
looking statement.
Although we believe that the expectations reflected in the forward-looking
statements are reasonable, we cannot guarantee future results, levels of
activity, performance or achievements. Moreover, neither we nor any other
person assumes responsibility for the accuracy and completeness of the forward-
looking statements. We are under no duty to update any of the forward-looking
statements after the date of this prospectus to conform these statements to
actual results or to changes in our expectations.
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USE OF PROCEEDS
The net proceeds to be received by us from the sale of the 4,500,000 shares
of common stock in this offering are estimated to be $65.9 million ($75.9
million if the underwriters exercise their over-allotment option in full),
after deducting estimated underwriting discounts and commissions and estimated
offering expenses payable by us. In addition, the net proceeds to be received
by us from the sale of 336,022 shares of common stock in a private placement to
Akamai are estimated to be $5.0 million, at a private placement price of $14.88
per share.
The principal purposes of this offering are to increase our working capital,
to create a public market for our common stock, to facilitate our future access
to the public capital markets and to increase our visibility in the retail
marketplace. We expect to use approximately $9.0 million of the net proceeds in
2000 for capital expenditures primarily associated with expansion of our
encoding and hosting infrastructure and other technology and systems upgrades.
In addition, we plan to use approximately $2.0 million of the proceeds to
establish production and sales facilities in Santa Monica, California and
New York, New York. We have no specific plans for the remaining proceeds. This
allocation is only an estimate and we may adjust it as necessary to address our
operational needs in the future. For instance, we may also use a portion of the
net proceeds to acquire complementary technologies or businesses; however, we
currently have no commitments or agreements and are not involved in any
negotiations with respect to any transactions of this nature. Pending use of
the net proceeds of this offering, we intend to invest the net proceeds in
interest-bearing, investment grade securities.
DIVIDEND POLICY
We have never declared or paid cash dividends on our capital stock. We
currently intend to retain all available funds and any future earnings for use
in the operation and expansion of our business and do not anticipate paying any
cash dividends in the foreseeable future. The terms of our credit agreement
with Imperial Bank restrict our ability to pay dividends, and in the future the
terms of other credit agreements or contractual provisions may impose
restrictions or limitations on the payment of dividends.
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CAPITALIZATION
The following table sets forth our capitalization as of December 31, 1999 on
an actual, pro forma and pro forma as adjusted basis:
. The "actual" column reflects our capitalization as of December 31, 1999
without any adjustments to reflect subsequent events or anticipated
events,
. The "pro forma" column reflects our capitalization as of December 31,
1999 with adjustments to give effect to the conversion of all shares of
outstanding convertible preferred stock into 21,063,236 shares of common
stock upon the closing of this offering,
. The "pro forma as adjusted" column reflects our capitalization as of
December 31, 1999 with adjustments to give effect to (1) the receipt of
the estimated proceeds from the sale of our common stock offered hereby
after deducting the estimated offering expenses and underwriting
discounts and commissions, (2) the change in the authorized number of
shares upon the completion of this offering, and (3) the receipt of the
proceeds from the sale by us of 336,022 shares of our common stock to
Akamai Technologies, Inc. at a price of $14.88 per share, with a
deferred charge of approximately $376,000 related to the discount, which
will be amortized over one year.
This table should be read in conjunction with "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and the financial
statements and related notes thereto included elsewhere in this prospectus.
<TABLE>
<CAPTION>
December 31, 1999
--------------------------------
Pro Forma
Actual Pro Forma As Adjusted
------- ----------- -----------
(Unaudited) (Unaudited)
(in thousands except share
data)
<S> <C> <C> <C>
Long-term obligations, including current
portion...................................... $ 3,094 $ 3,094 $ 3,094
Stockholders' equity:
Preferred stock; $0.001 par value; authorized
41,000,000 actual, 21,063,236 shares issued
and outstanding actual; 41,000,000 shares
authorized, no shares issued and
outstanding, pro forma; and 5,000,000 shares
authorized, no shares issued and outstanding
pro forma as adjusted....................... 58,536 -- --
Common stock; par value $0.001 per share;
100,000,000 shares authorized actual,
8,696,257 shares issued and outstanding
actual; 100,000,000 shares authorized,
8,696,257 shares issued and outstanding, pro
forma; and 100,000,000 shares authorized,
34,595,515 shares issued and outstanding pro
forma as adjusted and additional paid in
capital..................................... 27,147 85,683 156,938
Beneficial conversion feature................ 14,120 14,120 14,120
Warrants..................................... 1,159 1,159 1,159
Deferred stock compensation.................. (6,843) (6,843) (6,843)
Accumulated deficit.......................... (26,630) (26,630) (26,630)
------- ------- --------
Total shareholders' equity.................... 67,489 67,489 138,744
------- ------- --------
Total capitalization.......................... $70,583 $70,583 $141,838
======= ======= ========
</TABLE>
This table excludes the following shares:
. 6,371,772 shares of common stock issuable upon the exercise of options
under our stock option plans consisting of:
. 4,223,209 shares of common stock underlying options outstanding as
of December 31, 1999 at a weighted average exercise price of $0.97
per share, of which 355,783 were fully vested as of December 31,
1999;
. 2,148,563 shares of common stock underlying options available for
future grants; and
25
<PAGE>
. 41,053 shares issuable upon exercise of a Series C preferred stock
warrants outstanding as of December 31, 1999 with an exercise price of
$1.90.
. 650,000 shares issuable upon exercise of a common stock warrant
outstanding as of December 31, 1999 with an exercise price of $10.00 per
share.
. 200,000 shares of common stock available under our 2000 Employee Stock
Purchase Plan.
. 250,000 shares of common stock available under our 2000 Director Stock
Option Plan.
26
<PAGE>
DILUTION
Our pro forma net tangible book value as of December 31, 1999 was $47.6
million or approximately $1.60 per share. Pro forma net tangible book value per
share represents the amount of our total tangible assets less total
liabilities, divided by the number of shares of common stock outstanding after
giving effect to the conversion of all shares of outstanding preferred stock
into shares of common stock upon the closing of this offering.
Dilution in pro forma net tangible book value per share represents the
difference between the amount per share paid by purchasers of shares of common
stock in our initial public offering and the pro forma net tangible book value
per share of common stock immediately after the completion of this offering.
Our pro forma as adjusted net tangible book value at December 31, 1999 would
have been $118.4 million or approximately $3.42 per share after giving effect
to:
. the conversion of all shares of outstanding preferred stock into shares
of common stock upon the closing of this offering;
. the application of the net proceeds from the sale of 4,500,000 shares of
common stock offered by us after deducting the underwriting discount and
estimated offering expenses payable by us; and
. the receipt of $5.0 million from the sale of 336,022 shares of common
stock to Akamai Technologies, Inc. at a price of $14.88 per share.
This represents an immediate increase in net tangible book value per share of
$1.82 per share to existing stockholders and an immediate dilution of $12.58
per share to new investors in this offering and the private placement.
The following table sets forth, as of December 31, 1999, the differences
between the number of shares of our common stock purchased, the total
consideration paid and the average price per share paid by existing holders of
common stock and by the new investors, before deducting the underwriting
discounts and estimated offering expenses payable by us.
<TABLE>
<S> <C> <C>
Initial public offering price per share....................... $16.00
Pro forma net tangible book value per share as of December
31, 1999.................................................... $1.60
Increase per share attributable to new investors............. 1.82
-----
Pro forma as adjusted net tangible book value per share after
the offering................................................. $ 3.42
------
Dilution per share to new investors........................... $12.58
======
</TABLE>
27
<PAGE>
<TABLE>
<CAPTION>
Shares Purchased Total Consideration Average
--------------------- ----------------------- Price Per
Number Percentage Amount Percentage Share
---------- ---------- ------------ ---------- ---------
<S> <C> <C> <C> <C> <C>
Existing stockholders... 29,759,493 86.0% $ 61,117,473 44.3% $2.05
New investors........... 4,836,022 14.0% 77,000,000 55.7% 15.92
---------- ----- ------------ ----- -----
Total................. 34,595,515 100.0% $138,117,473 100.0%
========== ===== ============ =====
</TABLE>
The foregoing tables assume no exercise of the underwriters' overallotment
option and excludes the following shares:
. 6,371,772 shares of common stock issuable upon the exercise of options
under our stock option plans consisting of:
. 4,223,209 shares of common stock underlying options outstanding as
of December 31, 1999 at a weighted average exercise price of $0.97
per share, of which 355,783 were fully vested as of December 31,
1999; and
. 2,148,563 shares of common stock underlying options available for
future grants.
. 41,053 shares issuable upon exercise of a Series C preferred stock
warrant outstanding as of December 31, 1999 with an exercise price of
$1.90.
. 650,000 shares issuable upon exercise of a common stock warrant
outstanding as of December 31, 1999 with an exercise price of $10.00 per
share.
. 200,000 shares of common stock available under our 2000 Employee Stock
Purchase Plan.
. 250,000 shares of common stock available under our 2000 Director Stock
Option Plan.
28
<PAGE>
SELECTED FINANCIAL DATA
The selected financial data set forth below should be read in conjunction
with "Management's Discussion and Analysis of Financial Condition and Results
of Operations" and our financial statements and the notes thereto included
elsewhere in this prospectus. The statement of operations data set forth below
for the period from August, 1997 (inception) to December 31, 1999 and the
selected balance sheet data as of December 31, 1999 have been derived from our
audited financial statements included elsewhere in this prospectus, which have
been audited by Arthur Andersen LLP, Independent Public Accountants. The
"Pro Forma" balance sheet data displayed in the "Pro Forma" column reflects the
following:
. the conversion of all shares of outstanding preferred stock into shares
of common stock upon the closing of this offering;
. the application of the net proceeds from the sale of 4,500,000 shares of
common stock offered by us, after deducting the underwriting discount and
estimated offering expenses; and
. the receipt of $5.0 million from the sale of 336,022 shares of common
stock to Akamai Technologies, Inc., which we expect to sell in a private
placement concurrent with the closing of this initial public offering at
a price of $14.88 per share. We expect to recognize a deferred charge
associated with this discount of approximately $376,000, which will be
amortized over one year.
The historical results are not necessarily indicative of results to be expected
for any future period.
See note 2 of notes to financial statements for an explanation of the
determination of the number of weighted average shares used to compute pro
forma net loss per share amounts.
<TABLE>
<CAPTION>
Period from
Aug. 12, 1997
(inception) to Fiscal Year Ended Fiscal Year Ended
December 31, 1997 December 31, 1998 December 31, 1999
----------------- ----------------- -----------------
<S> <C> <C> <C>
Statement of Operations
Data:
Revenues................. $ 10 $ 286 $ 2,645
--------- --------- ----------
Cost of revenues......... 17 504 2,871
--------- --------- ----------
Gross margin............. (7) (218) (226)
Operating expenses:
Research and
development........... 12 204 1,248
Sales and marketing.... 39 588 3,982
General and
administrative........ 37 674 3,612
Amortization of
intangibles........... -- -- 302
Stock-based
compensation.......... -- -- 1,554
--------- --------- ----------
Total operating
expenses............ 88 1,466 10,698
--------- --------- ----------
Other income (expense)... -- 34 22
--------- --------- ----------
Net loss................. (95) (1,650) (10,902)
--------- --------- ----------
Beneficial conversion
feature................. -- -- (14,121)
--------- --------- ----------
Net loss to common
shareholders............ $ (95) $ (1,650) $ (25,023)
========= ========= ==========
Basic and diluted net
loss per share.......... n/a $ (0.41) $ (4.62)
========= ========= ==========
Basic and diluted pro
forma net loss per
share................... n/a $ (0.17) $ (1.50)
========= ========= ==========
Weighted average shares
outstanding used to
compute basic and
diluted net loss per
share................... n/a 4,039,444 5,410,507
========= ========= ==========
Weighted average shares
outstanding used to
compute basic and
diluted pro forma net
loss per share.......... n/a 9,585,049 16,659,800
========= ========= ==========
</TABLE>
<TABLE>
<CAPTION>
December 31, 1999
-------------------
Actual Pro Forma
------- -----------
(Unaudited)
<S> <C> <C>
Balance Sheet Data (in thousands):
Cash and cash equivalents................................... $49,273 $120,152
Working capital............................................. 44,032 114,911
Total assets................................................ 76,775 148,030
Long-term obligations, less current portion................. 1,963 1,963
Total stockholders' equity.................................. 67,489 138,744
</TABLE>
29
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis of our financial condition and results
of operations should be read in conjunction with "Selected Financial Data" and
our financial statements and notes thereto appearing elsewhere in this
prospectus. This discussion and analysis contains forward-looking statements
that involve risks, uncertainties and assumptions. Our actual results may
differ materially from those anticipated in these forward-looking statements
as a result of certain factors including, but not limited to, those set forth
under "Risk Factors" and elsewhere in this prospectus.
Overview
We are a leading provider of Internet media infrastructure services and
applications for the media entertainment and corporate markets that enable our
customers to optimize the use of digital media content over the Internet and
intranets. We provide our customers with outsourced end-to-end solutions that
include encoding services, publishing and distribution of rich media and
hosting services. To date, we have performed digital media services for over
250 customers.
We began our operations as a Washington limited liability company in August
1997 and were incorporated as a Delaware corporation in March 1998. We began
providing encoding services in 1997 for both audio and video content, and
recorded our first revenues from sales of our services in September 1997. From
inception through December 31, 1998, our operating activities related
primarily to recruiting personnel, raising capital, purchasing operating
assets, conducting research and development, building our brand and providing
encoding services. During 1999, we accelerated our investment in our research
and development capabilities, our sales and marketing organization, our
manufacturing operations and facilities, and our general and administrative
infrastructure.
Substantially all of our revenues to date have been generated by sales of
digital media services. Digital media services revenues consist primarily of
encoding services to convert audio and video content into Internet media
formats, as well as other services for deployment of media over the Internet.
These other services include digital watermarking, which protects content from
unauthorized use, distribution and management services, indexing services,
metadata collection and analysis of information related to the content, search
engine indexing, rights management and consulting services. We charge our
customers on either a time and materials basis or a fixed fee basis which
depends on a variety of factors, such as volume and type of content provided
and number and type of output formats requested. We generally recognize
digital media services revenues as the service is provided and invoice our
customers upon delivery of encoded product. Payment terms with customers
generally require payment within 30 days of the invoice date. In the fourth
quarter of 1999 we began requiring our customers to make a non-refundable
deposit at the time an order for encoding services is placed.
Our digital media applications consist of a set of targeted vertical
applications based on our media application platform, such as photo albums
applications, media-enhanced auction and classified listing applications and
media-enhanced advertising and marketing applications. We anticipate digital
media application revenues will consist of licensing fees, per use charges and
maintenance and support fees. As of December 31, 1999, we had not recorded any
revenues from licensing of our digital media applications.
We market our digital media services and applications primarily to the
media, entertainment and corporate markets through our direct sales force,
reseller and co-marketing partners and our Web site. We expect that sales
derived through indirect channels will increase as a percentage of total
revenues as we expand our international efforts and system integrator
relationships. Historically, we have provided our services pursuant to volume
purchase agreements with prices determined by projected
30
<PAGE>
volume. In the future, we anticipate providing digital media services pursuant
to volume purchase orders with prices determined based on specific committed
volume and schedules. We believe these anticipated commitments will improve our
ability to schedule production and forecast revenues.
We have recorded stock-based compensation expense related to stock options
granted below fair market value through December 31, 1999 of $7.8 million. Of
this amount, we amortized approximately $982,000 through that same period. This
amount represents the difference between the exercise price of these stock
option grants and the deemed fair value of the common stock at the time of
grant. Additionally, between January 1, 2000 and March 14, 2000 we granted
options to employees to purchase 1,050,200 shares of our common stock with
exercise prices ranging from $7.65 to $9.00 per share, resulting in additional
stock-based compensation of $3.1 million. We will record additional deferred
stock-based compensation charges of $9.9 million in respect of all of these
option grants over the vesting period of the options, which is generally four
and one-half years. As a result, the amortization of stock-based compensation
will impact our reported results of operations through fiscal 2005.
We have granted approximately 220,000 options to consultants which vest on
the same terms as options granted to employees. These terms require that the
individuals continue their current consulting relationship with us in order to
continue vesting. These options are accounted for in accordance with the
provisions of SFAS 123 and EITF 96-18. Accordingly, using the Black-Scholes
option pricing model and assuming a term of five years, a risk-free interest
rate of 5.50% and expected volatility of 75%, the options are marked to fair
value at each reporting period through charges to stock-based compensation in
the statements of operations. Approximately $572,000 was recognized in stock-
based compensation expense related to these options in the year ended
December 31, 1999.
We have granted a warrant to purchase 650,000 shares of common stock to
Valley Media in conjunction with a commercial agreement. The warrant is
exercisable immediately and expires in December 2000. This warrant has been
accounted for in accordance with the provisions of EITF 96-18. Accordingly,
using the Black-Scholes option pricing model and assuming a term of one year, a
risk-free interest rate of 5.00% and an expected volatility of 70%, we
calculated the value of the warrant to be $1,124,500. This amount has been
capitalized within other assets and will be amortized over three years, the
initial term of the agreement.
We have sustained losses and incurred negative gross margins on a quarterly
and annual basis since inception and we expect to continue to sustain losses
and incur negative gross margins for the foreseeable future as we expand our
operations and production facilities. As of December 31, 1999, we had an
accumulated deficit of $26.6 million. Our net loss was approximately $95,000
from inception to December 31, 1997, $1.6 million in fiscal year 1998, and
$25.0 million in fiscal year 1999. Included in the accumulated deficit as of
December 31, 1999 is a $14.1 million charge related to a beneficial conversion
feature associated with the sale of shares of Series D preferred stock in
December 1999. Operating losses resulted from significant costs incurred in the
development and sale of our products and services. We expect to experience
significant growth in our operating expenses in all functional areas in order
to execute our business plan. As a result, we anticipate that these operating
expenses, as well as planned capital expenditures, will constitute a material
use of our cash resources. We expect to incur additional losses and continued
negative cash flow from operations in the future. We cannot assure you that we
will achieve or sustain profitability.
Our limited operating history makes the prediction of future operating
results difficult. In view of our limited operating history and the rapidly
evolving nature of our business, we believe that period-to-period comparisons
of our operating results, particularly for each of the years ended 1997, 1998
and 1999, are not meaningful and should not be relied upon as an indication of
future performance. Our business prospects must be considered in light of the
risks and uncertainties often encountered by early-stage companies in the
Internet-related products and services market. We may
31
<PAGE>
not be successful in addressing these risks and uncertainties. We have
experienced significant percentage growth in revenues in recent periods;
however, we do not believe that prior growth rates are sustainable or
indicative of future growth rates. It is likely that in some future quarter our
operating results may fall below the expectations of securities analysts and
investors. In this event, the trading price of our common stock may fall
significantly.
In December 1999, we acquired Alive.com, Inc., whose principle business is
the development of streaming media applications, in exchange for 2,508,848
shares of our common stock and the issuance of options to purchase 91,181
shares of our common stock and the assumption of liabilities, representing a
total purchase price of $19.0 million. This acquisition was accounted for using
the purchase method of accounting. We recorded intangibles and goodwill of
$19.0 million, which will be amortized on a straight-line basis over three
years.
In December 1999, we sold $47.8 million of Series D preferred stock in a
private equity placement with a number of strategic investors pursuant to the
terms of a stock purchase agreement which was entered into on December 14, 1999
as amended on December 17, 1999. These investors included AmericaOnline, Inc.,
CBS Corporation, Microsoft Corporation, National Broadcasting Company, Inc.,
Olympic Venture Partners, RRE Ventures and Wasserstein Adelson Ventures. We
issued a total of 7,510,989 shares of Series D preferred stock at price of
$6.37 per share. The Series D preferred stock will convert to common stock at a
one-to-one ratio upon the closing of this offering. The Series D preferred
stock contains substantially the same rights and preferences as the Series B
and Series C preferred stock.
In February 2000, we entered into a common stock purchase agreement with
Akamai Technologies, Inc., under which we agreed to sell to Akamai shares of
our common stock in a private placement concurrent with and conditioned upon
the sale of shares in this offering. The price of the shares in the concurrent
private placement will be the initial public offering price per share less the
underwriting discounts and commissions. The number of shares we will sell to
Akamai is equal to $5.0 million worth of common stock priced at the initial
public offering price per share less the underwriting discounts and
commissions. We expect to recognize a deferred charge associated with this
discount of approximately $376,000, which will be amortized over a period of
approximately one year.
Results of Operations
The following table sets forth our historical operating information as a
percentage of our total revenues represented by each item for the periods
indicated:
<TABLE>
<CAPTION>
Year Ended
December 31,
------------------
1997 1998 1999
---- ---- ----
<S> <C> <C> <C>
Revenues.................. 100 % 100 % 100 %
Cost of revenues.......... 170 176 108
---- ---- ----
Gross margin.............. (70) (76) (8)
Operating expenses:
Research and
development............ 120 71 47
Sales and marketing..... 390 206 151
General and
administrative......... 370 236 137
Amortization of
intangibles............ -- -- 11
Stock-based
compensation........... -- -- 59
---- ---- ----
Total operating
expenses............... 880 513 405
Other income (expense),
net...................... -- 12 1
---- ---- ----
Net loss.................. (950)% (577)% (412)%
==== ==== ====
</TABLE>
32
<PAGE>
Years Ended December 31, 1998 and 1999
Revenues. Revenues were approximately $286,000 and $2.6 million for the years
ended December 31, 1998 and 1999, respectively. The increase was due primarily
to an increase in the number and average size of sales of our digital media
services generated by a larger sales force in the 1999 period and, to a lesser
extent, higher prices in the 1999 period.
Cost of revenues. Cost of revenues includes cost of personnel expenses and
the allocated portion of facilities and equipment. Stock-based compensation
charges of approximately $202,000 in 1999 are attributable to employees
categorized within production (cost of revenues) and are presented in a
separate line item within the statements of operations. Cost of revenues
increased 475% to $2.9 million in 1999 from approximately $504,000 in 1998. The
increase in absolute dollars was due primarily to increased sales volumes. The
decrease in percentage terms was due to more efficient use of our production
facility and staff.
Gross margins may be affected by the volume of services provided, the mix of
distribution channels used by us, the mix of services and applications
provided, and the average order size. We typically realize higher gross margins
on direct channel sales relative to indirect channels. If sales through
indirect channels increase as a percentage of total net revenues, particularly
if international sales increase which will primarily be the result of indirect
sales, our gross margins will decrease.
Operating expenses. Operating expenses increased 613% to $10.7 million in
1999 from $1.5 million in 1998. Without the effect of $1.6 million of
stock-based compensation charges and approximately $302,000 in amortization of
intangible assets, operating expenses for the 1999 period would have been $8.8
million, an increase of $7.3 million, or 487% over 1998.
Research and development expenses. Research and development expenses consist
primarily of salaries and consulting fees to support development and costs of
technology acquired from third parties to incorporate into applications
currently under development. Stock-based compensation charges of approximately
$126,000 in 1999 are attributable to employees categorized within research and
development and are presented in a separate line item within the statements of
operations. To date, all research and development costs have been expensed as
incurred. We believe that continued investment in research and development is
critical to attaining our strategic objectives and, as a result, expect
research and development expenses to increase significantly. Research and
development expenses increased 488% to $1.2 million in 1999 from approximately
$204,000 in 1998. The increase was due primarily to increases in development
personnel, travel and consulting expenses. We expect to continue to increase
our level of expenditures in future periods.
Sales and marketing expenses. Sales and marketing expenses consist primarily
of salaries, commissions, consulting fees paid, trade show expenses,
advertising and cost of marketing collateral. Stock-based compensation charges
of approximately $333,000 in 1999 are attributable to employees categorized
within sales and marketing and are presented in a separate line item within the
statements of operations. We intend to continue our aggressive branding and
marketing campaign and therefore expect sales and marketing expenses to
increase significantly. Sales and marketing expenses increased 580% to $4.0
million in 1999 from approximately $588,000 in 1998. The increases were due in
large part to growth in sales personnel and commissions and costs related to
our branding and marketing campaigns.
General and administrative expenses. General and administrative expenses
consist primarily of rent and nonallocated facilities charges, salaries,
general legal expenses, and recruiting and relocation
33
<PAGE>
charges associated with additional headcount required for the significant ramp-
up in operations. Stock-based compensation charges of approximately $893,000
are attributable to employees categorized within general and administrative and
are presented in a separate line item within the statements of operations. We
believe that as operations continue to increase in size and scope, that general
and administrative expenses will continue to increase proportionately. General
and administrative expenses increased 434% to $3.6 million in 1999 from
approximately $674,000 in 1998. The increase was primarily driven by the
additional facilities opened during 1999 and the increase in headcount in the
finance, executive and administration areas plus recruiting and relocation
expenses.
Amortization of intangibles. Amortization of intangibles of approximately
$302,000 in 1999 includes amortization of the goodwill and identified
intangible assets recorded as part of the Alive.com acquisition, which took
place on December 14, 1999. There were no intangible assets as of December 31,
1998, and accordingly, there were no related amortization charges.
Stock-based compensation. Stock-based compensation of $1.6 million through
December 31, 1999 consists of approximately $982,000 in amortization of
deferred stock compensation related to stock options granted below fair market
value through December 31, 1999 and approximately $572,000 in expense related
to marking 220,000 options granted to consultants to fair market value as of
December 31, 1999. There was no stock-based compensation in 1998.
Other income (expense), net. Net other expense is a combination of earnings
on our cash and cash equivalents and short-term investments and interest
expense on working capital and equipment financing. This combined total equaled
approximately $22,000 and $34,000 in net other income in 1999 and 1998,
respectively. The decrease was due primarily to increased interest expense
resulting from higher levels of indebtedness.
Period of August 12, 1997 (Inception) to December 31, 1997 and Year Ended
December 31, 1998
Revenues. Revenues increased to approximately $286,000 in 1998 from
approximately $10,000 in 1997. The increase was due primarily to an increase in
the number and average size of sales of our encoding services generated by a
larger sales force in the 1998 period and, to a lesser extent, higher prices in
the 1998 period.
Cost of revenues. Cost of revenues includes cost of equipment, personnel
expenses and overhead. Cost of revenues increased to approximately $504,000 in
1998 from approximately $17,000 in 1997. The increase in absolute dollars was
due primarily to higher sales volume and the need to establish production
capacities to meet future growth at a rate faster than the revenue growth
during the period.
Operating expenses. Operating expenses increased to $1.5 million in 1998 from
approximately $88,000 in 1997. There were no stock-based compensation charges
in 1998 or 1997.
Research and development expenses. Research and development expenses
increased to approximately $204,000 in 1998 from approximately $12,000 in 1997.
The increase was due primarily to increases in internal development personnel,
travel and consulting expenses.
Sales and marketing expenses. Sales and marketing expenses increased to
approximately $588,000 in 1998 from approximately $39,000 in 1997. The
increases were due in large part to growth in sales personnel, commissions and
costs related to the continued development and implementation of our branding
and marketing campaigns.
34
<PAGE>
General and administrative expenses. General and administrative expenses
increased to approximately $674,000 in 1998 from approximately $37,000 in 1997.
The increase was primarily a result of increased personnel and facility
expenses necessary to support our growth.
Other income (expense), net. Net other income was none and approximately
$34,000 for 1997 and 1998, respectively. The increase was due primarily to
interest income resulting from additional invested cash and cash equivalents
and short-term investments.
Selected Quarterly Operating Results (unaudited)
The following table sets forth certain unaudited quarterly statement of
operations data for the six quarters ended December 31, 1999. In the opinion of
management, this information has been prepared substantially on the same basis
as the audited financial statements appearing elsewhere in this prospectus, and
all necessary adjustments, consisting only of normal recurring adjustments,
have been included in the amounts stated below to present fairly the unaudited
quarterly results of operations. The quarterly data should be read in
conjunction with our audited financial statements and the notes thereto
appearing elsewhere in this prospectus. The operating results for any quarter
are not necessarily indicative of the operating results for any future period.
<TABLE>
<CAPTION>
Three-Month Periods Ended
----------------------------------------------------------
Sept. 30, Dec. 31, Mar. 31, June 30, Sept. 30, Dec. 31,
1998 1998 1999 1999 1999 1999
--------- -------- -------- -------- --------- --------
(in thousands)
<S> <C> <C> <C> <C> <C> <C>
Statement of Operations
Data:
Revenues................ $ 34 $ 179 $ 301 $ 528 $ 768 $ 1,048
Cost of revenues........ 111 349 388 530 790 1,163
------ ------ ------- ------- ------- -------
Gross margin............ (77) (170) (87) (2) (22) (115)
Operating expenses:
Research and
development.......... 57 105 142 202 318 586
Sales and marketing... 183 275 470 927 826 1,759
General and
administrative....... 231 312 422 590 804 1,796
Amortization of
intangibles.......... -- -- -- -- -- 302
Stock-based
compensation......... -- -- -- 8 196 1,350
------ ------ ------- ------- ------- -------
Total operating
expenses............. 471 692 1,034 1,727 2,144 5,793
Other income (expense),
net.................... 26 1 (10) (10) -- 42
------ ------ ------- ------- ------- -------
Net loss................ $ (522) $ (861) $(1,131) $(1,739) $(2,166) $(5,866)
====== ====== ======= ======= ======= =======
</TABLE>
Our total net revenues have increased in all quarters presented due to a
combination of external and internal factors. Internally, we have diversified
our sales channels, expanded our direct sales efforts and entered into
strategic relationships with numerous customers. Additionally, the market has
changed related to streaming media. The increase in broadband applications and
acceptance of our products and services has contributed significantly to our
continued growth in net revenues.
Operating expenses increased in each quarter, reflecting increased spending
on developing, selling, marketing and supporting our products, as well as
building our market presence. Research and development expenses have increased
as a result of continued enhancements to existing products and development of
new products. Sales and marketing expenses increased as a result of increased
sales personnel and commissions and an aggressive branding and marketing
campaign. The decrease in sales and marketing expenses from the quarter ended
June 30, 1999 to September 30, 1999 reflects
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a decision to reprioritize and reschedule certain programs during the quarter.
The trend of increasing general and administrative expenses is due primarily to
additional personnel and facilities costs.
Liquidity and Capital Resources
Since our inception, we have financed our operations primarily through
private sales of preferred stock and common stock and contributions of capital
by our founder, and to a lesser extent, borrowings under lines of credit. Net
proceeds from these sales, contributions and lines of credit totaled $62.3
million as of December 31, 1999.
Net cash used in operating activities was approximately $75,000 and
approximately $858,000 in 1997 and 1998, respectively. Cash used in operating
activities in 1997 was due primarily to a net loss of approximately $95,000.
For 1998, cash used in operating activities resulted primarily from a net loss
of $1.7 million and an increase of approximately $87,000 in trade accounts
receivable, largely offset by increases of approximately $292,000 in customer
deposits, approximately $274,000 in accounts payable and approximately $131,000
in other accrued expenses. Net cash used by operating activities was $4.9
million for the year ended December 31, 1999. This was primarily attributable
to a net loss of $10.9 million, an increase of approximately $856,000 in
accounts receivable, and increases in other assets of approximately $753,000
offset by depreciation expense of approximately $924,000 and other noncash
charges of $2.9 million, increases in accounts payable and accrued liabilities
of $4.8 million and an increase in customer deposits of approximately $145,000.
