<PAGE>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2000
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR
15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
Commission File Number 0-29583
Loudeye Technologies, Inc.
(Exact name of registrant as specified in its charter)
Delaware 91-1908833
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
Times Square Building 414 Olive Way, Suite 300 98101
Seattle, Washington 98101 (ZIP Code)
(Address of principal executive office)
206-832-4000
(Registrant's telephone number, including area code)
Not Applicable
(Former name, former address and former
fiscal year, if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
--- ---
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
As of May 10, 2000 there were outstanding 36,794,428 common shares, with .001
par value, of the registrant.
Page 1
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Loudeye Technologies, Inc.
Form 10-Q Quarterly Report
For the Quarter Ended March 31, 2000
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
Number
------
<S> <C>
PART I. Financial Information
Item 1 Financial Statements.............................................. 3
Condensed Balance Sheets as of December 31, 1999 and March 31,
2000 (unaudited).................................................. 3
Condensed Statements of Operations for the three months ended
March 31, 1999 and 2000 (unaudited)............................... 5
Condensed Statements of Cash Flows for the three months ended
March 31, 1999 and 2000 (unaudited)............................... 7
Notes to Unaudited Condensed Financial Statements................. 9
Item 2 Management's Discussion and Analysis of Financial Condition and
Results of Operations............................................. 17
Item 3 Quantitative and Qualitative Disclosures About Market Risk........ 34
PART II. Other Information
Item 1 Legal Proceedings................................................. 35
Item 2 Changes in Securities and Use of Proceeds......................... 35
Item 3 Defaults Upon Senior Securities................................... 37
Item 4 Submission of Matters to a Vote of Security Holders............... 37
Item 5 Other Information................................................. 37
Item 6 Exhibits and Reports on Form 8-K.................................. 37
Signatures....................................................................... 39
</TABLE>
2
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PART I - FINANCIAL INFORMATION
ITEM I FINANCIAL STATEMENTS
LOUDEYE TECHNOLOGIES, INC.
CONDENSED BALANCE SHEETS
(All amounts in thousands except share and per share amounts)
<TABLE>
<CAPTION>
As of December As of March 31,
-------------- ---------------
31, 1999 2000
-------- ----
(Unaudited)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 49,273 $103,954
Accounts receivable, net of allowance of $187 and
$163, respectively 955 770
Short-term investments 530 4,059
Prepaid and other assets 597 932
--------- ---------
Total current assets 51,355 109,715
Property and equipment, net 5,282 11,450
Goodwill, net 14,207 12,978
Intangibles and other long-term assets 5,931 5,878
--------- ---------
Total assets $ 76,775 $140,021
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable 4,778 1,319
Accrued compensation and benefits 388 624
Accrued liabilities 587 2,211
Customer deposits 438 323
Deferred revenues - 1,010
Current portion of long-term obligations 1,132 1,259
--------- ---------
Total Current Liabilities 7,323 6,746
Long-term obligations, less current portion 1,963 1,902
--------- ---------
Total liabilities 9,286 8,648
--------- ---------
STOCKHOLDERS' EQUITY
Preferred stock, $0.001 par value, 41,000,000 and
5,000,000 shares authorized, 21,063,236 and none
issued and outstanding, preference in liquidation of
$60,903,932 and none 58,536 --
Common stock and additional paid in capital and common
stock warrants, $0.001 par value, 100,000,000 shares
authorized; 8,696,257 and 36,098,178 issued and
outstanding 28,305 177,240
</TABLE>
3
<PAGE>
<TABLE>
<S> <C> <C>
Deferred stock compensation (6,843) (8,715)
Beneficial conversion feature 14,121 --
Accumulated deficit (26,630) (37,152)
--------- ---------
Total stockholders' equity 67,489 131,373
--------- ---------
Total liabilities and stockholders' equity $ 76,775 $140,021
========= =========
</TABLE>
The accompanying notes are an integral part of these financial statements
4
<PAGE>
LOUDEYE TECHNOLOGIES, INC.
CONDENSED STATEMENTS OF OPERATIONS
(UNAUDITED)
(All amounts in thousands except share and per share amounts)
<TABLE>
<CAPTION>
Three Months Ended March 31,
--------------------------------
1999 2000
-------------- -------------
<S> <C> <C>
Revenues:
Digital media services $ 301 $ 1,551
Digital media applications - 98
----------- -----------
Total revenues 301 1,649
Cost of revenues (exclusive of stock-based
compensation expense of none in 1999 and $253 in
2000 shown below)
Digital media services 388 2,134
Digital media applications - 36
----------- -----------
Total cost of revenues 388 2,170
----------- -----------
Gross margin (87) (521)
----------- -----------
Operating Expenses:
Research and development (exclusive of stock-based
compensation expense of none in 1999 and $157 in 142 1,313
2000 shown below)
Sales and marketing (exclusive of stock-based
compensation expense of none in 1999 and $416 in
2000 shown below and other non-cash charges of 470 2,776
$110 in 2000 shown below)
General and administrative (exclusive of stock-based
compensation expense of none in 1999 and $2,313 in 422 1,651
2000 shown below)
Amortization of goodwill and other intangibles -- 1,703
Stock-based compensation -- 3,139
----------- -----------
Total operating expenses 1,034 10,582
----------- -----------
Other income (expense), net (10) 581
----------- -----------
Net loss $ (1,131) $ (10,522)
=========== ===========
Basic and diluted net loss per share $ (0.21) $ (0.84)
=========== ===========
Weighted average shares outstanding used to compute
basic and diluted net loss per share 5,288,000 12,452,312
Basic and diluted pro forma net loss per share $ (0.08) $ (0.35)
=========== ===========
Weighted average shares outstanding used to compute 13,530,981 29,770,973
</TABLE>
5
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basic and diluted pro forma net loss per share
The accompanying notes are an integral part of these statements.
6
<PAGE>
LOUDEYE TECHNOLOGIES, INC.
