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Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes þ No o

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. o

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

The aggregate market value of the voting stock held by non-affiliates of the registrant was approximately $33,337,055 as of June 30, 2003, based upon the closing sale price on the Nasdaq National Market reported for such date. Shares of Common Stock held by each officer and director and by each person who owns 5% or more of the outstanding Common Stock have been excluded in that such persons may be deemed to be affiliates. This determination of affiliate status is not necessarily a conclusive determination for other purposes.

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

Portions of the registrant’s Proxy Statement relating to the registrant’s 2004 Annual Meeting are incorporated by reference into Part III of this Annual Report on Form 10-K where indicated.

Except for the historical information contained in this Annual Report on Form 10-K, the matters discussed herein, including, but not limited to “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in Item 7 of Part II hereof, and statements regarding regulatory approvals, operating results and capital requirements, are “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended, Section 21E of the Securities Exchange Act of 1934, as amended, and the Private Securities Litigation Reform Act of 1995, and are made under the safe harbor provisions thereof. In some cases, you can identify forward-looking statements by terminology such as “may,” “will,” “should,” “expect,” “plan,” “anticipate,” “believe,” “estimate,” “predict,” “potential” or “continue,” the negative of terms like these or other comparable terminology. These forward-looking statements are only predictions and actual events or results may differ materially from those projected. Specific factors that could cause actual results to differ materially from those projected include, but are not limited to, uncertainties related to our new product offerings; uncertainties related to the effectiveness of our technology and the development of our products and services; dependence on and management of existing and future corporate relationships; dependence on licensed content and technology; dependence on proprietary technology and uncertainty of patent protection; management of growth; history of operating losses; future capital needs and uncertainty of additional funding; dependence on key personnel; intense competition and probable new entrants; existing government regulations and changes in, or the failure to comply with, government regulations, and other risks detailed below, including the Risk Factors in Item 7 of Part II “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” and those included from time to time in the Company’s other reports with the SEC and press releases, copies of which are available from the Company upon request. All forward-looking statements included in this document are based on information available to us on the date hereof, and we assume no obligation to publicly release any revisions of the forward-looking statements contained herein to reflect events or circumstances after the date hereof. Readers are cautioned not to place undue reliance on these forward-looking statements, as our business and financial performance are subject to substantial risks and uncertainties.

We are an innovative business-to-business provider of services that facilitate the distribution and promotion of digital media content to media & entertainment, retail and enterprise customers. Our services enable our customers to outsource the management and distribution of audio and video digital media content over the Internet and on other digital distribution platforms. Our technical infrastructure and back-end solutions, combined with our proprietary applications, comprise an end-to-end solution, from basic digital media services, such as the hosting, storage, encoding, management and protection of media assets for content owners, to complex, fully-outsourced digital media distribution and promotional services, such as private-labeled digital music download stores and streaming Internet radio and music sample services. Our solutions reduce the complexity and cost of internal solutions, and enable our customers to provide branded digital media offerings to their users while supporting a variety of digital media technologies and consumer business models.

Some of our customers include Amazon.com, America Online, Apple Computer, BuyMusic, The Coca-Cola Company, Digital Music Initiative, Dreamworks Records, EMI Recorded Music Holdings, Microsoft Corporation, Siebel Systems, Sirius Corporation and Yahoo!.

The use of the Internet as a medium for media distribution has continued to evolve and grow in recent years. Traditional media & entertainment companies, such as major record labels, have in recent years faced significant challenges associated with the digital distribution of music. However, these companies have recently begun to license some of the rights to their digital music content for distribution and sale online on a subscription or individual track or album basis. Additionally, retailers and advertisers have begun to use digital

media to aid in the marketing and selling of their products. As such, traditional distribution channels for media have expanded as content owners have begun to license and distribute their content online through new and existing partners, and consumers have begun to purchase and consume content using personal computers and other digital devices. In addition, traditional media formats have expanded to include a variety of digital technologies, rich media formats and digital rights management solutions.

We developed our solutions to address the new methods of media distribution, promotion and content management that have emerged over recent years. Our digital media services enable digital distribution of media via the Internet and other emerging technologies. These services encompass a variety of related services and provide the major components needed to address the management and delivery of digital media, from content management to content distribution, including:


	•	Advanced application services. Our software applications enable our customers to outsource to us the complete requirements to run a digital media service over the Internet directed to end users or end consumers. We develop and provide proprietary Internet and wireless software applications to publish and manage digital media for the end users of our customers. The applications support private label user interfaces and customized templates. We can host the applications on behalf of the customer, and the customer’s deployment of these applications are designed to have the look, feel and branding of the customer’s existing products and website. The application platform and services support integration to a customer’s website, inventory, and commerce and billing systems. We offer such application services as the Loudeye Digital MusicStore^TM, iRadio^TM, music sample and webcasting services;

	•	Digital media storage and access. Our proprietary systems and technology enable the scalable archiving, retrieval and processing of large inventories of digital media. Digitized masters of the media assets are stored on our high capacity storage array systems and accessed via our proprietary, automated, web-based access tools to search, deliver and manage such content;

	•	Digital media distribution. Digitally formatted content can be distributed to end users on behalf of our customers via streaming or download services. Our solution can support full tracking and reporting of such end user activity for purposes such as royalty settlement or direct marketing. Our scalable network infrastructure can deliver to large numbers of end-users with high levels of reliability;

	•	Traditional source media ingest and capture. Source content is captured live via our extensive signal ingress capabilities, including satellite downlinks, video fiber, frame relay, ISDN, automated telephony-to-IP switches and teleconferencing equipment, as well as on-demand via processing of archived source audio and video in a wide range of legacy and digital formats; and

	•	Media processing services. Media assets are processed into the digital media formats of our customers’ specifications via our proprietary encoding and transcoding systems.

To support these solutions, we have obtained licenses and cultivated relationships with the five major record labels and hundreds of independent record labels. The target customers for our digital music services include media & entertainment companies, such as media portals, broadcasters, major record labels and advertisers, traditional and Internet-based retailers, wireless companies and consumer electronics manufacturers.

We also offer highly scalable live and “on-demand” audio and video webcasting services, supported by proprietary applications and an advanced Internet-protocol based digital broadcast center based in Seattle. The target customers for these solutions include media & entertainment companies, as well as large and medium-sized enterprises across a range of industries. Webcasting services are often sold in arrangements that include a continuing “on-demand” archival component that enables the customer access to its content after an event has been webcast.

Our capabilities include a robust production and rich media delivery infrastructure, featuring significant capacity to manage customer requirements and a flexible and extensible platform to enable tailored solutions and serve a diverse range of market opportunities. Our solutions offer customers the following key benefits:


	•	End-to-end outsourced solutions reduce complexity and cost of in-house implementations;

	•	High degree of flexibility enables tailored customer solutions;

	•	Scalable systems and network infrastructure provide significant capacity and reliability; and

	•	Strategic relationships facilitate authorized digital media strategies.

In January 2004, we sold our media restoration services business to a company controlled by the general manager of those operations. We will continue to sell, for a fee, media restoration services on behalf of the purchaser for a two-year period, but this is no longer a material part of our business.

Our shares trade through the Nasdaq SmallCap Market under the symbol “LOUD.” Our address is 1130 Rainier Avenue South, Seattle, WA 98144 and our telephone number is (206) 832-4000. Our Internet site is located at www.loudeye.com. We make available through our website free of charge all of our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and amendments to those reports filed pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934 as soon as reasonably practicable after we file them electronically with, or furnish them to, the SEC. The information found on our website is not part of this annual report.

The digital media industry encompasses many sectors, software and technologies. Companies operating in the digital media industry focus on developing and deploying innovative technologies to perform, promote and distribute audio and video content over the Internet and over other digitally-enabled channels such as personal computers, televisions, mobile phones and other portable devices.

In 2003, digital media continued to grow as a broad-based tool for communications, online media promotions and the distribution of content, particularly in the media, entertainment and corporate sectors. This growth has been driven in large part by an increase in broadband adoption and significant improvements in streaming technologies capable of delivering high quality content in smaller file sizes. A critical trend in these technology and streaming format enhancements is a marked increase in ease of use and effectiveness of streaming media, including, in some cases, instant-on access to streaming content without buffering. At the same time, content owners such as major media companies, film studios and record labels are providing more content in a digital format to capitalize on these opportunities.

The digital media industry underwent significant changes in 2003, and is rapidly adapting to satisfy the growing consumer and business demand for digital media products and services. Key trends in the industry over the past year have included:


	•	Increasing consumer broadband connectivity. The estimated number of consumers with a broadband Internet connection will reach approximately 30 million by the end of 2004, according to a 2003 report by Forrester Research. Jupiter Research concludes that a larger Internet audience using broadband connections will combine to shift nearly $2 billion in music spending to online distribution in the next five years.

	•	Wide proliferation of digital music technologies and devices. Digital media is no longer confined to personal computers. For example, in 2003 there was a significant increase in the number of portable digital music players, as well as an increase in the usage of digital music on other mobile devices. Jupiter Research predicts up to a 50% growth in the United States MP3 player market for the next three years, reaching an estimated install base of approximately 26 million players by 2006. Research group IDC predicts that the U.S. ringtone market will grow to more than $1.0 billion by 2007, and that approximately 1.5 million ringtones are purchased on the Internet each month in North America. Music subscription services are also expected to attract approximately 2.0 million subscribers and


		account for approximately $125 million, or 10%, of music sales by 2007, according to Forrester Research.

	•	Major record labels begin licensing digital media content. Music companies have faced a three-year decline in new CD sales, which they blame largely on illegal file swapping and other illegitimate means of copying and transferring copyrighted music. To create a legal means to meet the strong consumer demand for digital music, and to compensate for lost revenue as a result of peer-to-peer file sharing, the music industry has generally supported the launch of new music stores and services by licensing their catalogs for digital distribution.

	•	Consumer migration from illegal file sharing to legitimate music downloads. There are indications that illegal file sharing is declining due to factors including:


	•	Increased pressure from the Recording Industry Association of America (RIAA), including litigation directed at individual file traders;

	•	Corrupted files and other viruses embedded in files found on peer-to-peer networks;

	•	Declining pre-pressed CD prices; and

	•	The introduction of legitimate digital music stores.

For example, Nielsen SoundScan concluded that for the last three months of 2003, CD sales increased 5.6% and overall music sales, including singles and online downloads, increased 10.5% from the year-ago period. Forrester Research has predicted that downloads will generate approximately $2.1 billion by 2007 and account for approximately 33% of music sales the following year.

These shifts in the industry present market opportunities for us, as our turnkey product offerings address the technical challenges our partners face in launching their own music store or service to distribute digital music content to end-users.

To manage and distribute digital media, companies may develop internally the core competencies required to develop and deploy digital media content, or they may outsource these responsibilities to a third party. The core competencies required to manage and distribute digital media content include:


	•	Application and business model support to enhance the audio and video experience, track and report usage, monetize and protect content, and manage customer service;

	•	Scalable and reliable hosting and network distribution;

	•	High quality encoding and third-party digital media technology support;

	•	Digital media archive management; and

	•	Source media and metadata capture.

Metadata provides descriptive data to the consumer such as, in the case of music titles, artist information, track level data, title name, and cover art. Metadata may also include additional information that can be used to facilitate transactions or establish marketing relationships, such as links to online sale sites or opt-ins for email marketing campaigns. In addition, metadata is important to facilitating the administration of tracking and reporting required in many licensing arrangements with copyright holders.

It may be difficult or cost-prohibitive for providers and distributors of digital media content to develop, manage, and maintain these core competencies on an ongoing basis, as such companies may lack the internal resources or time to develop the expertise necessary to address these problems without disrupting their core business activities.

In addition to the technical challenges, digital media distributors may encounter a number of difficulties in obtaining copyright licenses from content owners. For example, a company may obtain a copyright license

that enables it to distribute certain digital media content — but only in one particular area (such as reproduction and performance, wireless delivery or subscription based programming, to the exclusion of others). Consequently, the company may need to enter into additional licensing arrangements to use the same content in other areas. As such rights are often held by different parties, such as publishers, artists and record labels, the effort to obtain such rights is often onerous, and may disrupt, delay or prevent the launch of a wide range of digital music business models.

For content owners, the digital media industry presents certain additional challenges. Content owners must:


	•	Ensure proper and timely distribution of their music catalog to hundreds of music services around the world;

	•	Ensure content is protected against unauthorized distribution or prohibited use;

	•	Collect and manage usage reports and associated royalty payments for the sale of content; and

	•	Manage sufficient and reliable technology resources to distribute content to partners and stay abreast of current technological developments that affect their interest and revenue potential in the digital distribution channel.

We support the end-to-end management and delivery of digital media content for both content owners and downstream distributors. Our digital media services enable our business partners to outsource completely the creation, management and delivery of audio, video and other visual content via the Internet and other digital distribution platforms. Our solutions reduce the complexity and cost of internal digital media solutions, while supporting a variety of digital media strategies and customer business models.

We believe we have been and remain a pioneer and industry leader in the rapidly developing digital music market. Through our new turnkey products, the Digital MusicStore^TM and iRadio Service^TM, we have expanded our signature services to enable our customers to launch digital music storefronts under their own private brand names. We also continue to increase the digital music catalog available to our customers, the size of which we believe is unparalleled in the industry.


	•	End-to-end outsourced solutions reduce complexity and cost of in-house implementations. Large and medium-sized enterprises and content owners that want to encode and distribute their video and audio content can do so either from their own production capabilities and network servers or through third-party service providers. Our services and applications provide a comprehensive solution through a single outsourced solution. Our solutions reduce complexity and allow our customers to avoid the development and ongoing maintenance costs of establishing internal capabilities. Our end-to-end services address a series of highly complex steps required to deploy digital media effectively and reliably to large audiences. We deliver high quality and reliable services at a lower cost than the development and maintenance of comparable internal solutions, enabling our customers to leverage our existing and evolving expertise.

	•	Transferable content license rights. We have obtained copyright licenses for various offerings within our digital music services which are transferable to our customers. We can therefore enable our customers to avoid the cost and time required to negotiate and obtain such licenses for themselves. We have developed relationships and signed content licensing agreements with all five of the major record labels: UMG Recordings, Inc., Sony Music Entertainment, Inc., Warner Music Group, Inc., EMI Recorded Music Holdings, Inc. and BMG Music, and hundreds of independent record labels, and we continue to develop working relationships with other music companies.

	•	Comprehensive digital media services to address the marketing and entertainment markets and enterprise communication. Customers in a broad range of industries are beginning to deploy digital


		media to communicate, market products, and distribute media & entertainment. We support the online marketing initiatives of our customers through our digital media services including our leading music samples services, online radio services, advertisement insertion solutions, and music download services. In addition, we provide outsourced services to support the management and distribution of our customers’ digital media catalogs, including scalable encoding and delivery services. Our proprietary suite of webcasting and web conferencing applications and services, coupled with our scalable network and production infrastructure technologies, provide a simple, cost-effective method for companies to communicate online with audiences of any size. Using our services, enterprises can offer their target audiences access to webcasts of a variety of corporate events such as product launches, investor earnings calls, conferences and distance learning seminars.

	•	Scalable systems and network infrastructure provide significant capacity and reliability. Corporations and content owners may encounter capacity and technological limitations if they attempt to deliver digital media to large numbers of end-users using in-house production capabilities and network servers. Our solution is highly scalable, allowing us to process a large number of simultaneous audio or video events and to seamlessly add additional capacity as necessary. We have developed proprietary products and services based upon an automated and distributed architecture of encoding, conversion and media enhancement systems. We have one of the most extensive signal ingress capacities in the industry that allows us to acquire hundreds of audio and video signals simultaneously. Additionally, we can handle a wide range of other traditional and legacy media formats. The content is then encoded by hundreds of distributed video/audio encoding servers. The content can be delivered back to customers in raw digital formats through a variety of methods, or hosted and served by our proprietary cell-based streaming network architecture. Our facility’s design is modular and scalable to accommodate growth and changes in technology.

	•	High degree of flexibility enables tailored customer solutions. Because our customers require flexibility in the formats and manner that their digital media is distributed, as well as the manner in which their content is captured, we offer a wide range of media ingest and capture methods and support a wide range of digital media formats and other third party technologies. In addition, our hosting services and proprietary applications provide additional support to customers, enabling them to access advanced reporting and management tools and offer value-added services such as digital rights management and ad insertion to enable a variety of business models and strategies for our customers.

Our comprehensive digital media products and services include private-branded digital music stores, such as our Digital MusicStore^TM and iRadio Service^TM, digital music encoding, metadata licensing, advanced fingerprint database generation, hosted music sample services, hosted music download services, including digital rights management license clearing, online radio solutions and rich media advertisement insertion. The target customers for our digital media services include traditional and Internet-based retailers, media & entertainment companies, including media portals, broadcasters and the major record labels.

We also provide enhanced enterprise communication services, which include highly scalable, live and on-demand audio and video webcasting services supported by proprietary applications such as synchronized streaming slide presentation capabilities. Using our services, enterprises can offer small and large audiences access to webcasts of a variety of corporate events, such as product launches, investor earnings calls, conferences and distance learning seminars. Our web conferencing service enables companies to easily facilitate small online slide presentation meetings. The target customers for these solutions include medium and large-sized enterprises across a range of industries.

Our digital media solutions are offered through three tiers of service — application services, hosting and streaming services and encoding services and customers may choose any combination of these tiers of service. Our services are priced based on several criteria, including the extent and volume of infrastructure usage, particularly of network and storage; the means used to capture the content; the applications used; and the extent of additional value-added services provided.

We have built an application layer of proprietary products comprising end-to-end solutions. These applications are deployed on an application services provider (ASP) basis where the software runs on equipment managed and monitored by us. Our customers have flexibility and options to choose their individual level of customization or integration.

The Loudeye Digital MusicStore^TM provides the components necessary to enable a partner to create, promote and operate a superior digital music experience under its own brand name. Digital MusicStore will permit our partners to give their customers the ability to search, sample, solicit recommendations, manage, purchase and download legally CD-quality music tracks, albums and ring tunes to devices of their choice. Our Digital MusicStore integrates with a partner’s existing technology and infrastructure, offering either a complete storefront or expanding an existing presence. Key features of Digital MusicStore include:


	•	Web-based, private-branded music discovery client;

	•	Digital music hosting and download delivery;

	•	Digital rights management using Windows Media DRM;

	•	Usage reporting;

	•	Digital music royalty settlement;

	•	Streaming music samples and cover art;

	•	Music metadata; and

	•	Rich media ring tunes (for wireless applications).

The Loudeye iRadio Service^TM offers 100 channels of CD-quality streaming music delivered through a partner’s own privately branded player interface. It is capable of supporting delivery to a range of consumer music devices and appliances. The iRadio service can be deployed online for web-based retailers and portals, as well as offline for consumer electronic devices and appliances, digital home entertainment systems and other digital broadcasting outlets. Key features in the first release of iRadio include:


	•	24x7 music programming in compliance with the Digital Millennium Copyright Act;

	•	Web-based, private-branded music discovery client;

	•	100 channels of pre-programmed or customizable (by artist or genre) CD quality music; and

	•	Support for delivery to PCs and consumer electronics products.

We have additional proprietary applications that support a variety of business models and customer strategies. Our advertisement insertion solutions support dynamic content insertion that enable digital media advertising and marketing campaigns and our digital download platform includes rights management clearing. These applications enable customers to promote, manage, and monetize their digital media offerings.

Our hosting services allow digital media content to be packaged and converted into a variety of streaming media and digital download formats via our encoding services. We can also host this content in a central media repository.

We provide comprehensive webcasting solutions that enable enterprises to broadcast audio, video and visually oriented communications over the Internet. Our proprietary suite of webcast applications and services, coupled with our scalable network and production infrastructure technologies, provide a simple, cost-effective way for corporations to communicate online with large groups. We provide our services to large and medium sized enterprises as well as traditional media and broadcast companies.

We provide our customers with the infrastructure and service components necessary to deploy a streaming media offering as part of an Internet or intranet presence. Our enterprise clients use this offering to augment and support their existing business initiatives. We also provide streaming services for audio and video conferencing, distance learning, corporate or departmental meetings, presentations, conferences, roadshows and other investor relations offerings. Our webcasting services include both live events and on-demand streaming services.

Our web broadcasting capabilities allow customers to extend significantly the reach of traditional conferencing services or live events to enable one-to-many communications to be broadcast conveniently and economically to the widest possible audience. Companies are able to leverage the creation of content over a mass medium, reduce communication costs, maintain brand identity through a controlled user experience, and in many instances, generate additional revenue streams from the distribution of content to previously untapped audiences and markets.

We also provide customers with access to our samples services, which is a hosted end-to-end streaming service that delivers high quality music samples to customers in the online music business. Our music samples are streaming files containing selected portions or “samples” of a full music track. For all musical genres except classical and jazz, the music samples are generally 30 seconds in duration. For classical and jazz music tracks, the music samples are typically 60 seconds in duration. Music samples are used by customers for many purposes, including increasing online music sales, user traffic and customer retention.

To transmit digital media over the Internet and other advanced digital distribution networks, the uncompressed digitized content needs to be encoded into compressed, Internet-compatible digital formats. Encoding large volumes of content in an efficient manner is a complex process that requires highly scalable production technology. In addition, it is at the encoding stage that metadata is at times merged with the encoded file from a centralized database, which adds to the complexity of the encoding process. Various digital encoding formats and technologies continue to evolve and often conflict with one another. As a result, content owners often desire to create multiple versions of their digital content in multiple formats to support their distribution strategies. Additionally, the encoding process for a particular item (or for an entire library) may need to be repeated over time to keep pace with the introduction of new formats and the changing preferences of online users.

Our innovative services address these challenges via the outsourced management and encoding of our customers’ content. Typical digital media service projects can involve conversion of tens of thousands of music titles or thousands of hours of video content into encoded content of multiple formats and bit rates. Once content has been encoded, we can provide watermarking, encryption and other digital rights management technologies to enable our customers to protect and manage their content. A file created from the source materials containing specified database and attribute data relating to a particular piece of content can then be linked to that content as part of the overall encoding process. We also provide project analysis, as well as consulting, integration and custom application development.

Our digital music archive includes nearly 4.5 million full song tracks and includes metadata associated with the music files. In 2003, we delivered approximately 14.0 million digital music files and served nearly a billion song samples to consumers through major online music retailers and websites, such as America Online, Amazon.com, barnesandnoble.com, CDNow, Yahoo!, House of Blues, Windowsmedia.com and MSN. We offer the service primarily under long-term contracts.

In March 2004 we acquired Overpeer, Inc., a provider of digital media anti-piracy, data mining and promotional solutions on peer-to-peer (p2p) networks worldwide. Overpeer holds multiple patents in Asia and Europe, and has three patents pending in the U.S. for its proprietary technology, systems and software.

With the inclusion of Overpeer’s technologies into our comprehensive package of digital media solutions, we now provide our content owners with the following additional benefits:


	•	Powerful data mining and analytical tools and comprehensive information on digital music, video, game and software usage;

	•	Potent anti-piracy solutions to disrupt the illegal sharing of copyrighted material; and

	•	Targeted promotional services for companies to capitalize on previously untapped revenue streams across content sharing networks.

We sell our services through a combination of direct and indirect sales, with all channels and regional offices managed by a single sales organization. Our digital media services direct sales force markets our services to customers in a diverse range of markets, such as media & entertainment, retail, computer software, business services, financial services, pharmaceutical and manufacturing. We currently have a sales presence in Seattle, Washington and Los Angeles, California. Sales employees are compensated with a salary and commission based upon business with existing and new clients.

Our indirect sales group targets resellers who market to their established customer bases. We private label or co-brand our services for these partners depending on their requirements. We also partner with companies to resell our services through their websites, or through co-branded websites, or to include our services with their product offerings. We offer our reseller partners our services at a discount to our traditional retail pricing model and our referral partners receive a percentage of revenue pursuant to terms of the agreements.

Our marketing objectives are to build awareness for our brand among key market segments and to maintain a position as a leading full-service digital media service provider. To support these objectives, we utilize public relations, trade shows, advertising and direct marketing.

As of February 15, 2004, we had nine full-time employees in our sales and marketing organization, all of whom were located in the United States.

We manage all aspects of our digital media products including encoding, content preparation, digital rights management, license verification, reporting and royalty payments, hosting and distribution to the Internet, and digital music licensing from our “Grand Central” media operations center in Seattle, Washington.


	•	Digital music storage and access. Our proprietary systems and technologies enable the scalable archiving, retrieval and processing of large inventories of digital music. Digitized content is stored on our high capacity storage array systems and accessed through our proprietary, automated web-based access tools to search, provision and manage such content. Once captured and digitized in uncompressed format, content can be stored on our digital music archive system for later uses.

	•	Music processing services. We process music to customer specifications using our proprietary production systems. The production system is an automated, scalable combination of hardware and software consisting of advanced digital archive technology, proprietary file management systems, customized user interfaces and a highly distributed encoding system. Metadata is also used to track and report information required by many licensing arrangements with copyright holders.

We encode customer content in a parallel process and we have developed proprietary processes which allow us to encode audio and video content across several streaming media and download formats simultaneously. Our parallel process supports multiple codecs and technologies from third party developers such as Microsoft, RealNetworks, Audible Magic and others. This format flexibility enables customers to support a variety of digital music strategies. Because these formats and platforms

continue to evolve, we believe that the benefits of our multiple platform approach will remain applicable as new technologies emerge. Encoded files are reviewed for quality and then delivered to the customer as a collection of files or routed automatically to our hosting services for direct delivery as a hosted stream or available download, over the Internet and through the Loudeye Digital MusicStore.


	•	Digital music distribution. Digitally formatted content can be delivered to customers through a range of methods, from secured file delivery to a fully hosted streaming or download service published and streamed through our network infrastructure and the Loudeye Digital MusicStore.

We have invested in a network distribution infrastructure built around a scalable, redundant, “cell-based” network architecture. Depending on the music format and the bit rate, we are able to stream and host simultaneously thousands of outbound streams and music downloads. We can expand our capacity by adding additional servers within cells. This network is backed by high-capacity online storage that uses mirroring and other techniques to increase redundancy and scalability. Our hosting and distribution operation includes hundreds of servers and supports load balancing and other network management techniques that have been optimized for digital music downloads. We can also serve content across networks of other providers if we exceed our capacity or if we are requested to do so.

Our operations and production personnel are organized into functional teams which include project management, quality control, logistics operations, data measurement, audio capture and encoding, video capture and encoding, and production systems engineering support. In addition, we have a team that supports our network and hosting services. As of February 15, 2004 we had six full-time employees in engineering, network services and information technology support and 32 full-time employees in our production and research and development areas.

The target customers for our digital music products include major consumer electronics companies, traditional and Internet-based retailers, media & entertainment companies, wireless carriers and branded consumer products companies. In 2003, we served over 500 customers. Our customers include Amazon.com, America Online, Apple Computer, BuyMusic, The Coca-Cola Company, Digital Music Initiative, Dreamworks Records, EMI Recorded Music Holdings, Microsoft Corporation, Siebel Systems, Sirius Corporation and Yahoo!. In 2003, Microsoft Corporation and The Coca-Cola Company accounted for 5% and 11% of our revenues. In 2002, Microsoft Corporation and The Coca-Cola Company accounted for 10% and 13% of our revenues. In 2001, The Coca-Cola Company accounted for 17% of our revenues.

The market for digital media solutions is rapidly evolving and intensely competitive. We expect competition to persist and intensify in the future. Although we do not currently compete against any one entity with respect to all aspects of our services, we do compete with various companies and technologies in regards to specific elements of our services. In addition, we face competition from in-house solutions.

For our digital music solutions, we compete with several companies providing similar levels of outsourced digital music services including Roxio (through its Napster service), Liquid Digital, MusicNet, and MusicNow. For encoding services, we compete with companies including Muze and All Music Guide. In addition, well-capitalized, diversified digital media technology companies such as Microsoft, Apple and Real Networks may compete with us in the future with their own services or applications. In certain markets, such as music distribution, the major record labels have acquired and invested in digital music services and technologies that could compete with our digital music services. Traditional radio broadcasters could also develop online music and radio services which could compete with our solutions.

