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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
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FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT
OF 1934
For the fiscal year ended December 31, 2000
Commission File Number: 0-29583
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LOUDEYE TECHNOLOGIES, INC.
(Exact name of registrant as specified in its charter)
Delaware 91-1908833
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
Times Square Building 414 Olive Way, Suite 500, Seattle, WA 98101
(Address of principal executive offices) (Zip Code)
206-832-4000
(Registrant's telephone number, including area code)
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Securities registered pursuant to Section 12(b) of the Act:
None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $0.001 Par Value Per Share
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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 by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to
the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [_]
The aggregate market value of the voting stock held by non-affiliates of the
registrant was approximately $30,326,000 as of February 23, 2001, based upon
the closing sale price on the Nasdaq National Market reported for such date.
Shares of Common Stock held by each officer and director and by each person
who owns 5% or more of the outstanding Common Stock have been excluded in that
such persons may be deemed to be affiliates. This determination of affiliate
status is not necessarily a conclusive determination for other purposes.
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Common 37,048,685
(Class) (Outstanding at February 23, 2001)
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant's Proxy Statement relating to the registrant's
2001 Annual Meeting of Shareholders to be held on May 17, 2001 are
incorporated by reference into Part III of this Report.
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LOUDEYE TECHNOLOGIES, INC.
ANNUAL REPORT ON FORM 10-K
FOR THE FISCAL YEAR ENDED DECEMBER 31, 2000
TABLE OF CONTENTS
Page
Number
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PART I
ITEM 1 BUSINESS..................................................... 1
ITEM 2 PROPERTIES................................................... 14
ITEM 3 LEGAL PROCEEDINGS............................................ 14
ITEM 4 SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.......... 14
PART II
ITEM 5 MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS..................................................... 15
ITEM 6 SELECTED CONSOLIDATED FINANCIAL DATA......................... 16
ITEM 7 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS AND RISK FACTORS.................. 17
ITEM 7A QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK... 35
ITEM 8 FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.................. 36
ITEM 9 CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE.................................... 57
PART III
ITEM 10 DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT........... 57
ITEM 11 EXECUTIVE COMPENSATION....................................... 57
ITEM 12 SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT.................................................. 57
ITEM 13 CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS............... 57
PART IV
ITEM 14 EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON
FORM 8-K.................................................... 58
EXHIBIT INDEX......................................................... 58-60
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PART I
ITEM I BUSINESS
Forward Looking Statements
Except for the historical information contained in this Annual Report on
Form 10-K, the matters discussed herein, including management's discussion and
analysis of financial condition and results of operations in Item 7 of Part II
hereof, are "forward-looking statements" within the meaning of Section 27A of
the Securities Act of 1933, as amended, and Section 21E of the Securities
Exchange Act of 1934, as amended, including, without limitation, statements
regarding regulatory approvals, operating results and capital requirements,
that are subject to certain risks and uncertainties that could cause the
actual results to differ materially from those projected. 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. Factors that could cause actual results to differ materially
include, but are not limited to, uncertainties related to the early stage of
the Company and its research and development programs; uncertainties related
to the effectiveness of the Company's technology and the development of its
products and services; dependence on and management of existing and future
corporate relationships; dependence on licensed content and technology;
dependence on proprietary technology and uncertainty of patent protection;
management of growth; history of operating losses; future capital needs and
uncertainty of additional funding; dependence on key personnel; intense
competition; existing government regulations and changes in, or the failure to
comply with, government regulations, and other risks detailed below, including
those in Item 7 of Part II "Risk Factors," the Risk Factors set forth in our
registration statement on Form S-1 as amended for the initial public offering
of our common stock as filed with the Securities and Exchange Commission and
declared effective on March 15, 2000 and those included from time to time in
the Company's other reports with the Securities Exchange Commission and press
releases, copies of which are available from the Company upon request. All
forward-looking statements included in this document are based on information
available to us on the date hereof, and the Company assumes no obligation to
update any forward-looking statements contained herein. We caution investors
that our business and financial performance are subject to substantial risks
and uncertainties.
Overview
We are a leading provider of digital media infrastructure services and
applications that create a complete solution for the media, entertainment and
corporate markets. Our digital media services and applications encompass an
end-to-end solution for customers that includes:
. media preservation and restoration, through our VidiPax subsidiary;
. media and metadata capture and digital archive management;
. encoding, or the transformation of audio and video content into
streaming media or digital download formats;
. distribution through a variety of methods including encoded file
delivery, hosted subscription services and syndication; and
. consulting services.
Our solutions simplify and accelerate the process of delivering audio and
video content on the Internet and other digital distribution platforms. Our
proprietary systems and technology enable scalable and cost effective
archival, retrieval and processing of large inventories of digital media. Our
services and applications are built upon a robust production and delivery
infrastructure. The benefits of our services and applications include:
. an end-to-end solution to reduce complexity for customers and cost-
effectively enable a wide range of digital media strategies;
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. significant capacity to process and manage large volume projects in a
rapid time frame;
. a highly flexible and extensible platform to enable tailored customer
solutions; and
. strategic relationships with selected major media companies and content
owners.
In 2000, we delivered over 7.4 million encoded audio files and 680,000
encoded video minutes to customers. We served over 220 customers in 2000
including AtomFilms (acquired by shockwave.com), Audible, Inc., CinemaNow, The
Coca-Cola Company, Digital Club Network, Disney Enterprises, Inc., EMusic.com
Inc., Ford Motor Company, IFILM, Kanakaris Communications, Inc.,
LicenseMusic.com, Inc., Microsoft Corporation, musicbank, Next Audio Inc.,
Universal Music Group, Valley Media Inc., and XM Satellite Radio, Inc.
Our objective is to be the leading digital media infrastructure provider of
comprehensive digital media solutions. We seek to achieve this objective
through the following key strategies:
. developing and marketing an end-to-end suite of products and services;
. leveraging existing management, production and delivery systems to
support new products and services;
. establishing relationships and obtaining content license agreements from
content owners;
. expanding into selected international markets; and
. selectively pursuing strategic acquisitions to strengthen our market
position, expand our proprietary technology and accelerate our product
strategy.
During 2000 the demand for digital music grew rapidly, and we believe it
will continue to grow. To address the opportunity in the digital music
segment, we intend to focus our efforts on developing and marketing an end-to-
end suite of digital music services and applications that leverage our
advanced digital media infrastructure systems and software applications. This
will enable media and music companies to deliver legitimate digital music
offerings to this growing audience. To support these initiatives, we intend to
continue executing our strategy to develop relationships with copyright owners
in the music industry, including major music companies, independent record
labels, artists and publishers, to enable them, and their authorized
licensees, to distribute digital music to their audiences on a legitimate
basis. To this end, in 2000 we announced content licensing agreements with
Universal Music Group, Warner Music Group and BMG Entertainment.
Loudeye Technologies, Inc. was founded as a Washington limited liability
company in 1997 and was incorporated in Delaware in 1998. Our headquarters are
in Seattle, Washington, and we have facilities in New York, New York, London,
England, and Santa Monica, California.
Industry Background
Traditional Media
The management of large inventories of audio and video content and the
ability to leverage distribution channels are constant challenges to companies
in a wide variety of global industries, including music and video
entertainment, corporate communications and advertising. With the millions of
hours of existing audio and video content and the thousands of hours of new
audio and video content created each day, media owners have become more
aggressive in exploring new ways to reach audiences and distribute their
content.
The technologies and standards that form the basis of traditional media and
distribution, however, are not compatible with the infrastructure supporting
the Internet and other advanced digital distribution platforms. For example,
audio and video content from compact discs, tapes and film, cannot be played
to a global Internet audience without significant manipulation, processing and
new technology. In order to further expand their markets and leverage the
value of their content over new digital distribution platforms, while
protecting, tracking, controlling and administering intellectual property
rights around their content, content owners need to find new
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methods that transfer the consistent formats and delivery methods of
traditional media into the multi-faceted and changing technologies of the new
digital distribution methods.
The Emergence of Digital Media
We believe the continued development of digital media technologies and
improved access to broadband connections will increase the quality and
reliability of digital media delivery and increase the demand for audio and
video content on the Internet and other digital distribution platforms.
. Internet usage and access speeds are increasing. The potential audience
for digital media continues to grow. According to Nielsen/NetRatings, as
of December 2000, more than 158 million people in the United States had
access to the Internet. In addition, average Internet access speeds in
the home continue to increase. Nielsen/NetRatings estimates home users
in the United States with 56Kbps or greater Internet access speeds
reached approximately 69.6 million at the end of 2000, or 71% of the
total number of home users. This is a 95% increase over the
approximately 35.6 million home users in the United States that
Nielsen/NetRatings estimates had 56Kbps or greater access at the end of
1999. Nielsen/NetRatings estimates broadband Internet access in U.S.
homes increased in 2000 by 148%, to a total of approximately 11.7
million U.S. home users in 2000 compared to approximately 4.7 million in
1999.
. Digital media players have high levels of penetration on home PCs in the
United States. Technology that enables the consumption of digital media
using personal computers and other connected devices was widely adopted
by users in the United States in 2000. For example, Media Metrix
estimates that as of September 2000 media player applications are
installed on approximately 99 percent of home personal computers in the
United States, enabling the consumption of streaming and downloadable
digital audio and video content. In addition, media player technology is
being widely utilized by such users. According to Media Metrix, in
November 2000, approximately 47 percent of home computer users in the
United States used a media player, and approximately 40 percent used a
streaming media player.
. The online music industry is a large and growing market. The market for
online media is large and growing. For example, Jupiter Research
estimates the domestic online music market in 2000, which includes the
domestic sale of CDs online as well as digital distribution of music,
equaled approximately $800 million. Jupiter Research estimates that the
domestic online music market will increase to approximately $5.4 billion
in 2005, with sales of digitally distributed music, including the sale
of digital downloads and music subscriptions services, representing
approximately 28% of the market in 2005.
Challenges to the Growth of Digital Media
Before companies can deliver traditional media over the Internet and new
digital distribution platforms, they must overcome several limitations of the
current Internet infrastructure. Digital media distribution over the Internet
is a highly fragmented process with a variety of evolving and competing
digital media formats. For example, there are a wide and growing number of
download technologies such as AAC, AVI, QuickTime and MPEG 1--n that are used
to transfer and play files from personal computers. Digital content is also
delivered in streaming formats developed by Microsoft, RealNetworks, Apple and
others, that must support a number of speeds, or bit rates. In most cases,
these formats are incompatible with one another and technology developers are
dedicated to the preservation of their own proprietary format. In order to
maximize their addressable audience and take full advantage of the compelling
experience that digital distribution of media can provide, distributors of
audio and video content must be able to distribute their content in a manner
optimized for each of these variables and must be able to respond as the
underlying technologies evolve.
Companies must internally develop the ability to deliver, or hire outside
firms to migrate, their existing and newly created audio and video content
onto the Internet and other digital platforms. The core competencies required
to complete this migration process include the following areas:
. Media Preservation and Restoration. Industry sources estimate there are
millions of hours of archived video and audio content worldwide,
representing content categories such as entertainment, news, sporting
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events, corporate communications, historical archives, etc. Much of this
video and audio content resides in enormous, discrete library archives
that were originally recorded and archived in a wide variety of
traditional and sometimes obscure magnetic media formats, all of which
degrade over time. The content owner must eventually either restore the
content on newer media formats or risk it degrading completely and losing
it forever. Recently, some of these archive and content owners have
recognized the need to both restore their media assets and adapt them for
use under the new distribution channels and business models now available
on the Internet. The process of restoring the content in parallel with
managing and encoding the files for Web distribution is complex.
. Media and Metadata Capture. Capturing digital media involves the
conversion of content from traditional analog formats to digital formats
while maintaining the original quality. Once captured, the high quality,
uncompressed digital content can be archived or used to create
compressed, encoded files that are ready for digital distribution.
The process of managing digital media is made more complex due to a range
of processes necessary to support the creation of metadata files.
Metadata, or data and information about the original content, is
especially important as companies attempt to sell and distribute content
over the Internet. Metadata provides descriptive data to the consumer such
as, in the case of music titles, artist information, track level data,
title name, cover art and additional information that can be used to
consummate commerce transactions or establish marketing relationships
associated with the music, such as an online CD sale or an email marketing
campaign. In addition, metadata is critical in facilitating the
administration of tracking and reporting required in many licensing
arrangements with copyright holders.
. Encoding. To transmit digital media over the Internet and other advanced
digital distribution networks, the uncompressed digitized content needs
to be encoded into compressed, Internet-compatible digital formats.
Encoding large volumes of content in an efficient manner is a complex
process that requires highly scalable production technology. In
addition, it is at the encoding stage that metadata is at times merged
with the encoded file from a centralized database. This adds to the
complexity of the encoding process. Since the Internet is still at a
formative stage of development, the various encoding formats and
technologies continue to conflict and evolve. As a result, content
owners many times desire to create multiple copies of their digital
content in multiple formats, to support their distribution strategies.
Additionally, the encoding process for a particular item or entire
libraries may need to be repeated over time to keep pace with the
introduction of new formats and the changing preferences of online
users, adding to the complexity.
. Distribution. Scalable and reliable methods to deliver electronic media
must be integrated with data management and encoding systems to manage
the data flow process effectively.
It is often difficult and costly for content owners and media companies to
develop and manage all of these core competencies themselves. They often do
not have the internal resources or time to develop the expertise necessary to
address these problems without disrupting their core business activities.
Also, there are many providers of applications or narrowly defined services
and technologies that fail to meet all of the challenges associated with
capturing, managing and distributing digital media, leaving a previously
unfulfilled demand in the Internet media infrastructure market. As a result,
we believe that content owners and media companies are increasingly seeking a
comprehensive, technology-agnostic, outsourced solution for enabling
traditional audio and video content on the Internet.
Moreover, apart from technical challenges, companies who seek to distribute
digital media over the Internet are often faced with challenges in obtaining
copyright licenses from a variety of rights holders. For example, these
copyrights often address differing activities related to the delivery of
digital media, such as reproduction and performance, which may require
separate licensing arrangements. In addition, these copyrights may be held by
different parties, such as publishers, artists and record labels. The effort
to obtain the necessary rights by such third parties is often significant, and
frequently disrupts, delays or prevents the launch of a wide range of digital
media business models.
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The Loudeye Solution
Loudeye is a leading provider of digital media infrastructure services and
applications that create a broad solution for the media, entertainment and
corporate markets. Our solution helps our customers reduce the barriers
impeding the management and delivery of digital audio and video content. Our
solution is based on a proprietary architecture comprised of an advanced
digital archival and production system and robust delivery infrastructure that
can scale to meet the encoding and distribution demands of large-volume and
complex digital media content libraries. The primary elements of our solution
include Digital Media Services and Digital Media Applications. By providing
this broad range of products and services, we enable the production, management
and distribution of our customers' digital media content over the Internet and
other digital distribution platforms.
Our solutions offer customers the following key benefits:
. End-to-end solution reduces complexity for customers and enables a wide
range of digital media strategies. Our end-to-end solution addresses a
series of highly complex steps required to deploy a wide range of
digital media strategies. Our services and applications provide a
comprehensive solution ranging from the restoration, capture, storage,
encoding, and delivery of audio and video content through a single
outsourced solution provider. As a result, customers receive quality and
reliable service at less expense than an internal solution without the
need to purchase capital equipment, develop system expertise, train
personnel or manage evolving technology platforms.
. Significant capacity provides time to market advantages. Our proprietary
archival and production systems are scalable resulting in significant
capacity to manage and process high volumes of digital media. We have
developed proprietary products and services based upon an automated and
distributed architecture of encoding, conversion and media enhancement
systems so that we can process high volumes of digital media while
simultaneously monitoring and enhancing its quality. We have invested
significant resources to provide the physical and technical capability
to manage large scale encoding projects in the rapid time frame that our
customers require to deploy their strategies quickly and capitalize upon
rapidly changing market opportunities. We believe we are the leader in
this area, delivering over 7.4 million encoded audio files and 680,000
encoded video minutes of digital content to customers in 2000.
. High degree of flexibility enables tailored customer solutions. Because
owners and distributors of content require flexibility in the ability to
distribute media in a variety of competing streaming and digital
download formats, we maintain platform neutrality among the expanding
number of digital media technologies. We also support third party
digital rights management technologies and content indexing solutions
and have developed close relationships and expertise related to a wide
range of industry leading hosting providers. In addition, we can offer
consulting and integration services to develop tailored solutions for
unique or highly complex digital media implementations.
. Strategic relationships facilitate legitimate digital media
strategies. From our inception we have positioned our products and
services as the enabling infrastructure to support content owners in the
legitimate distribution of digital media over the Internet and new
digital distribution platforms. At times, obtaining the requisite
licenses can prove challenging to customers, as they must often obtain
copyright licenses from a variety of rights holders. For example, these
copyrights often address differing activities related to the delivery of
digital media, such as reproduction and performance, which may require
separate licensing arrangements. In addition, these copyrights may be
held by different parties, such as publishers, artists and record
labels. We have developed relationships and signed content licensing
agreements with three of the major music companies, Universal Music,
Warner Music Group, and BMG Entertainment and have developed working
relationships with other music companies.
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Company Strategy
Our objective is to be the leading digital media infrastructure provider of
comprehensive digital media solutions. We seek to achieve this objective
through the following key strategies:
Developing and marketing an end-to-end suite of products and services. We
intend to expand upon our strengths in digital media services and applications
by continuing to develop and market an end-to-end suite of managed and
subscription services. Given the rapidly changing requirements of this evolving
industry, there are advantages in building complete systems that are optimized
for large scale archive management, high quality and high volume output, and
robust serving and delivery of hosted digital content. We believe that as the
volume of content requiring these processes continues to increase, media
companies and content owners that currently manage, encode and host their media
in-house will see a significant economic advantage to outsourcing to us for a
full-suite of managed and subscription services. This strategy allows us to
become the single, outsourced solution for digital media infrastructure
solutions for our target customers. We have invested significantly in our
research and development efforts and to build our intellectual property focused
on these digital media solutions.
