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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

FORM 10-Q

(Mark One)

For the quarterly period ended June 30, 2003

or

For the transition period from      to

Commission File Number: 0-29583

Loudeye Corp.

1130 Rainier Avenue South, Seattle, WA 98144
(Address of principal executive offices) (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  o

     Indicate by check mark whether the registrant is an accelerated filer (as defined in Exchange Act Rule 12b-2) Yes  No X

     Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.

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Loudeye Corp.

Form 10-Q Quarterly Report
For the Quarter Ended June 30, 2003

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PART I – FINANCIAL INFORMATION

ITEM I                      FINANCIAL STATEMENTS

LOUDEYE CORP.
CONSOLIDATED BALANCE SHEETS
(Unaudited, in thousands)

The accompanying notes are an integral part of these consolidated financial statements.

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LOUDEYE CORP.
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited, in thousands, except per share amounts)

The accompanying notes are an integral part of these consolidated financial statements.

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LOUDEYE CORP.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited, in thousands)

The accompanying notes are an integral part of these consolidated financial statements.

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LOUDEYE CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2003
(Unaudited)

1. ORGANIZATION, RISKS, and GOING CONCERN

The Company

     Loudeye Corp. (the Company) provides the business infrastructure and services for managing, promoting, and distributing digital content for the entertainment and corporate markets. The Company is headquartered in Seattle, Washington with offices in New York, NY, Hollywood, CA, and Washington D.C., and conducts business in two business segments, digital media services and media restoration services.

Risks

     The Company is subject to a number of risks similar to other companies in a comparable stage of development, including, but not limited to, 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.

Going Concern

     The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern, which contemplates realization of assets and the satisfaction of liabilities in the normal course of business. The Company has incurred losses since inception, has an accumulated deficit of $188.8 million at June 30, 2003, has experienced negative cash flows from operations since inception and the expansion and development of the Company’s business may require additional capital. These matters raise substantial doubt about the Company’s ability to continue as a going concern.

     Management has restructured the Company’s operations, reduced its work force, renegotiated leases, and taken other actions to limit the Company’s expenditures. However, there can be no assurance that the Company’s cash balances will be sufficient to sustain its operations until profitable operations and positive cash flows are achieved. Consequently, the Company may require additional capital to fund its operations. There can be no assurance that capital will be available to the Company on acceptable terms, or at all.

     If the Company fails to generate positive cash flows or fails to obtain additional capital when required, the Company could continue to modify, delay or abandon some or all of the Company’s business and expansion plans. The accompanying consolidated financial statements do not include any adjustments that may result from the outcome of this uncertainty.

Basis of Consolidation

     The consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries. All significant intercompany transactions and balances have been eliminated in consolidation.

Unaudited Interim Financial Data

     The interim 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 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 April 15, 2003. The financial information included herein reflects all adjustments (consisting only of normal recurring adjustments) that are, in the opinion of management, necessary for a fair presentation of the results for interim periods. The results of operations for the three and six months ended June 30, 2003 and 2002 are not necessarily indicative of the results to be expected for the full years.

Use of Estimates

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     The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and that affect the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates and assumptions. The recoverability of long-lived assets, which include property and equipment ($2.3 million) and intangible assets ($344,000), is a sensitive accounting estimate for which changes could result in additional charges in the near term. Additional impairment analyses could be required in a number of circumstances, including if the Company’s plans for the assets change, if operating results decline further, or if the price of the Company’s stock declines.

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. The Company considers all cash deposits and highly liquid investments with an original maturity at the date of acquisition 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. Short-term investments are generally held to maturity and are accounted for as available for sale. These securities all mature within one year and reported amounts approximate fair value due to the relatively short maturities of these investments.

Restricted Cash and Investments

     The Company has $1.2 million of restricted cash and investments which are utilized as collateral for certain irrevocable standby letters of credit. These securities all mature within one year and reported amounts approximate fair value due to the relatively short maturities of these investments.

Impairment of Long-lived Assets

     The Company assesses the recoverability of long-lived assets whenever events or changes in business circumstances indicate that the carrying value of an asset may not be recoverable. An impairment loss is recognized when the sum of the expected undiscounted future net cash flows over the remaining useful life is less than the carrying amount of the asset.

Stock Based Compensation

     The Company accounts for stock-based employee compensation plans under the recognition and measurement principles of Accounting Principles Board Opinion No. 25, “Accounting for Stock Issues to Employees,” (APB 25), as interpreted by Financial Accounting Standards Board Interpretation No. 44, “Accounting for Certain Transactions Involving Stock Compensation, an Interpretation of APB 25” (FIN 44), and related interpretations. Under APB 25, compensation expense is based on the difference between the exercise price of employee stock options granted and the fair value of the Company’s common stock at the date of grant. Deferred compensation, if any, is amortized over the vesting period of the related options, which is generally three to four and one-half years.

     Equity instruments issued to non-employees are accounted for in accordance with the provisions of Statement of Financial Accounting Standards No. 123, “Accounting for Stock-Based Compensation” (FAS 123) and Emerging Issues Task Force Issue No. 96-18, “Accounting for Equity Investments that are Issued to Other than Employees for Acquiring or in Conjunction with Selling Goods or Services” (EITF 96-18), and related interpretations.

     Stock compensation was $195,000 for the quarter ended June 30, 2003, consisting of the amortization of deferred stock compensation of $44,000, stock issued to former employees as severance and termination benefits of $30,000 and options with an estimated fair value, accounted for under FAS 123, of $121,000 granted to a member of the Company’s board of directors for consulting services, and approximately $102,000 for the quarter ended June 30, 2002, consisting of the amortization of deferred stock compensation.

     Stock compensation was $238,000 for the six months ended June 30, 2003, consisting of the amortization of deferred stock compensation of $87,000, stock issued to former employees as severance and termination benefits of $30,000, and options with an estimated fair value, accounted for under FAS 123, of $121,000 granted to a member of the Company’s board of directors for

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consulting services, and a credit of approximately $554,000 for the quarter ended June 30, 2002, consisting primarily of the reversal of expense related to accelerated amortization for options that were cancelled.

     The Company records stock-based compensation charges as a separate component of operating expenses. These amounts can be allocated to the other expense categories in the accompanying consolidated statements of operations as follows (in thousands):

     The following table illustrates the effect on net loss and loss per share if the Company had applied the fair value recognition provisions of FAS 123 to stock-based employee compensation (in thousands):