##### Table of Contents



UNITED STATES SECURITIES AND EXCHANGE COMMISSION
 Washington, DC 20549
 FORM 10-Q
  þ
    
    Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934
 For the quarterly period ended June 30, 2006
 or
 o
    
    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
    
    (I.R.S. Employer Identification No.)incorporation or organization)
 
 
 þ o
  o þ o
 o þ
  Common
    
    13,251,531(Class)
    
    (Outstanding at August 4, 2006)




---



##### 



Loudeye Corp.
 Form 10-Q Quarterly Report
As of and for the Quarter Ended June 30, 2006
 TABLE OF CONTENTS
 PagePART I. Financial Information
    
    
    3Item 1. Financial Statements
    
    
    3Unaudited Condensed Consolidated Balance Sheets
    
    
    3Unaudited Condensed Consolidated Statements of Operations
    
    
    4Unaudited Condensed Consolidated Statement of Stockholders Equity
    
    
    5Unaudited Condensed Consolidated Statements of Cash Flows
    
    
    6Notes to Unaudited Condensed Consolidated Financial Statements
    
    
    7Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    23Item 3. Quantitative and Qualitative Disclosures About Market Risk
    
    
    39Item 4. Controls and Procedures
    
    
    40PART II. Other Information
    
    
    40Item 1. Legal Proceedings
    
    
    40Item 1A. Risk Factors
    
    
    40Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
    
    
    59Item 3. Defaults Upon Senior Securities
    
    
    59Item 4. Submission of Matters to a Vote of Security Holders
    
    
    59Item 5. Other Information
    
    
    60Item 6. Exhibits
    
    
    60EXHIBIT 31.1EXHIBIT 31.2EXHIBIT 32.1EXHIBIT 32.2
  2




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##### Table of Contents



PART I. FINANCIAL INFORMATION.
 
 Item 1. Financial Statements.
  
  June 30,
    
    
    December 31,2006
    
    
    2005(in thousands, except pershare amounts)ASSETSCash and cash equivalents
    
    $
    22,275
    
    
    $
    6,932Marketable securities
    
    
    
    
    
    
    2,113Accounts receivable, net of allowances of $179 and $142 respectively
    
    
    2,565
    
    
    
    3,109Prepaid expenses and other current assets
    
    
    2,079
    
    
    
    1,048Restricted cash
    
    
    234
    
    
    
    1,810Current assets of discontinued operations
    
    
    659
    
    
    
    2,192Total current assets
    
    
    27,812
    
    
    
    17,204Property and equipment, net
    
    
    1,254
    
    
    
    1,442Goodwill
    
    
    46,667
    
    
    
    44,213Intangible assets, net
    
    
    2,903
    
    
    
    3,116Other assets, net
    
    
    18
    
    
    
    189Assets of discontinued operations
    
    
    301
    
    
    
    3,244Total assets
    
    $
    78,955
    
    
    $
    69,408LIABILITIES AND STOCKHOLDERS EQUITYAccounts payable
    
    $
    4,415
    
    
    $
    3,201Accrued compensation and benefits
    
    
    655
    
    
    
    642Accrued and other liabilities
    
    
    6,072
    
    
    
    6,033Deposits and deferred revenue
    
    
    4,418
    
    
    
    4,842Current portion of long-term debt
    
    
    
    
    
    
    1,000Current liabilities of discontinued operations
    
    
    1,761
    
    
    
    3,381Total current liabilities
    
    
    17,321
    
    
    
    19,099Deposits and deferred revenue, net of current portion
    
    
    174
    
    
    
    350Common stock payable related to acquisition
    
    
    321
    
    
    
    321Total liabilities
    
    
    17,816
    
    
    
    19,770Commitments and contingenciesSTOCKHOLDERS EQUITYPreferred stock, $0.001 par value, 5,000 shares authorized, none outstanding
    
    
    
    
    
    
    Common stock, warrants and additional paid-in capital; for common stock
$0.001 par value, 25,000 shares authorized; 13,255 shares issued and
outstanding in 2006, 11,537 issued and outstanding in 2005
    
    
    303,574
    
    
    
    296,020Deferred stock compensation
    
    
    
    
    
    
    (888
    )Accumulated deficit
    
    
    (241,931
    )
    
    
    (242,645
    )Accumulated other comprehensive loss
    
    
    (504
    )
    
    
    (2,849
    )Total stockholders equity
    
    
    61,139
    
    
    
    49,638Total liabilities and stockholders equity
    
    $
    78,955
    
    
    $
    69,408
  3




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##### Table of Contents



Three Months Ended
    
    
    Six Months EndedJune 30,
    
    
    June 30,2006
    
    
    2005
    
    
    2006
    
    
    2005REVENUE
    
    $
    5,382
    
    
    $
    4,892
    
    
    $
    11,202
    
    
    $
    8,764COST OF REVENUE (1)
    
    
    4,112
    
    
    
    4,016
    
    
    
    9,051
    
    
    
    7,825Gross profit
    
    
    1,270
    
    
    
    876
    
    
    
    2,151
    
    
    
    939OPERATING EXPENSES:Sales and marketing (1)
    
    
    786
    
    
    
    931
    
    
    
    1,663
    
    
    
    2,051Research and development (1)
    