Leveraging existing management, production and delivery systems to support
new products and services. As an early leader in the high-end, outsourced
encoding market, we have been able to develop strong relationships with
influential customers and manage the first step in the migration of audio and
video content onto the Internet. We plan to leverage our core infrastructure
and expertise in high quality and high capacity digital media systems into
applications and subscription services that address a variety of end-to-end
solutions for those customers. An example of these applications and services
include our Loudeye(TM) Media Subscription Services for Music Samples, an end-
to-end hosted content offering for the online music market. We believe that by
building and managing an applications platform for digital media, we can deploy
solutions that address the complete cycle of capture, management and
distribution more efficiently and cost effectively than our customers or
competitors.
Establishing relationships and obtaining content license agreements from
content owners. We have developed relationships and signed content licensing
agreements with three of the major music companies, Universal Music, Warner
Music Group and BMG Entertainment and have developed working relationships with
other music companies. We will continue to seek to obtain necessary content
licensing agreements to facilitate the delivery of other music from additional
music companies and publishers. In addition, we will seek to further develop
our relationships with all of the major music companies in order to support
their digital music strategy deployments and service their digital music
infrastructure requirements.
Expanding into selected international markets. We believe that we are well
positioned to leverage our current technology to provide digital media
solutions to major media and entertainment companies. We have relationships
with global media companies that have digital media initiatives in Europe. Our
European sales office is based in London and we plan to selectively expand into
additional international markets to capitalize upon the opportunity for
providing digital media solutions to international media and entertainment
companies.
Selectively pursuing strategic acquisitions to strengthen our market
position, expand our proprietary technology and accelerate our product
strategy. We will continue to selectively pursue strategic acquisitions to
strengthen our market position, expand our proprietary technology and
accelerate our product strategy. In addition, we continuously look for
components and technologies to augment our solutions through partnering with
industry leaders outside of our core area of expertise.
Products and Services
Our products and services are divided into two categories, Digital Media
Services and Digital Media Applications. These encompass an end-to-end solution
for customers that includes:
. media restoration, through our VidiPax subsidiary;
. media and metadata capture and digital archive management;
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. encoding, or the transformation of audio and video content into
streaming media or digital download formats;
. distribution through a variety of methods including encoded file
delivery, hosted subscription services and syndication; and
. consulting services.
Digital Media Services
Our digital media services provide a complete suite of services for customers
through project-specific and ongoing contracts. We support restoration,
capture, archival, management, encoding and delivery of audio and video content
and provide other value-added services for deployment of digital media
strategies. Typical digital media service projects can involve conversion of
tens of thousands of music titles or thousands of hours of video content into
encoded content of multiple formats and bit rates. Once content has been
encoded, we can provide watermarking, encryption and other digital rights
management technologies to our customers to protect and manage their content. A
file created from the source materials containing specified database and
attribute data relating to a particular piece of content can then be linked to
that content as part of the overall encoding process. We also provide project
analysis, as well as consulting, integration and custom application
development.
Our Digital Media Services include:
Media Preservation and Restoration. Our VidiPax subsidiary, based in New
York, is a leading independent provider of video and audio restoration,
preservation and migration services. VidiPax provides industry leading
technical expertise in the restoration of older or damaged archives of
traditional media. VidiPax's highly specialized media services are offered from
a comprehensive magnetic tape restoration facility, which features rare and
one-of-a-kind equipment to address a wide range of audio or video formats,
current or obsolete, that require restoration and repair. Some examples of
these media formats include 35mm and 16mm film, 2" quad high band and low band,
2" Helical, 1" Types A, B and C, Digital Betacam, Betacam SP,VHS / SVHS, 8mm /
Hi8, Betamax / SuperBeta, among many others. VidiPax's customers include
leading broadcast networks, production studios, Fortune 100 corporations, major
libraries, museums and universities. By offering media preservation and
restoration capabilities, we provide our customers with support for more
formats of source content and a significantly greater ability to prepare older
and poor quality and damaged originals prior to the capture and encoding
process.
Media Capture and Archive. We can capture our customers' content from
virtually all commercially available input formats. Customers deliver their
source content to us through a variety of means including satellite transfer,
source tapes, compact discs and electronic file transfer. The capture process
covers a broad spectrum of media formats and can be automated or managed as a
manual system depending on volume and complexity of the project. Also, to
significantly increase the speed of the capture process, additional capture
stations can be inserted into the production system architecture and
immediately begin capturing files. Once captured and digitized in uncompressed
format, content can be stored on our advanced digital media archive system for
later uses.
Metadata Collection and Analysis. We offer customers the ability to record
and utilize a wide array of metadata relating to the captured content, such as
artist, title, style, universal product code, album and track data and other
data that a particular customer may find useful for their particular content.
These metadata files enable customers to leverage their traditional content
over the Internet by allowing them to track and manage their digital media
content more efficiently. We perform custom metadata capture projects on a
selective basis for customers.
Encoding and Delivery Services. We have developed proprietary processes that
allow us to encode audio and video content across several streaming media and
download formats simultaneously, including support for multiple codecs from
third party developers such as Microsoft, RealNetworks, Apple, AT&T, and
others. This
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format flexibility enables customers to distribute their content to a wide
audience and support a variety of digital media strategies. Given that these
formats and platforms continue to evolve, the benefits of our multiple platform
approach remain applicable as new technologies emerge. We encode customer
content in a parallel, rather than serial, process allowing us to rapidly and
cost-effectively deliver encoded content to customers.
The production system is highly automated. Using proprietary management
software the system generates a queue that recognizes the location and order of
the files to be encoded. To encode a file, the software locates available
computing resources on the distributed computing network and requests that the
resource perform the encoding work. The software monitors the encoding
operation and reports results to the control database. The capture file and
metadata are automatically encoded into all of the streaming formats and bit
rates specified by the production system job management software and database.
If required, the encoded files can be automatically watermarked and indexed
during the encoding operation. The resulting encoded files are checked for
quality and then delivered to the customer as a collection of files or
automatically routed to our partner hosting services for direct delivery as a
hosted stream, over the Internet.
This encoding architecture creates an automated and highly scalable system.
As capacity demands grow, additional computing resources can be added with
little or no configuration effort, allowing us to rapidly respond to increased
encoding demands.
Third Party Technology Support and Rights Management. By integrating
technologies and third party solutions, we provide services to our customers
who want to secure their digital assets with certification and authentication
systems that help to prevent unauthorized copying and distribution of content
or piracy. We also provide customers with other types of rights management
solutions, including the ability to protect their digital content by utilizing
watermarking applications from third party vendors. Through this technology,
information can be embedded within digital audio or video without degrading the
quality, providing copyright and intellectual property protection.
Consulting Services. Our consulting services group helps customers create and
integrate digital media technologies and applications into key business
processes in order to increase the overall effectiveness, productivity and
profitability of the organization. Our consulting services group specializes in
enterprise-wide Internet application development for digital media initiatives.
The team has a broad range of cross-platform technical expertise specific to
the streaming media industry including Web development tools and systems,
database application programming interfaces, or APIs, and streaming server
formats and integration layers. Specific areas of expertise include: project
requirements and implementation analysis, system design and deployment, digital
media and information security, legacy system integration, database design and
development, hosting and storage management, and streaming server integration
and implementation.
Digital Media Applications
Our Loudeye(TM) Media Subscription Services platform allows content to be
packaged and converted into a variety of streaming media formats via our
encoding services and hosted in a central media repository. The hosted
applications are based upon an extensible, flexible platform, allowing us to
provide customers with a range of current and future subscriptions services.
Loudeye(TM) Media Subscription Services are deployed on an application
services provider, or ASP, basis whereby the software runs on equipment managed
and monitored by us. Our customers have flexibility and options to choose their
individual level of customization or integration.
Loudeye(TM) Media Subscription Services for Music Samples. Based upon Loudeye
Media Subscription Services platform, we will offer a complete hosted end-to-
end solution, delivering high quality music samples to customers in the online
music business. Our music samples are streaming files containing selected
portions or "samples" of a full music track. For all musical genres except
classical and jazz the music samples are generally 30 seconds in duration. For
classical and jazz music tracks the music samples are typically 60 seconds in
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duration. Music samples are used by customers for many purposes, including
increasing online music sales, user traffic and customer retention. Should the
announced acquisition of DiscoverMusic close as planned in the first quarter of
2001, we will integrate Loudeye Media Subscription Services with
DiscoverMusic's music sampling service.
In addition to hosting the music samples, our subscription solution includes
metadata associated with the music samples. For example, this may include front
cover art scans of the music title from which the song has been captured.
We are currently offering selected customers a free Beta Program for this
service, which includes a sample of 200 CD titles chosen from our catalog that
will, when complete, include more than 2 million songs from approximately
150,000 CDs available at commercial launch. The Beta Program was launched in
December 2000. The titles used in the Beta Program are from the major music
companies with which we have content licensing agreements. Formats supported in
the Beta Program include Microsoft Windows Media and RealAudio formats at
multiple bit rates. The Beta Program allows for internal testing of the service
in a non-commercial environment.
DiscoverMusic Acquisition. On January 31, 2000, we announced a definitive
agreement to acquire privately-held DiscoverMusic. DiscoverMusic, based in
Seattle, Washington, is the largest provider of song samples, and a leading
provider of music metadata and album cover art to online music retailers.
DiscoverMusic provides services to most of the major online music retailers,
such as Amazon.com, BMG Direct, barnesandnoble.com, CDnow and Tower Records,
under exclusive and generally long-term contracts. We believe that
DiscoverMusic's offerings, combined with our Media Subscription Services
platform, will accelerate our subscriptions services offering.
In 2000, DiscoverMusic served over 500 million song samples to over 80 online
music customers. DiscoverMusic hosts one of the world's largest databases of
song samples, including more than 2.5 million samples from approximately
190,000 CDs, and a recently announced video sampling service for movie trailers
in both Windows Media and RealAudio formats.
Upon completion of the acquisition of DiscoverMusic, we would discontinue our
Beta Program and seek to migrate customers for that Beta Program to the
DiscoverMusic samples offering.
Loudeye(TM) Media Syndicator. In September 2000 we released the commercial
version of Loudeye Media Syndicator, a platform independent, Java-based
application that enables businesses to create subscriptions, business rules,
encrypt and syndicate streaming media content over the Internet as part of our
end-to-end solution; customers can use our digital media services to capture,
manage and encode their digital content themselves, and then use the Loudeye
Media Syndicator application to securely distribute the content while managing
and enforcing rights and business rules related to the use of the content.
Loudeye Media Syndicator supports Microsoft WindowsMedia and RealNetworks
streaming audio and video formats. The application enables the content owner or
their authorized licensees to create business rules that govern how content is
priced and how it is used: by number of plays, time period, geographic location
or pay-per-view. The integrated, online catalog provides secure, reliable e-
commerce transactions in real time, and automated delivery and tracking of
streaming media content from the content owner's library to its customers, the
affiliates who have been approved to use the content in their site. Content is
encrypted and securely delivered to the affiliate at the time of purchase,
enabling protection of the content owner's content throughout the process. The
application manages reporting of sales and usage of the content at the
affiliates web site through a detailed reporting function.
We intend to extend the functionality of the Loudeye Media Syndicator
application into future versions of our Loudeye(TM) Media Subscription Services
platform, to enable customers of those services to have the control, tracking
and commerce functionality that Loudeye Media Syndicator provides.
9
Research and Development
We are focused on improving our digital media services and subscription
services through research and development. We believe that a strong emphasis on
automation and product development are essential to our strategy of continuing
to enhance and expand our capabilities.
Since inception, we have focused our efforts on building efficient, scalable
and quality-based capture, archival, management and encoding processes through
hardware and software integration and development. Software built to optimize
encoding, combined with our expertise learned through our automated encoding
process, has provided a platform upon which we build digital media products and
services.
Our team of developers, quality assurance engineers and program managers were
recruited from top Internet and streaming media companies. Our team has
significant experience in Java development, database development and Internet
software development. In addition, we have recruited senior management with
significant experience in the area of Internet development, streaming media and
networking.
Our core team of developers is focused in the following areas:
. digital media services, which focuses on automated capture, archive and
encoding;
. media management which focuses on building a core component layer for
streaming media online applications; and
. media subscription, distribution and syndication, which focuses on
building our subscription, distribution and business rules applications.
Most of our technology is developed internally. We also purchase and license
technology and intellectual property rights.
Our research and development expenses were $6.8 million, $1.2 million and
$204,000 in 2000, 1999, and 1998 respectively. As of February 1, 2001,
approximately 54 employees were engaged in ongoing engineering and production
development work for our services, solutions and applications.
Operations and Technology
Our production operation encompasses both an efficient, highly automated
process, optimized to produce high volumes of audio and video encoding as well
as a flexible process for complex requirements. The production personnel are
organized into functional teams which include project management, quality
control, logistics operations, data measurement, audio capture and encoding,
video capture and encoding, and production systems engineering support.
The production system is a combination of hardware and software, developed by
our research and development organization and consists of advanced digital
archive technology, proprietary file management systems, customized user
interfaces and a highly distributed encoding system. It is designed to automate
the time consuming, error prone steps inherent in a complex management and
encoding operation, and to scale for larger volume demands with minimal
configuration of additional capture and encoding machines.
Our Media Subscription Services offerings and other distribution offerings
are supported by our advanced and highly scalable infrastructure. We connect
our hosting facility and partner Internet service providers, or ISPs, in order
to provide customers with a high performance network connecting multiple
Internet backbones for Internet data transmission across over many geographic
locations, known as points of presence, or POPs. This system creates fewer
points of failure than a single network and can be monitored for network
bottlenecks or outages so the content can be re-routed and distributed to
additional resources. Customers using our subscription services receive the
benefit of redundant and high-quality Internet distribution without having to
manage or aggregate multiple relationships.
10
Sales and Marketing
Our sales and marketing group seeks to build long-term relationships with our
customers through a variety of methods including implementation of an
integrated marketing campaign that consists of direct and indirect sales and
marketing efforts, including reseller and co-marketing relationships, trade
show and conference participation, our Web site, and a monthly newsletter.
We maintain an active role in developing industry standards and initiatives
that help to mature and grow the streaming media industry. We are a founding
and active member of Secure Digital Music Initiative, or SDMI, which includes
the Recording Industry Association of America, or RIAA, and its members and is
working to create a specification for the secure digital delivery and sale of
music and help in the exposure and credibility that help to advance growth.
As of, February 1, 2001 we had 25 people in our sales and marketing
organization, substantially all of which were located in the United States. The
direct sales force primarily focuses its efforts on the large corporate
customers.
Customers
We serve customers in the media, entertainment and corporate markets. We
served over 220 customers in 2000 including AtomFilms (acquired by
shockwave.com), Audible, Inc., CinemaNow, The Coca-Cola Company, Digital Club
Network, Disney Enterprises, Inc., EMusic.com Inc., Ford Motor Company, IFILM,
Kanakaris Communications, Inc., LicenseMusic.com, Inc., Microsoft Corporation,
musicbank, NextAudio Inc., Universal Music Group, Valley Media Inc., and XM
Satellite Radio, Inc. In 2000, musicbank and Microsoft accounted for 21% and
10% of our revenues, respectively. In 1999, Kanakaris and Microsoft accounted
for 13% and 11% of our revenues, respectively.
Industry Alliances and Content Licensing Agreements
In 2000, we established and maintained a number of important relationships
that expand our end-to-end solution, provide licenses from major content owners
and strengthen our technology development.
We began executing on our music content licensing strategy by entering into
music content licenses with Universal Music Group, Warner Music Group and BMG
Entertainment enabling us to store, deliver or stream encoded music and related
contents to companies authorized to use the content. We also maintain alliance
agreements for digital media hosting and distribution with content delivery
networks including Akamai Technologies, Inc. and Digital Island.
Competition
We face competition from in-house encoding services by potential customers,
other vendors that directly address the outsourced encoding services market and
companies that directly address the digital media applications market. We
compete on the basis of service quality, ability to handle a wide range of
input and output formats, capacity of our production facilities, turnaround
time, and price and breadth of products and services offered, which include
encoding, hosting, consulting and applications.
In-House Competition. Our most significant competition has been from
potential customers who choose to invest in the resources and equipment to
digitally manage and encode their media themselves on an in-house basis. In-
house service is expected to remain a significant competitor to our services,
although we believe that as the volume of content requiring management and
optimized encoding continues to increase, companies that currently manage and
encode their media in-house will see a significant economic advantage to
outsourcing to a third-party expert for our services and applications.
11
Digital Media Services Competition. There are approximately ten identified
primary companies who are providing some level of outsourced digital media
services today. We also anticipate that as the market for outsourced digital
media services continues to develop, we could see competition from video post-
production houses and other traditional media services companies.
Digital Media Applications Competition. There are approximately ten
identified primary companies that are developing digital media applications
that will potentially compete with our applications and subscription services.
DiscoverMusic is a competitor in music samples, however on January 31, 2001 we
announced an agreement to acquire DiscoverMusic. In addition, as we continue to
develop media subscription applications, we may over time begin to compete with
some of our historical customers and partners who could also develop and market
business-to-business subscription offerings.
We may not compete successfully against current or future competitors, many
of which have substantially more capital, longer operating histories, greater
brand recognition, larger customer bases and significantly greater financial,
technical and marketing resources than we do. These competitors may also engage
in more extensive development of their technologies, adopt more aggressive
pricing policies and establish more comprehensive marketing and advertising
campaigns than we can. Our competitors may develop products and service
offerings that are more sophisticated than our own. For these or other reasons,
our competitors' products and services may achieve greater acceptance in the
marketplace than our own, limiting our ability to gain market share and
customer loyalty and to generate sufficient revenues to achieve a profitable
level of operations.