Net cash used in investing activities was approximately $134,000, $1.5
million and $5.0 million for the periods ended December 31, 1997 and 1998 and
1999, respectively. These expenses were primarily related to purchases of
equipment and increases in short-term investments.
Cash provided by financing activities of $3.8 million in 1998 consisted
primarily of $2.2 million in net proceeds from the issuance of Series B
preferred stock and $1.5 million in net proceeds from borrowings on long-term
debt. Cash provided by financing activities of $57.7 million for the year ended
December 31, 1999 was primarily from net proceeds of $9.3 million from the
issuance of Series C preferred stock, $3.1 million from borrowings on long-term
debt and the net proceeds of $45.5 million from the issuance of Series D
preferred stock.
Our accounts receivable at December 31, 1999 exceeded our revenues in the
fourth quarter of 1999 primarily due to the proportion of our revenue earned
and invoiced late in the quarter, advance billings for encoding services for
which the related revenue was not yet recognized and, to a lesser extent, past
due payments. In the fourth quarter of 1999, we hired additional finance
personnel to focus on accounts receivable credit and collections given our
increasing volume of business.
As of December 31, 1999, we had $49.2 million of cash and cash equivalents.
Our principal commitments consisted of obligations outstanding under operating
leases, a note payable of approximately $861,000 under our credit facility with
Imperial Bank and seven notes payable, totaling approximately $2.0 million,
under our credit facility with Dominion Venture Finance LLC. Borrowings from
Imperial Bank bear interest at the lender's prime rate. The average interest
rate paid to date on our borrowings under the Imperial Bank facility is 7.95%.
The notes payable to Dominion bear interest at rates ranging from 8.57% to
9.40%. Interest on the Imperial Bank note is payable monthly, and the principal
is due on August 30, 2002. Interest on the Dominion Venture
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Finance notes is payable monthly, and the principal is due in the third and
fourth quarters of 2002. Please see note 4 to the Financial Statements for a
more complete description of the credit facilities. We anticipate a
substantial increase in our capital expenditures and lease commitments
consistent with anticipated growth in operations, infrastructure and
personnel. We expect to use approximately $9.0 million of the net proceeds
from this offering and the concurrent private placement for capital
expenditures primarily associated with expansion of our encoding and hosting
infrastructure and other technology and systems upgrades.
Since our inception, we have significantly increased our operating expenses.
We currently anticipate that we will continue to experience significant growth
in our operating expenses for the foreseeable future and that our operating
expenses will be a material use of our cash resources.
We believe that the net proceeds from the sale of the common stock in this
offering, the proceeds from the concurrent private placement and the amounts
available under the working capital line will be sufficient to meet our
working capital and capital expenditure requirements for at least the next 18
months. Thereafter, we may find it necessary to obtain additional equity or
debt financing. In the event additional financing is required, we may not be
able to raise it on acceptable terms or at all.
Year 2000 Compliance
Prior to January 1, 2000, there was a great deal of concern regarding the
ability of computers to adequately distinguish 21st century dates from 20th
century dates due to the two-digit date fields used by many systems. Most
reports to date, however, are that computer systems are functioning normally
and the compliance and remediation work accomplished leading up to 2000 was
effective to prevent any problems.
Based on our assesment to date, we believe that our core encoding systems
used in the generation of revenues and other software and systems used in our
business are Year 2000 compliant. We recently replaced our internal management
and other information systems with a Year 2000 compliant system. The cost
associated with the replacement of our internal management and other
information systems was approximately $200,000. We have not incurred any costs
since December 31, 1999 in connection with Year 2000 compliance. As of March
15, 2000, we are not aware of any Year 2000 related problems with our internal
or peripheral systems or software.
Computer experts have warned, however, that there may still be residual
consequences of the change in centuries. If residual Year 2000 problems cause
the failure of any of the technology, software or systems necessary to provide
our products or services or operate our business, we could lose customers,
suffer significant disruptions of our business, lose revenues and incur
substantial liabilities and expenses. We could also become involved in costly
litigation resulting from residual Year 2000 problems. This could materially
and adversely affect our business, financial conditions and results of
operations.
Recently Issued Accounting Pronouncements
In March 1998, the American Institute of Certified Public Accountants, or
AICPA, issued Statement of Position 98-1, or SOP 98-1, "Accounting for the
Costs of Computer Software Developed or Obtained for Internal Use." SOP 98-1
establishes the accounting for costs of software products developed or
purchased for internal use, including when these costs should be capitalized.
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The implementation of SOP 98-1, which is effective for financial statements for
fiscal years beginning after December 15, 1998, did not have a significant
effect on our financial condition or results of operations.
In April 1998, the AICPA issued SOP 98-5, "Reporting on the Costs of Start-Up
Activities." SOP 98-5 requires companies to expense the costs of start-up
activities and organization costs as incurred. In general, SOP 98-5 is
effective for fiscal years beginning after December 15, 1998. The
implementation of SOP 98-5 did not have a material impact on our results of
operations.
In December 1998, the Accounting Standards Executive Committee, or AcSEC,
issued SOP 98-9, "Modification of SOP 97-2, Software Revenue Recognition, With
Respect to Certain Transactions." SOP 98-9 amends SOP 97-2 to require that an
entity recognize revenues for multiple element arrangements by means of the
"residual method" when (1) there is vendor-specific objective evidence, or
VSOE, of the fair values of all the undelivered elements that are not accounted
for by means of long-term contract accounting, (2) VSOE of fair value does not
exist for one or more of the delivered elements, and (3) all revenue
recognition criteria of SOP 97-2 and SOP 98-9 will be effective for
transactions entered into in fiscal years beginning after March 15, 1999. We do
not expect SOP 98-9 to have any effect on our results of operations.
In December 1999, the Staff of the Securities and Exchange Commission
released Staff Accounting Bulletin, or SAB, No. 101, "Revenue Recognition", to
provide guidance on the recognition, presentation and disclosure of revenues in
financial statements. We believe our revenue recognition practices are in
conformity with the guidelines in SAB No. 101.
Interest Rate Risk
Our exposure to market risk is limited to interest income sensitivity, which
is affected by changes in the general level of U.S. interest rates,
particularly because the majority of our investments are in short-term debt
securities issued by corporations. We place our investments with high-quality
issuers and limit the amount of credit exposure to any one issuer. Due to the
nature of our short-term investments, we believe that we are not subject to any
material market risk exposure. We do not have any foreign currency or other
derivative financial instruments.
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BUSINESS
Overview
We are a leading provider of Internet media infrastructure services and
applications that create a complete solution for the media, entertainment and
corporate markets. Our solution, which encompasses the encoding, or the
transformation of audio and video content into streaming media formats, as well
as the management and distribution of digital media, simplifies and accelerates
the process of delivering audio and video content to the Web. The benefits of
our services and applications include high quality, large volume, fast time to
market, format and platform independence, superior reliability and flexibility.
Our proprietary technologies and processes enable scalable processing of large
inventories of digital media.
Digital media services and applications enable our customers to manage their
Web-based audio and video content. Our customers include Atom Films, BMG Music,
Disney Enterprises, Inc., EMusic.com Inc., Hewlett-Packard Company, Kanakaris
Communications, Inc., Microsoft Corporation, Sony Music Entertainment, Inc. and
Sony Trans Com.
Industry Background
Traditional Media
The management of increasingly large inventories of audio and video content
and the ability to leverage distribution channels are constant challenges to
companies in a wide variety of global industries including corporate
communications, advertising and music and video entertainment. With the
millions of hours of existing audio and video content and the thousands of
hours of new audio and video content created each day, media owners have become
increasingly aggressive in exploring new ways to reach audiences and distribute
their content. Until recently, media and entertainment companies and other
enterprises have almost exclusively relied upon slowly evolving and inflexible
formats to deliver content to target audiences. These technologies and
standards that form the basis of traditional media and distribution, however,
are not compatible with the infrastructure supporting the Internet. Audio and
video content from compact disks and tapes, or film and video cannot be played
to a global Internet audience without significant manipulation, processing and
new technology. In order to further expand their markets and leverage the value
of their content over the Internet, these industries need to find new methods
that transfer the consistent formats and delivery methods of traditional media
into the multi-faceted and changing technologies of the Web.
The Emergence of Digital Media on the Internet
A major factor contributing to the rapid growth of the Internet is its
ability to change the way people communicate by providing capabilities that
improve traditional communication channels. Over the last few years,
significant advances in, and adoption of, streaming media technologies as well
as improved Internet infrastructure have begun to facilitate the Internet's
evolution from a mass of static, text-oriented Web pages to a highly dynamic
media environment combining text, graphics, audio and full-motion video. As a
result, the Internet is emerging as a global medium for communications,
information and transactions enabling millions of people worldwide to
communicate, engage in commerce, gather information and be entertained.
According to International Data Corporation, or IDC, there were 63 million
Internet users in the United States and 142 million users worldwide in 1998.
IDC estimates that by the end of 2003, there will be 177 million Internet users
in the United States and 502 million users worldwide.
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We believe the introduction of Internet streaming technologies and improved
access to broadband connections will increase demand for audio and video
content on the Internet and the delivery of digital media at quality and
reliability levels comparable to those of traditional media. According to
Jupiter Communications, Internet users in the United States currently spend an
average of 7.1 hours per week online as compared to 3.4 hours reading
magazines, 4.0 hours reading newspapers, 12.6 hours listening to the radio and
15.6 hours watching television. The increased momentum of audio and video
demand specifically is highlighted by the presence of over 50 million MP3
capable users today, according to Forrester Research Inc. In addition, over 140
million video digital players were downloaded by Internet users in the first
six months of 1998, according to IDC. As a result, there exists a significant
market opportunity for media, entertainment and corporate markets to expand the
creation and use of their traditional audio and video to the Internet. In
addition, new applications for digital media include application and service
promotions for electronic commerce, Web radio, advertising, and communications
within corporations and partner networks.
Challenges to the Growth of Digital Media
Before companies can deliver traditional media over the new medium of the
Internet, they must overcome several limitations of the current Internet
infrastructure. Digital media distribution over the Internet is a highly
fragmented process with a variety of evolving and competing media formats such
as Apple, AT&T, Liquid Audio, Microsoft and RealNetworks. In most cases, these
formats are incompatible with one another and providers are dedicated to the
preservation of their own proprietary format. In addition, there are a wide and
growing number of download technologies such as AVI, QuickTime and MPEG 1-n
that are used to transfer and play files from personal computers. Digital
content is also delivered in a streaming format that must support a number of
speeds, or bit rates. In order to take full advantage of the compelling
experience that Internet distribution of digital media can provide,
distributors of audio and video content must be able to distribute their
content in a manner optimized for each of these variables and must be able to
respond as the underlying Internet technologies evolve.
Companies must internally develop the ability to deliver, or hire outside
firms to migrate, their existing and newly created audio and video content onto
the Internet. The core competencies required to complete this migration process
include the following three areas:
. Media Capture. Capturing digital media involves the conversion of
content from traditional analog or digital formats to digital Internet
compatible files while maintaining the original quality. Since the
Internet is still at a formative stage of development, the formats and
technologies continue to conflict and evolve. As a result, the encoding
process for a particular item of content may need to be repeated over
time to keep pace with the introduction of new formats and the changing
preferences of online users.
. Data Management. The process of managing digital media is complex and
requires a range of processes including the creation of metadata files,
file indexing and copyright protection measures such as digital
watermarking and support for new electronic commerce models. Managing
this data effectively for archival and retrieval purposes is critical
for both internal systems and Internet search technologies so that end
users can find the content they seek.
. Distribution. Scalable and reliable methods to deliver electronic media
must be integrated with data management and encoding systems to manage
the data flow process effectively.
It is often difficult for organizations to migrate their audio and video
content onto the Internet because they often do not have the internal resources
or time, or it is not cost-effective, to develop
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the expertise necessary to address these problems without disrupting their core
business activities. Some of the most significant hurdles contributing to these
difficulties include:
. encoding is hardware and resource intensive, making it difficult to
scale in-house systems;
. access to quality equipment and trained operators is limited;
. applications enabling management, distribution and tracking of encoded
content are lacking;
. existing streaming applications encumber access to digitized media by
the entire Internet population because they only support a limited set
of proprietary formats;
. hosting companies have raw bandwidth but may not have the capability to
distribute content across multiple formats and bit rates or the ability
to integrate with data management and encoding systems; and
. current streaming media applications do not provide sophisticated search
or advanced media management tools.
Current providers of narrowly defined services and technologies fail to meet
all of the challenges associated with capturing, managing and distributing
digital media, leaving a previously unfulfilled need in the Internet media
infrastructure market. As a result, we believe companies increasingly seek a
comprehensive, technology-agnostic, outsourced solution for enabling
traditional audio and video content on the Internet.
The Loudeye Solution
We are a leading provider of Internet media infrastructure services and
applications that create an end-to-end solution for the media, entertainment
and corporate markets. Our solution helps our customers reduce the barriers
impeding delivery of audio and video content to Internet users, improve digital
media content management and leverage the value of Internet distribution
opportunities. Our solution is based on a proprietary architecture that can
scale to meet the encoding and distribution demands of large-volume and complex
digital media content. The primary elements of our solution include:
Digital Media Services. Our digital media services provide a complete suite
of services for customers who need to manage their audio and video content for
the Web. We provide project-specific and ongoing contracts for conversion,
encoding, management, and distribution through our industry leading specialized
hosting providers. Our digital media experts can provide project analysis, as
well as consulting, integration and custom application development.
Digital Media Applications. Our digital media applications leverage our
digital media services infrastructure to enable companies and Web sites to
author and deliver digital media services to their end-user customers with a
complete Web-based software solution. These solutions are delivered turnkey
from a Web-based services model and can be customized or integrated into their
existing systems.
By providing this broad range of products and services, we enable the
production, management and distribution of our customers' digital media content
over the Internet. Our solutions offer customers the following key benefits:
High Quality, Large Volume, Fast Time to Market. Our proprietary encoding
process includes a combination of innovative technologies and software, trained
media professionals and professional
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quality hardware and systems. We have developed proprietary products and
services in an automated and distributed architecture of encoding, conversion
and media enhancement systems so that we can process high volumes of digital
media while simultaneously monitoring and enhancing its quality. By building
our application platform and products on this architecture, we provide a high
quality end-user experience while maintaining the scalability required by
leading Web destinations. We have invested significant resources to provide the
physical and technical capability to manage large scale encoding projects in
the rapid time frame that Internet media customers require.
End-to-End Integrated Solution. Our suite of applications and services
provides a comprehensive solution ranging from the conversion, data entry and
encoding of content to media storage, management and distribution. We offer
customers a solution to collect and deliver new and legacy audio and video
content to and from audiences over the Internet through a single outsourced
solution provider. In addition, we provide many optional services for digital
media asset protection, search engine indexing and automated updating, content
indexing, consulting and integration services. As a result, customers receive
quality and reliable service at less expense, without the need to purchase
capital equipment, develop system expertise, train personnel, or manage an
evolving industry process.
Format and Platform Independence. We have developed proprietary processes
that allow us to encode audio and video content across several streaming media
platforms simultaneously, such as Microsoft Windows Media, RealNetworks G2,
AT&T a2b or Liquid Audio. This platform flexibility enables customers to
distribute their content to the entire Internet audience. We can also input any
of the wide variety of traditional analog formats that our customers use, such
as tape, film, compact disk, or CD, or digital video disk, or DVD, all across a
range of formats during a single production run. Given that these formats and
platforms continue to evolve, the benefits of our multiple platform approach
remain applicable as new technologies emerge. We encode our customers' content
in a parallel, rather than serial, process allowing us to rapidly and cost-
effectively deliver encoded content to customers.
Superior Reliability. By connecting our hosting facility and partner Internet
service providers, or ISPs, we provide our customers with a high performance
network connecting more than 40 Internet backbones for Internet data
transmission across over 90 geographic locations, known as points of presence,
or POPs. This system creates fewer points of failure than a single network and
can be monitored for network bottlenecks or outages so the content can be re-
routed and distributed to additional resources. Customers using our services or
applications receive the benefit of redundant and high-quality Internet
distribution without having to manage or aggregate multiple relationships.
Flexible and Easy to Implement Online Audio and Video Applications. We have
created a robust digital media application platform that allows us to develop
audio and video applications for a variety of vertical markets, including
personal photo and video content, corporate presentations, advertisements and
auctions. By integrating various existing components of our core technology
platform, we can satisfy the varied needs of individual customers quickly and
cost effectively. Our development platform and turnkey applications enable Web
destinations to offer early-market digital media applications for the consumer
and corporate markets without having to expend on significant internal
resources.
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Strategy
Our objective is to be the leading Internet media infrastructure provider of
comprehensive digital media services and applications. We seek to achieve this
objective through the following key strategies:
Leverage Leadership Position in Encoding Technology and Services. All audio
and video content must be processed in some type of encoding facility in order
to be distributed over the Internet. As an early leader in the high-end,
outsourced encoding market, we have been able to develop strong relationships
with influential customers, strategic Internet infrastructure companies and
leading streaming media industry providers. We intend to leverage these
relationships along with our leadership and industry-focused brand into
opportunities for additional products and services of managed distribution,
consulting and applications. By managing the first step in the transformation
of audio and video content onto the Internet in a dynamic technology
environment, we are in a strategic position in the streaming media industry
which we believe will enable an expansion of our technology and services as the
market matures. For example, we logically extend our conversion and encoding
services to include management and distribution applications that include
electronic commerce, rights management and syndication for digital media
publishers who want to expand their revenues and customer bases through secure
and automated distribution to partners and affiliates.
Utilize Core Technologies and Expertise to Advance Streaming Media
Applications. We plan to leverage our core infrastructure and expertise in high
quality and high capacity digital media systems into leading applications that
address a variety of end-to-end solutions. We believe that by building and
managing a leading applications platform for digital media, we can deploy
applications that address the complete cycle of capture, management and
distribution more efficiently and cost effectively than our competitors. We
believe our brand identity in the streaming media industry, together with our
industry-leading customers, gives us significant credibility. We also believe
our industry specific knowledge and streaming media consulting group will allow
us to effectively implement and integrate our applications into existing
systems.
Expand Superior Technologies and Processes. We will continue to leverage
technology and sophisticated processes to further distance ourselves from
alternative approaches that employ labor-intensive, non-automated processes.
Given the rapidly changing requirements of this evolving industry, there are
advantages in building complete systems that are optimized, tested and managed
for high quality and high volume output. This strategy allows us to be the
single, outsourced solution for digital media services and applications for our
target customers. We plan to invest significantly in expanding our research and
development efforts and building our intellectual property focused on Internet
media infrastructure.
Rapidly Deploy Format and Platform Independent Solutions. Because owners and
distributors of content require flexibility in the ability to distribute media
in the variety of competing streaming formats, we plan to maintain platform
neutrality among the expanding number of digital media technologies. Thus, we
intend to maximize flexibility for our customers as they leverage our
technology to reach their markets. Our strategy of developing solutions
independent of the underlying streaming format technology providers places us
in a strategic position to rapidly respond to customers' needs and changing
developments in streaming media technologies and provide our customers with
technologically advanced solutions. In addition, we are able to rapidly develop
solutions by leveraging and reusing components of our leading production and
distribution technologies and processes across our suite of digital media
services and applications.
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Target Major Media Centers Around the World. We believe that we are well
positioned to leverage our current customer base in order to provide digital
media services and applications to all major media and entertainment companies.
In addition to expanding our presence in the United States, we plan to pursue
the opportunity for providing digital media services to international media and
entertainment companies. We have also developed relationships and plan to
expand our application services to international markets through original
equipment manufacturers, or OEM, agreements with target customers who are
capable of working with our application platform and tools to localize the
solution and interface for regional markets.
Enable Strategic Internet Infrastructure Layer. Our digital media services
and applications support the emerging media Internet infrastructure layer. This
media infrastructure layer links content creators and hosting companies,
providing final delivery of streaming media content to the consumer. By
enabling this infrastructure, we provide a critical role in the streaming media
product cycle that is distinct from the core businesses of our customers and
partners. We plan to maintain a leadership role as a mission-critical enabler
focused on technology trends in the streaming media industry.
Leverage Platform Agnostic Position with Our Streaming Media Consulting
Services. With so many competing and conflicting standards and technologies in
the streaming media market, our customers typically need help and guidance in
the design and implementation of their digital media solutions. Our expert team
of consultants and integrators continue to work with and receive training
across all platforms. This knowledge and focus establishes a credibility that
helps differentiate our offering from single platform providers and is valued
by our customers.
Pursue Strategic Alliances and Acquisitions. We will continue to look to
outside technology companies to expand and enhance our products and services.
We focus our research and development efforts on improving and expanding upon
capabilities that we believe do not currently exist in the market. We
continuously look for components and technologies to augment our solutions
through partnering with industry leaders outside of our core area of expertise.
We intend to acquire companies or technologies in order to further expand our
proprietary products and services.
Products and Services
Our products and services are divided into two categories, digital media
services and applications.
Digital Media Services
We encode audio and video content and provide other value-added services for
deployment of streaming media over the Internet. Typical digital media service
projects involve conversion from thousands of analog source media and encoding
of tens of thousands of audio compact disks and then encode those files into
hundreds of thousands of format specific digital files. Once content has been
encoded, we provide watermarking, encryption and other digital rights
management technologies to our customers to protect and manage their content. A
file created from the source materials containing specified database and
attribute data relating to a particular piece of content is then linked to that
content as part of the overall encoding process. For example, a 15-minute short
film on video tape format may be encoded into more than nine different output
files, supporting three different distribution formats, optimized for three
different baud rates, encrypted and appended with information relating to the
participants involved in producing the film.
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Encoding Services. We convert our customers' content from virtually all
commercially available input formats, and from traditional analog or digital
media to virtually all commercially available streaming media formats for
distribution over the Internet at a variety of bit rates. Customers deliver
their source content to us through a variety of means including satellite
transfer, source tapes, compact disks and electronic file transfer.
The following table illustrates some of the wide variety of input formats,
output formats and bit rates we support.
Input Formats Output Formats Bit Rates
AVI Apple QuickTime 28.8 kbps
Beta SP AT&T a2b 56.6 kbps
CD-R Cinepak ISDN
DAT Emblaze DSL
D1 & D2 Intel Indeo T1
DigiBeta JPEG Cable Modem
DVCAM Liquid Audio Broadband
DVD Microsoft Windows Media
Hi-8 MP3
LaserDisc MPEG
MiniDisc RealNetworks G2
NTSC
PAL
VHS
VHS-C
WAV
Distribution and Management. We provide turnkey audio and video solutions for
management and distribution. Our customers can store video and audio clips at
our hosting facility or at hosting or managed distribution facilities provided
by our partners such as Enron, iBEAM, Digital Island and InterVU. We have built
our own data centers and manage all aspects of servers and connectivity
directly to global Internet service providers. We believe this strategy is
superior in terms of quality control, scalability and cost control over time
versus a co-location strategy. We use our internal hosting capabilities for
managing our own applications and key customers with specific requirements. The
primary distribution strategy is to service our customers through adding value
to our hosting partner network that allows for higher capacity and more
efficient routing across the global Internet.
Digital Watermarking. We provide customers with the ability to protect their
digital content by utilizing established vendors such as Verance Technologies
who focus on watermarking applications. Through this technology, information
can be embedded within digital audio or video without degrading the quality,
providing copyright and intellectual property protection. We have developed
proprietary technology to apply these watermarking technologies to audio and
video in a scalable, cost-effective manner, making the technology practical for
large-scale deployment.
Indexing. Through relationships with companies such as Excalibur Technologies
Corporation, we can provide turnkey applications for scalable, automated and
content-based indexing of digital media content. This service prepares a
customer's content for these sophisticated digital media library systems that
can be used for internal asset management or end-user file management and
search.
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Metadata Collection and Analysis. We offer customers the ability to record
and utilize a wide array of metadata relating to the encoded content, such as
artist, title, style, universal product code, album and track data and other
data that a particular customer may find useful for their particular content.
These metadata files enable customers to leverage their traditional content
over the Internet by allowing them to track and manage their digital media
content more efficiently.
Search Engine Indexing. We offer customers the ability to automatically
update the major rich media search engines, which include the traditional
internet portals such as Yahoo! and Alta Vista and specialized Internet media
portals which allow customers to find digital media content. These updates
provide consumers with access to our customers' most current digital media
content.
Rights Management. By integrating technologies and third party solutions such
as Recripicol, Inc. and Intertrust, we can provide services to our customers
who want to secure their digital assets with certification and authentication
systems that help to prevent unauthorized copying and distribution of content
or piracy.
Consulting Services. Our consulting services group helps companies create and
integrate digital media technologies and applications into key business
processes in order to increase the overall effectiveness, productivity and
profitability of the organization. Our consulting services group specializes in
enterprise-wide Internet application development for initiatives such as
distance learning and training, digital media asset management and aggregation,
digital media electronic commerce and in-house encoding and distribution
systems. The team has a broad range of cross-platform technical expertise
specific to the streaming media industry including, Web development tools and
systems, database application programming interfaces, or APIs, and streaming
server formats and integration layers. Specific areas of expertise include:
. project requirements and implementation analysis;
. project timing and resource management;
. system design and deployment;
. digital media and information security;
. custom development of Internet/intranet streaming media applications;
. legacy system integration;
. database design and development;
. digital media Web and user interface design;
. hosting and storage management;
. streaming server integration and implementation; and
. volume encoding of audio and video content.
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Digital Media Applications
We have developed a software applications platform based on our encoding
infrastructure that enables companies and Web sites to easily incorporate
digital media into their own Web-based products and services. The platform
enables developers to build custom media input modules, as well as full custom
turnkey solutions. We sell a set of targeted vertical applications based on our
media application platform, such as online photo albums, media-enhanced auction
and classified listings and media-enhanced advertising and marketing. The
foundation for our media application platform has interfaces that allow content
to be input in any form, including still digital images, analog video tapes,
digital video, telephony-based audio, digital audio files and compact disk
audio. In addition, our media application platform allows content to be
packaged and converted into a variety of streaming media formats via our
encoding services and hosted in a central media repository. By basing our
vertical applications on an extensible, flexible platform, we are able to
respond rapidly to market opportunities and provide customized digital media
applications for Web sites or other customers that want to implement digital
media, as well as create custom solutions for customers via our consulting
services group.
The following diagram illustrates our applications platform upon which we
build our custom media applications and custom turnkey solutions.
[DIAGRAM OF APPLICATION DEVELOPMENT PLATFORM APPEARS HERE]
Our applications are deployed on an application services provider, or ASP,
basis whereby the software runs on equipment managed and monitored by us. Our
customers have flexibility and options to choose their individual level of
customization or integration. Where there is enough customer demand, we intend
to license components of the technology directly to corporations to run on
their own hardware and in their own facilities.
Our recent acquisition of Alive.com, a multimedia applications developer,
provides us additional technology components to add to our existing platform in
order to provide increased levels of
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customization in applications development. In addition, we added approximately
20 developers to our internal development resources enabling us to deliver a
larger set of media applications and functionality in a faster timeframe.
We currently provide the following software solutions from our application
platforms:
MediaUpgrade. We believe MediaUpgrade is the first Web-based application to
allow publishers of Web content to simply and conveniently transform legacy
source files, such as AVI, Quicktime and WAV files, to a variety of streaming
media formats. MediaUpgrade is targeted at small- and medium-sized professional
publishers that have regular encoding needs, providing a fully automated
encoding, hosting, management and publishing solution for content. MediaUpgrade
offers users a number of features and benefits:
. fully automated and secure Web-based interface for content uploading,
review and management;
. electronic commerce, tracking and report-generation capabilities for
streaming media content;
. integrated hosting of content as part of the service; and
. support for all leading digital media file formats through a single
browser based interface, without specialized desktop software for each
format.
MySlideShow. MySlideShow is a Web-based application that enables professional
and consumer end-users to create streaming slideshows and presentations from
digital photographs and standard non-streaming presentations. In a fully
automated process, end-users upload digital photos, images or traditional non-
streaming presentations, annotate the slides with words and music, choose for
the slideshow to be public or private and receive an e-mail with a link to
their hosted presentation fully assembled into a Web page. The primary
customers for MySlideShow are Web sites and portals that service consumers and
professional users and want to add Internet media creation and management to
their site. The features and benefits of the application include:
. increase of Web site "stickiness" and usage by allowing users to easily
create and share online slideshows with friends and family;
. easy integration and implementation into customer Web sites, with media
hosting at our facilities;
. simple download and installation process for end-users; and
. greater advertising inventory through targeted interstitial advertising
as well as banner ads.
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Customers
The following table lists our media and entertainment customers and our
corporate and government customers for which we have performed significant
digital media services.
<TABLE>
<CAPTION>
Media & Entertainment Corporate & Government
--------------------- ----------------------
<S> <C>
A2B Music 2 Wire
Always Independent Films Ackerman McQueen
Atom Films Cancer Education
Beatnik, Inc. Digital Lava, Inc.
BMG Music Efficient Marketing
CinemaNow Federal Emergency Management Agency
Cineports Fuji Films
CNN Golfspan.com
Collegemusic.com Hewlett Packard Company
Columbia TriStar Interactive I Feel Good Network Corporation
Deo.com Network 24 Communications
Disney OnHealth Network Company
Eclips Pile and Company
EMI Qwest Communications
EMusic.com Inc. Radio Active Media Partners
EnergyFilm School Improvement.net
Eveo 3Com Corporation
Experience Music Project VDAT
FEG-TV LLC Wonderware
GMN Classical
iCast
Kanakaris Communications, Inc.
Kataweb
Mainely A Cappella
MetallicaClub
MeTV.com
Microsoft Corporation
Mjuice.com
MountainZone.com
MovieHead.com, Inc.
MyMusic Library.com
Online Music Company
Razor and Tie
Screenplay
Sony Music Entertainment Inc.
Sony Trans Com
TV Interactive
TVT Records
XOOM.com, Inc.
</TABLE>
In addition to customers with whom we have a direct relationship, we have
established a variety of relationships with other streaming media companies and
system integrators.
In 1998, two customers, National Emergency Training Center and Microsoft
Corporation, accounted for 14% and 12% of our revenues, respectively. In 1999,
Kanakaris and Microsoft accounted for 13% and 11% of our revenues,
respectively.
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Strategic Relationships and Corporate Investors
We have established a number of key strategic relationships to strengthen our
technology development, increase the adoption of our products and services and
increase the awareness of our brand. We have entered into significant
agreements with the following companies:
Streaming Media Platform and Technology Alliances
. Microsoft. We work closely with Microsoft on deployment of the Windows
Media platform and related servers and applications. We are also one of
four members of Microsoft's Net Credits program, which provides encoding
services to customers for the Windows Media platform; the other members
of the program provide hosting services. We are a member of the Windows
Media Broadband Jumpstart program, where Microsoft has partnered with
leading digital media service providers to provide encoding and hosting
for broadband content at a discount to increase the adoption and
availability of broadband content. We have a full-time account
representative managing the strategic partnership.
. RealNetworks. We have a reseller partnership which generates customer
referrals from RealNetworks, a streaming media software company. We have
engaged in a number of joint marketing efforts with RealNetworks.