CONDENSED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(All amounts in thousands)
<TABLE>
<CAPTION>
Three Months Ended March 31,
--------------------------------
1999 2000
------------- ------------
<S> <C> <C>
Cash flows from operating activities:
Net loss $(1,131) $(10,522)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization 116 2,351
Stock-based compensation -- 3,139
Gain/loss on disposal of assets -- 25
Changes in assets and liabilities:
Accounts receivable (175) 185
Prepaids and other assets (122) (335)
Other assets -- (76)
Accounts payable 182 (3,459)
Accrued compensation and benefits 76 235
Accrued liabilities (12) 1,623
Customer deposits and deferred revenues 10 895
------- --------
Net cash used in operating activities (1,056) (5,939)
Cash flows from investing activities:
Purchases of property and equipment (277) (6,810)
Purchases of short-term investments -- (3,529)
------- --------
Net cash used in investing activities (277) (10,339)
Cash flows from financing activities:
Proceeds from issuance of common stock, net -- 70,410
Borrowings on long-term obligations -- 361
Principal payments on long-term obligations -- (293)
Proceeds from issuance of stock options -- 481
------- --------
Net cash provided by financing activities -- 70,959
------- --------
Increase (decrease) in cash and cash equivalents (1,333) 54,681
</TABLE>
7
<PAGE>
<TABLE>
<S> <C> <C>
Cash and cash equivalents, beginning of period 1,442 49,273
------- --------
Cash and cash equivalents, end of period $ 109 $103,954
======= ========
Supplemental disclosure of cash flow information:
Cash paid for interest $ 21 $ 105
======= ========
</TABLE>
The accompanying notes are an integral part of these statements.
8
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LOUDEYE TECHNOLOGIES, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
MARCH 31, 2000 (UNAUDITED)
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:
Unaudited Interim Financial Data
The interim condensed financial statements are unaudited and have been
prepared pursuant to the rules and regulations of the Securities and Exchange
Commission. Certain information and footnote disclosures normally included in
financial statements prepared in accordance with generally accepted accounting
principles have been condensed or omitted pursuant to such rules and
regulations. These condensed financial statements should be read in conjunction
with the audited financial statements and notes thereto included in the
Company's final prospectus as filed with the Securities and Exchange Commission
on March 15, 2000. The financial information included herein reflects all
adjustments (consisting only of normal recurring adjustments) that are, in the
opinion of management, necessary for a fair presentation of the results for
interim periods. The results of operations for the three-month periods ended
March 31, 1999 and 2000 are not necessarily indicative of the results to be
expected for the full year.
Short-term Investments
The Company has established irrevocable standby letters of credit totaling
$4.1 million in conjunction with the lease of the Company's primary office
facility, a remote production facility and the financing of production
technology equipment. The letters of credit related to the leases expire in
October 2000 and December 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 reach $100,000, where they remain through the end of the
term. The letter of credit related to the production technology equipment
expires in April 2000, at which time the short-term investments that
collateralize the letters of credit will be available for general corporate
purposes.
9
<PAGE>
Deferred Revenues
The Company records deferred revenues when cash has been received but the
criteria for revenue recognition have not been met. Deferred revenues are
recognized in accordance with the Company's revenue recognition policy.
Revenue Recognition
The Company generates revenues from two sources: (1) digital media services
and (2) licensing digital media applications.
DIGITAL MEDIA SERVICES
Encoding 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 same
time and materials 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 fees associated with hosting
content and internet applications for customers. 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 long-term contracts. Consulting services revenues
generated by short-term fixed-price contracts will be recognized ratably over
the term of the contract. 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. 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.
DIGITAL MEDIA APPLICATIONS
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. 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 deferred 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.
10
<PAGE>
The Company has entered into agreements whereby it licenses digital media
applications to customers or provides customers the right to multiple copies.
These agreements 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.
The Company sells digital media applications in application service
provider arrangements where it is required to host those applications. When the
Company is required to host the application and the customer does not have the
ability to have the application hosted by another entity without penalty to the
customer, revenue is recognized over the term of the initial hosting
arrangement.
Financial Instruments and Concentrations of Credit Risk
Financial instruments that potentially subject the Company to
concentrations of market risk consist of cash and cash equivalents, short-term
investments, and long-term obligations. Fair values of cash and cash equivalents
and short-term investments, which at March 31, 2000 was a certificate of deposit
securing a 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. The Company performs initial and ongoing evaluations of its
customers' financial positions, and generally extends credit on open account,
requiring collateral as deemed necessary. The Company maintains allowances for
potential credit losses.
During the three-month periods ended March 31, 1999 and 2000, the company
had sales to certain significant customers, as a percentage of revenues, as
follows:
11
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------------------------------------------------------------
March 31, 1999 March 31, 2000
------------------------------------------------------------
Customer A 29%
Customer B 12%
Customer C 10%
Customer D 12% -
-------- --------
Total 12% 51%
======== ========
Reclassifications
Certain information reported in previous periods has been reclassified to
conform to the current period presentation.
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. 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.
Basic and diluted pro forma 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 into common stock upon the
completion of the Company's initial public offering on March 15, 2000 (using the
if-converted method from the original issue date). Diluted pro forma net loss
per share excludes the impact of stock options and warrants, as the effect of
their inclusion would be antidilutive.
At March 31, 2000 the Company had 1,517,792 stock options that had been
exercised but which were subject to repurchase at a weighted average exercise
price of $0.36 per share. Accordingly, the impact of these unvested but
exercised options has been removed from the calculation of weighted average
shares outstanding for purposes of determining basic and diluted earnings per
share and basic and diluted pro forma earnings per share.
12
<PAGE>
As part of the terms of the acquisition of Alive.com on December 14,
1999, the following shares were subject to repurchase:
. 297,628 outstanding vested shares issued by Alive.com 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.
. 148,816 outstanding unvested shares issued by Alive.com 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. Accordingly, the impact
of these shares has been removed from the calculation of weighted average
shares outstanding for purposes of determining basic and diluted earnings
per share and basic and diluted pro forma earnings per share.