Proprietary Rights and Intellectual Property
We rely primarily on a combination of copyrights, trademarks, trade secret
laws and contractual obligations with employees and third parties to protect
our proprietary rights. We do not yet have any issued patents, but we have
filed six U.S. patent applications and four international patent applications
that claim priority to six previously filed provisional applications. Despite
our efforts to protect our proprietary rights, unauthorized parties may copy
aspects of our products and obtain and use information that we regard as
proprietary. In addition, other parties may breach confidentiality agreements
or other protective contracts we have entered into and we may not be able to
enforce our rights in the event of these breaches. Furthermore, we expect that
we will increase our international operations in the future and the laws of
many foreign countries do not protect our intellectual property rights to the
same extent as the laws of the United States.
The streaming media, digital media and software industry is characterized by
the existence of a large number of patents and frequent litigation based on
allegations of patent infringement and the violation of other intellectual
property rights. As discussed above, at times obtaining the requisite licenses
can be difficult for customers, as they must obtain copyright licenses from a
variety of rights holders to grant rights to distinct activities related to the
delivery of digital media, such as reproduction and performance, which require
separate licensing arrangements. In addition, these copyrights may be held by
different parties, such as publishers, artists and record labels. The music
industry in the United States also is generally regarded as extremely litigious
in nature compared to other industries. As a result, in the future we may be
engaged in litigation with others in the music industry, including those
entities with whom we have ongoing content license arrangements. Although we
attempt to avoid infringing known proprietary rights of third parties in our
product development efforts, we expect that we may be subject to legal
proceedings and claims for alleged infringement by us or our licensees of third
party proprietary rights, such as patents, trademarks or copyrights, by us or
our licensees from time to time in the ordinary course of business. Any claims
relating to the infringement of third party proprietary rights, even if not
meritorious, could result in costly litigation, divert management's attention
and resources or require us to enter into royalty or license agreements which
are not advantageous to us. In addition, parties making these claims may be
able to obtain an injunction, which could prevent us from providing our
products or services in the United States or abroad. Any of these results could
harm our business. We may increasingly be subject to infringement claims if the
number of products and competitors in our industry grow and the functionalities
of products overlap.
12
Governmental Regulation
We are not currently subject to direct regulation by any governmental agency
other than laws and regulations generally applicable to businesses, although
certain U.S. export controls and import controls of other countries, including
controls on the use of encryption technologies, may apply to our products. Few
existing laws or regulations specifically apply to the Internet. However, it is
likely that a number of laws and regulations may be adopted in the United
States and other countries with respect to the Internet. These laws may relate
to areas such as content issues (such as obscenity, indecency and defamation),
encryption concerns, including export contents, copyright and other
intellectual property rights, caching of content by server products, electronic
authentication or "digital signatures," personal privacy, advertising,
taxation, electronic commerce liability, email, network and information
security and the convergence of traditional communication services with
Internet communications, including the future availability of broadband
transmission capability. Other countries and political organizations are likely
to impose or favor more and different regulation than that which has been
proposed in the United States, thus furthering the complexity of regulation.
The adoption of such laws or regulations, and uncertainties associated with
their validity and enforcement, may affect our ability to provide our products
and services and increase the costs associated with our products and services,
and may affect the growth of the Internet. These laws or regulations may
therefore harm our business.
We do not know with certainty how existing laws governing issues such as
property ownership, copyright and other intellectual property issues, taxation,
illegal or obscene content, retransmission of media and personal privacy and
data protection apply to the Internet or to the distribution of music over the
Internet. The vast majority of such laws were adopted before the advent of the
Internet and related technologies and do not address the unique issues
associated with the Internet and related technologies. Most of the laws that
relate to the Internet have not yet been interpreted. Changes to or the
interpretation of these laws could:
. limit the growth of the Internet;
. create uncertainty in the marketplace that could reduce demand for our
products and services;
. increase our cost of doing business;
. expose us to significant liabilities associated with content distributed
or accessed through our products or services; or
. lead to increased product and applications development costs, or
otherwise harm our business.
Specifically with respect to one aspect of copyright law, on October 28,
1998, the Digital Millennium Copyright Act (or "DMCA") was enacted. The DMCA
includes statutory licenses for the performance of sound recordings and for the
making of recordings to facilitate transmissions. Under these statutory
licenses, depending on our future business activities, we and our customers may
be required to pay licensing fees for digital sound recordings we deliver or
our customers provide on their web site and through retransmissions of radio
broadcasts and/or other audio content. The DMCA does not specify the rate and
terms of such licenses, which will be determined either through voluntary
inter-industry negotiations or arbitration. Moreover, with respect to digital
publishing, sound recording and other music licenses not directly covered by
the DMCA, various parties interested in distribution of digital music plan to
engage in a proceeding before a tribunal of the United States Copyright Office
along with the Recording Industry Association of America during 2001 to
determine what, if any, licensee fees should be paid to various rights holders.
Depending on the rates and terms adopted for the statutory licenses, our
business could be harmed both by increasing our own cost of doing business, and
by increasing the cost of doing business for our customers.
Employees
As of February 1, 2001, we had a total of 229 permanent employees, of which
54 were in research and development, 38 were in engineering and information
technology support, 25 were in sales and marketing, 73 were in production, 13
were in professional services and 26 were in finance and administration. Our
success is
13
highly dependent on our ability to attract and retain qualified employees.
Competition for employees is intense in the technology and software industry.
To date, we believe we have been successful in our efforts to recruit qualified
employees, but there is no assurance that we will continue to be as successful
in the future. None of our employees are subject to a collective bargaining
agreement. We consider our relations with our employees to be good.
ITEM 2 PROPERTIES
We are headquartered in Seattle, Washington where we lease 46,755 square feet
under a lease that expires on May 31, 2005. In addition, we have two other
Seattle, Washington locations: a 6,000 square foot facility under a lease that
expires on September 1, 2003, and a 12,697 square foot space under a lease that
expires November 15, 2004. We lease an additional facility in New York, New
York of approximately 12,200 square feet under a lease that expires May 14,
2005. We lease a location in Santa Monica, California of approximately 4,632
square feet under a lease that expires January 1, 2005. We also have a 4,050
square foot facility in London, England under a lease that expires on December
21, 2003.
ITEM 3 LEGAL PROCEEDINGS
We are currently not subject to any material legal proceedings.
ITEM 4 SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
14
PART II
ITEM 5 MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Our common stock has been traded on the Nasdaq National Market under the
symbol "LOUD" since our initial public offering in March 2000. There is
currently only a limited trading market for the shares of our common stock and
accordingly there is no assurance that any quantity of the common stock could
be sold at or near reported trading prices.
The following table sets forth for the periods indicated the high and low
closing prices for our common stock. These quotations represent prices between
dealers and do not include retail markups, markdowns or commissions and may
not necessarily represent actual transactions.
High Low
------- -------
Year Ended December 31, 2000:
First Quarter 2000 commencing on March 15, 2000............ $44.563 $31.875
Second Quarter 2000........................................ 32.563 12.938
Third Quarter 2000......................................... 19.125 6.813
Fourth Quarter 2000........................................ 6.688 1.188
We have not paid any cash dividends to date and do not intend to pay any
cash dividends in the foreseeable future.
As of February 21, 2001, there were approximately 476 holders of record of
our common stock. Most shares of our common stock are held by brokers and
other institutions on behalf of shareholders.
Recent Sales of Unregistered Securities
(a) Recent Sales of Unregistered Securities
On March 15, 2000, concurrent with the closing of our initial public
offering, we sold to Akamai Technologies, Inc., 336,022 shares of our
unregistered common stock at $14.88 per share, which generated cash
proceeds of $5.0 million.
Pursuant to the acquisition of VidiPax, Inc. on June 14, 2000, the
Company issued a total of 75,871 shares of Loudeye Common Stock to the sole
stockholder of VidiPax, Inc., James Lindner, and to two providers of
professional services to the sole stockholder.
In August 2000, as consideration for a business alliance, Loudeye issued
warrants to a corporation to purchase an aggregate of 75,000 common shares
in connection with a commercial agreement.
In October 2000, as consideration for a business alliance, Loudeye issued
warrants to a corporation to purchase an aggregate of 50,000 common shares
in connection with a commercial agreement.
Each of the above issuances were deemed to be exempt from registration
under the Securities Act in reliance upon Section 4(2) thereof as
transactions by an issuer not involving any public offering.
(b) Use of Proceeds from Sales of Registered Securities
The net proceeds of our initial public offering and the concurrent sale
of shares to Akamai Technologies, Inc., both of which closed on March 15,
2000 as well as the exercise of the underwriters' over-allotment option on
April 14, 2000, totaled $80.4 million. As of December 31, 2000, we have
used approximately $39.8 million of those proceeds for working capital and
general corporate purposes, including increased spending on sales and
marketing, customer support, research and development, expansion of our
operational and administrative infrastructure, and the purchase of capital
equipment and businesses. We expect to use the remaining proceeds of the
offering for similar purposes. In addition, we may use a portion of the net
proceeds to acquire or invest in complementary businesses, technologies,
product lines or products. Pending these uses, we intend to invest the net
proceeds in short-term, interest-bearing, investment grade securities with
original maturities of less than one year.
15
ITEM 6 SELECTED CONSOLIDATED FINANCIAL DATA
The selected financial data set forth below should be read in conjunction
with "Management's Discussion and Analysis of Financial Condition and Results
of Operations" and our financial statements and the notes thereto included
elsewhere in this Form 10-K. The statement of operations data set forth below
for the period from August, 1997 (inception) to December 31, 2000 and the
selected balance sheet data as of December 31, 2000 have been derived from our
audited financial statements included elsewhere in this Form 10-K, which have
been audited by Arthur Andersen LLP, Independent Public Accountants. The
historical results are not necessarily indicative of results to be expected
for any future period. Amounts are presented in thousands except for shares
outstanding and per share amounts.
Year Ended December 31, Period from
--------------------------------- Aug. 12, 1997
2000 1999 1998 to Dec. 31, 1997
---------- ---------- --------- ----------------
Revenues .................. $ 11,537 $ 2,645 $ 286 $ 10
Cost of revenues .......... 12,388 2,870 504 17
---------- ---------- --------- --------
Gross margin .......... (851) (225) (218) (7)
Operating expenses
Research and development
........................ 6,784 1,248 204 12
Sales and marketing ..... 14,621 3,982 588 39
General and
administrative ......... 8,079 3,612 674 37
Amortization of
intangibles and other
long-term assets........ 7,693 302 -- --
Stock-based compensation
........................ 5,409 1,554 -- --
---------- ---------- --------- --------
Total operating
expenses ............. 42,586 10,698 1,466 88
Special charges (1) ....... 947 -- -- --
---------- ---------- --------- --------
Operating loss ............ (44,384) (10,923) (1,684) (95)
Other income (expense), net
.......................... 4,860 21 34 --
---------- ---------- --------- --------
Net loss .................. $ (39,524) $ (10,902) $ (1,650) $ (95)
Beneficial conversion
feature (2) .............. -- (14,121) -- --
---------- ---------- --------- --------
Net loss to common
shareholders ............. $ (39,524) $ (25,023) $ (1,650) $ (95)
========== ========== ========= ========
Basic and diluted net loss
per share................. $ (1.33) $ (4.62) $ (0.41) n/a
========== ========== ========= ========
Weighted average shares
outstanding used to
compute basic and diluted
net loss per share (3).... 29,773,886 5,410,507 4,039,444 n/a
========== ========== ========= ========
Basic and diluted pro forma
net loss per share........ $ (1.16) $ (1.50) $ (0.17) n/a
========== ========== ========= ========
Weighted average shares
outstanding used to
compute basic and diluted
pro forma net loss per
share (3)................. 34,103,551 16,659,800 9,585,049 n/a
========== ========== ========= ========
December 31,
-----------------------
2000 1999 1998
-------- ------- ------
Balance Sheet Data
Cash, cash equivalents and short-term investments...... $ 94,989 $49,803 $1,442
Working capital........................................ 90,018 44,032 759
Total assets........................................... 132,676 76,775 2,940
Long-term obligations, less current portion............ 7,324 1,963 900
Total stockholders' equity............................. 116,068 67,489 1,242
- --------
(1) See Note 4 of Notes to Consolidated Financial Statements.
(2) See Note 11 of Notes to Consolidated Financial Statements.
(3) See Note 5 of Notes to Consolidated Financial Statements for an
explanation of the determination of the number of weighted average shares
used to compute pro forma net loss per share amounts.
16
ITEM 7 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
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 use digital media content on the Internet and other digital
distribution platforms. We provide our customers with outsourced and end-to-
end solutions that include encoding services, management, 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, media
restoration, preservation and migration services, which are services provided
by our VidiPax subsidiary to restore and upgrade old or damaged archives of
traditional media, as well as other services related to the 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 recognize digital media services revenues as the service
is provided and we have no further involvement. Standard payment terms with
customers require payment within 30 days of the invoice date. Our ongoing
digital media applications strategy consists primarily of the Loudeye(TM)
Media Subscription Services applications.
We have sustained losses on a quarterly and annual basis since inception and
we expect to sustain losses for the foreseeable future as we expand our
operations and production facilities. As of December 31, 2000, we had an
accumulated deficit of $66.2 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 increase on an annual basis in all functional areas as
we execute our business plan.
Company-wide employment has grown to 229 permanent employees at February 1,
2001. We anticipate that operating expenses, as well as planned capital
expenditures, debt repayments and the DiscoverMusic acquisition, if completed,
will constitute a material use of our cash resources in 2001. 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 interim and annual
period-to-period comparisons of our operating results 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 or
possibly even sequential quarterly growth are sustainable or indicative of
future growth rates (see "Forward-Looking Statements"). It is possible that in
some future quarter our operating results may fall below our expectations as
well as those of securities analysts and investors. In this event, the trading
price of our common stock may fall significantly.
Results of Operations
Year Ended December 31, 2000 compared to 1999
Revenues. Revenues totaled $11.5 million and $2.6 million for 2000 and 1999,
respectively. The increase was due primarily to significant large-scale orders
from our digital media audio customers, the benefit of our previously
announced acquisition of VidiPax, revenues related to our consulting services
group, the initial sales of our Loudeye Media Syndicator application, and
certain contractual revenues associated with forfeited deposits and
contractually guaranteed minimum revenues, and the recognition of deferred
revenue upon satisfaction of certain terms or the removal of our continuing
obligation under such contracts. We do not have any components
17
within operations that qualify as a separate segment, but have included
additional detail to provide insight into our operations and revenues.
We earned approximately $3.9 million in revenue from the performance of the
four largest audio digital media services projects in 2000, as compared with
approximately $400,000 for the four largest such projects in 1999. The
increase in large audio projects was primarily driven by trends driving the
demand for music online, the rapid expansion of companies and business models
focused on addressing that demand, as well as the build-out of our capacity in
late 1999 and early 2000 to be able to handle consumer volumes. We expect this
trend of significant revenue concentration among large audio customers to
continue in 2001, however the timing of any revenue realized will depend upon
issues surrounding the rights of our customers to use copyrighted music and
the ultimate survival of varied business models.
To a lesser degree, the increase was due also to video related revenues,
including those from VidiPax (which began to be included into our consolidated
results subsequent to the acquisition in June 2000). Video encoding projects
are expected to continue to trend down and the VidiPax revenues are expected
to increase modestly on a sequential basis in 2001.
In addition, our consulting services contributed to the increase in
revenues, substantially all of which occurred in the second and third quarters
of 2000. The decreasing consulting services revenue trend in late 2000 is
directly related to the slowing of the development of the market for digital
video media offerings of our customers. We expect that as more traditional
companies begin to utilize streaming media solutions, consulting revenues
could increase compared to the results in the fourth quarter of 2000. There
was no consulting revenue in 1999.
Digital media applications revenues included sales or licenses of our
Loudeye Media Syndicator application during 2000. We had no software
applications ready for sale in 1999, and accordingly had no revenues. Our
applications strategy for the future is geared toward the rapidly expanding
music industry and our Loudeye Media Subscription Services offerings.
Additionally, other application-related contractual revenues were recognized
in 2000 when contractual obligations and any uncertainties related to
performance were resolved. Such arrangements have revenue guarantees based
upon either our performance or the end of the particular contractual period.
We do not foresee recognizing significant amounts of such revenue in 2001.
Cost of Revenues. Cost of revenues increased to $12.4 million in 2000 from
$2.9 million in 1999. Cost of revenues includes the cost of production and
consulting, personnel and an allocated portion of facilities and equipment and
other supporting functions related to the delivery of digital media services
and applications. Stock-based compensation charges of $456,000 and $202,000
for the years ended December 31, 2000 and 1999, respectively are attributable
to employees included in cost of revenues and are presented in the separate
operating expense line item within the statements of operations. Cost of
revenues as a percent of revenues remained relatively constant from year to
year. This consistent margin was primarily due to the significant increase in
the amount of fixed expenses within cost of revenues. The increase in
depreciation and amortization expense was consistent with increased capital
expenditures, which totaled $15.8 million in 2000. The increase in
depreciation and amortization expense was significantly offset by the lower
costs associated with higher margin services, contracts and applications, as
well as increased efficiencies and utilization of employees and facilities. We
expect margins on traditional service offerings to remain fairly constant into
2001 and expect future margins to improve as product mix changes towards
Loudeye Media Subscription Services and offerings based upon our digital media
archive system.
Operating Expenses. Total operating expenses were $42.6 million and $10.7
million in the years ended December 31, 2000 and 1999, respectively. Without
the effect of $5.4 million of stock-based compensation charges and $7.7
million in amortization of intangible and other long-term assets, operating
expenses for the year ended December 31, 2000 would have been $29.5 million,
an increase of $20.7 million over the comparable amount in the same period in
1999.