. Terran Interactive. We plan to work closely with the Media Cleaner Pro
engineering team from Terran Interactive, a developer of multimedia
compression tools, to customize and develop the Media Cleaner Pro
product line for our automated encoding production system. We believe we
are the only digital media service provider for streaming media to work
with Terran in this fashion.
Hosting and Distribution Alliances
. Akamai Technologies, Inc. In February 2000 we entered into a services
agreement with Akamai in which we each agreed to promote the other's
services and applications and to pursue definitive agreements to become
resellers of the other's services. We also agreed to become a customer
of Akamai's Internet content and streaming media delivery services and
to purchase at least $1,000,000 of services from Akamai over a one year
period, subject to Akamai providing services at a level of quality and
on competitive price, payment and other essential terms which are
reasonably satisfactory to us. Akamai agreed to designate us as a
preferred provider for encoding services and for the other digital media
applications offered by us and not internally developed by Akamai. Also
in February 2000, we entered into a separate agreement with Akamai to
sell $5.0 million of common stock in a private placement that will close
at the same time or immediately after the closing of this offering.
Akamai will pay the price per share paid by the public in this offering,
less an amount equivalent to the underwriting discounts and commissions
per share. We expect to recognize a deferred charge associated with this
discount of approximately $376,000, which will be amortized over one
year.
. Digital Island, Inc. We have an agreement whereby Digital Island resells
our digital media services and is a member of our integrated
distribution network for the delivery of digital media.
. Enron Corp. We have a letter of intent with Enron whereby Enron would
resell our digital media services and is a member of our integrated
distribution network for the delivery of digital media.
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. iBEAM. We have an agreement whereby iBEAM resells our digital media
services and is a member of our integrated distribution network for the
delivery of digital media.
. InterVU. We have an agreement whereby InterVU resells our digital media
services and is a preferred member of our integrated distribution
network for the delivery of digital media.
Business Development Alliances
. Valley Media, Inc. We have an agreement with Valley Media to encode
their entire music catalog, which currently consists of over 150,000
commercial music compact disks. We will use this library of encoded song
files to jointly create a digital media clip service and jointly explore
other business opportunities. In connection with this agreement, we
issued Valley Media a one-year warrant to acquire 650,000 shares of our
common stock at an exercise price of $10.00 per share.
Corporate Investors. In addition to preexisting industry and commercial
relationships, America Online, Inc., CBS, Inc., Microsoft Corporation and
National Broadcasting Company, Inc. among others recently invested an aggregate
of $20.0 million in our $47.8 million December 1999 Series D preferred stock
financing which was sold at a per share price of $6.37.
Research and Development
We are focused on improving our digital media services and application
through research and development. We believe that a strong emphasis on
automation and product development are essential to our strategy of continuing
to enhance and expand our capabilities.
Since inception, we have focused our efforts on building the most efficient,
scalable and quality based encoding process through superior hardware and
software. Software built to optimize encoding, combined with our expertise
learned through our automated encoding process has provided a platform upon
which we build superior digital media products and services.
Our team of developers, quality assurance engineers and program managers were
recruited from top Internet and streaming media companies, including
RealNetworks, Microsoft, Starwave and Intel. Within our development team, we
have a combined experience level of over 50 years in Java development and
database development, and significant experience in internet software
development. In addition, we have recruited senior management with significant
experience in the area of internet development, streaming media and networking.
Our core team of developers is focused in the following areas:
. digital media services, which focuses on automating capture and
encoding;
. media management which focuses on building a core component layer for
streaming media online applications; and
. media distribution and syndication, which focuses on building our
distribution and business rules application.
In addition, an application development team is focused on the fast
development of online applications, such as myslideshow and media upgrade,
based on the core components developed by the development team.
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All of our product development efforts are undertaken using a structured
process developed within Loudeye. This process involves several functional
groups at all levels within our organization and is designed to provide a
framework for defining and addressing the activities required to bring product
concepts and development projects to market successfully.
Our research and development expenses were approximately $12,000 in 1997,
approximately $204,000 in 1998 and approximately $1.2 million in 1999. As of
December 31, 1999, approximately 48 employees were engaged in ongoing
engineering and production development work for our services, solutions and
applications.
Operations and Technology
Our production operation is an efficient, highly automated process, optimized
to produce high volumes of audio and video encoding. The production personnel
are organized into functional teams which include project management, quality
assurance, process traffic, data capture, audio encoding, video encoding,
process research and development and engineering support.
The production system is a combination of hardware and software, developed by
our research and development organization and consists of a highly distributed
encoding system. It is designed to automate the time consuming, error prone
steps inherent in a complex encoding operation.
The production system hardware is centered around a Silicon Graphics Origin
2000 file server, housing over 11 Terabytes of RAID 5 storage. The file server
stores capture files and encoded files for both audio and video. Our
distributed computing system, which performs the audio and video capture and
encode operations, includes an array of over 100 dual Intel Pentium(R)
processors and Apple Macintosh G4s.
The encoding workflow is divided into a separated audio and video process,
staffed with technicians trained for the specific encoding function.
Audio Capture Process
The audio encoding process begins by capturing the content description
information and attributes, or metadata. A range of information, including data
on artists or speakers, track or topic titles, and copyright information, is
collected along with any related images or graphics which are all captured
electronically and entered into the centralized production database. The
collection of metadata can be managed through an automated or manual process
depending on the complexity of the data. The data is then checked for accuracy
and merged as an embedded file as part of the encoded song file delivered to
the customers.
Audio files are captured using our proprietary capture stations. The audio
capture process covers a broad spectrum of media formats and can be automated
or managed as a manual system depending on volume and complexity of the
project. Also, to significantly increase the audio capture process, additional
capture stations can be inserted into the production system architecture and
immediately begin capturing files.
The production system has a queue that knows about the files to be encoded.
To encode a file, the software locates available computing resources on the
network and requests that the resource perform the encoding work. The software
monitors the encoding operation and reports results to the control database.
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The capture file and metadata are automatically encoded into all of the
streaming formats and bit rates specified by the production system job
management software and database. If required, the encoded files can be
automatically watermarked and indexed during the encoding operation. The
resulting encoded files are checked for quality and then delivered to the
customer as a collection of files or automatically routed to our partner
hosting services for direct delivery as a hosted stream, over the Internet.
Video Capture Process
The video encoding process begins with the conversion of the customer's
source material from of wide variety of input formats, such as SVHS and Betacam
SP, using commercial grade video tape decks into a digital file. As with the
audio process, capture and quality control levels from the source can be highly
automated or manually managed depending on customer requirements and complexity
of the project. The video signals are routed through preprocessing stations to
optimize the quality of the content prior to encoding.
After capture, the video files are rendered and encoded in a single parallel
operation into to all the formats and bit rates required by the customer. If
required, the encoded files can be automatically watermarked and indexed during
the encoding operation. The encoded video is checked for quality and delivered
to the customer or hosted directly on the Internet.
This encoding architecture creates an automated and highly scalable system.
As capacity demands grow, additional computing resources can be added with
little or no configuration effort, allowing us to rapidly respond to increased
encoding demands.
Sales and Marketing
We have implemented an integrated marketing campaign that consists of direct
sales, reseller and co-marketing partners, trade show and conference
participation and speakers program, our Web site, direct and email marketing
programs, monthly newsletter, Internet promotions and sponsorships and embedded
branding initiatives with customers and partners who promote our logo on the
application or next to the streaming media being delivered. Each of these
programs are deployed at various levels across the following target markets:
Media and Entertainment. We target prominent companies in this category with
a dedicated direct sales force. Smaller companies are primarily contacted
through partnerships with hosting companies, integrators and resellers. The
following outlines important vertical markets and applications in the media and
entertainment industry:
<TABLE>
<S> <C>
Markets Applications
------- ------------
Film Studios Product Promotions
Record Labels Business to Business
Stock Footage Houses Downloads
Music Distribution/Aggregate Electronic Marketing
Video Distribution/Aggregate Web Communities
New Media Content Acquisition
</TABLE>
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<PAGE>
Corporate. We target Fortune 1000 accounts with our direct sales force and
our consulting services group. In addition, we work with several of the large
and established system integrators, such as Andersen Consulting and KPMG who
are expanding their practices to include digital media groups. The following
outlines important industry markets and applications for the corporate segment:
<TABLE>
<S> <C>
Markets Applications
------- ------------
High Tech Product Promotions
Finance Rich Media Advertising
Education Electronic Commerce
Manufacturing Distance Learning & Training
Industrial/Aerospace Corporate Communications
Government Electronic Marketing
</TABLE>
For smaller corporate customers, we provide customized and vertical
applications to third parties who bundle various services to make-up a complete
solution for small to medium sized businesses. We target these third parties
with a direct sales force with special expertise in supporting the
applications.
Consumer. To address this mass-market opportunity, we use our direct sales
force and business development resources to deliver customized and vertical
applications to Web destinations that need streaming media solutions for their
end-users.
Industry Organizations. We maintain an active presence in industry standards
and initiatives that help to mature and grow the streaming media industry. We
are a founding and active member of Secure Digital Music Initiative, or SDMI,
which includes the Recording Industry Association of America, or RIAA, and its
members and is working to create a specification for the secure digital
delivery and sale of music and help in the exposure and credibility of that
help to advance the growth. We also work closely with the quality standards
boards such as the Motion Picture Association of America, or MPAA. Our Seattle,
Washington production and encoding facility is approved by the MPAA.
As of December 31, 1999, we had 17 people in our sales organization and 19 in
our marketing organization, all of which were in the United States. We intend
to increase the size of our direct sales force and to establish additional
sales offices domestically and internationally. The direct sales force
primarily serves the large institutional customers and a telemarketing team
focuses on smaller accounts and lead generation. We have also developed a
network of over 20 resellers, whose efforts are coordinated by four sales
people and one marketing person all dedicated to the reseller channel. There
are two additional sales representatives dedicated respectively to servicing
our relationships with RealNetworks and Microsoft.
Competition in our Industry
We face competition from in-house encoding services by potential customers,
other vendors that directly address the outsourced encoding services market and
companies that directly address the digital media applications market. We
compete on the basis of service quality, ability to handle a wide range of
input and output formats, capacity of our recently expanded production
facilities, turnaround time, and price and breadth of products and services
offered, which include encoding, hosting, consulting and applications.
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Our most significant competition has been from potential customers who choose
to invest in the resources and equipment to digitally encode their media
themselves on an in-house basis. In-house service is expected to remain a
significant competitor to our services, although we believe that as the volume
of content requiring optimized encoding continues to increase, companies that
currently encode their media in-house will see a significant economic advantage
to outsourcing to a third-party expert for encoding and other value-added
services.
There are a small number of companies who are providing outsourced encoding
solutions today, such as Globix, Magnum Design, Sonic Foundry and STV. We also
anticipate that as the market for outsourced encoding services continues to
grow, it will see competition from turn-key streaming media network providers
such as InterVU, V-Stream and Yahoo! Broadcast Services; streaming media
platform developers such as Apple, Liquid Audio, Microsoft and RealNetworks and
from video post-production houses. There are a number of companies that are
developing Internet media applications that will potentially compete with our
applications, such as Audiosoft, AudioTrack, InterTrust, Microsoft,
RealNetworks, Versifi and Vignette.
We also may not compete successfully against current or future competitors,
many of which have substantially more capital, longer operating histories,
greater brand recognition, larger customer bases and significantly greater
financial, technical and marketing resources than we do. These competitors may
also engage in more extensive development of their technologies, adopt more
aggressive pricing policies and establish more comprehensive marketing and
advertising campaigns than we can. Our competitors may develop products and
service offerings that are more sophisticated than our own. For these or other
reasons, our competitors' products and services may achieve greater acceptance
in the marketplace than our own, limiting our ability to gain market share and
customer loyalty and to generate sufficient revenues to achieve a profitable
level of operations.
Proprietary Rights and Intellectual Property
We rely primarily on a combination of copyrights, trademarks, trade secret
laws and contractual obligations with employees and third parties to protect
our proprietary rights. We do not yet have any issued patents, but are in the
processes of filing six patent applications that claim priority to six
previously filed provisional applications. Despite our efforts to protect our
proprietary rights, unauthorized parties may copy aspects of our products and
obtain and use information that we regard as proprietary. In addition, other
parties may breach confidentiality agreements or other protective contracts we
have entered into and we may not be able to enforce our rights in the event of
these breaches. Furthermore, we expect that we will increase our international
operations in the future and the laws of many foreign countries do not protect
our intellectual property rights to the same extent as the laws of the United
States.
The streaming media, digital media and software industry is characterized by
the existence of a large number of patents and frequent litigation based on
allegations of patent infringement and the violation of other intellectual
property rights. Although we attempt to avoid infringing known proprietary
rights of third parties in our product development efforts, we expect that we
may be subject to legal proceedings and claims for alleged infringement by us
or our licensees of third party proprietary rights, such as patents, trademarks
or copyrights, by us or our licensees from time to time in the ordinary course
of business. Any claims relating to the infringement of third party proprietary
rights, even if not meritorious, could result in costly litigation, divert
management's attention and resources or require us to enter into royalty or
license agreements which are not advantageous to us. In addition, parties
making these claims may be able to obtain an injunction, which could prevent us
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from providing our products or services in the United States or abroad. Any of
these results could harm our business. We may increasingly be subject to
infringement claims as the number of products and competitors in our industry
grow and the functionalities of products overlap.
Furthermore, former employers of our current and future employees may assert
that our employees have improperly disclosed confidential or proprietary
information to us.
Governmental Regulation
We are not currently subject to direct regulation by any governmental agency
other than laws and regulations generally applicable to businesses, although
certain U.S. export controls and import controls of other countries, including
controls on the use of encryption technologies, may apply to our products. Few
existing laws or regulations specifically apply to the Internet. However, it is
likely that a number of laws and regulations may be adopted in the United
States and other countries with respect to the Internet. These laws may relate
to areas such as content issues (such as obscenity, indecency and defamation),
encryption concerns, including export contents, copyright and other
intellectual property rights, caching of content by server products, electronic
authentication or "digital signatures," personal privacy, advertising,
taxation, electronic commerce liability, email, network and information
security and the convergence of traditional communication services with
Internet communications, including the future availability of broadband
transmission capability. Other countries and political organizations are likely
to impose or favor more and different regulation than that which has been
proposed in the United States, thus furthering the complexity of regulation.
The adoption of such laws or regulations, and uncertainties associated with
their validity and enforcement, may affect our ability to provide our products
and services and increase the costs associated with our products and services,
and may affect the growth of the Internet. These laws or regulations may
therefore harm our business.
We do not know for certain how existing laws governing issues such as
property ownership, copyright and other intellectual property issues, taxation,
illegal or obscene content, retransmission of media and personal privacy and
data protection apply to the Internet. The vast majority of such laws were
adopted before the advent of the Internet and related technologies and do not
address the unique issues associated with the Internet and related
technologies. Most of the laws that relate to the Internet have not yet been
interpreted. Changes to or the interpretation of these laws could:
. limit the growth of the Internet;
. create uncertainty in the marketplace that could reduce demand for our
products and services;
. increase our cost of doing business;
. expose us to significant liabilities associated with content distributed
or accessed through our products or services; or
. lead to increased product and applications development costs, or
otherwise harm our business.
Employees
As of December 31, 1999, we had a total of 210 employees, of which 48 were in
research and development, 36 were in sales and marketing, 83 were in
production, 8 were in professional services and product support and 35 were in
finance and administration. None of our employees are subject to a collective
bargaining agreement. We consider our relations with our employees to be good.
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Facilities
We are headquartered in Seattle, Washington where we lease approximately
21,125 square feet under a lease that expires on October 31, 2004. We have
exercised the option provided in the lease and will occupy an additional 14,056
square feet of space in the second quarter of 2000. In addition, we have three
other Seattle, Washington locations: a 6,000 square foot space under a lease
that expires on September 1, 2003, a 15,654 square foot space under a lease
that expires August 31, 2004 and a 9,000 square foot space under a lease that
expires November 15, 2004. We recently leased an additional location in Santa
Monica, California of approximately 4,632 square feet under a lease that
expires January 1, 2005.
Legal Proceedings
We are not currently subject to any material legal proceedings. Two of our
former employees have alleged that they are entitled to an equity interest in
us in connection with their employment in 1997 by our predecessor limited
liability company. Based upon our investigation to date, we believe that these
allegations are wholly without merit and that the outcome of any formal claim
brought by either of these former employees will not harm our business. We
believe that we have valid defenses to these allegations and intend to
vigorously defend ourselves.
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MANAGEMENT
Executive Officers, Key Employees and Directors
The following table sets forth information with respect to our executive
officers, key employees and directors as of December 31, 1999:
<TABLE>
<CAPTION>
Name Age Position
- ---- --- --------
<S> <C> <C>
Martin G. Tobias........ 35 Chief Executive Officer and Chairman of the Board of
Directors
David C. Bullis......... 47 President and Chief Operating Officer
Larry G. Culver......... 50 Chief Financial Officer
Thomas S. Hodge......... 45 Vice President, General Counsel
Michael D. McHenry...... 43 Vice President, Sales
Douglas F. Schulze...... 40 Vice President, Marketing
James L. Van Kerkhove... 50 Vice President, Production
David L. Weld, Jr. ..... 36 Senior Vice President, Product Development
Jeffrey R. Brown........ 37 Vice President, Operations and New Business
Implementation
Beverley J. Kite........ 30 Vice President, Core Development
Mark J. Richardson...... 32 Vice President, Application Development
Brent D. Shepherd....... 39 Vice President, Consulting Services Group
Stuart J. Ellman
(1)(2)................. 33 Director
Johan Liedgren (2)...... 35 Director
Charles P. Waite, Jr.
(1)(2)................. 44 Director
</TABLE>
- --------
(1) Member of Compensation Committee of the Board of Directors
(2) Member of Audit Committee of the Board of Directors
Executive Officers
Martin G. Tobias, our founder, has served as our chief executive officer and
chairman of our board of directors since our inception. From 1991 to 1997, he
worked for Microsoft Corporation, a software company, in several positions,
most recently as electronic software distribution strategy manager for the U.S.
channel policies group of Microsoft. Mr. Tobias is a director of
SoftwareBuyLine, Inc. Mr. Tobias holds a B.A. from Oregon State University.
David C. Bullis has served as our president and chief operating officer since
July 1999. From May 1998 to February 1999, he served as chief executive officer
and president of Data I/O Corporation, an electronic manufacturing company.
From June 1990 to April 1998, Mr. Bullis served as senior vice president and
general manager of Synopsys, Inc., a design automation company. Mr. Bullis
holds a B.S. from Iowa State University and an M.S. from Colorado State
University.
Larry G. Culver has served as our chief financial officer since August 1999.
From February 1999 to August 1999, he served as senior vice president of
finance and operations and chief financial officer of Metawave Communications
Corporation, a cellular technology company. From July 1998 to January 1999, Mr.
Culver served as senior vice president of finance and operations and chief
financial officer for Metapath Software Corporation, a cellular software
solutions company, which was acquired by Mobile Systems International Holding,
Ltd. in December 1998. From 1991 to May 1998, Mr. Culver served as executive
vice president, chief operating officer and chief financial officer for
CellPro, Inc., a biotechnology company. Mr. Culver holds a B.S. from the
University of Wisconsin, Stout and an M.B.A. from the University of Wisconsin,
Oshkosh.
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Thomas S. Hodge has served as our vice president and general counsel since
January 2000. From October 1994 to January 2000, he was a shareholder in the
Seattle office of Heller Ehrman White & McAuliffe LLP, an international law
firm, where he practiced corporate and securities law. From 1980 to October
1994, Mr. Hodge practiced corporate and securities law with Bogle & Gates LLP.
Mr. Hodge holds a B.A. from Houghton College and a J.D. from the University of
Virginia.
Michael D. McHenry has served as our vice president of sales since September
1998. From October 1997 to September 1998, he served as vice president of sales
of iCat Corporation, an electronic commerce company, which was acquired by
Intel in February 1999. From October 1995 to October 1997, Mr. McHenry served
as regional vice president of sales of Giga Information Group, Inc., an
electronic commerce advisory company. From 1993 to October 1995, Mr. McHenry
served as regional sales manager of FourGen Software, Inc., a software company.
Mr. McHenry holds a B.S. from the University of Oregon.
Douglas F. Schulze has served as our vice president of marketing since
October 1999. From December 1998 to October 1999, he served as general manager
of the Intel e-Commerce division of iCat Corporation. From March 1998 to
December 1998, he served as iCat Corporation's senior vice president of sales
and marketing, and from August 1996 to March 1998, he served as iCat's vice
president of business development. From 1993 to August 1996, Mr. Schulze served
as vice president of marketing for Excalibur Technologies Corporation, a
software company. Mr. Schulze holds a B.A. from California State Polytechnic
University, Pomona.
James L. Van Kerkhove has served as our vice president of production since
November 1999. From February 1999 to November 1999, he served as vice president
of the assembly products group of Johnson Matthey Electronics, Inc., a
manufacturing company, and from July 1998 to January 1999, he served as vice
president of manufacturing of Johnson Matthey Electronics. From 1990 to April
1998, Mr. Van Kerkhove worked for Mitsubishi Silicon America Corporation, a
manufacturing company, in several positions, most recently as executive vice
president of operations. Mr. Van Kerkhove holds a B.S. from Cornell University
and an M.B.A. from Rochester Institute of Technology.
David L. Weld, Jr. has served as our senior vice president of product
development since December 1999. From March 1998 to December 1999, Mr. Weld
served as president and chief executive officer of Alive.com, Inc., a media
application software company, which we acquired in December 1999. From January
1997 to November 1997, Mr. Weld served as president of the information
applications division of Verity, Inc., a knowledge management software company.
From April 1996 to January 1997, Mr. Weld served as chief executive officer of
Cognisoft, a knowledge management software company, which was acquired by
Verity in 1997. From 1991 to April 1996, Mr. Weld worked for Microsoft in
several positions, most recently as group manager of the Microsoft Network. Mr.
Weld holds both an A.B. and an M.B.A. from Dartmouth College.
Key Employees
Jeffrey R. Brown has served as our vice president of operations and new
business implementation since December 1999. From March 1998 to December 1999,
he served as chief operating officer and senior vice president of Alive.com.
From January 1997 to October 1997, Mr. Brown served as vice president of
quality of the information applications division of verity. From November 1996
to January 1997, Mr. Brown served as vice president of quality of Cognisoft.
From 1987 to October 1996, Mr. Brown worked for Microsoft in several positions,
most recently as test manager of content technology for the Microsoft Network.
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Beverley J. Kite has served as our vice president of core development since
December 1999. From October 1998 to December 1999, she served as vice president
of development. From 1996 to October 1998, Ms. Kite served as an engineering
manager for Starwave Corporation, an Internet technology company. From 1995 to
1996, Ms. Kite served as a senior developer for Midcom, Inc. a
telecommunications company. From 1994 to 1995, Ms. Kite served as a consultant
for Computer People, Inc., a computer consulting company. Ms. Kite holds a
B.S.C. from Demontfort University in England.
Mark J. Richardson has served as our vice president of application
development since December 1999. From March 1998 to December 1999, he served as
vice president of product development of Alive.com. From January 1997 to
November 1997, Mr. Richardson served as vice president of technology of the
information applications division of Verity. From April 1996 to January 1997,
Mr. Richardson served as senior software engineer of Cognisoft. From 1989 to
1995, Mr. Richardson worked for Microsoft in several positions, most recently
as a performance lead for Windows NT. Mr. Richardson holds a B.S. from the
University of Akron.
Brent D. Shepherd has served as our vice president of the consulting services
group since July 1999. From 1994 to July 1999, he worked for Mosaix Inc., a
customer relationship management company, in several positions, most recently
as vice president of enterprise customer management consulting. Mr. Shepherd
holds a B.A. from the University of Montana.
Directors
Stuart J. Ellman has served as one of our directors since August 1999. Mr.
Ellman has served as general partner of RRE Ventures II LP, a venture capital
firm, since co-founding RRE Ventures in 1994. Mr. Ellman serves as a director
of Watchguard Technologies, Inc., an internet security company, and several
private companies. Mr. Ellman holds a B.A. from Wesleyan University and an
M.B.A. from Harvard Business School.
Johan Liedgren has served as one of our directors of Loudeye since April
1998. Since October 1997, Mr. Liedgren has served as chief executive officer of
Honkworm, International, an entertainment studio. From January 1994 to August
1997, he worked for Microsoft Corporation in several positions, most recently
as director of channel policy. Mr. Liedgren serves as a director of
Netsolutions of Sweden. Mr. Liedgren attended the University of Stockholm in
Sweden.
Charles P. Waite, Jr. has served as one of our directors since June 1998. Mr.
Waite has served as a general partner of Olympic Venture Partners LP, a venture
capital firm, since 1987. Mr. Waite serves as a director of Verity, Watchguard
and several privately held companies. Mr. Waite holds an A.B. from Kenyon
College and an M.B.A. from Harvard Business School.
Board Composition
Our bylaws currently provide for a board of directors consisting of five
directors. Following the closing of the offering, our amended and restated
certificate of incorporation will provide for the division of our board of
directors into three classes, as nearly as equal in size as possible, with
staggered three year terms. Messrs. Tobias and Waite will serve for an initial
term of three years, Mr. Ellman will serve for an initial term of two years and
Mr. Liedgren will serve for an initial term of one year.
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Board Committees
The board of directors has a compensation committee and an audit committee.
Compensation Committee. The compensation committee of the board of directors
reviews and makes recommendations to the board regarding all forms of
compensation and benefits provided to our officers. In addition, the
compensation committee establishes and reviews general policies relating to the
compensation and benefits of all of our employees. The current members of the
compensation committee are Stuart Ellman and Charles Waite.
Audit Committee. The audit committee of the board of directors reviews and
monitors our internal accounting procedures, corporate financial reporting,
external and internal audits, the results and scope of the annual audit and
other services provided by our independent accountants, and our compliance with
legal matters that have a significant impact on our financial reports. The
current members of the audit committee are Stuart Ellman, Johan Liedgren and
Charles Waite.
Compensation Committee Interlocks and Insider Participation
The board of directors established its compensation committee in May 1999.
Prior to establishing the compensation committee, the board of directors as a
whole performed the functions delegated to the compensation committee. None of
the members of the compensation committee is currently, or has even been at any
time since our formation, one of our officers or employees. No member of the
compensation committee serves as a member of the board of directors or
compensation committee of any entity that has one or more officers serving as a
member of our board of directors or compensation committee.
Director Compensation
We currently do not provide any cash compensation to our directors for their
service as members of the board of directors, although we do reimburse the
directors for certain expenses in connection with attendance at board and
committee meetings. Under our 1998 stock option plan, nonemployee directors are
eligible to receive stock option grants at the discretion of the board or any
other administrator of the plan. See "Stock Plans" for a description of option
grants under the 1998 stock plan. In addition, following the closing of this
offering, directors will be participating in the 2000 director stock option
plan.
Executive Compensation
The following table sets forth certain compensation awarded to, earned by, or
paid to our chief executive officer, and our one other most highly compensated
executive officer whose total cash compensation exceeded $100,000 during the
year ended December 31, 1999, collectively, the "named officers."
Summary Compensation Table
<TABLE>
<CAPTION>
Annual
Compensation Long-Term Compensation
---------------- -----------------------
Securities
Underlying All Other
Salary Bonus Options Compensation
Name and Principal Position ($) ($)(1) (#) ($)(2)
--------------------------- -------- ------- ---------- ------------
<S> <C> <C> <C> <C>
Martin G. Tobias, Chief Executive
Officer............................. $129,167 -- -- $4,087
Michael D. McHenry, Vice President of
Sales............................... 103,333 $75,000 350,000 6,427
</TABLE>
- --------
(1) Bonus represents the amount paid to the employee in 1999.
(2) Consists of health insurance premiums paid by us.
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Option Grants
The following table shows certain information regarding stock options granted
to the named officers during the year ended December 31, 1999. No stock
appreciation rights were granted to these individuals during the year.
Option Grants in Last Fiscal Year
<TABLE>
<CAPTION>
Potential
Realizable
Value at
Assumed
Annual Rates
of Stock
Percentage Price
Number of of Total Appreciation
Shares Options for Option
Underlying Granted to Exercise Term(4)
Options Employees Price Expiration -------------
Name Granted(2) in 1999(3) per Share Date 5% 10%
---- ---------- ---------- --------- ---------- ------ ------
<S> <C> <C> <C> <C> <C> <C>
Martin G. Tobias(1)... -- -- -- -- -- --
Michael D. McHenry.... 25,000 0.6% $0.25 6/10/09 $3,931 $9,961
</TABLE>
- --------
(1) Mr. Tobias did not receive any stock option grants during the year ended
December 31, 1999.
(2) The exercise price per share of each option was equal to the fair market
value on the date of grant as determined by the board of directors at such
time.
(3) Based on an aggregate of 4,357,231 options granted by us during the year
ended December 31, 1999 to our employees, including our executive officers.
(4) The 5% and 10% assumed annual rates of compounded stock price appreciation
are mandated by the SEC and do not represent our estimate or projection of
future common stock prices.
Option Exercises and Holdings
There were no option exercises by the named officers in 1999. The following
table provides certain information concerning the shares of common stock
represented by outstanding stock options held by the named officers as of
December 31, 1999.
Aggregated Option Exercises in Last Fiscal Year and Fiscal Year-end Option
Values
<TABLE>
<CAPTION>
Number of
Shares Value of
Underlying Unexercised
Unexercised In-the-Money
Options at Options at
December 31, December 31, 1999
1999(1) ($)(2)
--------------- -------------------
Name Vested Unvested Vested Unvested
---- ------ -------- -------- ----------
<S> <C> <C> <C> <C>
Martin G. Tobias............................ -- -- -- --
Michael D. McHenry.......................... 40,625 309,375 $647,562 $4,926,688
</TABLE>
- --------
(1) All options granted under the 1998 Stock Option Plan, the Alive 1998 Stock
Option Plan and the 2000 Plan (for grants prior to the closing of this
offering) may be exercised prior to full vesting, subject to the optionee's
entering into a restricted stock purchase agreement with us with respect to
any unvested shares. Under such agreement, the optionee grants us an option
to repurchase any unvested shares at their original purchase price in the
event the optionee's employment or consulting relationship with us is
terminated. Our right of repurchase lapses as the shares vest in accordance
with the vesting schedule of the exercised options.
(2) Based on the initial public offering price of $16.00 per share, minus the
exercise price, multiplied by the number of shares underlying the option.
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Stock Plans
1998 Stock Option Plan. Our 1998 stock option plan provides for the grant of
incentive stock options to employees (including employee directors) and
nonstatutory stock options and stock purchase rights to employees, directors
and consultants. The purposes of the 1998 stock option plan are to attract and
retain the best available personnel, to provide additional incentives to our
employees and consultants and to promote the success of our business. Our board
of directors originally adopted and our stockholders approved the 1998 stock
option plan in March 1998 in March 1998. The 1998 stock option plan was amended
in September and November 1999 by the board of directors and our stockholders.
The 1998 stock option plan reserved 4,660,000 shares of common stock for stock
option grants under the 1998 stock option plan. Unless terminated earlier by
the board of directors, the 1998 stock option plan shall terminate in March
2008. As of December 31, 1999, options to purchase 3,778,928 shares of common
stock were outstanding at a weighted average exercise price of $0.50 per share
and 734,936 shares had been issued upon early exercise subject to our right to
repurchase pursuant to restricted stock purchase agreements, 143,273 shares had
been issued upon exercise of outstanding vested options, and 2,863 shares
remained available for future grant.