A significant source of competition includes our potential customers who choose to invest in the resources and equipment to digitally manage, encode and/or host and deliver their media themselves on an in-house basis. In-house service is expected to remain a significant competitor to our services, although we believe that as digital music strategies expand, and the scale of infrastructure and applications required to support business


	•	Ability to offer a private branded solution;

	•	Service functionality;

	•	Service quality;

	•	Service performance;

	•	Ease of use of products and services;

	•	Reliability of services,

	•	Scalability of services;

	•	Security of services;

	•	Breadth of content;

	•	Customer service and support; and

	•	Pricing.

Although we believe that our products and services compete favorably with respect to each of these factors, the market for our products and services is new and evolving rapidly. We may not compete successfully against current or future competitors, many of which have substantially more capital, longer operating histories, greater brand recognition, larger customer bases and significantly greater financial, technical and marketing resources than we do. These competitors may also engage in more extensive development of their technologies, adopt more aggressive pricing policies or establish more comprehensive marketing and advertising campaigns than we can. Our competitors may develop products and service offerings that are more sophisticated than our own. For these and other reasons, our competitors’ products and services may achieve greater acceptance in the marketplace than our own, limiting our ability to gain market share and customer loyalty and to generate sufficient revenues to achieve a profitable level of operations.

We rely primarily on a combination of copyrights, trademarks, trade secret laws and contractual obligations with employees and third parties to protect our proprietary rights. We have one issued patent, and we have filed eight U.S. patent applications and twelve international patent applications that claim priority to six previously filed provisional applications. Our Overpeer subsidiary, acquired in March 2004, holds multiple patents in Asia and Europe, and has four patents pending in the U.S. for their proprietary technology, systems and software. Despite our efforts to protect our proprietary rights, unauthorized parties may copy aspects of our products and obtain and use information that we regard as proprietary. In addition, other parties may breach confidentiality agreements or other protective contracts we have entered into and we may not be able to enforce our rights in the event of these breaches. Furthermore, we expect that we will increase our international operations in the future and the laws of many foreign countries do not protect our intellectual property rights to the same extent as the laws of the United States.

The digital music industry is characterized by the existence of a large number of patents, licenses and frequent litigation based on allegations of patent infringement and the violation of other intellectual property rights. As discussed above, obtaining the requisite licenses can be difficult, as separate licenses often must be obtained from a variety of rights holders for distinct activities related to the delivery of digital music, such as reproduction and performance, which requires separate licensing arrangements. In addition, these copyrights may be held by different parties, such as publishers, artists and record labels. The music industry in the United States is generally regarded as highly litigious. As a result, in the future we may be engaged in litigation with

Although we attempt to avoid infringing known proprietary rights of third parties in our product development efforts, we may be subject to legal proceedings and claims for alleged infringement by us or our licensees of third party proprietary rights, such as patents, trademarks or copyrights, by us or our licensees, from time to time in the ordinary course of business. Any claims relating to the infringement of third party proprietary rights, even if not meritorious, could result in costly litigation, divert management’s attention and resources or require us to enter into royalty or license agreements which are not advantageous to us. In addition, parties making these claims may be able to obtain an injunction, which could prevent us from providing our products or services in the United States or abroad. Any of these results could harm our business. We may increasingly be subject to infringement claims if the number of products and competitors in our industry grow and the functions of products overlap.

We are not currently subject to direct regulation by any governmental agency, other than laws and regulations generally applicable to businesses, although certain U.S. export controls and import controls of other countries, including controls on the use of encryption technologies, may apply to our products. Few existing laws or regulations specifically apply to the Internet. However, it is likely that a number of laws and regulations may be adopted in the United States and other countries with respect to the Internet. These laws may relate to areas such as content issues (such as obscenity, indecency and defamation), encryption concerns, including export contents, copyright and other intellectual property rights, caching of content by server products, electronic authentication or “digital signatures,” personal privacy, advertising, taxation, electronic commerce liability, email, network and information security and the convergence of traditional communication services with Internet communications, including the future availability of broadband transmission capability. Other countries and political organizations may also impose regulations, some of which may conflict with U.S. regulation.

The adoption of such laws or regulations, and the uncertainties associated with their validity and enforcement, may affect our ability to provide our products and services, may increase the costs associated with our products and services and may affect the growth of the Internet generally. These laws or regulations may therefore harm our business.

We do not know with certainty how existing laws governing issues such as property ownership, copyright and other intellectual property issues, taxation, illegal or obscene content, retransmission of media and personal privacy and data protection apply to the Internet or to the distribution of music over the Internet. The vast majority of such laws were adopted before the advent of the Internet and related technologies and do not address the unique issues associated with the Internet and related technologies. Most of the laws that relate to the Internet have not yet been interpreted. Changes to or the interpretation of these laws could:


	•	Limit the growth of the Internet;

	•	Create uncertainty in the marketplace that could reduce demand for our products and services;

	•	Increase our cost of doing business;

	•	Expose us to significant liabilities associated with content distributed or accessed through our products or services; or

	•	Lead to increased product and applications development costs, or otherwise harm our business.

Specifically, with respect to one aspect of copyright law, on October 28, 1998, the Digital Millennium Copyright Act, or DMCA, was enacted. The DMCA includes statutory licenses for the performance of sound recordings and for the making of recordings to facilitate transmissions. Under these statutory licenses, depending on our future business activities, we and our customers may be required to pay licensing fees for digital sound recordings we deliver or our customers provide on their web site and through retransmissions of radio broadcasts and/or other audio content. The DMCA does not specify the rate and terms of such licenses,

which will be determined either through voluntary inter-industry negotiations or arbitration. Moreover, with respect to digital publishing, sound recording and other music licenses not directly covered by the DMCA, various parties interested in distribution of digital music plan to engage in a proceeding before a tribunal of the United States Copyright Office along with the RIAA during 2004 to determine what, if any, licensee fees should be paid to various rights holders.

Depending on the rates and terms adopted for the statutory licenses, our business could be harmed both by increasing our own cost of doing business, and by increasing the cost of doing business for our customers.

As of February 15, 2004, we had a total of 56 full-time employees, of which 19 were in production, 13 were in research and development, 9 were in sales and marketing, 6 were in engineering, network services and information technology support, and 9 were in general and administration. None of our employees are subject to a collective bargaining agreement. We consider our relations with our employees to be good.

Following is a summary of our properties and related lease obligations. We do not own any real property.


	*1130 Rainier Avenue, Seattle, WA.* Our principal operations are conducted here. We lease 41,763 square feet of this facility. The lease expires on December 31, 2005 and annual base rent is approximately $823,000 for 2004 and $921,000 for 2005.

	*1601 Cloverfield, Santa Monica, CA.* We lease offices for our sales staff in a shared office space arrangement at this facility. The annual rent is approximately $48,000 with a lease term expiring November 30, 2004.

	*414 Olive Way, Seattle, WA.* We have a lease obligation for 39,098 square feet of space at the Times Square Building. The current annual rent is $1.1 million with the lease term expiring May 31, 2005. We have surrendered the leased premises and the landlord has filed suit against us for breach of the lease. See Item 3 — “Legal Proceedings” for additional information on this suit. An estimate of the lease termination settlement and related costs is included in accrued special charges at December 31, 2003.

	*1424 Second Street, Santa Monica, CA.* We lease approximately 4,632 square feet at an annual base rent of $200,288. We sublease the entire premises to a tenant at the full base rent amount. The term of the lease and sublease expires on December 31, 2004.

	*110 East 55th Street, New York, NY.* As a result of our acquisition of Overpeer, Inc. in March 2004, we lease approximately 1,500 square feet at an annual base rent of $60,000. The lease expires on April 30, 2004.

Between July 26, 2001 and August 30, 2001, four substantially similar class action complaints were filed in the United States District Court for the Southern District of New York against us and certain of our former officers and directors, as well as against certain underwriters who handled our March 15, 2000 initial public offering of common stock. The various complaints were purportedly filed on behalf of a class of persons who purchased our common stock during the time period beginning on March 15, 2000 and ending on December 6, 2000. The complaints together allege violations of the Securities Act of 1933 and the Securities Exchange Act of 1934, primarily based on the allegation that there was undisclosed compensation received by our underwriters in connection with our initial public offering and the allegation that the underwriters entered into undisclosed arrangements with some investors that were designed to distort and/or inflate the market price for our common stock in the aftermarket following the initial public offering. These actions have all been consolidated before the same judge for pretrial purposes. No specific amount of damages has been claimed. We and the individual defendants have demanded to be indemnified by the underwriter defendants pursuant to the underwriting agreement entered into at the time of the initial public offering. Presently, all claims against

the former officers have been withdrawn without prejudice. We, along with the many other issuer defendants, moved to dismiss the claims in the complaint. By decision dated February 19, 2003 the court denied our motion. A proposal has been made for the settlement and release of claims against the issuer defendants. The settlement is subject to a number of conditions, including approval of other proposed settling parties and the court. If the settlement does not occur, and litigation against us continues, we believe we have meritorious defenses and we intend to defend the case vigorously.

On February 3, 2003, we entered into an agreement with Regent Pacific Management Corporation pursuant to which Regent Pacific would provide management services. The agreement was for a term of 26 weeks, with an option to renegotiate certain terms of the agreement after 13 weeks, and was terminable by either party under certain circumstances. Under the agreement, we paid certain fees to Regent Pacific. In addition, Regent Pacific was to receive stock options to purchase up to 4,000,000 shares of our common stock based on Regent Pacific’s length of service. These options were to be granted at various times throughout their engagement at exercise prices based on the closing market price on each grant date. On March 7, 2003, Regent Pacific resigned from the engagement. On July 25, 2003, Regent Pacific filed suit against us in the United States District Court for the Northern District of California for breach of the agreement. In this complaint, Regent Pacific is seeking unspecified damages and specific performance of our alleged obligation to grant the stock options due them under the contract. We believe that we have meritorious defenses to the claims made in the suit, intend to defend vigorously this suit, and intend to bring certain counterclaims against Regent Pacific.

On or about January 8, 2003 Dominion Venture Finance, L.L.C. commenced an action against us and other defendants in the Superior Court of the State of California, County of San Francisco. In its complaint, plaintiff alleged that pursuant to a loan and security agreement and a master lease agreement (the liabilities for which agreement, plaintiff alleged, were acquired by us when we merged with an entity known as DiscoverMusic.com, Inc.), we failed to make certain required payments to plaintiff. On August 5, 2003, we agreed to settle all claims under the suit for a cash payment of approximately $228,000, which represented the outstanding principal and interest under the agreements.

In April 2003, the landlord of our unoccupied facility at 414 Olive Way, Seattle, WA filed suit against us in the Superior Court of Washington, King County, for breach of our lease and is seeking damages of $2.0 million. In January 2004, the Court entered a judgment in favor of the plaintiff for rents due through January 2004 of $438,000, which we appealed immediately. The Court reserved the other issues in the suit, including mitigation, interest and attorney’s fees, for trial. We believe that we have meritorious defenses to the claims made in the suit and intend to defend this suit vigorously and may also bring certain counterclaims against the landlord. If we do not prevail on our appeal or our counterclaims, we may be held liable for additional amounts beyond the amount of the judgment. As of December 31, 2003, we have recorded in accrued special charges an estimate of the amount we may ultimately be required to pay with respect to this matter.

We become involved from time to time in various other claims and lawsuits incidental to the ordinary course of our operations, including such matters as contract and lease disputes and complaints alleging employment discrimination. We believe that it is likely that the outcome of any such pending claims or proceedings individually or in the aggregate, will not have a material adverse effect upon our business or financial condition, results of operations, or cash flows.

The following table sets forth for the periods indicated the high and low closing prices for our common stock. These quotations represent prices between dealers and do not include retail markups, markdowns or commissions and may not represent actual transactions.

As of February 15, 2004, there were 476 holders of record of our common stock. Most shares of our common stock are held by brokers and other institutions on behalf of shareholders.

We have not paid any cash dividends to date and do not intend to pay any cash dividends in the foreseeable future.

As discussed in Note 7 to the consolidated financial statements, in November 2002, we entered into a merger agreement pursuant to which we acquired TT Holding Corp., also known as Streampipe. Pursuant to the merger agreement, we issued the former stockholders of Streampipe shares of our common stock and unsecured promissory notes bearing interest at 5 percent per annum, in an aggregate original principal amount of $1,059,435. The notes were redeemable by us in the form of common stock if we met certain conditions, including that we were not in default under the notes and our common stock was listed on a principal exchange or on NASDAQ. In December 2003, we redeemed the notes at a redemption price of $1.76 per share by issuing 635,386 shares of common stock. The number of shares was calculated by dividing the principal and all accrued interest due under the notes as of the date of redemption by the average of the last sale price of the common shares for the 30 trading days preceding January 1, 2004. The shares issued upon redemption of the notes were issued in reliance upon the exemption contained in Section 3(a)(9) of the Securities Act, since the redemption involved the exchange of securities with our existing securities holders, and no commission or other remuneration was paid or given directly or indirectly.

Of the shares of common stock issued upon redemption of the notes, 624,447 are registered for resale under the Securities Act on a registration statement on Form S-3 declared effective by the SEC on October 14, 2003. The remaining 10,939 shares issued upon redemption of the notes have not been registered under the Securities Act and unless so registered, may not be sold in the United States, except pursuant to an applicable exemption from the registration requirements of the Securities Act and applicable state securities laws.

The following selected consolidated financial data should be read in conjunction with “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our financial statements and the notes thereto included elsewhere in this Form 10-K. The selected Consolidated Statements of Operations Data for the years ended December 31, 2003, 2002 and 2001 and Balance Sheet Data as of December 31,

2003 and 2002 have been derived from our audited financial statements appearing elsewhere in this Form 10-K. The Selected Consolidated Statements of Operations Data for the years ended December 31, 2000 and 1999 and selected Consolidated Balance Sheet Data as of December 31, 2001, 2000 and 1999 have been derived from our audited consolidated financial statements that are not included in the Form 10-K. The selected Consolidated Balance Sheet Data and selected Consolidated Statements of Operations Data for each of the years ended December 31, 2001, 2000 and 1999 have been derived from consolidated financial statements that were audited by independent auditors who have ceased operations. The historical results are not necessarily indicative of results to be expected for any future period. All amounts are presented in thousands except for per share amounts.


(1)	See Note 4 of Notes to Consolidated Financial Statements for an explanation of the special charges.

(2)	See Note 18 of Notes to Consolidated Financial Statements for an explanation of the determination of the number of weighted average shares used to compute net loss per share amounts

The following discussion and analysis should be read in conjunction with the Consolidated Financials Statements and Notes thereto included elsewhere in this Annual Report on Form 10-K. This discussion contains certain forward-looking statements that involve risks and uncertainties, such as statements of our plans, objectives, expectations and intentions. Our actual results could differ materially from those discussed here. The cautionary statements made in the Annual Report on Form 10-K should be read as being applicable to all forward-looking statements wherever they appear. Factors that could contribute to such differences include those discussed in “Risk Factors,” as well as those discussed elsewhere herein. We undertake no obligation to publicly release the result of any revision to these forward-looking statements that may be required to reflect events or circumstances after the date hereof or to reflect the occurrence of unanticipated events.

The following is an overview of our operating results for the year ended December 31, 2003. A more detailed discussion of our operating results, comparing our operating results for the years ended December 31, 2003, 2002 and 2001, is included below under the heading “Results of Operations.”

2003 was a year of significant change for Loudeye. In the first quarter, we experienced changes in our senior management and altered our business strategy to focus more on digital media products and services, with less emphasis on enterprise communications and media restoration services. By the end of 2003, revenues from digital media products and services had not yet increased sufficiently to offset the decline in enterprise communication and media restoration services that resulted from this transition. As a result, revenues decreased from $12.7 million in 2002 to $11.9 million in 2003.

In addition to our change in business strategy, we continued to execute those cost reduction initiatives implemented in 2002, and implemented a number of new cost reduction initiatives for 2003. These included, among other things, reductions in our work force and the termination and renegotiation of several operating leases. These actions contributed to substantial decreases in expenses. For example, cost of goods sold decreased from $13.3 million in 2002 to $7.2 million in 2003 and total operating expenses decreased from $31.7 million in 2002 to $23.8 million in 2003. We also recorded special charges related to corporate restructurings, facilities consolidations and the impairment of goodwill and tangible and intangible assets of $8.7 million in 2003 and $6.8 million in 2002. These initiatives are described in more detail below under the caption Special Charges and in Note 4 to our consolidated financial statements. We believe that as a result of these actions and additional operational and management realignment actions taken in 2003, gross margins and operating margins should improve for 2004. However, we may continue to incur net losses for the foreseeable future.

As a result of the factors described above, our net loss decreased from $31.2 million in 2002 to $19.2 million in 2003. We also strengthened our capital resources by completing a private placement financing transaction in August 2003 that resulted in net proceeds of $11.4 million. In February 2004, we completed an additional private placement financing transaction that resulted in net proceeds of approximately $18.9 million.

We have recently shifted our strategic focus and marketing resources more toward our new Tier 3 application level services. See “Business — Products and Services — Application Services,” above, and “The Loudeye Solution,” below. Our business prospects must therefore be considered in light of the risks and uncertainties often encountered by early-stage companies in the Internet-related products and services market. We may not be successful in addressing these risks and uncertainties.

The media industry is in the midst of a significant transition. Business models are changing to incorporate the migration of media content from analog to digital and from physical packaging and distribution to electronic distribution. The changing business models reflect the increase in consumer adoption of broadband connectivity and the introduction of new consumer electronics devices, such as personal MP3 players, and the incorporation of new technologies and features in traditional devices. Along with the new consumer electronics devices, media formats and technologies have evolved at a rapid pace, and standards have not been established by the industry or marketplace. Finally, the emergence of peer-to-peer services and illegitimate file sharing, combined with the increased consumer adoption of digital media, has contributed to significant declines in physical CD sales in the music sector. As a result, content owners are beginning to embrace the legitimate digital distribution channel. To date, these trends have impacted primarily the music sector of the media industry, but we anticipate that the video sector will experience many of the same trends in the future.

Digital media distribution represents a significant challenge for companies that want to enter or stay competitive in the space. Problems to overcome include the following:


	•	Obtain rights from content owners;

	•	Obtain access to digital masters of the content;

	•	Supporting multiple competing digital media formats and codecs to meet the needs of competing media players;

	•	Supporting multiple bit rates and quality levels for different Internet connection speeds;

	•	Supporting multiple content protection technologies, including digital rights management (DRM) platforms;

	•	Complex reporting and auditing requirements of content owners; and

	•	Significant upfront investment to develop a comprehensive solution and continued investment to keep pace with technology changes and content additions.

During 2003, we provided our services via two primary business segments, Digital Media Services and Media Restoration Services. In January 2004, we sold substantially all of the assets of our media restoration services subsidiary, Vidipax, Inc. to a company controlled by the general manager of that subsidiary. While we will have ongoing rights to co-market and resell media restoration services for two years after the sale, we anticipate media restoration services will represent a significantly smaller portion of our operations for 2004 and beyond.

Digital Media Services. Our existing products and services, combined with those we are currently developing, represent and end-to-end solution for our customers. We provide a full service business-to-business digital media solution that allows our customers to deploy, rapidly and cost effectively, their own privately branded digital media service. Our solution is the culmination of our significant investments in our systems and infrastructure. Some of the key features of our solution include:


	•	Web enabled architecture;

	•	Archive of 4.5 million music tracks in uncompressed, digital master format;

	•	Highly scalable and reliable operations;

	•	Support for multiple media players, digital media formats and codecs;

	•	Support for multiple bit rates; and

	•	Extensive, transferable content rights and experience working with major and independent record labels.

Although our customers may choose any combination of services we offer, our management views our solutions in three tiers of service. These tiers are summarized as follows:

Tier 1:

These services consist primarily of content management, encoding and fulfillment, and metadata services. Revenues from these services tend to consist of repeat, rather than recurring, business. Tier 1 services currently account for a substantial portion of our digital media services revenue. However, over the next several years we expect the proportion of revenues from Tier 1 services to decline relative to revenues from Tier 2 and Tier 3 services.


	Sales of our Tier 1 digital media services are generally under nonrefundable time and materials or per unit contracts. Under these contracts, we recognize revenues as services are rendered and we have no continuing involvement in the goods and services delivered, which generally is the date the finished media is shipped to the customer.

Tier 2:

These services consist primarily of hosted media and delivery as well as rights administration and settlement. Revenues from these services tend to consist of recurring business and may include some scalable economics. Revenues for Tier 2 services may include monthly minimum fees, setup and license fees, professional services fees, ongoing maintenance fees and a share in our customers’ revenues.


	We sell our music samples service in application service provider (ASP) arrangements. We are required to host the applications and the customer does not have the ability to have the application hosted by another entity without additional charge. Billings are generally made based upon volumes of data delivered or minutes of content streamed, and revenue is recognized as the services are delivered.

	Our enhanced enterprise communication services include highly scalable, live and on-demand audio and video webcasting services, supported by proprietary applications such as synchronized streaming slide presentation capabilities. Revenue from live webcasts is recognized when the webcasts are delivered. Revenue from on-demand webcasts is recognized over the period of time they are made available.

Tier 3:

These services consist primarily of custom application development, ASP services, commerce engine, analytics and full operational outsourcing. Revenues from Tier 3 services will consist of recurring business and may include setup and licensing fees, professional services fees, ongoing maintenance fees and a share in our customers’ revenues. We expect to launch our first Tier 3 services in 2004 and expect that over the next several years Tier 3 services will account for the majority of our revenues.

During 2004, our primary marketing focus will be on our Tier 3 turnkey, private labeled end-to-end digital delivery solutions, with comparatively less marketing emphasis on the Tier 1 and 2 components of our solution, particularly enterprise webcasting.

Media Restoration Services. Our media restoration services segment has performed services to restore and migrate legacy media archives to current media formats. We recognized revenues as services were rendered and we had no continuing involvement in the goods and services delivered, which generally was the date the finished media was shipped to the customer. As described in Note 5 to the consolidated financial statements, in January 2004 we sold substantially all of the assets of our media restoration services business pursuant to an agreement dated October 31, 2003. Accordingly, the assets and certain liabilities of our media restoration services business have been classified as held for sale at December 31, 2003 and 2002.

As described below under Special Charges, for the Year Ended December 31, 2003, we experienced significant changes in our management during the first quarter of fiscal 2003. In March 2003, we announced our intention to restructure to reduce costs and to focus our efforts on digital media services where we anticipated the best customer growth and higher gross margins. As part of this strategic restructuring, we announced a reduction in staff affecting approximately 35% of our workforce. This reduction in staff affected employees in all departments, but primarily located at our headquarters in Seattle, Washington.


	•	Anthony J. Bay, Chairman and Chief Strategy Officer: Formerly Corporate Vice President and General Manager of Microsoft’s Digital Media Division, Mr. Bay previously managed MSN and eCommerce development for Microsoft. Prior to joining Microsoft, Mr. Bay served 8 years with Apple Computer in the U.S. and Europe.

	•	Jeffrey M. Cavins, President & Chief Executive Officer: Formerly Senior Vice President of Exodus/ Cable & Wireless where he was responsible for North American sales, professional services and operations. Mr. Cavins also served as CEO of CSI Digital, an advanced technology services firm serving the entertainment industry.

	•	John H. Martin, Senior Vice President, Technology and Development: Formerly general manager of Microsoft’s Windows Media Services, Mr. Martin led the development efforts of all Internet-based services of the Windows Media Player as well as windowsmedia.com, the highest trafficked digital media site on the Internet. Mr. Martin pioneered and operated microsoft.com in the mid 1990’s. Prior to joining Microsoft, Mr. Martin was an engineer at NASA working on the early Internet backbone.

	•	William Fasig, Executive Vice President of Business Development, Sales and Marketing: Formerly senior vice president of worldwide marketing and corporate affairs for VeriSign, Inc., Mr. Fasig was responsible for the development, implementation, and management of worldwide marketing strategies. Before joining VeriSign, Mr. Fasig served as vice president of corporate communications for Compaq, and was chairman and managing director of the global technology practice at Young & Rubicam/ Burson-Marsteller. Prior to that, he held several senior management roles during his 9-year tenure at Apple Computer and served as a policy analyst for the U.S. Department of Defense.

	•	Larry Madden, Executive Vice President and Chief Financial Officer: Mr. Madden was formerly executive vice president, chief financial officer and chief administrative officer for Equity Marketing, Inc., a Los Angeles based provider of integrated marketing services for connecting multinational corporate brands with popular entertainment content. Prior to joining Equity Marketing, Mr. Madden was executive vice president and chief financial officer for Atomic Pop, an online music distribution and marketing venture. He also served as senior vice president and chief financial officer for the recorded music and music publishing investments of Wasserstein & Co., Inc., an investment bank. Mr. Madden also held executive financial roles at Def Jam Records and Polygram International, a leading music and entertainment company. Mr. Madden began his career at Ernst & Young, where he spent 8 years in the firm’s media & entertainment practice.

	•	Jerold J. Goade, Jr., Senior Vice President of Finance: Mr. Goade joined Loudeye in 1999 and has previously held the positions of chief financial officer, vice president of finance and controller for the Company. Mr. Goade’s prior experience includes serving as CFO of D. Garvey Corporation, an international wireless telecommunication services company, controller of Video Only, a consumer electronics retailer, and on the finance staff of KING Broadcasting, a television and radio broadcasting company in Seattle. Mr. Goade began his career in audit practice of Deloitte & Touche.

	•	Mike Dougherty, Vice President of Corporate Development: Mr. Dougherty joined Loudeye prior to its initial public offering in 2000. Mr. Dougherty was formerly a vice president in the global investment banking group of Chase H&Q, focusing on telecom and media & Internet infrastructure transactions. Prior to joining the global investment banking group, Mr. Dougherty served in Chase’s high yield group focusing on buildout and LBO financing. He began his career in Prudential Securities’s high yield and merchant banking group.

Revenues. Revenues totaled $11.9 million and $12.7 million for 2003 and 2002 and consisted of the following (in thousands):

Revenue from our digital media services segment increased in 2003 to $10.1 million from $9.5 million in 2002. This increase is due primarily to an increase in the volume of encoding and other fulfillment and related services, as well as the licensing of media player applications, offset by a decrease in webcasting revenues. Our product mix has changed significantly over the course of 2003, as we shifted marketing emphasis away from webcasting and more toward digital media services, primarily digital music solutions.

Media restoration revenues totaled $1.9 million in 2003 compared to $3.2 million in 2002. This decrease was the result of decreased revenue from a significant customer, as well as decreased customer spending on discretionary projects due to current economic conditions. As described in Note 5 to the consolidated financial statements, in January 2004 we sold substantially all of the assets of our media restoration services business pursuant to an agreement dated October 31, 2003. Accordingly, media restoration services will not be a material portion of our operations in future periods. At closing, we also entered into a co-marketing and reseller agreement with the purchaser pursuant to which we will sell, for a fee, media restoration services on behalf of the purchaser for a two-year period. The co-marketing and reseller agreement and earn-out provisions of the transaction constitute continuing involvement under FAS 144. Consequently, our media restoration business has not been reported as a discontinued operation.

Cost of Revenues. Cost of revenues decreased to $7.2 million for 2003 from $13.3 million for 2002. Cost of revenues decreased from 105.0% of revenue in 2002 to 60.3% of revenue in 2003, and consisted of the following (in thousands):

Cost of revenues include the cost of production, including personnel, an allocated portion of facilities and equipment, and other supporting functions related to the delivery of our digital media and media restoration services. Depreciation included in cost of revenues decreased to approximately $849,000 in 2003 from $3.4 million in 2002. This decrease is due primarily to impairment charges recorded in the fourth quarter of 2002 and the first quarter of 2003 for certain assets of our digital media services and media restoration services segments. These impairment charges decreased the cost basis of the assets, resulting in lower depreciation charges. For 2004, we expect that depreciation expense will increase compared to 2003 as we invest in upgrading and enhancing our digital media services infrastructure and technology. For example, in the first quarter of 2004 we invested $1.5 million to upgrade the storage and access systems for our digital music archive. The remainder of the decrease in cost of revenues is due to cost reduction initiatives, primarily reductions in our work force, implemented in the second half of 2002 and the first quarter of 2003. We expect cost of revenues to increase moderately in 2004 compared to 2003.

Operating Expenses. Our operating expenses were as follows for 2003 and 2002 (in thousands):

Research and Development. Research and development expenses totaled $1.7 million and $3.2 million in 2003 and 2002. This decrease is due to the reduction in the number of development personnel as a result of the corporate restructurings. Research and development expenses include labor and other related costs of the continued development support of our digital media.