    
    839
    
    
    
    647
    
    
    
    1,675
    
    
    
    1,228General and administrative (1)
    
    
    2,869
    
    
    
    3,005
    
    
    
    5,624
    
    
    
    6,483Amortization of intangibles
    
    
    84
    
    
    
    51
    
    
    
    147
    
    
    
    109Stock-based compensation (1)
    
    
    269
    
    
    
    (2
    )
    
    
    565
    
    
    
    42Special charges (credits)  other
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (43
    )Total operating expenses
    
    
    4,847
    
    
    
    4,632
    
    
    
    9,674
    
    
    
    9,870LOSS FROM OPERATIONS
    
    
    (3,577
    )
    
    
    (3,756
    )
    
    
    (7,523
    )
    
    
    (8,931
    )OTHER INCOME (EXPENSE):Interest income
    
    
    207
    
    
    
    183
    
    
    
    296
    
    
    
    391Interest expense
    
    
    (9
    )
    
    
    (28
    )
    
    
    (27
    )
    
    
    (102
    )Other income (expense), net
    
    
    (109
    )
    
    
    75
    
    
    
    (77
    )
    
    
    235Total other income
    
    
    89
    
    
    
    230
    
    
    
    192
    
    
    
    524Loss from continuing operations
    
    
    (3,488
    )
    
    
    (3,526
    )
    
    
    (7,331
    )
    
    
    (8,407
    )Income (loss) from discontinued operations, net of gain on sale
    
    
    8,843
    
    
    
    (3,404
    )
    
    
    8,045
    
    
    
    (5,975
    )NET INCOME (LOSS)
    
    $
    5,355
    
    
    $
    (6,930
    )
    
    $
    714
    
    
    $
    (14,382
    )INCOME (LOSS) PER SHARE  BASIC AND DILUTED:From continuing operations
    
    $
    (0.26
    )
    
    $
    (0.32
    )
    
    $
    (0.58
    )
    
    $
    (0.80
    )From discontinued operations
    
    
    0.67
    
    
    
    (0.32
    )
    
    
    0.64
    
    
    
    (0.57
    )Net income (loss) per share  basic and diluted
    
    $
    0.41
    
    
    $
    (0.64
    )
    
    $
    0.06
    
    
    $
    (1.37
    )Weighted average shares outstanding  basic and diluted
    
    
    13,142
    
    
    
    10,869
    
    
    
    12,574
    
    
    
    10,523
 
 (1)
    
    Stock-based compensation, consisting of the fair value of equity instruments issued for
services rendered, is attributable as follows: Three Months Ended
    
    Six Months EndedJune 30,
    
    June 30,2006
    
    2005
    
    2006
    
    2005Cost of revenue
    
    $
    12
    
    
    $
    30
    
    
    $
    22
    
    
    $
    65Sales and marketing
    
    
    37
    
    
    
    
    
    
    
    73
    
    
    
    Research and development
    
    
    30
    
    
    
    
    
    
    
    55
    
    
    
    General and administrative
    
    
    202
    
    
    
    (2
    )
    
    
    437
    
    
    
    42Discontinued operations
    
    
    15
    
    
    
    7
    
    
    
    46
    
    
    
    20
  4




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Common Stock,Warrants and
    
    
    
    
    
    
    
    
    
    
    AccumulatedAdditional Paid-in
    
    
    Deferred
    
    
    
    
    
    
    Other
    
    
    TotalCapital
    
    
    Stock-based
    
    
    Accumulated
    
    
    Comprehensive
    
    
    StockholdersShares
    
    
    Amount
    
    
    Compensation
    
    
    Deficit
    
    
    Loss
    
    
    Equity(in thousands)BALANCES, December 31,
2005
    
    
    11,537
    
    
    $
    296,020
    
    
    $
    (888
    )
    
    $
    (242,645
    )
    
    $
    (2,849
    )
    
    $
    49,638Stock option exercises
    
    
    83
    
    
    
    234
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    234Private equity transaction, net
    
    
    1,650
    
    
    
    7,575
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    7,575Vesting of restricted stock,
net of cancellations
    
    
    (15
    )
    
    
    88
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    88Implementation of FAS 123(R)
    
    
    
    
    
    
    (888
    )
    
    
    888
    
    
    
    
    
    
    
    
    
    
    
    Stock-based compensation
    
    
    
    
    
    
    545
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    545Comprehensive loss:Unrealized gain on
marketable securities
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    11
    
    
    
    11Foreign currency
translation adjustment
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,334
    
    
    
    2,334Net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    714
    
    
    
    
    
    
    
    714Total comprehensive income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    3,059BALANCES, June 30, 2006
    
    
    13,255
    
    
    $
    303,574
    
    
    $
    
    
    
    $
    (241,931
    )
    
    $
    (504
    )
    
    $
    61,139
  5




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##### Table of Contents



Six Months EndedJune 30,2006
    
    
    2005(in thousands)OPERATING ACTIVITIESNet income (loss)
    
    $
    714
    
    
    $
    (14,382
    )Adjustments to reconcile net income (loss) to net cash used in operating activities:Loss from discontinued operations
    
    
    (8,045
    )
    
    
    5,975Depreciation and amortization
    
    
    950
    
    
    