The 1998 stock option plan may be administered by the board of directors or a
committee appointed by the board of directors. The administrator determines the
terms of options granted under the 1998 stock option plan, including the number
of shares subject to the option, exercise price, term and exercisability.
Incentive stock options granted under the 1998 stock option plan must have an
exercise price of at least 100% of the fair market value of the common stock on
the date of grant and at least 110% of such fair market value in the case of an
optionee who holds more then 10% of the total voting power of all classes of
our stock. Nonstatutory stock options granted under the 1998 stock option plan
must have an exercise price of at least 85% of the fair market value of the
common stock on the date of grant and at least 110% of such fair market value
in the case of an optionee who holds more then 10% of the total voting power of
all classes of our stock. Payment of the exercise price may be made in cash or
such other consideration as determined by the administrator.
The administrator determines the term of options, which may not exceed ten
years or five years in the case of an incentive stock option granted to a
holder of more than 10% of the total voting power of all classes of our stock.
No option may be transferred by the optionee other than by will or the laws of
descent or distribution. Each option may be exercised during the lifetime of
the optionee only by such optionee or permitted transferee. The administrator
determines when options become exercisable. Options granted under the 1998
stock option plan generally must be exercised within three months after the
termination of the optionee's status as an employee, director or consultant of
Loudeye, within six months if such termination is due to the death of the
optionee, or within twelve months if such termination is due to the disability
of the optionee, but in no event later than the expiration of the option's
term. Options granted under the 1998 stock option plan generally vest over a
four and half year period at a rate of 12.5% of the total number of shares
subject to the option nine months after the date of grant, an additional 12.5%
of the total number of shares subject to the option 18 months after the date of
grant, with the remaining shares vesting in equal quarterly installments
thereafter.
If we are acquired by another corporation in a transaction in which options
and stock purchase rights outstanding under the 1998 stock option plan are
being assumed or replaced with substitute options by our acquiror, or are being
replaced with a cash incentive program of our acquiror based on the value of
the awards at the time of the acquisition, the vesting of these outstanding
awards will accelerate as to 25% of the underlying shares then unvested upon
closing of the transaction. If our
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acquiror did not agree to assume or substitute outstanding awards or replace
such awards with a cash incentive program, then the vesting of such awards will
accelerate in full upon the closing. If we experience a change in control event
and the position of an executive officer is terminated within twelve months of
the change of control event, vesting will accelerate with respect to 100% of
the executive officer's options. Outstanding awards, as well as the number of
shares remaining available for issuance under the plan, will adjust in the
event of a stock split, stock dividend or other similar change in our capital
stock. The board of directors has the authority to amend or terminate the 1998
stock option plan provided that no action that impairs the rights of any holder
of an outstanding option may be taken without the holder's consent. In
addition, we will obtain stockholder approval for any such amendments to the
extent required by applicable law.
Alive.com, Inc. 1998 Stock Option Plan. In connection with the Alive.com
merger, we will assume the Alive.com, Inc. 1998 stock option plan. Upon closing
of the merger, options outstanding under the Alive.com plan became options to
purchase an aggregate of 91,181 shares of our common stock. The terms of the
Alive.com options are similar to the terms of options issuable under our 1998
stock plan, except that options granted under the 1998 Alive.com stock option
plan generally vest over a four year period at a rate of 25% of the total
number of shares subject to the option one year after the date of grant, with
the remaining shares vesting in equal quarterly installments thereafter. In
addition, in the event of a sale of all or substantially all of our assets or
our merger with or into another corporation, or other change in control event,
the Alive.com, Inc. 1998 stock option plan provides for 100% acceleration of
vesting for options granted prior to March 18, 1999 and 50% vesting for options
granted after March 18, 1999 if the optionee had been employed by Alive.com for
more than six months. If Alive.com's executive officers are terminated within
six months of a change of control event, the 1998 Alive.com stock option plan
provides 100% acceleration of vesting.
As of December 31, 1999, 89,981 options to purchase shares of common stock
were outstanding under the Alive plan at a weighted average exercise price of
$0.86 per share and 1,200 shares had been issued upon exercise of outstanding
options since the date of the merger.
2000 Stock Option Plan. Our 2000 stock option plan provides for the grant of
incentive stock options to employees, including employee directors, and of
nonstatutory stock options and stock purchase rights to employees, directors
and consultants. The purposes of the 2000 stock option plan are to attract and
retain the best available personnel, to provide additional incentives to our
employees and consultants and to promote the success of our business. The 2000
stock option plan was originally adopted by our board of directors in December
1999 and will be approved by our stockholders prior to completion of this
offering. The 2000 stock option plan provides for this issuance of options and
rights to purchase up to 2,500,000 shares of our common stock, plus an
automatic annual increase on the first day of each of our fiscal years
beginning in 2001, 2002, 2003, 2004 and 2005 equal to the lesser 5% of our
outstanding common stock on the last day of the immediately preceding fiscal
year, 2,500,000 shares or a lesser number of shares as our board of directors
determines. Unless terminated earlier by the board of directors, the 2000 stock
option plan will terminate in December 2009.
As of December 31, 1999, 354,300 options to purchase shares of common stock
were outstanding under the 2000 stock option plan at a weighted average
exercise price of $6.00 per share, no shares had been issued upon exercise of
outstanding options or pursuant to stock purchase rights, and 2,145,700 shares
remained available for future grant.
The 2000 stock option plan may be administered by the board of directors or a
committee of the board, each known as the administrator. The administrator
determines the terms of options and stock
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purchase rights granted under the 2000 stock option plan, including the number
of shares subject to the award, the exercise or purchase price, and the vesting
and/or exercisability of the award and any other conditions to which the award
is subject. No employee may receive awards under the plan for more than
2,500,000 shares in any one calendar year. Incentive stock options granted
under the 2000 stock option plan must have an exercise price of at least 100%
of the fair market value of the common stock on the date of grant. Generally,
the plan does not impose restrictions on the exercise or purchase price
applicable to nonstatutory stock options and stock purchase rights, although we
expect that nonstatutory stock options and stock purchase rights granted to our
chief executive officer and our four other most highly compensated officers
will generally equal at least 100% of the grant date fair market value. Payment
of the exercise or purchase price may be made in cash or any other
consideration allowed by the administrator.
With respect to options granted under the 2000 stock option plan, the
administrator determines the term of options, which may not exceed 10 years, or
5 years in the case of an incentive stock option granted to a holder of more
than 10% of the total voting power of all classes of our stock. Generally, an
option is nontransferable other than by will or the laws of descent and
distribution, and may be exercised during the lifetime of the optionee only by
such optionee. In certain circumstances, the administrator has the discretion
to grant nonstatutory stock options with limited transferability rights. Stock
options are generally subject to vesting, meaning that the optionee earns the
right to exercise the option over a specified period of time only if he or she
continues to provide services to us over that period. Shares of stock issued
pursuant to stock purchase rights granted under the 2000 stock option plan are
generally subject to a repurchase right exercisable by us upon the termination
of the holder's employment or consulting relationship with us for any reason
(including death or disability). This repurchase right will lapse in accordance
with terms established by the administrator at the time of grant.
If we are acquired by another corporation in a transaction in which options
and stock purchase rights outstanding under the 2000 stock option plan are
being assumed or replaced with substitute options by our acquiror, or are being
replaced with a cash incentive program of our acquiror based on the value of
the awards at the time of the acquisition, the vesting of these outstanding
awards will accelerate as to 25% of the underlying shares then unvested upon
closing of the transaction. If our acquiror did not agree to assume or
substitute outstanding awards or replace such awards with a cash incentive
program, then the vesting of such awards will accelerate in full upon the
closing. Outstanding awards,the number of shares remaining available for
issuance under the plan, the number of shares added to the plan each year under
the plan's evergreen provision and the annual per-employee share limit will
adjust in the event of a stock split, stock dividend or other similar change in
our capital stock. The administrator has the authority to amend or terminate
the 2000 stock option plan, but no action may be taken that impairs the rights
of any holder of an outstanding option or stock purchase right without the
holder's consent. In addition, we must obtain stockholder approval of
amendments to the plan as required by applicable law.
2000 Director Stock Option Plan. The 2000 director stock option plan was
adopted by the board of directors in December 1999 and will be submitted for
approval by our stockholders prior to completion of this offering. It will
become effective upon the date of this offering. A total of 250,000 shares of
common stock has been reserved for issuance under the 2000 director stock
option plan, all of which remain available for future grants. The 2000 director
stock option plan provides for the grant of nonstatutory stock options to our
nonemployee directors. The 2000 director stock option plan is designed to work
automatically without administration; however, to the extent administration is
necessary, it will be performed by the board of directors. To the extent they
arise, it is expected
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that conflicts of interest will be addressed by abstention of any interested
director from both deliberations and voting regarding matters in which a
director has a personal interest. Unless terminated earlier, the directors'
plan will terminate in December 2009.
The 2000 director stock option plan provides that each nonemployee director
at the time of completion of this offering will automatically receive an option
to purchase 20,000 shares of our common stock. In addition, the 2000 director
stock option plan provides that each person who becomes a nonemployee director
after the completion of this offering will be granted a nonstatutory stock
option to purchase 20,000 shares of common stock on the date on which such
individual first becomes a member of our board of directors. On the date of
each annual stockholders meeting, each nonemployee director who will continue
serving on the board following the meeting and who has been a director of
Loudeye for at least six months prior to the meeting date will be granted an
option to purchase 7,500 shares of common stock.
All options granted under the 2000 director stock option plan will have a
term of ten years and an exercise price equal to the fair market value of on
the date of grant (except for options granted on the date of this offering
which will have an exercise price equal to the price at which shares are first
sold to the public in the offering) and will be nontransferable. All initial
options granted under the 2000 director stock option plan shall vest as to 25%
of the shares underlying the option on each of the first four anniversaries of
the date of the option grant. The subsequent options to purchase 7,500 shares
granted under the director plan shall vest as to 100% of the shares underlying
the option on the first anniversary of the date of the option grant. If a
nonemployee director ceases to serve as a director for any reason other than
death or disability, he or she may, but only within 90 days after the date he
or she ceases to be a director, exercise options granted under the director
plan. If he or she does not exercise the option within such 90-day period, the
option will terminate. If a director's service terminates as a result of his or
her disability or death, or if a director dies within three months following
termination for any reason, the director or his or her estate will have
12 months after the date of termination or death, as applicable, to exercise
options that were vested as of the date of termination. In addition, if we
determine that a director has engaged in fraud, embezzlement or similar acts
against us, or if a director has disclosed information that is confidential to
us or engaged in any conduct constituting unfair competition against us, we
have the right to suspend or terminate that director's right to exercise an
option under the 2000 director stock option plan.
If we are acquired by another corporation, each option outstanding under the
2000 director stock option plan will be assumed or equivalent options
substituted by our acquiror, unless our acquiror does not agree to such
assumption or substitution, in which case the options will terminate upon
consummation of the transaction to the extent not previously exercised. In
connection with any acquisition, each director holding options under the 2000
director stock option plan will have the right to exercise his or her options
immediately before the consummation of the transaction as to all shares
underlying the options, including shares which would not have been vested and
exercisable but for the acquisition. Outstanding awards, the number of shares
remaining available for issuance under the plan and the number of shares
subject to the automatic director option grants as provided in the plan will
adjust in the event of a stock split, stock dividend or other similar change in
our capital stock. Our board of directors may amend or terminate the director
plan as long as such action does not adversely affect any outstanding option.
We will obtain stockholder approval for any amendment to the plan to the extent
required by applicable law.
2000 Employee Stock Purchase Plan. Our 2000 employee stock purchase plan was
adopted by the board of directors in December 1999 and will be submitted for
approval by our stockholders prior
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to completion of this offering. A total of 200,000 shares of common stock has
been reserved for issuance under the 2000 employee stock purchase plan, none of
which have been issued as of the date of this offering. The number of shares
reserved for issuance under the 2000 employee stock purchase plan will be
subject to an automatic annual increase on the first day of each of our fiscal
years beginning in 2001, 2002, 2003, 2004 and 2005 equal to the lesser of 0.75%
of our outstanding common stock on the last day of the immediately preceding
fiscal year, 300,000 shares or a lesser number of shares as the board of
directors determines. The 2000 employee stock purchase plan becomes effective
upon the date of this offering. Unless terminated earlier by the board of
directors, the 2000 employee stock purchase plan will terminate in December
2019.
The 2000 employee stock purchase plan, which is intended to qualify under
Section 423 of the Internal Revenue Code, will be implemented by a series of
overlapping offering periods of approximately 24 months' duration, with new
offering periods (other than the first offering period) commencing on May 1 and
November 1 of each year. Each offering period will generally consist of four
consecutive purchase periods of six months' duration, at the end of which an
automatic purchase will be made for participants. The initial offering period
is expected to commence on the date of this offering and end on April 30, 2002;
the initial purchase period is expected to begin on the date of this offering
and end on October 31, 2000, with subsequent purchase periods ending on April
30, 2001, October 31, 2001 and April 30, 2002. The 2000 employee stock purchase
plan will be administered by the board of directors or by a committee appointed
by the board. Our employees (including officers and employee directors), or of
any majority-owned subsidiary designated by the board, are eligible to
participate in the 2000 employee stock purchase plan if they are employed by us
or a designated subsidiary for at least 20 hours per week and more than five
months per year. The 2000 employee stock purchase plan permits eligible
employees to purchase common stock through payroll deductions at a rate of not
more than 20% of an employee's compensation. The purchase price is equal to the
lower of 85% of the fair market value of the common stock at the beginning of
each offering period or at the end of each purchase period, subject to certain
adjustments as provided in the plan. Employees may end their participation in
the 2000 employee stock purchase plan at any time during an offering period,
and participation ends automatically on termination of employment.
An employee is not eligible to participate in the 2000 employee stock
purchase plan if immediately after the grant of an option to purchase stock
under the plan such employee would own stock and/or hold outstanding options to
purchase stock equaling 5% or more of the total voting power or value of all
classes of our stock or stock of our subsidiaries, or if such option would
permit an employee's rights to purchase stock under the 2000 employee stock
purchase plan at a rate that exceeds $25,000 of fair market value of such stock
for each calendar year in which the option is outstanding. In addition, no
employee may purchase more than 2,000 shares of common stock under the 2000
employee stock purchase plan in any one purchase period. If the fair market
value of the common stock on a purchase date is less than the fair market value
at the beginning of the offering period, each participant in that offering
period shall automatically be withdrawn from the offering period as of the end
of the purchase date and re-enrolled in the new 24-month offering period
beginning on the first business day following the purchase date.
If we merge or consolidate with or into another corporation or sell all or
substantially all of our assets, each right to purchase stock under the 2000
employee stock purchase plan will be assumed or an equivalent right substituted
by our acquiror. If our acquiror did not agree to assume or substitute stock
purchase rights, any offering period and purchase period then in progress would
be shortened and a new exercise date occurring prior to the closing of the
transaction would be set. Outstanding
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awards, the number of shares remaining available for issuance under the plan,
the number of shares added to the plan each year under the plan's evergreen
provision and the maximum number of shares that may be purchased by a
participant during a purchase period will adjust in the event of a stock split,
stock dividend or other similar change in our capital stock. Our board of
directors has the power to amend or terminate the 2000 employee stock purchase
plan and to change or terminate offering periods as long as such action does
not adversely affect any outstanding rights to employee stock purchase stock
thereunder. However, the board of directors may amend or terminate the 2000
purchase plan or an offering period even if it would adversely affect
outstanding options in order to avoid our incurring adverse accounting charges.
Employee Benefit Plans
401(k) Plan. In 1999, we adopted our 401(k) plan covering our full-time
employees over age twenty-one . Employees are eligible after three months
employment. The 401(k) plan is intended to qualify under Section 401(k) of the
Internal Revenue Code of 1986, as amended, so that contributions to the 401(k)
plan by employees or by us, and the investment earnings thereon, are not
taxable to employees until withdrawn from the 401(k) plan, and so that our
contributions, if any, will be deductible by us when made. Under the 401(k)
plan, employees may elect to reduce their current compensation by up to 20% up
to the statutorily prescribed annual limit ($10,500 in 2000) and to have the
amount of such reduction contributed to the 401(k) plan. The 401(k) plan
permits, but does not require, additional matching contributions to our 401(k)
plan on behalf of all participants in the 401(k) plan. To date, we have not
made any matching contributions to the 401(k) plan.
Employment Offer Letters
In connection with the hiring of David Bullis as our president and chief
operating officer in July 1999, we entered into a letter agreement with Mr.
Bullis. Mr. Bullis's options vest over a four year period at a rate of 18.75%
of the number of shares subject to the option nine months after the date of
grant, with the remaining shares vesting in equal installments at the end of
each quarter thereafter. If we experience a change in control within Mr.
Bullis's first two years of employment, the vesting will accelerate with
respect to 50% of these options. Mr. Bullis's employment is for no specified
length of time, and either party has the right to terminate Mr. Bullis's
employment at any time with or without cause.
In connection with the hiring of Larry Culver as our chief financial officer
in August 1999, we entered into a letter agreement with Mr. Culver. In
addition, prior to Mr. Culver joining us as chief financial officer, Mr. Culver
had been hired by us as a consultant in August 1999, and in connection with
such consulting agreement, Mr. Culver was granted a nonqualified stock option.
Mr. Culver's incentive stock options vest over a four year period with 12.5% of
the total number of shares subject to the option vesting twenty-seven months
after the date of grant, with the remaining shares vesting in equal
installments at the end of each quarter thereafter. Mr. Culver's nonqualified
options vest over a two year period at a rate of 37.5% of the total number of
shares subject to the option nine months after the date of grant, with the
remaining shares vesting in equal installments at the end of each quarter
thereafter. If we experience a change in control within Mr. Culver's first two
years of employment, the vesting on his nonqualified option will accelerate
completely. Mr. Culver's employment is for no specified length of time, and
either party has the right to terminate Mr. Culver's employment at any time
with or without cause.
In connection with the hiring of Douglas Schulze as our vice president of
marketing in October 1999, we entered into a letter agreement with Mr. Schulze.
Mr. Schulze's options vest over a four
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year period at a rate of 18.75% of the total number of shares subject to the
option nine months after the date of grant, with the remaining shares vesting
in equal installments at the end of each quarter thereafter. Mr. Schulze's
employment is for no specified length of time, and either party has the right
to terminate Mr. Schulze's employment at any time with or without cause.
In connection with the hiring of James Van Kerkhove as our vice president of
production in November 1999, we entered into a letter agreement with Mr. Van
Kerkhove. Mr. Van Kerkhove's options generally vest over a four year period at
a rate of 18.75% of the total number of shares subject to the option nine
months after the date of grant, with the remaining shares vesting in equal
installments at the end of each quarter thereafter. Mr. Van Kerkhove's
employment is for no specified length of time, and either party has the right
to terminate Mr. Van Kerkhove's employment at any time with or without cause.
In connection with the hiring of David Weld as our senior vice president of
product development in December 1999, we entered into a letter agreement with
Mr. Weld. Mr. Weld's options generally vest over a four year and three month
period at a rate of 12.5% of the total number of shares subject to the option
nine months after the date of grant, with the remaining shares vesting in equal
installments at the end of each quarter thereafter. Mr. Weld is treated as an
executive officer in the event of a change in control of Loudeye. In addition,
in connection with our acquisition of Alive.com Mr. Weld's right to purchase
shares of Alive.com common stock converted into a right to purchase shares of
our common stock. Mr. Weld's employment is for no specified length of time, and
either party has the right to terminate Mr. Weld's employment at any time with
or without cause.
In connection with the hiring of Thomas Hodge as our Vice President, General
Counsel in January 2000, we entered into a letter agreement with Mr. Hodge. Mr.
Hodge's options generally vest over a four year period at a rate of 18.75% of
the total number of shares subject to the option nine months after the date of
grant, with the remaining shares vesting in equal installments at the end of
each quarter thereafter. Mr. Hodge's employment is for no specified length of
time, and either party has the right to terminate Mr. Hodge's employment at any
time with or without cause.
In addition, we have a severance arrangement with each of our officers which
provides that if an officer is terminated without cause, he or she will receive
the then-current base salary and benefits for three months, or for six months
in the case of our executive officers.
Limitation of Liability and Indemnification Matters
Our certificate of incorporation limits the liability of directors to the
maximum extent permitted by Delaware law. Delaware law provides that directors
of a corporation will not be personally liable for monetary damages for breach
of their fiduciary duties as directors, except liability for:
. any breach of their duty of loyalty to the corporation or its
stockholders;
. acts or omissions not in good faith or which involve intentional
misconduct or a knowing violation of law;
. unlawful payments of dividends or unlawful stock repurchases or
redemptions; or
. any transaction from which the director derived an improper personal
benefit.
This limitation of liability does not apply to liabilities arising under the
federal securities laws and does not affect the availability of equitable
remedies such as injunctive relief or rescission.
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Our certificate of incorporation and bylaws provide that we shall indemnify
our directors and executive officers and may indemnify our other officers and
employees and other agents to the fullest extent permitted by law. We believe
that indemnification under our bylaws covers at least negligence and gross
negligence on the part of indemnified parties. Our bylaws also permit us to
secure insurance on behalf of any officer, director, employee or other agent
for any liability arising out of his or her actions in such capacity,
regardless of whether the bylaws would permit indemnification.
We have entered into agreements to indemnify our directors and officers, in
addition to indemnification provided for in our bylaws. These agreements, among
other things, provide for indemnification of our directors and officers for
expenses specified in the agreements, including attorneys' fees, judgments,
fines and settlement amounts incurred by any such person in any action or
proceeding arising out of such person's services as our director or officer,
any of our subsidiaries or any other company or enterprise to which the person
provides services at our request. We believe that these provisions and
agreements are necessary to attract and retain qualified persons as directors
and officers.
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CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Private Placements of Securities
Since our inception in August 1997, we have issued shares of our capital
stock as follows:
. a total of 5,288,000 shares of common stock and 4,712,000 shares of
Series A preferred stock in connection with the conversion of the
predecessor limited liability company into a Delaware corporation in
March 1998;
. a total of 2,508,848 shares of common stock in connection with the
acquisition of Alive.com;
. a total of 271,787 shares of Series A preferred stock at a price of
$0.843 per share in June 1998;
. a total of 3,259,194 shares of Series B preferred stock at a price of
$0.843 per share in June and August 1998;
. a total of 5,309,266 shares of Series C preferred stock at a price of
$1.90 per share in April and August 1999; and
. a total of 7,510,989 shares of Series D preferred stock at a price of
$6.37 per share in December 1999.
All shares of our preferred stock will convert into common stock on a one-for-
one basis upon the closing of this offering. The following table summarizes the
shares of capital stock purchased by executive officers, directors and five-
percent stockholders and their affiliates in these transactions:
<TABLE>
<CAPTION>
Series A Series B Series C Series D
Common Preferred Preferred Preferred Preferred
Investor (1) Stock Stock Stock Stock Stock
- ---------------------------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
Martin G. Tobias (2)(3)..... 5,288,000 4,983,787 -- 278,949 117,739
Olympic Venture Partners
(2)........................ 362,987 -- 1,779,360 1,539,474 706,437
RRE Ventures (2)............ -- -- -- 2,105,263 470,957
EnCompass Group (2)......... -- -- 1,186,240 157,895 305,023
David C. Bullis(4).......... -- -- -- 105,263 --
</TABLE>
- --------
(1) Shares held by affiliated persons and entities have been added together
for the purposes of this chart. See "Principal Stockholders" for a chart
of beneficial owners.
(2) Holder of 5% or more of a class of our capital stock. Mr. Tobias is our
chief executive officer. Charles P. Waite, one of our directors, is a
general partner of entities affiliated with Olympic Venture Partners.
Stuart J. Ellman, one of our directors, is a general partner of entities
affiliated with RRE Ventures.
(3) Includes shares held by Martin Tobias's wife, Alex Tobias. In
consideration of Martin Tobias, our founder and chief executive officer,
and his wife's conversion of their membership interests in Encoding.com
LLC, we issued 5,288,000 shares of common stock and 4,712,000 shares of
Series A preferred stock. In addition, we repaid $225,000 in outstanding
principal and issued 271,787 shares of Series A preferred stock at a price
of $0.843 per share in exchange for a cancellation of the remaining
indebtedness from a note issued by us to Mr. Tobias in the aggregate
principal amount of $454,117.06.
(4) Mr. Bullis is our president and chief operating officer.
Transactions with Officers and Directors
On December 14, 1999, we acquired Alive.com and issued 2,508,848 shares of
common stock and 91,181 options to purchase our common stock in exchange for
all outstanding capital stock and the assumption of all outstanding options of
Alive.com. In exchange for their shares of Alive.com, entities affiliated with
Olympic Venture Partners were issued 362,987 shares of our common stock. In
addition, three officers of Alive.com became officers of Loudeye. David Weld
was issued 84,896 shares of our common stock, Jeffrey Brown was issued 41,600
shares of our common stock
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and Mark Richardson was issued 41,600 shares of our common stock, in each case
in exchange for their shares of Alive.com common stock. Weld Brown LLC, of
which Mr. Weld and Mr. Brown are managers, was issued 412,559 shares of our
common stock.
Martin Tobias, our chief executive officer, is the landlord on our 3406 East
Union Street, Seattle, Washington lease and the owner of that property. We
lease 6,000 square feet under that lease that expires on September 1, 2003 with
an annual rental expense of approximately $120,000.
We have a severance arrangement with each of our officers. See "Employment
Offer Letters" for a description of the offer letters and a description of the
severance arrangement.
All future transactions, including any loans from us to our officers,
directors, principal stockholders or affiliates, will be approved by a majority
of our board of directors, including a majority of the independent and
disinterested members of the board, and if required by law, a majority of
disinterested stockholders.
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PRINCIPAL STOCKHOLDERS
The following table sets forth information regarding the beneficial ownership
of our common stock as of December 31, 1999, assuming conversion of all
outstanding shares of preferred stock into common stock and as adjusted to
reflect the sale of common stock offered hereby by:
. each stockholder known by us to own beneficially more than 5% of our
common stock;
. each director;
. our chief executive officer and other executive officers; and
. all directors and executive officers as a group.
Except as otherwise noted, the address of each person listed in the table is
c/o Loudeye Technologies, Inc., Times Square Building, 414 Olive Way, Suite
300, Seattle, WA 98101.
As of December 31, 1999, there were 29,759,493 shares of common stock
outstanding. The percent of beneficial ownership for each stockholder is based
on 29,759,493 shares of common stock outstanding prior to this offering, on an
as converted basis, and 34,595,515 shares of common stock outstanding after
this offering and the concurrent private placement. Beneficial ownership is
determined in accordance with the rules of the SEC. In computing the number of
shares beneficially owned by a person and the percentage ownership of that
person, shares of common stock subject to options or warrants held by that
person that are currently exercisable or will become exercisable within 60 days
after December 31, 1999 are deemed outstanding, while such shares are not
deemed outstanding for purposes of computing percentage ownership for any other
person. Unless otherwise indicated in the footnotes below, the persons and
entities named in the table have sole voting and investment power with respect
to all shares beneficially owned, subject to community property laws where
applicable. In addition, the percentage calculation after the offering assumes
no exercise of the underwriters' over-allotment option.
<TABLE>
<CAPTION>
Percentage of Shares
Number of Outstanding
Shares -----------------------
Beneficially Before After
Name and Address of Beneficial Owner Owned Offering Offering
- ------------------------------------ ------------ ---------- ----------
<S> <C> <C> <C>
Martin G. Tobias (1)................... 10,631,634 35.7% 30.7%
Olympic Venture Partners (2)........... 4,388,258 14.8% 12.7%
2420 Carillon Point
Kirkland, WA 98033
RRE Ventures (3)....................... 2,576,220 8.7% 7.4%
126 East 56th Street
New York, NY 10022
EnCompass Group U.S. Information 1,649,158 5.5% 4.8%
Technology Partners (4)...............
777 108th Avenue NE, Suite 2300
Bellevue, WA 98004
David C. Bullis (5).................... 555,263 1.9% 1.6%
David L.Weld, Jr. (6).................. 547,455 1.8% 1.6%
Larry Culver (7)....................... 400,000 1.3% 1.2%
Michael D. McHenry (8)................. 350,000 1.2% 1.0%
Douglas F. Schulze (9)................. 350,000 1.2% 1.0%
James L. Van Kerkhove (10)............. 250,000 * *
Charles P. Waite, Jr. (11)............. 4,388,258 14.8% 12.7%
Stuart J. Ellman (12).................. 2,576,220 8.7% 7.4%
Johan Liedgren (13).................... 60,000 * *
All directors and executive officers as
a group (10 persons).................. 20,108,830 64.8% 56.1%
</TABLE>
- --------
* Represents ownership less than one percent.
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(1) Includes 10,197,338 shares held by Martin Tobias and 434,297 shares held
by Alex Tobias.
(2) Includes 3,644,753 shares held by Olympic Venture Partners IV, LP,
423,862 shares held by Olympic Venture Partners V, LP, 272,547 shares
held by OVP IV Entrepreneurs' Fund, LP and 47,096 shares of OVP V
Entrepreneurs' Fund, LP. Charles P. Waite, Jr., a general partner of
Olympic Venture Partners, is one of our directors. Mr. Waite disclaims
beneficial ownership of shares held by these entities except to the
extent of his pecuniary interest therein. The general partner of each of
the foregoing entities is OVMC IV, L.L.C. The managing members of OVMC
IV, L.L.C. are George H. Clute, Gerard H. Langeler, William D. Miller and
Charles P. Waite, Jr.
(3) Includes 510,156 shares held by RRE Ventures Fund II, LP and 2,066,064
shares held by RRE Ventures II, LP. Stuart J. Ellman, a general partner
of RRE Ventures II, LP and RRE Ventures Fund II, LP and a member of RRE
Ventures GP II, LLC, is one of our directors. Mr. Ellman disclaims
beneficial ownership of shares held by these entities except to the
extent of his pecuniary interest therein. The general partner of each of
the foregoing entities is RRE Ventures GP II, L.L.C. The managing members
of RRE Ventures GP II, L.L.C. are James D. Robinson III, James D.
Robinson IV, Stuart J. Ellman and Andrew L. Zalasin.
(4) Includes 1,422,628 shares held by EnCompass Group U.S. Information
Technology Partners I, LP, 156,986 shares held by EnCompass U.S.
Information Technology Partners II, LP and 69,544 shares held by
Northwest Financing, LLC. The general partner of EnCompass Group U.S.
Information Technology Partners I, LP, is EGI Fund Management Company,
L.L.C. The general partner of EnCompass U.S. Information Technology
Partners II, LP is EGI Fund Management Company II, L.L.C. The managing
members of EGI Fund Management Company, L.L.C. and EGI Fund Management
Company II, L.L.C. are Wayne Wager, Scot Land, Yasuki Matsumoto and
Kiyoyuki Kubota. The general partner of Northwest Financing, L.L.C. is
EGI Fund Management Company, L.L.C. The managing members of EGI Fund
Management Company, L.L.C. are Wayne Wager, Scot Land and Yasuki
Matsumoto.
