UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-Q
| (Mark One) | ||
| [X] | Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 | |
| For the quarterly period ended June 30, 2002 | ||
| or | ||
| [ ] | Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 |
For the transition period from ___________ to ____________
Commission File Number: 0-29583
Loudeye Corp.
| Delaware | 91-1908833 | |
| (State or other jurisdiction of incorporation or organization) |
(I.R.S. Employer Identification No.) |
|
| 1130 Rainier Avenue South, Seattle, WA (Address of principal executive offices) |
98144 (Zip Code) |
206-832-4000
(Registrant’s telephone number, including area code)
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
| Yes | [X] | No | [ ] |
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.
Common |
39,979,719 |
|
(Class) |
(Outstanding at August 1, 2002) |
1
Loudeye Corp.
Form 10-Q Quarterly Report
For the Quarter Ended June 30, 2002
TABLE OF CONTENTS
| Page | ||||||
| PART | I | Financial Information | ||||
| Item | 1 | Financial Statements (unaudited) | ||||
| Condensed Consolidated Balance Sheets | 3 | |||||
| Condensed Consolidated Statements of Operations | 4 | |||||
| Condensed Consolidated Statements of Cash Flows | 5 | |||||
| Notes to Unaudited Condensed Consolidated Financial Statements | 6 | |||||
| Item | 2 | Management’s Discussion and Analysis of Financial Condition and Results of Operations | 15 | |||
| Item | 3 | Quantitative and Qualitative Disclosures About Market Risk | 32 | |||
| PART | II | Other Information | ||||
| Item | 1 | Legal Proceedings | 33 | |||
| Item | 2 | Changes in Securities and Use of Proceeds | 33 | |||
| Item | 3 | Defaults Upon Senior Securities | 33 | |||
| Item | 4 | Submission of Matters to a Vote of Security Holders | 34 | |||
| Item | 5 | Other Information | 34 | |||
| Item | 6 | Exhibits and Reports on Form 8-K | 34 | |||
| Signatures | 35 |
PART I — FINANCIAL INFORMATION
ITEM I FINANCIAL STATEMENTS
LOUDEYE CORP.
| June 30, | Dec. 31, | |||||||||||
| 2002 | 2001 | |||||||||||
ASSETS |
||||||||||||
Cash and cash equivalents |
$ | 13,286 | $ | 37,159 | ||||||||
Short-term investments |
29,356 | 23,782 | ||||||||||
Accounts receivable, net of allowances of $307 and $492 |
2,599 | 2,200 | ||||||||||
Prepaids and other current assets |
1,461 | 1,769 | ||||||||||
Total current assets |
46,702 | 64,910 | ||||||||||
Restricted investments |
1,391 | — | ||||||||||
Property and equipment, net |
6,765 | 7,306 | ||||||||||
Goodwill, net |
1,532 | 1,310 | ||||||||||
Intangibles and other long-term assets, net |
6,505 | 7,357 | ||||||||||
Total assets |
$ | 62,895 | $ | 80,883 | ||||||||
LIABILITIES AND STOCKHOLDERS’ EQUITY |
||||||||||||
Accounts payable |
$ | 1,336 | $ | 913 | ||||||||
Accrued compensation and benefits |
715 | 1,439 | ||||||||||
Other accrued expenses |
1,213 | 1,859 | ||||||||||
Accrued special charges |
3,175 | 2,939 | ||||||||||
Accrued acquisition consideration |
3,000 | 3,000 | ||||||||||
Deposits and deferred revenues |
153 | 639 | ||||||||||
Current portion of long-term debt |
19,978 | 1,368 | ||||||||||
Total current liabilities |
29,570 | 12,157 | ||||||||||
Long-term debt, net of current portion |
508 | 19,532 | ||||||||||
Total liabilities |
30,078 | 31,689 | ||||||||||
Commitments and contingencies |
||||||||||||
STOCKHOLDERS’ EQUITY |
||||||||||||
Preferred stock, $0.001 par value, 41,000 shares
authorized, none outstanding |
— | — | ||||||||||
Common stock, additional paid-in capital and warrants,
$0.001 par value, 100,000 shares authorized; 40,481 and
40,475 outstanding in 2002 and 2001; 4,613 and 4,000 in
treasury in 2002 and 2001 |
191,552 | 192,627 | ||||||||||
Deferred stock compensation |
(268 | ) | (883 | ) | ||||||||
Accumulated deficit |
(158,467 | ) | (142,550 | ) | ||||||||
Total stockholders’ equity |
32,817 | 49,194 | ||||||||||
Total liabilities and stockholders’ equity |
$ | 62,895 | $ | 80,883 | ||||||||
The accompanying notes are an integral part of these statements |
||||||||||||
3
LOUDEYE CORP.