    925Special charges (credits) and other non cash items
    
    
    (79
    )
    
    
    (124
    )Stock-based compensation
    
    
    633
    
    
    
    127Loss on disposal of equipment
    
    
    2
    
    
    
    90Foreign currency transaction loss (gain)
    
    
    79
    
    
    
    (268
    )Operating cash flows from discontinued operations
    
    
    (73
    )
    
    
    (2,256
    )Changes in operating assets and liabilities:Accounts receivable
    
    
    603
    
    
    
    (787
    )Prepaid expenses and other assets
    
    
    (813
    )
    
    
    (495
    )Accounts payable
    
    
    1,050
    
    
    
    (84
    )Accrued compensation and benefits and accrued and other liabilities
    
    
    (193
    )
    
    
    260Accrued special charges
    
    
    
    
    
    
    (360
    )Deposits and deferred revenue
    
    
    (514
    )
    
    
    33Net cash used in operating activities
    
    
    (5,686
    )
    
    
    (11,346
    )INVESTING ACTIVITIESPurchases of property and equipment
    
    
    (373
    )
    
    
    (249
    )Purchases of intangibles
    
    
    (36
    )
    
    
    (81
    )Payments of accrued acquisition consideration
    
    
    
    
    
    
    (2,524
    )Release of restricted cash
    
    
    1,586
    
    
    
    1,388Purchases of marketable securities
    
    
    
    
    
    
    (750
    )Sales of marketable securities
    
    
    2,114
    
    
    
    6,223Investing cash flows from discontinued operations
    
    
    11,046
    
    
    
    (1,755
    )Net cash provided by investing activities
    
    
    14,337
    
    
    
    2,252FINANCING ACTIVITIESProceeds from sale of stock and exercise of stock options
    
    
    234
    
    
    
    663Proceeds from private equity financing, net
    
    
    7,575
    
    
    
    Penalty related to private equity financing
    
    
    (155
    )
    
    
    (314
    )Principal payments on debt, line of credit and capital lease obligations
    
    
    (1,000
    )
    
    
    (500
    )Financing cash flows of discontinued operations
    
    
    
    
    
    
    (82
    )Net cash provided by (used in) financing activities
    
    
    6,654
    
    
    
    (233
    )Effect of foreign currency translation on cash
    
    
    38
    
    
    
    (153
    )Net increase (decrease) in cash and cash equivalents
    
    
    15,343
    
    
    
    (9,480
    )Cash and cash equivalents, beginning of period
    
    
    6,932
    
    
    
    28,978Cash and cash equivalents, end of period
    
    $
    22,275
    
    
    $
    19,498
  6




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##### Table of Contents



LOUDEYE CORP. AND SUBSIDIARIES
 
 NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 June 30, 2006
 1. Description of Business and Risks
 Business
    Risks
  Going Concern
   2. Summary of Significant Accounting Policies
 Accounting Principles
  Basis of Consolidation
  Estimates and Assumptions
  7




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##### Table of Contents



Unaudited Interim Financial Information
   Cash, Cash Equivalents and Marketable Securities
    June 30,
    
    
    December 31,2006
    
    
    2005Cash and cash equivalents:Cash
    
    $
    14,688
    
    
    $
    4,616Money market mutual funds
    
    
    3,217
    
    
    
    2,316Commercial paper & U.S. Agency notes
    
    
    4,370
    
    
    
    Total cash and cash equivalents
    
    
    22,275
    
    
    
    6,932Marketable securities:Corporate notes & bonds
    
    
    
    
    
    
    2,113Total marketable securities
    
    
    
    
    
    
    2,113Total cash, cash equivalents and marketable securities
    
    $
    22,275
    
    
    $
    9,045
  8




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##### Table of Contents



Restricted Cash
  Accounts Receivable
  Goodwill
  Impairment of Long-Lived Assets
  9




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##### Table of Contents



Fair Value of Financial Instruments and Concentrations of Credit Risk
    For the three months ended
    
    
    For the six months endedJune 30,
    
    
    June 30,2006
    
    
    2005
    
    
    2006
    
    
    2005Microsoft
    
    
    28
    %
    
    
    27
    %
    
    
    32
    %
    
    
    27
    %KPN Telecom B.V.
    
    
    16
    %
    
    
    4
    %
    
    
    15
    %
    
    
    3
    %Wanadoo
    
    
    14
    %
    
    
    8
    %
    
    
    14
    %
    
    
    9
    %Coca-Cola
    
    
    6
    %
    
    
    14
    %
    
    
    5
    %
    
    
    15
    %64
    %
    
    
    53
    %
    
    
    66
    %
    
    
    54
    %
  Revenue Recognition
   Determining Separate Elements and Allocating Value to Those Elements.
 10




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##### Table of Contents



Digital media store services revenue.
 