The following table presents a reconciliation of shares used to calculate
basic and diluted earnings per share:
<TABLE>
<CAPTION>
March 31, 2000
Actual Pro Forma
------- ----------
<S> <C> <C>
Weighted average shares outstanding 13,911,827 31,230,488
Impact of Allaire unvested shares subject to repurchase (148,816) (148,816)
Impact of Alive options exercised, not vested (152,593) (152,593)
Weighted average impact of options exercised but subject
to repurchase (1,158,106) (1,158,106)
---------- ----------
Weighted average shares used to calculate basic and
diluted earnings per share 12,452,312 29,770,973
========== ==========
</TABLE>
3. INITIAL PUBLIC OFFERING
On March 15, 2000, the Company closed its initial public offering of
4,500,000 shares of common stock at $16.00 per share, for net proceeds of $67.0
million. At closing, all of the Company's issued and outstanding shares of
convertible preferred stock were converted into shares of common stock on a one-
for-one basis. On April 14, 2000, the underwriters for the IPO exercised their
over-allotment option and purchased an additional 675,000 shares at $16.00 per
share, for net proceeds of $10.0 million. Concurrent with the initial public
offering, the Company sold 336,022 shares of common stock at a price of $14.88
per share to a strategic investor. Net proceeds to the Company were $5.0
million. The discount from the initial public offering price of approximately
$376,000 was capitalized as an intangible asset and will be amortized over a
period of one year. The combined net proceeds to the Company
13
<PAGE>
from the preceding transactions, less offering costs of approximately $1.5
million, were $80.4 million.
4. 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 March 31, 1999.
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. Approximately 53,000 of these options had vested
in full as of March 31, 2000 and therefore give rise to no further compensation
related to their vesting. Approximately 53,000 of these options had been
cancelled as of March 31, 2000. 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 four and one-half 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 $1.9 million was
recognized in stock-based compensation expense related to these options in the
three-month period ended March 31, 2000.
For the three-month period ended March 31, 2000, the Company recorded a
total of approximately $3.1 million in stock-based compensation charges as a
component of operating expenses. This amount represents both the consulting
expenses described above as well as amortization of stock options granted below
deemed fair market value. These amounts can be allocated to other expense
categories in the accompanying statements of operations as follows: (in
thousands)
<TABLE>
<S> <C>
Production (cost of revenues).............................. $ 253
Research and development................................... 157
Sales and marketing........................................ 416
General and administrative................................. 2,313
------
$3,139
======
</TABLE>
5. SEGMENT INFORMATION
14
<PAGE>
The Company operates in one business segment, digital media services, for
which the Company receives revenues from its customers. The Company's Chief
Operating Decision Maker is considered to be the Company's Executive Team
(CET) which is comprised of the Company's Chief Executive Officer, the
Company's Chief Operating Officer, and the Company's Vice Presidents. The CET
reviews financial information presented on a consolidated basis accompanied by
disaggregated information about products and services for purposes of making
decisions and assessing financial performance. The CET does not allocate
resources by product or service type and does not review discrete financial
information regarding the Company's different products or services on a
disaggregated basis other than as presented in the following table and,
therefore, the Company does not have operating segments as defined by SFAS
131, "Disclosure About Segments of an Enterprise and Related Information".
The following table sets forth certain information by product type for the
three-month periods ended March 31, 1999 and 2000. (000s)
<TABLE>
<CAPTION>
For the three months ended
March 31,
---------------------------------
1999 2000
---------------------------------
<S> <C> <C>
Revenues from unaffiliated customers:
Digital media services $ 301 $ 1,551
Digital media applications - 98
------------- ---------------
$ 301 $ 1,649
============= ===============
Cost of revenues:
Digital media services $ 388 $ 2,134
Digital media applications - 36
------------- ---------------
$ 388 $ 2,170
============= ===============
Gross margin:
Digital media services $ (87) $ (583)
Digital media applications - 62
------------- ---------------
$ (87) $ (521)
============= ===============
Profit reconciliation
Gross margin by product $ (87) $ (521)
Operating expenses (1,034) (10,582)
Other income (expense), net (10) 581
------------- ---------------
Net loss $(1,131) $(10,522)
============= ===============
</TABLE>
6. SUBSEQUENT EVENT
In April 2000, the Company entered into a non-binding agreement in principal
with Imperial Bank to amend our loan agreement with Imperial to permit revolving
borrowings and standby letters of credit aggregating up to $2.0 million.
Additionally, the amended facility would provide a term loan of up to $10.0
million for the purchase of capital equipment. The $2.0 million credit line
would bear interest at Imperial Bank's prime rate (9.0% at March 31, 2000), with
principal and interest due at maturity in one year. The $10.0 million equipment
facility would bear interest payable monthly during each draw period at
Imperial's prime rates plus 0.75% followed by 36 equal monthly payments of
principal plus interest. Borrowings under this facility will be secured by a
pledge of substantially all of our assets. Closing of this credit facility is
subject to negotiation of definitive agreements and satisfaction of a number of
conditions. We expect to close this facility during the second quarter of 2000,
but there is no assurance that we will do so.
15
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7. RECENT ACCOUNTING PRONOUNCEMENTS
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. In March 2000, the SEC staff announced that the adoption
date for SAB No. 101 would be delayed until the second quarter of 2000. We
believe that our revenue recognition practices are currently in conformity with
the guidelines in SAB No. 101, and therefore this announcement will have no
impact on our financial statements.
In March 2000, the Financial Accounting Standards Board, or FASB, released
FASB Interpretation No.44, "Accounting for Certain Transactions involving Stock
Compensation, an interpretation of APB Opinion No.25," which provides
clarification of Opinion 25 for certain issues such as the determination of who
is an employee, the criteria for determining whether a plan qualifies as a
noncompensatory plan, the accounting consequence of various modifications to the
terms of a previously fixed stock option or award, and the accounting for an
exchange of stock compensation awards in a business combination. We believe that
our practices are in conformity with this guidance, and therefore Interpretation
No. 44 will have no impact on our financial statements.
In March 2000, the Emerging Issues Task Force of the FASB, or EITF, issued
EITF 00-2, "Accounting for the Costs of Developing a Website." This issue
addresses how an entity should account for costs incurred to develop a website.
To date, we have not capitalized any such costs and believe that our historical
and current practices are in conformity with EITF 00-2 and therefore, this
release will not have a material impact on our financial statements.