We believe that continued investment in research and development is critical to attaining our strategic objectives. However, due to our operational restructurings and a sharper focus on opportunities which we believe will result in near term results, development headcount was reduced significantly in 2003 as compared to 2002 and, as a result, research and development expenses declined in 2003 as compared to 2002. In 2004, we expect to increase investment in the development of future digital media service offerings, including hiring additional personnel in this area. Accordingly, we expect that research and development expenses for 2004 will be higher than 2003.

Sales and Marketing. Sales and marketing expenses totaled $3.3 million and $7.7 million in 2003 and 2002. Sales and marketing expenses consist primarily of salaries, commissions, product branding costs, advertising, trade show expenses, and cost of marketing collateral. The decrease in sales and marketing expenses is due to the decreased personnel related to our reductions in force in the second half of 2002 and first quarter of 2003. We expect sales and marketing expenses to increase moderately in 2004 as we expand our sales force and marketing personnel to market and sell our new Tier 3 application level products and services.

General and Administrative. General and administrative expenses decreased to $7.8 million for 2003 from $11.4 million for 2002. This decrease was due to the decrease in personnel related to our reductions in force in the second half of 2002 and first quarter of 2003, and related cost reduction initiatives. General and administrative expenses consist primarily of rent, facilities and information technology charges, salaries, legal expenses, investor relations costs and other costs associated with being a public company. We anticipate that general and administrative expenses for 2004 will increase moderately as we increase our personnel and other resources to support our growth. In addition, we will incur additional professional fees in order to comply with the new requirements under the Sarbanes-Oxley Act of 2002.

Amortization of Intangible and Other Assets. Amortization of intangible and other assets totaled $1.1 million and $3.0 million for 2003 and 2002, and includes amortization of identified intangible assets related to past acquisitions. The decrease was due to the impairment charges recorded in the fourth quarter of 2002 and first quarter of 2003, which resulted in lower amortization charges during of 2003. All of our intangible and other assets included on our consolidated balance sheet at December 31, 2003 will be fully amortized by the end of the second quarter of 2004. However, we expect to incur additional amortization expense in 2004 related to our acquisition of Overpeer, Inc. as discussed in Note 22 of our consolidated financial statements.

Stock-Based Compensation. Stock-based compensation for 2003 totaled $1.3 million, consisting of the amortization of deferred stock compensation of $398,000, stock-based compensation expense of $730,000 related to stock options granted to a member of our board of directors for consulting services provided through September 30, 2003, variable stock compensation expense of $64,000 related to stock options that were

repriced in 2001, stock and options issued to former employees as severance and termination benefits of $99,000, and stock options issued to a consultant of $7,000. Stock-based compensation was a credit of $383,000 for the year ended December 31, 2002, consisting of the amortization of deferred stock compensation and the reversal of expense related to accelerated amortization for options that were cancelled.

Special Charges. We have recorded special charges related to corporate restructurings, facilities consolidations and the impairment of assets in accordance with our long-lived asset policy. Following is a summary of special charges for 2003 and 2002 (in thousands):

In February 2003, our Chairman and Chief Executive Officer, John T. Baker, resigned and we engaged Regent Pacific Management Corporation to provide management services. On March 7, 2003, Regent Pacific resigned from the engagement and Jeffrey M. Cavins was elected President and Chief Executive Officer. During and subsequent to Regent Pacific’s engagement, we undertook a strategic and operational analysis of our business and product lines. This analysis resulted in the development of a new strategic and operational plan, under which we restructured our business to focus on our core competencies in digital media services and on core strategic customers and markets for our enterprise communications services. We developed a revised corporate forecast in connection with this plan. The revised forecast also considered that we had learned that revenue from a significant customer in our media restoration services segment would be less than originally anticipated. Utilizing the revised forecast based on our revised strategy, we performed a reassessment of the carrying value of all of our assets, both tangible and intangible. The revised forecast demonstrated that certain tangible and intangible assets and goodwill related to our media restoration services and enterprise communications services businesses were impaired, as the projected undiscounted discernible cash flows did not exceed the carrying value of the assets over their estimated useful lives. The fair values of each of these assets were estimated using a probability weighted discounted cash flow method. The estimated fair values of each of the assets were then compared to their carrying values to measure the impairments. As a result of this analysis, we recorded impairment charges in the first quarter of 2003 for goodwill, intangible assets, and property and equipment related to our enterprise communication services and media restoration services businesses of $5.3 million, $685,000, and $670,000, respectively.

In addition to the impairments above, we recorded severance and termination benefits of $204,000 associated with a reduction in force announced in March 2003 of approximately 35% of our consolidated staffing. In addition, we recorded $297,000 of severance and termination benefits with respect to certain changes in senior management in the first quarter of 2003. We incurred costs of approximately $658,000 related to the termination or renegotiation of certain facilities leases in connection with our ongoing facilities consolidation. The other restructuring charges of $878,000 represent fees and costs paid to Regent Pacific Management Corporation with respect to interim management services provided to us in connection with our management and operational restructuring.

As discussed above, during the fourth quarter of 2002, we committed to a plan to exit certain of our leased facilities. The exit plan identified all significant actions to be taken, including the method of disposition, locations of those activities and the expected dates of completion. Under the provisions of EITF 94-3, we recorded the estimated lease termination costs in accrued special charges at December 31, 2002. Current year activity for accruals established under EITF 94-3 is summarized in the following paragraphs.

In April 2003, we entered into a lease termination agreement with the landlord of our unoccupied facility on Fourth Avenue, Seattle, Washington. Under the terms of the agreement, we paid a lease termination fee of $200,000. As a result, all of our obligations under the lease were terminated effective April 30, 2003. In accordance with EITF 94-3, the lease termination fee was included in accrued special charges at December 31, 2002. We had been paying approximately $29,000 per month under this lease.

In May 2003, we entered into a lease termination agreement with the landlord of our unoccupied facility in Ardsley, New York. Under the terms of the agreement, we paid a lease termination fee of approximately $114,000 which included a security deposit of $29,000. As a result, all of our obligations under the lease were terminated effective May 19, 2003. In accordance with EITF 94-3, the lease termination fee was included in accrued special charges at December 31, 2002. We had been paying approximately $19,000 per month under this lease.

Under the provisions of FAS 146, we recorded certain additional lease termination costs during the year ended December 31, 2003. These additional costs were related to certain leased facilities whereby we had ceased using the facilities and notified the landlords that we had released our rights under the lease agreements. These additional costs were recognized and measured at the present value of the future minimum lease payments, net of estimated sublease rentals that could be reasonably obtained for the facilities. Current year activity for accruals established under FAS 146 is summarized in the following paragraphs.

In March 2003, we terminated a portion of a lease for approximately half the space we occupied for our principal operating facility on Rainier Avenue, Seattle, Washington. Rents were reduced from approximately $108,000 per month with a term expiring in November 2005 to rent for the remainder of the facility of approximately $33,000 per month through June 2003 with options, that we exercised, to extend the term through December 2003 at a base rent of $33,000 per month and pre-paid utility expenses of $60,000 per quarter. As consideration for the lease termination, we allowed the landlord to retain its security deposit in the amount of $218,500 and made cash payments of $126,700. In December 2003, we signed a new lease with the landlord that expires in December 2005. Monthly rental payments under the new lease are approximately $55,000 through March 2004 and then $73,000 thereafter, reflecting an increase in the square footage occupied beginning in April 2004.

In October 2003, we vacated and ceased using our former Streampipe facility in Washington, D.C. and migrated its operations to our facility on Rainier Avenue, Seattle, Washington. At that time, the landlord was informed of our decision to no longer occupy the Washington D.C. facility and release of our rights under the lease agreement. The lease for the facility expires in March 2004 and, under the requirements of FAS 146, the present value of future minimum rental payments, net of sublease rentals, of $43,000, were recorded in accrued special charges during the year ended December 31, 2003.

We have accrued special charges related to our media restoration facility in New York, New York. The lease agreement was originally entered into in December 2002 and we have never occupied the facility. During 2003, we informed the landlord of our decision to release our rights under the lease agreement and have been in ongoing discussions with the landlord to negotiate a lease termination agreement. Accordingly, under the requirements of FAS 146, we had accrued $562,000 in accrued special charges through the third quarter of 2003 representing the estimated fair value of future rental payments, net of sublease rentals and related costs with respect to the termination of this lease. In December 2003, we accrued an additional $150,000, for a total accrual of $712,000, to adjust our estimate of the fair value of the liability based on further negotiations with the landlord. In February 2004, we entered into a lease settlement agreement with the landlord. The amount of the settlement was included in accrued special charges at December 31, 2003.

For certain of the lease terminations described above, the settlement amounts were less than we had accrued initially due to favorable negotiations with landlords and improvements in real estate markets. In other cases, we increased our accruals as a result of our ongoing evaluations of our lease obligations. The adjustments resulting from these settlements and additional accruals were recorded in special charges in the consolidated statements of operations.

We will continue to review the carrying value of our long-lived assets for impairments. Future adverse developments in our business could result in additional impairments.

The following table reflects the activity in accrued special charges for the year ended December 31, 2003 (in thousands). We believe that all of these accrued charges, which represent primarily future rent obligations, will ultimately be paid in cash.

We recorded special charges totaling $6.8 million in 2002 related to impairment of intangible assets, write-downs of property and equipment, accrued lease payments related to vacated facilities and employee severance charges associated with company restructurings. Effective January 1, 2002 we adopted SFAS No. 142, Goodwill and Intangible Assets, and SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets, and determined that certain intangible assets and property and equipment related to our Digital Media Services and Enterprise Communications reporting units were impaired.

Interest Income. Interest income totaled $347,000 and $1.1 million in 2003 and 2002. The decrease was due to the lower average cash and investment balances in 2003 resulting from the voluntary repayment of our credit facility in the third quarter of 2002 and utilization of cash to fund operations, and lower interest rates in 2003. For 2004, we expect interest income will increase due to higher average investment balance resulting from the proceeds received from the private equity financings we completed in August 2003 and February 2004.

Interest Expense. Interest expense relates to our debt instruments, consisting of our line of credit, term loan and capital lease obligations. Interest expense totaled $286,000 and $631,000 in 2003 and 2002. The decrease was due primarily to lower average debt balances in 2003 due to the voluntary repayment of our credit facility in the third quarter of 2002 and lower interest rates in 2003. We anticipate that interest expense will increase slightly in 2004 due to higher average debt balances resulting from borrowings under the $3 million term loan facility that we put in place at the end of 2003.

Increase in Fair Value of Common Stock Warrants. The increase in fair value of common stock warrants of $248,000 represents the increase in the estimated fair value of the warrants that we issued in connection with our private equity financing. This transaction is described more fully in Note 6 to the consolidated financial statements.

Other Income. Other income for 2003 of $120,000 consisted principally of gains on sales of excess equipment. Other income for 2002 of $659,000 consisted principally of a gain related to the renegotiation of final closing terms with respect to the acquisition of Activate and realized gains from the sale of certain investments, partially offset by expenses incurred related to the sale of our Canadian subsidiary. On the date of our acquisition of Activate, the total payment due to the seller was $3.0 million in a combination of cash and stock. During the third quarter of 2002, we reached a final settlement with the seller, which required payment of $2.0 million in cash and 1.0 million restricted common shares valued at $300,000. The $700,000 of other income is equal to the difference between the accrued acquisition consideration of $3.0 million and the negotiated final consideration of $2.3 million.

Revenue. Revenues totaled $12.7 million and $10.4 million for 2002 and 2001, and consisted of the following (in thousands):

Digital media services revenue increased to $9.5 million in 2002 from $7.7 million in 2001. The increase was due primarily to the acquisition of Activate in September 2001. The increase in enterprise communications revenue generated by Activate was partially offset by the decrease in revenue generated by our encoding services, due to fewer large encoding projects in 2002 compared to 2001, and a decrease in samples revenue from the previous year, largely a result of pricing pressures for this service.

Media restoration revenues totaled $3.2 million in 2002, as compared to $2.7 million in 2001. This increase was primarily the result of an increase in revenue generated from a significant customer.

Cost of Revenues. Cost of revenues increased to $13.3 million in 2002 from $12.7 million in 2001. Cost of revenues decreased from 122.6% of revenues in 2001 to 105.0% of revenues in 2002, and consisted of the following (in thousands):

Cost of revenues include the cost of production including personnel, and an allocated portion of facilities and equipment and other supporting functions related to the delivery of digital media services and applications. Depreciation, the primary non-cash component of cost of revenues, decreased to $3.4 million from $4.1 million in 2001 as a result of the property and equipment write-downs recorded in 2001. This was offset by a higher number of personnel involved in digital media services production and the increased reliance on third-party vendors related to webcasting services.

Media restoration cost of revenues totaled $1.9 million in 2002, an increase from $1.2 million in 2001. The increase was slightly out of proportion to the increased revenues. This is a result of the variable nature of the restoration business, which requires adding personnel to generate additional revenues. Additionally, production facility expansion at VidiPax resulted in higher levels of depreciation on a comparative basis.

Operating expenses. Operating expenses were as follows for 2002 and 2001 (in thousands):

Research and Development Expenses. Research and development expenses totaled $3.2 million and $9.7 million in 2002 and 2001. Research and development expenses include salaries and consulting fees paid to support technology development, and costs of technology acquired from third parties to incorporate into applications. The decrease is due to the significant reduction in the number of development personnel as a result of the corporate restructurings. Costs of enhancing webcasting offerings, the continued support of our music offerings and the development of internal operational solutions necessary to fully integrate previous acquisitions comprised a majority of our research and development expenses in 2002. We had approximately $263,000 in media restoration research and development expenses during 2002 primarily as a result of efforts to integrate certain acquired equipment and efficiency enhancements into the media restoration production process. There were no research and development expenses included in media restoration services in 2001.

Sales and Marketing Expenses. Sales and marketing expenses totaled $7.7 million and $9.4 million in 2002 and 2001. Sales and marketing expenses consist primarily of salaries, commissions, co-marketing expenses, trade show expenses, product branding costs, advertising and cost of marketing collateral. The decrease in sales and marketing expenses was primarily due to decreased personnel subsequent to our reductions in force, partially offset by a general increase in commissions and other selling expenses to generate the increased level of sales. The decrease was partially offset by an increase in advertising and marketing activities during 2002. Media restoration services sales and marketing expenses totaled $232,000 and $450,000 in 2001 and 2000, respectively. This decrease was due to a reduction in personnel and a general change in the sales compensation structure at our media restoration subsidiary.

General and Administrative Expenses. General and administrative expenses totaled $11.4 million and $11.1 million in 2002 and 2001. General and administrative expenses consist primarily of rent, facilities and information technology charges, salaries, legal expenses for general corporate purposes, professional services, investor relations and other costs associated with being a public company. General and administrative expenses increased over the previous year as a result of integrating acquisitions into our operations and higher professional fees, insurance and other costs associated with being a publicly held company. The increase is partially offset by internal efforts beginning in the third quarter of 2002 to decrease all operating expenses, including external and internal legal fees, public relations, investor relations and insurance premiums. Our media restoration segment contributed general and administrative expenses of approximately $1.3 million and $1.2 million in 2002 and 2001.

Amortization of Intangibles and Other Assets. Amortization of intangibles and other assets totaled $3.0 million and $8.2 million in 2002 and 2001. The decrease was primarily due to impairment charges recorded during 2001, which led to lower balances of intangible assets and, in turn, lower amortization charges. In addition, effective January 1, 2002, we adopted FAS 142, which stipulates that goodwill can no longer be amortized but is subject to review for impairment. Amortization expense decreased by $2.6 million compared to the previous year as a result of the implementation of FAS 142.

Stock-Based Compensation. Stock-based compensation was a credit of $417,000 in 2002, of which $34,000 is included in cost of revenues, and a charge of $359,000 in 2001. This decrease is a result of previous reductions in force, which has reduced the amortization of stock-based compensation, and in reversals of previously recorded deferred stock compensation associated with terminated employees. As a result of stock option cancellations associated with our reductions in force, we recorded a stock-based compensation credit of $835,000 in the first quarter of 2002. The remaining charge was due to normal, recurring amortization.

Special Charges. We recorded special charges totaling $6.8 million and $37.3 million in 2002 and 2001 related to impairment of intangible assets, write-downs of property and equipment, accrued lease payments related to vacated facilities and employee severance charges associated with company restructurings. Effective January 1, 2002 we adopted SFAS No. 142, Goodwill and Intangible Assets, and SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets, and determined that certain intangible assets and property and equipment related to our Digital Media Services and Enterprise Communications reporting units were impaired. In addition, as a result of a decline in revenues and other economic factors, we performed an analysis of carrying values of property, plant and equipment and amortizable intangibles pursuant to

SFAS No. 144 as of November 30, 2002. As a result of these actions and other economic conditions, we recorded special charges in 2002 and 2001 which are summarized in the following table (in thousands):

The following table reflects the activity in accrued special charges (in thousands).

Interest Income. Interest income representing earnings on our cash, cash equivalents and short-term investments totaled $1.1 million and $3.2 million in 2002 and 2001. The decrease in income was due to lower average cash and investment balances in 2002, reflecting cash used for operations, as well as, the voluntary prepayment of our primary outstanding credit facility during the third quarter of 2002, as well as lower interest rates.

Interest Expense. Interest expense relating to our debt instruments, as well as amortization of financing charges related to our debt instruments, totaled $0.6 million and $1.2 million in 2002 and 2001. The decrease was due to lower interest rates resulting from a credit facility signed in October 2001 and our repayment of this facility in the third quarter of 2002.

Other Income (Expense). Other income (expense) consists of $700,000 of other income related to the renegotiation of the final closing terms with CMGi related to the acquisition of Activate and realized gains from the sale of certain investments, partially offset by expenses incurred related to the sale of our Canadian subsidiary. On the date of our acquisition of Activate, the total payment due to CMGi on September 25, 2002 was $3.0 million in a combination of cash and stock. During the third quarter of 2002, we reached a final settlement with CMGi, which required payment of $2.0 million in cash and 1.0 million shares of restricted common stock valued at $300,000, resulting in a gain of $700,000 included in other income.

At December 31, 2003, we had approximately $22.3 million of cash, cash equivalents, short-term investments and restricted investments. In February 2004, we completed an additional private placement financing transaction that resulted in net proceeds of approximately $18.9 million.

Cash used in operating activities was $7.3 million, $22.3 million, and $26.3 million in 2003, 2002, and 2001 and resulted primarily from net losses of $19.2 million, $31.2 million and $76.4 million, offset partially by special charges, depreciation and amortization and increased by other adjustments and working capital changes. All changes in operating assets and liabilities are net of amounts acquired in purchases of businesses. Cash used in operating activities declined steadily over the course of 2003, as we have realized the benefits of cost reduction initiatives implemented late in 2002 and in the first quarter of 2003. For example, cash used in operating activities was $3.1 million for the first quarter of 2003 compared to approximately $273,000 in the fourth quarter of 2003.

Cash provided by investing activities was $1.7 million, $8.5 million, and $7.4 million in 2003, 2002, and 2001. For 2003, cash provided by investing activities was related primarily to net sales of short-term investments of $518,000 and payments received on loans made to related parties of $1.2 million. For 2002, cash provided by investing activities was related primarily to net sales of short-term investments of $12.5 million, offset by purchases of property and equipment totaling $1.7 million and cash paid for the acquisition of businesses totaling $2.4 million. For 2001, cash provided from investing activities was related primarily to net sales of marketable securities of $19.7 million, offset partially by purchases of property and equipment of $2.7 million and cash paid for the acquisitions of businesses of $9.6 million. We expect purchases of property and equipment to increase moderately in 2004 as we intend to upgrade certain equipment related to our digital media services infrastructure. In the first quarter of 2004, we will spend approximately $1.5 million on such equipment pursuant to a purchase commitment executed in December 2003.

Cash provided by financing activities was $16.3 million for 2003 and consisted primarily of net proceeds from a private equity placement financing transaction of $11.4 million in August 2003, net borrowings under our line of credit and term loan facilities of $3.3 million, and proceeds from the exercise of stock options and warrants of $2.0 million, offset partially by repurchases of stock of $426,000. Cash used in financing activities was $21.6 million in 2002 and resulted primarily from the decision to prepay our primary long-term credit facility in the third quarter of 2002, as well as payments on our capital lease obligations and repurchases of our common stock. Cash provided by financing activities was $4.4 million for 2001 and consisted primarily from borrowings under our credit facility of $18.9 million, offset by principal payments on our long-term debt and capital lease obligations of $11.8 million. In addition, we repurchased 4.0 million shares from our founder for $2.0 million and also made a collateralized loan of $1.0 million to him in 2001.

In December 2003 we entered into a term loan with a bank under which we borrowed $3.0 million. The term loan also provides for up to $500,000 to collateralize standby letters of credit. Borrowings under the term loan are collateralized by substantially all of our assets and bear interest at the Prime Rate plus 1.25 percent (5.25% at December 31, 2003). Principal payments are due in equal monthly installments, plus interest, through January 1, 2007. In addition, the term loan restricts, among other things, our borrowings, dividend payments, stock repurchases, and sales or transfers of ownership or control, and contains certain other restrictive covenants that require us to maintain a certain quick ratio and tangible net worth. We were in compliance with these covenants at December 31, 2003. We intend to use the proceeds to upgrade certain equipment related to our digital media services and technology infrastructure, repay certain capital lease obligations, and for working capital and other general corporate purposes.

As of December 31, 2003, our principal commitments consisted of obligations outstanding under our term loan, line of credit and operating leases and capital leases. We have other credit facilities and leasing arrangements that, in general, are not prepayable without penalty. Total principal amounts outstanding under the line of credit, capital lease obligations and term loan were $4.8 million at December 31, 2003. These instruments bear interest ranging from approximately 2.26% to 7.52% and mature at various times through 2006. Letters of credit of approximately $316,000 collateralize certain of the capital lease obligations and are collateralized by short-term investments. These short-term investments have been classified as restricted investments on the accompanying consolidated balance sheets.

The following table provides aggregated information about our contractual obligations as of December 31, 2003 (in thousands):


(1)	Capital lease obligations represent the total minimum future obligations inclusive of interest.

(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 co-location services that run on a month-to-month basis and for which there is no unconditional obligation. Monthly amounts due under the month-to-month contracts are approximately $37,000.

Since inception, we have sustained substantial net losses to sustain our growth and establish our business. Beginning in 2001, we commenced a variety of cost reduction initiatives to reduce costs. For 2004, we will continue to focus on managing costs and increasing sales. We expect the following items may represent significant uses of capital resources in the foreseeable future:


	•	We have commitments under leases for certain facilities which we no longer occupy. One of these leases extends past 2004. Scheduled payments under these leases for 2004 total $1.1 million. We are presently negotiating lease reduction or termination agreements that we believe will result in a substantial reduction to future obligations under certain of these leases. However, there can be no assurance that we will be able to do so. In addition, we may have to make up-front cash payments to terminate or reduce our obligations under these leases. At December 31, 2003 accrued special charges includes amounts accrued for estimated rent obligations.

	•	In December 2003, we entered in to a commitment to purchase approximately $1.5 million of equipment to upgrade our digital media services and technology infrastructure. The equipment was delivered in January 2004 and we anticipate paying the $1.5 million in the first quarter of 2004.

	•	We have certain commitments under existing arrangements with certain licensors of copyrighted materials that may require payments estimated to be approximately $600,000 in 2004. These amounts are included in accrued expenses in the accompanying balance sheets.

	•	We may enter into future transactions where we acquire complementary businesses. Such acquisitions may require the use of our capital resources.

In the first quarter of 2004, we completed a private placement of 10,811,811 shares of common stock at $1.85 per share to a limited number of accredited investors that resulted in net proceeds of approximately $18.9 million. We intend to use the net proceeds for working capital and general corporate purposes, including expansion of our business-to-business digital music solutions in the U.S. and internationally. We agreed to use our best efforts to file a registration statement for the resale of the securities sold in the private placement on

We believe that our existing cash, cash equivalents, and short-term investments will be sufficient to fund our operations and meet our working capital and capital expenditure requirements for 2004.

We have identified the most critical accounting policies and estimates used in the preparation of our financial statements by considering accounting policies and estimates that involve the most complex or subjective decisions or assessments.

Revenue recognition. We recognize revenue in accordance with Staff Accounting Bulletin No. 101, “Revenue Recognition in Financial Statements,” as amended by Staff Accounting Bulletin No. 104, and EITF 00-21. We recognize revenue associated with the license of software in accordance with Statement of Position 97-2, “Software Revenue Recognition” (SOP 97-2), as amended by SOP 98-4, SOP 98-9 and related interpretations and Technical Practice Aids.

We recognize revenues from encoding services, digital music samples services, Internet radio services, live and on-demand webcasting services, software licensing, and media restoration services. We recognize these revenues when persuasive evidence of an arrangement exists, the product and/or service has been delivered, the price is fixed and determinable, and collectibility is reasonably assured.

In arrangements that include rights to multiple products and/or services, we allocate the total arrangement consideration among each of the deliverables using the residual method, under which revenue is allocated to undelivered elements based on verifiable and objective evidence of the fair value of the undelivered elements. Multiple element arrangements may consist of implementation services, development services, encoding services, digital music samples services, Internet radio services, and live and on-demand webcasting services. Verifiable objective evidence is based upon the price charged when an element is sold separately.

Under the provisions of SOP 97-2, in software arrangements that involve rights to multiple products and services, we allocate the total arrangement consideration among each of the deliverables using the residual method, under which revenue is allocated to the undelivered elements based on vendor-specific objective evidence of the fair value of such undelivered elements. Elements included in multiple element arrangements consist of software, intellectual property, implementation services, maintenance and consulting services. Vendor-specific objective evidence is based on the price charged when an element is sold separately or, in the case of an element not sold separately, the price established by management, if it is probable that the price, once established, will not change before market introduction.

Deferred revenue arises from payments received in advance of the culmination of the earnings process. Deferred revenue expected to be realized within the next twelve months is classified as current liability.

Long-lived assets. Management periodically evaluates the recoverability of our long-lived assets in accordance with SFAS No. 144. When doing so, management is required evaluate the recoverability of an asset’s (or group of assets) carrying value through estimates of undiscounted future cash flows. If the assets are deemed impaired, the assets are written down to estimated fair value. Estimates of fair value may differ from the actual amount that could be realized if we were to sell our assets.

As described in Note 4, we recorded impairment charges of $6.7 million, $3.5 million, and $27.9 million in 2003, 2002 and 2001. These amounts are included in Special Charges on the accompanying statements of operations. Management’s assessments of the impairment of property and equipment, intangible assets and goodwill are sensitive accounting estimates that could result in additional impairment charges in the near term. Factors that impact these estimates include, but are not limited to, possible changes in business plans, market price of our common stock and declining financial results. Net long-term assets subject to impairment review in the future totaled $1.2 million at December 31, 2003. We will continue to review the carrying value

Exit costs. We have followed the provisions of EITF 94-3 to record the costs associated with exit activities through December 31, 2002 and FAS 146 for exit activities after December 31, 2003. Management is required to make its best estimates of exit costs such as remaining lease obligations and/or termination fees, these estimates may be different than the actual amounts that will be paid under existing lease arrangements. Future adverse changes in our business could result in additional exit activities and charges.

Litigation. We become involved from time to time in various claims and lawsuits incidental to the ordinary course of our operations, including such matters as contract and lease disputes and complaints alleging employment discrimination. We believe that the outcome of any such pending claims or proceedings individually or in the aggregate, will not have a material adverse effect upon our business or financial condition, cash flows, or results of operations.

Income tax valuation allowance. Deferred tax assets and liabilities are determined based on the differences between the financial statement and tax bases of assets and liabilities using the enacted tax rates in effect for the periods in which the differences are expected to reverse. The Company’s net deferred tax asset has been reduced by a full valuation allowance based upon management’s determination that the criteria for recognition have not been met.

Set forth below and elsewhere in this report and in other documents we file with the SEC are risks and uncertainties that could cause actual results to differ materially from the results contemplated by the forward-looking statements contained in this report.

We were formed as a limited liability company in August 1997 and incorporated in March 1998. Our limited operating history makes it difficult to evaluate us or our prospects and performance, due to:


	•	Our unproven ability to generate profits;

	•	Our limited historical financial data; and

	•	Our limited experience in addressing emerging trends that may affect our business.