 
 
    
 
 
 11




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##### Table of Contents




   Software license revenue.
 Research and Development Costs
  Stock-Based Compensation
   12




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Three months ended
    
    
    Six months endedJune 30, 2005
    
    
    June 30, 2005Net loss, as reported
    
    $
    (6,930
    )
    
    $
    (14,382
    )Add: stock-based employee compensation expense under APB 25 included in reported
net loss
    
    
    21
    
    
    
    42Deduct: total stock-based employee compensation expense determined under fair value
method for all awards
    
    
    (990
    )
    
    
    (1,693
    )Pro forma net loss
    
    $
    (7,899
    )
    
    $
    (16,033
    )Basic and diluted net loss per share, as reported
    
    $
    (0.64
    )
    
    $
    (1.37
    )Pro forma basic and diluted net loss per share
    
    $
    (0.73
    )
    
    $
    (1.52
    )
   2006
    
    
    2005Risk-free interest rates
    
    
    4.8-5.16
    %
    
    
    2.33-5.71
    %Expected lives
    
    2.0 years
    
    
    2.5 yearsExpected dividend yields
    
    
    0
    %
    
    
    0
    %Expected volatility
    
    
    90
    %
    
    
    120
    %
 13




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Comprehensive Income (Loss)
  Foreign Currencies
  Segments
  Recent Accounting Pronouncements
 14




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##### Table of Contents



3. Discontinued Operations
 Overpeer, Inc.
    Impairment.
 15




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##### Table of Contents



Severance
 Overpeer Lease
 Savvis Communications Corp
 U.S.-Based Operating Assets
    
 
 
 
 16




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##### Table of Contents



For the three months ended
    
    
    For the six months endedJune 30,
    
    
    June 30,2006
    
    
    2005
    
    
    2006
    
    
    2005Revenue
    
    $
    550,000
    
    
    $1.6 million
    
    $3.1 million
    
    $2.9 millionNet income (loss), net of gain on sale
    
    $8.8 million
    
    $(2.2) million
    
    $8.0 million
    
    $(4.3) million
 4. Special Charges (Credits)
  5. Net Income (Loss) Per Share
  17




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##### Table of Contents



Three months ended
    
    
    Three months endedJune 30,
    
    
    June 30,2006
    
    
    2005
    
    
    2006
    
    
    2005Options outstanding under Loudeye stock option plans
    
    
    873
    
    
    
    1,363
    
    
    
    873
    
    
    
    1,363Restricted stock outstanding under Loudeye stock option
plans
    
    
    102
    
    
    
    15
    
    
    
    102
    
    
    
    15OD2 options assumed
    
    
    22
    
    
    
    90
    
    
    
    22
    
    
    
    90Warrants outstanding
    
    
    1,833
    
    
    
    595
    
    
    
    1,833
    
    
    
    595Shares excluded
    
    
    2,830
    
    
    
    2,063
    
    
    
    2,830
    
    
    
    2,063
  6. Long-Term Debt
  
 
    7. Contingencies
 Royalty Obligations.
 Nasdaq Listing Compliance
 18




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Legal Proceedings
 Settlement of Altnet Litigation Matter.
 Savvis Communications Corp
 19




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##### Table of Contents



IPO Class Action.
  
 
 
 
  SPEDIDAM 
 Other
 20




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##### Table of Contents



8. Stockholders Equity
 Reverse Stock Split
  February 2006 private placement transaction
   Stock Option Plans
     Restricted Stock Awards
 21




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##### Table of Contents



9. Segment Information
   At
    
    
    AtJune 30,
    
    
    December 31,2006
    
    
    2005Long-lived Assets:United States
    
    $
    1,507
    
    
    $
    1,548United Kingdom
    
    
    2,622
    
    
    
    2,990Other countries, principally Europe
    
    
    28
    
    
    
    20Total long-lived assets
    
    $
    4,157
    
    
    $
    4,558
 10. Income Tax Provision
  11. Subsequent Event
  The Merger Agreement
     
    
    approval of Loudeyes stockholders,
 
    
    the absence of a material adverse effect with respect to Loudeye. A material adverse
effect with respect to Loudeye is defined in the merger agreement to specifically include,
among other things, the loss of more than 30 employees, the loss (or reasonable likelihood
of loss) of 30% of the value of Loudeyes current customer base and
Loudeyes failure to have a minimum cash balance (including cash equivalents, marketable
securities and restricted cash) of $10.0 million as of October 31, 2006 before certain
transaction related expenses,
 
    
    receipt of third party consents to the continuation, modification, extension and/or
termination of certain specified contracts, including the consent of the major record
labels to continue to license content to Loudeye on substantially the same terms for a
period of 12 months following the closing date of the merger,
 
    
    absence of any law or order prohibiting the closing, and
 
    
    expiration or termination of the Hart-Scott-Rodino waiting period and certain other
regulatory approvals.
   Voting and Other Agreements
        22




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Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations.
 Forward-Looking Statements
    Overview
  23




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
 
 
 
 
 
 
 
 Recent Event
   
    
    approval of our stockholders;
    
    the absence of a material adverse effect with respect to Loudeye. A material adverse
effect with respect to Loudeye is defined in the merger agreement to specifically include,
among other things, the loss of more than 30 employees, the loss (or reasonable likelihood
of loss) of 30% of the value of our current customer base and our failure to have a minimum cash balance
(including cash equivalents, marketable securities and restricted cash) of $10.0 million as
of October 31, 2006 before certain transaction related expenses;
    
    receipt of third party consents to the continuation, modification, extension and/or
termination of certain specified contracts, including the consent of the major record
labels to continue to license content to Loudeye on substantially the same terms for a
period of 12 months following the closing date of the merger;
    
    absence of any law or order prohibiting the closing; and
    
    expiration or termination of the Hart-Scott-Rodino waiting period and certain other regulatory approvals.
   24




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Loudeye Background
      25




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##### Table of Contents



Digital media store services.
   