In March 2000, the EITF issued EITF 00-3, Application of AICPA SOP 97-2 to
"Arrangements that Include the Right to Use Software Stored on Another Entity's
Hardware." This issue addresses situations where entities license software
applications to a third party and also host those applications. To date we have
not recognized significant revenues from applications that are subject to EITF
00-3. We do not expect this pronouncement to have a material impact on our
financial statements.
16
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Forward-Looking Statements
The following discussion of the financial condition and results of
operations of Loudeye Technologies contains forward-looking statements within
the meaning of section 27A of the Securities Act of 1993 and Section 21E of the
Securities Exchange Act of 1934. 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. All forward-looking statements
included in this document are based on information available to the Company on
the date hereof, and the Company assumes no obligation to update any such
forward-looking statements. In evaluating these statements, you should
specifically consider various factors, including the risks outlined under the
caption "Risk Factors" set forth at the end of this Item 2, the Risk Factors set
forth in our prospectus dated March 15, 2000 filed with the Securities and
Exchange Commission and those contained from time to time in our other filings
with the SEC. We caution investors that our business and financial performance
are subject to substantial risks and uncertainties.
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 and end-to-end solutions
that include encoding services, publication and distribution of rich media and
hosting services.
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.
We charge our customers on either a time and materials basis or a fixed fee
basis that 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 customer upon delivery of encoded product. Payment terms with customers
generally require payment within 30 days of the invoice date. 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. In the first quarter of 2000 we recognized our first
revenue from licensing our digital media applications. Revenues consisted of
licensing fees and implementation fees of approximately $98,000.
In the period ended March 31, 2000, we recorded deferred stock-based
compensation related to stock options granted below deemed fair market value in
that period of $3.1
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million. We amortized $1.2 million of deferred stock-based compensation through
the same period. This amount represents the difference between the exercise
price of stock option grants and the deemed fair value of the common stock at
the time of grant. We will record additional stock-based compensation charges of
$8.7 million in respect of all options granted to date over the vesting period
of the options, which is generally four and one-half years. As a result, the
amortization of stock-based compensation associated with options granted prior
to the date of this report will impact our reported results of operations
through fiscal 2005.
To date, we have granted approximately 220,000 options to consultants which
vest on similar terms as options granted to employees. These terms require that
the individuals continue their current consulting relationship with us in order
to continue vesting. Approximately 53,000 of these options had vested in full
as of March 31, 2000 and therefore have no further compensation related to their
vesting. Approximately 53,000 of these options had been cancelled as of March
31, 2000. Remaining 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 four and one-half 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 $1.9 million was recognized in stock-
based compensation expense related to these options in the quarter ended March
31, 2000.
In December 1999, we granted a warrant to purchase 650,000 shares of common
stock to Valley Media in conjunction with a services agreement. The warrant was
exercised in March 2000 in a cashless exercise for a total of 487,500 shares.
We have sustained losses and incurred negative gross margins on a quarterly
and annual basis since inception and we expect to sustain losses and incur
negative gross margins for the foreseeable future as we expand our operations
and production facilities. As of March 31, 2000, we had an accumulated deficit
of $37.2 million. Operating losses resulted from significant costs incurred in
the development and sale of our products and services as well as significant
non-cash charges related to stock-based compensation and amortization of
intangibles and other assets. We expect our operating expenses to continue to
increase 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 early and
rapidly evolving nature of our business, we believe that period-to-period
comparisons of our operating results, particularly for the three-month periods
ended March 31, 1999 and 2000, 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 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
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of securities analysts and investors. In this event, the trading price of our
common stock may fall significantly.
Results of operations
Three-Month Periods Ended March 31, 2000 and 1999
Revenues. Revenues were $1.6 million and approximately $301,000 for the
three-month periods ended March 31, 2000 and 1999, respectively. The increase
was due primarily to an increase in the number and average size of orders for
our digital media services. We believe that the increase in sales was primarily
driven by the addition during the period ended March 31, 2000 of 17 new
employees within sales and marketing for digital media services. Additionally,
the introduction of our Consulting Services Group in late 1999 and the
commencement of applications sales added to the increase in revenues over the
same period last year.
Cost of Revenues. Cost of revenues increased 467% to $2.2 million in 2000
from approximately $388,000 in 1999. Cost of revenues includes cost of personnel
expenses and the allocated portion of facilities and equipment. Stock-based
compensation charges of approximately $253,000 and none for the periods ended
March 31, 2000 and 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 as a percent of revenues
increased to 132% for the period ended March 31, 2000 from 129% of revenues for
the period ended March 31, 1999. The increase in absolute dollars was primarily
due to increased sales volumes. The decrease in gross margin as a percent of
revenues was primarily due to the expansion of our facilities and added
allocations which increased at a rate greater than the increase in our sales.
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 sales. If sales through
indirect channels increase as a percentage of total net revenues our gross
margins will decrease.
Operating Expenses. Operating expenses increased 960% to $10.6 million in
the period ended March 31, 2000 from $1.0 million in the period ended March 31,
1999. Without the effect of $3.1 million of stock-based compensation charges and
$1.7 million in amortization of intangible assets and partner acquisition costs,
operating expenses for the period ended March 31, 2000 would have been $5.8
million, an increase of $4.8 million, or 480% over the period ended March 31,
1999.
Research and Development Expenses. Research and development expenses
consist of salaries and consulting fees to support development and costs of
technology acquired from third parties to incorporate into applications and
other proprietary technology currently under development. Additionally, costs of
developing original digital media applications for license to third parties and
continued work on enhancing our proprietary automated encoding processes
comprise a significant portion of research and
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development expenses. Finally, the continued development costs associated with
our Valley Media project have added to the increase in research and development
costs. Stock-based compensation charges of approximately $157,000 in the period
ended March 31, are attributable to employees categorized within research and
development and are presented in a separate line item within the statements of
operations. There were no stock-based compensation charges in the three month
period ended March 31, 1999. To date, approximately $53,000 of research and
development costs have been capitalized within other intangible assets as
capitalized software development costs. All other 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 815% to $1.3 million, or 80% of
revenues; in the period ended March 31, 2000 from approximately $142,000, or 47%
of revenues, in the period ended March 31, 1999. The increase was due primarily
to increases in applications under development and additional development
personnel.