We have recently shifted our marketing emphasis to application level services, which we have only recently begun to deliver. You should consider our prospects in light of the risk, expenses and difficulties we may encounter as an early stage company in the new and rapidly evolving market segments we serve. As a result of such risks, expenses and difficulties, we may have difficulty:


	•	Establishing and maintaining broad market acceptance of our products and services and converting that acceptance into direct and indirect sources of revenue;

	•	Establishing and maintaining our brand name;

	•	Timely and successfully developing new products, product features and services and increasing the functionality and features of existing products and services;

	•	Successfully responding to our current competition including, competition from emerging technologies and solutions;

	•	Developing and maintaining strategic relationships to enhance the distribution, features, content and utility of our products and services; and

	•	Attracting, training and retaining qualified sales, technical and customer support personnel.

Our quarterly operating results have fluctuated in the past and we expect our revenues and operating results may vary significantly from quarter to quarter due to a number of factors, many of which are beyond our control, including:


	•	Market acceptance of our turn-key application level services;

	•	Variability in demand for our digital media services and applications;

	•	Market acceptance of our digital media and components offered by us and our competitors;

	•	Ability of our customers and ourselves to procure necessary intellectual property rights for digital media content;

	•	Willingness of our customers to enter into longer-term volume or recurring revenue digital media and applications service agreements and purchase orders in light of the economic and legal uncertainties related to their business models;

	•	Governmental regulations affecting use of the Internet, including regulations concerning intellectual property rights and security measures; or

	•	Competition from other companies entering our markets.

Our limited operating history and unproven business model further contribute to the difficulty of making meaningful quarterly comparisons and forecasts. Our current and future levels of operating expenses and capital expenditures are based largely on our growth plans and estimates of expected future revenues. These expenditure levels are, to a large extent, fixed in the short term and our sales cycle can be lengthy. Thus, we may not be able to adjust spending or generate new revenue sources in a timely manner to compensate for any shortfall in revenues, and any significant shortfall in revenues relative to planned expenditures could have an immediate adverse effect on our business and results of operations. If our operating results fall below the expectations of securities analysts and investors in some future periods, our stock price could decline significantly.

As of December 31, 2003, we had approximately $22.3 million in cash and cash equivalents, short-term investments, and restricted investments. In the first quarter of 2004, we completed a private placement that resulted in net proceeds of $18.9 million. We have, however, experienced net losses from operations, and net losses are expected to continue into future periods. If our existing cash reserves prove insufficient to fund operating and other expenses, we may find it necessary to secure additional financing, sell assets or reduce expenditures further. In the event additional financing is required, we may not be able to obtain such financing on acceptable terms, or at all. If adequate funds are not available or are not available on acceptable terms, we may not be able to pursue our business objectives. This inability could seriously harm our business, results of operations and financial condition.

If additional funds are raised through the issuance of equity or convertible debt securities, the percentage ownership of our current stockholders will be reduced and these securities may have rights and preferences superior to those of our current stockholders. If we raise capital through debt financing, we may be forced to accept restrictions affecting our liquidity, including restrictions on our ability to incur additional indebtedness or pay dividends.

As of December 31, 2003, we had an accumulated deficit of $192.9 million. We have incurred net losses from inception, and we expect to continue to incur net losses in future periods.

Accordingly, our ability to operate our business and implement our business strategy may be hampered by negative cash flows in the future, and the value of our stock may decline as a result. Our capital requirements may vary materially from those currently planned if, for example, we incur unforeseen capital expenditures, unforeseen operating expenses or make investments to maintain our competitive position. If we lack necessary capital, we may have to delay or abandon some or all of our development plans or otherwise forego market opportunities. We will need to generate significant additional revenues to be profitable in the future and we may not generate sufficient revenues to be profitable on either a quarterly or annual basis in the future.

We might not be successful in implementing our business strategy in a cost-effective manner, if at all, and the implementation may require significant additional expenditures on our part. The capital requirements of our business strategy combined with the expectation that we will incur net losses in future periods could have a serious adverse impact on our business, results of operations and financial position. Even if we ultimately do achieve profitability, we may not be able to sustain or increase profitability on a quarterly or annual basis.

Our business and operations are substantially dependent on the performance of our executive officers and key employees who have worked together for only a relatively short period of time. We do not maintain “key person” life insurance on any of our executive officers.. The loss of one or several key employees could

seriously harm our business. Any reorganization or reduction in the size of our employee base could harm our ability to attract and retain other valuable employees critical to the success of our business.

We have completed a number of acquisitions during the past three fiscal years and we expect to continue to pursue strategic acquisitions in the future. In March 2004, we completed the acquisition of Overpeer, Inc.

Integrating the Overpeer acquisition and completing any potential future acquisitions could cause significant diversions of management time and resources. Financing for future acquisitions may not be available on favorable terms, if at all. If we identify an appropriate acquisition candidate for any of our businesses, we may not be able to negotiate the terms of the acquisition successfully, finance the acquisition or integrate the acquired business, products, technologies or employees into our existing business and operations. Future acquisitions may not be well-received by the investment community, which may cause our stock price to fall. We cannot ensure that we will be able to identify or complete any acquisition in the future.

If we acquire businesses, new products or technologies in the future, we may be required to amortize significant amounts of identifiable intangible assets and we may record significant amounts of goodwill that will be subject to at least annual testing for impairment. For example, we recorded in our first quarter of fiscal 2003 impairments of $5.3 million, $685,000 and $601,000 to goodwill, intangible assets, and property and equipment related to our enterprise communication services and media restoration services business. A significant portion of those impairments related to assets acquired in our acquisition of TT Holding Corp. in November 2002. If we consummate one or more significant future acquisitions in which the consideration consists of stock or other securities, our existing stockholders’ ownership could be diluted significantly. If we were to proceed with one or more significant future acquisitions in which the consideration included cash, we could be required to use a substantial portion of our available cash. The anticipated benefits of any acquisition may not be realized. If any of the negative events occur, our operations and financial position could be harmed.

The online music services of our customers face significant competition from “free” peer-to-peer services, such as KaZaA, Morpheus, Grokster and a variety of other similar services that allow computer users to connect with each other and to copy many types of program files, including music and other media, from one another’s hard drives, all without securing licenses from content providers. The legal status of these “free” services is uncertain, because although some courts have found that these services violate copyright laws, other services have been found to not violate any copyright laws, particularly in the case of Grokster. Additionally, enforcement efforts against those in violation have not effectively shut down these services, and there can be no assurance that these services will ever be shut down. The ongoing presence of these “free” services substantially impairs the marketability of legitimate services, regardless of the ultimate resolution of their legal status.

Because digital recorded music formats, such as MP3, do not always contain mechanisms for tracking the source or ownership of digital recordings, users are able to download and distribute unauthorized or “pirated” copies of copyrighted recorded music over the Internet. This piracy is a significant concern to record companies and artists, and is a primary reason many record companies and artists are reluctant to digitally deliver their recorded music over the Internet. As long as pirated recordings are available, many consumers will choose free pirated recordings rather than paying for legitimate recordings. Accordingly, if this issue is not addressed, our business might be harmed.

Many of our competitors have significantly more resources than we do, including access to content, and some of our competitors may be able to leverage their experience in providing online music distribution services or similar services to their customers in other businesses. Some of these competitors may be able to offer services at a lower price than we can. In addition, competing services may be able to obtain more or better music content or may be able to license such content on more favorable terms than we can, which could harm the ability of our online music services to compete effectively in the marketplace.

Online music distribution services are a relatively new business model for delivering digital media over the Internet. It is too early to predict whether consumers will accept in significant numbers online music services and accordingly whether the services will be financially viable. If online music distribution services do not prove to be popular with consumers, or if these services cannot sustain any such popularity, our business and prospects would be harmed.

We must also provide digital rights management solutions and other security mechanisms in order to address concerns of content providers and artists, and we cannot be certain that we can develop, license or acquire such solutions, or that content licensors or consumers will accept them. Consumers may be unwilling to accept the use of digital rights management technologies that limit their use of content, especially with large amounts of free content readily available. No assurance can be given that such solutions will be available to us upon reasonable terms, if at all. If we are unable to acquire these solutions on reasonable or any terms, or if customers are unwilling to accept these solutions, our business and prospects could be harmed.

Our digital media services business is affected by the release of “hit” music titles, which can create cyclical trends in sales distinctive to the music industry. It is not possible to determine the timing of these cycles or the future availability of hit titles. Hit products are important because they generate consumer interest. We depend upon the music content providers to continue to produce hit products. To the extent that new hits are not available, or not available at prices attractive to consumers, our sales and margins may be adversely affected.

The growth of our business depends on the continued growth of the Internet as a medium for media consumption, communications, electronic commerce and advertising. Our business will be harmed if Internet usage does not continue to grow, particularly as a source of media information and entertainment and as a vehicle for commerce in goods and services. Our success also depends on the efforts of third parties to develop the infrastructure and complementary products and services necessary to maintain and expand the Internet as a viable commercial medium, and identifying additional viable revenue models for digital media-bases business. We believe that other Internet-related issues, such as security, privacy, reliability, cost, speed, ease of use and access, quality of service, and necessary increases in bandwidth availability and access on an affordable basis, remain largely unresolved and may affect the amount and type of business that is conducted over the Internet, and may adversely affect our ability to sell our products and services and ultimately impact our business results and prospects.

If Internet usage grows, the Internet infrastructure may not be able to support the demands placed on it by such growth, specifically the demands of delivering high-quality media content. As a result, the performance and reliability of the Internet may decline. In addition, Websites have experienced interruptions

in service as a result of outages, system attacks and other delays occurring throughout the Internet network infrastructure. If these outages, attacks or delays occur frequently or on a broad scale in the future, Internet usage, as well as the usage of our products, services and Websites, could grow more slowly or decline.

We believe that increased Internet use and especially the increased use of media over the Internet may depend on the availability of greater bandwidth or data transmission speeds (also known as broadband transmission). 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 and prospects could be harmed. Congestion over the Internet and data loss may interrupt audio and video streams, resulting in unsatisfying user experiences. The success of digital media distribution over the Internet depends on the continued rollout of broadband access to consumers on an affordable basis. To date, we believe that broadband technologies have been adopted at a slower rate than expected, which we believe has delayed broader-based adoption of the Internet as a media Internet distribution medium. Our business and prospects may be harmed if the rate of adoption does not increase.

In the coming years, the number of individuals who access digital content through devices other than a personal computer, such as personal digital assistants, cellular telephones, television set-top devices, game consoles and Internet appliances, may increase dramatically. Manufacturers of these types of products are increasingly investing in media-related applications, but these devices are in an early stage of development and business models are new and unproven. If we are unable to offer our services on these alternative non-PC devices, we may fail to capture a sufficient share of an increasingly important portion of the market for digital media services or our costs may increase significantly.

A limited number of customers have accounted for a majority of our revenues and may continue to do so for the foreseeable future. During 2003 and 2002, one customer accounted for approximately 11% and 13% of our revenues and another customer accounted for 5% and 10% of our revenues. We believe that a small number of customers may continue to account for a significant percentage of our revenues for the foreseeable future. Due to high revenue concentration among a limited number of customers, the cancellation, reduction or delay of a large customer order or our failure to timely complete or deliver a project during a given quarter is likely to significantly reduce revenues. In addition, if any significant customer fails to pay amounts it owes us, or does not pay those amounts on time, our revenues and operating results could suffer. If we are unsuccessful in increasing and broadening our customer base, our business could be harmed.

The average selling prices of our products and services may be lower than expected as a result of competitive pricing pressures, promotional programs and customers who negotiate price reductions in exchange for longer term purchase commitments or otherwise. The pricing of services sold to our customers depends on the duration of the agreement, the specific requirements of the order, purchase volumes, the sales and service support and other contractual agreements. We have experienced and expect to continue to experience pricing pressure and anticipate that the average selling prices and gross margins for our products will decrease over product life cycles. We may not be successful in developing and introducing on a timely basis new products with enhanced features that can be sold at higher gross margins.

We may be liable or alleged to be liable to third parties for the content that we encode, distribute or make available to our customers:


	•	If the content or the performance of our services violates third party copyright, trademark, or other intellectual property rights;

	•	If our customers violate the intellectual property rights of others by providing content to us or by having us perform digital media services; or

	•	If content that we encode or otherwise handle for our customers is deemed obscene, indecent, or defamatory.

Any alleged liability could harm our business by damaging our reputation, requiring us to incur legal costs in defense, exposing us to awards of damages and costs and diverting management’s attention which could have an adverse effect on our business, results of operations and financial condition. Our customers for encoding services generally agree to hold us harmless from claims arising from their failure to have the right to encode the content given to us for that purpose. However, customers may contest this responsibility or not have sufficient resources to defend claims and we have limited insurance coverage for claims of this nature.

Because we host, stream and Webcast audio and video content on or from our Web site and on other Websites for customers and provide services related to digital media content, we face potential liability or alleged liability for negligence, infringement of copyright, patent, or trademark rights, defamation, indecency and other claims based on the nature and content of the materials we host. Claims of this nature have been brought, and sometimes successfully prosecuted, against content distributors. In addition, we could be exposed to liability with respect to the unauthorized duplication of content or unauthorized use of other parties’ proprietary technology. Any imposition of liability that is not covered by insurance or is in excess of insurance coverage or any alleged liability could harm our business.

We cannot assure you that third parties will not claim infringement by us with respect to past, current, or future technologies. The music industry in particular has recently been the focus of infringement claims. We expect that participants in our markets will be increasingly subject to infringement claims as the number of services and competitors in our industry segment grows. In addition, these risks are difficult to quantify in light of the continuously evolving nature of laws and regulations governing the Internet. Any claim relating to proprietary rights, whether meritorious or not, could be time-consuming, result in costly litigation, cause service upgrade delays or require us to enter into royalty or licensing agreements, and we can not assure you that we will have adequate insurance coverage or that royalty or licensing agreements will be available on terms acceptable to us or at all.

In order to achieve return on our investments in new products and services, we must continue to add new customers while minimizing the rate of loss of existing customers. If our other marketing and promotional activities fail to add new customers at a rate significantly higher than our rate of loss, our business will suffer. In addition, if the costs of such marketing and promotional activities increase in order to add new customers, our margins and operating results will suffer.

Our intellectual property is important to our business, and we seek to protect our intellectual property through copyrights, trademarks, patents, trade secrets, confidentiality provisions in our customer, supplier and strategic relationship agreements, nondisclosure agreements with third parties, and invention assignment agreements with our employees and contractors. We cannot assure you that measures we take to protect our

In addition, we could be subject to intellectual property infringement claims by others. Potential customers may be deterred from distributing content over the Internet for fear of infringement claims. The music industry in particular has recently been the focus of heightened concern with respect to copyright infringement and other misappropriation claims, and the outcome of developing legal standards in that industry is expected to affect music, video and other content being distributed over the Internet. If, as a result, potential customers forego distributing traditional media content over the Internet, demand for our digital media services and applications could be reduced which would harm our business. The music industry in the U.S. is generally regarded as extremely litigious in nature compared to other industries and we could become engaged in litigation with others in the music industry. Claims against us, and any resultant litigation, should they occur in regard to any of our digital media services and applications, could subject us to significant liability for damages including treble damages for willful infringement. In addition, even if we prevail, litigation could be time-consuming and expensive to defend and could result in the diversion of our time and attention. Any claims from third parties may also result in limitations on our ability to use the intellectual property subject to these claims. Further, we plan to offer our digital media services and applications to customers worldwide including customers in foreign countries that may offer less protection for our intellectual property than the United States. Our failure to protect against misappropriation of our intellectual property, or claims that we are infringing the intellectual property of third parties could have a negative effect on our business, revenues, financial condition and results of operations.

Our ability to provide our services to users of multiple technologies and platforms depends significantly on our ability to develop and maintain our strategic relationships with key streaming media technology companies and content providers. We rely on these relationships for licensed technology and content. We also rely on relationships with major recording labels for our music content licensing strategy. Obtaining comprehensive music content licenses is challenging, as doing so may require us to obtain copyright licenses with various third parties in the fragmented music recording and publishing industries. These copyrights often address differing activities related to the delivery of digital media, including reproduction and performance, some of which may require separate licensing arrangements from various rights holders such as publishers, artists and record labels. The effort to obtain the necessary rights by such third parties is often significant, and could disrupt, delay, or prevent us from executing our business plans. Because of the large number of potential parties from which we must obtain licenses, we may never be able to obtain a sufficient number of licenses to allow us to provide services that will meet our customers’ expectations.

Due to the evolving nature of our industry, we will need to develop additional relationships to adapt to changing technologies and standards and to work with newly emerging companies with whom we do not have pre-existing relationships. We cannot be certain that we will be successful in developing new relationships or that our partners will view these relationships as significant to their own business or that they will continue their commitment to us in the future. If we are unable to maintain or enhance these relationships, we may have difficulty strengthening our technology development and increasing the adoption of our brand and services.

The market for digital media services is characterized by rapid technological change, frequent new product introductions and changes in customer requirements, some of which are unique or on a custom by custom basis. We may be unable to respond quickly or effectively to these developments or requirements. Our future success will depend to a substantial degree on our ability to offer services that incorporate leading technology, address the increasingly sophisticated, varied or individual needs of our current and prospective


	•	Our technology or systems may become obsolete upon the introduction of alternative technologies;

	•	We may not have sufficient resources to develop or acquire new technologies or to introduce new services capable of competing with future technologies or service offerings; and

	•	The price of our services is likely to decline as rapidly as the cost of any competitive alternatives.

The development of new or enhanced services through technology development activities is a complex and uncertain process that requires the accurate anticipation of technological and market trends. We may experience design, manufacturing, marketing and other difficulties that could delay or prevent the development, introduction or marketing of new services and enhancements. In addition, our inability to effectively manage the transition from older services to newer services could cause disruptions to customer orders and harm our business and prospects.

The large number of licenses that we need to maintain in order to expand our music-related services creates operational difficulties in connection with tracking the rights that we have acquired and the complex royalty structures under which we must pay. In addition, our licensing agreements typically allow the third party to audit our royalty tracking and payment mechanisms to ensure that we are accurately reporting and paying the royalties owed. If we are unable to accurately track the numerous parties that we must pay in connection with each delivery of digital music services and deliver the appropriate payment in a timely fashion, we may risk penalties up to and including termination of certain licenses.

We face intense and increasing competition in the digital media services market. If we do not compete effectively or if we experience reduced market share from increased competition, our business will be harmed. In addition, the more successful we are in the emerging market for digital media services, the more competitors are likely to emerge. We believe that the principal competitive factors in our market include:


	•	Ability to offer a private branded solution

	•	Service functionality, quality and performance;

	•	Ease of use, reliability, scalability and security of services;

	•	Establishing a significant base of customers and distribution partners;

	•	Ability to introduce new services to the market in a timely manner;

	•	Customer service and support;

	•	Attracting third-party web developers; and

	•	Pricing.

Many of our competitors have substantially more capital, longer operating histories, greater brand recognition, larger customer bases and significantly greater financial, technical and marketing resources than we do. These competitors may also engage in more extensive development of their technologies, adopt more aggressive pricing policies and establish more comprehensive marketing and advertising campaigns than we can. Our competitors may develop products and service offerings that we do not offer or that are more sophisticated or more cost effective than our own. For these and other reasons, our competitors’ products and services may achieve greater acceptance in the marketplace than our own, limiting our ability to gain market share and customer loyalty and to generate sufficient revenues to achieve a profitable level of operations. Our failure to adequately address any of the above factors could harm our business and operating results.

The Internet and digital media services industries are undergoing substantial change that has resulted in increasing consolidation and a proliferation of strategic transactions. Many companies in these industries have failed or are being acquired by larger entities. As a result, we are increasingly competing with larger competitors which have substantially greater resources than we do. We expect this consolidation and strategic partnering to continue. Acquisitions or strategic relationships could harm us in a number of ways. For example:


	•	Competitors could acquire or enter into relationships with companies with which we have strategic relationships and discontinue our relationship, resulting in the loss of distribution opportunities for our products and services or the loss of certain enhancements or value-added features to our products and services;

	•	Competitors could obtain exclusive access to desirable multimedia content and prevent that content from being available in certain formats, thus impairing our content selection and our ability to attract customers;

	•	Suppliers of important or emerging technologies could be acquired by a competitor or other company which could prevent us from being able to utilize such technologies in our offerings, and disadvantage our offerings relative to those of competitors;

	•	A competitor could be acquired by a party with significant resources and experience that could increase the ability of the competitor to compete with our products and services; and

	•	Other companies with related interests could combine to form new, formidable competition, which could preclude us from obtaining access to certain markets or content; or which could significantly change the market for our products and services.

Any of these results could put us at a competitive disadvantage that could cause us to lose customers, revenue and market share. They could also force us to expend greater resources to meet the competitive threat, which could also harm our operating results.

The market for digital media service solutions is characterized by rapidly changing technologies and short product life cycles. These market characteristics are heightened by the emerging nature of the Internet and the continuing trend of companies from many industries to offer Internet-based applications and services. The widespread adoption of the new Internet, networking, streaming media, or telecommunications technologies or other technological changes could require us to incur substantial expenditures to modify or adapt our operating practices or infrastructure. Our future success will depend in large part upon our ability to:


	•	Identify and respond to emerging technological trends in the market;

	•	Enhance our products by adding innovative features that differentiate our digital media services and applications from those of our competitors;

	•	Acquire and license leading technologies;

	•	Bring digital media services and applications to market and scale our business and operations on a timely basis at competitive prices; and

	•	Respond effectively to new technological changes or new product announcements by others.

We will not be competitive unless we continually introduce new services and applications or enhancements to existing services and applications that meet evolving industry standards and customer needs. In the future, we may not be able to address effectively the compatibility and interoperability issues that arise as a result of technological changes and evolving industry standards. The technical innovations required for us to

remain competitive are inherently complex, require long development schedules and are dependent in some cases on sole source suppliers. We will be required to continue to invest in research and development in order to attempt to maintain and enhance our existing technologies and products, but we may not have the funds available to do so. Even if we have sufficient funds, these investments may not serve the needs of customers or be compatible with changing technological requirements or standards. Most development expenses must be incurred before the technical feasibility or commercial viability of new or enhanced services and applications can be ascertained. Revenue from future services and applications or enhancements to services and applications may not be sufficient to recover the associated development costs.

The technology underlying our digital media services and applications is complex and includes software that is internally developed and software licensed from third parties. These software products may contain errors or defects, particularly when first introduced or when new versions or enhancements are released. We may not discover software defects that affect our current or new services and applications or enhancements until after they are sold. Furthermore, because our digital media services are designed to work in conjunction with various platforms and applications, we are susceptible to errors or defects in third-party applications that can result in a lower quality product for our customers. Because our customers depend on us for digital media management, any interruptions could:


	•	Damage our reputation;

	•	Cause our customers to initiate product liability suits against us;

	•	Increase our product development resources;

	•	Cause us to lose sales; and

	•	Delay market acceptance of our digital media services and applications.

We do not possess product liability insurance, and our errors and omissions coverage is not likely to be sufficient to cover our complete liability exposure.

Online commerce and communications depend on the ability to transmit confidential information and licensed intellectual property securely over private and public networks. Any compromise of our ability to transmit such information and data securely or reliably, and any costs associated with preventing or eliminating such problems, could harm our business. Our systems and operations are susceptible to, and could be damaged or interrupted by a number of security and stability risks, including: outages caused by fire, flood, power loss, telecommunications failure, Internet breakdown, earthquake and similar events. We do not have complete redundancy in our webcasting facilities and therefore any damage or destruction to these would significantly harm our webcasting business. Our systems are also subject to human error, security breaches, power losses, computer viruses, break-ins, “denial of service” attacks, sabotage, intentional acts of vandalism and tampering designed to disrupt our computer systems, Websites and network communications. A sudden and significant increase in traffic on our Websites could strain the capacity of the software, hardware and telecommunications systems that we deploy or use. This could lead to slower response times or system failures.

Our operations also depend on receipt of timely feeds from our content providers, and any failure or delay in the transmission or receipt of such feeds could disrupt our operations. We also depend on Web browsers, ISPs and online service providers to provide access over the Internet to our product and service offerings. Many of these providers have experienced significant outages or interruptions in the past, and could experience outages, delays and other difficulties due to system failures unrelated to our systems. These types of interruptions could continue or increase in the future.

The occurrence of any of these or similar events could damage our business, hurt our ability to distribute products and services and collect revenue, threaten the proprietary or confidential nature of our technology, harm our reputation, and expose us to litigation or liability. We may be required to expend significant capital or other resources to protect against the threat of security breaches, hacker attacks or system malfunctions or to alleviate problems caused by such breaches, attacks or failures.

Our services are highly complex and are designed to be deployed in and across numerous large complex networks. Our digital distribution activities are managed by sophisticated software and computer systems. From time to time, we have needed to correct errors and defects. In addition, we must continually develop and update these systems over time as our business and business needs grow and change, and these systems may not adequately reflect the current needs of our business. We may encounter delays in developing these systems, and the systems may contain undetected errors and defects that could cause system failures. Any system error or failure that causes interruption in availability of products or content or an increase in response time could result in a loss of potential or existing business services customers, users, advertisers or content providers. If we suffer sustained or repeated interruptions, our products, services and Websites could be less attractive to such entities or individuals and our business could be harmed.

Significant portions of our business are dependent on providing customers with efficient and reliable services to enable customers to broadcast content to large audiences on a live or on-demand basis. Our operations are dependent in part upon transmission capacity provided by third-party telecommunications network providers. Any failure of such network providers to provide the capacity we require may result in a reduction in, or interruption of, service to our customers. If we do not have access to third-party transmission capacity, we could lose customers and if we are unable to obtain such capacity on terms commercially acceptable to us, our business and operating results could suffer.

Our computer and communications infrastructure is located at a single leased facility in Seattle, Washington, an area that is at heightened risk of earthquake and volcanic events. We do not have fully redundant systems, and we may not have adequate business interruption insurance to compensate us for losses that may occur from a system outage. Despite our efforts, our network infrastructure and systems could be subject to service interruptions or damage and any resulting interruption of services could harm our business, operating results and reputation.

Few existing laws or regulations specifically apply to the Internet, other than laws and regulations generally applicable to businesses. Certain U.S. export controls and import controls of other countries, including controls on the use of encryption technologies, may apply to our products. Many laws and regulations, however, are pending and may be adopted in the United States, individual states and local jurisdictions and other countries with respect to the Internet. These laws may relate to many areas that impact our business, including content issues (such as obscenity, indecency and defamation), copyright and other intellectual property rights, digital rights management, encryption, caching of content by server products, personal privacy, taxation, e-mail, sweepstakes, promotions, network and information security and the convergence of traditional communication services with Internet communications, including the future availability of broadband transmission capability and wireless networks. These types of regulations are likely to differ between countries and other political and geographic divisions. Other countries and political organiza-

tions are likely to impose or favor more and different regulation than that which has been proposed in the United States, thus furthering the complexity of regulation. In addition, state and local governments may impose regulations in addition to, inconsistent with, or stricter than federal regulations. The adoption of such laws or regulations, and uncertainties associated with their validity, interpretation, applicability and enforcement, may affect the available distribution channels for and costs associated with our products and services, and may affect the growth of the Internet. Such laws or regulations may harm our business. Our products and services may also become subject to investigation and regulation of foreign data protection and e-commerce authorities, including those in the European Union. Such activities could result in additional product and distribution costs for us in order to comply with such regulation.

There is uncertainty regarding how existing laws governing issues such as property ownership, copyright and other intellectual property issues, digital rights management, taxation, gambling, security, illegal or obscene content, retransmission of media, and personal privacy and data protection apply to the Internet. The vast majority of such laws was adopted before the advent of the Internet and related technologies and does not address the unique issues associated with the Internet and related technologies. Most of the laws that relate to the Internet have not yet been interpreted. In addition to potential legislation from local, state and federal governments, labor guild agreements and other laws and regulations that impose fees, royalties or unanticipated payments regarding the distribution of media over the Internet may directly or indirectly affect our business. While we and our customers may be directly affected by such agreements, we are not a party to such agreements and have little ability to influence the degree such agreements favor or disfavor Internet distribution or our business models. Changes to or the interpretation of these laws and the entry into such industry agreements could:


	•	Limit the growth of the Internet;

	•	Create uncertainty in the marketplace that could reduce demand for our products and services;

	•	Increase our cost of doing business;

	•	Expose us to increased litigation risk, substantial defense costs and significant liabilities associated with content available on our Websites or distributed or accessed through our products or services, with our provision of products and services, and with the features or performance of our products and Websites;

	•	Lead to increased product development costs or otherwise harm our business; or

	•	Decrease the rate of growth of our user base and limit our ability to effectively communicate with and market to our user base.