 
 
 
 
 
 
     26




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##### Table of Contents




 
 
    
    Discontinued Operations.
 27




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##### Table of Contents



Overpeer, Inc.
      U.S.-Based Operating Assets.
 28




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##### Table of Contents




 
 
 
       29




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##### Table of Contents



For the three months ended
    
    For the six months endedJune 30,
    
    June 30,2006
    
    2005
    
    2006
    
    2005Revenue
    
    $
    550,000
    
    
    $1.6 million
    
    $3.1 million
    
    $2.9 millionNet income (loss), net of gain on sale
    
    $
    8.8 million
    
    $(2.2) million
    
    $8.0 million
    
    $(4.3) million
 Critical Accounting Policies and Estimates
   Stock-Based Compensation Expense.
    Recent Accounting Pronouncements
  30




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##### Table of Contents



Consolidated Results of Operations
   Comparison of Second Quarter 2006 Operating Results to First Quarter 2006
  
  Comparison of Three and Six Month Periods Ended June 30, 2006 and June 30, 2005
  Three Months Ended
    
    
    
    
    
    
    
    
    
    

    Six Months EndedJune 30,
    
    
    Variance
    
    
    June 30,
    
    
    Variance2006
    
    
    2005
    
    
    $
    
    
    %
    
    
    2006
    
    
    2005
    
    
    $
    
    
    %Revenue
    
    $
    5,382
    
    
    $
    4,892
    
    
    $
    490
    
    
    
    10
    %
    
    $
    11,202
    
    
    $
    8,764
    
    
    $
    2,438
    
    
    
    28
    %Cost of revenue
    
    
    4,112
    
    
    
    4,016
    
    
    
    96
    
    
    
    2
    %
    
    
    9,051
    
    
    
    7,825
    
    
    
    1,226
    
    
    
    16
    %Gross profit
    
    
    1,270
    
    
    
    876
    
    
    
    394
    
    
    
    45
    %
    
    
    2,151
    
    
    
    939
    
    
    
    1,212
    
    
    
    129
    %Operating expensesSales and marketing
    
    
    786
    
    
    
    931
    
    
    
    (145
    )
    
    
    (16
    )%
    
    
    1,663
    
    
    
    2,051
    
    
    
    (388
    )
    
    
    (19
    )%Research and development
    
    
    839
    
    
    
    647
    
    
    
    192
    
    
    
    30
    %
    
    
    1,675
    
    
    
    1,228
    
    
    
    447
    
    
    
    36
    %General and administrative
    
    
    2,869
    
    
    
    3,005
    
    
    
    (136
    )
    
    
    (5
    )%
    
    
    5,624
    
    
    
    6,483
    
    
    
    (859
    )
    
    
    (13
    )%Amortization of intangibles
    
    
    84
    
    
    
    51
    
    
    
    33
    
    
    
    65
    %
    
    
    147
    
    
    
    109
    
    
    
    38
    
    
    
    35
    %Stock-based compensation
    
    
    269
    
    
    
    (2
    )
    
    
    271
    
    
    
    
    
    
    
    565
    
    
    
    42
    
    
    
    523
    
    
    
    1245
    %Special charges (credits)  other
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (43
    )
    
    
    43
    
    
    
    100
    %Total operating expenses
    
    
    4,847
    
    
    
    4,632
    
    
    
    215
    
    
    
    5
    %
    
    
    9,674
    
    
    
    9,870
    
    
    
    (196
    )
    
    
    (2
    )%Interest income
    
    
    207
    
    
    
    183
    
    
    
    24
    
    
    
    13
    %
    
    
    296
    
    
    
    391
    
    
    
    (95
    )
    
    
    (24
    )%Interest expense
    
    
    (9
    )
    
    
    (28
    )
    
    
    19
    
    
    
    68
    %
    
    
    (27
    )
    
    
    (102
    )
    
    
    75
    
    
    
    74
    %Other income (expense), net
    
    
    (109
    )
    
    
    75
    
    
    
    (184
    )
    
    
    (245
    )%
    
    
    (77
    )
    
    
    235
    
    
    
    (312
    )
    
    
    (133
    )%Loss from continuing operations
    
    
    (3,488
    )
    
    
    (3,526
    )
    
    
    38
    
    
    
    1
    %
    
    
    (7,331
    )
    
    
    (8,407
    )
    
    
    1,076
    
    
    
    13
    %Income (loss) from discontinued
operations, net of gain
on sale
    
    
    8,843
    
    
    
    (3,404
    )
    
    
    12,247
    
    
    
    360
    %
    
    
    8,045
    
    
    
    (5,975
    )
    
    
    14,020
    
    
    
    235
    %Net income (loss)
    
    $
    5,355
    
    
    $
    (6,930
    )
    
    $
    12,285
    
    
    
    177
    %
    
    $
    714
    
    
    $
    (14,382
    )
    
    $
    15,096
    
    
    
    105
    %
 31




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##### Table of Contents



Comparison of Three and Six Month Periods Ended June 30, 2006 and June 30, 2005
 Revenue.
  For the three months ended
    
    
    For the six months endedJune 30,
    
    
    June 30,2006
    
    
    2005
    
    
    2006
    
    
    2005Microsoft
    
    
    28
    %
    
    
    27
    %
    
    
    32
    %
    
    
    27
    %KPN Telecom B.V.
    