Sales and Marketing Expenses. Sales and marketing expenses consist
primarily of salaries, commissions, trade show expenses, advertising and cost of
marketing collateral. Stock-based compensation charges of approximately $416,000
in the period ended March 31, 2000 are attributable to employees categorized
within sales and marketing and are presented in a separate line item within the
statements of operations. There were no stock-based compensation charges in the
three month period March 31, 1999. Sales and marketing expenses increased 496%
to $2.8 million, or 168% of revenues; in the period ended March 31, 2000 from
approximately $470,000, or 156% of revenues, in the period ended March 31, 1999.
The increase was primarily due to growth in the sales force, commissions paid on
the increased sales over the same period in 1999 and costs related to our
increased branding and marketing campaigns. We intend to continue our aggressive
branding and marketing campaigns and therefore expect sales and marketing
expenses to increase significantly.
General and Administrative Expenses. General and administrative expenses
consist primarily of rent and unallocated facilities charges, salaries, legal
expenses for general corporate purposes and patents applied for, legal and
investor relations costs associated with becoming a public company, and
recruiting and relocation costs required for the significant expansion in our
operations. We believe that as operations continue to increase in size and
scope, general and administrative expenses will continue to increase. General
and administrative expenses increased 303% to $1.7 million, or 100% of revenues,
in the period ended March 31, 2000 from approximately $422,000, or 140% of
revenues, in the period ended March 31, 1999. The increase in absolute terms
was primarily driven by new facilities opened during late 1999 and the first
quarter of 2000 and the increase in employees in the finance, legal, investor
relations and executive areas required to support a larger organization,
increased sales and public reporting obligations. Company-wide part-time and
full time employment grew from approximately 41 at January 31, 1999 to
approximately 294 at March 31, 2000. The decrease as a percentage of revenues
was driven by added focus on cost control measures as compared to the same
period of the prior year. Stock-based compensation charges of $2.3 million for
the period
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ended March 31, 2000 are attributable to employees and consultants categorized
within general and administrative and are presented within a separate line item
within the statements of operations. Of the total stock-based compensation
charges, $1.9 million is due to marking options granted to consultants to fair
value.
Amortization of Goodwill and other intangibles. Amortization of Goodwill
and other intangibles of $1.7 million in the period ended March 31, 2000
includes amortization of the goodwill and identified intangible assets recorded
as part of the Alive.com acquisition, which took place in December 1999.
Additional amortization of capitalized partner acquisition costs of $1.1 million
and $376,000 related to the fair value of warrants granted to Valley Media and
the discount on the sale of securities to Akamai Technologies which closed
concurrent with our initial public offering is included in this line item on the
statements of operations. We had no intangible assets as of March 31, 1999, and
accordingly, there were no related amortization charges.
Stock-Based Compensation. Stock-based compensation of $3.1 million in the
period ended March 31, 2000 consists of $1.2 million in amortization of deferred
stock compensation related to stock options granted below deemed fair market
value through March 31, 2000 and $1.9 million in expense related to marking
options granted to consultants to fair market value as of March 31, 2000. There
were no stock-based compensation charges in the period ended March 31, 1999.
Other Income (Expense), net. Net other income (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
was approximately $581,000 net income in the period ended March 31, 2000 and
$10,000 net expense in the period ended March 31, 1999. The increase was due
primarily to interest earned on our significantly higher cash and investment
balances in 2000, which totaled $108.0 million at March 31, 2000.
Liquidity and Capital Resources
On March 15, 2000, we closed our initial public offering of 4,500,000
shares of common stock at $16.00 per share, for proceeds of $67.0 million. On
April 14, 2000, the underwriters for the IPO exercised their over-allotment
option and purchased an additional 675,000 shares at $16.00 per share, for net
proceeds of $10.0 million. Concurrent with the initial public offering, we sold
336,022 shares of common stock at a price of $14.88 per share to a strategic
investor for net proceeds of $5.0 million. The combined net proceeds of these
stock transactions, less offering costs of approximately $1.6 million, were
$80.4 million.
Net cash used in operating activities was $5.9 million and $1.0 million in
the three-month periods ended March 31,2000 and 1999, respectively. Cash used in
operating activities in 1999 was due primarily to a net loss of $1.1 million.
For 2000, cash used in operating activities resulted primarily from a net loss
of $10.5 million and a decrease of approximately $3.5 million in accounts
payable, largely offset by non-cash charges of $5.5 million related to stock-
based compensation, depreciation and amortization and
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increases of approximately $895,000 in customer deposits and deferred revenues,
a decrease in trade accounts receivable of approximately $185,000 and increases
of $1.9 million in other accrued expenses.
Net cash used in investing activities was $10.3 million and approximately
$277,000 for the three-month periods ended March 31, 2000 and 1999,
respectively. This was primarily related to purchases of equipment and increases
in short-term investments.
Cash provided by financing activities was $71.0 million and none for the
three-month periods ended March 31, 2000 and 1999, respectively. This primarily
resulted from the net proceeds of our initial public offering on March 15, 2000,
which yielded $70.4 million. As of March 31, 2000, we had $108.0 million of
cash, cash equivalents and short-term investments.
As of March 31, 2000, our principal commitments consisted primarily of
obligations outstanding under operating leases, a note payable of approximately
$777,000 under our credit facility with Imperial Bank and eight notes payable,
totaling approximately $2.2 million, under our credit facility with Dominion
Venture Finance LLC. Borrowings from Imperial Bank bear interest at Imperial's
prime rates and are secured by substantially all of our assets. The average
interest rate paid in the period ended March 31, 2000 on our borrowings under
the Imperial Bank facility was 8.77%. The notes payable to Dominion bear
interest at rates ranging from 8.57% to 9.65%. Interest on the Imperial Bank
note is payable monthly, and the principal is due on August 30, 2002. Interest
on the Dominion Venture Finance notes is payable monthly, and the principal is
due in the third and fourth quarters of 2002. For the foreseeable future we
anticipate an increase in our capital expenditures and lease commitments
consistent with anticipated growth in operations, infrastructure and personnel.