The Digital Millennium Copyright Act (DMCA) includes statutory licenses for the performance of sound recordings and for the making of recordings to facilitate transmissions. Under these statutory licenses, we and our broadcast customers may be required to pay licensing fees for digital sound recordings we deliver in original and archived programming and through retransmissions of radio broadcasts. The DMCA does not specify the rate and terms of the licenses, which are determined by arbitration proceedings, known as CARP proceedings, supervised by the United States Copyright Office. Past CARP proceedings have resulted in proposed rates for statutory webcasting that were significantly in excess of rates requested by webcasters. CARP proceedings relating to music subscription and non-subscription services offering music programming that qualify for various licenses under U.S. copyright law are pending. We cannot predict the outcome of these CARP proceedings and may elect instead to directly license music content for our subscription and/or non-subscription services, either alone or in concert with other affected companies.

Such licenses may apply only to music performed in the United States, and the availability of corresponding licenses for international performances is unclear. Therefore, our ability to find rights holders and negotiate appropriate licenses is uncertain. Many of our customers may be affected by these rates, which may negatively affect our revenue. Several CARP proceedings are pending for subscription music services and services that deliver digital downloads of music, and the outcome of these CARPs will also likely affect our business in ways that we cannot predict. Depending on the rates and terms adopted for the statutory licenses, our business could be harmed both by increasing our own cost of doing business, as well as by increasing the

The Child Online Protection Act and the Child Online Privacy Protection Act impose civil and criminal penalties on persons distributing material harmful to minors over the Internet to persons under the age of 17, or collecting personal information from children under the age of 13. We do not knowingly distribute harmful materials to minors or collect personal information from children under the age of 13. The manner in which these Acts may be interpreted and enforced cannot be fully determined, and future legislation similar to these Acts could subject us to potential liability if we were deemed to be non-compliant with such rules and regulations, which in turn could harm our business.

There are a large number of legislative proposals before the United States Congress and various state legislatures regarding intellectual property, digital rights management, copy protection requirements, privacy, email marketing and security issues related to our business. It is not possible to predict whether or when such legislation may be adopted, and certain proposals, if adopted, could materially and adversely affect our business through a decrease in user registration and revenue, and influence how and whether we can communicate with our customers.

Many of our products are interactive Internet applications that by their very nature require communication between a client and server to operate. To provide better consumer experiences and to operate effectively, our products send information to servers. Many of the services we provide also require that a user provide certain information to us. We post an extensive privacy policy concerning the collection, use and disclosure of user data involved in interactions between our client and server products. Any failure by us to comply with our posted privacy policy and existing or new legislation regarding privacy issues could impact the market for our products and services, subject us to litigation and harm our business.

We, and various underwriters for our initial public offering are defendants in a putative shareholder class action. The complaint alleges undisclosed improper underwriting practices concerning the allocation of shares for our IPO, in violation of the federal securities laws. Similar complaints have been filed concerning the IPOs of more than 300 companies, and the litigation has been coordinated in federal court for the Southern District of New York as In re Initial Public Offering Securities Litigation, 21 MC 92. A proposal has been made for the settlement and release of claims against the issuer defendants. The settlement is subject to a number of conditions, including approval of other proposed settling parties and the court. If the settlement does not occur, and litigation against us continues, we believe we have meritorious defenses and intend to defend the case vigorously. In addition, because class action litigation has often been brought against companies with periods of volatility in their stock prices, we could become involved in additional litigation.

Our common stock trades on the Nasdaq SmallCap Market. The market price of our common stock has fluctuated significantly to date. In the future, the market price of our common stock could be subject to significant fluctuations due to general market conditions and in response to quarter-to-quarter variations in:


	•	Our anticipated or actual operating results;

	•	Developments concerning our technologies and market offerings;

	•	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.

The stock market in recent years has experienced extreme price and volume fluctuations that have affected the market price of many technology companies, and that have often been unrelated or disproportionate to the operating performance of companies.

If a large number of shares of our common stock are sold in the open market or if there is a perception that such sales could occur, the trading price of our common stock could decline materially. In addition, the sale of these shares, or possibility of such sale, could impair our ability to raise capital through the sale of additional shares of common stock.

The 17,358,553 shares subject to our recent prospectus represent 30.5% of our common shares outstanding on December 31, 2003. In addition, in the first quarter of 2004, we sold an additional 10,810,811 shares of common stock to a limited number of accredited investors and we have agreed to file a registration statement covering the resale of the shares sold in that financing. The selling stockholders under the registration statements will be permitted to sell their registered shares in the open market from time to time without advance notice to us or to the market and without limitations on volume.

Sales of shares pursuant to exercisable options and warrants could also lead to subsequent sales of the shares in the public market. These sales, together with sales of shares by the selling stockholders, could depress the market price of our stock by creating an excess in supply of shares for sale. Availability of these shares for sale in the public market could also impair our ability to raise capital by selling equity securities.

There is no guarantee that securities analysts will continue to cover our common stock. If securities analysts do not cover our common stock, the lack of research coverage may adversely affect our common stock’s market price. The trading market for our common stock relies in part on the research and reports that industry or financial analysts publish about our business or us. If one or more of the analysts who cover us downgrades our stock, our stock price would likely decline rapidly. If one or more of these analysts ceases coverage of our company, we could lose visibility in the market, which in turn could cause our stock price to decline. In addition, recently adopted rules mandated by the Sarbanes-Oxley Act of 2002, and a global settlement reached between the SEC, other regulatory analysts and a number of investment banks in April 2003, may lead to a number of fundamental changes in how analysts are reviewed and compensated. In particular, many investment banking firms will now be required to contract with independent financial analysts for their stock research. It may be difficult for companies with smaller market capitalizations, such as our company, to attract independent financial analysts that will cover our common stock, which could have a negative effect on our market price.

A number of publicly-traded companies have recently announced that they will begin expensing stock option grants to employees. In addition, the Financial Accounting Standards Board (FASB) has indicated that possible rule changes requiring expensing of stock options may be adopted in the near future. Currently, we include such expenses on a pro forma basis in the notes to our annual financial statements in accordance with accounting principles generally accepted in the United States, but do not include stock option expense for employee options in our reported financial statements. If accounting standards are changed to require us to expense stock options, our reported earnings will decrease significantly and our stock price could decline.

Some of the provisions of our certificate of incorporation and bylaws could make it more difficult for a third party to acquire us, even if doing so might be beneficial to our stockholders by providing them with the opportunity to sell their shares possibly at a premium over the then market price. For example, our board of directors is divided into three classes. At each annual meeting of stockholders, the terms of approximately one-third of the directors will expire, and new directors will be elected to serve for three years. It will take at least two annual meetings to effect a change in control of our board of directors because a majority of the directors cannot be elected at a single meeting, which may discourage hostile takeover bids.

In addition, our certificate of incorporation authorizes the board of directors to issue up to 5,000,000 shares of preferred stock. The preferred stock may be issued in one or more series, the terms of which may be determined at the time of issuance by our board of directors without further action by the stockholders. These terms may include voting rights including the right to vote as a series on particular matters, preferences as to dividends and liquidation, conversion rights, redemption rights and sinking fund provisions. No shares of preferred stock are currently outstanding and we have no present plans for the issuance of any preferred stock. The issuance of any preferred stock, however, could diminish the rights of holders of our common stock, and therefore could reduce the value of our common stock. In addition, specific rights granted to future holders of preferred stock could be used to restrict our ability to merge with, or sell assets to, a third party. The ability of our board of directors to issue preferred stock could make it more difficult, delay, discourage, prevent or make it more costly to acquire or effect a change in control, thereby preserving the current stockholders’ control.

Our bylaws contain provisions that require stockholders to act only at a duly-called meeting and make it difficult for any person other than management to introduce business at a duly-called meeting by requiring such other person to follow certain notice procedures.

Finally, we are also subject to Section 203 of the Delaware General Corporation Law which, subject to certain exceptions, prohibits a Delaware corporation from engaging in any business combination with any interested stockholder for a period of three years following the date that the stockholder became an interested stockholder. The preceding provisions of our certificate of incorporation and bylaws, as well as Section 203 of the Delaware General Corporation Law, could discourage potential acquisition proposals, delay or prevent a change of control and prevent changes in our management, even if such things would be in the best interests of our stockholders.

We have never paid any dividends on our common stock and do not plan to pay dividends on our common stock for the foreseeable future.

Our financial results could be affected by factors such as changes in interest rates and fluctuations in the stock market. As substantially all sales are currently made in U.S. dollars, a strengthening of the dollar could make our services less competitive in foreign markets. We do not use derivative instruments to hedge our risks. Our interest income is sensitive to changes in the general level of U.S. interest rates. Based on our invested cash balances of $22.3 million at December 31, 2003, a one percent change in interest rates would cause a change in interest income of $223,000 per year. Due to the investment grade level of our investments, we anticipate no material market risk exposure. In addition, our revolving credit facility and our term loan are based on the prime rate. Based on the $4.3 million balance outstanding at December 31, 2003, a one percent increase in the prime rate would increase our interest expense by $43,000 per year.

We invest in investment-grade government obligations, institutional money market funds and other obligations with FDIC insured US banks. Concentration is limited to 10% in any one instrument or issuer. Our primary investment focus is to preserve capital and earn a market rate of return on our investments. We do not speculate nor invest in publicly traded equity securities and, therefore, do not believe that our capital is subject to significant market risk.

In our opinion, the accompanying consolidated balance sheets and the related consolidated statements of operations, of stockholders’ equity, and of cash flows present fairly, in all material respects, the financial position of Loudeye Corp. (formerly Loudeye Technologies, Inc.) and subsidiaries at December 31, 2003 and 2002, and the results of their operations and of their cash flows for the years then ended in conformity with accounting principles generally accepted in the United States of America. These financial statements are the responsibility of the Company’s management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these statements in accordance with auditing standards generally accepted in the United States of America, which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. The consolidated financial statements of Loudeye Technologies, Inc. and subsidiaries, for the year ended December 31, 2001, prior to the revision described in Note 2, were audited by other independent auditors who have ceased operations. Those independent auditors expressed an unqualified opinion on those consolidated financial statements in their report dated February 14, 2002.

As described in Note 2, the Company adopted the provisions of Statement of Financial Accounting Standards No. 142, “Goodwill and Other Intangible Assets” as of January 1, 2002.

As discussed above, the consolidated financial statements of Loudeye Technologies, Inc. for the year ended December 31, 2001 were audited by other independent auditors who have ceased operations. As described in Note 2, these consolidated financial statements have been revised to include the transitional disclosures required by Statement of Financial Accounting Standards No. 142, “Goodwill and Other Intangible Assets,” which was adopted by the Company as of January 1, 2002. We audited the transitional disclosures described in Note 2. In our opinion, the transitional disclosures for 2001 in Note 2 are appropriate. However, we were not engaged to audit, review or apply any procedures to the 2001 consolidated financial statements of the Company other than with respect to such disclosures and, accordingly, we do not express an opinion or any other form of assurance on the 2001 consolidated financial statements taken as a whole.

The following is a copy of the report of Arthur Andersen LLP dated February 14, 2002 on their audits of the financial statements of Loudeye Technologies, Inc and subsidiaries for December 31, 2001 and 2000 and each of the three years in the period ended December 31, 2001. Arthur Andersen LLP has ceased operations and has not reissued this report. In 2002, the Company adopted the provisions of the Statement of Financial Accounting Standards No. 142, “Goodwill and Other Intangible Assets” (SFAS No. 142). As discussed in Note 2, the Company has presented the transitional disclosures for 2001 required by SFAS No. 142. The Arthur Andersen LLP report does not extend to these changes to the 2001 consolidated financial statements. These revisions to the 2001 consolidated financial statements were reported on by PricewaterhouseCoopers LLP as stated in their report appearing herein. The footnote shown below was not part of Arthur Andersen LLP’s report.

We have audited the accompanying consolidated balance sheets of Loudeye Technologies, Inc. and subsidiaries (Loudeye) as of December 31, 2001* and 2000*, and the related consolidated statements of operations, stockholders equity (deficit) and cash flows for each of the three years* in the period ended December 31, 2001. These financial statements are the responsibility of Loudeye’s management. Our responsibility is to express an opinion on these financial statements based on our audits.

We conducted our audits in accordance with auditing standards generally accepted in the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Loudeye Technologies, Inc. and subsidiaries as of December 31, 2001* and 2000*, and the results of their operations and their cash flows for each of the three years* in the period ended December 31, 2001 in conformity with accounting principles generally accepted in the United States.

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

Loudeye Corp. (the “Company” or “Loudeye”) provides digital media services and media restoration services. The Company is headquartered in Seattle, Washington and to date has conducted business in the United States, Canada and Europe 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 Company has incurred net losses and negative cash flows from operations since inception and has an accumulated deficit of $192.9 million at December 31, 2003. Management has restructured the Company’s operations, reduced its work force, renegotiated leases, and taken other actions to limit the Company’s expenditures. In August 2003, the Company sold shares of common stock in a private placement transaction that raised net proceeds of approximately $11.4 million.

In the first quarter of 2004, the Company completed an additional private placement financing transaction that resulted in net proceeds of approximately $18.9 million. The Company believes that its existing cash, cash equivalents, and short-term investments will be sufficient to fund its operations and meet its working capital and capital expenditure requirements for 2004. 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. Accordingly, the Company may require additional capital to fund its operations. There can be no assurance that additional capital will be available to the Company on acceptable terms, or at all.

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.

The Company considers all highly liquid investments with an original maturity of three months or less to be cash equivalents. Cash and cash equivalents consist of demand deposits and money market accounts maintained with financial institutions and certain other investment grade instruments, which at times exceeds federally insured limits. The Company has not experienced any losses on its cash and cash equivalents

The Company has invested amounts in investment-grade government obligations, institutional money market funds and other obligations with FDIC insured U.S. banks. Marketable securities 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 and their relatively low risk.

The Company has approximately $316,000 of short-term investments which are utilized as collateral for certain irrevocable standby letters of credit. Accordingly, these investments are classified as restricted investments in the consolidated balance sheets. These securities all mature within one year and reported amounts approximate fair value due to the relatively short maturities of these investments. These investments are related to standby letters of credit required for certain lease agreements which expire through 2005. Accordingly, the restricted investments have been classified in long-term assets in the accompanying consolidated balance sheets.

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. As described in Note 4, the Company recorded impairment charges of $6.7 million, $3.6 million and $27.9 million in 2003, 2002 and 2001, respectively. These amounts are included in Special Charges in the accompanying consolidated statements of operations.

Advertising costs are expensed as incurred. The Company incurred $85,000, $787,000 and $122,000 in advertising costs for the years ended December 31, 2003, 2002 and 2001, respectively. These expenses have been included as a component of sales and marketing expenses in the accompanying consolidated statements of operations.

Financial instruments that potentially subject the Company to concentrations of credit risk consist of cash and cash equivalents, short-term investments, and long-term obligations. Fair values of cash and cash equivalents approximate their carrying value due to the short period of time to maturity. Short-term investments are reported at their market value. The carrying value of the Company’s line of credit and long-term obligations approximate fair value because the interest rates of the obligations reflects the current market rates of similar facilities for comparable companies. In addition, the interest rates on the line of credit and term loan are variable.

The Company is exposed to credit risk since it extends credit to its customers. The Company performs initial and ongoing evaluations of its customers’ financial condition, and generally extends credit on open account, requiring collateral as deemed necessary.

During the three years in the period ended December 31, 2003, the company had sales to certain significant customers, as a percentage of revenues, as follows:

Revenues from Customer A were reported primarily in the Digital Media Services segment and revenues from Customer B were reported primarily in the Media Restoration Services segment.

Property and equipment is stated at historical cost less accumulated depreciation and impairment write-downs. Depreciation is computed using the straight-line method over the estimated useful lives of the property and equipment, ranging from three to five years. Leasehold improvements are amortized over the lesser of the applicable lease term or the estimated useful life of the asset. Expenditures and improvements that increase the value or extend the life of an asset are capitalized. Expenditures for maintenance and repair are expensed as incurred. Gains or losses on the disposition of assets are reflected in the consolidated statement of operations in the period of disposal.

The Company adopted Statement of Financial Accounting Standards No. 142, “Goodwill and Other Intangible Assets” (FAS 142) effective January 1, 2002. Under the new rule, goodwill and intangible assets deemed to have indefinite lives are no longer amortized, but are subject to, at a minimum, annual impairment tests in accordance with the Statement. The Company completes its annual impairment test as of November 30 of each year. This change has reduced amortization expense during the years ended December 31, 2003 and 2002 compared to prior years. Other than goodwill, the Company has no intangible assets deemed to have indefinite lives. The impact of adopting FAS 142 on the Company’s net loss and net loss per share for 2001, as if FAS 142 had been adopted effective January 1, 2001, is as follows (in thousands, except per share amounts):

The Company determined that it has three reporting units for purposes of FAS 142; Enterprise Communications, Digital Media Services, and Restoration. The Company’s Digital Media Services segment consists of the Enterprise Communications and Digital Media Services reporting units. Assets reclassified to goodwill ($222,000) consisted of acquired technology and workforce from the Company’s acquisition of Vidipax. The Company performed its annual impairment tests for 2002 under FAS 142 and recorded resulting impairment charges. These charges are discussed in greater detail in Note 4. The Company does not have any goodwill at December 31, 2003.

Research and development costs consist primarily of salaries, wages and benefits for development personnel and are expensed as incurred. Software developed for internal use is capitalized once the preliminary project stage has been completed and management has committed to funding the continuation of the development project. Capitalization is ceased when the software project is substantially complete and ready for its intended use. Internally developed software and software acquired in business combinations are recorded in

other long term assets and intangibles, respectively. Purchased software is recorded in property, plant and equipment.

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 No. 25), as interpreted by Financial Accounting Standards Board Interpretation No. 44, “Accounting for Certain Transactions Involving Stock Compensation, an Interpretation of APB No. 25” (FIN 44) and related interpretations. In addition, the Company complies with the disclosure provisions of Statement of Financial Accounting Standards No. 123, “Accounting for Stock-Based Compensation” (FAS 123) and related interpretations. The Company records deferred stock-based compensation for the difference between the exercise price of employee stock options and the fair value of the Company’s common stock at the date of grant. These differences are deferred and amortized on an accelerated basis over the vesting period of the individual options in accordance with Financial Accounting Standards Board Interpretation No. 28, “Accounting for Stock Appreciation Rights and Other Variable Stock Option or Award Plans” (FIN 28).

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-based compensation for the year ended December 31, 2003 totaled $1.4 million, consisting of the amortization of deferred stock compensation of $460,000, of which $62,000 is included in cost of revenues, stock-based compensation expense of $730,000 related to options granted to a member of the Company’s board of directors for consulting services, variable stock compensation expense of $64,000 related to stock options that were repriced in 2001, stock and options issued to former employees as severance and termination benefits of $99,000, and stock options issued to an outside consultant of $7,000. Stock-based compensation was a credit of $417,000 for the year ended December 31, 2002, of which $34,000 is included in cost of revenues, consisting of the amortization of deferred stock compensation net of the reversal of expense related to accelerated amortization for options that were cancelled. Stock-based compensation totaled $359,000 for the year ended December 31, 2001, consisting of the amortization of deferred stock compensation.

The Company records stock-based compensation charges as a separate component of expenses. These amounts can be allocated to the other expense categories in the accompanying consolidated statements of operations as follows for the year ended December 31, 2001 (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 and shares issued to employees under the Company’s employee stock purchase plan (in thousands):

To determine compensation expense under FAS 123, the Company used the following assumptions:

The Company recognizes deferred tax assets and liabilities for the expected future tax consequences of events that have been included in the financial statements or tax returns. Deferred tax assets and liabilities are determined based on the differences between the financial statement and tax bases of assets and liabilities using enacted tax rates in effect for the periods in which the differences are expected to reverse. A valuation allowance is recorded when it is more likely than not that the net deferred tax asset will not be realized.

The Company has adopted Statement of Financial Accounting Standards No. 131, “Disclosure about Segments of an Enterprise and Related Information,” which establishes annual and interim reporting standards for an enterprise’s operating segments and related disclosures about its products, services, geographic areas and major customers. Management has determined that the Company operates in two segments, digital media services and media restoration services.

In the normal course of business, the Company indemnifies other parties, including business partners, lessors and parties to other transactions with the Company. The Company has agreed to hold the other parties harmless against losses arising from a breach of representation or covenants, or out of intellectual property infringement or other claims made by third parties. These agreements may limit the time within which an indemnification claim can be made. In addition, the Company has entered into indemnification agreements with certain of its officers and directors and the Company’s by-laws contain similar indemnification obligations to the Company’s officers and directors. It is not possible to determine the maximum potential amount under these indemnification agreements since the Company has not had any prior indemnification claim upon which

to base an estimate and each claim would be based on the unique facts and circumstances of the claim and the particular provisions of each agreement.

The Company has adopted the provisions of Statement of Accounting Standards No. 130, “Reporting Comprehensive Income” (FAS 130). FAS 130 requires the disclosure of comprehensive income or loss and its components in the consolidated financial statements. Comprehensive income or loss is the change in stockholders’ equity from transactions and other events and circumstances other than those resulting from investments by owners and distributions to owners. The Company had no such transactions in 2003, 2002 or 2001.

Certain information reported in previous periods has been reclassified to conform to the current period presentation. These reclassifications had no impact on net loss, stockholders’ equity, or cash flows as reported previously.

The preparation of the financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

Management’s assessments of the impairment of property and equipment and intangible assets are sensitive accounting estimates that could result in additional impairment charges in the near term. Factors that impact these estimates include, but are not limited to, possible changes in business plans, decreases in the market price of the Company’s common stock and declining financial results.

Management evaluates the potential loss exposure on various claims and lawsuits arising in the normal course of business. An accrual is made if the amount of a particular claim or lawsuit is probable and reasonably estimable.

In 2001, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards No. 143, “Accounting for Asset Retirement Obligations” (FAS 143), which establishes requirements for the financial accounting and reporting for obligations associated with the retirement of tangible long-lived assets and the associated asset retirement costs. The standard is effective for fiscal years beginning after June 15, 2002. The adoption of this statement has not impacted the results of operations or the financial position of the Company.

In 2002, the FASB issued statement of Financial Accounting Standards No. 145, “Rescission of FASB Statements No. 4, 44 and 64, Amendment to FASB Statement No. 13, and Technical Corrections” (FAS 145). FAS 145 eliminates the requirement in FAS 4 that gains and losses from the extinguishments of debt be aggregated and classified as extraordinary items, net of the related income tax. The rescission of FAS 4 is effective for fiscal years beginning after May 15, 2002. Adoption of this statement has not impacted the results of operations or the financial position of the Company.

In 2002, the FASB issued Statement of Financial Accounting Standards no. 146, “Accounting for Costs Associated with Exit or Disposal Activities” (FAS 146). FAS 146 requires the recognition of such costs when

they are incurred rather than at the date of a commitment to an exit or disposal plan. The provisions of FAS 146 are to be applied prospectively to exit or disposal activities initiated after December 31, 2002. The Company adopted the provisions of FAS 146 on January 1, 2003. As discussed in Note 4, the Company recorded restructuring charges under FAS 146 for activities initiated after December 31, 2002.

In April 2003, the FASB issued SFAS No. 149, “Amendment of Statement 133 on Derivative Instruments and Hedging Activities,” which is generally effective for contracts entered into or modified after June 30, 2003 and for hedging relationships designated after June 30, 2003. SFAS 149 clarifies under what circumstances a contract with an initial net investment meets the characteristic of a derivative as discussed in SFAS No. 133, when a derivative contains a financing component, amends the definition of an “underlying” to conform it to the language used in FASB interpretation No. 45, “Guarantor Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others” and amends certain other existing pronouncements. The adoption of this standard did not have an impact on the results of operations or financial position of the Company.

In May 2003, the FASB issued Statement of Financial Accounting Standard No. 150 “Accounting for Certain Financial Instruments with Characteristics of Both Liability and Equity” (“FASB No. 150”). FASB No. 150 establishes standards for how companies classify and measure certain financial instruments with characteristics of both liabilities and equity. This Statement is effective for financial instruments entered into or modified after May 31, 2003. In October 2003, the FASB deferred certain provisions of FASB No. 150 relating to mandatorily redeemable non-controlling interests. The adoption of this standard did not have an impact on the results of operations or financial position of the Company.

In November 2002, the FASB issued Interpretation No. 45 (“FIN 45”), “Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of the Indebtedness of Others”, which clarifies the requirements of SFAS No. 5, “Accounting for Contingencies,” relating to a guarantor’s accounting for and disclosures of certain guarantees issued. FIN 45 requires enhanced disclosures for certain guarantees. It also requires certain guarantees that are issued or modified after December 31, 2002, including certain third-party guarantees, to be initially recorded on the balance sheet at fair value. The adoption of this standard did not have an impact on the results of operations or financial position of the Company. Disclosures required by FIN 45 are included in the Notes to the consolidated financial statements.

In December 2003, the Financial Accounting Standards Board issued a revised Interpretation No. 46, Consolidation of Variable Interest Entities, an interpretation of Accounting Research Bulletin No. 51, (“FIN 46R”). FIN 46R requires the consolidation of entities in which an enterprise absorbs a majority of the entity s expected losses, receives a majority of the entity’s expected residual returns, or both, as a result of ownership, contractual or other financial interests in the entity. Currently entities are generally consolidated by an enterprise when it has a controlling financial interest through ownership of a majority voting interest in the entity. The provisions of FIN 46R are generally effective for existing (prior to February 1, 2003) variable interest relationships of a public entity no later than the end of the first reporting period that ends after March 15, 2004. However, prior to the required application of this interpretation, a public entity that is not a small business issuer shall apply FIN 46R to those entities that are considered to be special-purpose entities no later than the end of the first reporting period that ends after December 15, 2003. The Company does not have any special purpose entities and will apply the remaining provisions of FIN 46R to its first quarter 2004 financial statements.

In 2002, the Emerging Issues Task Force (EITF) finalized its tentative consensus on EITF Issue No. 00-21, Revenue Arrangements With Multiple Deliverables (EITF 00-21), which provides guidance on the timing and methods of revenue recognition for sales agreements that include delivery of more than one product or service. EITF 00-21 is effective prospectively for arrangements entered into in fiscal periods beginning after June 15, 2003. The Company recognizes revenue in accordance with the provisions of EITF 00-21.

The Company recognizes revenue in accordance with Staff Accounting Bulletin No. 101, “Revenue Recognition in Financial Statements,” (SAB 101) as amended by Staff Accounting Bulletin No. 104 (SAB 104), and EITF 00-21. The Company recognizes revenue associated with the license of software in accordance with Statement of Position 97-2, “Software Revenue Recognition” (SOP 97-2), as amended by SOP 98-4, SOP 98-9 and related interpretations and Technical Practice Aids.

The Company recognizes revenues from encoding services, digital music samples services, Internet radio services, live and on-demand webcasting services, software licensing, and media restoration services. The Company recognizes these revenues when persuasive evidence of an arrangement exists, the product and/or service has been delivered, the price is fixed and determinable, and collectibility is reasonably assured.

In arrangements that include rights to multiple products and/or services, the Company allocates the total arrangement consideration among each of the deliverables using the residual method, under which revenue is allocated to undelivered elements based on verifiable and objective evidence of the fair value of the undelivered elements. Multiple element arrangements may consist of implementation services, development services, encoding services, digital music samples services, Internet radio services, and on-demand webcasting services. Verifiable and objective evidence is based upon the price charged when an element is sold separately.

Under the provisions of SOP 97-2, in software arrangements that involve rights to multiple products and services, the Company allocates the total arrangement consideration among each of the deliverables using the residual method, under which revenue is allocated to the undelivered elements based on vendor-specific objective evidence of the fair value of such undelivered elements. Elements included in multiple element arrangements consist of software, intellectual property, implementation services, maintenance and consulting services. Vendor-specific objective evidence is based on the price charged when an element is sold separately or, in the case of an element not sold separately, the price established by management, if it is probable that the price, once established, will not change before market introduction.

Encoding 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 the provisions of SAB 101, as amended by SAB 104, and EITF 00-21, the Company recognizes revenues as the encoding 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.

