LOUDEYE TECHNOLOGIES INC - 10-Q Quarterly Report

[ X] Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

[ ] Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

Loudeye Corp.
(formerly known as Loudeye Technologies, Inc.)
(Exact name of registrant as specified in its charter)

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.

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

			Sep. 30,	Dec. 31,
			2002	2001

ASSETS
	Cash and cash equivalents		$ 6,338	$ 37,159
	Short-term investments		12,255	22,436
	Accounts receivable, net of allowances of $328 and $492		2,931	2,200
	Notes receivable from related parties		1,322	-
	Prepaid expenses and other current assets		997	1,769

		Total current assets	23,843	63,564

	Restricted investments		1,419	1,346
	Property and equipment, net		5,917	7,306
	Goodwill, net		1,532	1,310
	Intangibles and other long-term assets, net		4,404	7,357


		Total assets	$ 37,115	$ 80,883


LIABILITIES AND STOCKHOLDERS' EQUITY
	Accounts payable		$ 1,392	$ 913
	Accrued compensation and benefits		568	1,439
	Other accrued expenses		1,228	1,859
	Accrued special charges		1,931	2,939
	Accrued acquisition consideration		2,000	3,000
	Deposits and deferred revenues		64	639
	Current portion of long-term debt		814	1,368

		Total current liabilities	7,997	12,157

	Long-term debt, net of current portion		419	19,532


		Total liabilities	8,416	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; 40,444 and 40,475 outstanding in 2002 and 2001; 5,815 and 4,000 in treasury in 2002 and 2001

			191,431	192,627
	Deferred stock compensation		(177)	(883)
	Accumulated deficit		(162,555)	(142,550)


		Total stockholders' equity	28,699	49,194


		Total liabilities and stockholders' equity	$ 37,115	$ 80,883

			Three Months Ended		Nine Months Ended
			September 30,		September 30,
			2002	2001	2002	2001


REVENUES			$ 3,626	$ 2,498	$ 10,103	$ 7,103

COST OF REVENUES
	Cost of revenues, excluding depreciation		2,624	1,577	7,854	5,667
	Depreciation		889	1,161	2,536	2,881

		Total cost of revenues	3,513	2,738	10,390	8,548

		Gross profit	113	(240)	(287)	(1,445)

OPERATING EXPENSES
	Research and development		425	2,459	2,689	7,868
	Sales and marketing		1,370	2,001	5,831	7,341
	General and administrative		2,366	2,508	8,603	7,710
	Amortization of intangibles and other assets		810	2,131	2,219	5,941
	Stock-based compensation		91	313	(463)	211


			5,062	9,412	18,879	29,071

Special charges			-	2,721	1,890	20,462


OPERATING LOSS			(4,949)	(12,373)	(21,056)	(50,978)

OTHER INCOME (EXPENSE), net
	Interest income		218	631	860	2,731
	Interest expense		(138)	(267)	(590)	(943)
	Other income (expense)		781	-	781	-

		Total other income, net	861	364	1,051	1,788


Net loss			$ (4,088)	$ (12,009)	$ (20,005)	$ (49,190)



Basic and diluted net loss per share			$ (0.10)	$ (0.27)	$ (0.49)	$ (1.19)


Weighted average shares - basic and diluted			40,664	44,280	40,442	41,362

				Nine Months Ended
				September 30,
				2002	2001
Operating activities:
	Net loss			$ (20,005)	$ (49,190)
	Adjustments to reconcile net loss to net cash from operating activities:
		Depreciation and amortization		5,381	11,396
		Special charges and other		25	16,160
		Other income from final settlement of acquisition terms		(700)	-
		Stock-based compensation		(463)	211
	Changes in operating assets and liabilities, net
	of amounts acquired in purchase of business:
		Accounts receivable		(577)	2,235
		Prepaid expenses and other		691	(453)
		Accounts payable		479	(345)
		Accrued compensation, benefits and other expenses		(1,261)	1,808
		Accrued special charges		(1,008)	-
		Deposits and deferred revenues		(575)	(375)

			Net cash from operating activities	(18,013)	(18,553)

Investing activities:
	Purchases of property and equipment and other, net			(1,586)	(2,264)
	Cash paid for acquisition of business and technology, net			(266)	(9,580)
	Loans made to related party and related interest			(788)	-
	Sales of investments, net			10,136	36,688

			Net cash from investing activities	7,496	24,844

Financing activities:
	Proceeds from sale of stock and exercise of stock options, net			40	137
	Proceeds from long-term debt			-	15,163
	Shares repurchased under repurchase program			(216)
	Principal payments on long-term debt			(20,128)	(11,414)

			Net cash from financing activities	(20,304)	3,886

			Net change in cash and cash equivalents	(30,821)	10,177

Cash and cash equivalents, beginning of period				37,159	51,689

Cash and cash equivalents, end of period				$ 6,338	$ 61,866


Supplemental disclosure of cash flow information:
Issuance of common stock for acquisition of businesses and technology				$ 708	$ 10,756
Shares used to repay related party note				$ 584	-
Reversal of deferred stock compensation as a result of option cancellations				$ 1,169

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 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.

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 September 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 generally held to maturity. These securities all mature within one year.

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. Should operating results fail to meet certain thresholds, an impairment charge may be necessary in the future.

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 7.

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.

In June 2002, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards No. 146, "Accounting for Costs Associated with Exit or Disposal Activities" (FAS 146), which is effective for exit or disposal activities that are initiated after December 31, 2002. FAS 146 nullifies Emerging Issues Task Force (EITF) Issue No. 94-3, "Liability recognition for Certain Employee Termination Benefits and Other Costs to Exit and Activity (including Certain Costs Incurred in a Restructuring). FAS146 requires that a liability for a cost associated with an exit or disposal activity be recognized when the liability is incurred. FAS146 does not require restatement of prior financial results. The Company plans to adopt FAS 146 beginning with any exit or disposal activities initiated after December 31, 2002. The Company does not believe that FAS146 will impact its 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 and other and (2) media restoration services.

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. The Company recognizes webcasting revenues as the related services are rendered. The Company often sells webcasting services with both a live and on-demand component. When such sales are made, the Company defers the value of the archival component as determined by stand-alone sales of archival events and recognizes this value over the related archival term.

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 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 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.

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. There were no special charges recorded in the three months ended September 30, 2002. The Company recorded special charges totaling $1.9 million in the nine months ended September 30, 2002, 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	Six Months Ended	Three Months Ended
	Dec. 31, 2001	June 30, 2002	Sep. 30, 2002
Beginning balance	$ 310	$ 2,939	$ 3,175
Additional accruals	3,790	1,890	-
Paid in cash	(1,161)	(1,654)

Delaware	91-1908833
(State or other jurisdiction of incorporation or organization)	(I.R.S. Employer Identification No.)

Common	40,461,207
(Class)	(Outstanding at November 1, 2002)

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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 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

Item	4	Controls and Procedures	33

PART	II.	OTHER INFORMATION
Item	1	Legal Proceedings	34
Item	2	Changes in Securities and Use of Proceeds	34
Item	3	Defaults Upon Senior Securities	34
Item	4	Submission of Matters to a Vote of Security Holders	35
Item	5	Other Information	35
Item	6	Exhibits and Reports on Form 8-K	35
		Signatures	36

	Nine Months Ended
	September 30,
	2002	2001
Employee severance	$ 1,890	$ 2,323
Intangible impairments	-	11,573
Fixed assets	-	3,367
Facilities charges and other	-	3,199

	$ 1,890	$ 20,462