(5) Includes 450,000 shares subject to our right of repurchase.
(6) Includes 62,400 shares subject to our right of repurchase, 412,559 shares
held by Weld Brown LLC and 50,000 shares issuable upon exercise of
outstanding options within 60 days of December 31, 1999 but subject to
our right of repurchase. Mr. Weld disclaims beneficial ownership of
shares held by Weld Brown LLC except to the extent of his pecuniary
interest in those shares.
(7) Includes 200,000 shares issuable upon exercise of outstanding options
within 60 days of December 31, 1999, and 200,000 shares, all which are
subject to our right of repurchase.
(8) Includes 73,750 shares issuable upon exercise of outstanding options
within 60 days of December 31, 1999 and 306,250 shares issuable upon
exercise of outstanding options, within 60 days of December 31, 1999 but
subject to our right of repurchase.
(9) Includes 345,000 shares issuable upon exercise of outstanding options
within 60 days of December 31, 1999, and 5,000 shares, all of which are
subject to our right of repurchase.
(10) Includes 250,000 shares issuable upon exercise of outstanding options
within 60 days of December 31, 1999 but subject to our right of
repurchase.
(11) Charles P. Waite, Jr. is one of our directors and is a general partner of
Olympic Venture Partners, Mr. Waite disclaims beneficial ownership of
shares held by Olympic Venture Partners except to the extent of his
pecuniary interest in those shares.
(12) Stuart J. Ellman is one of our directors and is a general partner of RRE
Ventures II, LP and RRE Ventures Fund II, LP, and a member of RRE
Ventures GP II, LLC. Mr. Ellman disclaims beneficial ownership of shares
held by RRE Ventures except to the extent of his pecuniary interest in
those shares.
(13) Includes 22,500 shares issuable upon exercise of outstanding options
within 60 days of December 31, 1999 and 37,500 shares issuable upon
exercise of outstanding options within 60 days of December 31, 1999 but
subject to our right of repurchase.
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DESCRIPTION OF CAPITAL STOCK
As of December 31, 1999, there were 29,759,493 shares of common stock
outstanding, assuming the conversion of all outstanding shares of preferred
stock into shares of common stock held by approximately 138 stockholders of
record. Upon completion of this offering, we will be authorized to issue
100,000,000 shares of common stock, $0.001 par value, and 5,000,000 shares of
undesignated preferred stock, $0.001 par value.
The following description of our capital stock is not complete and is
qualified in its entirety by our certificate of incorporation and bylaws, which
are included as exhibits to the registration statement of which this prospectus
forms a part, and by the provisions of applicable Delaware law.
Common Stock
The holders of common stock are entitled to one vote per share on all matters
to be voted on by the stockholders. Subject to preferences that may be
applicable to any outstanding preferred stock, the holders of common stock are
entitled to receive ratably such dividends, if any, as may be declared from
time to time by the board of directors out of funds legally available for that
purpose. See "Dividend Policy" for a description of our policy of distribution
of dividends. In the event of a liquidation, dissolution or winding up of
Loudeye, the holders of common stock are entitled to share ratably in all
assets remaining after payment of liabilities, subject to prior distribution
rights of preferred stock, if any, then outstanding. The common stock has no
preemptive or conversion rights or other subscription rights. There are no
redemption or sinking fund provisions applicable to the common stock. All
outstanding shares of common stock are fully paid and nonassessable, and the
shares of common stock to be issued upon the closing of this offering will be
fully paid and nonassessable.
Preferred Stock
Upon the closing of this offering, the board of directors will have the
authority, without action by the stockholders, to designate and issue up to
5,000,000 shares of preferred stock in one or more series and to designate the
rights, preferences and privileges of each series, any or all of which may be
greater than the rights of the common stock. It is not possible to state the
actual effect of the issuance of any shares of preferred stock upon the rights
of holders of the common stock until the board of directors determines the
specific rights of the holders of such preferred stock. However, the effects
might include, among other things, restricting dividends on the common stock,
diluting the voting power of the common stock, impairing the liquidation rights
of the common stock and delaying or preventing a change in control of Loudeye
without further action by the stockholders. We have no present plans to issue
any shares of preferred stock.
Warrants
In June, 1999 in connection with an equipment line of credit, we issued a
warrant to Dominion Capital Management, L.L.C. to purchase 41,053 shares of
Series C preferred stock at an exercise price of $1.90 per share which will
expire on the earlier of June 22, 2008, or four years after the effective date
of this offering. In December 1999 in connection with a commercial agreement,
we issued a warrant to Valley Media to purchase 650,000 shares of common stock
at an exercise price of $10.00 per share which will expire on December 17,
2000.
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Registration Rights
Upon completion of this offering and the concurrent private placement, the
holders of 28,866,009 shares of common stock or their permitted transferees
will be entitled to certain rights with respect to registration of such shares
under the Securities Act. These rights are provided under the terms of an
agreement between Loudeye and the holders of registrable securities. Under
these registration rights, beginning on the earlier of June 3, 2005, or twelve
months after the effective date of the offering contemplated by this
prospectus, holders of at least a majority of the then-outstanding registrable
securities may require on two occasions that we register their shares for
public resale. We are obligated to register these shares only if the shares to
be registered would have an anticipated public offering price of at least
$10,000,000. In addition, holders of at least 25% of the then-outstanding
registrable securities may require that we register their shares for public
resale on form S-3 or similar short-form registration up to two times per year,
provided we are eligible to use form S-3 or similar short-form registration
statement and provided further that the value of the securities to be
registered is at least $500,000. Furthermore, in the event we elect to register
any of our shares of common stock for purposes of effecting any public
offering, the holders of registrable securities are entitled to include their
shares of common stock in the registration, subject however to our right to
reduce the number of shares proposed to be registered in view of market
conditions. All expenses in connection with any registration, other than
underwriting discounts and commissions, will be borne by us. All registration
rights will terminate four years after the date of this public offering or,
with respect to each holder of registrable securities, at such time as the
holder is entitled to sell all of its shares in any three month period under
Rule 144 of the Securities Act.
Upon closing of this offering and the concurrent private placement to Akamai
Technologies, Inc., Akamai will become a holder of registrable securities and,
therefore, will have the same registration rights as those described in the
preceding paragraph. These shares are included in the numbers stated above.
Delaware and Washington Anti-Takeover Law and Certain Charter and Bylaw
Provisions
Provisions of Delaware and Washington law and our certificate of
incorporation and bylaws could make more difficult the acquisition of Loudeye
by a third party and the removal of incumbent officers and directors. These
provisions, summarized below, are expected to discourage certain types of
coercive takeover practices and inadequate takeover bids and to encourage
persons seeking to acquire control of us to first negotiate with us. We believe
that the benefits of increased protection of our ability to negotiate with the
proponent of an unfriendly or unsolicited proposal to acquire or restructure us
outweigh the disadvantages of discouraging such proposals because, among other
things, negotiation of such proposals could result in an improvement of their
terms.
We are subject to Section 203 of the Delaware General Corporation Law, which
regulates corporate acquisitions. In general, Section 203 prohibits a publicly
held Delaware corporation from engaging in a "business combination" with an
"interested stockholder" for a period of three years following the date the
person became an interested stockholder, unless:
. the board of directors approved the transaction in which such
stockholder became an interested stockholder prior to the date the
interested stockholder attained such status;
. upon consummation of the transaction that resulted in the stockholder's
becoming an interested stockholder, he or she owned at least 85% of the
voting stock of the corporation outstanding at the time the transaction
commenced, excluding shares owned by persons who are directors and also
officers; or
. on or subsequent to such date the business combination is approved by
the board of directors and authorized by 66 2/3% vote at an annual or
special meeting or stockholders.
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A business combination generally includes a merger, asset or stock sale, or
other transaction resulting in a financial benefit to the interested
stockholder. In general, an "interested stockholder" is a person who, together
with affiliates and associates, owns, or within three years prior to the
determination of interested stockholder status, did own, 15% or more of a
corporation's voting stock.
The laws of the state of Washington, where our principal executive offices
are located, also impose restrictions on certain transactions between certain
foreign corporations and significant stockholders. Chapter 23B.19 of the
Washington Business Corporation Act, or the WBCA, prohibits a "target
corporation," with certain exceptions, from engaging in certain "significant
business transactions" with a person or group of persons who beneficially own
10% or more of the voting securities of the target corporation (an acquiring
person) for a period of five years after such acquisition unless the
transaction or acquisition of such shares is approved by a majority of the
members of the target corporation's board of directors prior to the time of
acquisition.
Such prohibited transactions include, among other things:
. a merger or consolidation with, disposition of assets to, or issuance or
redemption of stock to or from, the acquiring person;
. termination of 5% or more of the employees of the target corporation as
a result of the acquiring person's acquisition of 10% or more of the
shares; or
. allowing the acquiring person to receive disproportionate benefit as a
stockholder.
After the five-year period, a significant business transaction may take place
as long as it complies with certain fair price provisions of the statute.
A target corporation includes a foreign corporation if:
. the corporation has a class of voting stock registered pursuant to
Section 12 or 15 of the Exchange Act;
. the corporation's principal executive office is located in Washington;
. any of (a) more than 10% of the corporation's stockholders of record are
Washington residents, (b) more than 10% of its shares are owned of
record by Washington residents, or (c) 1,000 or more of its stockholders
of record are Washington residents;
. a majority of the corporation's employees are Washington residents or
more than 1,000 Washington residents are employees of the corporation;
and
. a majority of the corporation's tangible assets are located in
Washington or the corporation has more than $50.0 million of tangible
assets located in Washington.
A corporation may not "opt out" of this statute and, therefore, we anticipate
this statute will apply to us. Depending upon whether we meet the definition of
a target corporation, Chapter 23B.19 of the WBCA may have the effect of
delaying, deferring or preventing a change in control.
Our certificate of incorporation and bylaws do not provide for the right of
stockholders to act by written consent without a meeting or for cumulative
voting in the election of directors. In addition, our certificate of
incorporation permits the board of directors to issue preferred stock with
voting or other rights without any stockholder action. The authorization of
undesignated preferred stock makes it possible for the board of directors to
issue preferred stock with voting or other rights or preferences that could
impede the success of any attempt to change control of Loudeye.
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Our Certificate of Incorporation provides for the division of our board of
directors into three classes, as nearly as equal in size as possible, with
staggered three year terms. The classification of the board of directors has
the effect of requiring more than one annual stockholder meeting to replace a
majority of the directors. Our bylaws provide that special meetings of
stockholders can be called only by the board of directors, the chairman of the
board, if any, the president and holders of 25% of the votes entitled to be
cast at a meeting. Moreover, the business permitted to be conducted at any
special meeting of stockholders is limited to the business brought before the
meeting by the board of directors, the chairman of the board, if any, the
president or any 25% holder. Our bylaws set forth an advance notice procedure
with regard to the nomination, other than by or at the direction of the board
of directors, of candidates for election as directors and with regard to
business to be brought before a meeting of stockholders. These and other
provisions may have the effect of deterring hostile takeovers or delaying
changes in control or management of Loudeye.
Concurrent Private Placement
In February 2000, we entered into a common stock purchase agreement with
Akamai Technologies, Inc., under which we agreed to sell to Akamai shares of
our common stock in a private placement concurrent with and conditioned upon
the sale of shares in this offering. The price of the shares in the concurrent
private placement will be the initial public offering price per share less the
underwriting discounts and commissions. The number of shares we will sell to
Akamai is equal to $5.0 million worth of common stock priced at the initial
public offering price per share less the underwriting discounts and
commissions. We expect to recognize a deferred charge associated with this
discount of approximately $376,000, which will be amortized over a period of
approximately one year.
Transfer Restrictions. Akamai has agreed not to sell, transfer, encumber or
otherwise dispose of any of the shares of common stock acquired in the
concurrent private placement in a public or private sale for a period of 180
days following the closing of the offering.
Registration Rights. We have committed to grant Akamai registration rights
relating to the shares of common stock they will purchase in the concurrent
private placement. See "--Registration Rights."
Transfer Agent and Registrar
The transfer agent and registrar for common stock is ChaseMellon Shareholders
Service, telephone number (206) 674-3030.
Listing
Our common stock has been approved for quotation on the Nasdaq National
Market under the symbol "LOUD".
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SHARES ELIGIBLE FOR FUTURE SALE
Prior to this offering, there has been no market for our common stock. Future
sales of substantial amounts of common stock in the public market could
adversely affect prevailing market prices. Furthermore, since only a limited
number of shares will be available for sale shortly after this offering because
of certain contractual and legal restrictions on resale, as described below,
sales of substantial amounts of our common stock in the public market after the
restrictions lapse could adversely affect the prevailing market price and
impair our ability to raise equity capital in the future.
Upon completion of the offering and the concurrent private placement, we will
have outstanding 34,595,515 shares of common stock. Of these shares, the
4,500,000 shares sold in the offering, plus any shares issued upon exercise of
the underwriters' over-allotment option, will be freely tradable without
restriction under the Securities Act, unless purchased by our "affiliates" as
that term is defined in Rule 144 under the Securities Act.
The remaining 30,095,515 shares outstanding are "restricted securities"
within the meaning of Rule 144 under the Securities Act. Restricted shares may
be sold in the public market only if registered or if they qualify for an
exemption from registration under Rules 144, 144(k) or 701 promulgated under
the Securities Act, which are summarized below. Sales of the restricted shares
in the public market, or the availability of such shares for sale, could
adversely affect the market price of the common stock.
Our directors, officers and securityholders have entered into lock-up
agreements in connection with this offering generally providing that they will
not offer, sell, contract to sell or grant any option to purchase or otherwise
dispose of our common stock or any securities exercisable for or convertible
into our common stock owned by them for a period of 180 days after the date of
this prospectus without the prior written consent of FleetBoston Robertson
Stephens Inc., the representative of the underwriters. As a result of these
contractual restrictions, notwithstanding possible earlier eligibility for sale
under the provisions of Rules 144, 144(k) and 701, shares subject to lock-up
agreements will not be salable until such agreements expire or are waived by
the designated underwriters' representative. Taking into account the lock-up
agreements, and assuming FleetBoston Robertson Stephens Inc. does not release
stockholders from these agreements, the following shares will be eligible for
sale in the public market at the following times:
. Beginning on the effective date of this prospectus, only the shares sold
in the offering will be immediately available for sale in the public
market.
. Beginning 180 days after the effective date, approximately 878,159
shares will be eligible for sale pursuant to Rule 701 and approximately
18,840,247 additional shares will be eligible for sale pursuant to Rule
144, of which all but 2,796,992 shares are held by affiliates.
. An additional 7,774,939 shares will be eligible for sale pursuant to
Rule 144 after December 14, 2000, 2,244,898 shares will be eligible for
sale pursuant to Rule 144 after December 17, 2000 and 336,022 additional
shares will be eligible for sale pursuant to Rule 144 one year after the
date of this offering. Shares eligible to be sold by affiliates pursuant
to Rule 144 are subject to volume restrictions as described below.
In general, under Rule 144 as currently in effect, and beginning after the
expiration of the lock-up agreements, which is 180 days after the date of this
prospectus, a person or persons whose shares are aggregated who has
beneficially owned restricted securities for at least one year would be
entitled to sell within any three-month period a number of shares that does not
exceed the greater of: (i) one percent of the number of shares of common stock
then outstanding (which will equal approximately
79
<PAGE>
345,955 shares immediately after the offering); or (ii) the average weekly
trading volume of the common stock during the four calendar weeks preceding the
sale. Sales under Rule 144 are also subject to certain manner of sale
provisions and notice requirements and to the availability of current public
information about us. Under Rule 144(k), a person who is not deemed to have
been our affiliate at any time during the three months preceding a sale, and
who has beneficially owned the shares proposed to be sold for at least two
years, is entitled to sell such shares without complying with the manner of
sale, public information, volume limitation or notice provisions of Rule 144.
In general Rule 701, as currently in effect, permits resales of shares issued
pursuant to certain compensatory benefit plans and contracts commencing 90 days
after we become subject to the reporting requirements of the Exchange Act in
reliance upon Rule 144 but without compliance with certain restrictions,
including the holding period requirement, of Rule 144. Any of our employees,
officers, directors or consultants who purchased shares pursuant to a written
compensatory plan or contract may be entitled to rely on the resale provisions
of Rule 144. Rule 701 permits affiliates to sell their Rule 701 shares under
Rule 144 without complying with the holding period requirement of Rule 144.
Rule 701 further provides that non-affiliates may sell such shares in reliance
on Rule 144 without having to comply with the holding period, public
information, volume limitation or notice provisions of Rule 144. In addition,
we intend to file registration statements under the Securities Act as promptly
as possible after the effective date to register shares to be issued pursuant
to our employee benefit plans. As a result, any options exercised under the
1998 stock option plan, the Alive.com 1998 stock option plan, the 2000 stock
option plan, the 2000 director option plan, the 2000 employee stock purchase
plan or any other benefit plan after the effectiveness of such registration
statement will also be freely tradable in the public market, except that shares
held by affiliates will still be subject to the volume limitation, manner of
sale, notice and public information requirements of Rule 144 unless otherwise
resalable under Rule 701. As of December 31, 1999, there were outstanding
options for the purchase of 4,223,209 shares of our common stock under our
employee benefit plans.
80
<PAGE>
UNDERWRITERS
The underwriters named below, acting through their representatives,
FleetBoston Robertson Stephens Inc., Chase Securities Inc. and CIBC World
Markets Corp. have severally agreed with us, subject to the terms and
conditions of the underwriting agreement, to purchase from us the number of
shares of common stock indicated opposite their names below. The underwriters
are committed to purchase and pay for all of the shares if any are purchased.
FleetBoston Robertson Stephens Inc. expects to deliver the shares of common
stock to purchasers on March 20, 2000.
<TABLE>
<CAPTION>
Number of
Name Shares
---- ---------
<S> <C>
FleetBoston Robertson Stephens Inc. and FleetBoston Robertson
Stephens International Limited.................................. 2,070,000
Chase Securities Inc. ........................................... 1,345,500
CIBC World Markets Corp. ........................................ 724,500
Dain Rauscher Wessels............................................ 80,000
Ragen MacKenzie Incorporated..................................... 80,000
Thomas Weisel Partners Ltd. ..................................... 80,000
D.A. Davidson & Co., Inc. ....................................... 60,000
McAdams Wright Ragen, Inc. ...................................... 60,000
---------
Total........................................................ 4,500,000
=========
</TABLE>
We have been advised that the underwriters propose to offer the shares of
common stock to the public at the initial public offering price located on the
cover page of this prospectus and to certain dealers at that price less a
concession of not in excess of $0.67 per share, of which $0.10 may be
reallocated to other dealers. After the initial public offering, the public
offering price, concession and reallowance to dealers may be reduced by the
representatives. No reduction in this price will change the amount of proceeds
to be received by us as indicated on the cover page of this prospectus.
The underwriters have advised us that they do not expect sales to
discretionary accounts to exceed five percent of the total number of shares
offered.
Over-Allotment Option. We have granted to the underwriters an option,
exercisable during the 30-day period after the date of this prospectus, to
purchase up to 675,000 additional shares of common stock at the same price per
share as we will receive for the 4,500,000 shares that the underwriters have
agreed to purchase. To the extent that the underwriters exercise this option,
each of the underwriters will have a firm commitment to purchase approximately
the same percentage of additional shares that the number of shares of common
stock to be purchased by it shown in the above table represents as a percentage
of the 4,500,000 shares offered by this prospectus. If purchased, the
additional shares will be sold by the underwriters on the same terms as those
on which the 4,500,000 shares are being sold. We will be obligated, under this
option, to sell shares to the extent the option is exercised. The underwriters
may exercise the option only to cover over-allotments made in connection with
the sale of the 4,500,000 shares of common stock offered by this prospectus.
Indemnity. The underwriting agreement contains covenants of indemnity among
the underwriters and us against certain civil liabilities including liabilities
under the Securities Act of 1933 and liabilities arising from breaches of
representations and warranties contained in the underwriting agreement.
Lock-Up Agreements. Each of our executive officers, directors and other
significant stockholders of record has agreed with the representatives, for a
period until 180 days after the date of this prospectus, not to offer to sell,
contract to sell or otherwise sell, dispose of, loan, pledge or grant any
rights with respect to any shares of common stock, any options or warrants to
purchase any
81
<PAGE>
shares of common stock, or any securities convertible into or exchangeable for
shares of common stock owned as of the date of this prospectus or acquired
directly from us by these holders or with respect to which they have or may
acquire the power of disposition, without the prior written consent of
FleetBoston Robertson Stephens Inc. However, FleetBoston Robertson Stephens
Inc. may, in its sole discretion and at any time without notice, release all or
any portion of the securities subject to lock-up agreements. There are no
agreements between the representatives and any of our stockholders providing
consent by the representatives to the sale of shares prior to the expiration of
the 180-day lock-up period.
Future Sales By Us. In addition, we have generally agreed that, during the
180-day lock-up period, we will not, without the prior written consent of
FleetBoston Robertson Stephens Inc., (a) consent to the disposition of any
shares held by stockholders prior to the expiration of the 180-day lock-up
period or (b) issue, sell, contract to sell or otherwise dispose of, any shares
of common stock, any options or warrants to purchase any shares of common
stock, or any securities convertible into, exercisable for or exchangeable for
shares of common stock, other than our sale of shares in the offering, our
issuance of common stock upon the exercise of currently outstanding options and
warrants, our issuance of incentive awards under our stock incentive plans and
certain other conditions. See "Shares Eligible for Future Sale."
Directed Shares. We have requested that the underwriters reserve up to ten
percent of the shares of common stock for sale in this offering, at the initial
public offering price, to directors, officers, employees and other individuals
designated by us. As a result, the number of shares of common stock available
for sale to the general public in the offering will be reduced to the extent
these individuals and entities purchase the directed shares. Any directed
shares not so purchased will be offered by the underwriters to the general
public on the same terms as the other shares.
No Prior Public Market. Prior to this offering, there has been no public
market for the common stock. Consequently, the initial public offering price
for the common stock offered by this prospectus has been determined through
negotiations between us and the representatives. Among the factors considered
in these negotiations were prevailing market conditions, our financial
information, market valuations of other companies that we and the
representatives believe to be comparable to us, estimates of our business
potential and the present state of our development.
Stabilization. The representatives have advised us that, under Regulation M
under the Securities Exchange Act, some participants in the offering may engage
in transactions, including stabilizing bids, syndicate covering transactions or
the imposition of penalty bids, that may have the effect of stabilizing or
maintaining the market price of the common stock at a level above that which
might otherwise prevail in the open market. A "stabilizing bid" is a bid for or
the purchase of the common stock on behalf of the underwriters for the purpose
of fixing or maintaining the price of the common stock. A "syndicate covering
transaction" is the bid for or purchase of the common stock on behalf of the
underwriters to reduce a short position incurred by the underwriters in
connection with the offering. A "penalty bid" is an arrangement permitting the
representatives to reclaim the selling concession otherwise accruing to an
underwriter or syndicate member in connection with the offering if the common
stock originally sold by the underwriter or syndicate member is purchased by
the representatives in a syndicate covering transaction and has therefore not
been effectively placed by the underwriter or syndicate member. The
representatives have advised us that these transactions may be effected on the
Nasdaq National Market or otherwise and, if commenced, may be discontinued at
any time.
82
<PAGE>
Share Purchases. On December 17, 1999, an entity affiliated with FleetBoston
Robertson Stephens Inc., one of the representatives, purchased 78,493 shares of
Series D preferred stock at a price of $6.37 per share, for an aggregate
purchase price of $500,000. On December 14, 1999, entities affiliated with
Chase Securities Inc., one of the representatives, purchased 235,479 shares of
Series D preferred stock at a price of $6.37 per share, for an aggregate
purchase price of $1,500,001, of which 48,980 shares of Series D preferred
stock may be deemed beneficially owned by Chase Securities Inc.
Additional Lock-Up Agreements of Representatives' Affiliates. Bayview
(Encoding.com), L.P., Access Technology Partners, L.P., Access Technology
Partners Brokers Fund, L.P., H&Q Encoding.com Investors, LLC, Hambrecht & Quist
California and H&Q Employee Venture Fund 2000, L.P., as affiliates of the
Representatives, have agreed not to sell, transfer, assign or hypothecate any
of their shares of Series D preferred stock, which will convert into common
stock upon the closing of this offering for a period of one year following the
effective date of this offering, except to officers or partners of the
underwriters and members of the selling group and their officers or partners
and except that Access Technology Partners, L.P. has agreed to lock-up only one
percent of its shares of Series D preferred stock.
Expenses of the Offering. The expenses of the offering are estimated at
$1,081,180 and are payable entirely by us.
E*OFFERING Corp. A copy of the prospectus in electronic format will be made
available on the Internet web sites hosted by E*OFFERING Corp. and E*TRADE
Securities, Inc. E*TRADE Securities, Inc. will accept conditional offers to
purchase shares from all of its customers that pass and complete an online
eligibility profile. In the event that the demand for shares from the customers
of E*TRADE Securities, Inc. exceeds the amount of shares allocated to it,
E*TRADE Securities, Inc. will use a random allocation methodology to distribute
shares in even lots of 100 shares per customer.
83
<PAGE>
LEGAL MATTERS
The validity of the common stock offered hereby will be passed upon by
Venture Law Group, Professional Corporation, Kirkland, Washington. Certain
legal matters will be passed upon for the underwriters by Brobeck, Phleger &
Harrison LLP. Investment partnerships associated with Venture Law Group and
individual attorneys of Venture Law Group beneficially own an aggregate of
48,399 shares of our common stock.
EXPERTS
The audited financial statements included in this prospectus have been
audited by Arthur Andersen LLP, independent public accountants, as indicated in
their reports with respect thereto, and are included herein in reliance upon
the authority of said firm as experts in giving said reports.
CHANGE IN INDEPENDENT PUBLIC ACCOUNTANTS
Effective November 3, 1999, Arthur Andersen LLP was engaged as our
independent auditors and replaced other auditors who were dismissed as our
independent accountants on the same date. The decision to change auditors was
approved by our board of directors on November 27, 1999.
Prior to November 3, 1999, our former auditors issued a report on the period
from inception (August 12, 1997) to December 31, 1998. The report of our former
auditors did not contain an adverse opinion or disclaimer of opinion qualified
or modified as to audit scope or accounting principle. In connection with the
audit for the period from inception (August 12, 1997) through December 31, 1998
and through November 3, 1999, there were no disagreements with our former
auditors on any matter of accounting principles or practices, financial
statement disclosure or auditing scope or procedure, which disagreements if not
resolved to the satisfaction of our former auditors, would have caused them to
make reference thereto in their report. Our former auditors have not audited or
reported on any of the financial statements or information included in this
prospectus.
Prior to November 3, 1999, we had not consulted with Arthur Andersen LLP on
items that involved our accounting principles or the form of audit opinion to
be issued on our financial statements. We have requested that our former
auditors furnish us with a letter addressed to the SEC stating whether or not
they agree with the above statements. A copy of this letter is filed as an
exhibit to the registration statement of which this prospectus forms a part.
84
<PAGE>
ADDITIONAL INFORMATION
We have filed with the SEC, a registration statement on Form S-1 under the
Securities Act with respect to the shares of common stock offered hereby. This
prospectus does not contain all the information set forth in the registration
statement and the exhibits and schedules thereto. For further information with
respect to Loudeye and our common stock, we refer you to the registration
statement and to the exhibits and schedules filed therewith. Statements
contained in this prospectus as to the contents of any contract or other
document referred to 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, each such statement being qualified in
all respects by such reference. A copy of the registration statement may be
inspected by anyone without charge at the public reference section of the SEC
at Room 1024, Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549.
Copies of all or any portion of the registration statement may be obtained from
the public reference section of the SEC, 450 Fifth Street, N.W., Washington,
D.C. 20549, upon payment of prescribed fees. Information on the operation of
the public reference room can be obtained by calling 1-800-SEC-0330. The SEC
maintains a Web site at http://www.sec.gov that contains reports, proxy and
information statements and other information regarding registrants that file
electronically with the SEC.
85
<PAGE>
Glossary of Technical Terms
"Apple Quicktime" is a proprietary audio and video technology developed by
Apple Computer.
"AT&T a2b" is a proprietary audio compression/decompression technology
developed by AT&T.
"AVI" or "Audio Video Interleaved" animation file is a Windows multimedia video
format developed by Microsoft.
"Betacam SP" is an input format.
"Bit rate" is the data transfer rate at which a digital file is encoded to
transfer, indicating the amount of network bandwidth required to play the file
and is usually measured in Kbps.
"Broadband" refers to high speed transfer rates across the Internet and
typically refers to network transfer speeds in excess of 100 Kbps.
"Digital media" is any audio or video content that is in an electronic format.
"Digital video players" are any software applications that "play" video files.
For example, Windows Media Player is a digital video player.
"Digital Watermarking" is the process of embedding an unremovable and
unalterable pattern of bits into a digital media electronic file in order to
identify the source of illegal copies. For example, if a digital watermark is
placed into a master copy of an audio CD or a DVD movie, then all copies of
that disc are uniquely identified. The digital watermark enables the owner of a
copyright to trace unauthorized copies of its work to the holder of the master
copy from which the unauthorized copies were made.
"DSL" or "Digital Subscriber Line" is a technology that significantly increases
the digital capacity of ordinary telephone lines into a home or office.
"Gigabyte" refers to 1,000,000 kilobytes.
"Hosting facility" refers to a physical location that houses the hardware and
software needed to store the software and data files necessary to enable
applications, content and services available over the Internet.
"Indexing" is a process by which timing signals are created and embedded in a
video clip to identify visual scene changes, spoken words, names and faces of
recognized speakers, or other specified information, enabling the viewer to
search, fast-forward or rewind the clip and view the segment(s) of their
choice.
"Input formats" refers to the various types of electronic or analog (videotape,
film) media source materials received and processed through digital media
services, such as AVI, DVCAM (an international standard for recording high-
quality digital video), NTSC (an international standard for recording analog
video), and PAL (an international standard for recording analog video).
"ISDN" or "Integrated Services Digital Network" is an international
telecommunications standard for transmitting voice, video and data over digital
lines running at 64 Kbps.
"JPEG" or "Joint Photographic Experts Group" is a standard for compressing
digital still image files.
"Kbps" or "Kilobits-per-second" is the number of bits (in thousands) of data
that can be transferred across a network or telephone line in one second.
86
<PAGE>
"Liquid Audio" is a proprietary audio compression/decompression technology
developed by Liquid Audio.
"Metadata collection" and "metadata files" is the process of gathering
information associated with a single audio or video electronic file and the
digital files that store the information. Sample data could include song title,
copyright and artist.
"Microsoft Windows Media" is a proprietary audio and video technology developed
by Microsoft.
"MP3" or "Motion Picture Entertainment Group, Layer 3" is an audio
compression/decompression technology developed by the Fraunhofer Institute.
"MPEG" or "Motion Picture Entertainment Group" is a standard for compressing
digital video files. There are various levels of MPEG technology, indicated by
MPEG-1 (used in CD-ROMs and Video CDs), MPEG-2 (used in DVDs), and MPEG-4.
"Output formats" refers to the various types of digital files and streaming
media formats produced through digital media services, such as Apple Quicktime,
RealNetworks Realmedia, and Microsoft Windows Media.