Research and Development Expenses. Research and development expenses totaled
$6.8 million and $1.2 million in the years ended December 31, 2000 and 1999,
respectively. Research and development expenses
18
consist of salaries and consulting fees paid to support technology
development, costs of technology acquired from third parties to incorporate
into applications and other proprietary technology currently under
development. Costs of developing Loudeye Media Subscription Services, the
digital media archive and production system and Loudeye Media Syndicator for
sale or license to third parties and continued work on enhancing our
proprietary automated encoding processes comprised a significant portion of
research and development expenses. Stock-based compensation charges of
approximately $283,000 and $126,000 for the years ended December 31, 2000 and
1999, respectively, are attributable to employees categorized within research
and development and are presented in the separate operating expense line item
in the statements of operations.
To date we have capitalized approximately $1.3 million in software
development costs. Through December 31, 2000, $119,000 of these capitalized
amounts had been amortized into expense. 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 continue at
approximately the same or higher rate in the future compared to those incurred
in 2000.
Sales and Marketing Expenses. Sales and marketing expenses totaled $14.6
million and $4.0 million in the years ended December 31, 2000 and 1999,
respectively. Sales and marketing expenses consist primarily of salaries,
commissions, co-marketing expenses, trade show expenses, product branding
costs, advertising and cost of marketing collateral. The increase in sales and
marketing expenses was primarily due to an increase in the direct sales force
in 2000, commissions paid on the increased sales over the same period in 1999,
marketing related to the launch of our Loudeye Media Subscription Services and
Loudeye Media Syndicator application, expanded advertising and trade-show
related expenses as well as costs associated with negotiating rights
agreements with recording companies. Stock-based compensation charges of
approximately $749,000 and $333,000 for the years ended December 31, 2000 and
1999, respectively, are attributable to employees categorized within sales and
marketing and are presented in the separate operating expense line item in the
statements of operations.
General and Administrative Expenses. General and administrative expenses
totaled $8.1 million and $3.6 million in the years ended December 31, 2000 and
1999, respectively. General and administrative expenses consist primarily of
unallocated rent, facilities and information technology charges, salaries,
allowances for uncollectible accounts legal expenses for general corporate
purposes and investor relations costs associated with being a public company.
The increase was primarily due to new facilities opened during late 1999 and
the first quarter of 2000 and the significant increase in employees in the
finance, information technology, legal, investor relations and executive areas
required to support a larger organization, and increased public company
reporting obligations. We believe that as operations continue to increase in
size and scope, general and administrative expenses will continue to increase
although at a significantly lower percentage than in past periods. Stock-based
compensation charges totaling $3.9 million and $893,000 for the years ended
December 31, 2000 and 1999, respectively, are attributable to employees
categorized within general and administrative and are presented in the
separate operating expense line item in the statements of operations.
Amortization of Intangibles and Other Long-term Assets. Amortization of
intangibles and other long-term assets totaled $7.7 million and $302,000 in
the years ended December 31, 2000 and 1999, respectively, and includes
amortization of the goodwill and identified intangible assets related to past
acquisitions, amortization related to the fair value of warrants granted to
certain partners and the discount on the sale of common stock to Akamai
Technologies, Inc. in early 2000. The increase was primarily due to the timing
of the Alive.com acquisition in December 1999 and VidiPax in June 2000. We
expect that such charges will increase as the result of the pending
acquisition of DiscoverMusic in the first quarter of 2001.
Stock-Based Compensation. Stock-based compensation totaled $5.4 million and
$1.6 million in the years ended December 31, 2000 and 1999, respectively, and
consisted of $4.5 million in amortization of deferred stock compensation,
through December 31, 2000, related to stock options previously granted below
deemed fair market value, $1.3 million in compensation expense related to the
variable accounting treatment and the subsequent termination in the third
quarter of 2000 of our consultant options, a charge of $400,000 related to the
acceleration of options and $820,000 in credits related to the reversal of
previously amortized deferred stock compensation
19
due to option cancellations. In the fourth quarter of 2000, we accelerated the
vesting of approximately 660,000 options which resulted in a charge of
approximately $400,000 to stock-based compensation. There was $1.6 million in
stock-based compensation charges during the year ended December 31, 1999,
composed of $982,000 in amortization of deferred stock compensation and
$572,000 of compensation expense related to marking certain consultant options
to fair value.
Additionally, in the fourth quarter of 2000, we allowed employees to sell
back to the Company shares related to previously exercised unvested options at
the same price at which they were originally exercised. This opportunity was
made available to all employees. The 171,000 shares related to previously
exercised and unvested options were then retired without replacement of the
original option. We accounted for these transactions under APB 25 and FIN44 as
those pronouncements pertain to immature shares, and accordingly the amounts
paid were recognized as compensation expense although they were not
significant in total.
Special Charges. In January 2001, we announced a cost-savings initiative
which resulted in a $947,000 special charge being incurred in 2000, and an
anticipated similar charge of approximately $750,000 in the first quarter of
2001. Consistent with the overall market trends, we have experienced
decreasing demand for video services. Accordingly, in December 2000 our board
of directors approved a plan to close our Santa Monica, California facility
and reduce video production which resulted in an impairment in the value of
our video encoding equipment as well as existing tenant improvements at our
Santa Monica facility which was closed in the first quarter of 2001. This
combined non-cash impairment charge of $637,000 was included as a component of
operating loss in the special charge line item within the financial
statements. The fourth quarter of 2000 charge also included $300,000 related
to employee termination payments of which approximately $200,000 were paid in
the first quarter of 2001. The remaining amounts of the 2000 employee
termination costs will be paid in cash throughout 2001. As of December 31,
2000, approximately $300,000 was included within accrued expenses related to
the special charge.
Interest Income. Interest income, representing earnings on our cash, cash
equivalents and short-term investments, totaled $5.8 million and $204,000 in
the years ended December 31, 2000 and 1999, respectively. The increased income
was due primarily to interest earned on our significantly higher cash and
investment balances in 2000. We expect that our interest income will decrease
in the future as our cash balances decrease to fund our operating, investing
and financing activities.
Interest Expense and Other. Interest expense and other consists of interest
expense related to our debt instruments as well as amortization of financing
charges related to our debt instruments. This totaled $907,000 and $183,000 in
the years ended December 31, 2000 and 1999, respectively. The increase was due
primarily to interest on increased levels of borrowings incurred to finance
fixed asset expenditures.
Year Ended December 31, 1999 compared to 1998
Revenues. Revenues totaled $2.6 million and $286,000 for the years ended
December 31, 1999 and 1998, respectively. The increase was due primarily to an
increase in the number and average size of sales of our digital media services
generated by a larger sales force in the 1999 period and, to a lesser extent,
higher prices in the 1999 period.
Cost of Revenues. Cost of revenues totaled $2.9 million and $504,000 in 1999
and 1998, respectively. The increase was due primarily to increased sales
volumes. Cost of revenues includes cost of personnel expenses and the
allocated portion of facilities and equipment. Stock-based compensation
charges of $202,000 in 1999 are attributable to employees categorized within
production (cost of revenues) and are presented in a separate line item within
the statements of operations.
Operating Expenses. Operating expenses totaled $10.7 million and $1.5
million in 1999 and 1998, respectively. Without the effect of $1.6 million of
stock-based compensation charges and $302,000 in amortization of intangible
assets, operating expenses for the 1999 period would have been $8.8 million,
an increase of $7.3 million over 1998.
20
Research and Development Expenses. Research and development expenses totaled
$1.2 million and $204,000 in 1999 and 1998, respectively. The increase was due
primarily to increases in development personnel, travel and consulting
expenses. Stock-based compensation charges of $126,000 in 1999 were
attributable to employees categorized within research and development and are
presented in a separate line item within the statements of operations.
Sales and Marketing Expenses. Sales and marketing expenses totaled $4.0
million and $588,000 in 1999 and 1998, respectively. The increases were due in
large part to growth in sales personnel and commissions and costs related to
our branding and marketing campaigns. Stock-based compensation charges of
$333,000 in 1999 are attributable to employees categorized within sales and
marketing and are presented in a separate line item within the statements of
operations.
General and Administrative Expenses. General and administrative expenses
totaled $3.6 million and $674,000 in 1999 and 1998, respectively. The increase
was primarily due to the additional facilities opened during 1999 and the
increase in headcount in the finance, information technology, executive and
administration areas plus recruiting and relocation expenses. Stock-based
compensation charges of $893,000 in 1999 are attributable to employees
categorized within general and administrative and are presented in a separate
line item within the statements of operations.
Amortization of Intangibles, and Other Long-term Assets. Amortization of
intangibles, and other long-term assets totaled $302,000 in 1999 and includes
amortization of the goodwill and identified intangible assets recorded as part
of the Alive.com acquisition, which took place on December 14, 1999. There
were no intangible assets as of December 31, 1998, and accordingly, there were
no related amortization charges in 1998.
Stock-based Compensation. Stock-based compensation expense of $1.6 million
in 1999 consists of $982,000 in amortization of deferred stock compensation
related to stock options granted below fair market value prior to December 31,
1999 and $572,000 in expense related to marking options granted to consultants
to fair market value as of December 31, 1999. There was no stock-based
compensation expense in 1998.
Interest Income. Interest income, representing earnings on our cash, cash
equivalents and short-term investments, totaled $204,000 and $54,000 in the
years ended December 31, 1999 and 1998, respectively. The increase was due
primarily to interest earned on our significantly higher cash and investment
balances in 1999 compared to 1998.
Interest Expense and Other. Interest expense and other totaled $183,000 and
$20,000 in the years ended December 31, 1999 and 1998, respectively. The
increase was due primarily to interest on borrowings to finance equipment
purchases during 1999.
Liquidity and Capital Resources
As of December 31, 2000, we had approximately $95.0 million of cash, cash
equivalents and short-term investments.
Net cash used in operating activities was $25.4 million and $4.9 million in
the years ended December 31, 2000 and 1999, respectively. For 2000, cash used
in operating activities resulted primarily from a net loss of $39.5 million, a
decrease of approximately $3.8 million in accounts payable and an increase in
trade accounts receivable of $2.1 million, partially offset by non-cash
charges totaling $18.6 million related to stock-based compensation,
depreciation and amortization, and the non-cash component of the special
charge. Cash used in operating activities in 1999 was due primarily to a net
loss of $10.9 million, partially offset by an increase in accounts payable of
$4.2 million and non-cash stock-based compensation, depreciation and
amortization charges totaling $2.8 million.
Net cash used in investing activities was $61.6 million and $5.0 million for
the years ended December 31, 2000 and 1999, respectively. This was primarily
related to purchases of short-term investments, equipment, cash paid for the
acquisition of Vidipax in June of 2000 and capitalized software development
costs.
21
Net cash provided by financing activities was $89.4 million and $57.7
million for the years ended December 31, 2000 and 1999, respectively. The cash
provided by financing activities in 2000 primarily resulted from the net
proceeds of our initial public offering, and the concurrent sale of common
shares to a strategic investor. 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 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 Akamai for net proceeds of $5.0 million. The combined net
proceeds from these transactions, less offering costs of $1.6 million, totaled
$80.4 million. An additional $10.2 million in proceeds were generated from
borrowing on our credit facilities. Net cash provided by financing activities
for the year ended December 31, 1999 totaled $57.7 million and consisted
primarily of proceeds from the sales of convertible preferred stock of $55.0
million and $3.1 million in proceeds from long-term debt.
As of December 31, 2000, our principal commitments consisted of obligations
outstanding under operating leases and credit facilities with our banks. We
have notes payable totaling $528,000 under our original equipment line of
credit with Imperial Bank. Borrowings from Imperial Bank under the equipment
line of credit bear interest at Imperial's prime rate (9.50% at December 31,
2000), and are secured by assets financed under the agreement. Interest and
principal on the Imperial Bank note is payable monthly, and the principal is
due on August 30, 2002. The average interest rate paid on our borrowings under
the Imperial Bank facility was 9.24% and 7.99% for the years ended December
31, 2000 and 1999, respectively.
In June 2000, we amended our loan agreement with Imperial Bank to add an
additional credit facility that permits revolving borrowings and standby
letters of credit aggregating up to $2.0 million. Additionally, the amended
facility provides for a term loan of up to $10.0 million for the purchase of
capital equipment. The $2.0 million credit line bears interest at Imperial
Bank's prime rate (9.50% at December 31, 2000), with principal and interest
due in June 2001. There were no borrowings outstanding under the amended
credit line at December 31, 2000 although as of February 2001, it is being
used to back up a stand-by letter of credit. The $10.0 million equipment
facility bears interest payable monthly during each draw period at Imperial's
prime rates plus 0.75% (10.25% at December 31, 2000) followed by 36 equal
monthly payments of principal plus interest payable through May 2004.
Borrowings under this facility are secured by any assets financed under the
agreement. At December 31, 2000, $9.6 million was outstanding under the
amended credit facility with Imperial Bank. The average interest rate paid on
our borrowings under the Imperial Bank equipment facility was 10.25% for the
year ended December 31, 2000.
At December 31, 2000, we also have notes payable totaling $1.7 million under
our equipment loan facility with Dominion Venture Finance LLC. The notes
payable to Dominion bear interest at rates ranging from 8.57% to 9.65%, and
are secured by assets financed under the agreement. Interest is payable
monthly, and the principal is due in February 2003. A fee equal to 15% of the
principal balance is due with the final payment of each advance. That
additional fee is accrued on a monthly basis and is included in accrued
liabilities and interest expense over the term of the loan.
We have certain financial commitments under existing agreements that will
require significant uses of our cash resources. We entered into a strategic
partnership agreement that commits us to purchase at least $625,000 in
services in 2001. Additionally, pursuant to the acquisition of VidiPax in June
2000, additional consideration will be paid to the employees and former
shareholder based upon predetermined results in the first year subsequent to
acquisition. These payments can be made in a combination of cash and stock in
a manner to be determined solely by the Company. The value given under this
arrangement is expected to range from $600,000 to $3.4 million.
In January 2001, we announced a cost-savings initiative which resulted in a
$947,000 special charge being recognized in 2000; a similar charge totaling
approximately $750,000 will be recorded in the first quarter of 2001. The
December 2000 charge included approximately $300,000 related to employee
termination payments, of which approximately $200,000 were paid in the first
quarter of 2001. The 2001 charge relates primarily to payments for
terminations announced in January 2001 and paid in cash during the first
quarter of 2001.
22
Additionally, we expect to close the acquisition of DiscoverMusic in the
first quarter of 2001. That acquisition will require approximately $4.0
million in cash, net of acquired cash, and the remainder of the purchase price
will be paid with 3.7 million shares of our common stock.
Since our inception, our operating expenses have significantly increased. We
currently anticipate that such expenses will continue to be a material use of
our cash resources. We expect that capital expenditures, excluding
acquisitions, will total approximately $6.0 million in 2001.
We believe that our existing cash, cash equivalents, short-term investments,
the amounts available under our debt facilities will be sufficient to fund our
operations and meet our working capital and capital expenditure requirements
during 2001 and 2002. Thereafter, if we cannot fund operating and other
expenses, working capital and capital expenditure requirements from our
operations, we may find it necessary to obtain additional equity or debt
financing, sell assets or reduce spending plans. In the event additional
equity or debt financing is required, we may not be able to raise it on
acceptable terms or at all.
Recent Accounting Pronouncements
In December 1999, the staff of the Securities and Exchange Commission
released Staff Accounting Bulletin, or SAB, No. 101, "Revenue Recognition" (as
amended in 2000 by SAB 101A and SAB 101B), to provide guidance on the
recognition, presentation, and disclosure of revenues in financial statements.
We believe that our revenue recognition practices are currently in conformity
with the guidelines in SAB101 as amended, 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," (FIN 44) 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 non-compensatory 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 FIN 44 had 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 had no 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. This
pronouncement did not have a material impact on our financial statements.
In July 2000, the EITF issued EITF 00-10, "Accounting for Shipping and
Handling Fees and Costs". This issue requires that all amounts billed to a
customer in a sale transaction related to shipping and handling to be
classified as revenue. EITF 00-10 is required to be implemented during the
quarter ending December 31, 2000, with reclassification of all prior periods
presented. The impact of the implementation of this consensus did not have a
material impact on our financial statements.
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133, "Accounting for Derivative Instruments
and Hedging Activities" (SFAS 133). SFAS 133 establishes a new model for
accounting for derivatives and hedging activities and supersedes and amends
existing accounting standards and is effective for fiscal years beginning
after June 15, 2000. SFAS 133 requires that all derivatives be recognized in
the balance sheet at their fair market value, and the corresponding derivative
gains
23
or losses be either reported in the statement of operations or as a component
of other comprehensive income depending on the type of hedge relationship that
exists with respect to such derivative. The adoption of SFAS 133 is not
expected to have an effect on our financial statements as we have no
derivatives.
In September 2000, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 140, "Accounting for Transfers and
Servicing of Financial Assets and Extinguishments of Liabilities" (SFAS 140).
SFAS 140 provides accounting and reporting standards for transfers and
servicing of financial assets and extinguishments of liabilities and is
effective for transfers and servicing of financial assets and extinguishments
of liabilities occurring after March 31, 2001. The adoption of SFAS 140 is not
expected to have a material impact on our financial statements.
RISK FACTORS
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, our executives have
limited 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 relatively 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 $57.0 million during the
period August 12, 1997 (inception) through December 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;
. Address media copyright issues without negatively impacting our
business;
. 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.