In April 2000, we entered into a non-binding agreement in principal with
Imperial Bank to amend our loan agreement with Imperial to permit revolving
borrowings and standby letters of credit aggregating up to $2.0 million.
Additionally, the amended facility would provide a term loan of up to $10.0
million for the purchase of capital equipment. The $2.0 million credit line
would bear interest at Imperial Bank's prime rate (9.0% at March 31, 2000), with
principal and interest due at maturity in one year. The $10.0 million equipment
facility would bear interest payable monthly during each draw period at
Imperial's prime rates plus 0.75% followed by 36 equal monthly payments of
principal plus interest. Borrowings under this facility will be secured by a
pledge of substantially all of our assets. Closing of this credit facility is
subject to negotiation of definitive agreements and satisfaction of a number of
conditions. We expect to close this facility during the second quarter of 2000,
but there is no assurance that we will do so.
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 our existing cash, cash equivalents and short-term
investments and the amounts available under the working capital line and the new
facility 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.
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RISK FACTORS
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 $23.0 million during the
period August 12, 1997 (inception) through March 31, 2000. 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:
. Achieve customer adoption and acceptance of our products and services;
. 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 our operating expenses in
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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 that 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.
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Historically, we have priced our digital media services based on the
customer's projected service volumes. We generally offer our digital media
services through volume purchase orders with prices determined by customers
committing to specific service volumes and schedules and paying nonrefundable
deposits. We attempt to secure these commitments from customers to enable us 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, uncertainty about how to generate revenue by using rich media,
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, identifying viable revenue models for digital media, 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.
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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.
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 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 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
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Computer, Inc., Microsoft Corporation, RealNetworks, Inc. and Terran
Interactive, Inc. and hosting and distribution companies including, among
others, Digital Island, Inc., Enron Corp., Akamai Technologies, Inc., and iBEAM
Broadcasting. We rely on these relationships for licensed technology to maintain
our ability to service RealNetworks RealMedia, 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 March
31, 2000, we have grown from 41 to 294 employees. In December 1999, we acquired
Alive.com. In addition, we 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 and expand 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 have recently added new production facilities in Santa
Monica, California, and plan to add sales offices and production facilities in
New York, New York as well as internationally. In March 2000 we opened a sales
office in London, England. This broad expansion will create significant
challenges for us. If we are unable to meet these 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
advancement 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.
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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 or
volume of content 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.
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 grow, we will need to hire additional 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
28
<PAGE>
share from increased competition, our business will be harmed. In addition, the
more successful we are in the emerging market for Internet media services and
applications, the more competitors are likely to emerge including turnkey
Internet media application and service providers such as Yahoo!, Broadcast
Services, 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 and Sonic Foundry. Our
digital media applications business may face competitive products from companies
like AudioSoft, AudioTruck, InterTrust Technologies Corporation, Microsoft,
RealNetworks, Versifi, Virage and Vignette Corporation.
We also may not compete successfully against current or future competitors,
many of whom 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 and 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 of 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 sales and service support and other contractual agreements. We
have experienced and expect to continue to experience
29
<PAGE>
pricing pressure 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 the 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;
. 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 schedules 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 or 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.
30
<PAGE>
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 five patent applications on file with the U.S. Patent and
Trademark Office. We cannot assure 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 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. 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.
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
three-months ended March 31, 1999, one of our customers composed approximately
12% of our revenues, while in the three-months ended March 31, 2000, three
customers composed approximately 51% of our revenues. 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
31
<PAGE>
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 expectation 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 represent 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 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.
Our expansion into international markets 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. In March 2000 we opened a sales office in London,
England. Our further expansion will involve a significant use of management and
financial resources, particularly because we have no previous experience with
international operations. We
32
<PAGE>
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.
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 expect to search for and acquire businesses, technologies, services, or
products that we believe are a strategic fit with our business. We currently
have no binding commitments or definitive agreements with respect to any
material acquisition. 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 to 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 acquired 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
33
<PAGE>
and business in the future. If returns increase, our reserves may not be
sufficient and our operating results would be negatively affected.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We provide internet media infrastructure services and applications. Our
financial results could be affected by factors such as changes in interest
rates. As all sales are currently made in U.S. dollars, a strengthening of the
dollar could make our services less competitive in foreign markets. We do not
use derivative instruments to hedge our risks. Our interest income is sensitive
to changes in the general level of U.S. interest rates, particularly since the
majority of our investments are in short-term instruments. Due to the nature of
our short-term investments, we anticipate no material market risk exposure.
Therefore, no quantitative tabular disclosures are presented.
34
<PAGE>
PART II. OTHER INFORMATION
ITEM 1: LEGAL PROCEEDINGS
None.
ITEM 2: CHANGES IN SECURITIES AND USE OF PROCEEDS
(c) Recent Sales of Unregistered Securities
On March 15, 2000, concurrent with the closing of our initial public
offering, we sold to Akamai Technologies, Inc., or Akamai, 336,022 shares of our
unregistered common stock at $14.88 per share, which generated cash proceeds of
$5.0 million. In issuing these securities, we relied on Section 4(2) of the
Securities Act, on the basis that the transaction did not involve a public
offering. Akamai represented to us that it was an accredited investor within the
meaning of Rule 501 of Regulation D and was able to bear the financial risk of
its investment. Akamai further represented that its intention to acquire the
securities was for investment only and not with a view to or for sale in
connection with any distribution thereof and appropriate legends were affixed to
the securities. We did not make any offer to sell the securities by means of any
general solicitation or general advertising within the meaning of Rule 502 of
Regulation D of the Securities Act. We intend to use the net proceeds from the
private placement primarily for working capital and general corporate purposes.
In the quarter ended March 31, 2000, we issued 986,551 shares of
unregistered common stock to employees pursuant to the exercise of stock options
under our 1998 Stock Option Plan. These options were exercised at a weighted
average exercise price of $0.47 per share. The issuance of these securities was
deemed to be exempt from registration under the Securities Act in reliance on
Rule 701 of the Securities Act.