"Scalable" and "scalability" refers to the ability to increase the output of a
system or process.
"Streaming media formats" refers to the structure of digital media files that
enables audio and video content to be played in real time over the Internet.
Microsoft Windows Media, Apple Quicktime and RealNetworks G2 are examples of
streaming media formats.
"Streaming media technologies/software" are applications and technologies
created to produce, enhance or enable audio and video content to be played in
real-time (vs. downloaded for viewing later) over the Internet.
"SVHS" is an input format.
"T1" refers to a data/voice communication line that provides a connection speed
of approximately 1.4 Mbps.
"Terabyte" refers to 1,000,000,000 kilobytes.
87
<PAGE>
LOUDEYE TECHNOLOGIES, INC.
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
Report of Independent Public Accountants................................. F-2
Balance Sheets--Loudeye Technologies, Inc. .............................. F-3
Statements of Operations--Loudeye Technologies, Inc. .................... F-4
Statements of Stockholders' Equity (Deficit)--Loudeye Technologies,
Inc. ................................................................... F-5
Statements of Cash Flows--Loudeye Technologies, Inc. .................... F-6
Notes to Financial Statements--Loudeye Technologies, Inc. ............... F-7
Unaudited Pro Forma Combined Financial Information--Loudeye Technologies,
Inc. ................................................................... F-23
Unaudited Pro Forma Combined Statements of Operations for the year ended
December 31, 1999....................................................... F-24
Notes to Unaudited Pro Forma Combined Statements of Operations--Loudeye
Technologies, Inc. ..................................................... F-25
Report of Independent Public Accountants................................. F-27
Balance Sheets--Alive.com, Inc. ......................................... F-28
Statements of Operations--Alive.com, Inc. ............................... F-29
Statements of Changes in Shareholders' Deficit--Alive.com, Inc. ......... F-30
Statements of Cash Flows--Alive.com, Inc. ............................... F-31
Notes to Financial Statements--Alive.com, Inc. .......................... F-32
</TABLE>
F-1
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors
of Loudeye Technologies, Inc.:
We have audited the accompanying balance sheets of Loudeye Technologies, Inc.
as of December 31, 1998 and 1999, and the related statements of operations,
stockholders' equity (deficit) and cash flows for the period from inception
(August 12, 1997) to December 31, 1997 and for each of the two years in the
period ended December 31, 1999. These financial statements are the
responsibility of Loudeye'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. 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, the financial statements referred to above present fairly, in
all material respects, the financial position of Loudeye Technologies, Inc. as
of December 31, 1998 and 1999, and the results of its operations and its cash
flows for the period from inception to December 31, 1997 and for each of the
two years in the period ended December 31, 1999, in conformity with generally
accepted accounting principles.
/s/ Arthur Andersen LLP
Seattle, Washington,
March 14, 2000
F-2
<PAGE>
LOUDEYE TECHNOLOGIES, INC.
BALANCE SHEETS
<TABLE>
<CAPTION>
Pro Forma
Stockholders'
Equity
As of December 31, (Note 2) as of
------------------------- December 31,
1998 1999 1999
----------- ------------ --------------
(Unaudited)
<S> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents.......... $ 1,442,307 $ 49,272,656
Accounts receivable, net of
allowance of $20,000 and $187,000,
respectively...................... 86,687 955,357
Short-term investments............. -- 530,000
Prepaid and other assets........... 27,190 596,940
----------- ------------
Total current assets............. 1,556,184 51,354,953
Property and equipment, net.......... 1,383,174 5,282,267
Other assets, net.................... -- 1,394,589
Goodwill, net........................ -- 14,206,942
Other intangibles, net............... -- 4,536,326
----------- ------------
Total assets..................... $ 2,939,358 $ 76,775,077
=========== ============
LIABILITIES AND STOCKHOLDERS' EQUITY
(DEFICIT)
Current liabilities:
Accounts payable................... 274,990 4,778,380
Accrued compensation and benefits.. 17,784 388,373
Accrued liabilities................ 112,720 587,136
Customer deposits.................. 292,298 437,743
Current portion of long-term
obligations....................... 99,670 1,131,587
----------- ------------
Total current liabilities........ 797,462 7,323,219
Long-term obligations, less current
portion............................. 900,330 1,962,602
----------- ------------
Total liabilities................ 1,697,792 9,285,821
----------- ------------
Stockholders' equity (deficit):
Preferred stock, $0.001 par value,
41,000,000 shares authorized,
8,242,981, 21,063,236 issued and
outstanding, preference in
liquidation of $60,903,932........ 2,981,329 58,535,704 $ --
Common stock, $0.001 par value,
100,000,000 shares authorized;
5,288,000 and 8,696,257 issued and
outstanding, and 29,759,493 pro
forma, respectively, and
additional paid in capital........ (133,169) 27,146,582 85,682,286
Stock warrants..................... -- 1,158,574 1,158,574
Deferred stock compensation........ -- (6,842,786) (6,842,786)
Beneficial conversion feature...... -- 14,120,659 14,120,659
Accumulated deficit................ (1,606,594) (26,629,477) (26,629,477)
----------- ------------ ------------
Total stockholders' equity
(deficit)....................... 1,241,566 67,489,256 $ 67,489,256
----------- ------------ ============
Total liabilities and
stockholders' equity
(deficit)..................... $ 2,939,358 $ 76,775,077
=========== ============
</TABLE>
The accompanying notes are an integral part of these balance sheets.
F-3
<PAGE>
LOUDEYE TECHNOLOGIES, INC.
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Period from
Inception
(August 12, Year Ended
1997) to December 31,
December 31, -------------------------
1997 1998 1999
------------ ----------- ------------
<S> <C> <C> <C>
Revenues............................... $ 10,141 $ 285,635 $ 2,645,279
Cost of revenues (exclusive of non-cash
compensation expense of $202,000 in
1999 shown below)..................... 16,645 504,187 2,870,850
-------- ----------- ------------
Gross margin......................... (6,504) (218,552) (225,571)
-------- ----------- ------------
Operating expenses:
Research and development (exclusive
of non-cash compensation expense of
$126,000 in 1999 shown below)....... 12,270 203,506 1,248,081
Sales and marketing (exclusive of
non-cash compensation expense of
$333,000 in 1999 shown below)....... 38,841 587,998 3,981,975
General and administrative (exclusive
of non-cash compensation expense of
$893,000 in 1999 shown below)....... 37,164 673,965 3,612,054
Amortization of intangibles.......... -- -- 301,978
Stock-based compensation............. -- -- 1,554,131
-------- ----------- ------------
Total operating expenses............. 88,275 1,465,469 10,698,219
-------- ----------- ------------
Other income (expense):
Interest income...................... -- 54,365 204,741
Interest expense..................... -- (20,616) (183,175)
-------- ----------- ------------
Net loss............................... (94,779) (1,650,272) (10,902,224)
Beneficial conversion feature of
convertible preferred stock........... -- -- (14,120,659)
-------- ----------- ------------
Net loss to common shareholders........ $(94,779) $(1,650,272) $(25,022,883)
======== =========== ============
Basic and diluted net loss per share... -- $ (0.41) $ (4.62)
======== =========== ============
Weighted average shares outstanding
used to compute basic and diluted net
loss per share........................ -- 4,039,444 5,410,507
======== =========== ============
Basic and diluted pro forma net loss
per share............................. $ (0.17) $ (1.50)
=========== ============
Weighted average shares outstanding
used to compute basic and diluted pro
forma net loss per share.............. 9,585,049 16,659,800
=========== ============
</TABLE>
The accompanying notes are an integral part of these statements.
F-4
<PAGE>
LOUDEYE TECHNOLOGIES, INC.
STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
<TABLE>
<CAPTION>
Common Stock and
Convertible Additional Paid-in
Preferred Stock Capital Stock Warrants Beneficial Deferred
---------------------- --------------------- Members' ------------------ Conversion Stock
Shares Amount Shares Amount Equity Shares Amount Feature Compensation
---------- ----------- --------- ----------- -------- ------- ---------- ----------- ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balances, August
12, 1997........ -- $ -- -- $ -- $10,000 -- $ -- $ -- $ --
Net loss........ -- -- -- -- -- -- -- -- --
---------- ----------- --------- ----------- ------- ------- ---------- ----------- -----------
Balances,
December 31,
1997............ -- -- -- -- 10,000 -- -- -- --
Issuance of
common stock, in
conjunction with
conversion from
LLC to C
corporation..... -- -- 5,288,000 5,288 (5,288) -- -- -- --
Issuance of
Series A
convertible
preferred stock
in conjunction
with conversion
from LLC to C
corporation..... 4,712,000 4,712 -- -- (4,712) -- -- -- --
Conversion from
LLC to C
corporation..... -- -- -- (138,457) -- -- -- -- --
Conversion of
advances to
Series A
convertible
preferred
stock........... 271,787 229,116 -- -- -- -- -- -- --
Conversion of
notes payable
into Series B
convertible
preferred
stock........... 593,120 500,000 -- -- -- -- -- -- --
Issuance of
Series B
convertible
preferred
stock........... 2,666,074 2,247,501 -- -- -- -- -- -- --
Net loss........ -- -- -- -- -- -- -- -- --
---------- ----------- --------- ----------- ------- ------- ---------- ----------- -----------
Balances,
December 31,
1998............ 8,242,981 2,981,329 5,288,000 (133,169) -- -- -- -- --
Issuance of
Series C
convertible
preferred
stock........... 4,914,529 9,327,603 -- -- -- -- -- -- --
Conversion of
notes payable
into Series C
convertible
preferred
stock........... 394,737 750,000 -- -- -- -- -- -- --
Deferred stock
compensation.... -- -- -- 7,824,681 -- -- -- -- (7,824,681)
Stock-based
compensation-
consultants..... -- -- -- 572,236 -- -- -- -- --
Issuance of
common stock for
the purchase of
certain assets.. -- -- 20,000 30,000 -- -- -- -- --
Acquisition of
Alive.com....... -- -- 2,508,848 18,663,564 -- -- -- -- --
Issuance of
Series D
convertible
preferred
stock........... 7,510,989 45,476,772 -- -- -- -- -- -- --
Amortization of
deferred stock
compensation.... -- -- -- -- -- -- -- -- 981,895
Common stock
options
exercised....... -- -- 879,409 189,270 -- -- -- -- --
Warrants issued
in conjunction
with the
issuance of
certain credit
facilities...... -- -- -- -- -- 41,053 34,074 -- --
Warrants issued
in conjunction
with strategic
sales
agreements...... -- -- -- -- -- 650,000 1,124,500 -- --
Beneficial
Conversion
feature of
convertible
preferred
stock........... -- -- -- -- -- -- -- 14,120,659 --
Net loss........ -- -- -- -- -- -- -- -- --
---------- ----------- --------- ----------- ------- ------- ---------- ----------- -----------
Balances,
December 31,
1999............ 21,063,236 $58,535,704 8,696,257 $27,146,582 $ -- 691,053 $1,158,574 $14,120,659 $(6,842,786)
========== =========== ========= =========== ======= ======= ========== =========== ===========
<CAPTION>
Total
Stockholders'
Accumulated Equity
Deficit (Deficit)
------------- --------------
<S> <C> <C>
Balances, August
12, 1997........ $ -- $ 10,000
Net loss........ (94,779) (94,779)
------------- --------------
Balances,
December 31,
1997............ (94,779) (84,779)
Issuance of
common stock, in
conjunction with
conversion from
LLC to C
corporation..... -- --
Issuance of
Series A
convertible
preferred stock
in conjunction
with conversion
from LLC to C
corporation..... -- --
Conversion from
LLC to C
corporation..... 138,457 --
Conversion of
advances to
Series A
convertible
preferred
stock........... -- 229,116
Conversion of
notes payable
into Series B
convertible
preferred
stock........... -- 500,000
Issuance of
Series B
convertible
preferred
stock........... -- 2,247,501
Net loss........ (1,650,272) (1,650,272)
------------- --------------
Balances,
December 31,
1998............ (1,606,594) 1,241,566
Issuance of
Series C
convertible
preferred
stock........... -- 9,327,603
Conversion of
notes payable
into Series C
convertible
preferred
stock........... -- 750,000
Deferred stock
compensation.... -- --
Stock-based
compensation-
consultants..... -- 572,236
Issuance of
common stock for
the purchase of
certain assets.. -- 30,000
Acquisition of
Alive.com....... -- 18,663,564
Issuance of
Series D
convertible
preferred
stock........... -- 45,476,772
Amortization of
deferred stock
compensation.... -- 981,895
Common stock
options
exercised....... -- 189,270
Warrants issued
in conjunction
with the
issuance of
certain credit
facilities...... -- 34,074
Warrants issued
in conjunction
with strategic
sales
agreements...... -- 1,124,500
Beneficial
Conversion
feature of
convertible
preferred
stock........... (14,120,659) --
Net loss........ (10,902,224) (10,902,224)
------------- --------------
Balances,
December 31,
1999............ $(26,629,477) $ 67,489,256
============= ==============
</TABLE>
The accompanying notes are an integral part of these statements.
F-5
<PAGE>
LOUDEYE TECHNOLOGIES, INC.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Period from
Inception
(August 12, Year Ended
1997) to December 31,
December 31, -------------------------
1997 1998 1999
------------ ----------- ------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net loss.............................. $ (94,779) $(1,650,272) $(10,902,224)
Adjustments to reconcile net loss to
net cash used in operating
activities:
Depreciation and amortization......... 12,965 215,726 1,225,786
Stock-based compensation.............. -- -- 1,554,131
Changes in assets and liabilities:
Accounts receivable.................. -- (86,687) (856,070)
Prepaids and other assets............ (1,532) (25,658) (563,747)
Other assets......................... -- -- (189,283)
Bank overdraft....................... 7,590 (7,590) --
Accounts payable..................... 1,150 273,840 4,203,820
Accrued compensation and benefits.... -- 17,784 279,984
Accrued liabilities.................. -- 112,720 220,226
Customer deposits.................... -- 292,298 145,445
--------- ----------- ------------
Net cash used in operating
activities......................... (74,606) (857,839) (4,881,932)
--------- ----------- ------------
Cash flows from investing activities:
Purchases of property and equipment... (133,773) (1,478,092) (4,423,053)
Purchases of short-term investments... -- -- (530,000)
--------- ----------- ------------
Net cash used in investing
activities......................... (133,773) (1,478,092) (4,953,053)
--------- ----------- ------------
Cash flows from financing activities:
Proceeds from issuance of common
stock................................ -- -- 189,270
Advances from stockholder............. 198,579 255,537 --
Repayment of stockholder advances..... -- (225,000) --
Borrowings on long-term obligations... -- 1,500,000 3,104,824
Principal payments on long-term
obligations.......................... -- -- (433,135)
Equity contributed at inception....... 10,000 -- --
Proceeds from issuance of convertible
preferred stock, net of offering
costs................................ -- 2,247,501 54,804,375
--------- ----------- ------------
Net cash provided by financing
activities......................... 208,579 3,778,038 57,665,334
--------- ----------- ------------
Increase in cash and cash equivalents.. 200 1,442,107 47,830,349
Cash and cash equivalents, beginning of
period................................ -- 200 1,442,307
--------- ----------- ------------
Cash and cash equivalents, end of
period................................ $ 200 $ 1,442,307 $ 49,272,656
========= =========== ============
Supplemental disclosure of cash flow
information:
Cash paid for interest................ $ -- $ 20,616 $ 182,134
========= =========== ============
</TABLE>
SUPPLEMENTAL DISCLOSURES OF NONCASH INVESTING AND FINANCING ACTIVITIES:
. $4,712 of members' equity was converted into 4,712,000 shares of Series A
convertible preferred stock on March 26, 1998
. $5,288 of members' equity was converted into 5,288,000 shares of common
stock on March 26, 1998
. $229,116 of advances from a stockholder was converted into 271,787 shares
of Series A convertible preferred stock on June 5, 1998
. $500,000 of debt was converted into 593,120 shares of Series B
convertible preferred stock on June 5, 1998
. $750,000 of debt was converted into 394,737 shares of Series C
convertible preferred stock on April 30, 1999
. 20,000 shares of common stock were issued for the purchase of $30,000 of
certain assets in August 1999
. 2,508,848 shares of common stock were issued for the purchase of
Alive.com on December 14, 1999
. 650,000 warrants to purchase common stock were issued on December 17,
1999 in connection with a commercial agreement.
The accompanying notes are an integral part of these statements.
F-6
<PAGE>
LOUDEYE TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1999
1. ORGANIZATION AND DEVELOPMENT STAGE RISKS:
The Company
Loudeye Technologies, Inc. (the Company) provides digital media
infrastructure services and applications that transform audio and video content
from traditional sources into Internet compatible formats. The Company is
headquartered in Seattle, Washington and to date has conducted business in the
United States in one business segment. The Company was organized on August 12,
1997 (date of inception) as a Washington limited liability company (LLC). On
March 26, 1998, the Company was converted to a Delaware C Corporation.
The Company is subject to a number of risks similar to other companies in a
comparable stage of development including reliance on key personnel, successful
marketing of its services in an emerging market, competition from other
companies with greater technical, financial management and marketing resources,
successful development of new services and the enhancement of existing
services, and the ability to secure adequate financing to support future
growth.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Initial Public Offering and Unaudited Pro Forma Amounts
In December 1999, the Board of Directors of the Company authorized the filing
of a registration statement with the Securities and Exchange Commission (the
SEC) that would permit the Company to sell shares of the Company's common stock
in connection with a proposed initial public offering (IPO). If the offering is
consummated under the terms presently anticipated, all the outstanding shares
of the Company's convertible preferred stock will automatically convert into
21,063,236 shares of common stock upon the closing of the proposed IPO. The
unaudited pro forma stockholders' equity at December 31, 1999 is adjusted for
the conversion of preferred stock.
Cash and Cash Equivalents
Cash and cash equivalents consist of demand deposits and money market
accounts maintained with financial institutions. Recorded amounts approximate
fair value. The Company considers all cash deposits and highly liquid
investments with a maturity of three months or less when purchased to be cash
equivalents.
Short-term Investments
In December, the Company established irrevocable standby letters of credit
totalling $530,000 in conjunction with the lease of the Company's primary
office facility and a remote production facility. The letters of credit are
secured by certificates of deposit in the same amount which are required to
remain until the expiration of the letters of credit. The letters of credit
expire October 31, 2000 and December 31, 2000, however, they will be
automatically renewed during the term of the leases. The letters of credit
contain an automatic reduction schedule reducing the amount of the letter of
credit each year by $70,000 until they each reach $100,000, and remains through
the end of the term.
F-7
<PAGE>
LOUDEYE TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
Financial Instruments and Concentrations of Credit Risk
Financial instruments that potentially subject the Company to concentrations
of credit risk consist of cash and cash equivalents, short-term investments,
trade accounts receivable, accounts payable and long-term obligations. Fair
values of cash and cash equivalents and short-term investments, which is a
certificate of deposit securing the letter of credit, approximate cost due to
the short period of time to maturity. The fair values of financial instruments
that are short-term and/or that have little or no market risk are considered to
have a fair value equal to book value. Assets and liabilities that are included
in this category are receivables, accounts payable and accrued liabilities.
The Company performs initial and ongoing evaluations of its customers'
financial position, and generally extends credit on open account, requiring
collateral as deemed necessary. The Company maintains allowances for potential
credit losses.
During 1998, two customers made up 14% and 12%, respectively, of the
Company's revenue. During 1999, two customers made up 13% and 11% of the
Company's revenues, respectively.
Property and Equipment
Property and equipment is stated at historical cost less accumulated
depreciation. Depreciation is computed using the straight-line method over the
estimated useful lives of the assets, as follows:
<TABLE>
<S> <C>
Improvements....................................................... 5 years
Computer and production equipment.................................. 3 years
Office equipment................................................... 5 years
Software........................................................... 3 years
</TABLE>
Long-Lived Assets
The Company assesses potential impairments to its long-lived assets when
there is evidence that events or changes in circumstances have made recovery of
the asset's carrying value unlikely. An impairment loss would be recognized
when the sum of the expected future undiscounted net cash flows is less than
the carrying amount of the asset. The Company has identified no such impairment
losses.
Revenue Recognition
The Company generates revenues from three sources: (1) digital media
services, (2) consulting and hosting services and (3) licensing digital media
applications. To date, substantially all of our revenues have been generated by
sales of digital media services.
Digital Media Services Revenues consist of encoding services to convert audio
and video content into internet media formats. Sales of digital media services
are generally under nonrefundable time and material contracts. Under these time
and material contracts, the Company recognizes revenues as services are
rendered and the Company has no continuing involvement in the goods and
services delivered, which is the date of shipment of the finished media to the
customer.
Consulting and Hosting Services consist of services provided by our
consulting services group to enable customers to utilize streaming media within
their websites and internet applications and
F-8
<PAGE>
LOUDEYE TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
fees associated with hosting content and internet applications for customers.
To date, insignificant revenues have been generated from consulting and hosting
services. Hosting services revenues are generated under noncancelable contracts
with the fees paid by the customer on a recurring monthly basis generally based
upon bandwidth provided and amount of content hosted. Consulting services are
provided under both long-term and short-term contracts that are either fixed-
price contracts, time and materials contracts or milestone-based contracts.
Revenues from long-term contracts are recognized on the percentage-of-
completion method, measured by the cost incurred to date relative to the
estimated total cost for the contracts. To date, there have been no revenues
associated with consulting contracts extending beyond one year, and therefore
there have been no revenues recognized under such contracts. Consulting
services revenues generated by short-term fixed-price contracts will be
recognized ratably over the term of the contract. To date, there have been no
revenues associated with such contracts. For milestone-based contracts with
customer acceptance clauses, revenues are recognized under the outputs method,
with output being measured by the completion of milestones and acceptance by
the customer. To date, revenues generated under milestone-based contracts have
been insignificant.
Digital Media Applications revenues are generated from licenses of software.
Our revenue recognition policies are in accordance with Statement of Position
(SOP 97-2), Software Revenue Recognition as amended by SOP 98-9. To date, the
Company has not recognized any revenue associated with licensing digital media
applications. Under SOP 97-2, in general, license revenues are recognized when
a non-cancelable license agreement has been signed and the customer
acknowledges an unconditional obligation to pay, the software product has been
delivered, there are no uncertainties surrounding customer acceptance, the fees
are fixed and determinable, and collection is considered probable. Revenues
recognized from multiple-element software arrangements are allocated to each
element of the arrangement based on the fair values of the elements, such as
software products, upgrades, enhancements, post contract customer support, or
training. The determination of fair value is based on objective evidence that
is specific to the Company. If such evidence of fair value for each element of
the arrangement does not exist, all revenue from the arrangement is deferred
until such time that evidence of fair value does exist or until all elements of
the arrangement are delivered. The Company records unearned revenue for
software arrangements when cash has been received from the customer and the
arrangement does not qualify for revenue recognition under the Company's
revenue recognition policy. The Company intends to enter into agreements
whereby it will license digital media applications to customers or provide
customers the right to multiple copies. These agreements will generally provide
for nonrefundable fixed fees, which will be recognized at delivery of the
product master or the first copy, provided that the fee is fixed and
determinable, collectibility is probable and no further Company obligations
exist. Certain of these arrangements will provide for royalties based upon the
number of sites into which the digital media applications are deployed. Under
such multi-site arrangements, revenues are recognized at deployment.
Additionally, these arrangements may provide for payments to the Company based
on the amount of revenues generated by the sites into which the digital media
applications have been deployed. These fees will be recognized as earned. For
arrangements that include significant customization or modification of the
software, revenue will be recognized using contract accounting in the same
manner as for consulting services.
F-9
<PAGE>
LOUDEYE TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
Warranty Obligations
The Company generally provides warranties for 30 days after date of delivery.
Estimated warranty obligations are provided at the time of delivery of the
encoded product to the customer. Warranty liabilities are included in accrued
liabilities in the accompanying balance sheets.
Research and Development Costs
Costs incurred in connection with research and development are charged to
operations as incurred.
Software Development Costs
Under the criteria set forth in SFAS No. 86, "Accounting for the Costs of
Computer Software to Be Sold, Leased, or Otherwise Marketed," capitalization of
software development costs begins upon the establishment of technological
feasibility of the product, which the Company has defined as the completion of
beta testing of a working product. The establishment of technological
feasibility and the ongoing assessment of the recoverability of these costs
require considerable judgment by management with respect to certain external
factors, including, but not limited to, anticipated future gross product
revenues, estimated economic life and changes in software and hardware
technology. Amounts that could have been capitalized under this statement after
consideration of the above factors were immaterial and, therefore, no software
development costs have been capitalized by the Company to date.
Advertising Costs
Advertising costs are expensed as incurred. The Company incurred $164,000 and
$636,000 in advertising costs for the years ended December 31, 1998 and 1999,
respectively. Advertising costs prior to December 31, 1997 were not
significant.
Income Taxes
Before March 26, 1998, the Company was taxed as an LLC, which provided that,
in lieu of corporate income taxes, the members of the LLC were taxed on their
proportionate shares of the Company's taxable income. After March 26, 1998,
when the Company converted to a C corporation, income taxes were accounted for
under the liability method.
The Company recognizes deferred income tax assets and liabilities for the
expected future income tax consequences, based on enacted tax laws, of
temporary differences between the financial reporting and tax bases of assets,
liabilities and tax carryforwards. Deferred tax assets are then reduced, if
deemed necessary, by a valuation allowance for the amount of any tax benefits
which, more likely than not based on current circumstances, are not expected to
be realized (see Note 8).
F-10
<PAGE>
LOUDEYE TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
Stock-Based Compensation
The Company has elected to apply the disclosure-only provisions of Statement
of Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation" (SFAS 123). In accordance with the provisions of SFAS 123, the
Company applies Accounting Principles Board Opinion No. 25, "Accounting for
Stock Issued to Employees" (APB 25), and related interpretations in accounting
for its stock option plan. The Company accounts for stock issued to non-
employees in accordance with the provisions of SFAS 123 and the Emerging Issues
Task Force consensus in Issue No. 96-18, "Accounting for Equity Instruments
That Are Issued to Other Than Employees for Acquiring, or in Conjunction With
Selling, Goods or Services" (EITF 96-18).
Use of Estimates in the Preparation of Financial Statements
The preparation of the 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, the
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Net Loss Per Share
In accordance with Statement of Financial Accounting Standards (SFAS) No.
128, "Earnings Per Share," basic earnings per share is computed by dividing net
loss by the weighted average number of shares of common stock outstanding
during the period. Diluted earnings per share is computed by dividing net loss
by the weighted average number of common and dilutive common equivalent shares
outstanding during the period. Common equivalent shares consist of shares of
common stock issuable upon the conversion of the convertible preferred stock
(using the if-converted method) and shares issuable upon the exercise of stock
options and warrants (using the treasury stock method); common equivalent
shares are excluded from the calculation if their effects is antidilutive. The
Company has not had any issuances or grants for nominal consideration as
defined under Staff Accounting Bulletin 98. Diluted net loss per share for all
periods shown does not include the effects of the convertible preferred stock
and shares issuable upon the exercise of stock options and warrants as the
effect of their inclusion is antidilutive during each period.
Pro forma basic and diluted net loss per share is computed based on the
weighted average number of shares of common stock outstanding giving effect to
the conversion of convertible preferred stock outstanding that will
automatically convert upon completion of the Company's initial public offering
(using the if-converted method from the original issue date). Pro forma diluted
net loss per share excludes the impact of stock options and warrants as the
effect of their inclusion would be antidilutive.
At December 31, 1999 there were 734,936 stock options which had been
exercised under the 1998 Stock Option Plan but which were subject to repurchase
at a weighted average exercise price of $0.24. Additionally, as part of the
terms of the acquisition of Alive.com on December 14, 1999, the following
shares were subject to repurchase:
. 229,754 outstanding shares issued under exercise of stock options were
subject to repurchase at a weighted average price of $0.48.
F-11
<PAGE>
LOUDEYE TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
. 272,825 outstanding vested shares issued as consideration under the terms
of a stock purchase agreement with Allaire Corporation repurchaseable at
fair market value within 90 days of the termination date of the licensing
and stock purchase agreement assumed by Loudeye as part of the terms of
the acquisition of Alive.com.
. 173,619 outstanding unvested shares issued as consideration under the
terms of a stock purchase agreement with Allaire Corporation
repurchaseable at a weighted average exercise price of $0.20 within 90
days of the termination date of the licensing and stock purchase
agreement assumed by Loudeye as part of the terms of the acquisition of
Alive.com.
The impact of the above unvested shares subject to repurchase has been
removed from the calculation of weighted average shares outstanding for
purposes of calculating basic and diluted earnings per share. The following
table presents a reconciliation of shares used to calculate basic and diluted
earnings per share:
<TABLE>
<CAPTION>
Actual Pro Forma
--------- ----------
<S> <C> <C>
Weighted average shares outstanding................. 5,703,655 16,952,948
Impact of 1998 Stock Option Plan shares subject to
repurchase......................................... (274,099) (274,099)
Impact of Allaire unvested shares subject to
repurchase......................................... (8,199) (8,199)
Impact of Alive Option Plan shares subject to
repurchase......................................... (10,850) (10,850)
--------- ----------
Weighted average shares used to calculate basic and
diluted earnings per share......................... 5,410,507 16,659,800
========= ==========
</TABLE>
Segment Reporting
The Company adopted Statement of Financial Accounting Standards No. 131,
"Disclosures About Segments of an Enterprise and Related Information," (SFAS
131) during 1998. SFAS 131 requires companies to disclose certain information
about operating segments. Based on the criteria within SFAS 131, the Company
has determined that it has one reportable segment, digital media services.
Recent Accounting Pronouncements
In March 1998, the American Institute of Certified Public Accountants issued
Statement of Position 98-1 (SOP 98-1), "Accounting for the Costs of Computer
Software Developed or Obtained for Internal Use." SOP 98-1 is effective for
financial statements for years beginning after December 15, 1998. SOP 98-1
provides guidance over accounting for computer software developed or obtained
for internal use including the requirement to capitalize specific costs and
amortization of such costs. The implementation of SOP 98-1 did not have a
material impact on the Company's financial position or results of operations.
In April 1998, the American Institute of Certified Public Accountants issued
Statement of Position 98-5 (SOP 98-5), "Reporting on the Costs of Start-Up
Activities." SOP 98-5, which is effective for fiscal years beginning after
December 15, 1998, provides guidance on the financial reporting of start-up
costs and organization costs. It requires costs of start-up activities and
organization costs to be expensed as incurred. The implementation of SOP 98-5
did not have a material impact on the Company's financial position or results
of operations.
F-12
<PAGE>
LOUDEYE TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
In December 1998, the Accounting Standards Executive Committee, or AcSEC,
issued SOP 98-9, "Modification of SOP 97-2, Software Revenue Recognition, With
Respect to Certain Transactions." SOP 98-9 amends SOP-97-2 to require that an
entity recognize revenues for multiple element arrangements by means of the
"residual method" when (1) there is vendor-specific objective evidence, or
VSOE, of the fair values of all the undelivered elements that are not accounted
for by means of long-term contract accounting, and (2) VSOE of fair value does
not exist for one or more of the delivered elements, and (3) all revenue
recognition criteria of SOP 97-2 and SOP 98-9 will be effective for
transactions entered into in fiscal years beginning after March 15, 1999. We do
not expect SOP 98-9 to have any effect, on our results of operations.