24
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 will
likely increase our operating expenses in the future as we attempt to expand
our digital media service and application offerings; obtain, administer, and
renew financially reasonable music content license agreements with the various
third parties in the fragmented music recording and publishing industries;
grow our customer base; enhance our brand image; improve our technology
infrastructure; and open new offices. We expect the number of our employees
may grow. 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;
. Profitability and viability of existing and emerging businesses focused
on distribution of digital media content over the Internet;
. Market acceptance of new digital media services and applications offered
by us and our competitors;
. Ability of our customers to procure necessary intellectual property
rights in the digital media content they intend to utilize in their
businesses;
. Introduction or enhancement of digital media services and applications
offered by us and our competitors;
. Willingness of our customers to enter into digital media and
applications services agreements for digital media in light of the
economic and legal uncertainties related to their business models;
. The mix of distribution channels through which our products and services
are licensed and sold;
. Changes in the growth rate of Internet usage and adoption of broadband
access;
. Variability in average order size or product mix;
. 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.
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 in absolute dollars on an annual
basis. Our current and future levels of operating expenses and capital
expenditures are based largely on our growth plans and estimates of expected
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 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 our expectations as well as those of securities analysts and
investors in some future periods, our stock price will likely decline.
25
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, we believe future quarters may not show similar percentage
revenue increases and may show declining revenue (see "Forward-Looking
Statements").
We depend on the development and rate of adoption of digital media and the
delay or failure of this development would seriously harm our business
We depend 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 the Internet does not develop as an effective medium for
the distribution of digital media content to consumers or if businesses
predicated on the distribution of digital media content are not profitable or
are unable to raise necessary operating capital, 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 intellectual property rights associated with
music and other digital 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 minimum microprocessor
requirements and data transmission capacities, as well as streaming media
software. The success of digital media over the Internet depends on the
continued rollout 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-based businesses, 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.
Copyright infringement may decrease the demand for our products and services
The music industry in particular has recently been the focus of heightened
concern with respect to copyright infringement and other misappropriation
claims, and the outcome of developing legal standards in that industry is
expected to impact music, video and other content being distributed over the
Internet. If, as a result, potential customers forego distributing traditional
media content over the Internet, demand for our digital media applications and
services could be reduced which would harm our business.
Commercial failure of Internet-based businesses could reduce demand for our
digital media services and applications
The substantial proportion of customers for our digital media services and
applications have been Internet-based businesses and we expect that in the
future, a majority of our customers will be these types of businesses.
26
Our business prospects and revenues would be harmed by the commercial failure
or diminished commercial prospects of these or like customers. In addition, if
such customers have difficulty raising additional capital to fund their
operations, our business prospects and revenues would be harmed.
We may be liable or alleged to be liable to third parties for music, software,
and other content that we encode, distribute, or make available on our site
We may be liable or alleged to be liable to third parties for the content
that we encode, distribute or make available on our site:
. If the content or the performance of our services 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 that our customers might not have all
necessary ownership or license 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 or alleged 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 or any alleged
liability 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 depend on a limited number of customers for a majority of our revenues so
the loss of, 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 customers have accounted for a majority of our revenues
and will continue to do so for the foreseeable future. During the year ended
December 31, 2000, two of our customers accounted for approximately 29% of our
revenues; while in the year ended December 31, 1999, two customers accounted
for approximately 24% of our revenues. We believe that a small number of
customers will likely continue to account
27
for a significant percentage of our revenues for the foreseeable future. Due
to high revenue concentration among a limited number of customers, the
cancellation, reduction or delay of a large 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 any 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.
We rely on strategic relationships to promote our services and for access to
licensed technology; if we fail to maintain or enhance these relationships,
our ability to serve our customers and develop new services and applications
could be harmed
Our ability to provide our services to users of multiple technologies and
platforms depends significantly on our ability to develop and maintain our
strategic relationships with key streaming media technology companies
including, among others, Apple Computer, Inc., Microsoft Corporation, and
RealNetworks, Inc. 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 pre-existing
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.
In 2000, we began executing our music content licensing strategy by entering
into music content licenses with three major record labels. However, obtaining
comprehensive music content licenses is challenging, as doing so may require
us to obtain copyright licenses with various third parties in the fragmented
music recording and publishing industries. These copyrights often address
differing activities related to the delivery of digital media, including
reproduction and performance, some of which may require separate licensing
arrangements from various rights holders such as publishers, artists and
record labels. The effort to obtain the necessary rights by such third parties
is often significant, and could disrupt, delay, or prevent us from executing
our business plans. Because of the large number of potential parties from
which we must obtain licenses, we may never be able to obtain a sufficient
number of licenses to allow us to provide services that will meet our
customers' expectations. Customers of our services may decide that we are not
able to provide them with access to enough content to make their own services
valuable to consumers, and they may choose not to do business with us. Even if
we are able to obtain a sufficient number of licenses, those licenses may not
be on favorable terms, and we may have to increase the amount that we charge
our customers for our services in order to cover the costs of these licenses,
and the market for digital music may not support these increased costs.
The United States music industry is extremely litigious; we may become
involved in litigation and expenses related to litigation could severely
impact our financial condition, and could also result in the discontinuation
or interruption of services to our customers
The music industry in the United States is generally regarded as extremely
litigious in nature compared to other industries. As a result, in the future
we could become engaged in litigation with others in the music industry. Any
litigation could subject us to significant liability for damages and could
result in us having to discontinue or interrupt services to our customers. In
addition, even if we were to prevail, litigation could be time-consuming and
expensive to defend and could result in the diversion of management time and
attention.
If we are ineffective in managing our growth, our business may be harmed
We have rapidly and significantly expanded our operations and anticipate
that further expansion will be required to execute our business strategy. This
growth has accelerated since inception, we have grown to 229 permanent
employees as of February 1, 2001. In December 1999, we acquired Alive.com,
Inc. and in
28
June 2000 we acquired VidiPax, Inc. As announced in January 2001, we expect to
close the acquisition of DiscoverMusic in the first quarter of 2001. The
integration of these acquisitions into our operations may place a significant
strain on our employees, systems and other resources. If any acquisition fails
to integrate well, our operations and financial position could be harmed.
Our current infrastructure and systems (such as information technologies and
accounting) might prove to be insufficient to indefinitely 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, continue to improve our management reporting
capabilities and accounting systems. We also need to attract, hire and retain
highly skilled and motivated executives and other employees. We must also
maintain close coordination among our marketing, operations, development,
finance and administrative organizations.
Our music content licenses could result in operational complexity that may
divert resources or make our business more expensive to conduct
The large number of licenses which we need to maintain in order to expand
our services creates operational difficulties in connection with tracking the
rights that we have acquired and the complex royalty structures under which we
must pay. In addition, our licensing agreements typically allow the third
party to audit our royalty tracking and payment mechanisms to ensure that we
are accurately reporting and paying the royalties owed. If we are unable to
accurately track the numerous parties that we must pay in connection with each
delivery of digital music services and deliver the appropriate payment in a
timely fashion, we may risk termination of certain licenses.
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.
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 other areas 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 relatively
short period of time. We do not maintain "key person" life insurance on any of
our executive officers. In addition, we hired or named new employees in 2000
in key executive positions, including our Chief Executive Officer, Chief
Financial Officer, Vice President of Sales, Vice President of Marketing and
General Counsel. The loss of several key executives could seriously harm our
business.
29
Competition may decrease our market share, revenues, and gross margins
Our products and services are divided into digital media services, which is
the encoding of audio and video content for deployment over the Internet,
media migration and restoration services and consulting services; and digital
media applications, which are primarily subscription services focused towards
business models providing music over the Internet.
The market for digital media services and applications is relatively new,
and we face competition from in-house encoding services by potential
customers, other vendors that provide outsourced digital media services and
companies that directly provide digital media applications If we do not
compete effectively or if we experience reduced market share from increased
competition, our business will be harmed. In addition, the more successful we
are in the emerging market for Internet media services and applications, the
more competitors are likely to emerge including turnkey Internet media
application and service providers; streaming media platform developers;
digital music infrastructure providers; digital media applications service
providers (including for digital music subscription), and; video post-
production houses. As we continue to develop media subscription applications,
we may also over time begin to compete with some of our historical customers
and partners who could also develop and market business-to-business
subscription offerings.
In addition, we 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 may 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 and may not lead to improved gross margins. In
order to remain competitive, we expect to reduce the cost of our services
through design and engineering changes. We may not be successful in reducing
the costs of providing 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 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.
30
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:
. Obtain the necessary intellectual property rights from music companies
and other content owners to be able to legally provide our services;
. Identify and respond to emerging technological trends in the market;
. 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.
We cannot be certain that we will be able to protect our intellectual
property, and we may be found to infringe on 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 have filed six U.S. patent applications and four international
patent applications that claim priority to six previously filed provisional
applications. We cannot assure 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.
31
The length of our sales cycle is uncertain and therefore could cause
significant variations in our operating results
Our customers typically include 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 their procurement of appropriate rights from content
owners, 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 uncertainties that may limit our return from our
international sales efforts
One of our strategies to increase our sales is to selectively 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 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;
32
. 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 could disrupt our business and harm our financial
condition
We expect to evaluate 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, except the agreement to acquire DiscoverMusic expected
to close in the first quarter of 2001. Transactions of this sort require the
process of integrating an acquired business, technology, service, or product
and 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. Acquisitions could
result in material use of cash resources, potentially dilutive issuances of
equity securities, the incurrence of debt, contingent liabilities, or
amortization expenses related to goodwill and other intangible assets and the
incurrence of large and immediate write-offs, any of which could seriously
harm our business, results of operations and financial condition.
In addition, recent proposed 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, a possible elimination of the
"pooling" method of accounting for mergers increases the amount of goodwill
and other intangible assets 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. The DiscoverMusic acquisition will be accounted for under the purchase
method of accounting. We will incur additional amortization expense in future
periods as a result of the excess purchase price associated with this
acquisition.
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 an negatively affect our operating results
In the past, we have had on occasion difficulty monitoring the quality of
our service. A limited number of our customers have returned encoded content
to us for our failure to meet the customer's specifications and requirements.
It is likely that we will experience some level of returns in the future and,
as our business grows, the amount of returns may increase. Also, returns may
harm our relationship with potential customers and business in the future. If
returns increase, our reserves may not be sufficient and our operating results
would be negatively affected.
The concentration of ownership by our affiliated stockholders and provisions
in our charter documents and provisions of applicable state law may delay or
prevent any merger or takeover of the Company
Certain of our existing stockholders have significant influence over our
management and affairs, which they could exercise against your best interests.
As of December 31, 2000, our officers and directors, together with entities
that may be deemed affiliates of or related to such persons or entities, will
beneficially own approximately 40% of our outstanding common stock. As a
result, these stockholders, acting together, may be able to influence
significantly our management and affairs and matters requiring stockholder
approval, including the election of directors and approval of significant
corporate transactions. Accordingly, this concentration of ownership may have
the effect of impeding a merger, consolidation, takeover or other business
consolidation involving us, or discouraging a potential acquiror from making a
tender offer for our shares. This concentration of ownership
33
could also adversely affect our stock's market price or lessen any premium
over market price that an acquiror might otherwise pay.
Certain provisions of our certificate of incorporation and bylaws and the
provisions of Delaware and Washington law could have the effect of delaying,
deferring or preventing an acquisition of Loudeye, even if an acquisition
would be beneficial to our stockholders.
We may need to raise additional capital in the future, and if we are unable to
secure adequate funds on terms acceptable to us, we may be unable to execute
our business plan
We believe that our existing cash, cash equivalents, short-term investments,
the amounts available under the working capital line and the new facility will
be sufficient to meet our operating expenses working capital, capital
expenditure and business expansion requirements through 2001 and 2002.
Thereafter, we may need to raise additional funds. We may have to raise funds
even sooner in order to fund more rapid expansion, to develop new or enhanced
services or products, to respond to competitive pressures, to acquire
complementary products, businesses or technologies or otherwise to respond to
unanticipated requirements. If additional funds are raised through the
issuance of equity or convertible debt securities, the percentage ownership of
our stockholders will be reduced. If we raise capital through debt financing,
we may be forced to accept restrictions affecting our liquidity, including
restrictions on our ability to incur additional indebtedness or pay dividends.
We cannot assure you that additional financing will be available on favorable
terms or at all. If adequate funds are not available or are not available on
acceptable terms, we may not be able to fund our ongoing operations and
planned expansion, take advantage of unanticipated acquisition opportunities,
develop or enhance services and applications or respond to competitive
pressures. This inability could seriously harm our business, results of
operations and financial condition.
Our encoding and data storage and web server systems may stop working or work
improperly due to natural disasters, failure of third-party services, power
outages, fire and other unexpected problems
Since our primary encoding and data storage facilities and network
facilities are located in the state of Washington, a seismic disturbance, or
other natural disaster could affect these primary facilities simultaneously.
An unexpected event like a power or telecommunications failure, fire, flood,
seismic disturbance at or near our encoding and on-site data storage facility
or at any of our Internet service providers' facilities could cause the loss
of critical data and prevent us from offering our services to our customers.
In addition, California utility companies are currently experiencing a
financial crisis which have led to "brownouts," "rolling blackouts" and other
disruptions of power services to consumers, and this crisis could spread to
the state of Washington as well. These losses of power could continue or
worsen due to circumstances out of our control and adversely affect our
business and other operations entirely. Our insurance may not adequately
compensate us for any losses that may occur.
Government regulation may require us to change our business
On October 28, 1998, the United States Congress enacted the Digital
Millennium Copyright Act (or "DMCA"). The DMCA includes statutory licenses for
the performance of sound recordings and for the making of recordings to
facilitate transmissions. Under these statutory licenses, depending on our and
our customers' future business activities, we and our customers may be
required to pay licensing fees for digital sound recordings streamed or
distributed from web sites and through retransmissions of radio broadcasts
and/or other audio content. The DMCA does not specify the rate and terms of
such licenses, which will be determined either through voluntary inter-
industry negotiations or arbitration. Moreover, with respect to digital
publishing, sound recording and other music licenses not directly covered by
the DMCA, various companies and individuals in the digital music industry plan
to engage in a proceeding before a tribunal of the United States Copyright
Office along with the Recording Industry Association of America during 2001 to
determine what, if any, licensee fees should be paid to various rights
holders. Depending on the rates and terms adopted for the statutory licenses,
our business could be harmed both by increasing our own cost of doing
business, and by increasing the cost of doing business for our customers.
34
Because of this rapidly evolving and uncertain regulatory environment, both
domestically and internationally, we cannot predict how existing or proposed
laws and regulations might affect our business. In addition, these
uncertainties make it difficult to ensure compliance with the laws and
regulations governing digital music. These laws and regulations could harm us
by subjecting us to liability or forcing us to change our business.
ITEM 7a 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 and fluctuations in the stock market. As substantially 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 substantially all
of our investments are in short-term instruments with original maturities of
less than six months. Due to the limited duration of our short-term
investments and their investment grade level, we anticipate no material market
risk exposure. Therefore, no quantitative tabular disclosures are presented.
We invest in investment-grade government obligations, institutional money
market funds and other obligations with FDIC insured US banks. Concentration
is limited to 10% in any one instrument or issuer. Our primary investment
focus is to preserve capital and earn a market rate of return on our
investments. We do not speculate nor invest in publicly traded equity
securities and therefore do not believe that our capital is subject to
significant market risk. The average portfolio balance must remain under one
year in duration.
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ITEM 8 FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
LOUDEYE TECHNOLOGIES, INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Page
Number
------
Report of Independent Public Accountants............................ 37
Consolidated Balance Sheets as of December 31, 2000 and 1999........ 38
Consolidated Statements of Operations for the three years ended
December 31, 2000.................................................. 39
Consolidated Statements of Shareholders' Equity for the three years
ended December 31, 2000............................................ 40
Consolidated Statements of Cash Flows for the three years ended
December 31, 2000.................................................. 41
Notes to Consolidated Financial Statements.......................... 42
36
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Loudeye Technologies, Inc.:
We have audited the accompanying balance sheets of Loudeye Technologies,
Inc. (Loudeye) as of December 31, 1999 and 2000, and the related statements of
operations, stockholders' equity (deficit) and cash flows for each of the
three years in the period ended December 31, 2000. These financial statements
are the responsibility of Loudeye's management. Our responsibility is to
express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on
a test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used
and significant estimates made by management, as well as evaluating the
overall financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Loudeye Technologies, Inc.
as of December 31, 1999 and 2000, and the results of its operations and its
cash flows for each of the three years in the period ended December 31, 2000
in conformity with accounting principles generally accepted in the United
States.
/s/ Arthur Andersen LLP
February 6, 2001
Seattle, Washington
37
LOUDEYE TECHNOLOGIES, INC.