Digital music samples services are provided to customers using the Company’s proprietary streaming media software, tools, and processes. Music samples are streamed files containing selected portions, or samples, of a full music track and are typically 30 to 60 seconds in length. Customer billings are based on the volume of data streamed at rates agreed upon in the customer contract, subject to a nonrefundable monthly minimum fee. Under the provisions of SAB 101, as amended by SAB 104, and EITF 00-21, the Company recognizes revenue in the period in which the samples are delivered.

Similar to the digital music samples services, Internet radio and video services are provided to customers using the Company’s proprietary media software, tools and processes. Internet radio and video services can consist of the rebroadcasting over the Internet of a customer’s over-the-air radio programming. Services provided may also include playlist selection and programming services for online radio channels and may include related video content, such as music videos. Under the provisions of SAB 101, as amended by SAB 104, and EITF 00-21, revenue from the sale of Internet radio and video services is recognized on a monthly basis as the services are provided and customers are typically billed monthly in arrears.

Webcasting services are provided to customers using the Company’s proprietary streaming media software, tools and processes. Services for live webcast events may be sold separately or combined with on-demand webcasting services in which the Company may host an archive of the webcast event for future use on an on-demand basis. In addition, on-demand webcasting services are often sold separately without the live event component. As a result, the Company has verifiable and objective evidence of the fair value for both the live and on-demand services. Accordingly, under the provisions of SAB 101, as amended by SAB 104, and EITF 00-21, the Company recognizes revenue for live webcasting in the period in which the webcast event occurs. Revenue for on-demand webcasting services are deferred and recognized ratably over the period in which the services are provided. Customer billings are typically based on the volume of data streamed at rates agreed upon in the customer contract or a set monthly fee.

Media restoration services consist of services provided by our VidiPax subsidiary to restore and upgrade old or damaged archives of traditional media. Under the provisions of SAB 101, as amended by SAB 104, and EITF 00-21, the Company recognizes revenues as these 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. As discussed in Note 6, the Company sold its Vidipax subsidiary on January 30, 2004 pursuant to an agreement dated October 31, 2003.

Beginning in the fourth quarter of 2000 and through the first quarter of 2003, the Company commenced a series of operational restructurings and facilities consolidations. As a result of these activities, the Company has recorded special charges in the years ended December 31, 2003, 2002 and 2001.

In the fourth quarter of 2000, the Company assessed each product and service offering and the costs related to each in making the determination to cease providing, or otherwise change the level of support the Company would provide to these offerings. The Company determined that it was not feasible to continue to provide or support digital media consulting services, certain digital media applications and the Alive e-show platform in 2001. Additionally, the decision was made to decrease the level of emphasis placed on video encoding activities. This decision was made as a response to the decreased demand for such services, which started in the third quarter of 2000 and continued into the first quarter of 2001, at which time the Company determined that no further resources would be provided to support video encoding in the Seattle facility. In the second quarter of 2001, the Company terminated approximately 45% of its workforce. That reduction in force created excess facilities, resulting in the development of facilities consolidation plans. During 2002 the Company implemented additional consolidation and cost savings initiatives, which included continued integration and realignment processes related to our acquisition activity. As a result of these initiatives the Company consolidated its digital media services operations in the first quarter of 2002 from three separate facilities to one facility acquired in the Activate acquisition. Implementing these consolidation plans have generated a number of special charges in 2002, and 2001.

On February 4, 2003, the Company’s Chairman and Chief Executive Officer, John T. Baker, resigned and the Company engaged Regent Pacific Management Corporation to provide management services to the Company. On March 7, 2003, Regent Pacific resigned from the engagement and Jeffrey M. Cavins was elected President and Chief Executive Officer. During and subsequent to Regent Pacific’s engagement, the Company undertook a strategic and operational analysis of its business and product lines. This analysis resulted in the development of a new strategic and operational plan, under which the Company restructured itself to focus on its core competencies in digital media services and on core strategic customers and markets for its enterprise communications services.

Implementing the consolidation and restructuring plans described above have generated a number of special charges, summarized as follows (in thousands):

Following is a more detailed description of the special charges for each of the categories in the table above:

Goodwill Impairment. A revised corporate forecast was developed in connection with the 2003 strategic and operational plan. The revised forecast also considered that the Company had learned that revenue from a significant customer in its Media Restoration Services segment would be less than originally anticipated. Utilizing the revised forecast, the Company performed a reassessment of the carrying value of all of its assets, both tangible and intangible. The revised forecast demonstrated that certain tangible and intangible assets and goodwill related to its media restoration services and enterprise communications services businesses were impaired, as the projected undiscounted discernible cash flows did not exceed the carrying value of the assets over their estimated useful lives. The fair values of each of these assets were estimated using primarily a probability weighted discounted cash flow method. The fair value of goodwill was estimated under the two-step process required by FASB No. 142 and resulted in an impairment of the goodwill associated with the Media Restoration Services segment of $5.3 million during the first quarter of 2003.

Intangible and other asset impairments. The Company recorded impairments of $685,000, $1.4 million and $21.4 million in 2003, 2002 and 2001, respectively, related to intangibles and other long-term assets. The Company decided in 2001 to focus on areas of business that it believed had a near-term opportunity to drive increases in revenue. This decision led to certain acquisitions described in Note 10.

The goodwill previously recognized associated with the Alive.com acquisition and certain other digital applications had no discernable cash flows or fair value and, as a result, were impaired. The remaining unamortized balances, totaling $10.6 million were written off in the first quarter of 2001. In the third and fourth quarters of 2001, the Company reassessed the remaining Alive intangibles and recorded additional impairment charges of $180,000 and $117,000, respectively. The Company previously had capitalized the cost of warrants issued to a strategic partner. In the first quarter of 2001, the Company terminated this relationship and, accordingly, the Company recorded a charge of $708,000 related to the unamortized portion of the warrants.

In the fourth quarter of 2001, the Company performed a reassessment of the carrying value of all of the Company’s assets, both tangible and intangible, in conjunction with the corporate forecast for 2002 and beyond. The development of this forecast demonstrated that certain assets related to acquisitions in 2000 and 2001 were impaired, as the projected undiscounted discernible cash flows did not exceed the carrying value of the assets over the estimated useful life of those assets.

In the fourth quarter of 2001, the Company recorded a charge totaling $5.0 million related to intangible assets acquired from DiscoverMusic in March 2001. Increased competition, including pricing pressures and

the continued economic downturn caused the Company to lower its initial projections for the business and subsequently write-down the value originally assigned to the acquired customer list and other acquired intangibles. The Company did not expect to fully recover the current carrying value of the assets in the near term, resulting in the impairment. The assets were written down to estimated current cost to replace, which the Company believed was a reliable estimate of the fair value.

In the fourth quarter of 2001, the Company recorded a charge totaling $3.5 million related to the impairment of various intangibles that were recorded as a result of its online radio transactions. Through December 31, 2001, the Company had not generated significant revenues from radio customers. Internal projections for online radio-related revenues were revised and were lower than those projections that existed at the time of the acquisitions. This revision and the general uncertainty of the economic situation and the advertising market required the Company to perform an assessment of these assets. The projected undiscounted cash flows over the remaining estimated life of two years did not fully support the carrying value of these assets on the balance sheet. Accordingly, the Company obtained an independent valuation to assess the fair values of these assets. The Company used this as the new basis of the intangible assets and recorded the difference between the carrying value and the assessed fair market value to special charges.

The Company also recorded a charge totaling $1.2 million in the fourth quarter of 2001 related to the impairment of VidiPax goodwill. The projected undiscounted cash flows did not fully support the carrying value of the related goodwill. The Company estimated the fair value of VidiPax’s long-lived assets and charged the $1.2 million difference between the carrying value and the estimated fair market value to special charges.

In the fourth quarter of 2002, in connection with the Company’s annual impairment test for goodwill and as a result of declining revenue, the Company obtained an independent valuation to assist in evaluating its goodwill and intangible assets for impairment in accordance with FAS 142 and FAS 144. The fair values of the Company’s reporting units and their respective intangible assets were estimated using primarily a discounted cash flow method. As a result of this analysis, the Company determined that certain of the intangible assets in its digital media services and enterprise communication services reporting units were impaired as the cash flows did not support the carrying value of the assets. Accordingly, the Company recorded special charges reflecting the impairment of these intangible assets as follows (in thousands):

In the first quarter of 2003, the revised corporate forecast developed in connection with the 2003 strategic and operational plan described above demonstrated that certain intangible assets related to the Company’s media restoration services and enterprise communications services reporting units were impaired, as the projected undiscounted discernible cash flows over the estimated useful lives of the assets did not exceed their carrying value. The fair values of each of these assets were estimated using primarily a discounted cash flow method, and resulted in impairments as follows (in thousands):

Property and equipment. The Company recorded special charges of $6.5 million related to property and equipment in 2001. These included charges of approximately $820,000 related to previously capitalized software that the Company abandoned during 2001. The Company determined that due to the acquisition of a music samples platform from DiscoverMusic, the previously capitalized software costs associated with Loudeye’s separately developed music samples platform were redundant and not recoverable. Accordingly, since the code base developed by Loudeye would not be sold or otherwise used, it was determined to have no further value and the remaining unamortized cost, approximately $600,000, was adjusted to zero. The Company also discontinued all sales efforts related to certain digital media applications and terminated the related development efforts. This resulted in a full impairment and a related charge of $250,000.

The Company’s decision in early 2001 to focus on the audio business led to a further review of its video assets. The Company performed a review of the current market prices for similar used equipment and adjusted the remaining value of its video assets down to the estimated net realizable value. The Company sold a significant amount of these assets at auction during the second quarter of 2001, at amounts approximately equal to their adjusted values. Prior to the sale, the Company had ceased depreciation the assets until such time as they were disposed of. The Company also recorded in the third quarter of 2001 charges of $607,000 related to assets acquired from DiscoverMusic that were abandoned due to obsolescence or otherwise unusable in its restructured business. In conjunction with the consolidated forecast for 2002 and beyond, it became apparent that the projected undiscounted cash flows were insufficient to recover fully the carrying value of the remaining property and equipment (excluding those recently acquired from Activate). The Company then performed an analysis of all remaining property and equipment that had not been purchased recently to determine its fair value. These analyses resulted in charges of $5.1 million in 2001.

In the fourth quarter of 2002, as a result of declining revenue and economic conditions, it became apparent that projected undiscounted cash flows were insufficient to recover fully the carrying value of the remaining property and equipment related to the Company’s digital media services reporting unit (excluding those acquired from Streampipe). The Company then performed an analysis of the remaining property and equipment to determine its fair value. These analyses resulted in impairment charges of $2.0 million in 2002.

In the first quarter of 2003, the revised corporate forecast developed in connection with the 2003 strategic and operational plan described above demonstrated that certain tangible assets related to the Company’s Digital Media Services and Media Restoration Services segments were impaired, as the projected undiscounted discernible cash flows of the assets over their estimated useful lives did not exceed their carrying value. The fair values of each of these assets were estimated using primarily a discounted cash flow method. In the fourth quarter of 2003, the Company vacated its facility in Washington, D.C. and migrated its operations to its facility on Rainier Avenue, Seattle, Washington. As a result of this decision, the Company recorded impairment charges of $68,000 related to the property and equipment located at the Washington, D.C. facility. The fair value of this equipment was estimated to be $90,000, based on discussions and negotiations with parties interested in purchasing the equipment, and is reported in assets held for sale in the accompanying consolidated balance sheets. Total impairments of property and equipment were $670,000, consisting of $219,000 in the digital media services segment and $451,000 in the media restoration services segment.

Facilities related charges. As a result of acquisition activity, the de-emphasis of video encoding operations and the reductions in force that led to excess facilities, the board of directors approved plans to consolidate facilities during the course of 2001. In addition to the closing of the Company’s Santa Monica facility, these plans called for the closing of its London offices in early 2001 and the migration from four facilities in Seattle into one facility in late 2001 and early 2002. Accordingly, all unamortized leasehold improvements related to the vacated facilities, totaling $2.1 million, were charged to special charges in 2001. The Company also accrued for the rental payments it believed would be paid on these abandoned facilities while it sought a suitable sublessor or negotiate a termination of the lease. Related rent charges of $3.6 million were recorded in 2001, including $2.3 million in the fourth quarter of 2001, reflecting current local real-estate

market conditions. In the fourth quarter of 2002, the Company accrued additional charges of $1.5 million to adjust its estimate of future rental payments and related costs associated with these leases and to reflect updated current local real estate market conditions.

As discussed above, during the fourth quarter of 2002, management committed to a plan to exit certain of the Company’s leased facilities. The exit plan identified all significant actions to be taken, including the method of disposition, locations of those activities and the expected dates of completion. Under the provisions of EITF 94-3, the Company recorded the estimated lease termination costs in accrued special charges at December 31, 2002. Current year activity for accruals established under EITF 94-3 is summarized in the following paragraphs.

In April 2003, the Company entered into a lease termination agreement with the landlord of its unoccupied facility on Fourth Avenue, Seattle, Washington. Under the terms of the agreement, the Company paid a lease termination fee of $200,000. As a result, all of the Company’s obligations under the lease were terminated effective April 30, 2003. In accordance with EITF 94-3, the lease termination fee was included in accrued special charges at December 31, 2002. The Company had been paying approximately $29,000 per month under this lease.

In May 2003, the Company entered into a lease termination agreement with the landlord of its unoccupied facility in Ardsley, New York. Under the terms of the agreement, the Company paid a lease termination fee of approximately $114,000 which included its security deposit of $29,000. As a result, all of the Company’s obligations under the lease were terminated effective May 19, 2003. In accordance with EITF 94-3, the lease termination fee was included in accrued special charges at December 31, 2002. The Company had been paying approximately $19,000 per month under this lease.

Under the provisions of FAS 146, the Company recorded certain additional lease termination costs during the year ended December 31, 2003. These additional costs were related to certain leased facilities whereby the Company had ceased using the facilities and notified the landlords that it had released its rights under the lease agreements. These additional costs were recognized and measured at the present value of the future minimum lease payments, net of estimated sublease rentals that could be reasonably obtained for the facilities. Current year activity for accruals established under FAS 146 is summarized in the following paragraphs.

In March 2003, the Company terminated a portion of a lease for approximately half the space it occupied for its principal operating facility on Rainier Avenue, Seattle, Washington. Rents were reduced from approximately $108,000 per month with a term expiring on November 30, 2005 to rent for the remainder of the facility of approximately $33,000 per month through June 30, 2003 with options, that the Company exercised, to extend the term through December 31, 2003 at a base rent of $33,000 per month and pre-paid utility expenses of $60,000 per quarter. As consideration for the lease termination, the Company allowed its landlord to retain its security deposit in the amount of $218,500 and made cash payments of $126,700. On December 31, 2003, the Company signed a new lease with the landlord that expires on December 31, 2005. Monthly rental payments under the new lease are approximately $55,000 through March 2004 and then $73,000 thereafter, reflecting an increase in the square footage leased commencing April 1, 2004.

In October 2003, the Company vacated and ceased using its former Streampipe facility in Washington, D.C. and migrated its operations to its facility on Rainier Avenue, Seattle Washington. At that time, the landlord was informed of the Company’s decision to no longer occupy the Washington D.C. facility and the Company’s release of its rights under the lease agreement. The lease for the facility expired in March 2004 and, under the requirements of FAS 146, the present value of future minimum rental payments, net of sublease rentals, of $43,000 were recorded in accrued special charges during the year ended December 31, 2003.

The Company has accrued special charges related to its Vidipax facility in New York, New York. The lease agreement was originally entered into in December 2002 and the Company has never occupied the

facility. During 2003, the Company informed the landlord of its decision to release its rights under the lease agreement and has been in ongoing discussions with the landlord to negotiate a lease termination agreement. Accordingly, under the requirements of FAS 146, the Company had accrued $562,000 in accrued special charges through the third quarter of 2003 representing the estimated fair value of future rental payments, net of sublease rentals and related costs with respect to the termination of this lease. In December 2003, the Company accrued an additional $150,000, for a total accrual of $712,000, to adjust its estimate of the fair value of the liability based on further negotiations with the landlord In February 2004, the Company entered into a lease settlement agreement with the landlord. The amount of the settlement has been included in accrued special charges at December 31, 2003.

Employee severance. In connection with the operational restructurings and facilities consolidations described above, the Company has reduced is work force on several occasions during 2003, 2002 and 2001. Severance and related costs paid related to these employee terminations were as follows (in thousands):

Other restructuring charges. The other restructuring charges of $878,000 represent fees and costs paid to Regent Pacific Management Corporation with respect to interim management services provided to the Company in connection with its management and operational restructuring.

Accrued special charges. The following table reflects the activity in accrued special charges for the year ended December 31, 2003 related to the events described above (in thousands). The Company believes that it will ultimately pay all of these accrued charges, which primarily represent future rent obligations, in cash.

For certain of the lease terminations described above, the settlement amounts were less than the Company had accrued initially due to favorable negotiations with landlords and improvements in real estate markets. In other cases, the Company increased its accruals as a result of its ongoing evaluations of its lease obligations. The adjustments resulting from these settlements and additional accruals were recorded in special charges expense in the consolidated statements of operations.

For certain of the employment terminations, the amounts paid were less than the Company had accrued initially due to favorable settlements with the former employees. These adjustments were recorded in special charges in the consolidated statements of operations.

On January 30, 2004, the Company’s wholly-owned media restoration services subsidiary, Vidipax, Inc., sold substantially all of its assets and certain liabilities to a company controlled by the current general manager of Vidipax pursuant to an asset purchase agreement signed on October 31, 2003. The total purchase price of

$1.2 million was placed in escrow when the asset purchase agreement was signed. $900,000 will be released from escrow upon the assignment of a certain customer contract and $300,000 will be released from escrow upon the satisfaction of certain conditions. In addition, the Company may receive up to an additional $500,000 based on the purchaser achieving certain performance targets over a period of two years from the closing date. At closing, the Company also entered into a co-marketing and reseller agreement with the purchaser pursuant to which the Company will sell, for a fee, media restoration services on behalf of the purchaser for a two-year period. The co-marketing and earn-out provisions constitute continuing involvement by the Company under FAS 144. Consequently, Vidipax has not been reported as a discontinued operation. In addition, the Company has recorded in assets held for sale $90,000 of equipment located in its Washington D.C. facility that was vacated in October 2003.

The following assets and liabilities of the media restoration services business to be sold have been classified as “held for sale” in the consolidated balance sheet (in thousands):

On August 28, 2003, the Company issued 7,838,708 shares of common stock to institutional investors in a private placement transaction for $1.55 per share, raising gross proceeds of approximately $12.1 million. In connection with the transaction, the Company also issued warrants to the investors to purchase 783,871 shares of the Company’s common stock and warrants to the placement agent to purchase 195,968 shares of the Company’s common stock, representing total warrant shares of 979,839 shares of common stock. The exercise price of the warrants is $2.00 per share. The warrants are exercisable beginning February 27, 2004 and expire February 27, 2007. Net proceeds from the transactions, after issuance costs and a placement fee of 4% of the gross proceeds, were approximately $11.4 million.

Within 45 calendar days following the closing date, the Company was required to file with the Securities and Exchange Commission (SEC) a registration statement covering the resale of all of the common stock purchased and the common stock underlying the warrants, including common stock underlying the placement agent’s warrant. The Company was required to use its commercially reasonable efforts to obtain effectiveness of the registration statement before the earlier of (a) the 120th calendar day following the closing date or (b) the fifth trading day following notification by the SEC that the registration statement will not be reviewed or is no longer subject to further review and comments.

The registration rights agreement provided that if a registration statement was not filed, or did not become effective, within the defined time period, then in addition to any other rights the holders may have, the Company would be required to pay to each holder an amount in cash, as liquidated damages, equal to 2% per month of the aggregate purchase price, prorated daily. The registration statement was filed within the allowed

time, and was declared effective by the SEC on October 14, 2003. Accordingly, no liquidated damages were required to be paid in connection with the initial registration.

In accordance with EITF 00-19, “Accounting for Derivative Financial Instruments Indexed To, and Potentially Settled In a Company’s Own Stock,” and the terms of the warrants, the fair value of the warrants were accounted for as a liability, with an offsetting reduction to the carrying value of the common stock. The warrant liability was reclassified to equity as of the October 14, 2003 effective date of the registration statement.

The fair value of the warrants was estimated using the Black-Scholes option-pricing model with the following assumptions: no dividends; risk-free interest rate of 2.71%, the contractual life of 3.5 years and volatility of 136%. The fair value of the warrants was estimated to be $1.5 million on the closing date of the transaction. The fair value of the warrants was re-measured at September 30, 2003 and estimated to be $1.7 million. The increase in the fair value of $222,000 from the transaction date to September 30, 2003 was recorded as a charge to other expenses in the statement of operations during the third quarter of 2003. The fair value of the warrants increased by approximately $26,000 from September 30, 2003 to October 14, 2003 and such increase was reflected as a charge to other expenses in the statement of operations in the fourth quarter of 2003.

Generally, the Company’s goodwill, intangibles and other assets have resulted from purchase acquisitions, equity transactions or the capitalization of software development costs. The acquisitions described below were accounted for under the purchase method of accounting.

Streampipe In November 2002, the Company acquired TT Holding Corp. (“Streampipe”), a New York company which provided enterprise Webcasting technology and services pursuant to an agreement and plan of reorganization (“Merger Agreement”). The acquisition price was $4.5 million, consisting of $3.1 million of common stock issued at closing (7,900,165 shares), unsecured promissory notes (“Notes”) aggregating $1.1 million and transaction costs of $0.3 million. The Notes bear interest at an annual rate of 5% and matured on January 1, 2004. In addition, the Notes contained an equity redemption option pursuant to which the Company could, at its option, satisfy its obligation under the Notes by issuing additional shares of common stock. On December 31, 2003, the Company redeemed the Notes at a redemption price of $1.76 per share by issuing 635,386 shares of its common stock. The number of shares of common stock issued to redeem the Notes was calculated by dividing the principal and all accrued interest due under the Notes as of the date of redemption, by the average of the last sale price of its common shares for the 30 trading days preceding January 1, 2004.

The Company accounted for the acquisition in accordance with FAS 141. The purchase price allocation was as follows (in millions):

EncodeThis In June 2002, The Company acquired certain assets of Digital Media Broadcast (“EncodeThis”), a California company that provided digital media services similar to those of the Company.

The total acquisition price was $608,000, consisting of $400,000 of the Company’s common stock (667,418 shares), a warrant to purchase 100,000 shares of common stock at a price of $1.00 per share, and $200,000 in cash. Approximately $169,000 of the purchase price was allocated to accounts receivable and property and equipment, with the remaining $439,000 allocated to customer related intangible assets.

Activate.net In September 2001, the Company acquired Activate.net Corporation (“Activate”, a Seattle-based company which provided live and on-demand webcasting services for a variety of enterprise business communication needs. Activate had been operated as a majority-owned operating company of CMGi, Inc.

Total acquisition consideration was $6.6 million. $1.0 million was paid in cash at closing and the Company assumed $2.4 million of liabilities as a part of its working capital and incurred costs of $0.2 million. The remaining $3.0 million of the purchase price was to be paid in stock or cash in September 2002. This remaining obligation was settled in the fourth quarter of 2002 for $2.0 million in cash and $300,000 of the Company’s common stock, resulting in a gain of $700,000 which has been included in other income in the consolidated statements of operations for the year ended December 31, 2002. The acquisition consideration was as follows (in millions):

The Company accounted for the acquisition in accordance with FAS No. 141. The primary identified intangibles were related to technology in service which has not yet been patented and purchased contracts with firmly committed customer backlog. No purchase price was assigned to goodwill or in-process research and development. The purchase price allocation was as follows (in millions):

Amounts allocated to unpatented technology were amortized over two years, while the amounts allocated to acquired contracts were amortized over one year.

DiscoverMusic In March 2001, the Company purchased DiscoverMusic, a Seattle company that was the largest provider of music samples on the Internet. The Company paid $4.0 million in cash, net of DiscoverMusic’s cash, and issued 3,677,013 shares of common stock valued at $6.1 million for cash and stock consideration of $10.7 million. As part of the acquisition price, the Company placed $1.0 million in cash into an escrow account to pay for certain legal exposures assumed. In conjunction with the settlement of these legal matters, the Company paid the remaining portion of the legal escrow fund in March 2002. The total

acquisition price, including costs of the acquisition and liabilities assumed, of $16.3 million was allocated as follows (in millions):

The customer list and digital samples archive acquired were being amortized over three and two years, respectively. In conjunction with its long-lived assets policy, the Company determined that some of the above acquired assets were impaired at December 31, 2001, and accordingly recorded an impairment charge. See Note 4.

Online Radio In March and June 2001, the Company made three other asset acquisitions, primarily related to content and ad insertion technology and online radio technology. These acquisitions are presented in the following table (in thousands):

The following table presents the unaudited pro forma results assuming that the Company had acquired Streampipe and EncodeThis at the beginning of fiscal year 2002 (in thousands):

The activity in the allowance for doubtful accounts is summarized as follows (in thousands)

Prepaid expenses and other current assets consisted of the following (in thousands):

Depreciation and amortization expense related to property and equipment was $1.3 million, $4.3 million and $7.2 million for the years ended December 31, 2003, 2002 and 2001, respectively.

The Company’s intangible assets at December 31, 2003 and 2002 were as follows (in thousands):

As described in Note 4, the Company recorded impairment charges related to certain intangible assets in 2003, 2002 and 2001. The customer list intangible asset will be amortized fully in the first quarter of 2004.

Amortization of goodwill and intangible assets totaled $1.1 million, $3.0 million and $8.2 million for the years ending December 31, 2003, 2002 and 2001, respectively.

The Streampipe acquisition is a component of the Company’s digital media services segment and the Vidipax acquisition is a component of the Company’s media restoration services segment.

The decrease in long-term deposits resulted from the negotiated settlement of operating leases for unoccupied facilities. As described in more detail in Note 4, in several of these settlements the landlords were allowed to retain the security deposits for the facilities. These security deposits were included in other long-term assets in the consolidated balance sheet at December 31, 2002.

In 2001, the company recorded impairment charges on capitalized software development costs of approximately $820,000. The Company did not capitalize any software development costs in 2003 or 2002.

In June, 2003, the Company entered into a revolving credit facility (the “Revolver”) with a bank under which it may borrow up to $2.5 million based on a certain percentage of eligible accounts receivable. The Revolver expires in June, 2004 and is collateralized by substantially all of the Company’s assets. Borrowings

under the Revolver bear interest at the greater of the prime rate plus 1.75% (5.75% at December 31, 2003) or 5.75%. In addition, the Company was required to establish a lockbox account with the lender to which all payments from customers are deposited. The lender applies such deposits to the outstanding borrowings and transfers any excess funds to the Company’s operating bank account. Annual fees for the lockbox arrangement are 0.35% of the average daily outstanding principal balance. At December 31, 2003, outstanding borrowings under the Revolver were $1.3 million. The Company is utilizing borrowings under the 2003 Revolving Facility for working capital and general corporate purposes.

The Company also issued a warrant to the lender to purchase 47,500 shares of its common stock at $0.89 per share. The warrant expires in June 2010. The fair value of the warrants was estimated using the Black-Scholes option-pricing model with the following assumptions: no dividends; risk-free interest rate of 2.0%, contractual life of seven years and volatility of 136%. The fair value of the warrant was estimated to be $28,000 and was recorded in interest expense.

On December 31, 2003, the Company entered into a Loan and Security Agreement (the “Term Loan”) with a bank under which it borrowed $3,000,000. The Term Loan also provides for up to $500,000 to collateralize standby letters of credit. Borrowings under the Term Loan are collateralized by substantially all of the Company’s assets and bear interest at the Prime Rate plus 1.25 percent (5.25% at December 31, 2003). Principal payments are due in equal monthly installments, plus interest, through January 1, 2007. In addition, the Term Loan restricts, among other things, the Company’s borrowings, dividend payments, stock repurchases, and sales or transfers of ownership or control, and contains certain other restrictive covenants that require the Company to maintain a certain quick ratio and tangible net worth, as defined in the Term Loan. The Company was in compliance with these covenants at December 31, 2003. The Company intends to use the proceeds to upgrade certain equipment related to its digital media services and technology infrastructure, repay certain capital lease obligations, and for working capital and other general corporate purposes.