In December 1999, the Staff of the Securities and Exchange Commission
released Staff Accounting Bulletin (SAB) No. 101, "Revenue Recognition," to
provide guidance on the recognition, presentation and disclosure of revenues in
financial statements. The Company believes its revenue recognition practices
are in conformity with SAB No. 101.
3. PROPERTY AND EQUIPMENT:
Property and equipment were as follows:
<TABLE>
<CAPTION>
December 31,
-----------------------
1998 1999
---------- -----------
<S> <C> <C>
Office equipment.................................... $ 85,369 $ 440,489
Software............................................ 53,215 472,515
Improvements........................................ 294,102 853,785
Computer and production equipment................... 1,179,179 4,588,015
Construction in progress............................ -- 79,962
Accumulated depreciation............................ (228,691) (1,152,499)
---------- -----------
Property and equipment, net......................... $1,383,174 $ 5,282,267
========== ===========
</TABLE>
Depreciation expense was $13,000, $216,000 and $924,000 in 1997, 1998 and
1999, respectively.
4. LONG-TERM OBLIGATIONS:
In August 1998, the Company established an equipment line of credit for up to
$1.0 million secured by the Company's property and equipment. Advances under
the equipment line are payable over 36 equal monthly installments commencing on
August 30, 1999. The equipment line bears interest at the bank's prime rate
(7.75% at December 31, 1998 and 8.50% at December 31, 1999) and had an
outstanding balance of $1,000,000 and $861,111 as of December 31, 1998 and
December 31, 1999, respectively.
In June 1999, the Company established a debt facility totaling up to $2.6
million that allows the Company to borrow funds through June 2000. Loans made
under this facility will be secured by assets financed under the agreement.
Advances under the debt agreement bear interest at 8%, adjusted for prevailing
interest rates. Rates in effect for advances outstanding range from 8.57% to
9.40% and are payable over 36 equal monthly installments plus a final payment
equal to 15% of the principal amount. As of December 31, 1999, $2,027,087 was
outstanding under this debt facility.
F-13
<PAGE>
LOUDEYE TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
As a part of this debt facility, the lender received a warrant to purchase
41,053 shares of Series C preferred stock at a purchase price of $1.90 per
share. This warrant expires upon the earlier of June 22, 2008 or four years
after an initial public offering. The outstanding warrant contains provisions
for the adjustment of the exercise price and the aggregate number of shares
issuable upon the exercise of the warrant in the case of stock dividends, stock
splits, reorganizations, reclassifications, consolidations and dilutive
issuances of securities at prices below the then existing warrant exercise
price. The determination of fair value of the warrant was made using the Black-
Scholes option pricing model and assuming a term of two years, a risk-free
interest rate of 5.5% and expected volatility of 75%.
Pursuant to the acquisition of Alive.com on December 14, 1999, the Company
assumed a $250,000 bank line of credit, under which $172,500 was outstanding at
December 31, 1999. Borrowings bear interest at the bank's prime rate plus 1.0%
(9.50% at December 31, 1999) and are collateralized by property and equipment.
Future payments of long-term debt are as follows: as of December 31, 1999
<TABLE>
<S> <C>
2000............................................................ 1,131,587
2001............................................................ 1,186,666
2002............................................................ 775,936
----------
$3,094,189
==========
</TABLE>
5. STOCKHOLDERS' EQUITY:
Convertible Preferred Stock
The Company is authorized to issue 41,000,000 shares of preferred stock. Shares
of preferred stock may be issued from time to time in one or more series, with
designations, rights, preferences and limitations established by the Company's
Board of Directors.
As of December 31, 1999, the Company had designated four series of convertible
preferred stock (Series A through D). Amounts are as follows:
<TABLE>
<CAPTION>
December 31, December 31,
1998 1999
------------ ------------
<S> <C> <C>
Series A preferred stock: Issued 4,983,787 shares
in 1998, aggregate liquidation preference
$233,828, with participation to $500,000 in the
event of the liquidation or sale of the
Company......................................... $ 233,828 $ 233,828
Series B preferred stock: Issued 3,259,194 shares
in 1998, aggregate liquidation preference
$2,747,501 with participation to $5,495,001 in
the event of the liquidation or sale of the
Company......................................... 2,747,501 2,747,501
Series C preferred stock: Issued 5,309,266 shares
in 1999, aggregate liquidation preference
$10,077,603, with participation to $20,175,211
in the event of the liquidation or sale of the
Company......................................... -- 10,077,603
Series D preferred stock: Issued 7,510,989 shares
in 1999, aggregate liquidation preference
$47,845,000, with participation to $95,690,000
in the event of the liquidation or sale of the
Company......................................... -- 45,476,772
---------- -----------
$2,981,329 $58,535,704
========== ===========
</TABLE>
F-14
<PAGE>
LOUDEYE TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
The rights and privileges of the preferred stock are as follows:
Dividends--Holders of Series A, B, C and D are entitled to receive
dividends of $0.07, $0.07, $0.15 and $0.52, respectively, per share per
annum, when and if declared by the Board of Directors. Such dividends are
not cumulative. As of December 31, 1999, none have been declared.
Conversion--Each share of Series A, B, C and D is convertible, at the
option of the holders, into common stock. Each share of Series A, B, C and
D automatically converts into common stock upon the closing of a public
offering that meets certain conditions.
Liquidation Preferences--The Series A, B, C and D shares have liquidation
preferences of $0.843, $0.843, $1.90 and $6.37 per share, respectively,
(with participation up to $500,000, $5,495,001, $20,175,211 and
$95,690,000, respectively) in the event of the liquidation of the Company.
If the value of the Company on liquidation is insufficient to pay the
entire preferential amount, distribution shall be made pro rata to all
preferred shareholders in proportion to the preferential amount the
preferred shareholder is otherwise entitled to receive.
Any assets remaining after the preferential distribution will be paid to
holders of common stock in proportion to shares held by each.
Voting Rights--The holders of each share of Series A, B, C and D shall be
entitled to the number of votes equal to the number of shares of common
stock into which such shares could be converted, and have voting rights
equal to holders of common stock.
The Company is prohibited from taking certain corporate actions without the
approval of the holders of the majority of outstanding Series A, B, C and D
shares, as well as separate class votes of the individual series in certain
circumstances. In conjunction with the sale of Series A and Series B redeemable
preferred stock, the Company, its founders, and the redeemable preferred stock
investors also entered into an investor rights agreement, voting agreement,
cosale agreement and a stock restriction agreement. In subsequent sales of
preferred stock the investor rights agreement, voting agreement and cosale have
been amended and restated.
Beneficial Conversion Feature
In December 1999, the Company issued 7,510,989 shares of Series D convertible
preferred stock at a purchase price of $6.37 per share. Such shares are
convertible into shares of common stock on a one-for-one basis. The deemed fair
value of the common stock was based on the lowpoint of the anticipated filing
range for the initial public offering. Consequently, the transaction resulted
in a beneficial conversion feature of $14,120,659. The beneficial conversion
feature has been reflected as a preferred dividend in the accompanying
financial statements as of December 31, 1999.
F-15
<PAGE>
LOUDEYE TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
Reserved for Future Issuance
The following shares of common and preferred stock have been reserved for
future issuance as of December 31, 1999 (in thousands):
<TABLE>
<S> <C>
Employee stock option plans..................................... 6,371,772
2000 Director stock option plan................................. 250,000
2000 Employee stock purchase plan............................... 200,000
Convertible preferred stock..................................... 41,000,000
Common stock warrants........................................... 650,000
Preferred stock warrants........................................ 41,053
----------
48,512,825
==========
</TABLE>
6. STOCK OPTION PLANS:
1998 Stock Option Plan
Under the Company's 1998 Stock Option Plan, the Board of Directors and any of
its committees may grant to employees, consultants and directors options to
purchase the Company's common stock at terms and prices determined by the Board
of Directors. Incentive stock options may be granted to employees at a price
set by the plan administrator. Options may generally be exercised after six
months of employment, and within 10 years of the date of grant, whether or not
fully vested, or within three months of termination of employment, and
typically vest over 4.5 years. Unvested shares issued are subject to repurchase
upon termination of service. The Plan provides for the issuance of options to
purchase up to 4,660,000 shares of the Company's stock. The Company accounts
for the Plan under APB 25.
2000 Stock Option Plan
In December 1999 the board of directors approved the creation of the 2000
Stock Option Plan. This plan provides for the grant of incentive stock options
to employees, including employee directors, and of nonstatutory stock options
to employees, directors and consultants. The 2000 plan provides for the
issuance of options to purchase up to 2,500,000 shares of the Company's common
stock, plus an automatic annual increase on the first day of each of the fiscal
years beginning in 2001, 2002, 2003, 2004 and 2005 equal to the lesser of 5% of
our outstanding common stock on the last day of the immediately preceding
fiscal year or a lesser number of shares as our Board determines. Options
granted prior to the initial public offering may be exercised whether or not
fully vested. Unvested shares issued are subject to repurchase upon termination
of service.
2000 Directors Stock Option Plan
In December 1999 the board of directors approved the creation of the 2000
Directors' Stock Option Plan. 250,000 shares of common stock has been reserved
for issuance under the 2000 directors' plan, all of which remain available for
future grants. This plan provides for the grant of nonstatutory stock options
to the Company's nonemployee directors.
F-16
<PAGE>
LOUDEYE TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
2000 Employee Stock Purchase Plan
In December 1999, the board of directors approved the creation of the 2000
Employee Stock Purchase Plan (ESPP). A total of 200,000 shares of common stock
has been reserved for issuance under the ESPP, none of which have been issued
as of December 17, 1999. The number of shares reserved for issuance under the
ESPP will be subject to an automatic annual increase on the first day of each
of the fiscal years beginning in 2001, 2002, 2003, 2004 and 2005 equal to the
lesser of 0.75% of the Company's outstanding common stock on the last day of
the immediately preceding fiscal year or a lesser number of shares as the board
of directors determines.
Alive Stock Option Plan
As part of the terms of the acquisition of Alive.com, Alive's stock option
plan (Alive Plan) was assumed by the Company. There were no alterations to any
of the provisions of the Alive Plan. This plan provides for the issuance of
737,038 incentive and nonqualified common stock options for employees,
directors, consultants, or advisors of the Company and options to purchase
89,981 shares are currently outstanding. Options issued under this plan
typically vest over a four-year period, expire five years from the date of
grant, and generally expire ninety days after termination of employment or
services. Stock options are immediately exercisable as of the vesting
commencement date, however, unvested shares issued are subject to repurchase
upon termination of service at the individual's exercise price. No further
options will be issued under the Alive Plan.
The Company has adopted the disclosure-only provisions of SFAS 123. Had
compensation expense been recognized on stock options issuance based on the
fair value of the options at the date of grant and recognized over the vesting
period, the Company's net loss would have been increased to the pro forma
amounts indicated below.
<TABLE>
<CAPTION>
December 31,
-----------------------------------
1997 1998 1999
-------- ----------- ------------
<S> <C> <C> <C>
Net loss to common shareholders:
As reported.......................... $(94,779) $(1,650,272) $(25,022,883)
Pro forma............................ (94,779) (1,650,938) (25,396,414)
Basic and diluted net loss per share:
As reported.......................... -- $ (0.41) $ (4.62)
Pro forma............................ -- $ (0.41) $ (4.69)
</TABLE>
To determine compensation expense under SFAS 123, the Company used the
following assumptions:
. Risk-free interest rates of 5.0 to 5.5%
. Expected lives of 5 years
. Expected dividend yields of 0%
. Expected volatility of 0%
F-17
<PAGE>
LOUDEYE TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
Option activity under the plans was as follows:
<TABLE>
<CAPTION>
Weighted Weighted
Average Average
Grant Date Exercise
Number Fair Value Price
--------- ---------- --------
<S> <C> <C> <C>
Outstanding, January 1, 1998
Granted..................................... 1,420,500 $0.01 $0.07
Cancelled................................... (125,000) 0.01 0.06
---------
Outstanding, December 31, 1998................ 1,295,500 0.02 0.07
Granted..................................... 4,387,431 2.15 0.98
Exercised................................... (879,409) 0.62 0.22
Cancelled................................... (580,313) 0.15 0.16
---------
Outstanding, December 31, 1999................ 4,223,209 2.09 0.97
</TABLE>
The following information is provided for options outstanding and exercisable
at December 31, 1999:
<TABLE>
<CAPTION>
Outstanding Exercisable
------------------------------ ----------------------------
Weighted Weighted
Weighted Average Weighted Average
Average Remaining Average Remaining
Exercise Contractual Exercise Contractual
Range Number Prices life Number Prices life
----- --------- -------- ----------- ------- -------- -----------
<S> <C> <C> <C> <C> <C> <C>
.05-.25 1,724,307 0.12 8.94 293,612 0.11 8.85
.40-.81 1,253,486 0.41 9.68 396,134 0.42 9.69
1.00-2.54 824,316 1.02 9.86 7,033 1.55 9.35
6.00 421,100 6.00 9.96 -- -- --
---------
4,223,209
</TABLE>
The options outstanding at December 31, 1999 have a weighted average
remaining contractual life of approximately 9.4 years.
Included in the exercised options outstanding are 734,936 shares subject to
repurchase at a weighted average exercise price of $0.24 under provisions of
the 1998 stock option plan. Also included in the exercised options outstanding
are 229,756 options exercised under the Alive stock option plan but subject to
repurchase at a weighted average price of $0.48.
7. STOCK-BASED COMPENSATION
The Company records deferred stock compensation for the difference between
the exercise price of stock options granted and the deemed fair value for
financial statement presentation purposes of the Company's common stock at the
date of grant. The deferred compensation is amortized over the vesting period
of the related options, which is generally 4.5 years. No deferred compensation
or related stock-based compensation expense was recorded at December 31, 1998.
Through December 31, 1999, the Company recorded gross deferred compensation
totaling $7.8 million and related stock-based compensation expense totaled
approximately $982,000.
The Company has granted approximately 220,000 options to consultants which
vest on the same terms as options granted to employees. These terms require
that the individuals continue their current consulting relationship with the
Company in order to continue vesting. These options are accounted
F-18
<PAGE>
LOUDEYE TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
for in accordance with the provisions of SFAS 123 and EITF 96-18. Accordingly,
using the Black-Scholes option pricing model and assuming a term of five years,
a risk-free interest rate of 5.50% and expected volatility of 75%, the options
are marked to fair value at each reporting period through charges to stock-
based compensation in the statements of operations. Approximately $572,000 was
recognized in stock-based compensation expense related to these options in the
year ended December 31, 1999.
For the year ended December 31, 1999, the Company recorded in total
approximately $1.5 million in stock-based compensation charges as a component
of operating expenses. This amount represents both the consulting expenses as
well as amortization of stock options granted below fair market value. These
amounts can be allocated to the other expense categories in the accompanying
statements of operations as follows:
<TABLE>
<S> <C>
Production (cost of revenues).................................... $ 202,270
Research and development......................................... 125,683
Sales and marketing.............................................. 332,862
General and administrative....................................... 893,316
----------
$1,554,131
==========
</TABLE>
8. FEDERAL INCOME TAXES:
At December 31, 1999, the Company had net operating loss carryforwards of
approximately $9.4 million related to U.S. federal and state jurisdictions.
Utilization of net operating loss carryforwards are subject to certain
limitations under Section 382 of the Internal Revenue Code of 1986, as amended.
These carryforwards will begin to expire in 2018.
The Company did not provide any current or deferred United States federal or
state income tax provision or benefit for any of the periods presented because
it has experienced operating losses since inception, and has provided full
valuation allowances on deferred tax assets because of uncertainty regarding
their realizability. This valuation allowance increased in 1998 and 1999 by
$477,712 and $2,112,022, respectively. Deferred taxes consist primarily of net
operating loss carryforwards and timing differences for customer deposits,
stock compensation expense and excess book depreciation.
The difference between the statutory federal tax rate of 35% (34% federal and
1% state, net of federal benefits) and the tax benefit of zero recorded by the
Company is primarily due to the Company's full valuation allowance against its
net deferred tax assets.
The components of the deferred tax assets and liabilities were as follows:
<TABLE>
<CAPTION>
December 31,
--------------------------------
1997 1998 1999
-------- --------- -----------
<S> <C> <C> <C>
Deferred tax assets:
Net operating loss carryforward............ $ 31,226 $ 411,724 $ 3,724,594
Other...................................... -- 97,214 438,717
Deferred tax liabilities related to
intangible assets......................... -- -- (1,542,351)
-------- --------- -----------
Total net deferred tax assets............ 31,226 508,938 2,620,960
Valuation allowance.......................... (31,226) (508,938) (2,620,960)
-------- --------- -----------
Total.................................... $ -- $ -- $ --
======== ========= ===========
</TABLE>
F-19
<PAGE>
LOUDEYE TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
9. COMMITMENTS:
Operating Leases
During 1999, the Company entered into an agreement for its office facility
under an operating lease which expires in 2004. Additionally, the Company
entered into a five-year office lease with annual payments of approximately
$243,000, a five year office lease with annual payments of approximately
$500,000, and a five-year office lease with annual payments of approximately
$180,000. Prior to 1999, the Company had leased office space from a related
party. Minimum lease commitments as of December 31, 1999 under noncancellable
leases are as follows:
<TABLE>
<S> <C>
2000............................................................ $1,369,311
2001............................................................ 1,488,873
2002............................................................ 1,584,629
2003............................................................ 1,634,599
2004............................................................ 1,451,153
----------
$7,528,565
==========
</TABLE>
Rent expense under operating leases totaled $61,328 and $267,149 for the
years ended December 31, 1998 and 1999, respectively.
Services Agreement
On December 17, 1999 the Company entered into a services agreement with a
distributor of music and video entertainment products. In conjunction with the
services agreement, the Company granted a warrant to acquire 650,000 shares of
common stock at $10 per share. The warrant is exercisable immediately and
expires in December 2000. According to EITF 96-18, the fair market value of
this warrant was calculated using the Black-Scholes pricing model, using a
risk-free interest rate of 5.0%, volatility of 70% and an expected life of one
year. The value of the warrant was calculated to be $1,124,500 and has been
capitalized within other assets. This asset will be amortized over the initial
term of the agreement, which is three years.
10. RELATED PARTY TRANSACTIONS:
On September 1, 1998, the Company entered into a five-year lease agreement
with the Company's primary officer. The total monthly rental payments are
approximately $10,000 per month. Total payments during the years ended December
31, 1998 and 1999 were approximately $40,000 and $120,000. The lease agreement
provides for an early termination payment of $52,000.
11. ACQUISITION OF ALIVE.COM, INC.:
Effective December 14, 1999, the Company acquired Alive.com, Inc., a
developer of multimedia applications. In connection with the acquisition, the
Company issued 2,508,848 shares of common stock and 91,181 options to purchase
shares of common stock valued at fair market value using the Black-Scholes
option pricing model in exchange for all of the outstanding capital stock and
the assumption of all outstanding options of Alive.com, Inc. The deemed fair
value of the common stock and options issued in the acquisition, for accounting
purposes, was approximately $18.7 million. The Company also incurred $74,000 in
acquisition costs and assumed net liabilities of $300,000, for a
F-20
<PAGE>
LOUDEYE TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
total purchase price of $19.0 million. The acquisition was accounted for as a
purchase and, accordingly, the results of operations of Alive.com, Inc. have
been included in the consolidated financial statements commencing on the date
of acquisition. The excess purchase price of approximately $19.0 million was
allocated to goodwill, work force in place and acquired technology, which is
being amortized on a straight-line basis over an estimated useful life of three
years.
In connection with the acquisition, net assets purchased and liabilities
assumed were as follows:
<TABLE>
<S> <C>
Cash, receivables and other current assets..................... $ 92,828
Property and equipment, and other noncurrent assets............ 424,714
Total liabilities.............................................. (817,542)
---------
$(300,000)
=========
</TABLE>
The following table presents the purchase price and excess purchase price
associated with the acquisition of Alive.com.
<TABLE>
<S> <C>
Value of common stock and common stock options issued......... $18,664,000
Net liabilities assumed....................................... 300,000
Transaction costs............................................. 74,000
-----------
Excess purchase price....................................... $19,038,000
===========
</TABLE>
The following table presents the unaudited pro forma results assuming that
the Company had acquired Alive.com, Inc. at the beginning of fiscal year 1998.
This information may not necessarily be indicative of the future combined
results of the operations of the Company.
<TABLE>
<CAPTION>
Year Ended Year Ended
December 31, December 31,
1998 1999
------------ ------------
<S> <C> <C>
Total revenues................................ $ 286,259 $ 2,718,211
Net loss to common shareholders............... $(8,962,387) $(35,835,979)
Basic and diluted net loss per share.......... $ (1.37) $ (4.58)
</TABLE>
Included in the outstanding shares purchased as part of the Alive.com
acquisition were 229,756 shares subject to repurchase which were assumed as
part of the terms of the purchase agreement. 446,444 shares had been issued by
Alive.com in exchange for a license of certain of Allaire Corporation's
technology, on a royalty free basis, coupled with an agreement by Allaire to
provide certain technological, sales, distribution and marketing support.
272,825 of these shares were vested as of December 31, 1999, however, in the
event of the termination of the agreement, the shares may be repurchased by the
Company within 90 days of termination at the then fair market value of the
Company's common stock. 173,619 of these shares remained unvested as of
December 31, 1999 and may be repurchased by the Company within 90 days of
termination at the weighted average exercise price of $0.20. The unvested
shares vest at the rate of 24,802 shares at the end of each three-month period.
The effect of the 173,619 shares subject to repurchase has been eliminated from
the computation of earnings per share as described in Note 2.
F-21
<PAGE>
LOUDEYE TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
12. SUBSEQUENT EVENTS
Subsequent to year-end, in February 2000 the Company entered into a services
agreement to sell to Akamai Technologies, Inc. $5.0 million of common stock in
a private placement that will close concurrent with and conditioned on closing
of the Company's initial public offering. The price per share for this
subscription agreement is equal to the initial offering price to the public for
this offering less 7%. Should the private placement occur, the related discount
of approximately $376,000 is expected to be capitalized within other assets.
This other asset will be amortized over a period of approximately one year,
which is the term of the services agreement.
Subsequent to year-end, the Company granted options to employees to purchase
1,050,200 shares of its common stock with exercise prices ranging from $7.65 to
$9.00 per share. The Company will record additional deferred stock-based
compensation charges of $3.1 million in respect of these options over the
vesting period of the options, which is generally four and one-half years.
F-22
<PAGE>
LOUDEYE TECHNOLOGIES, INC.
UNAUDITED PRO FORMA COMBINED FINANCIAL INFORMATION
The unaudited pro forma combined statement of operations of Loudeye
Technologies, Inc. for the year ended December 31, 1999 gives effect to the
acquisition of Alive.com, Inc. as if it had been acquired on January 1, 1999.
The unaudited pro forma combined statements of operations are presented for
informational purposes only and do not purport to represent what the Company's
financial position and results of operations for the year ended December 31,
1999 would actually have been had the acquisition, in fact, occurred on January
1, 1999, or the Company's results of operations for any future period. The
unaudited pro forma combined statement of operations should be read in
conjunction with the financial statements and related notes thereto included
elsewhere in this prospectus and the information set forth in "Management's
Discussion and Analysis of Financial Condition and Results of Operations."
Unaudited pro forma adjustments have been applied to the financial
information derived from the financial statements of Loudeye Technologies and
Alive.com to account for the merger as a purchase. Accordingly, assets acquired
and liabilities assumed are reflected at their estimated fair values which are
subject to further refinement, including appraisals and other analysis. The
unaudited pro forma consolidated financial information has been prepared based
on the assumptions described in the notes thereto and includes assumptions
relating to the allocation of the consideration paid for the assets and
liabilities of Alive.com based on preliminary estimates of their fair value.
The actual allocation of such consideration may differ from that reflected in
the unaudited pro forma combined financial information after valuations and
other procedures to be performed after the closing of the merger. In the
opinion of Loudeye Technologies, all adjustments necessary to present fairly
such unaudited pro forma combined financial information have been made based on
the proposed terms and structure of the merger. The unaudited pro forma
information is presented for illustrative purposes only and is not necessarily
indicative of future operating results or financial position. These unaudited
pro forma combined financial statements and accompanying notes should be read
in conjunction with historical financial statements and the related notes
thereto of Loudeye Technologies and Alive.com.
F-23
<PAGE>
UNAUDITED PRO FORMA COMBINED STATEMENTS OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1999
<TABLE>
<CAPTION>
(January 1, 1999
to December 14, 1999) Pro Forma Pro Forma
Loudeye Alive Adjustments Total
------------ --------------------- ----------- ------------
<S> <C> <C> <C> <C>
Revenues................ $ 2,645,279 $ 72,932 $ 2,718,211
Cost of revenues........ 2,870,850 5,017 2,875,867
------------ ----------- ------------
Gross margin.......... (225,571) 67,915 (157,656)
Operating expenses:
Research and
development.......... 1,248,081 1,503,736 2,751,817
Sales and marketing... 3,981,975 1,769,224 5,751,199
General and
administrative....... 3,612,054 1,481,864 5,093,918
Amortization of
intangibles.......... 301,978 -- 6,081,276(b) 6,383,254
Stock-based
compensation......... 1,554,131 28,456 1,582,587
------------ ----------- ------------
Total operating
expenses........... 10,698,219 4,783,280 21,562,775
Other income (expense),
net.................... 21,566 (16,455) 5,111
------------ ----------- ------------
Net loss................ $(10,902,224) (4,731,820) $(21,715,320)
------------ ----------- ------------
Beneficial conversion
feature of convertible
preferred stock........ (14,120,659) -- $(14,120,659)
------------ ----------- ------------
Net loss to common
shareholders........... $(25,022,883) $(4,731,820) $(35,835,979)
============ =========== ============
Basic and diluted net
loss per share......... $ (4.62) $ (4.58)
============ ============
Weighted average shares
outstanding used to
compute basic and
diluted net loss per
share.................. 5,410,507 7,816,252
============ ============
Basic and diluted pro
forma net loss per
share.................. $ (1.50) $ (1.88)
============ ============
Weighted average shares
outstanding used to
compute basic and
diluted pro forma net
loss per share......... 16,659,800 19,065,545
============ ============
</TABLE>
F-24
<PAGE>
LOUDEYE TECHNOLOGIES, INC.
NOTES TO UNAUDITED PRO FORMA COMBINED STATEMENT OF OPERATIONS
December 31, 1999
1. BASIS OF PRESENTATION:
The pro forma combined statement of operations for the year ended December
31, 1999 gives effect to the acquisition of Alive.com, Inc. as if it had been
acquired January 1, 1999. The pro forma adjustments are based on consideration
exchanged, including the estimated fair value of assets acquired, liabilities
assumed and common stock issued. The actual adjustments, which will be based on
valuations of fair value as of the date of acquisition, may differ from that
made herein.
The pro forma combined financial statement is presented for illustrative
purposes only and should not be construed to be indicative of the actual
combined results of operations as may exist in the future. The pro forma
adjustments are based on the common stock consideration exchanged by Loudeye
Technologies, Inc. for the fair value of the assets acquired and liabilities
assumed.
2. PRO FORMA ADJUSTMENTS:
(a) To record the acquisition of Alive.com, Inc. as follows:
<TABLE>
<S> <C>
Common stock consideration.................................... $18,664,000
Estimated transaction costs................................... 74,000
Net liabilities acquired...................................... 300,000
-----------
Excess purchase price......................................... $19,038,000
===========
</TABLE>
The purchase price of Alive.com, Inc. consists of 2,508,848 shares of common
stock based on the price of Loudeye Technologies, Inc. common stock with an
assumed fair value of $7.25 as determined by the Company's Board of Directors
and 91,181 options to purchase shares of common stock valued at fair market
value using the Black-Scholes option pricing model.
Transaction costs associated with this merger have been estimated to be
$74,000. Should the actual amount differ, the intangible asset recorded would
increase and related amortization would increase.
(b) To record amortization of intangibles as follows:
<TABLE>
<S> <C>
Eleven and one-half months of 1999 amortization................ $6,081,276
</TABLE>
All intangibles are amortized over a period of three years.
(c) Basic and diluted net loss per share is computed by dividing net loss by
the weighted average number of shares outstanding during the period assuming
that shares issued for acquisitions were outstanding for the entire period. Pro
forma basic and diluted net loss per share is computed based on the weighted
average number of shares outstanding giving effect to shares issued in
acquisitions as if they were outstanding for the entire period and to the
conversion of convertible preferred stock on an as-if converted basis from the
original issuance date.
F-25
<PAGE>
LOUDEYE TECHNOLOGIES, INC.
NOTES TO UNAUDITED PRO FORMA COMBINED STATEMENT OF OPERATIONS--(Continued)
3. RECONCILIATION OF HISTORICAL WEIGHTED AVERAGE SHARES TO PRO FORMA WEIGHTED
AVERAGE SHARES:
<TABLE>
<CAPTION>
December 31, 1999
-----------------
<S> <C>
Historical............................................... 5,410,507
Alive.com, January 1, 1999-December 14, 1999............. 2,405,745
---------
Pro forma................................................ 7,816,252
=========
</TABLE>
F-26
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors
Alive.com, Inc.:
We have audited the accompanying balance sheet of Alive.com, Inc. (a
development stage company) as of December 31, 1998, and the related statements
of operations, changes in shareholders' deficit, and cash flows for the period
from inception (February 27, 1998) to December 31, 1998. 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 audit.
We conducted our audit in accordance with generally accepted auditing
standards. 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 audit provides a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Alive.com, Inc. as of December
31, 1998, and the results of its operations and cash flows for the period from
inception to December 31, 1998, in conformity with generally accepted
accounting principles.
/s/ Arthur Andersen LLP
Seattle, Washington,
December 21, 1999
F-27
<PAGE>
ALIVE.COM, INC.
(A Development Stage Company)
BALANCE SHEETS
<TABLE>
<CAPTION>
December 31, December 14,
1998 1999
------------ ------------
(unaudited)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents........................ $ 243,665 $ 74,225
Accounts receivable, net allowance of $11,384 as
of December 14, 1999............................ -- 12,600
Prepaids and other assets........................ 114,967 6,003
----------- -----------
Total current assets........................... 358,632 92,828
Property and equipment, net........................ 241,257 392,849
Other assets....................................... 90,887 31,865
----------- -----------
$ 690,776 $ 517,542
=========== ===========
LIABILITIES AND SHAREHOLDERS' DEFICIT
Current liabilities:
Accounts payable................................. $ 429,550 $ 299,570
Accrued liabilities.............................. 42,910 344,795
Note payable, current portion.................... 75,000 90,000
Convertible notes payable........................ 1,000,000 --
----------- -----------
Total current liabilities...................... 1,547,460 734,365
Note payable, net of current portion............... 150,000 82,500
Deferred rent...................................... 36,512 83,393
----------- -----------
Total liabilities.............................. 1,733,972 900,258
----------- -----------
Mandatorily redeemable convertible preferred stock,
902,886 and 2,770,119 shares authorized, issued
and outstanding, liquidation preference of
$6,189,976 at December 14, 1999................... 673,698 6,017,172
Shareholders' deficit:
Preferred stock, undesignated series, $.01 par
value, authorized 7,229,881 shares, none issued
and outstanding................................. -- --
Common stock, $.01 par value, 20,000,000 shares
authorized, 2,301,581 and 2,322,752 issued and
outstanding at December 31, 1998 and December
14, 1999, respectively, and additional paid-in
capital......................................... 295,221 369,149
Deferred stock compensation...................... -- (25,102)
Deficit accumulated during the development
stage........................................... (2,012,115) (6,743,935)
----------- -----------
Total shareholders' deficit.................... (1,716,894) (6,399,888)
----------- -----------
Total liabilities and shareholders' deficit.. $ 690,776 $ 517,542
=========== ===========
</TABLE>
The accompanying notes are an integral part of these statements.