    
    16
    %
    
    
    4
    %
    
    
    15
    %
    
    
    3
    %Wanadoo
    
    
    14
    %
    
    
    8
    %
    
    
    14
    %
    
    
    9
    %Coca-Cola
    
    
    6
    %
    
    
    14
    %
    
    
    5
    %
    
    
    15
    %64
    %
    
    
    53
    %
    
    
    66
    %
    
    
    54
    %
  Deposits and deferred revenue.
 Cost of revenue.
 32




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##### Table of Contents



Sales and marketing.
 Research and development.
 General and administrative.
 33




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##### Table of Contents



Amortization of intangibles.
 Stock-Based Compensation Expense.
   Special charges (credits).
 Interest income.
 Interest expense.
 34




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##### Table of Contents



Other income (expense), net.
 Income taxes.
 Liquidity, Capital Resources and Going Concern
      35




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36




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
    
    Focus our European service offerings on our key markets and customers;
    
    Continue efforts to develop our mobile music services offerings;
    
    Increase or decrease research and development spending;
    
    Increase or decrease sales and marketing activities; and
    
    Improve our operational and financial systems.
     Contractual Obligations
  Payments Due by PeriodLess Than
    
    
    
    
    
    
    
    
    
    
    AfterTotal
    
    
    1 Year
    
    
    1-3 years
    
    
    4-5 years
    
    
    5 yearsOperating leases (1)
    
    $
    816
    
    
    $
    579
    
    
    $
    147
    
    
    $
    90
    
    
    $
    Bandwidth and co-location purchase obligations (2)
    
    
    276
    
    
    
    213
    
    
    
    63
    
    
    
    
    
    
    
    Total contractual obligations
    
    $
    1,092
    
    
    $
    792
    
    
    $
    210
    
    
    $
    90
    
    
    $
    
 37




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##### Table of Contents



(1)
    
    Our future minimum rental commitments under noncancellable leases comprise the majority of
the operating lease obligations presented above. We expect to fund these commitments with existing
cash and cash flows from operations. Rental commitments are presented net of sublease income.(2)
    
    Many of the contracts underlying these obligations contain renewal provisions, generally
for a period of one year. In addition, amounts payable under these contracts may vary based on the
volume of data transferred. The amounts in the table represent the base fee amount. We also have
contracts for bandwidth and collocation services that run on a month-to-month basis and for which
there are no unconditional obligations. Monthly amounts due under the month-to-month contracts are
not material and have been excluded from the table above.  
 
 
  
 
 
 Off-Balance Sheet Arrangements
 Indemnification Obligations.
  38




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Legal Proceedings
  
 Item 3. Quantitative and Qualitative Disclosures About Market Risk.
  Interest Rate Risk.
   Foreign Currency Exchange Risk. 
   39




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##### Table of Contents



Item 4. Controls and Procedures.
 Disclosure Controls and Procedures
  Changes in Disclosure Controls and Procedures
    
 
 PART II
 OTHER INFORMATION
 
 Item 1. Legal Proceedings.
  
 Item 1A. Risk Factors.
   
 
 
 
 
 
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##### Table of Contents




  Risks Related to Our Business
 We have a history of losses, negative cash flows on a quarterly and annual basis and we may
experience greater losses from operations than we currently anticipate.
  If the Nokia merger is not consummated, we expect to require additional capital to fund
ongoing operations which may not be available on acceptable terms or at all.
   Our quarterly and annual financial results will continue to fluctuate making it difficult to
forecast our operating results.
  
 
 
 
 
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##### Table of Contents




 
 
 
 
  Failure to complete our proposed acquisition by Nokia could adversely affect our stock price
and future business and operations.
  
    
    approval of our stockholders;
    
    the absence of a material adverse effect with respect to Loudeye. A material adverse
effect with respect to Loudeye is defined in the merger agreement to specifically include,
among other things, the loss of more than 30 employees, the loss (or reasonable likelihood
of loss) of 30% of the value of our current customer base and our failure to have a minimum cash balance
(including cash equivalents, marketable securities and restricted cash) of $10.0 million as
of October 31, 2006 before certain transaction related expenses;
    
    receipt of third party consents to the continuation, modification, extension and/or
termination of certain specified contracts, including the consent of the major record
labels to continue to license content to Loudeye on substantially the same terms for a
period of 12 months following the closing date of the merger;
    
    absence of any law or order prohibiting the closing; and
    
    expiration or termination of the Hart-Scott-Rodino waiting period and certain other regulatory approvals.
  