The Company also issued a warrant to the lender to purchase 25,000 shares of its common stock at $1.75 per share. The warrant expires in December 2010. The fair value of the warrant was estimated using the Black-Scholes option-pricing model with the following assumptions: no dividends; risk-free interest rate of 3.81%, the contractual life of seven years and volatility of 137%. The fair value of the warrant was estimated to be $46,000 and will be recorded in interest expense ratably over the term of the loan.

The Company has financed the acquisition of certain equipment with capital lease arrangements. These leases are collateralized by the equipment as well as by standby letters of credit totaling approximately $316,000. The leases bear interest at rates ranging form 2.26% to 7.52% with outstanding balances totaling approximately $481,000 at December 31, 2003.

As of December 31, 2003, future minimum payments under capital leases are as follows (in thousands):

The carrying value of assets held under capital lease obligations at December 31, 2003 was approximately $580,000.

At December 31, 2003, the Company had net operating loss carryforwards of approximately $193.5 million related to Federal and state jurisdictions. Utilization of net operating loss carryforwards are subject to certain limitations. These carryforwards will expire in 2018 through 2023. The Company did not provide for any current or deferred Federal or state income tax expense or benefit for any of the periods presented because it has experienced operating losses since inception, and has provided full valuation allowances on net deferred tax assets because of uncertainty regarding their realizability. The valuation allowance increased by $5.5 million, $29.1 million, and $24.3 million in 2003, 2002, and 2001, respectively. Deferred income taxes consist primarily of net operating loss carryforwards and temporary differences for customer deposits, accrued special charges, allowances, stock-compensation expense and the difference between book and tax depreciation and amortization.

The difference between the statutory tax rate of 35% (34% federal and 1% state, net of federal benefits) and the tax benefit of zero recorded by the Company is due to the Company’s full valuation allowance against its net deferred tax assets.

The components of the deferred tax assets and liabilities were as follows (in thousands):

The holders of common stock are entitled to one vote per share on all matters to be voted on by the stockholders. Subject to preferences that may be applicable to any outstanding preferred stock, the holders of common stock are entitled to receive ratably such dividends, if any, as may be declared from time to time by the board of directors out of funds legally available for that purpose. To date the Company has not declared any dividends on its common stock. In the event of a liquidation, dissolution or winding up of the Company, the holders of common stock are entitled to share ratably in all assets remaining after payment of liabilities, subject to prior distribution rights of preferred stock, if any, then outstanding. The common stock has no preemptive or conversion rights or other subscription rights. There are no redemption or sinking fund provisions applicable to the common stock.

The board of directors has the authority, without action by the stockholders, to designate and issue up to 5,000,000 shares of preferred stock in one or more series and to designate the rights, preferences and privileges of each series, any or all of which may be greater than the rights of the common stock.

The following shares of common stock have been reserved for future issuance as of December 31, 2003:

Basic loss per share is computed by dividing net loss by the weighted average number of shares of common stock outstanding during the period. Diluted loss per share is computed by dividing net loss by the weighted average number of common and dilutive common equivalent shares outstanding during the year. Common equivalent shares consist of shares issuable upon the exercise of stock

options and warrants (using the treasury stock method). Common equivalent shares are excluded from the calculation if their effect is antidilutive, which is the case for all periods presented. The Company has excluded the following numbers of shares using this method:

The Company had 1,207 and 87,291 shares outstanding that had been issued through stock option exercises but which were subject to repurchase at December 31, 2002 and 2001, with weighted average purchase prices of $0.17 and 0.31, respectively. There were no shares subject to repurchase at December 31, 2003. The impact of these unvested shares has been removed from the calculation of weighted average shares outstanding for purposes of determining basic and diluted earnings per share and basic and diluted pro forma earnings per share.

The following table presents a reconciliation of shares used to calculate basic and diluted earnings per share:

The Company maintains a 401(k) plan covering its full-time employees over age twenty-one. Employees are eligible after three months employment. Under the 401(k) plan, employees may elect to reduce their current compensation by up to 80% up to the statutorily prescribed annual limit ($12,000 in 2003) and to have the amount of such reduction contributed to the 401(k) plan. The 401(k) plan permits, but does not require, Company matching contributions on behalf of all participants in the 401(k) plan. The Company expensed a contribution of $94,000 in 2001 that was contributed to the plan participants’ accounts in March 2002. No expense was incurred in 2003 or 2002.

In December 1999, the board of directors approved the creation of the 2000 Employee Stock Purchase Plan (ESPP). A total of 200,000 shares of common stock were reserved for issuance under the ESPP, with the number of shares reserved for issuance under the ESPP subject to an automatic annual increase on the first day of each of the fiscal years beginning in 2001, 2002, 2003, 2004 and 2005 equal to the lesser of 300,000 shares or 0.75% of the Company’s outstanding common stock on the last day of the immediately preceding fiscal year or a lesser number of shares as the board of directors determines. At December 31, 2003, the total number of shares reserved for issuance was 1,075,175, and a total of 423,120 shares have been issued under the Plan.

Under the Company’s various stock option plans, the board of directors and its stock option committee may grant to employees, consultants, and directors both incentive and nonstatutory options to purchase the Company’s common stock. At December 31, 2003, the plans provided for options to purchase up to 17,824,487 of the Company’s common stock. One of the option plans provides for an automatic annual increase on the first day of each of the fiscal years beginning in 2001, 2002, 2003, 2004 and 2005 equal to the lesser of 2.5 million shares or 5% of our outstanding common stock on the last day of the immediately preceding fiscal year or a lesser number of shares as our Board determines. Option grants under the plans have terms of ten years and generally vest over three to four and one half years.

The following information is provided for options outstanding and exercisable at December 31, 2003:

The Company leases its facilities and certain equipment under non-cancelable operating leases. The leases expire at various dates through August 2005 and generally provide that the Company pay taxes, insurance, maintenance and other operating costs related to the leased assets.

Future minimum lease payments under operating leases, net of sublease payments, as of December 31, 2003 are as follows (in thousands):

Amounts due related to the unoccupied facilities may not represent the actual amount that will be paid under their respective leases, as the Company is in settlement negotiations with the landlord of one of the facilities and in litigation with the landlord of another facility. At December 31, 2003, the Company has recorded in accrued special charges an estimated liability of $1.7 million with respect to leases for its unoccupied facilities.

Rent expense under operating leases totaled approximately $1.6 million, $2.0 million and $2.8 million during 2003, 2002 and 2001, respectively. In addition, the Company paid approximately $1.6 million in 2002 for operating leases that had been accrued as special charges in the prior year, related to unoccupied facilities. Approximately $600,000 of the 2001 rent expense is included within the special charge, as it related to that portion of rent for facilities which had been vacated under the Company’s plans of consolidation.

At December 31, 2003, the Company had a commitment to purchase for $1.5 million certain equipment to upgrade its digital media services and technology infrastructure. The $1.5 million will be paid in the first quarter of 2004.

The Company is also required to make royalty payments to the music companies and other various rights holders, based upon the amount of revenues the Company generates from its music related services. Amounts due under such agreements are included in cost of revenues.

Between July 26, 2001 and August 30, 2001, four substantially similar class action complaints were filed in the Untied States District Court for the Southern District of New York against the Company and certain of its former officers and directors, as well as against certain underwriters who handled its March 15, 2000 initial public offering of common stock. The various complaints were purportedly filed on behalf of a class of persons who purchased the Company’s common stock during the time period beginning on March 15, 2000 and ending on December 6, 2000. The complaints together allege violations of the Securities Act of 1933 and the Securities Exchange Act of 1934, primarily based on the allegation that there was undisclosed compensation received by the Company’s underwriters in connection with its initial public offering and the allegation that the underwriters entered into undisclosed arrangements with some investors that were designed to distort and/or inflate the market price for the Company’s common stock in the aftermarket following the initial public offering. These actions have all been consolidated before the same judge for pretrial purposes. No specific amount of damages has been claimed. The Company and the individual defendants have demanded to be indemnified by the underwriter defendants pursuant to the underwriting agreement entered into at the time of the initial public offering. Presently, all claims against the former officers have been withdrawn without prejudice. The Company, along with the many other issuer defendants, moved to dismiss the claims in the complaint. By decision dated February 19, 2003 the court denied the Company’s motion. A proposal has been made for the settlement and release of claims against the issuer defendants. The settlement is subject to a number of conditions, including approval of other proposed settling parties and the court. If the settlement does not occur, and litigation against the Company continues, management believes the Company has meritorious defenses and intends to defend the case vigorously.

On February 3, 2003, the Company entered into an agreement with Regent Pacific Management Corporation pursuant to which Regent Pacific would provide management services. The agreement was for a term of 26 weeks, with an option to renegotiate certain terms of the agreement after 13 weeks, and was terminable by either party under certain circumstances. Under the agreement, the Company paid certain fees to Regent Pacific. In addition, Regent Pacific was to receive stock options to purchase up to 4,000,000 shares of our common stock based on Regent Pacific’s length of service. These options were to be granted at various times throughout their engagement at exercise prices based on the closing market price on each grant date. On March 7, 2003, Regent Pacific resigned from the engagement. On July 25, 2003, Regent Pacific filed suit against the Company in the United States District Court for the Northern District of California for breach of the agreement. In this complaint, Regent Pacific is seeking unspecified damages and specific performance of the alleged obligation to grant the stock options due to them under the contract. The Company believes that it has meritorious defenses to the claims made in the suit, intends to defend vigorously this suit, and intends to bring certain counterclaims against Regent Pacific.

On or about January 8, 2003, Dominion Venture Finance, L.L.C. commenced an action against the Company and “John Doe” defendants in the Superior Court of the State of California, County of San Francisco. In its complaint, plaintiff alleges that pursuant to a loan and security agreement and a master lease agreement (the liabilities for which agreement, plaintiff alleges, were acquired by the Company when it merged with DiscoverMusic.com, Inc.) the Company failed to make certain required payments to plaintiff. On August 5, 2003, the Company agreed to settle all claims under the suit for a cash payment of approximately $228,000, which represented the outstanding principal and interest under the agreements.

In April 2003, the landlord of the Company’s unoccupied facility at 414 Olive Way, Seattle, WA filed suit against the Company in the Superior Court of Washington, King County, for breach of its lease and is seeking damages of $2.0 million. In January 2004, the Court entered a judgment in favor of the plaintiff for rents due through January 2004 of $438,000, which the Company appealed immediately. The Court reserved the other issues in the suit, including mitigation, interest and attorney’s fees, for trial. Management believes that the Company has meritorious defenses to the claims made in the suit and intends to defend this suit vigorously and the Company may also bring certain counterclaims against the landlord. If the Company does not prevail on its appeal or its counterclaims, the Company may be held liable for additional amounts beyond the amount of the judgment. As of December 31, 2003, the Company has recorded in accrued special charges an estimate of the amount the Company may ultimately be required to pay with respect to this matter.

The Company becomes involved from time to time in various other claims and lawsuits incidental to the ordinary course of its operations, including such matters as contract and lease disputes and complaints alleging employment discrimination. The Company believes that the outcome of any such pending claims or proceedings individually or in the aggregate, will not have a material adverse effect upon its business or financial condition, cash flows, or results of operations.

On September 1, 1998, the Company entered into a five-year lease agreement with the Company’s founder, largest shareholder and former Chairman of the Board, Martin Tobias, and his wife, Alex Tobias (the “Tobias’s”). The monthly rental payments were approximately $10,000 per month. Total payments were approximately $120,000 during each of the three years ended December 31, 2001. The Company terminated this lease effective February 28, 2002 and made an early termination payment of $72,000.

On October 26, 2001, the Company entered into an agreement with the Tobias’s, pursuant to which Loudeye purchased four million shares of Loudeye common stock from the Tobias’s for $2.0 million, or $0.50 per share, and also entered into a comprehensive agreement with the Tobias’s, including the extension of a $2.0 million collateralized line of credit to the Tobias’s (“the Loan”). The Tobias’s had previously entered into a loan agreement with City National Bank to borrow a principal amount of $3.0 million. The Company

collateralized $2.5 million of the principal amount with a letter of credit. The $2.0 million payment due to Mr. Tobias from the Company for the common stock was paid directly to City National Bank to reduce the current outstanding principal balance to $500,000. The new credit line was collateralized by liens on certain real property assets owned by Mr. Tobias, as well as all his remaining 4.6 million Loudeye shares. Under the terms of the agreement, the collateral shares were restricted from public market sale, without Loudeye’s consent, until the later of January 31, 2003, or the full repayment of the credit facility, which occurred in June of 2003. At December 31, 2002, amounts outstanding under the credit line were $1.1 million and are reflected in notes receivable from related parties. As part of the agreement, Mr. Tobias granted the Board of Directors of the Company an irrevocable proxy to vote the remaining shares of Common Stock owned by Mr. Tobias at any stockholders’ meeting. The proxy terminated on the repayment of the Loan in June of 2003. In addition, as part of the agreement, Mr. Tobias resigned from the Company’s Board of Directors. The agreement also permitted Mr. Tobias to establish a program for sales of his shares consistent with Rule 10b5-1 under the Securities Exchange Act of 1934 and with Rule 144 under the Securities Act of 1933, so long as the minimum per share sales price of the shares under such plan equaled or exceeded $1.25.

In addition, under the Rule 10b5-1 program described above, if Mr. Tobias was unable to sell shares of Loudeye common stock so that the proceeds from these sales equal the lesser of (a) $500,000 or (b) the proceed from sales of 150% of the maximum number of shares that could have been sold by Mr. Tobias under Rule 144 during the calendar quarter multiplied by a discounted share price as defined in the agreement, the Company agreed to purchase a limited number of shares from Mr. Tobias at a discount from market price. During 2003, the Company purchased a total of 1,468,850 shares from Mr. Tobias for $426,000. During 2002, the Company purchased a total of 1,812,170 shares from Mr. Tobias for $0.8 million.

In March 2001, the Company loaned its former President, David L. Weld Jr., $90,000 pursuant to a promissory note bearing interest at the prime rate plus 1%. This loan was due in three equal installments of principal plus accrued interest in each of March 2002, September 2003, and September 2004. At December 31, 2002, $60,000 remained outstanding under the note and is included in notes receivable from related parties. The loan was repaid in full in September of 2003.

In April 2001, the Company loaned its former Sr. Vice President of Sales, Todd A. Hinders $64,000 pursuant to a promissory note bearing interest at the prime rate plus 4%. This loan was due in annual installments on anniversary of the loan equal to the greater of $3,000 or the Alternative Minimum Tax credit carry forward utilized on Mr. Hinders’ income tax return for that year. At December 31, 2002, $38,169 remained outstanding under the note and is included in notes receivable from related parties. The remaining balance was repaid in full in January 2003.

In May 2001, the Company acquired all of the capital stock of Addition Systems, Inc., owned by Digital Media Campus Inc., for $1,323,766 in cash. In connection with this transaction, Digital Media Campus assigned to the Company a promissory note receivable from eWave Networks. John Baker, the Company’s former Chief Executive Officer and Chairman of the Board of Directors, was Chief Operating Officer of Digital Media Campus until he joined Loudeye in March 2001. At December 31, 2002, the balance of the note receivable from eWave was $133,545 and is included in prepaid expenses and other current assets. The note receivable was repaid in full in June of 2003.

On June 14, 2000, the Company entered into a five-year lease agreement with a company whose president and sole shareholder was a vice president of the Company until his employment terminated in August of 2001. Total payments during 2001 were approximately $362,000.

In February 2004, the Company sold 10,810,811 shares of common stock at $1.85 per share to a limited number of accredited investors. The gross proceeds received from the financing were $20,000,000. The

Company paid a placement fee equal to 5% of the gross proceeds. The net proceeds of the offering, after commissions and expenses, will be used for working capital and general corporate purposes, including expansion of the Company’s business-to-business digital music solutions in the U.S. and internationally. The Company has agreed to use its best efforts to file a registration statement covering the resale of the shares sold in the financing.

In March 2004, the Company completed the acquisition of Overpeer, Inc. (“Overpeer”), a privately held company based in New York. Pursuant to the Agreement and Plan of Merger and Reorganization (the “Merger Agreement”), among Loudeye, Privateer Acquisition Corp., a wholly owned subsidiary of the Company, Overpeer and certain of Overpeer’s stockholders, Privateer Acquisition Corp. was merged with and into Overpeer, with Overpeer continuing as the surviving company and a wholly-owned subsidiary of the Company (the “Merger”). As a result of the Merger, all of the outstanding capital stock of Overpeer was exchanged for a total of 1,752,772 shares of Loudeye’s common stock. The number of shares issued in the Merger was calculated by dividing $4,000,000 by the volume weighted average closing sales price of Loudeye’s common stock on each of the thirty consecutive trading days preceding the closing of the Merger, or $2.2821 per share. 262,916 of the shares issued in the Merger will be held in escrow for one year and will be available during that time to satisfy indemnity claims under the Merger Agreement. The Company agreed to use its best efforts to file a registration statement for the resale of the securities sold in the private placement on or before March 31, 2004, and to use its reasonable efforts to have the registration statement declared effective by the SEC as soon thereafter as practicable. The Company is currently in the process of determining the allocation of the purchase price and will record the purchase price allocation when a valuation of the assets acquired is completed.

The Company operates in two business segments, digital media services and media restoration services, for which the Company receives revenues from its customers. The Company’s Chief Operating Decision Maker is considered to be the Company’s Executive Team (CET) that is comprised of the Company’s Chief Executive Officer, Chief Financial Officer, and certain of its Vice Presidents. The CET reviews financial information presented on a consolidated basis accompanied by disaggregated information about products and services for purposes of making decisions and assessing financial performance. The following table provides information about the Company’s segments (in thousands):

The media restoration segment reflects the operating results and assets of the Company’s wholly-owned subsidiary, Vidipax, Inc. As disclosed in Note 5, on January 30, 2004 the Company sold substantially all of the assets of Vidipax.

The following table sets forth certain unaudited consolidated quarterly statement of operations data for the eight quarters ended December 31, 2003. In the opinion of management, this information has been prepared substantially on the same basis as the audited consolidated financial statements and all necessary adjustments, consisting only of normal recurring adjustments, have been included in the amounts stated below to present fairly the unaudited quarterly results of operations. The quarterly data should be read in conjunction with our audited consolidated financial statements and the notes thereto. The operating results for any quarter are not necessarily indicative of the operating results for any future period.


(1)	Loss per share is computed independently for each of the periods presented. Therefore, the sum of the quarterly per share amounts will not necessarily equal the total amount for the year.

On May 23, 2002, the audit committee of our board of directors decided to replace Arthur Andersen LLP, our independent accountants. Arthur Andersen LLP had served as our independent accountants since 1999.

Arthur Andersen LLP’s reports on our consolidated financial statements for the two years ended December 31, 2001 did not contain an adverse opinion or disclaimer of opinion, nor were they qualified or modified as to uncertainty, audit scope or accounting principles. During the two fiscal years ended December 31, 2001 and 2000, and through the date of dismissal, there were no disagreements with Arthur Andersen LLP on any matter of accounting principles or practices, financial statement disclosure, or auditing scope or procedure which, if not resolved to Arthur Andersen LLP’s satisfaction, would have caused Arthur Andersen LLP to make reference to the subject matter in connection with its report on our consolidated financial statements for such years; and there were no reportable events as defined in Item 304(a)(1)(v) of Regulation S-K.

On June 6, 2002, based on the recommendation of the audit committee, the Board of Directors appointed PricewaterhouseCoopers LLP as our independent auditors for the fiscal year ending December 31, 2002.

During the two fiscal years ended December 31, 2001 and 2000 and through the date of retention, we did not consult with PricewaterhouseCoopers LLP with respect to the application of accounting principles to a specified transaction, either completed or proposed, or the type of audit opinion that might be rendered on our consolidated financial statements, or any other matters or reportable events as set forth in Items 304(a)(2)(i) and (ii) of Regulation S-K.

Our management, with the participation of the our Chief Executive Officer and Principal Financial Officer, has evaluated the effectiveness of our disclosure controls and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the Exchange Act)) as of the end of the period covered by this report. Based on that evaluation, the our Chief Executive Officer and Chief Financial Officer have concluded that, as of the end of such period, our disclosure controls and procedures are effective.

There have not been any changes in our internal control over financial reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during our fiscal fourth quarter that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

Limitations. Our management, including our Chief Executive Officer and Principal Financial Officer, does not expect that our disclosure controls or internal controls over financial reporting will prevent all errors or all instances of fraud. A control system, no matter how well designed and operated, can provide only reasonable, not absolute, assurance that the control system’s objectives will be met. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within our company have been detected. These inherent limitations include the realities that judgments in decision-making can be faulty, and that breakdowns can occur because of simple error or mistake. Controls can also be circumvented by the individual acts of some persons, by collusion of two or more people, or by management override of the controls. The design of any system of controls is based in part upon certain assumptions about the likelihood of future events, and any design may not succeed in achieving its stated goals under all potential future conditions. Over time, controls may become inadequate because of changes in conditions or deterioration in the degree of compliance with policies or procedures. Because of the inherent limitation of a cost-effective control system, misstatements due to error or fraud may occur and not be detected.

The information required by this Item is incorporated herein by reference under the captions “Board of Directors-Nominees for Director,” “Board of Directors — Continuing Directors Not Standing for Election This Year,” “Board of Directors — Contractual Arrangements,” “Executive Officers” and “Voting Securities and Principal Holders — Section 16(a) Beneficial Ownership Reporting Compliance” in the Proxy Statement for our 2004 Annual Meeting of Stockholders.

We have adopted a code of ethics that applies to our directors, officers and employees, including our principal executive officer, principal financial officer and principal accounting officer and persons performing similar functions. Our code of ethics is filed as Exhibit 14.1 to this Annual Report on Form 10-K. We intend to satisfy the disclosure requirement under Item 10 of Form 8-K, regarding an amendment to or waiver from our code of ethics, by posting the required information on our Internet website at www.loudeye.com or as otherwise permitted under applicable law.

The information required by this Item is incorporated herein by reference to the information under the caption “Compensation and Benefits” in the Proxy Statement for our 2004 Annual Meeting of Stockholders.

The information required by this Item is incorporated herein by reference to the information under the caption “Voting Securities and Principal Holders” in the Proxy Statement for our 2004 Annual Meeting of Stockholders.

The information required by this Item is incorporated herein by reference to the information under the caption “Voting Securities and Principal Holders — Certain Transactions” in the Proxy Statement for our 2004 Annual Meeting of Stockholders.

Information with respect to principal accountants’ fees and services is incorporated herein by reference to the information under the caption “Information About Our Independent Accountants” in the Proxy Statement for our 2004 Annual Meeting of Stockholders.

The following financial statements of Loudeye are submitted in a separate section pursuant to the requirements of Form 10-K, Part I, Item 8:


	Index to Consolidated Financial Statements
	Report of Independent Auditors
	Report of Arthur Andersen LLP
	Consolidated Balance Sheets
	Consolidated Statements of Operations
	Consolidated Statements of Stockholders’ Equity
	Consolidated Statements of Cash Flows
	Notes to Consolidated Financial Statements


	(1)	Incorporated by reference to Loudeye Corp.’s registration statement on Form S-1 file number 333-93361.

	(2)	Incorporated by reference to Loudeye Corp.’s Form 10-K for the period ended December 31, 2001.

	(3)	Incorporated by reference to Loudeye Corp.’s Form 10-Q, for the period ending March 31, 2001.

	(4)	Incorporated by reference to Loudeye Corp.’s Form 10-Q/ A filed on September 2, 2003.

	(5)	Incorporated by reference to Loudeye Corp.’s Form 8-K filed on September 2, 2003.

	(6)	Incorporated by reference to Loudeye Corp.’s Form 8-K dated July 15, 2003.

	(7)	Incorporated by reference to Loudeye Corp.’s Form 10-Q dated May 20, 2003.

	(8)	Incorporated by reference to Loudeye Corp.’s Form 8-K dated November 19, 2002.

	(9)	Incorporated by reference to Loudeye Corp.’s Form 8-K dated February 3, 2003.


(10)	Incorporated by reference to Loudeye Corp.’s Form 8-K dated January 9, 2004.

On November 6, 2003, we furnished a Report on Form 8-K containing disclosure for Item 12.

Pursuant to the requirements of Section 13 or 15 (d) of the Securities Exchange Act of 1934, the Registrant has duly caused this Report on Form 10-K to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of Seattle, State of Washington, March 19, 2004.

Each person whose signature appears below hereby constitutes and appoints Jeffrey M. Cavins and Jerold J. Goade, Jr., and each of them severally, his true and lawful attorneys-in-fact and agents, with full power to act without the other and with full power of substitution and resubstitution, to execute in his name and on his behalf, individually and in each capacity stated below, any and all amendments and supplements to this Report on Form 10-K, and any and all other instruments necessary or incidental in connection herewith, and to file the same with the Commission.

Pursuant to the requirements of the Securities Exchange Act of 1934, this Report on Form 10-K has been signed by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.

The following is a copy of the report of Arthur Andersen LLP dated March 26, 2002 on their audit of the financial statement schedule of Loudeye Technologies, Inc. and subsidiaries for December 31, 2001. Arthur Andersen LLP has ceased operations and has not reissued this report.

We have audited in accordance with auditing standards, generally accepted in the United States, the financial statements of Loudeye Technologies, Inc. included in this Form 10-K and have issued our report thereon dated February 14, 2002. Our audit was made for the purpose of forming an opinion on the basic financial statements taken as a whole. The schedule listed in Item 14(a)(2) of this Form 10-K is the responsibility of the Company’s management and is presented for purposes of complying with the Securities and Exchange Commission’s rules and is not part of the basic financial statements. This schedule has been subjected to the auditing procedures applied in the audit of the basic financial statements and, in our opinion, is fairly stated in all material respects in relation to the basic financial statements taken as a whole.


(1)	Deductions represent write-offs of specifically identified uncollectible accounts.

(2)	Deductions represent amounts paid in cash during the period.