F-28
<PAGE>
ALIVE.COM, INC.
(A Development Stage Company)
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Period from Period from
Inception Inception
(February 27, (February 27,
1998) to 1998) to Period Ended-
December 31, December 14, December 14,
1998 1999 1999
------------- ------------- ------------
(unaudited)
<S> <C> <C> <C>
Revenues.............................. $ 624 $ 73,556 $ 72,932
Cost of revenues...................... 21 5,038 5,017
----------- ----------- -----------
Gross margin........................ 603 68,518 67,915
----------- ----------- -----------
Operating expenses:
Research and development............ 631,793 2,135,529 1,503,736
Sales and marketing................. 941,577 2,710,801 1,769,224
General and administrative.......... 424,941 1,935,261 1,510,320
----------- ----------- -----------
Total operating expenses.......... 1,998,311 6,781,591 4,783,280
Other income (expense), net........... (14,407) (30,862) (16,455)
----------- ----------- -----------
Net loss.............................. $(2,012,115) $(6,743,935) $(4,731,820)
=========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these statements.
F-29
<PAGE>
ALIVE.COM, INC.
(A Development Stage Company)
STATEMENTS OF CHANGES IN SHAREHOLDERS' DEFICIT
<TABLE>
<CAPTION>
Common Stock and
Additional Paid-in
Capital Deferred Total
------------------- Stock Deficit Shareholders'
Shares Amount Compensation Accumulated Deficit
--------- -------- ------------ ----------- -------------
<S> <C> <C> <C> <C> <C>
Balances,
February 27, 1998...... -- $ -- $ -- $ -- $ --
Issuance of common
stock................. 1,753,298 188,600 -- -- 188,600
Common stock options
exercised............. 548,283 106,621 -- -- 106,621
Net loss............... -- -- -- (2,012,115) (2,012,115)
--------- -------- -------- ----------- -----------
Balances,
December 31, 1998...... 2,301,581 295,221 -- (2,012,115) (1,716,894)
Common stock options
exercised............. 106,671 27,195 -- -- 27,195
Repurchase of common
stock................. (85,500) (9,300) -- -- (9,300)
Issuance of stock
warrants.............. -- 2,475 -- -- 2,475
Deferred stock
compensation.......... -- 36,280 (36,280) -- --
Amortization of
deferred stock
compensation.......... -- -- 11,178 -- 11,178
Compensation
attributable to stock
options............... -- 17,278 -- -- 17,278
Net loss............... -- -- -- (4,731,820) (4,731,820)
--------- -------- -------- ----------- -----------
Balances,
December 14, 1999
(unaudited)........... 2,322,752 $369,149 $(25,102) $(6,743,935) $(6,399,888)
========= ======== ======== =========== ===========
</TABLE>
The accompanying notes are an integral part of these statements.
F-30
<PAGE>
ALIVE.COM, INC.
(A Development Stage Company)
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Period from Period from
Inception Inception
(February 27, (February 27,
1998) to 1998) to Period Ended
December 31, December 14, December 14,
1998 1999 1999
------------- ------------- ------------
(unaudited)
<S> <C> <C> <C>
Cash flows from operating activities:
Net loss............................. $(2,012,115) $(6,743,935) $(4,731,820)
Adjustments to reconcile net loss to
net cash used in operating
activities:
Depreciation and amortization........ 28,714 182,242 153,528
Common stock and warrant expense..... 132,213 148,978 16,765
Amortization of deferred stock
compensation........................ -- 11,178 11,178
Non-employee common stock
compensation expense................ -- 17,278 17,278
Changes in assets and liabilities:
Accounts receivable.................. -- (12,600) (12,600)
Prepaids and other assets............ (149,467) (28,592) 120,875
Accounts payable..................... 429,550 299,570 (129,980)
Accrued liabilities.................. 46,216 348,101 301,885
Deferred rent........................ 36,512 83,393 46,881
----------- ----------- -----------
Net cash used in operating
activities........................ (1,488,377) (5,694,387) (4,206,010)
----------- ----------- -----------
Cash flows from investing activities:
Purchases of property and equipment.. (269,971) (524,025) (254,054)
----------- ----------- -----------
Net cash used in investing
activities........................ (269,971) (524,025) (254,054)
----------- ----------- -----------
Cash flows from financing activities:
Proceeds from issuance of common
stock, net.......................... $ 106,621 $ 124,476 $ 17,855
Proceeds from issuance of preferred
stock, net.......................... 370,392 4,195,661 3,825,269
Proceeds from issuance of convertible
notes payable....................... 1,300,000 1,800,000 500,000
Proceeds from issuance of note
payable............................. 225,000 225,000 --
Repayment of note payable............ -- (52,500) (52,500)
----------- ----------- -----------
Net cash provided by financing
activities........................ 2,002,013 6,292,637 4,290,624
----------- ----------- -----------
Change in cash and cash equivalents... 243,665 74,225 (169,440)
Cash and cash equivalents, beginning
of period............................ -- -- 243,665
----------- ----------- -----------
Cash and cash equivalents, end of
period............................... $ 243,665 $ 74,225 $ 74,225
=========== =========== ===========
Supplemental disclosure of cash flow
information:
Cash paid--interest.................. $ 15,630 $ 37,315 $ 21,685
=========== =========== ===========
Supplemental disclosures of noncash
investing and financing activities:
Conversion of convertible notes
payable and accrued interest to
redeemable convertible preferred
stock............................... $ 303,306 $ 1,821,511 $ 1,518,205
=========== =========== ===========
Deferred compensation on grants of
stock options....................... $ -- $ 36,280 $ 36,280
=========== =========== ===========
Issuance of common stock and warrants
in exchange for software licenses
and services........................ $ 188,600 $ 191,075 $ 2,475
=========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these statements.
F-31
<PAGE>
ALIVE.COM, INC.
(a development stage company)
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1998
(Amounts and disclosures as of and for the period
ended December 14, 1999 are unaudited)
1. DESCRIPTION OF THE COMPANY AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Description of the Company
Alive.com, Inc. (the "Company") is engaged in the development of software
products which enable users to develop multimedia presentations over the
Internet and intranets. The Company was incorporated in the State of Washington
on February 27, 1998 (date of inception). The Company has devoted substantially
all of its efforts to date in product development, establishment of sales and
marketing distribution channels, and raising capital.
Inherent in the Company's business are various risks and uncertainties,
including the Company's limited operating history and development of the
Internet as a communications medium. The Company's success depends upon the
acceptance of the Company's technology and the Company's ability to generate
license revenues from the use of its technology.
On December 14, 1999, the Company was acquired by Loudeye Technologies, Inc.
Cash and Cash Equivalents
Cash and cash equivalents consist of demand deposits and money market
accounts maintained with financial institutions. Recorded amounts approximate
fair value. The Company considers all cash deposits and highly liquid
investments with a maturity of three months or less when purchased to be cash
equivalents.
Financial Instruments and Concentrations of Credit Risk
Financial instruments that potentially subject the Company to concentrations
of credit risk consist of cash and cash equivalents, and trade accounts
receivable, accounts payable and long-term debt. Fair values of cash and cash
equivalents approximate cost due to the short period of time to maturity. The
fair values of financial instruments that are short-term and/or that have
little or no market risk are considered to have a fair value equal to book
value. Assets and liabilities that are included in this category are
receivables, accounts payable and accrued liabilities.
Property and Equipment
Property and equipment is stated at historical cost less accumulated
depreciation and depreciation is computed using the straight-line basis over
the estimated useful lives of the assets, which are generally three to seven
years. Leasehold improvements are amortized using the straight-line method over
the shorter of the respective lease term or estimated useful life of the asset.
F-32
<PAGE>
ALIVE.COM, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
Revenue Recognition
The Company recognizes revenues from software license fees upon delivery of
the software product to the end-user, unless the fee is not fixed or
determinable or collectibility is not probable. Revenue from packaged product
sales to and through distributors and resellers is recorded when related
products are shipped, net of an allowance for estimated returns.
Research and Development Costs
Costs incurred in connection with research and development are charged to
operations as incurred.
Software Development Costs
Under the criteria set forth in SFAS No. 86, "Accounting for the Costs of
Computer Software to Be Sold, Leased, or Otherwise Marketed," capitalization of
software development costs begins upon the establishment of technological
feasibility of the product, which the Company has defined as the completion of
beta testing of a working product. The establishment of technological
feasibility and the ongoing assessment of the recoverability of these costs
require considerable judgment by management with respect to certain external
factors, including, but not limited to, anticipated future gross product
revenues estimated economic life and changes in software and hardware
technology. Amounts that could have been capitalized under this statement after
consideration of the above factors were immaterial and, therefore, no software
development costs have been capitalized by the Company to date.
Advertising Expenses
Advertising costs are expensed as incurred. The Company incurred $280,500 and
$635,594 in advertising for the period from February 27, 1998 (date of
inception) to December 31, 1998, and for the period ended December 14, 1999,
respectively.
Income Taxes
The Company recognizes deferred income tax assets and liabilities for the
expected future income tax consequences, based on enacted tax laws, of
temporary differences between the financial reporting and tax bases of assets,
liabilities and tax carryforwards. Deferred tax assets are then reduced, if
deemed necessary, by a valuation allowance for the amount of any tax benefits
which, more likely than not based on current circumstances, are not expected to
be realized (see Note 8).
Stock-Based Compensation
The Company has elected to apply the disclosure-only provisions of Statement
of Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation" (SFAS 123). In accordance with the provisions of SFAS 123, the
Company applies Accounting Principles Board Opinion No. 25, "Accounting for
Stock Issued to Employees" (APB 25), and related interpretations in accounting
for its stock option plan.
F-33
<PAGE>
ALIVE.COM, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
The Company accounts for stock issued to non-employees in accordance with the
provisions of SFAS No. 123 and the Emerging Issues Task Force consensus in
Issue No. 96-18, "Accounting for Equity Instruments that Are Issued to Other
Than Employees for Acquiring, or in Conjunction with Selling, Goods or
Services."
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 disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amount of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
Unaudited Interim Financial Data
The unaudited interim financial statements for the period ended December 14,
1999 have been prepared on the same basis as the audited financial statements
and, in the opinion of management, include all adjustments (consisting only of
normal recurring adjustments) necessary to present fairly the financial
information set forth therein, in accordance with generally accepted accounting
principles. Results of operations for interim period presented herein are not
necessarily indicative of results of operations for the entire year.
Segment Reporting
The Company adopted Statement of Financial Accounting Standards No. 131,
"Disclosures About Segments of an Enterprise and Related Information," (SFAS
131) during 1998. SFAS 131 requires companies to disclose certain information
about operating segments. Based on the criteria within SFAS 131, the Company
has determined that it has one reportable segment, software product
development.
Recent Accounting Pronouncements
In March 1998, the American Institute of Certified Public Accountants issued
Statement of Position 98-1 (SOP 98-1), "Accounting for the Costs of Computer
Software Developed or Obtained for Internal Use." SOP 98-1 is effective for
financial statements for years beginning after December 15, 1998. SOP 98-1
provides guidance over accounting for computer software developed or obtained
for internal use including the requirement to capitalize specific costs and
amortization of such costs. The implementation of SOP 98-1 did not have a
material impact on the Company's financial position or results of operations.
In April 1998, the American Institute of Certified Public Accountants issued
Statement of Position 98-5 (SOP 98-5), "Reporting on the Costs of Start-Up
Activities." SOP 98-5, which is effective for fiscal years beginning after
December 15, 1998, provides guidance on the financial reporting of start-up
costs and organization costs. It requires costs of start-up activities and
organization costs to be expensed as incurred. The implementation of SOP 98-5
did not have a material impact on the Company's financial position or results
of operations.
F-34
<PAGE>
ALIVE.COM, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
2. PROPERTY AND EQUIPMENT:
Property and equipment were as follows:
<TABLE>
<CAPTION>
December 31, December 14,
1998 1999
------------ ------------
<S> <C> <C>
Office equipment................................. $108,161 $ 122,092
Software......................................... 2,356 56,582
Improvements..................................... 47,461 84,848
Computer equipment............................... 111,993 260,503
Accumulated depreciation......................... (28,714) (131,176)
-------- ---------
Property and equipment, net.................... $241,257 $ 392,849
======== =========
</TABLE>
3. OTHER ASSETS:
Other assets were as follows:
<TABLE>
<CAPTION>
December 31, December 14,
1998 1999
------------ ------------
<S> <C> <C>
Deferred charges, net........................... $56,387 $ --
Deposits........................................ 25,000 25,400
Trade name, net................................. 9,500 6,465
------- -------
$90,887 $31,865
======= =======
</TABLE>
4. NOTE PAYABLE:
In August 1998, the Company entered into a financing arrangement with a bank
which provided for a $250,000 line of credit for operating needs and equipment
financing. Under the terms of the agreement, the maximum borrowing on the
revolving line of credit is reduced by the amount of equipment financed.
Borrowings under the line of credit bear interest at the bank's prime rate plus
1.0% (9.00% at December 31, 1998 and 9.25% at December 14, 1999) and are
collateralized by substantially all of the Company's property and equipment.
The line of credit matures in February 2000, and equipment financing is payable
in 30 equal installments of principal, plus interest, commencing on March 27,
1999.
During 1998, the Company financed $225,000 of equipment purchases under the
terms of the arrangement.
Future principal payments are as follows:
<TABLE>
<S> <C>
2000.............................................................. $ 90,000
2001.............................................................. 82,500
--------
$172,500
========
</TABLE>
F-35
<PAGE>
ALIVE.COM, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
5. CONVERTIBLE NOTES PAYABLE:
The Company issued convertible notes payable in connection with the Series A
redeemable preferred stock and Series B redeemable preferred stock financings.
The notes were unsecured and due on demand with interest at the federal short-
term interest rate. Note principal and accrued interest were converted to
Series A redeemable preferred stock and Series B redeemable preferred stock at
a conversion price of $0.858358 and $2.90 per share, respectively.
6. MANDATORILY REDEEMABLE CONVERTIBLE PREFERRED STOCK:
During July 1998, the Company issued 902,886 shares of Series A mandatorily
redeemable preferred stock at $.858358 per share. In March and April 1999, the
Company issued 1,867,233 shares of Series B mandatorily redeemable preferred
stock at $2.90 per share.
A summary of convertible preferred stock is as follows:
<TABLE>
<CAPTION>
December 31, December 14,
1998 1999
------------ ------------
<S> <C> <C>
Series A redeemable preferred stock, $.01 par
value; 902,886 shares authorized, issued and
outstanding; $775,000 aggregate liquidation
preference, net of issuance costs of
$101,302...................................... $673,698 $ 673,698
Series B redeemable preferred stock, $.01 par
value; 1,867,233 shares authorized, issued and
outstanding; $5,414,976 aggregate liquidation
preference, net of issuance costs of
$71,502....................................... -- 5,343,474
-------- ----------
$673,698 $6,017,172
======== ==========
</TABLE>
Each share of redeemable preferred stock has voting rights equal to its
common stock equivalent, and is convertible at the holder's option into one
share of the Company's common stock, subject to certain adjustments. The
preferred stock automatically converts to common stock in the event of an
initial public offering of not less than $5.00 per share and for a total
offering of not less than $20,000,000, or the date specified by election of
two-thirds of the preferred shareholders voting as a class.
The holders of preferred stock will be entitled to receive non-cumulative
dividends, if and when declared by the Board of Directors, and shall be
entitled to participate pro rata in any dividends paid on the common stock on
an as-if-converted basis.
In the event of any liquidation, dissolution, or winding up of the Company,
the holders of Series A and Series B shall be entitled to receive, in
preference to holders of common stock, an amount equal to $0.858358 and $2.90
per share subject to certain adjustments, respectively plus declared but unpaid
dividends or such amount per share as-if each share had been converted to
common stock prior to such event.
Each of the Series A and Series B redeemable preferred stock is redeemable by
the holder in three equal annual installments upon the election of a majority
of the respective shareholders on or
F-36
<PAGE>
ALIVE.COM, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
after July 2, 2003 and March 15, 2004, respectively. The redemption price of
Series A and Series B is equal to $0.858358 and $2.90 per share subject to
certain adjustments, respectively plus declared but unpaid dividends.
The Company is prohibited from taking certain corporate actions without the
approval of the holders of the majority of outstanding Series A and Series B
shares. In conjunction with the sale of Series A and Series B redeemable
preferred stock, the Company, its founders, and the redeemable preferred stock
investors also entered into an investor rights agreement, voting agreement, and
a stock restriction agreement.
7. SHAREHOLDERS' DEFICIT:
Authorized Shares
The Company has authorized for issuance a total of 30,000,000 shares,
consisting of 20,000,000 shares of common stock, and 10,000,000 shares of
preferred stock, of which 902,886 shares are designated as Series A redeemable
preferred stock and 1,867,233 shares designated as Series B redeemable
preferred stock.
Voting Agreements
Weld, Brown LLC, a Washington limited liability company ("Weld Brown"), and
certain common stock shareholders entered into a voting agreement, whereby each
shareholder has agreed to vote all shares of the Company's common stock or any
other class of voting security of the Company now or hereafter owned or
controlled by them only in the manner specified by a manager of Weld Brown.
In conjunction with the sale of the Series A and Series B redeemable
preferred stock, Allaire Corporation ("Allaire"), Weld Brown, and the Series A
and Series B investors have entered into a voting agreement whereby each has
agreed to fix the number of directors at no more than five, and each are
allowed to designate a director. The fifth board member is designated by the
other four directors.
Restricted Stock and Repurchase Agreements
On July 14, 1998, the Company entered into a contribution and restricted
purchase agreement with Allaire and issued 907,591 shares of common stock
("Allaire shares") in exchange for a license of certain of Allaire's
technology, on a royalty free basis, coupled with an agreement by Allaire to
provide certain technological, sales, and marketing support. Under the terms of
the agreement, 302,531 shares vested immediately and the remaining shares vest,
so long as the agreement is not terminated, at the rate of 50,421 shares at the
end of each three-month period. Shares issued are subject to a repurchase
option upon the occurrence of certain events, at the current fair market value
for vested shares and $0.10 per share for unvested shares.
On July 14, 1998, the Company entered into a restricted stock purchase
agreement with Weld Brown and issued 845,707 shares of common stock ("Weld
Brown shares") in exchange for certain
F-37
<PAGE>
ALIVE.COM, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
intellectual property rights. Under the terms of the agreement, 123,762 shares
were founders shares, 165,017 shares were advisory shares, and 556,928 shares
were executive shares. The founders shares were immediately vested, and
advisory and executive shares vest upon the occurrence of certain performance
and service conditions. Unvested shares were subject to a repurchase option at
$0.10 per share. During October 1998, the Company's board of directors
determined that the performance and service conditions had been satisfied and
all shares were released from the repurchase option.
The fair value of the Allaire shares and Weld Brown shares exchanged, $96,810
and $91,790, respectively was recorded as a deferred charge at the date the
performance commitment was established and is being amortized over the
respective vesting periods. The value of the shares was determined using a
Black-Scholes valuation model with the following assumptions; expected life of
three years, expected dividend yield and volatility of 50%, and a risk-free
interest rate of approximately 5%.
The Company's 1998 Stock Incentive Compensation Plan ("Option Plan") provides
for options to purchase the Company's common stock which are immediately
exercisable, however, the shares are subject to repurchase by the Company at
the exercise price paid. The Company's right of repurchase lapses over four
years, subject to certain acceleration provisions.
Warrants
In June 1999, in connection with an office lease agreement, the Company
issued warrants to purchase 7,500 of the Company's common stock at a price of
$1.25 per share. The warrants are immediately exercisable and expire after the
earlier of August 31, 2004, the sale of substantially all of the Company's
assets, the acquisition of the Company, or an initial public offering. The
value of the warrants of $2,475 was fully amortized at December 14, 1999.
Common Stock Reserved
The Company has reserved sufficient common stock to effect the conversions of
all outstanding shares of the preferred stock. The Company has also reserved
common stock for grants pursuant to the Company's Option Plan and exercise of
common stock warrants.
Stock Option Plan
The Company's Option Plan provides for the issuance of up to 1,498,350
incentive and nonqualified common stock options for employees, directors,
consultants, or advisors of the Company. The Board of Directors is authorized
to administer the Plan and establish the stock option terms, including the
exercise price and vesting periods.
Stock options typically vest over a four-year period, expire five years from
the date of grant, and generally expire ninety days after termination of
employment or services. Stock options are immediately exercisable as of the
options vesting commencement date, however, shares issued are subject to the
Company's right of repurchase which lapses over the vesting period.
The Company's repurchase price is equal to the amount the holder paid for
such shares. Any shares issued which are no longer subject to the Company's
right to repurchase are subject to the
F-38
<PAGE>
ALIVE.COM, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
Company's right of first refusal to purchase any Company shares such holders
propose to sell, pledge, or otherwise transfer.
The Company generally grants stock options with exercise prices equal to the
fair market value of common stock on the date of grant as determined by the
Board of Directors. During 1999 and 1998, the weighted average fair value of
options granted was $0.45 and $0.02, respectively.
On March 18, 1999, the Company amended the Option Plan to provide the
acceleration of vesting of outstanding awards upon a change in control unless
such acceleration would preclude the use of the pooling of interests method in
a business combination. The amendment specifies that for any awards granted
prior to March 18, 1999, upon a change in control, such awards immediately vest
in full and for awards granted on or after March 18, 1999, vesting is
accelerated up to 50% under various circumstances.
A summary of stock option activity is as follows:
<TABLE>
<CAPTION>
Weighted
Average
Exercise
Options Price
-------- ------
<S> <C> <C>
Options granted.......................................... 796,054 $ 0.20
Exercised................................................ (548,283) 0.19
--------
Outstanding, December 31, 1998........................... 247,771 0.22
Options granted.......................................... 167,250 0.80
Exercised................................................ (106,671) (0.25)
Expired.................................................. (123,050) (0.63)
--------
Outstanding, December 14, 1999........................... 185,300 0.45
========
</TABLE>
At December 14, 1999, outstanding stock options have exercise prices ranging
from $0.10-$1.25 per share and weighted average remaining contractual life of
4.31 years.
Under APB No. 25, no compensation expense is recognized when the exercise
price of the Company's employee stock options equals the fair value of the
underlying stock on the date of grant. Deferred stock-based compensation is
recorded for those situations where the exercise price of a stock option is
lower than the deemed fair value for financial reporting purposes of the
underlying common stock. The Company recorded aggregate deferred stock-based
compensation of $36,280 in the period ended December 14, 1999. The deferred
stock-based compensation is being amortized over the vesting period of the
underlying options.
Had the stock-based compensation for the Company's stock options been
determined based on the fair value method prescribed in SFAS 123, the Company's
net loss would have been increased by approximately $60,000 and $1,000 for the
period ended December 14, 1999 and the period from February 27, 1998 (date of
inception) to December 31, 1998, respectively. The fair value for these options
was estimated at the date of grant using the Black-Scholes option pricing model
with the following weighted-average assumptions: risk-free interest rate of
approximately 5%, no dividend yield, zero volatility, and a weighted-average
expected life of the option of three years. The
F-39
<PAGE>
ALIVE.COM, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
pro forma disclosure is not necessarily indicative of future pro-forma
disclosures because of the manner in which Statement 123 calculations are
phased in over time.
8. INCOME TAXES:
At December 14, 1999, the Company has a net operating loss carryforward of
approximately $6.7 million, which is available to offset future taxable income
through 2018. The significant components of the Company's deferred tax assets
consist of the net operating loss carryforward, accrued vacation, and stock-
based compensation expense. Deferred tax assets reflect the 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.
Since the Company's utilization of these deferred tax assets is dependent on
future profits which are not assured, a valuation allowance equal to the
deferred tax assets has been provided.
9. RELATED PARTY TRANSACTIONS:
The Company had a cost-sharing arrangement with Weld Brown whereby the
Company reimbursed Weld Brown for office expenses (including rent, amortization
of applicable computers and furniture, and office supplies) and 50% of the
office administrator's salary. The cost sharing arrangement ceased upon the
Company acquiring its own facility. Total payments to Weld Brown for the period
from February 27, 1998 (date of inception) and for the period ended December
14, 1999 were approximately $158,500 and $32,900, respectively.
10. COMMITMENTS AND CONTINGENCIES:
Operating Lease
The Company leases office facilities in Seattle, Washington and certain
equipment. Rent expense is amortized on a straight-line basis over the periods
in which the benefit from the property is derived. Minimum future rental
payments under these noncancelable operating leases are approximately as
follows:
<TABLE>
<S> <C>
2000............................................................ $ 369,000
2001............................................................ 473,000
2002............................................................ 553,000
2003............................................................ 627,000
2004............................................................ 621,000
Thereafter...................................................... --
----------
$2,643,000
==========
</TABLE>
Rent expense was approximately $50,900 and $276,000 for the period from
February 27, 1998 (date of inception) to December 31, 1998, and for the period
ended December 14, 1999, respectively.
In June 1999, the Company entered into a lease agreement which provides for
the landlord to reimburse the Company for tenant improvements at the rate of
$5.00 per square rentable area. Reimbursements are payable in phases, upon
completion, and are not to exceed an aggregate of $120,215.
F-40
<PAGE>
ALIVE.COM, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
11. SUBSEQUENT EVENT:
Effective December 14, 1999, the Company entered into an agreement whereby
all of the outstanding stock and options of the Company would be acquired by
Loudeye Technologies, Inc. in exchange for 2,508,848 shares of Loudeye common
stock and 91,181 options to acquire Loudeye Common Stock. Immediately prior to
closing of this acquisition, all shares of mandatorily redeemable, convertible
preferred stock were converted into common stock of the Company which were then
acquired by Loudeye in the purchase transaction.
F-41
<PAGE>
[Inside back cover artwork]
[Logo of Loudeye Technologies, Inc.]
www.loudeye.com
<PAGE>
[LOGO OF LOUDEYE TECHNOLOGIES, INC.]
originally encoding.com
Until April 9, 2000 (25 days after commencement of this offering), all
dealers that buy, sell or trade our common stock, whether or not participating
in this offering, may be required to deliver a prospectus. This delivery
requirement is in addition to the dealers' obligation to deliver a prospectus
when acting as underwriters and with respect to their unsold allotments or
subscriptions.
<PAGE>
[LOGO OF LOUDEYE TECHNOLOGIES, INC.]
4,500,000 Shares
Common Stock
Loudeye Technologies, Inc. is offering 4,500,000 shares of its common stock.
This is our initial public offering and no public market currently exists for
our shares.
Our common stock has been approved for quotation on the Nasdaq National
Market under the symbol "LOUD."
--------------
Investing in the common stock involves risks.
See "Risk Factors" beginning on page 7.
--------------
<TABLE>
<CAPTION>
Per Share Total
--------- -----
<S> <C> <C>
Public Offering Price.................................... $16.00 $72,000,000
Underwriting Discounts and Commissions................... $ 1.12 $ 5,040,000
Proceeds to Loudeye...................................... $14.88 $66,960,000
</TABLE>
The Securities and Exchange Commission and state securities regulators have
not approved or disapproved these securities or determined if this prospectus
is truthful or complete. Any representation to the contrary is a criminal
offense.
Loudeye has granted the underwriters a 30-day option to purchase up to an
additional 675,000 shares of common stock to cover over-allotments. FleetBoston
Robertson Stephens Inc. expects to deliver the shares of common stock to
purchasers on March 20, 2000.
--------------
Robertson Stephens International Chase H&Q
CIBC World Markets
The date of this prospectus is March 15, 2000
<PAGE>
UNDERWRITERS
The underwriters named below, acting through their representatives,
FleetBoston Robertson Stephens Inc., Chase Securities Inc. and CIBC World
Markets Corp. have severally agreed with us, subject to the terms and
conditions of the underwriting agreement, to purchase from us the number of
shares of common stock indicated opposite their names below. The underwriters
are committed to purchase and pay for all of the shares if any are purchased.
FleetBoston Robertson Stephens Inc. expects to deliver the shares of common
stock to purchasers on March 20, 2000.
<TABLE>
<CAPTION>
Number of
Underwriters Shares
------------ ---------
<S> <C>
FleetBoston Robertson Stephens Inc. and FleetBoston Robertson
Stephens International Limited.................................. 2,070,000
Chase Securities Inc. ........................................... 1,345,500
CIBC World Markets Corp. ........................................ 724,500
Dain Rauscher Wessels............................................ 80,000
Ragen MacKenzie Incorporated..................................... 80,000
Thomas Weisel Partners Ltd. ..................................... 80,000
D.A. Davidson & Co., Inc. ....................................... 60,000
McAdams Wright Ragen, Inc. ...................................... 60,000
---------
Total........................................................ 4,500,000
=========
</TABLE>
We have been advised that the underwriters propose to offer the shares of
common stock to the public at the initial public offering price located on the
cover page of this prospectus and to certain dealers at that price less a
concession of not in excess of $0.67 per share, of which $0.10 may be
reallocated to other dealers. After the initial public offering, the public
offering price, concession and reallowance to dealers may be reduced by the
representatives. No reduction in this price will change the amount of proceeds
to be received by us as indicated on the cover page of this prospectus.
The underwriters have advised us that they do not expect sales to
discretionary accounts to exceed five percent of the total number of shares
offered.
Over-Allotment Option. We have granted to the underwriters an option,
exercisable during the 30-day period after the date of this prospectus, to
purchase up to 675,000 additional shares of common stock at the same price per
share as we will receive for the 4,500,000 shares that the underwriters have
agreed to purchase. To the extent that the underwriters exercise this option,
each of the underwriters will have a firm commitment to purchase approximately
the same percentage of additional shares that the number of shares of common
stock to be purchased by it shown in the above table represents as a percentage
of the 4,500,000 shares offered by this prospectus. If purchased, the
additional shares will be sold by the underwriters on the same terms as those
on which the 4,500,000 shares are being sold. We will be obligated, under this
option, to sell shares to the extent the option is exercised. The underwriters
may exercise the option only to cover over-allotments made in connection with
the sale of the 4,500,000 shares of common stock offered by this prospectus.
Indemnity. The underwriting agreement contains covenants of indemnity among
the underwriters and us against certain civil liabilities including liabilities
under the Securities Act of 1933 and liabilities arising from breaches of
representations and warranties contained in the underwriting agreement.
Lock-Up Agreements. Each of our executive officers, directors and other
significant stockholders of record has agreed with the representatives, for a
period until 180 days after the date of this prospectus, not to offer to sell,
contract to sell or otherwise sell, dispose of, loan, pledge or grant any
rights with respect to any shares of common stock, any options or warrants to
purchase any
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