    
    we would not realize the potential benefits of the acquisition, including the potentially
enhanced financial and competitive position of combining the Company with Nokia;
    
    the market price of shares of our common stock may decline to the extent that the current
market price of those shares reflects an assumption that the acquisition by Nokia will be
completed;
    
    managements attention from our day-to-day business may be diverted and we may lose key
employees;
    
    our relationships with current and prospective customers and partners may be disrupted as a
result of uncertainties with regard to our business and prospects;
    
    to the extent the acquisition is not completed due to a lack of the requisite stockholder
approval, we may face additional challenges in any attempt to engage in a similar transaction
or any matter that may require our stockholder approval, including future acquisition
proposals and material fund raising proposals; and
    
    we must pay significant costs related to the acquisition, such as investment advisory, legal, accounting and
proxy solicitation fees and expenses and it is possible that we could trigger a requirement to pay Nokia a
termination fee as set out in more detail in the agreement and plan of merger.
  Our business could suffer due to the announcement and/or consummation of the proposed
acquisition by Nokia.
  42




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We have restructured our business to focus on our OD2 digital media store services operated
out of Europe. Even after giving effect to this restructuring, we may not have sufficient cash to
execute on our present operating plan.
  We depend on a limited number of customers for a significant percentage of our digital media
store services revenue. These customers may be able to terminate their service contracts with us on
short notice, with or without cause. Accordingly, the loss of, or delay in payment from, one or a
small number of customers could materially and adversely impact our revenue, results of operations
and cash flows.
   If we are unsuccessful in developing our mobile music store service offerings, we may fail to
meet expectations of our business plan and our results of operations could be materially and
adversely affected.
   43




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##### Table of Contents



Increases in wholesale rates for digital music content may negatively impact gross margins
which could harm our business.
  Our efforts to institute variable pricing rates for digital content may result in loss of end
consumers or a reduction in transactional revenue, which could harm our business, reputation and
results of operations.
  Our unlimited, monthly streaming music subscription service carries unique business risks.
  Success of our digital music store services depends in part on our customers commitment to
marketing the services we provide for them.
  Our music content licenses are generally for limited terms and limited territories. If we are
unable to reach agreement with recorded music companies, especially with the four major recorded
music companies, to renew existing licenses or to grant us expanded license rights, portions of our
services could be interrupted and our business and results of operations could be harmed.
  44




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Our music content licenses generally require prior approval for us to distribute content to
our customers. If approval is delayed or withheld, portions of our services could be interrupted
and our business and results of operations could be harmed.
  Recorded music companies or our customers may desire to have a direct license relationship.
This trend may lengthen our sales cycle and may result in us reporting certain music store services
revenue on a net basis rather than on a gross basis.
  Our music content licenses could result in operational complexity that may divert resources or
make our business more expensive to conduct.
  45




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##### Table of Contents



We make estimates of music publishing and performance rates; a determination of higher than
estimated royalty rates could negatively impact our operating results.
  We may be liable or alleged to be liable to third parties for music, software, and other
content that we encode, distribute, archive or make available to our customers.
  
 
 
 
 
    46




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Competition may decrease our market share, revenue, and gross margin.
  
     If we do not continue to add customers for our services, our revenue and business will be
harmed.
 47




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##### Table of Contents



Our business will suffer if we do not anticipate and meet specific customer requirements or
respond to technological change.
  
 
 
  Paid digital media content services face competition from free peer-to-peer services.
 MGM
Studios, Inc. v. Grokster, Ltd.,
  Average selling prices of our services may decrease, which may negatively impact our gross
margins.
  48




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##### Table of Contents



Our music store services operating results fluctuate on a seasonal and quarterly basis.
  A decline in current levels of consumer spending could reduce our music store service revenue.
  Efforts by record labels to shore up declining sales of CDs may impact sales of digital
content.
  Our success is dependent on the performance of our CEO and the cooperation, performance and
retention of our executive officers and key employees.
  We cannot be certain that we will be able to protect our intellectual property.
  We may be subject to intellectual property infringement claims which are costly to defend and
could limit our ability to use certain technologies in the future.
   49




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##### Table of Contents



We must enhance our existing digital media services and develop and introduce new services in
a timely manner to remain competitive in that segment. Any failure to do so in a timely manner will
cause our results of operations to suffer.
  
 
 
 
 
  Delays in technology enhancements, such as completion of mobile services for our OD2 platform,
could result in customer terminations which could cause our results of operations to suffer.
 50




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##### Table of Contents



The success of our digital media store services depends, in part, on interoperability with our
customers music playback hardware.
  The technology underlying our services is complex and may contain unknown defects that could
harm our reputation, result in liability or decrease market acceptance of our services.
  
    
    Damage our reputation;
    
    Cause our customers to initiate liability suits against us;
    
    Increase our service development resources;
    
    Cause us to lose revenue; and
    
    Delay market acceptance of our digital media services.
  More consumers are utilizing non-PC devices to access digital content, and we may not be
successful in developing versions of our services that will gain widespread adoption by users of
such devices.
   51




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We provide guarantees to some of our customers under service level agreements and could be
liable for service credits for failure to meet specified performance metrics.
  Our network and digital media store service operations are subject to security, stability,
disaster and third party facility risks that could harm our business and reputation and expose us
to litigation or liability.
       Our services are complex and are deployed in complex environments and therefore may have
errors or defects that could seriously harm our business.
  52




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##### Table of Contents



We are dependent on third parties to supply key music content. Delays or failures of these
companies to provide content as requested could harm our business.
  Our transmission capacity is not entirely in our control, as we rely in part on transmission
capacity provided by third parties. Insufficient transmission capacity could result in delays or
interruptions in our services and loss of revenue.
  We may seek to enforce indemnification obligations against third parties and there can be no
assurance such third parties would have sufficient resources to satisfy any claims for
indemnification.
  Our operations could be harmed by factors including political instability, natural disasters,
fluctuations in currency exchange rates and changes in regulations that govern international
transactions.
  