| Three Months Ended | Six Months Ended | |||||||||||||||||
| June 30, | June 30, | |||||||||||||||||
| 2002 | 2001 | 2002 | 2001 | |||||||||||||||
REVENUES |
$ | 3,217 | $ | 2,676 | $ | 6,477 | $ | 4,605 | ||||||||||
COST OF REVENUES
|
||||||||||||||||||
Cost of revenues, excluding depreciation |
2,820 | 1,810 | 5,230 | 4,090 | ||||||||||||||
Depreciation |
812 | 729 | 1,647 | 1,720 | ||||||||||||||
Total cost of revenues |
3,632 | 2,539 | 6,877 | 5,810 | ||||||||||||||
Gross margin |
(415 | ) | 137 | (400 | ) | (1,205 | ) | |||||||||||
OPERATING EXPENSES |
||||||||||||||||||
Research and development |
974 | 2,739 | 2,264 | 5,409 | ||||||||||||||
Sales and marketing |
2,245 | 2,728 | 4,461 | 5,340 | ||||||||||||||
General and administrative |
2,762 | 2,452 | 6,237 | 5,202 | ||||||||||||||
Amortization of intangibles and other assets |
713 | 1,582 | 1,409 | 3,810 | ||||||||||||||
Stock-based compensation |
102 | (995 | ) | (554 | ) | (102 | ) | |||||||||||
| 6,796 | 8,506 | 13,817 | 19,659 | |||||||||||||||
Special charges |
1,142 | 3,118 | 1,890 | 17,741 | ||||||||||||||
OPERATING LOSS |
(8,353 | ) | (11,487 | ) | (16,107 | ) | (38,605 | ) | ||||||||||
OTHER INCOME (EXPENSE), net |
||||||||||||||||||
Interest income |
309 | 838 | 642 | 2,100 | ||||||||||||||
Interest expense |
(235 | ) | (334 | ) | (452 | ) | (676 | ) | ||||||||||
Total other income, net |
74 | 504 | 190 | 1,424 | ||||||||||||||
Net loss |
$ | (8,279 | ) | $ | (10,983 | ) | $ | (15,917 | ) | $ | (37,181 | ) | ||||||
Basic and diluted net loss per share |
$ | (0.21 | ) | $ | (0.26 | ) | $ | (0.39 | ) | $ | (0.93 | ) | ||||||
Weighted average shares — basic and diluted |
40,229 | 41,516 | 40,330 | 39,903 | ||||||||||||||
The accompanying notes are an integral part of these statements.
4
LOUDEYE CORP.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(in thousands)
| Six Months Ended | |||||||||||
| June 30, | |||||||||||
| 2002 | 2001 | ||||||||||
Operating activities: |
|||||||||||
Net loss |
$ | (15,917 | ) | $ | (37,181 | ) | |||||
Adjustments to reconcile net loss to net cash from
operating activities: |
|||||||||||
Depreciation and amortization |
3,450 | 7,730 | |||||||||
Special charges and other |
25 | 14,167 | |||||||||
Stock-based compensation |
(554 | ) | (102 | ) | |||||||
Changes in operating assets and liabilities, net
of amounts acquired in purchase of business: |
|||||||||||
Accounts receivable |
(245 | ) | 1,516 | ||||||||
Prepaid expenses and other |
291 | (619 | ) | ||||||||
Accounts payable |
423 | (337 | ) | ||||||||
Accrued compensation, benefits and other expenses |
(1,129 | ) | 2,056 | ||||||||
Accrued special charges |
236 | — | |||||||||
Deposits and deferred revenues |
(486 | ) | (537 | ) | |||||||
Net cash from operating activities |
(13,906 | ) | (13,307 | ) | |||||||
Investing activities: |
|||||||||||
Purchases of property and equipment and other, net |
(1,192 | ) | (2,238 | ) | |||||||
Cash paid for acquisition of business and technology, net |
(266 | ) | (7,199 | ) | |||||||
Loans made to related party and related interest |
(771 | ) | — | ||||||||
Sales (purchases) of investments, net |
(6,965 | ) | 32,270 | ||||||||
Net cash from investing activities |
(9,194 | ) | 22,833 | ||||||||
Financing activities: |
|||||||||||
Proceeds from sale of stock and exercise of stock options, net |
40 | 100 | |||||||||
Proceeds from long-term debt |
— | 131 | |||||||||
Principal payments on long-term debt |
(813 | ) | (2,485 | ) | |||||||
Net cash from financing activities |
(773 | ) | (2,254 | ) | |||||||
Net change in cash and cash equivalents |
(23,873 | ) | 7,272 | ||||||||
Cash and cash equivalents, beginning of period |
37,159 | 51,689 | |||||||||
Cash and cash equivalents, end of period |
$ | 13,286 | $ | 58,961 | |||||||
Supplemental disclosure of cash flow information: |
|||||||||||
Issuance
of common stock for acquisition of business and technology |
$ | 408 | $ | 10,756 | |||||||
Shares
used to repay related party note |
$ | 379 | $ | — | |||||||
The accompanying notes are an integral part of these statements.
5
LOUDEYE CORP.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2002
(Unaudited)
1. ORGANIZATION AND DEVELOPMENT STAGE RISKS:
The Company
Loudeye Corp. (the Company) provides enterprise webcasting, related digital media services and media restoration services. The Company is headquartered in Seattle, Washington and conducts business in the United States and Canada in two business segments, digital media services and media restoration services.