(d) Use of Proceeds from Sales of Registered Securities
On March 15, 2000, we completed an initial public offering of our common
stock pursuant to a registration statement on Form S-1, file number 333-93361
that was declared effective by the SEC on March 14, 2000. All 4,500,000 shares
of common stock offered in the final prospectus, as well as an additional
675,000 shares of common stock subject to the underwriters' over-allotment
option that was exercised on April 14, 2000, were sold at a price per share of
$16.00. The managing underwriters of our offering were BancBoston Robertson
Stephens, Chase H&Q, and CIBC World Markets. The aggregate gross proceeds of the
shares offered and sold was $87.8 million. In connection with the offering, we
paid an aggregate of $5.8 million in underwriting discounts and commissions to
the underwriters. In addition, the following table sets forth the other
material expenses incurred in connection with the offering.
Amount Paid
-----------
Securities and Exchange Commission registration fee 89,000
NASD filing fee 9,000
35
<PAGE>
Nasdaq National Market listing fee 118,000
Printing and engraving expenses 350,000
Legal fees and expenses 309,000
Accounting fees and expenses 211,000
Travel fees and expenses 315,000
Miscellaneous fees and expenses 148,000
----------
Total $1,549,000
==========
After deducting the underwriting discounts and commissions and the offering
expenses described above, we received net proceeds from our initial public
offering of approximately $80.4 million. We are using the net proceeds raised in
our initial public offering primarily for working capital and general corporate
purposes and to repay indebtedness.
To date we have not used any of the proceeds from the offering, but we
intend to use the proceeds from this offering as follows:
. We intend to expand our operations internationally. In March, 2000 we
announced the opening of our first international office in London to
increase sales to customers already served from our Seattle office, and to
expand our presence in Europe.
. We have opened production facilities in Santa Monica, California and
intend to open facilities in New York, New York in 2000. We estimate that
over $3.5 million will be used to fund the initial build-out of these
facilities.
. We continue to incur losses from operations and expect to fund these
through the net proceeds from our financings to date. The remainder of the
net proceeds will be used for working capital and general corporate
purposes. The amounts that we actually expend for working capital will vary
significantly depending on a number of factors, including future revenue
growth, if any, and the amount of cash we generate from operations. As a
result, we will retain broad discretion in allocating the net proceeds of
our initial public offering.
In addition, we may use a portion of the net proceeds our initial public
offering to acquire or invest in complementary businesses, products and
technologies. From time to time, in the ordinary course of business, we expect
to evaluate potential acquisitions of such businesses, products or technologies.
As a result, we will have broad discretion in the way we use net proceeds.
Pending such uses, the net proceeds will be invested in interest bearing,
investment-grade securities.
None of the net offering proceeds were paid, and none of the initial public
offering expenses related to payments, directly or indirectly, to directors,
officers or general partners of the Company or their associates, persons owing
10% or more of any class of our securities, or affiliates of the Company.
36
<PAGE>
ITEM 3: DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4: SUBMISSION OF MATTERS TO A VOTE OF SECURITY SHAREHOLDERS
(a)/(c) Effective February 9, 2000, at least a majority of the holders
of capital stock of Loudeye approved the following items in an action by written
consent:
. the form of post initial public offering Amended and Restated Certificate
of Incorporation of Loudeye Technologies, Inc.;
. the adoption of the 2000 Stock Option Plan;
. the adoption of the 2000 Director Stock Option Plan;
. the adoption of the 2000 Employee Stock Purchase Plan;
. the election of directors; and
. the conversion of all of our outstanding preferred stock into common stock.
(b) Martin G. Tobias, Charles P. Waite, Jr., Stuart Ellman and Johan Liedgren
were reelected to the Board of Directors and constitute all of the directors
whose terms of office continued after the date of the stockholder action.
ITEM 5: OTHER INFORMATION
ITEM 6: EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits.
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------
Exhibit Number Description
- -------------- -----------
- ------------------------------------------------------------------------------------------------
<S> <C>
2.1* Agreement and Plan of Reorganization dated November 19, 1999 between
Loudeye Technologies, Inc. and Alive.com, Inc.
- ------------------------------------------------------------------------------------------------
3.1* Fifth Amended and Restated Certificate of Incorporation of Loudeye
Technologies, Inc.
- ------------------------------------------------------------------------------------------------
3.2* Form of Amended and Restated Certificate of Incorporation of Loudeye.
- ------------------------------------------------------------------------------------------------
3.4* Bylaws of Loudeye Technologies, Inc.
- ------------------------------------------------------------------------------------------------
4.1* Form of Loudeye Technologies, Inc. common stock certificate.
- ------------------------------------------------------------------------------------------------
10.1* Form of Indemnification Agreement between Loudeye Technologies and each of
its officers and directors.
- ------------------------------------------------------------------------------------------------
</TABLE>
37
<PAGE>
<TABLE>
<S> <C>
- ------------------------------------------------------------------------------------------------
10.2* 1998 Stock Option Plan, as amended.
- ------------------------------------------------------------------------------------------------
10.3* Alive.com, Inc. 1998 Stock Option Plan.
- ------------------------------------------------------------------------------------------------
10.4* 2000 Stock Option Plan.
- ------------------------------------------------------------------------------------------------
10.5* 2000 Director Stock Option Plan.
- ------------------------------------------------------------------------------------------------
10.6* 2000 Employee Stock Purchase Plan.
- ------------------------------------------------------------------------------------------------
10.7* Series A Preferred Stock Subscription Agreement dated March 26, 1998
between Loudeye Technologies, Inc. and Martin Tobias.
- ------------------------------------------------------------------------------------------------
10.8* Series A Preferred Stock Subscription Agreement dated March 26, 1998
between Loudeye Technologies, Inc. and Alex Tobias.
- ------------------------------------------------------------------------------------------------
10.9* Series A Preferred Stock Note Conversion Agreement dated June 5, 1998
between Loudeye Technologies, Inc. and Martin Tobias.
- ------------------------------------------------------------------------------------------------
10.10* Series B Preferred Stock Purchase Agreement dated June 5, 1998 among
Loudeye Technologies, Inc. and Purchasers of Series B Preferred Stock.
- ------------------------------------------------------------------------------------------------
10.11* Series C Preferred Stock Purchase Agreement dated April 30, 1999 among
Loudeye Technologies and Purchasers of Series C Preferred Stock.