 
 
 
 
 
 
 
 
 
 53




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##### Table of Contents




 
  We are subject to exchange rate risk in connection with our international operations.
   We may need to make additional future acquisitions to remain competitive. The process of
identifying, acquiring and integrating these future acquisitions may have a material adverse effect
on our operating results.
  
 
 
 
 
 
 
 
  54




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##### Table of Contents



We may need to select successor auditors, which could result in additional expense and a
diversion of management attention.
  55




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##### Table of Contents



Risks Related to Our Industry
 We must provide digital rights management solutions that are acceptable to both content
providers and consumers.
  Our industry is experiencing consolidation that may intensify competition.
  
 
 
 
 
  Our business could be harmed by a lack of availability of popular content, or enough content.
  The growth of our business depends on the increased use of the Internet and wireless networks
for communications, electronic commerce and advertising.
  56




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##### Table of Contents



If broadband technologies do not become widely available or widely adopted, our online media
distribution services may not achieve broad market acceptance, and our business may be harmed.
  Government regulation could adversely affect our business.
  We may be subject to market risk and legal liability in connection with the data collection
capabilities of our services.
  Risks Related to Our Common Stock
 Our future capital-raising activities could involve the issuance of equity securities, which
would dilute your investment and could result in a decline in the trading price of our common
stock.
  Some provisions of our amended and restated certificate of incorporation and amended bylaws
and of Delaware law may deter takeover attempts, which may limit the opportunity of our
stockholders to sell their shares at a favorable price.
 57




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##### Table of Contents



Securities analysts may not continue to cover our common stock or may issue negative reports,
and this may have a negative impact on our common stocks market price.
  Market fluctuations and volatility could cause the trading price of our common stock to
decline and limit our ability to raise capital.
  
    
    Our anticipated or actual operating results;
    
    Developments concerning our technologies and market offerings;
 58




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##### Table of Contents




    
    Technological innovations or setbacks by us or our competitors;
    
    Conditions in the digital media and Internet markets;
    
    Announcements of merger or acquisition transactions; and
    
    Other events or factors and general economic and market conditions.
  Future sales of our common stock, or the perception that future sales could occur, may
adversely affect our common stock price.
    
 Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.
  
 Item 3. Defaults Upon Senior Securities.
  
 Item 4. Submission of Matters to a Vote of Security Holders.
   
 
  59




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##### Table of Contents



Item 5. Other Information.
  
 Item 6. Exhibits.
  60




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##### Table of Contents



SIGNATURES
  LOUDEYE CORP.BY:
    /s/ MICHAEL A. BROCHUMichael A. BrochuPresident and Chief Executive Officer
(Principal Executive Officer) BY:
    /s/ CHRIS J. POLLAKChris J. PollakChief Financial Officer
(Principal Financial and Accounting Officer) 61




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##### Table of Contents



EXHIBIT INDEX
 Incorporated by ReferenceExhibit
    
    
    
    
    
    
    
    Exhibit
    
    FiledNo.
    
    Exhibit Description
    
    Form
    
    Date
    
    Number
    
    Herewith3.1
    
    
    Certificate of Amendment of the Amended and Restated
Certificate of Incorporation of Loudeye Corp. filed with the
Secretary of State of the State of Delaware on May 22, 2006.
    
    8-K
    
    05/23/06
    
    
    3.110.1
    
    
    Asset Purchase Agreement dated April 28, 2006 among Loudeye
Corp., Loudeye Enterprise Communications, Inc. and Muze Inc.
    
    8-K/A
    
    05/04/06
    
    
    10.110.2
    
    
    Sublease dated effective as of May 1, 2006, among Loudeye
Corp., Loudeye Enterprise Communications, Inc., and Muze Inc.,
for offices as 1130 Rainier Avenue South, Seattle, Washington.
    
    8-K/A
    
    05/05/06
    
    
    10.231.1
    
    
    Certification of Michael A. Brochu, President and Chief
Executive Officer of Loudeye Corp., Pursuant to 18 U.S.C.
Section 1350, as Adopted Pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002
    
    
    
    
    
    
    
    
    
    X31.2
    
    
    Certification of Chris J. Pollak, Chief Financial Officer of
Loudeye Corp., Pursuant to 18 U.S.C. Section 1350, as Adopted
Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
    
    
    
    
    
    
    
    
    
    X32.1
    
    
    Certification of Michael A. Brochu, President and Chief
Executive Officer of Loudeye Corp., Pursuant to 18 U.S.C.
Section 1350, as Adopted Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002
    
    
    
    
    
    
    
    
    
    X32.2
    
    
    Certification of Chris J. Pollak, Chief Financial Officer of
Loudeye Corp., Pursuant to 18 U.S.C. Section 1350, as Adopted
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
    
    
    
    
    
    
    
    
    
    X
 62