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, successful integration of acquired businesses and technology, the enhancement of existing services, and the ability to secure adequate financing to support future operations.
The consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries. All significant intercompany transactions and balances have been eliminated.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Unaudited Interim Financial Data
The interim condensed consolidated financial statements are unaudited and have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission. Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted pursuant to such rules and regulations. These condensed consolidated financial statements should be read in conjunction with the audited financial statements and notes thereto included in the Company’s Annual Report on Form 10-K, as filed with the Securities and Exchange Commission on March 28, 2002. The financial information included herein reflects all adjustments (consisting only of normal recurring adjustments) that are, in the opinion of management, necessary for a fair presentation of the results for interim periods. The results of operations for the periods ended June 30, 2002 and 2001 are not necessarily indicative of the results to be expected for the full years.
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 a purchased maturity of three months or less to be cash equivalents.
Short-term Investments
Short-term investments consist of 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. Short-term investments are held to maturity. These securities all mature within one year.
A separate investment account that holds at least $30.0 million of short-term investments and cash equivalents is required to be utilized as collateral for the Company’s credit facility. At June 30, 2002, short-term investments and cash equivalents totaling $31.7 million were in this account.
6
Restricted Investments
The Company has approximately $1.4 million of short-term investments that are utilized as collateral for certain irrevocable standby letters of credit.
Long-lived Assets
The Company continually 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 over the remaining useful life is less than the carrying amount of the asset. The Company does not currently anticipate any impairment charges; however, should operating results fail to meet certain thresholds, an impairment charge may be necessary.
New Accounting Policies
The Company adopted Statement of Financial Accounting Standards No. 142, “Goodwill and Other Intangible Assets” (FAS 142) effective June 30, 2002. The impact of adopting FAS 142 is discussed in Note 3.
In October 2001, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets” (FAS 144), which is effective for fiscal years beginning after December 15, 2001. FAS 144 supercedes FAS 121. The Company adopted FAS 144 as of January 1, 2002. Adoption of FAS 144 did not effect the Company’s consolidated financial position or results of operations.
Reclassifications
Certain information reported in previous periods has been reclassified to conform to the current period presentation.
3. REVENUE RECOGNITION
The Company generates revenues primarily from two sources: (1) digital media services, licensing and selling digital media applications and (2) media restoration services.
DIGITAL MEDIA SERVICES AND OTHER
Corporate webcasting services use licensed and proprietary streaming media software, tools and processes to provide companies with the ability to webcast and communicate to their large, online communities over the Internet. Customers use these communication services to announce financial, legal, product and training information in real-time to thousands of investors, partners, employees and customers located all over the world. The Company recognizes webcasting revenues as the related services are rendered.
Encoding and fulfillment services consist of the conversion of audio and video content into Internet media formats. Sales of encoding services are generally under nonrefundable time and materials or per unit contracts. Under these contracts, the Company recognizes encoding revenues as the 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.
Other revenues are generated from the Company’s music samples service business. The Company sells digital media applications in application service provider arrangements. The Company is required to host the applications and the customer does not have the ability to have the application hosted by another entity without penalty to the customer. Billings are based upon the volume of data delivered or minutes of content streamed and the related revenue is recognized as the services are delivered.
MEDIA RESTORATION SERVICES
Media restoration services consist of services provided by our VidiPax subsidiary to restore and upgrade old or damaged archives of traditional media. The Company recognizes media restoration revenues as the
7
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.
4. SPECIAL CHARGES
The Company recorded special charges in each of the six quarters ended June 30, 2002 related to ongoing corporate restructurings, facilities consolidations and the impairment of assets in accordance with its long-lived asset policy. The following table summarizes these special charges (in thousands):
| Three Months Ended | Six Months Ended | |||||||||||||||
| June 30, | June 30, | |||||||||||||||
| 2002 | 2001 | 2002 | 2001 | |||||||||||||
Employee severance |
$ | 1,142 | $ | 1,538 | $ | 1,890 | $ | 2,220 | ||||||||
Facilities charges and other |
— | 1,207 | — | 1,631 | ||||||||||||
Impairment of property and equipment |
— | 373 | — | 2,497 | ||||||||||||
Impairment of intangibles and other assets |
— | — | — | 11,393 | ||||||||||||
| $ | 1,142 | $ | 3,118 | $ | 1,890 | $ | 17,741 | |||||||||
Six Months Ended June 30, 2002
The Company recorded special charges totaling $748,000 and $1.1 million in the three and six months ended June 30, 2002, respectively, associated with reductions in force in March and June of approximately 40% of consolidated staffing. These special charges were primarily related to severance and related termination benefits and are expected to be paid in cash.
The Company’s accrual for certain special charges was as follows at the respective balance sheet dates (in thousands):
| Year Ended | Three Months Ended | Three Months Ended | |||||||||||
| Dec. 31, 2001 | March 31, 2002 | June 30, 2002 | |||||||||||
Beginning Balance |
$ | 310 | $ | 2,939 | $ | 2,415 | |||||||
Additional accruals |
3,790 | 748 | 1,149 | ||||||||||
Paid in cash |
(1,161 | ) | (1,272 | ) | (389 | ) | |||||||