- ------------------------------------------------------------------------------------------------
10.12* Series C Preferred Stock Purchase Agreement dated August 6, 1999 among
Loudeye Technologies, Inc. and Purchasers of Series C Preferred Stock.
- ------------------------------------------------------------------------------------------------
10.13* Form of Warrant To Purchase Series C Preferred Stock dated June 22, 1999
between Loudeye Technologies, Inc. and Dominion Capital Management, L.L.C.
- ------------------------------------------------------------------------------------------------
10.14* Series D Preferred Stock Purchase Agreement dated December 14, 1999 among
Loudeye Technologies, Inc. and Purchasers of Series D Preferred Stock.
- ------------------------------------------------------------------------------------------------
10.15* Amended and Restated Investors' Rights Agreement dated December 14, 1999
among Loudeye Technologies, Inc. and certain holders of our preferred stock.
- ------------------------------------------------------------------------------------------------
10.16* Warrant to Purchase Common Stock dated December 17, 1999 between Loudeye
Technologies, Inc. and Valley Media, Inc.
- ------------------------------------------------------------------------------------------------
10.17* Lease Agreement dated August 10, 1999 between Loudeye Technologies, Inc.and
Times Square Building LLC for offices at Times Square Building, 414 Olive
Way, Suite 300, Seattle, Washington.
- ------------------------------------------------------------------------------------------------
10.18* Lease Agreement dated September 1, 1998 between Loudeye Technologies,
Inc. and Martin Tobias for offices at 3406 E. Union Street, Seattle,
Washington.
- ------------------------------------------------------------------------------------------------
10.19* Lease Agreement dated October 28, 1999 between Loudeye Technologies, Inc.and
Westlake Park Associates for offices at Centennial Building, 1904 Fourth
Avenue, Seattle, Washington.
- ------------------------------------------------------------------------------------------------
10.20* Lease Agreement dated June 7, 1999 between Loudeye Technologies, Inc. and
MSI 83 King LLC for offices at 83 King Street, Seattle, Washington.
- ------------------------------------------------------------------------------------------------
10.21* Lease Agreement dated November 9, 1999 between Loudeye Technologies, Inc.
and Downtown Entertainment Associates, LP for offices at 1424 Second
Street, Santa Monica, California.
- ------------------------------------------------------------------------------------------------
10.22+* Encoding Services Agreement dated June 30, 1999 between Loudeye
Technologies, Inc. and Emusic.com, Inc.
- ------------------------------------------------------------------------------------------------
10.23+* Services Agreement dated December 17, 1999 between Loudeye Technologies,
Inc. and Valley Media, Inc.
- ------------------------------------------------------------------------------------------------
</TABLE>
38
<PAGE>
<TABLE>
<S> <C>
- ------------------------------------------------------------------------------------------------
10.24* Imperial Bank Starter Kit Loan and Security Agreement dated August 4, 1998
between Loudeye Technologies, Inc. and Imperial Bank.
- ------------------------------------------------------------------------------------------------
10.25* Loan and Security Agreement with Dominion Venture Finance L.L.C. dated June
15, 1999 between Loudeye Technologies, Inc. and Dominion Venture Finance
L.C.C.
- ------------------------------------------------------------------------------------------------
10.26* Offer Letter to David Bullis dated June 23, 1999.
- ------------------------------------------------------------------------------------------------
10.27* Offer Letter to Larry Culver dated August 2, 1999.
- ------------------------------------------------------------------------------------------------
10.28* Offer Letter to Douglas Schulze dated August 30, 1999.
- ------------------------------------------------------------------------------------------------
10.29* Offer Letter to James Van Kerkhove dated November 5, 1999.
- ------------------------------------------------------------------------------------------------
10.30* Offer Letter to David Weld dated December 2, 1999.
- ------------------------------------------------------------------------------------------------
10.31* Offer Letter to Tom Hodge dated January 17, 2000.
- ------------------------------------------------------------------------------------------------
10.32+* Agreement between Loudeye Technologies, Inc. and Microsoft Corporation
dated June 22, 1998.
- ------------------------------------------------------------------------------------------------
10.33* Common Stock Purchase Agreement between the Registrant and Akamai
Technologies, Inc. dated as of February 15, 2000.
- ------------------------------------------------------------------------------------------------
10.34+* Services Agreement between Loudeye Technologies, Inc. and Akamai
Technologies, Inc. dated as of February 15, 2000.
- ------------------------------------------------------------------------------------------------
27.1 Financial Data Schedule
- ------------------------------------------------------------------------------------------------
</TABLE>
+ Confidential treatment has been requested as to certain portions of this
Exhibit.
* Incorporated by reference to Loudeye Technologies, Inc.'s registration
statement on Form S-1 file number 333-93361.
(b) Reports on Form 8(k).
None.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this Report to be signed on its behalf by the
undersigned, thereunto duly authorized, on May 15, 2000.
LOUDEYE TECHNOLOGIES, INC.
By /s/ LARRY G. CULVER
-------------------------------------
Larry G. Culver
Chief Financial Officer
39
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
ACCOMPANYING FINANCIAL STATEMENTS AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE
TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-2000
<PERIOD-START> JAN-01-2000
<PERIOD-END> MAR-31-2000
<CASH> 103,954
<SECURITIES> 0
<RECEIVABLES> 770
<ALLOWANCES> 163
<INVENTORY> 0
<CURRENT-ASSETS> 109,715
<PP&E> 11,450
<DEPRECIATION> 1,773
<TOTAL-ASSETS> 140,021
<CURRENT-LIABILITIES> 6,746
<BONDS> 1,902
0
0
<COMMON> 177,240
<OTHER-SE> (45,867)
<TOTAL-LIABILITY-AND-EQUITY> 140,021
<SALES> 1,649
<TOTAL-REVENUES> 1,649
<CGS> 2,170
<TOTAL-COSTS> 10,582
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (11,103)
<INCOME-TAX> 0
<INCOME-CONTINUING> (11,103)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (10,522)
<EPS-BASIC> (0.84)
<EPS-DILUTED> (0.84)
</TABLE>