CONSOLIDATED BALANCE SHEETS
(Amounts in thousands except share and per share amounts)
December 31,
------------------
2000 1999
-------- --------
ASSETS
------
Cash and cash equivalents.................................. $ 51,689 $ 49,273
Short-term investments..................................... 43,300 530
Accounts receivable, net of allowance of $709 and $187..... 3,241 955
Prepaids and other current assets.......................... 1,072 597
-------- --------
Total current assets................................... 99,302 51,355
Property and equipment, net................................ 15,955 5,282
Goodwill, net.............................................. 9,785 14,207
Intangibles and other long-term assets, net................ 7,634 5,931
-------- --------
Total assets............................................... $132,676 $ 76,775
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
----------------------------------------------
Accounts payable........................................... $ 1,137 $ 4,778
Accrued compensation and benefits.......................... 1,247 388
Employee Stock Purchase Plan withholding................... 307 --
Other accrued expenses..................................... 1,368 587
Customer deposits.......................................... 255 438
Deferred revenues.......................................... 545 --
Current portion of long-term debt.......................... 4,425 1,132
-------- --------
Total current liabilities.............................. 9,284 7,323
Long-term debt, net of current portion..................... 7,324 1,963
-------- --------
Total liabilities...................................... 16,608 9,286
Stockholders' equity (deficit)
Preferred stock, $0.001 par value, 5,000,000 and
41,000,000 shares authorized, 21,063,236 issued and
outstanding in 1999..................................... -- 58,536
Beneficial conversion feature............................ -- 14,121
Common stock, additional paid-in capital and warrants,
$0.001 par value, 100,000,000 shares authorized;
37,072,442 and 8,696,257 issued and outstanding......... 185,609 28,305
Deferred stock compensation.............................. (3,387) (6,843)
Accumulated deficit...................................... (66,154) (26,630)
-------- --------
Total stockholders' equity............................. 116,068 67,489
-------- --------
Total liabilities and stockholders' equity............. $132,676 $ 76,775
======== ========
The accompanying notes are an integral part of these financial statements
38
LOUDEYE TECHNOLOGIES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(Amounts in thousands except share and per share amounts)
Year ended December 31,
---------------------------------
2000 1999 1998
---------- ---------- ---------
Revenues:
Digital media services ................... $ 10,468 $ 2,645 $ 286
Digital media applications and other ..... 1,069 -- --
---------- ---------- ---------
Total revenues ......................... 11,537 2,645 286
Cost of Revenues (excluding stock-based
compensation expense of $456 in 2000 and
$202 in 1999 shown below):
Digital media services ................... 11,914 2,870 504
Digital media applications and other ..... 474 -- --
---------- ---------- ---------
Total cost of revenues ................. 12,388 2,870 504
Gross margin ........................... (851) (225) (218)
Operating Expenses:
Research and development (excluding stock-
based compensation of $283 in 2000 and
$126 in 1999 shown below)................ 6,784 1,248 204
Sales and marketing (excluding stock-based
compensation of $749 in 2000 and $333 in
1999 shown below and other non-cash
charges of $663 in 2000 shown below)..... 14,621 3,982 588
General and administrative (excluding
stock-based compensation of $3,921 in
2000 and $893 in 1999 shown below)....... 8,079 3,612 674
Amortization of intangibles and other
long-term assets ........................ 7,693 302 --
Stock-based compensation ................. 5,409 1,554 --
---------- ---------- ---------
Total operating expenses ............... 42,586 10,698 1,466
Special charges ............................ 947 -- --
---------- ---------- ---------
Operating loss ............................. (44,384) (10,923) (1,684)
Interest income ............................ 5,767 204 54
Interest expense ........................... (907) (183) (20)
---------- ---------- ---------
Total other income (expense) ........... 4,860 21 34
---------- ---------- ---------
Net loss ................................... $ (39,524) $ (10,902) $ (1,650)
Beneficial conversion feature .............. -- (14,121) --
---------- ---------- ---------
Net loss to common shareholders ............ $ (39,524) $ (25,023) $ (1,650)
========== ========== =========
Basic and diluted net loss per share ....... $ (1.33) $ (4.62) $ (0.41)
========== ========== =========
Weighted average shares outstanding used to
compute basic and diluted net loss per
share ..................................... 29,773,886 5,410,507 4,039,444
========== ========== =========
Basic and diluted pro forma net loss per
share ..................................... $ (1.16) $ (1.50) $ (0.17)
========== ========== =========
Weighted average shares outstanding used to
compute basic and diluted pro forma net
loss per share ............................ 34,103,551 16,659,800 9,585,049
========== ========== =========
The accompanying notes are an integral part of these statements.
39
LOUDEYE TECHNOLOGIES, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
(Amounts in thousands, except for share amounts)
Common Stock and
Convertible Additional Total
Preferred Stock Paid-in Capital Stock Warrants Beneficial Deferred Stockholders'
--------------------- ------------------- ----------------- Conversion Stock Accumulated Equity
Shares Amount Shares Amount Shares Amount Feature Compensation Deficit (Deficit)
----------- -------- ---------- -------- -------- ------- ---------- ------------ ----------- -------------
BALANCES,
DECEMBER 31,
1997............ -- $ -- -- $ 10 -- $ -- -- $ -- $ (95) $ (85)
Issuance of
common stock, in
conjunction with
conversion from
LLC to C
Corp. .......... -- -- 5,288,000 -- -- -- -- -- -- --
Issuance of
Series A
preferred stock
in conjunction
with conversion
from LLC to
C Corp. ........ 4,712,000 5 -- (5) -- -- -- -- -- --
Conversion from
LLC to C
Corp. .......... -- -- -- (138) -- -- -- -- 138 --
Conversion of
advances to
Series A
preferred
stock........... 271,787 229 -- -- -- -- -- -- -- 229
Conversion of
debt into
preferred
stock........... 593,120 500 -- -- -- -- -- -- -- 500
Issuance of
Series B
preferred
stock........... 2,666,074 2,248 -- -- -- -- -- -- -- 2,248
Net loss........ -- -- -- -- -- -- -- -- (1,650) (1,650)
----------- -------- ---------- -------- -------- ------- ------- ------- -------- --------
BALANCES,
DECEMBER 31,
1998............ 8,242,981 2,982 5,288,000 (133) -- -- -- -- (1,607) 1,242
Issuance of
Series C
preferred
stock........... 4,914,529 9,328 -- -- -- -- -- -- -- 9,328
Conversion of
debt into
preferred
stock........... 394,737 750 -- -- -- -- -- -- -- 750
Deferred stock
compensation.... -- -- -- 7,825 -- -- -- (7,825) -- --
Stock-based
compensation--
consultants..... -- -- -- 572 -- -- -- -- -- 572
Issuance of
common stock for
acquisitions.... -- -- 2,528,848 18,693 -- -- -- -- -- 18,693
Issuance of
Series D
preferred
stock........... 7,510,989 45,476 -- -- -- -- -- -- -- 45,476
Amortization of
deferred
compensation.... -- -- -- -- -- -- -- 982 -- 982
Stock option
exercises....... -- -- 879,409 189 -- -- -- -- -- 189
Issuance of
warrants........ -- -- -- -- 691,053 1,159 -- -- -- 1,159
Beneficial
conversion
feature......... -- -- -- -- -- -- 14,121 -- (14,121) --
Net loss........ -- -- -- -- -- -- -- -- (10,902) (10,902)
----------- -------- ---------- -------- -------- ------- ------- ------- -------- --------
BALANCES,
DECEMBER 31,
1999............ 21,063,236 58,536 8,696,257 27,146 691,053 1,159 14,121 (6,843) (26,630) 67,489
Conversion of
preferred
stock........... (21,063,236) (58,536) 21,063,236 58,536 -- -- -- -- -- --
Beneficial
conversion
reclass......... -- -- -- 14,121 -- -- (14,121) -- -- --
Initial Public
Offering........ -- -- 5,175,000 75,372 -- -- -- -- -- 75,372
Exercise and
conversion of
warrants........ -- -- 526,528 1,159 (691,053) (1,159) -- -- -- --
Sale of shares
to strategic
partner......... -- -- 336,022 5,376 -- -- -- -- -- 5,376
Deferred stock
compensation.... -- -- -- 3,100 -- -- -- (3,100) -- --
Issuance of
shares under
Employee Stock
Purchase Plan... -- -- 175,246 550 -- -- -- -- -- 550
Stock option
exercises and
repurchases..... -- -- 1,031,869 177 -- -- -- 46 -- 223
Cancellation of
common stock
options......... -- -- -- (2,587) -- -- -- 1,767 -- (820)
Acceleration of
common stock
options......... -- -- -- 128 -- -- -- 230 -- 358
Stock-based
compensation--
consultants..... -- -- -- 1,267 -- -- -- -- -- 1,267
Amortization of
deferred
compensation.... -- -- -- -- -- -- -- 4,513 -- 4,513
Issuance of
shares for
acquisition..... -- -- 68,284 1,105 -- -- -- -- -- 1,105
Issuance of
warrants to
partners........ -- -- -- -- 140,000 159 -- -- -- 159
Net loss........ -- -- -- -- -- -- -- -- (39,524) (39,524)
----------- -------- ---------- -------- -------- ------- ------- ------- -------- --------
BALANCES,
DECEMBER 31,
2000............ -- $ -- 37,072,442 $185,450 140,000 $ 159 -- $(3,387) $(66,154) $116,068
=========== ======== ========== ======== ======== ======= ======= ======= ======== ========
The accompanying notes are an integral part of these statements.
40
LOUDEYE TECHNOLOGIES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Amounts in thousands)
Year Ended December 31,
---------------------------
2000 1999 1998
-------- -------- -------
OPERATING ACTIVITIES:
Net Loss........................................ $(39,524) $(10,902) $(1,650)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization................. 12,494 1,226 216
Special charges and other non-cash items...... 661 -- --
Stock-based compensation...................... 5,409 1,554 --
Changes in operating assets and liabilities, net
of amounts acquired in purchase of business
Accounts receivable........................... (2,121) (856) (87)
Prepaid and other current assets.............. (475) (564) (26)
Other long-term assets........................ (226) (189) (9)
Accounts payable.............................. (3,758) 4,204 274
Accrued compensation and benefits............. 1,365 280 18
Other accrued expenses........................ 436 221 113
Customer deposits and deferred revenue........ 362 146 292
-------- -------- -------
Net cash used in operating activities....... (25,377) (4,880) (859)
INVESTING ACTIVITIES:
Purchases of property and equipment............. (15,814) (4,423) (1,478)
Capitalized software development costs.......... (1,304) -- --
Cash paid for acquisition of business, net...... (1,907) -- --
Purchases/sales of short-term investments, net.. (42,605) (530) --
-------- -------- -------
Net cash used in investing activities....... (61,630) (4,953) (1,478)
FINANCING ACTIVITIES:
Proceeds from sale of stock, net................ 80,921 54,994 2,279
Proceeds from long term debt.................... 10,205 3,104 1,500
Principal payments on long-term obligations..... (1,882) (434) --
Proceeds from exercise of common stock options,
net............................................ 179 -- --
-------- -------- -------
Net cash provided by financing activities... 89,423 57,664 3,779
-------- -------- -------
Net increase in cash and cash equivalents......... 2,416 47,831 1,442
Cash and cash equivalents, beginning of period.... 49,273 1,442 --
-------- -------- -------
Cash and cash equivalents, end of period.......... $ 51,689 $ 49,273 $ 1,442
======== ======== =======
Cash paid for interest............................ $ 683 $ 183 $ 21
Issuance of common stock for acquisition of
business......................................... 1,105 18,693 --
Issuance of common stock warrants................. 159 1,159 --
Conversion of debt into preferred stock........... -- 750 729
The accompanying notes are an integral part of these statements.
41
LOUDEYE TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2000
1. ORGANIZATION AND DEVELOPMENT STAGE RISKS:
The Company
Loudeye Technologies, Inc. (the Company) provides digital media
infrastructure services and applications including transforming 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 and Europe in one business segment.
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, the enhancement of existing
services, and the ability to secure adequate financing to support future
operations.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Cash and Cash Equivalents
Cash and cash equivalents consist of demand deposits and money market
accounts maintained with financial institutions and certain other investment
grade instruments. Recorded amounts approximate fair value. The Company
considers all cash deposits and highly liquid investments with an original
maturity of three months or less to be cash equivalents.
Short-term Investments
The Company has invested amounts in investment-grade government obligations,
institutional money market funds and other obligations with FDIC insured U.S.
banks. Concentration is limited to 10% in any one instrument or issuer. The
Company's primary focus is to preserve capital and earn a market rate of
return on its investments. The Company does not speculate or invest in
publicly traded equity securities and, therefore, does not believe that its
capital is subject to significant market risk. The average portfolio balance
must remain under one year in duration.
Additionally, the Company has established irrevocable standby letters of
credit totaling approximately $900,000 in conjunction with the lease of the
Company's primary office facility and a remote production facility. The
letters of credit related to the leases automatically renew during the term of
the leases. The letters of credit are required to be collateralized by short-
term investments and contain an automatic reduction schedule reducing the
amount of the letter of credit each year by a specified amount until they
reach $292,000, where they remain through the end of the leases.
Long-Lived Assets
The Company assesses potential impairments to its long-lived assets when
there is evidence that events or changes in circumstances have made recovery
of the asset's carrying value unlikely. An impairment loss is recognized when
the sum of the expected future undiscounted net cash flows is less than the
carrying amount of the asset. As described in Note 4, the Company recorded
impairment charges of $637,000 in 2000.
Advertising Costs
Advertising costs are expensed as incurred. The Company incurred $1.1
million, $636,000 and $164,000 in advertising costs for the years ended
December 31, 2000, 1999 and 1998, respectively.
42
LOUDEYE TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 31, 2000
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.
Software Development Costs
The Company capitalizes internal costs in developing software products upon
determination that technological feasibility has been established for the
product, if that product is to be sold, leased, or otherwise marketed. Costs
incurred prior to the establishment of technological feasibility are charged
to research and development expense. When the product is available for general
release to customers, capitalization is ceased, and such previously
capitalized costs are amortized on a product-by-product basis computed as the
greater of (a) the ratio that current gross revenues for the product bear to
the total of current and anticipated future gross revenues or (b) the
straight-line amortization over the remaining estimated economic useful life
of the product. The amortization is recorded as a component of digital media
applications cost of revenues.
Software developed for internal use is capitalized once the preliminary
project stage has been completed and management has committed to funding the
continuation of the development project. Capitalization is ceased when the
software project is substantially complete and ready for its intended use.
At December 31, 2000, $1.3 million in software development costs had been
capitalized and included in other long-term assets, of which approximately
$119,000 was amortized during 2000. In 1999 and 1998 no software development
costs were capitalized.
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.
3. REVENUE RECOGNITION
The Company generates revenues primarily from two sources: (1) digital media
services and (2) licensing and selling digital media applications.
DIGITAL MEDIA SERVICES
Encoding Services 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 materials or per unit contracts. Under
these contracts, the Company recognizes revenues as services are rendered and
the Company has no continuing involvement in the goods and services delivered,
which generally is the date the finished media is shipped to the customer.
43
LOUDEYE TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 31, 2000
Media Restoration and Migration Services consist of services provided by our
VidiPax subsidiary to restore and upgrade old or damaged archives of
traditional media. The Company recognizes revenues as services are rendered
and the Company has no continuing involvement in the goods and services
delivered, which generally is the date the finished media is shipped to the
customer.
Consulting Services consist of services provided by our consulting services
group to enable customers to utilize streaming media within their intranets,
websites and Internet applications. Consulting services are provided under
short-term contracts that are generally time and materials or fixed-price
milestone-based. Consulting services revenue generated by time and materials
contracts are recognized as the services are provided if there are no
contingencies. 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 consist of fees associated with hosting content and
Internet applications for customers. Hosting services revenues are generated
generally under non-cancelable 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 AND OTHER
Digital Media Applications and other revenues are generated from licensing
and selling of software and contractually guaranteed revenue amounts. 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.
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.
Other revenues are composed of contractual revenues associated with
forfeited deposits, the recognition of deferred revenue upon either the
completion of the earn-out period, the removal of our continuing obligation
under such agreements, maintenance revenues of our applications or the
recognition of contractually guaranteed minimum revenues. Contractual revenues
were recognized in 2000 when our further contractual obligations and all
uncertainties related to performance were resolved. We have no continuing
obligations to perform additional work under any of these agreements.
The Company has adopted the provisions of Staff Accounting Bulletin No. 101,
"Revenue Recognition," and believes its revenue policy is in accordance with
SAB 101; therefore, this pronouncement will not have an impact on recorded
results.
44
LOUDEYE TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 31, 2000
4. SPECIAL CHARGES
In January 2001, the Company announced a cost-savings initiative which
resulted in a $947,000 charge in the fourth quarter of 2000, and will result
in a charge of approximately $750,000 in the first quarter of 2001. Consistent
with the overall market trends, we experienced decreasing demand for video
services, accordingly in December 2000, our board of directors approved a plan
to shut-down our Santa Monica office and reduce video encoding services which
resulted in an impairment to our video encoding equipment as well as existing
tenant improvements at our Santa Monica facility which was closed in the first
quarter of 2001. This combined non-cash impairment charge of $637,000 was
included within the special charge line item in the financial statements. The
2000 charge also included approximately $300,000 related to payments to
employees terminated in November and December 2000 of which $200,000 were paid
in the first quarter of 2001. The remaining amounts of 2000 employee
termination costs will be paid in cash in 2001. As of December 31, 2000,
approximately $300,000 was included within accrued expenses related to the
cost-savings initiative. The special charge to be recorded in the first
quarter of 2001 relates primarily to payments to employees terminated in
January 2001.
5. 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 effect 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 presented.
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) as if the conversion and
IPO had occurred on January 1, 2000. 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 December 31, 2000, the Company had 267,748 stock options that had been
exercised but which were subject to repurchase at a weighted average exercise
price of $0.33 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.
As part of the terms of the acquisition of Alive.com on December 14, 1999,
74,411 Loudeye shares originally issued by Alive.com under the terms of a
stock purchase agreement with Allaire Corporation were subject to repurchase
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. 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.
45
LOUDEYE TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 31, 2000
The following table presents a reconciliation of shares used to calculate
basic and diluted earnings per share:
For the Year Ended For the Year Ended
December 31, 2000 December 31, 1999
---------------------- ---------------------
Actual Pro Forma Actual Pro Forma
---------- ---------- --------- ----------
Weighted average shares
outstanding................. 31,143,841 35,473,506 5,703,655 16,952,948
Allaire unvested shares
subject to repurchase....... (115,196) (115,196) (8,199) (8,199)
Weighting of shares subject
to repurchase............... (1,254,759) (1,254,759) (284,949) (284,949)
---------- ---------- --------- ----------
Weighted average shares used
to calculate basic and
diluted earnings per share.. 29,773,886 34,103,551 5,410,507 16,659,800
========== ========== ========= ==========
There were no reconciling items in 1998, and accordingly, no reconciliation
is presented above.
6. CONCENTRATION OF RISK AND SEGMENT DISCLOSURES
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 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 maintains cash and cash equivalents on deposit at various
institutions that at times exceed the insured limits by the Federal Deposit
Insurance Corporation. This exposes the Company to potential risk of loss in
the event the institutions become insolvent. The Company does not invest its
funds in derivative securities and the Company does not enter into hedging
activities; accordingly FAS 133 will have no impact on results.
The Company is exposed to credit risk since it extends credit to its
customers. The Company performs initial and ongoing evaluations of its
customers' financial positions, and generally extends credit on open account,
requiring collateral as deemed necessary.
During the three years ended December 31, 2000, the company had sales to
certain significant customers, as a percentage of revenues, as follows:
2000 1999 1998
---- ---- ----
Customer A................................................... 19% -- --
Customer B................................................... 10% 11% 12%
Customer C................................................... -- 13% --
Customer D................................................... -- -- 14%
--- --- ---
29% 24% 26%
=== === ===
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, Chief
Financial Officer, and certain of its 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 Company does not have any
operating units which exceed the threshold required for separate disclosure
and therefore, the Company does not have operating segments required to be
separately disclosed by SFAS 131, "Disclosure About Segments of an Enterprise
and Related Information".
46
LOUDEYE TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 31, 2000
7. PROPERTY AND EQUIPMENT
Property and equipment are stated at historical cost less accumulated
depreciation and any impairment write-downs. Depreciation is computed using
the straight-line method over the estimated useful lives of the property and
equipment that is generally three to five years. Property and equipment under
construction is capitalized and depreciation commences when the asset is
placed in service.
Property and equipment consist of the following:
2000 1999
------- ------
(In thousands)
Computer and production equipment......................... $17,103 $4,588
Leasehold improvements.................................... 2,668 854
Software.................................................. 1,232 473
Office equipment.......................................... 729 440
Construction in progress.................................. -- 80
Accumulated depreciation.................................. (5,777) (1,153)
------- ------
Property and equipment, net............................. $15,955 $5,282
======= ======
Depreciation expense was $4.6 million, $924,000, and $216,000 for the years
ended December 31, 2000, 1999 and 1998, respectively.
8. ACQUISITIONS, GOODWILL, INTANGIBLES AND OTHER LONG-TERM ASSETS
Generally, the Company's goodwill, intangibles and other assets have
resulted from purchase acquisitions, equity transactions or the capitalization
of software development costs. The acquisitions described below were both
accounted for under the purchase method of accounting.
In June 2000, the Company purchased VidiPax, a New York company which
performs audio and video media restoration and migration services. The Company
paid $1.9 million in cash and issued 68,284 shares of common stock for a
consideration of $3.1 million. The total purchase price, including costs of
the acquisition, of $3.1 million was allocated as follows:
(In thousands)
Goodwill.................................................... $ 457
Tradename................................................... 685
Customer list............................................... 1,524
Acquired technology and workforce........................... 457
------
Total purchase price...................................... $3,123
======
All goodwill and identified intangibles associated with the acquisition are
being amortized over three years. Additional consideration will be paid to the
employees and former shareholder based upon predetermined results in the first
year subsequent to acquisition. These payments can be made in a combination of
cash and stock as determined solely by the Company. The value of the estimated
additional consideration is between $600,000 and $3.4 million. The additional
payment to the selling shareholder will be considered additional goodwill and
will be amortized over the remaining two-year period. Any payments to
employees will be expensed once estimable.
On December 14, 1999, the Company issued 2,508,848 shares of common stock
and 91,181 options to purchase all of the shares of Alive.com, Inc. common
stock. The deemed fair value of the common stock and options issued in the
acquisition was approximately $18.7 million. The Company also incurred
acquisition costs and assumed net liabilities totaling $374,000, for a total
purchase price of approximately $19.0 million.
47
LOUDEYE TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 31, 2000
Substantially all of the purchase price was allocated to goodwill, work force
in-place and acquired technology, all of which are being amortized on a
straight-line basis over estimated useful lives of three years.
In connection with the acquisition, net assets purchased and liabilities
assumed were as follows:
(In thousands)
Assets........................................................... $ 518
Liabilities...................................................... (818)
-------
$ (300)
=======
The following table presents the purchase price and excess purchase price
associated with the acquisition of Alive.com.
(In thousands)
Equity issued.................................................... $18,664
Liabilities assumed and transaction costs........................ 390
-------
Excess purchase price............................................ $19,054
=======
The following table presents the unaudited pro forma results assuming that
the Company had acquired Alive.com, Inc. at the beginning of fiscal year 1998.
This information may not necessarily be indicative of the future combined
results of the operations of the Company.
Year ended
December 31,
-----------------
1999 1998
(In thousands) -------- -------
Total revenues......................................... $ 2,718 $ 286
Net loss to common shareholders........................ $(35,836) $(8,962)
Basic and diluted net loss per share................... $ (4.58) $ (1.37)
In addition to the intangibles resulting from acquisitions, the Company has
previously recognized intangible assets related to discounts on stock and the
fair value of warrants issued to certain strategic partners. Each of these
intangibles and other assets are being amortized over one to three years. The
following table sets forth information related to the Company's intangibles
and other assets at December 31, 2000:
Net
Gross Accumulated Book
Asset Amortization Value
------- ------------ -------
(In thousands)
Goodwill--acquisition of Alive.com........... $14,424 $(5,013) $ 9,411
Other identified intangibles--Alive.com...... 4,630 (1,637) 2,993
Other identified intangibles--VidiPax........ 2,666 (481) 2,185
Acquisition goodwill--VidiPax................ 457 (83) 374
Capitalized software development costs....... 1,304 (119) 1,185
Partner acquisition costs--warrants.......... 1,146 (375) 771
Other long-term assets....................... 561 (61) 500
------- ------- -------
$25,188 $(7,769) $17,419
======= ======= =======
9. LONG-TERM DEBT, COMMITMENTS AND CONTINGENCIES
Long-term Debt
The Company has an equipment line of credit for up to $1.0 million secured
by the Company's property and equipment. Advances under the equipment line are
payable over 36 equal monthly installments that
48
LOUDEYE TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 31, 2000
commenced on August 30, 1999. The equipment line bears interest at the bank's
prime rate (9.50% at December 31, 2000) and had an outstanding balance of
approximately $528,000 as of December 31, 2000.
The Company also has a credit facility that provides for advances up to $2.6
million for the purchase of capital equipment. Advances under the equipment
loan are payable in 36 equal monthly installments from inception date and are
secured by assets financed under the agreement. As of December 31, 2000,
approximately $1.7 million was outstanding under the equipment facility. The
notes payable bear interest at rates ranging from 8.57% to 9.65%, with various
maturity dates through February 2003. A fee equal to 15% of the principal
balance is due with the final payment of each advance. That additional fee is
accrued on a monthly basis and is included in accrued liabilities and interest
expense over the term of the loan.
In June 2000, the Company amended the credit facility to provide for a term
loan of up to $10.0 million for the purchase of capital equipment, in addition
to providing revolving borrowings aggregating up to $2.0 million. The $10.0
million equipment facility bears interest payable monthly during each draw
period at the bank's prime rates plus 0.75% (10.25% at December 31, 2000),
followed by 36 equal monthly payments of principal plus interest payable
through May 2004. Advances under this facility are secured by assets financed
under the agreement. At December 31, 2000, $9.6 million was outstanding under
the equipment credit facility. The $2.0 million credit line bears interest at
the bank's prime rate (9.50% at December 31, 2000), with principal and
interest due at maturity in one year. There were no borrowings outstanding
under the credit line at December 31, 2000 although subsequent to year-end it
was used to back-up a stand-by letter of credit.
The Company's long-term debt requires that the Company maintain various
financial ratios on a quarterly basis. These financing arrangements place
restrictions on the amount of cash dividends that the Company may pay to its
stockholders. In the opinion of management, the Company is in compliance with
all necessary financial requirements at December 31, 2000.
Maturities of long-term debt are as follows as of December 31, 2000:
(In thousands)
--------------
2001........................................................ $ 4,425
2002........................................................ 4,234
2003........................................................ 3,015
2004........................................................ 75
-------
Total..................................................... $11,749
=======
Operating Leases
The Company leases its facilities and certain equipment under non-cancelable
operating leases. The leases expire at various dates through May 2005 and
generally provide that the Company pay taxes, insurance, maintenance and other
operating costs related to the leased assets. Future minimum lease payments
under operating leases as of December 31, 2000 are as follows:
(In thousands)
--------------
2001........................................................ $ 2,413
2002........................................................ 2,510
2003........................................................ 2,495
2004........................................................ 2,162
2005........................................................ 662
-------
Total minimum lease payments.............................. $10,242
=======
Rent expense under operating leases totaled approximately $1.8 million,
$267,000 and $61,000 during 2000, 1999, and 1998 respectively
49
LOUDEYE TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 31, 2000
Services Agreement
The Company has entered into an agreement with a strategic partner that
commits the Company to use or resell $625,000 in services during the first
seven months of 2001. Any shortfall between the amounts used or resold by the
Company and the commitment amounts must be paid in cash by the Company.
Legal Proceedings
The Company is subject to legal proceedings and claims that arise in the
ordinary course of business. As of December 31, 2000, management is not aware
of any asserted or pending litigation or claims against the Company that would
have a material adverse effect on the Company's financial condition, results
of operations or liquidity.
10. INCOME TAXES
Before March 26, 1998, the Company was taxed as an LLC, which provided that,
in lieu of corporate income taxes, the members of the LLC were taxed on their
proportionate shares of the Company's taxable income. After March 26, 1998,
when the Company converted to a C corporation, income taxes were accounted for
under the liability method.
The Company recognizes deferred income tax assets and liabilities for the
expected future income tax consequences, based on enacted tax laws, of
temporary differences between the financial reporting and tax bases of assets,
liabilities and tax carryforwards. Deferred tax assets are then reduced, if
deemed necessary, by a valuation allowance for the amount of any tax benefits
which, more likely than not based on current circumstances, are not expected
to be realized.
At December 31, 2000, the Company had net operating loss carryforwards of
approximately $34.7 million related to Federal and state jurisdictions.
Utilization of net operating loss carryforwards are subject to certain
limitations under Section 382 of the Internal Revenue Code of 1986, as
amended. These carryforwards will begin to expire in 2018.
The Company did not provide any current or deferred Federal or state income
tax provision or benefit for any of the periods presented because it has
experienced operating losses since inception, and has provided full valuation
allowances on deferred tax assets because of uncertainty regarding their
realizability. The valuation allowance increased by $11.2 million and $3.7
million in 2000 and 1999, respectively. Deferred taxes consist primarily of
net operating loss carryforwards and timing differences for customer deposits,
allowances, stock-compensation expense and the difference between book and tax
depreciation.
The difference between the statutory tax rate of 35% (34% federal and 1%
state, net of federal benefits) and the tax benefit of zero recorded by the
Company is primarily due to the Company's full valuation allowance against its
net deferred tax assets.
The components of the deferred tax assets and liabilities were as follows:
December 31,
------------------------
2000 1999 1998
-------- ------- -----
(In thousands)
Deferred tax assets:
Net operating loss carryforwards............... $ 11,784 $ 3,724 $ 412
Other.......................................... 3,562 439 97
-------- ------- -----
Total net deferred tax assets................ 15,346 4,163 509
Valuation allowance.............................. (15,346) (4,163) (509)
-------- ------- -----
Total........................................ $ -- $ -- $ --
======== ======= =====
50
LOUDEYE TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 31, 2000
11. STOCKHOLDERS' EQUITY
The Company is authorized to issue 100,000,000 shares of common stock,
$0.001 par value, and 5,000,000 shares of undesignated preferred stock, $0.001
par value.
Common Stock
The holders of common stock are entitled to one vote per share on all
matters to be voted on by the stockholders. Subject to preferences that may be
applicable to any outstanding preferred stock, the holders of common stock are
entitled to receive ratably such dividends, if any, as may be declared from
time to time by the board of directors out of funds legally available for that
purpose. To date the Company has not declared any dividends on its common
stock. In the event of a liquidation, dissolution or winding up of the
Company, the holders of common stock are entitled to share ratably in all
assets remaining after payment of liabilities, subject to prior distribution
rights of preferred stock, if any, then outstanding. The common stock has no
preemptive or conversion rights or other subscription rights. There are no
redemption or sinking fund provisions applicable to the common stock.
Preferred Stock
The board of directors has the authority, without action by the
stockholders, to designate and issue up to 5,000,000 shares of preferred stock
in one or more series and to designate the rights, preferences and privileges
of each series, any or all of which may be greater than the rights of the
common stock. The Company has no present plans to issue any shares of
preferred stock.
Beneficial Conversion Feature
In December 1999, the Company issued 7,510,989 shares of Series D
convertible preferred stock at a purchase price of $6.37 per share. Such
shares are convertible into shares of common stock on a one-for-one basis. The
deemed fair value of the common stock was based on the low-point of the
anticipated filing range for the initial public offering. Consequently, the
transaction resulted in a beneficial conversion feature of $14,120,659. The
beneficial conversion feature has been reflected as a preferred stock dividend
for the year ended December 31, 1999 in the accompanying financial statements.
Shares Reserved for Future Issuance
The following shares of common stock have been reserved for future issuance
as of December 31, 2000:
Employee stock option plans.................................... 7,579,582
2000 Director stock option plan................................ 250,000
2000 Employee stock purchase plan.............................. 24,754
Outstanding common stock warrants.............................. 140,000
---------
7,994,336
=========
12. STOCK OWNERSHIP PLANS
1998 Stock Option Plan
Under the Company's 1998 Stock Option Plan, the board of directors and any
of its committees may grant to employees, consultants and directors options to
purchase the Company's common stock at terms and prices determined by the
board of directors. Incentive stock options may be granted to employees at a
price set by the
51
LOUDEYE TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 31, 2000
plan administrator. Options under this plan may generally be exercised after
six months of employment, and within 10 years of the date of grant, whether or
not fully vested, or within three months of termination of employment, and
typically vest over 4.5 years. Unvested shares issued are subject to
repurchase upon termination of service at the original exercise price. The
Plan provides for the issuance of options to purchase up to 4,660,000 shares
of the Company's stock. The Company accounts for the Plan under APB 25.
2000 Stock Option Plan
In December 1999 the board of directors approved the creation of the 2000
Stock Option Plan. This plan provides for the grant of incentive stock options
to employees, including employee directors, and of nonstatutory stock options
to employees, directors and consultants. The 2000 plan provides for the
issuance of options to purchase up to 2,500,000 shares of the Company's common
stock, plus an automatic annual increase on the first day of each of the
fiscal years beginning in 2001, 2002, 2003, 2004 and 2005 equal to the lesser
of 5% of our outstanding common stock on the last day of the immediately
preceding fiscal year or a lesser number of shares as our Board determines.
Options granted prior to the March 2000 initial public offering may be
exercised whether or not fully vested. Unvested shares issued are subject to
repurchase upon termination of service at the original exercise price.
2000 Directors Stock Option Plan
In December 1999 the board of directors approved the creation of the 2000
Directors' Stock Option Plan. Under the plan 250,000 shares of common stock
has been reserved for issuance. This plan provides for the grant of
nonstatutory stock options to the Company's nonemployee directors.
2000 Employee Stock Option Plan
In November 2000 the board of directors approved the creation of the 2000
Employee Stock Option Plan. Under the plan 800,000 shares of common stock were
reserved for issuance. This plan provides for the grant of nonstatutory stock
options to Company employees and consultants.
2000 Employee Stock Purchase Plan
In December 1999, the board of directors approved the creation of the 2000
Employee Stock Purchase Plan (ESPP). A total of 200,000 shares of common stock
have been reserved for issuance under the ESPP, 175,246 shares of which have
been issued as of December 31, 2000. The number of shares reserved for
issuance under the ESPP will be subject to an automatic annual increase on the
first day of each of the fiscal years beginning in 2001, 2002, 2003, 2004 and
2005 equal to the lesser of 0.75% of the Company's outstanding common stock on
the last day of the immediately preceding fiscal year or a lesser number of
shares as the board of directors determines.
401(k) Plan
We have a 401(k) plan covering our full-time employees over age twenty-one.
Employees are eligible after three months employment. Under the 401(k) plan,
employees may elect to reduce their current compensation by up to 20% up to
the statutorily prescribed annual limit ($10,500 in 2000) and to have the
amount of such reduction contributed to the 401(k) plan. The 401(k) plan
permits, but does not require, Company matching contributions to our 401(k)
plan on behalf of all participants in the 401(k) plan. To date, we have not
made any matching contributions to the 401(k) plan.
52
LOUDEYE TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 31, 2000
Alive Stock Option Plan
As part of the terms of the acquisition of Alive.com, Alive.com's stock
option plan (Alive Plan) was assumed by the Company. Options to purchase
12,642 shares are currently outstanding. Options issued under this plan
typically vest over a four-year period, expire five years from the date of
grant, and generally expire ninety days after termination of employment or
services. Stock options are immediately exercisable as of the vesting
commencement date, however, unvested shares issued are subject to repurchase
upon termination of service at the individual's exercise price. No further
options will be issued under the Alive Plan.
The Company has adopted the disclosure-only provisions of SFAS 123. Had
compensation expense been recognized on stock options issuance based on the
fair value of the options at the date of grant and recognized over the vesting
period, the Company's net loss would have been increased to the pro forma
amounts indicated below.
December 31,
---------------------------
2000 1999 1998
-------- -------- -------
Net loss to common shareholders:
As reported................................ $(39,524) $(25,023) $(1,650)
Pro forma.................................. (44,672) (25,396) (1,651)
Basic and diluted net loss per share:
As reported................................ $ (1.33) $ (4.62) $ (0.41)
Pro forma.................................. $ (1.50) $ (4.69) $ (0.41)
To determine compensation expense under SFAS 123, the Company used the
following assumptions:
. Risk-free interest rates of 5.0% to 5.71%
. Expected lives of 5 years
. Expected dividend yields of 0%
. Expected volatility of 0% to 75%
Option activity under the plans was as follows:
Weighted Weighted
Average Average
Grant Date Exercise
Number Fair Value Price
---------- ---------- --------
Outstanding, January 1, 1998
Granted.................................. 1,420,500 $0.01 $0.07
Cancelled................................ (125,000)
----------
Outstanding, December 31, 1998............. 1,295,500
Granted.................................. 4,387,431 2.15
Exercised................................ (879,409) 0.22
Cancelled................................ (580,313)
----------
Outstanding, December 31, 1999............. 4,223,209 0.97
Granted equal to market value............ 4,127,847 5.46 7.28
Granted less than market value........... 140,000 6.60 7.03
Exercised................................ (1,031,869) 0.32
Cancelled................................ (1,856,164) 4.79
----------
Outstanding, December 31, 2000............. 5,603,023 4.64
==========
53
LOUDEYE TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 31, 2000
The following information is provided for options outstanding and
exercisable at December 31, 2000:
Outstanding Exercisable
----------------------------------- ---------------------
Weighted
Weighted Average Weighted
Average Remaining Average
Exercise Contractual Exercise
Range Number Price Life Number Price
----- --------- -------- ----------- --------- --------
$ 0.06--$ 0.40 1,127,567 $0.32 8.52 1,127,567 $ 0.32
$ 0.51--$ 2.54 581,963 1.03 8.92 556,463 1.02
$ 3.00--$ 3.00 1,717,048 3.00 9.89 885,000 3.00
$ 3.03--$ 8.88 832,450 5.22 9.46 101,348 6.00
$ 9.00--$12.25 990,945 9.72 9.28 110,777 9.00
$12.94--$19.75 353,050 16.69 9.43 82,548 16.40
--------- ---------
5,603,023 2,863,703
========= =========
The options outstanding at December 31, 2000 have a weighted average
remaining contractual life of approximately 9.3 years.
Included in the exercised options outstanding are 267,748 shares subject to
repurchase under provisions of the stock option plans at a weighted average
exercise price of $0.33.
13. STOCK-BASED COMPENSATION
The Company records deferred stock compensation for the difference between
the exercise price of stock options granted and the deemed fair market value
or the price of the Company's common shares as traded on the NASDAQ exchange
at the date of grant. The deferred compensation is amortized over the vesting
period of the related options, which is generally four and one-half years.
Through December 31, 2000, $10.9 million had been recorded as deferred stock
compensation.
During the year ended December 31, 2000, the Company amortized $4.5 million
of deferred stock compensation that is included in stock-based compensation
expense in the accompanying statements of operations. Due to stock option
cancellations, $1.8 million of deferred stock compensation was reversed and
approximately $820,000 in previously amortized deferred stock compensation was
recorded as a credit to stock-based compensation expense in the year ended
December 31, 2000. The Company will record additional stock-based compensation
charges totaling $3.4 million in future periods related to options granted to-
date. As a result, the amortization of stock-based compensation associated
with certain options granted prior to December 31, 2000 will impact our
reported results of operations through 2004.
Prior to 2000, the Company had granted approximately 220,000 options to
consultants that vested on terms similar to options granted to employees.
Accordingly, these options were marked to fair market value using the Black-
Scholes option pricing model until fully vested. In the seven months ended
July 31, 2000, $1.1 million was recognized in stock-based compensation expense
related to these options. Effective August 1, the Company ended these
consulting relationships, resulting in the immediate vesting of approximately
17,000 shares and the cancellation of the remaining 80,000 outstanding
options. The impact of the termination of these consultant options was
recorded as a charge to stock-based compensation expense of approximately
$230,000. As of December 31, 2000, no options remain outstanding which require
fair value accounting.
In the fourth quarter of 2000, the Company accelerated the vesting of
approximately 660,000 options that resulted in a charge of approximately
$400,000 to stock-based compensation. Additionally, in the fourth quarter
54
LOUDEYE TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 31, 2000
of 2000, the Company allowed employees to sell back to the Company shares
related to previously exercised unvested options at the same price at which
they were originally exercised. This opportunity was made available to all
employees. The 171,000 shares related to previously exercised and unvested
options were then retired without replacement of the original option. The
Company accounted for these transactions under APB 25 and FIN44 as those
pronouncements pertain to immature shares, and accordingly the amounts paid
were recognized as compensation expense.
The Company records stock-based compensation charges as a separate component
of operating expenses. That amount represents the consulting expenses,
amortization of stock options granted below fair market value, the charges for
acceleration of options and amounts paid under rescission. These amounts can
be allocated to the other expense categories in the accompanying statements of
operations as follows:
Year Ended Dec. 31,
-------------------
2000 1999
--------- ---------
(In thousands)
Production (cost of revenues)......................... $ 456 $ 202
Research and development.............................. 283 126
Sales and marketing................................... 749 333
General and administrative............................ 3,921 893
--------- ---------
$ 5,409 $ 1,554
========= =========
14. RELATED PARTY TRANSACTIONS
On September 1, 1998, the Company entered into a five-year lease agreement
with the Company's Chairman of the Board and largest stockholder. The monthly
rental payments are approximately $10,000 per month. Total payments were
approximately $120,000, $120,000 and $40,000 during the years ended December
31, 2000, 1999 and 1998, respectively. The lease agreement provides for an
early termination payment of $52,000.
On June 14, 2000, the Company entered into a five-year lease agreement with
a company whose president and sole shareholder is a vice president of the
Company. The monthly rental payments are approximately $25,000 per month, with
scheduled annual increases throughout the term of the lease. Total payments
during the year ended December 31, 2000 were approximately $163,000.
15. SUBSEQUENT EVENTS
In January 2001, the Company announced the signing of an agreement to
purchase DiscoverMusic, a Seattle-based provider of music samples on the
Internet. The total purchase price is expected to consist of 3,700,000 shares
of common stock and cash of approximately $4.0 million, net of acquired cash.
The purchase of DiscoverMusic is expected to close in the first quarter of
2001.
55
LOUDEYE TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 31, 2000
16. UNAUDITED QUARTERLY INFORMATION
The following table sets forth certain unaudited quarterly statement of
operations data for the eight quarters ended December 31, 2000. In the opinion
of management, this information has been prepared substantially on the same
basis as the audited consolidated financial statements and all necessary
adjustments, consisting only of normal recurring adjustments, have been
included in the amounts stated below to present fairly the unaudited quarterly
results of operations. The quarterly data should be read in conjunction with
our audited consolidated financial statements and the notes thereto. The
operating results for any quarter are not necessarily indicative of the
operating results for any future period.
Three-Month Periods Ended
---------------------------------------------------------------------------------
Dec. 31, Sep. 30, June 30, March 31, Dec. 31, Sep. 30, June 30, March 31,
2000 2000 2000 2000 1999 1999 1999 1999
--------- -------- -------- --------- -------- -------- -------- ---------
(In thousands, except per share amounts)
REVENUES................ $ 3,918 $ 3,418 $ 2,552 $ 1,649 $ 1,048 $ 768 $ 528 $ 301
COST OF REVENUES........ 3,775 3,396 3,047 2,170 1,163 790 530 387
OPERATING EXPENSES:
Research and
development........... 1,875 1,816 1,780 1,313 586 318 202 142
Sales and marketing.... 3,697 3,920 4,228 2,776 1,759 826 927 470
General and
administrative........ 2,531 2,016 1,881 1,651 1,796 804 590 422
Amortization of
intangibles and other
long-term assets...... 2,113 2,051 1,826 1,703 302 -- -- --
Stock-based
compensation.......... 1,007 1,035 228 3,139 1,350 196 8 --
--------- -------- -------- -------- ------- ------- ------- -------
11,223 10,838 9,943 10,582 5,793 2,144 1,727 1,034
Special Charges........ 947 -- -- -- -- -- -- --
--------- -------- -------- -------- ------- ------- ------- -------
OPERATING LOSS.......... (12,027) (10,816) (10,438) (11,103) (5,908) (2,166) (1,729) (1,120)
OTHER INCOME (EXPENSE)--
NET.................... 1,359 1,361 1,559 581 42 -- (10) (11)
--------- -------- -------- -------- ------- ------- ------- -------
NET LOSS................ $ (10,668) $ (9,455) $ (8,879) $(10,522) $(5,866) $(2,166) $(1,739) $(1,131)
========= ======== ======== ======== ======= ======= ======= =======
EARNINGS PER SHARE--
BASIC AND DILUTED(1)... $ (0.30) $ (0.27) $ (0.25) $ (0.84) $ (1.02) $ (0.41) $ (0.33) $ (0.21)
========= ======== ======== ======== ======= ======= ======= =======
EARNINGS PER SHARE--
PRO FORMA(1)........... $ (0.30) $ (0.27) $ (0.25) $ (0.35) $ (0.29) $ (0.12) $ (0.11) $ (0.08)
========= ======== ======== ======== ======= ======= ======= =======
- --------
(1) Earnings per share is computed independently for each of the periods
presented. Therefore, the sum of the quarterly per share amounts will not
necessarily equal the total amount for the year. See Note 5 for an
explanation of the determination of the number of weighted average shares
used to compute pro forma net loss per share amounts.
56
ITEM 9 CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III
ITEM 10 DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required by this Item is contained in part in the sections
captioned "Board of Directors-Nominees for Director," "Board of Directors --
Continuing Directors Not Standing for Election This Year," "Board of Directors
- -- Contractual Arrangements," "Executive Officers" and "Voting Securities and
Principal Holders-Section 16(a) Beneficial Ownership Reporting Compliance" in
the Proxy Statement for Loudeye's Annual Meeting of Shareholders scheduled to
be held on May 17, 2001, and such information is incorporated herein by
reference.
ITEM 11 EXECUTIVE COMPENSATION
The information required by this Item is incorporated by reference to the
information contained in the section captioned "Compensation and Benefits" of
the Proxy Statement for Loudeye's Annual Meeting of Shareholders scheduled to
be held on May 17, 2001.
ITEM 12 SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this Item is incorporated by reference to the
information contained in the sections captioned "Voting Securities and
Principal Holders" of the Proxy Statement for Loudeye's Annual Meeting of
Shareholders scheduled to be held on May 17, 2001.
ITEM 13 CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this Item is incorporated by reference to the
information contained in the section captioned "Voting Securities and
Principal Holders -- Certain Transactions" of the Proxy Statement for
Loudeye's Annual Meeting of Shareholders scheduled to be held on May 17, 2001.
57
PART IV
ITEM 14 EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) Documents filed as part of Form 10-K
1. Financial Statements:
The following financial statements of Loudeye are submitted in a
separate section pursuant to the requirements of Form 10-K, Part I,
Item 8:
Index to Consolidated Financial Statements
Reports of Independent Accountants
Consolidated Balance Sheets
Consolidated Statements of Operations
Consolidated Statements of Shareholders' Equity (Deficit)
Consolidated Statements of Cash Flows
Notes to Consolidated Financial Statements
2. Schedules Supporting Financial Statements:
Report of Independent Public Accountants on Schedule
Schedule II--Valuation and Qualifying Accounts
3. Exhibits:
Exhibit
Number Description
------- -----------
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 Form of Amended and Restated Bylaws of Loudeye Technologies, Inc.,
dated November 21, 2000 (filed herewith).
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.
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* Amended and Restated Investors' Rights Agreement dated December 14,
1999 among Loudeye Technologies, Inc. and certain holders of our
preferred stock.
10.8* Lease Agreement dated August 10, 1999 between Loudeye Technologies,
Inc. and Times Square Building L.L.C. for offices at Times Square
Building, 414 Olive Way, Suite 300, Seattle, Washington.
10.9* Lease Agreement dated September 1, 1998 between Loudeye Technologies,
Inc. and Martin Tobias for offices at 3406 E. Union Street, Seattle,
Washington.
10.10* Lease Agreement dated October 28,1999 between Loudeye Technologies,
Inc. and Westlake Park Associates for offices at Centennial Building,
1904 Fourth Avenue, Seattle, Washington.
58
Exhibit
Number Description
------- -----------
10.11* Lease Agreement dated November 9, 1999 between Loudeye Technologies,
Inc. and Downtown Entertainment Associates, LP for offices at 1424
Second Street, Santa Monica, California.
10.12* Imperial Bank Starter Kit Loan and Security Agreement dated August
4, 1998 between Loudeye Technologies, Inc. and Imperial Bank.
10.13* 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.
10.14* Offer Letter to David Bullis dated June 23, 1999.
10.15* Offer Letter to Douglas Schulze dated August 30, 1999.
10.16* Offer Letter to James Van Kerkhove dated November 5, 1999.
10.17* Offer Letter to David Weld dated December 2, 1999.
10.18* Services Agreement between Loudeye Technologies, Inc. and Akamai
Technologies, Inc. dated as of February 15, 2000.
10.19** Amended and Restated Loan and Security Agreement between Imperial
Bank and Loudeye Technologies, Inc. dated May 17, 2000.
10.20** Amended and Restated Services Agreement between Valley Media, Inc.
and Loudeye Technologies, Inc. dated April 2000.
10.21** Stock Purchase Agreement dated as of June 14, 2000 by and among
Loudeye Technologies, Inc., VidiPax, Inc. and James Lindner.
10.22** First Amendment of Office Lease Agreement dated April 3, 2000
between Times Square Building L.L.C. and Loudeye Technologies, Inc.
10.23** Second Amendment of Office Lease Agreement dated May 1, 2000 between
Times Square Building L.L.C. and Loudeye Technologies, Inc.
10.24** Lease Agreement dated June 14, 2000 between Brown Bear Realty
Corporation and Loudeye Technologies, Inc.
10.25+*** Volume Purchase Order dated July 19, 2000 by and between MusicBank
and Loudeye Technologies, Inc.
10.26 Offer Letter to Todd Hinders dated December 15, 2000 (filed
herewith).
10.27 Underlease Agreement and Agreement to Lease dated December 21, 2000
between WCRS Limited and Loudeye Technologies, Inc. (filed
herewith).
10.28 Severance Agreement and Mutual Release between Mike McHenry and
Loudeye Technologies, Inc., dated July 17, 2000 (filed herewith).
10.29+ Encoding Services and Compact Disc Purchase Agreement between XM
Satellite Radio, Inc., and Loudeye Technologies, Inc., dated August
25, 2000 (filed herewith).
10.30+ First Addendum to Encoding Services and Compact Disc Purchase
Agreement between XM Satellite Radio, Inc., and Loudeye
Technologies, Inc., dated October 10, 2000 (filed herewith).
10.31 2000 Employee Stock Option Plan (filed herewith).
21.1 Subsidiaries of Company (filed herewith).
23.1 Consent of Arthur Andersen (filed herewith).
24.1 Powers of Attorney of Board of Directors (See Form 10K).
- --------
+ 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.
59
** Incorporated by reference to Loudeye Technologies, Inc.'s Form 10-Q, for
the period ending June 30, 2000.
*** Incorporated by reference to Loudeye Technologies, Inc.'s Form 10-Q, for
the period ending September 30, 2000.
(b) Reports on Form 8-K
None.
60
SIGNATURES
Pursuant to the requirements of Section 13 or 15 (d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this Report on Form 10-K
to be signed on its behalf by the undersigned, thereunto duly authorized, in
the City of Seattle, State of Washington, on February 27, 2001.
Loudeye Technologies, Inc.
/s/ David C. Bullis
By: _________________________________
David C. Bullis
Chief Executive Officer
POWER OF ATTORNEY
Each person whose signature appears below hereby constitutes and appoints
David C. Bullis and Bradley A. Berg, and each of them severally, his true and
lawful attorneys-in-fact and agents, with full power to act without the other
and with full power of substitution and resubstitution, to execute in his name
and on his behalf, individually and in each capacity stated below, any and all
amendments and supplements to this Report on Form 10-K, and any and all other
instruments necessary or incidental in connection herewith, and to file the
same with the Commission.
Pursuant to the requirements of the Securities Exchange Act of 1934, this
Report on Form 10-K has been signed by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
Signature Title Date
--------- ----- ----
/s/ David C. Bullis Chief Executive Officer February 26, 2001
______________________________________ (Principal Executive
David C. Bullis Officer) and Director
/s/ Bradley A. Berg Chief Financial Officer February 26, 2001
______________________________________ (Principal Financial and
Bradley A. Berg Accounting Officer)
/s/ Martin G. Tobias Director February 26, 2001
______________________________________
Martin G. Tobias
/s/ Stuart J. Ellman Director February 26, 2001
______________________________________
Stuart J. Ellman
/s/ Johan Liedgren Director February 26, 2001
______________________________________
Johan Liedgren
/s/ Charles P. Waite Director February 26, 2001
______________________________________
Charles P. Waite
/s/ Anthony J. Bay Director February 26, 2001
______________________________________
Anthony J. Bay
61
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS ON SCHEDULE
We have audited in accordance with auditing standards, generally accepted in
the United States, the financial statements of Loudeye Technologies, Inc.
included in this Form 10-K and have issued our report thereon dated February
6, 2001. Our audit was made for the purpose of forming an opinion on the basic
financial statements taken as a whole. The schedule listed in Item 14(a)(2) of
this Form 10-K is the responsibility of the Company's management and is
presented for purposes of complying with the Securities and Exchange
Commission rules and is not part of the basic financial statements. This
schedule has been subjected to the auditing procedures applied in the audit of
the basic financial statements and, in our opinion, is fairly stated in all
material respects in relation to the basic financial statements taken as a
whole.
/s/ Arthur Andersen LLP
Seattle, Washington
February 6, 2001
62
SCHEDULE II
VALUATION AND QUALIFYING ACCOUNTS
(Amounts in thousands)
Balance at Charged to Balance at
Beginning Costs and End of
of Period Expenses Deductions(1) Period
---------- ---------- ------------- ----------
Allowance for Doubtful Accounts
Year Ended December 31, 1998... -- 20 -- 20
Year Ended December 31, 1999... 20 183 (16) 187
Year Ended December 31, 2000... 187 662 (140) 709
- --------
(1) Deductions represent writeoffs of specifically identified uncollectible
accounts.
63