92 EX-10.10 3 v96773exv10w10.txt EXHIBIT 10.10 EXHIBIT 10.10 EMPLOYMENT AGREEMENT This Employment Agreement (the "Agreement"), dated December 5, 2003 is by and between Anthony Bay (the "Executive") and Loudeye Corp., a Delaware corporation (the "Company" or "Loudeye"). The Company and the Executive are hereinafter collectively referred to as the "Parties" and individually referred to as a "Party." WITNESSETH: WHEREAS, the Executive has served the Company in the capacity of a Consultant under a separate Consulting Agreement (the "Consulting Agreement") dated April 1, 20003; and WHEREAS, the Company wishes to obtain the future services of the Executive as an employee of the Company and terminate the Consulting Agreement contemporaneously with this Agreement, except as stated within; and WHEREAS, the Executive is willing, upon the terms and conditions herein set forth, to provide services hereunder; and WHEREAS, defined terms not defined herein shall have the respective meanings set forth on Schedule 1 attached hereto; NOW, THEREFORE, in consideration of the mutual promises and covenants contained herein, and intending to be legally bound hereby, the parties hereto agree as follows: 1. Nature of Employment The Company hereby employs Executive and Executive agrees to accept such employment, as Chairman and Chief Strategy Officer of the Company to serve as an at-will employee at the pleasure of the Board of Directors of the Company (the "Board"). 2. Extent of Employment The Executive shall perform his obligations hereunder faithfully and to the best of his ability under the direction of and accountable to the Board and in cooperation with and support of the Chief Executive Officer of the Company. The Executive shall have such duties, responsibilities and obligations ("Responsibilities") as shall be assigned to him from time to time by the Board, in its discretion. Executive shall devote such time, energy and skill as may be reasonably necessary for the performance of his Responsibilities (except for vacation periods and reasonable periods of illness or other incapacity), estimated to average approximately 40% of the time which he would spend as a full time senior executive of the Company. Executive's initial Responsibilities shall be as set forth in Schedule D. Nothing contained herein shall require the Executive to follow any directive or to perform any act which would violate any laws, ordinances, regulations or rules of any governmental, regulatory or administrative body, agent or authority, any court or judicial authority, or any public, private or industry regulatory authority (collectively, the "Regulations"). 3. Compensation During the Term of this Agreement, the Company shall pay compensation to the Executive as follows: (a) Base Salary As base compensation for his services hereunder, consistent with the Company's regular payroll practices, an annual base salary of $150,000 (the "Base Salary"). The Board shall annually, and in its sole discretion, determine whether the Base Salary should be increased and, if so, the amount of such increase. Executive will receive no additional compensation as a member of the Board. (b) Performance Bonus. The Executive shall be eligible to receive a bonus of up to a maximum of One Hundred Percent (100%) of the Executive's Base Salary (the "Target Bonus Amount"), provided, however, that for 2003, the Target Bonus Amount shall be $50,000. The Target Bonus Amount shall be paid contingent upon attainment of such performance criteria as the Board may determine from time to time in its sole discretion. For 2003 the performance criteria are set forth on Schedule 3. Notwithstanding anything to the contrary herein, the payment of any Target Bonus shall be in the sole discretion of the Board. (c) Stock Option. During the Term (as hereinafter defined), the Executive shall be entitled to participate in the Company's stock option plan in the discretion of the Board. (d) Existing Consultant Options. Options previously granted to Executive, pursuant to the Consulting Agreement, will remain in place and vest in accordance with the terms and schedule set forth in the Consulting Agreement and the document(s) evidencing the grant of such options, for so long as the Executive is employed by the Company in accordance with the provisions of this Agreement. (e) Restricted Stock Award. (i) Issuance of Shares. Concurrently with the execution of this Agreement, the Parties hereto shall execute and deliver a Restricted Stock Purchase Agreement, attached hereto as Exhibit A and incorporated herein by this reference (the "Stock Purchase Agreement"). Subject to the terms and conditions of this Agreement and the Stock Purchase Agreement, a certificate representing 15,000 shares of the Company's common stock (the "Shares") shall be issued, but held in escrow by the Company for the benefit of the Executive, upon execution of this Agreement and the Stock Purchase Agreement. (ii) Repurchase Right of the Company. The Company shall have the right to repurchase the Shares (the "Repurchase Right") under the terms and conditions set forth in this Agreement and the Stock Purchase Agreement. The repurchase price for "Unvested Shares" shall be the original - 2 - purchase price for such Shares paid by the Executive (the "Repurchase Consideration"). For the purposes of this Section 2(e), "Vest," "Shares that Vest" or "Vested Shares" shall mean that, subject to the terms and conditions of this Agreement and the Stock Purchase Agreement, the Company shall have no Repurchase Right with respect to those Shares that have become Vested Shares. The Shares shall Vest quarterly in arrears, during the period of October 1, 2003 -- October 1, 2005, upon the terms and conditions set forth in the Stock Purchase Agreement. (iii) Restriction on Transfer Imposed by the Company. The Executive agrees that he shall not under any circumstances transfer, assign, grant a lien or security interest in, pledge, hypothecate, encumber or otherwise dispose of any of the Shares which are subject to the Company's Repurchase Right. (f) Compensation on sale of the Company or Company assets. Executive shall be entitled to a bonus or bonuses ("Sale Bonus") equal to one and one-half percent (1.5%) of the total Incremental Value (as defined below) upon consummation of a Change of Control. "Incremental Value" for purposes hereof shall mean the difference between (x) the Consideration, as defined in Schedule 1, delivered in connection with the consummation of a Change of Control event as defined in Schedule 1 (a "Qualifying Transaction"), and (y) $12,340,964, representing the market value of the Company as of April 1, 2003. The Sale Bonus shall be fully earned upon consummation of the Qualifying Transaction that creates Incremental Value, and shall be paid in the same currency as the Consideration (including securities) paid to Loudeye or the stockholders of Loudeye in connection with such Qualifying Transaction. In the event that Executive is terminated without Cause or resigns with Good Reason within six (6) months prior to a Qualifying Transaction, and Executive did not otherwise receive a Sale Bonus, Executive shall be entitled to the Sale Bonus in amounts described above. Payment of the Sale Bonus will be subject to execution of a Release of Claims by Executive. 4. Term of this Agreement This Agreement shall be effective as of October 1, 2003 (the "Effective Date"), and shall continue until terminated in accordance with Section 5 herein (the "Term"). Notwithstanding anything herein to the contrary, either Party may terminate the Executive's employment under this Agreement at any time, with or without Cause. 5. Termination (a) Subject to the Company's obligations to make the payments contemplated by Section 5(b)(i), this Agreement may be terminated at any time: i. upon the death of the Executive ("Death"); ii. in the event that, due to a physical or mental disability, the Executive is unable to perform, and does not perform, as certified by a mutually agreeable competent medical physician, his material duties hereunder for 30 days in any continuous 60 day period ("Disability"); - 3 - iii. by the Company for Cause; iv. by the Company for any reason and without Cause; v. by the Executive for Good Reason; vi. by the Executive voluntarily or for any reason or no reason, in each case, after sixty (60) days' prior written notice to the Company and the Board ("Resignation"); or vii. by the Executive upon Change of Control. Executive acknowledges that no representations or promises have been made in connection with this Agreement or any other arrangement, plan or agreement between the Executive and the Company concerning the grounds for termination or the future operation of the Company's business, and that nothing contained herein or otherwise stated by or on behalf of the Company modifies or amends the right of the Company to terminate the Executive at any time, with or without Cause. (b) If the Executive's employment is terminated for any reason whatsoever, then, subject to the execution by Executive of a release of claims in form reasonably satisfactory to the Company, which shall include, without limitation, a waiver of all claims the Executive may have against Loudeye, and all of its respective subsidiaries, affiliates, directors, officers, employees, stockholders and agents ("Release of Claims") other than rights of indemnification and any rights to accrued benefits under the employee benefit plans (including equity plans), the Executive shall be entitled to (i) accrued and unpaid base salary, earned and unpaid Performance Bonus and benefits (including sick pay, vacation pay and benefits under Section 7) with respect to the period prior to termination, (ii) reimbursement for expenses under Section 6 with respect to such period, and (iii) reimbursement of any other benefits (including COBRA) required by law to be provided after termination of employment under the circumstances. Except as may otherwise be expressly provided to the contrary in this Agreement, nothing in this Agreement shall be construed as requiring the Executive to be treated as employed by the Company for purposes of any employee benefit plan following the Termination Date. In the event the Executive's employment is terminated pursuant to: (i) Death, Disability, Good Reason, without Cause or due to a Change of Control, the Company will also pay to Executive (or his estate or representative) the termination benefits in accordance with Schedule 2. Such payment shall be made ratably over a period of two months (2) months as determined by the Company, provided, however, that in the event of termination due to a Change of Control, the payment shall be made in a lump sum at the time of the consummation of the transaction constituting a Change of Control. (ii) Cause or Resignation, there will be no additional amounts owing by the Company to the Executive under this Agreement from and after the Termination Date. (c) Termination of this Agreement will not terminate any other provisions not associated specifically with this Agreement. - 4 - (d) Upon termination of this Agreement, the Company shall have no further obligations to the Executive under any option plan, share subscription or similar plan or arrangement, except to the extent that the documentation governing such plan or arrangement specifically requires the Company to continue to incur such obligations. 6. Reimbursement of Expenses During the Term of this Agreement, the Company shall reimburse Executive for reasonable documented travel, entertainment and other expenses reasonably incurred by Executive in connection with the performance of his duties hereunder and, in each case, in accordance with the rules, customs and usages promulgated by the Company from time to time in effect. 7. Benefits The Executive shall be entitled to participate in and be covered by any insurance plan (including, but not limited to, medical, dental, health, accident, hospitalization and disability), vacation policy, 401(k) plan and non-qualified pension plan of the Company, each as determined, from time to time, by the Board. The Company shall have no obligation to establish or maintain an particular plan or program. The Executive shall be entitled to paid vacation accruing at the rate of .50 days per month, subject to the reasonable requirements of the Company as to the timing of the taking of such vacation. 8. Confidential Information Executive shall, as soon as practicable, execute and deliver to the Company a Proprietary Information and Inventions Agreement in favor of the Company (the "Confidentiality Agreement"), in such form as is reasonably satisfactory to the Company. The terms of the Confidentiality Agreement shall survive termination hereof. 9. Non-Competition The Executive acknowledges that services to be provided give him the opportunity to have special knowledge of the Company and of its affiliates and subsidiaries (the "Company Group") and their Confidential Information (as such term is defined in the Confidentiality Agreement, and herein, to the extent that the definition contained herein does not conflict with such provisions of the Confidentiality Agreement) and the capabilities of the individuals employed by or affiliated with the Company and that interference in these relationships would cause irreparable injury to the Company. In consideration of this Agreement, the Executive covenants and agrees that for a period of twelve (12) months from termination, the Executive will not, without the express written approval of the Board, directly or indirectly, in one or a series of transactions, or enter into any agreement to, own, manage, operate, control, invest or acquire an interest in, or otherwise engage or participate in, whether as a proprietor, partner, stockholder, lender, director, officer, employee, joint venturer, investor, lessor, agent, representative or other participant, in any business which competes with the Company, provided, however, that Executive may in one or a series of transactions, own, invest or acquire an interest in up to five percent (5%) of the capital stock of another corporation. The Executive - 5 - acknowledges that the terms of this Section 9 are reasonable and necessary for the protection of the Company, and that the scope and term of this Section 9 would not preclude Executive from earning a living with an entity that does not compete with the Company. 10. Non-Solicitation During the Term of this Agreement and for a period of twenty-four (24) months thereafter, Executive will not and will not cause another business or commercial enterprise to, without the express prior written approval of the Board, in one or a series of transactions, recruit, solicit or otherwise induce or influence any proprietor, partner, stockholder, lender, director, officer, employee, sales agent, joint venturer, investor, lessor, customer, consultant, agent, representative or any other person which has a business relationship with any member of the Company Group or had a business relationship with any member of the Company Group to discontinue, reduce or modify such employment, agency or business relationship. 11. Non-Disparagement During and after the Term of this Agreement, Executive agrees that he shall not make any false, defamatory or disparaging statements about the Company or any member of the Company Group, or the officers or directors of the Company or any member of the Company Group. During and after the Term of this Agreement, the Company shall not make any false, defamatory or disparaging statements about the Executive. 12. Defense of Claims The Executive agrees that from the date hereof, and continuing for a reasonable period after termination of this Agreement, the Executive will cooperate with the Company in defense of any claims that may be made against the Company provided same does not interfere with the Executive's then current employment. The Company agrees to reimburse the Executive for all of the Executive's reasonable out-of-pocket expenses associated with such cooperation, including travel expenses and the fees and expenses of the Executive's legal counsel. 13. Notice Any notice, request, demand or other communications required or permitted to be given under this Agreement shall be given in writing and if delivered personally, sent be certified or registered mail, return receipt requested, sent by overnight courier or sent by facsimile transmission (with confirmation and a copy sent by mail within one day) as follows (or to such other addressee or address as shall be set forth in a notice given in the same manner): If to the Executive: Anthony Bay 16224 NE 130th Place Redmond, WA 98052 Facsimile No._______________ - 6 - If to the Company: Loudeye Corp. 1130 Rainier Ave. South Seattle, WA 98144 Attention: CEO With a copy to the CFO Facsimile No.: (206) 832-4001 with a copy to: John Hentrich PROCOPIO, CORY, HARGREAVES & SAVITCH, LLP 530 B. Street, Suite 2100 San Diego, CA 92101-4469 Facsimile No.: (619) 235-0398 Any such notices shall be deemed to be given on the date personally delivered or sent by facsimile transmission or such return receipt is issued or the day after if sent by overnight courier. 14. The Executive's Representations The Executive hereby warrants and represents to the Company that Executive has carefully reviewed this Agreement and has consulted with such advisors, including, but not limited to, the Executive's financial, tax and legal advisors, or such other advisors as Executive considers appropriate in connection with this Agreement, and is not subject to any covenants, agreements or restrictions, including without limitation any covenants, agreements or restrictions arising out of Executive's prior employment which would be breached or violated by Executive's execution of this Agreement or by Executive's performance of his duties hereunder. 15. Termination of Consulting Agreement. Subject to the provisions of this Agreement, the Parties agree that the Consulting Agreement shall terminate on the Effective Date and the Company shall have no further obligations thereunder. For the avoidance of doubt, the Executive acknowledges and agrees that any provisions of the Consulting Agreement that, by their terms, would survive termination, including, but not limited to Section 8 therein, shall survive such termination. 16. Company's Obligation; Taxes. In connection with a Change of Control, the Company will use all reasonable efforts to maintain, or will use all reasonable efforts to cause any successor to the Company to maintain, reasonably comparable directors' and officers' insurance and indemnification policies (including employment practices liability insurance) to be maintained for a period of not less than three years, from the date of the consummation of the transaction constituting a Change of Control, to the extent that they provide coverage for events occurring prior to the effective date of the transaction constituting a Change of Control, for the Executive's service as an officer and director of the Company prior to such event. The Executive agrees and acknowledges that the obligations owed to Executive under this Agreement are solely the obligation of the Company, and that none of the Company's members, stockholders, directors, officers, or lenders will have any obligations or liabilities in respect of this Agreement and the subject matter hereof. Any - 7 - amounts payable to the Executive pursuant to this Agreement shall be subject to withholding and any other applicable taxes. 17. Severability Whenever possible, each provision of this Agreement will be interpreted in such manner as to be effective and valid under applicable law, but if any provision of this Agreement is held to be invalid, illegal or unenforceable in any respect under any applicable law or rule in any jurisdiction, such invalidity, illegality or unenforceability will not affect any other provision or any other jurisdiction, but this Agreement will be reformed, construed and enforced in such jurisdiction as if such invalid, illegal or unenforceable provision had never been contained herein. If any court determines that any provision of this Agreement is unenforceable and therefore acts to reduce the scope or duration of such provision, the provision in its reduced form shall then be enforceable. 18. Breach; Waiver of Breach: Specific Performance If either party breaches its obligations in connection with this Agreement, the non-breaching party shall be entitled to pursue all remedies available at law or in equity for such breach. The waiver by the Company or Executive of a breach of any provision of this Agreement by the other party shall not operate or be construed as a waiver of any other breach of such other party. Each of the parties (and any third party beneficiaries) to this Agreement will be entitled to enforce its rights under any provision of this Agreement and to exercise all other rights existing in its favor. The parties hereto agree and acknowledge that the Company would be irreparably injured by a violation of Sections 8 through 11 of this Agreement, that the provisions of such sections are reasonable and that the Company could not adequately be compensated in monetary damages, in light of the sensitivity of the non-public information of the Company to which the Executive will be exposed and that the Company may apply to any court of law or equity of competent jurisdiction for specific performance and/or injunctive relief, including temporary restraining orders, preliminary injunctions and permanent injunctions in order to enforce or prevent any violations of the provisions of such sections of this Agreement. 19. Assignment: Third Parties Neither the Executive nor the Company may assign, transfer, pledge, hypothecate, encumber or otherwise dispose of this Agreement or any of his or its respective rights or obligations hereunder, without the prior written consent of the other. Notwithstanding the foregoing, the Company may, in its sole discretion and without the requirement of notice to or consent of Executive, assign this Agreement in the event of the sale of all or substantially all of the assets of the Company. 20. Amendment: Entire Agreement This Agreement may not be changed orally but only by an agreement in writing agreed to by the parties hereto. This Agreement constitutes the entire Agreement between the parties concerning the subject matter hereof and, except as expressly set forth herein, supersedes all prior agreements, if any, between the parties relating to the subject matter hereof. The enforceability of this Agreement shall not cease or otherwise be adversely affected by the - 8 - termination of the Executive's employment with the Company. The Executive and the Company agree that the language used in this Agreement is the language chosen by the parties to express their mutual intent, and that no rule of strict construction is to be applied against any party hereto. 21. Choice of Law; Litigation THIS AGREEMENT SHALL BE GOVERNED BY, CONSTRUED, APPLIED AND ENFORCED IN ACCORDANCE WITH THE INTERNAL LAWS OF THE STATE OF WASHINGTON. THE CHOICE OF FORUM SET FORTH IN THIS SECTION 20 SHALL NOT BE DEEMED TO PRECLUDE THE ENFORCEMENT OF ANY JUDGMENT OF A WASHINGTON FEDERAL OR STATE COURT, OR THE TAKING OF ANY ACTION UNDER THIS AGREEMENT TO ENFORCE SUCH A JUDGMENT, IN ANY OTHER APPROPRIATE JURISDICTION. IN THE EVENT ANY PARTY TO THIS AGREEMENT COMMENCES ANY LITIGATION, PROCEEDING OR OTHER LEGAL ACTION IN CONNECTION WITH OR RELATING TO THIS AGREEMENT, ANY RELATED AGREEMENT OR ANY MATTERS DESCRIBED OR CONTEMPLATED HEREIN OR THEREIN, THE PARTIES TO THIS AGREEMENT HEREBY (1) AGREE UNDER ALL CIRCUMSTANCES ABSOLUTELY AND IRREVOCABLY TO INSTITUTE ANY LITIGATION, PROCEEDING OR OTHER LEGAL ACTION IN A COURT OF COMPETENT JURISDICTION LOCATED WITHIN THE STATE OF WASHINGTON; (2) AGREE THAT IN THE EVENT OF ANY SUCH LITIGATION, PROCEEDING OR ACTION, SUCH PARTIES WILL CONSENT AND SUBMIT TO THE PERSONAL JURISDICTION OF SUCH COURT AND TO SERVICE OF PROCESS UPON THEM IN ACCORDANCE WITH THE RULES AND STATUTES GOVERNING SERVICE OF PROCESS; (3) AGREE TO WAIVE TO THE FULL EXTENT PERMITTED BY LAW ANY OBJECTION THAT THEY MAY NOW OR HEREAFTER HAVE TO THE VENUE OF ANY SUCH LITIGATION, PROCEEDING OR ACTION IN ANY SUCH COURT OR THAT ANY SUCH LITIGATION, PROCEEDING OR ACTION WAS BROUGHT IN ANY INCONVENIENT FORUM; (4) AGREE, AFTER CONSULTATION WITH COUNSEL, TO WAIVE ANY RIGHTS TO A JURY TRIAL TO RESOLVE ANY DISPUTES OR CLAIMS RELATING TO THIS AGREEMENT; AND (5) AGREE THAT NOTHING HEREIN SHALL AFFECT THE RIGHTS OF ANY PARTY TO EFFECT SERVICE OF PROCESS IN ANY OTHER MANNER PERMITTED BY LAW. 22. Headings The headings contained in this Agreement are for convenience only and shall not affect in any way the meaning or interpretation of this Agreement. 23. Survival Sections 5, 8, 9, 10, 11, 12, 13, 14, 15, 16, 17, 18, 21 and this Section 23 of this Agreement shall survive the termination of this Agreement. - 9 - 24. Counterparts This Agreement may be executed in counterparts, each of which will be deemed an original, but all of which together shall constitute one and the same instrument. THE NEXT PAGE IS THE SIGNATURE PAGE - 10 - IN WITNESS WHEREOF, the parties hereto have set their hands as of the day and year first written above. EXECUTIVE: LOUDEYE CORP. ______________________________ By:______________________________ Anthony Bay Name: Jeff Cavins Title: President and CEO [SIGNATURE PAGE TO EMPLOYMENT AGREEMENT FOR ANTHONY BAY DATED AS OF NOVEMBER 13, 2003] - 11 - SCHEDULE D Executive's Initial Responsibilities In addition to Executive's normal governance responsibilities as Chairman of the Board, Executive shall provide support to the Chief Executive Officer and the Board on specific issues and initiatives which shall initially include: - Development of a "Strategic Priorities & Agenda" to drive the company for the next twelve months; - Strengthening and extending the Company's relationship with Microsoft Corporation; - Participation in selective, high potential new business opportunities; - Assistance on Technology and product strategy; and - Mentorship and assimilation of John Martin. - 12 - SCHEDULE 1 Certain Definitions "Cause" shall include but not be limited to termination based on any of the following grounds: (i) the Executive has committed an act that is intended to and does materially injure the business of the Company; (ii) fraud, misappropriation, embezzlement or acts of similar dishonesty; (iii) conviction of a felony; (iv) illegal use of drugs or excessive use of alcohol in the workplace; (v) intentional or willful misconduct that may subject the Company to criminal or civil liability; (vi) breach of the Executive's duty of care or loyalty, including the diversion or usurpation of corporate opportunities properly belonging to the Company; (vii) willful disregard of Company policies; (viii) breach of any of the material terms of this Agreement; (ix) insubordination or the willful failure by the Executive to substantially perform Executive's Responsibilities (other than any such failure resulting from Executive's incapacity due to physical or mental illness), including a refusal or failure to follow lawful and reasonable directions of the Board, after a written demand for substantial performance is delivered to Executive by Loudeye, which specifically identifies the manner in which Loudeye believes that the Executive has not substantially performed Executive's duties or failed to follow directions of the Board, and Executive's failure within 10 days to cure such insubordination or failure to perform; provided, however, that Employee shall not be required to provide Executive with more than one cure period, (x) a determination by the Board that the Executive has engaged in conduct constituting sexual harassment of any current or former employee of the Company; (xi) the Executive has committed an act that is intended to and does materially injure the business of the Company; or (xii) the Executive's commission of any fraud against the Company, its employees, agents or customers or use or intentional appropriation for his personal use or benefit of any funds or properties of the Company not authorized by the Board to be so used or appropriated (but not including immaterial takings or uses of office supplies, company facilities, etc.). "Change of Control" means the occurrence of any of the following: (i) the consummation of a sale, lease, transfer, conveyance or other disposition (other than by way of merger or consolidation), in one or a series of related or unrelated transactions, of all or substantially all of the assets of Loudeye and its subsidiaries, or (ii) the consummation of any transaction (including, without limitation, any merger or consolidation) the result of which Loudeye stockholders prior to the transaction no longer represent as a group a majority of the voting stock of Loudeye after the consummation of the transaction. "Confidential Information" means any confidential information including, without limitation, any study, data, calculations, software storage media or other compilation of information, patent, patent application, copyright, "know-how", trade secrets, customer lists, details of client or consultant contracts, pricing policies, operational methods, marketing plans or strategies, product development techniques or plans, business acquisition plans or any portion or - 13 - phase of any scientific or technical information, ideas, discoveries, designs, inventions, creative works, computer programs (including source of object codes), processes, procedures, formulae, improvements or other proprietary or intellectual property of the Company Group, whether or not in written or tangible form, and whether or not registered, and including all files, records, manuals, books, catalogues, memoranda, notes, summaries, plans, reports, records, documents and other evidence thereof. Notwithstanding the foregoing, the term "Confidential Information" does not include, and there shall be no obligation hereunder with respect to, information that is or becomes generally available to the public other than as a result of a disclosure by the Executive not permissible hereunder or that was in the possession of Executive prior to the date of this Agreement. "Consideration" shall mean the total net proceeds and other consideration paid or exchanged directly or indirectly by the Acquiror (as hereinafter defined), to or for the benefit of the stockholders of the Company, or to or for the benefit of the Company to the extent that such proceeds are distributed to the stockholders, in connection with a transaction that shall constitute a Change of Control, and be comprised of cash, notes, evidences of indebtedness, securities and other property, or a combination thereof. For the avoidance of doubt, Consideration shall not be deemed to include any "Contingent Payments" which, for the purposes of this Agreement, shall mean Consideration received or receivable by the Company in the form of deferred performance-based payments, "earnouts", royalty agreements or other contingent payments based upon the future performance of the Company, its business or assets. For the purposes of this section, Acquiror shall mean the other party or parties to the transaction that, when consummated, shall constitute a Change of Control. "Good Reason" shall mean: (i) any substantial material diminution of the Executive's authority, duties or responsibilities (ii) the knowing and willful failure of Loudeye to make any payments provided under Subsections 3(a) or 3(b) in accordance with the terms of each of those subsections; or (iii) the relocation without the Executive's consent of the Executive's principal work location more than 50 miles from the former Loudeye work location where the Executive was formally employed; provided, however, that the Executive shall not be deemed to have resigned for Good Reason hereunder unless with respect to each of (i), (ii) and (iii) above, the Executive shall have provided written notice to Loudeye within 60 calendar days after the event that the Executive believes gives rise to the Executive's right to terminate employment for Good Reason, describing in reasonable detail the facts that provide the basis for such belief, and Loudeye shall have thirty (30) days from the date of such notice to cure any such diminution, failure or relocation. "Notice of Termination" Any termination of the Executive's employment by Loudeye or by the Executive pursuant to this Agreement (other than termination on account of the Executive's Death) shall be communicated by written "Notice of Termination" to the other party hereto in accordance with Section 13. "Operational Breakeven" shall mean EBITDA or EBIT, as allocated Paragraph 1 of Schedule. "Release of Claims" shall have the meaning set forth in Section 5(b). - 14 - "Termination Date" shall mean: (i) if the Executive's employment is terminated by Executive's Death, the date of Executive's Death; (ii) if the Executive's employment is terminated on account of Disability, the date of the Notice of Termination is transmitted to Executive once the conditions set forth in Section 5(a)(ii) have been satisfied; (iii) if the Executive's employment is terminated due to a Change of Control, the date of the consummation of the transaction that constitutes a Change of Control; and (iv) if the Executive employment is terminated for any other reason, the date on which a Notice of Termination is transmitted (or any later date set forth in such Notice of Termination) or the Executive's last day of active employment, whichever date is later. - 15 - SCHEDULE 2 Termination Benefits a) Termination by Loudeye Without Cause or by the Executive for Good Reason. In the event Loudeye terminates Executive's employment hereunder without Cause, or Executive terminates his employment for Good Reason, Loudeye shall provide the Executive with six (6) months' severance, Base Salary. In addition, Executive will be entitled to payment of such portion of the Performance Bonus as the Compensation Committee shall authorize as necessary (collectively, the "Severance Payments"). Executive will cooperate, if requested by the Company, in the training and support Executive's replacement, if any. Failure of Executive to comply with this requirement may result in Termination for Cause. In the event Executive is terminated without Cause within 6 months following a Change of Control, Executive's Performance Bonus will be considered earned to the extent specified by the Compensation Committee in its discretion, and, to the extent payable, payment will be made no later than sixty (60) days after the effective date of the Change of Control. The Executive will be entitled to all rights under this Change of Control provision in the event that the Executive's employment is terminated without Cause within six months prior to a Change of Control. b) Termination by Loudeye For Cause. Loudeye may terminate Executive's employment immediately for "Cause", in which case Executive shall receive only Executive's Base Salary and normal benefits through the last day of Executive's active employment. For purposes of this Agreement, the term "Cause" shall be defined in Schedule 1. c) Termination By Executive Due to Voluntary Resignation. The Executive may terminate Executive's employment hereunder by voluntarily resigning Executive's employment and providing Loudeye with sixty (60) days prior notice of such resignation. In such event, Executive shall continue to receive Base Salary, earned incentive compensation and benefits during the period in which Executive remains in active employment or Loudeye may, in its sole discretion, terminate the employment at any time within such sixty (60) day period with no further obligation. d) Termination By Death or Disability. Executive's employment shall terminate if the Executive is unable to perform the Executive's Responsibilities due to Death or Disability (as defined in Section 5(a)(ii) of the Agreement. In such case, the Executive's heirs, beneficiaries, successors, or assigns shall not be entitled to any of the compensation or benefits to which Executive is entitled under this Agreement, except: (a) with respect to any Base Salary earned prior to the Executive's Death or Disability; (b) to the extent specifically provided in this Agreement; (c) to the extent required by law; or (d) to the extent such benefit plans or policies under which Executive is covered provide a benefit to the Executive's heirs, beneficiaries, successors, or assigns. - 16 - SCHEDULE 3 Performance Factors (Set annually by BOD in its discretion, 2003 metrics listed below) 1. Revenue 2. New Customers 3. EBIT 4. CASH - 17 - EXHIBIT A RESTRICTED STOCK PURCHASE AGREEMENT - 18 - EX-10.15 4 v96773exv10w15.txt EXHIBIT 10.15 EXHIBIT 10.15 August 13, 2003 Mr. John Martin Dear John: On behalf of Loudeye Corp., a Delaware corporation (the "Company"), I am pleased to offer you the position of Senior Vice President. Speaking for myself, as well as the other members of the Company's management team and board of directors, we are very much looking forward to having you on the Loudeye team in that capacity. The terms of your new position with the Company are outlined below: 1. Position. a. You will be the Senior Vice President, working out of the Company's headquarters in Seattle, Washington. At present, you will report to the CEO. b. You agree to the best of your ability and experience that you will at all times loyally and conscientiously perform all of the duties and obligations required to the reasonable satisfaction of the Company. During the term of your employment, you further agree that you will devote all of your business time and attention to the business of the Company, and the Company will be entitled to all of the benefits and profits arising from or incident to all such work services and advice. You will not render commercial or professional services of any nature to any person or organization, whether or not for compensation, without the prior written consent of the Company's Board of Directors, and you will not directly or indirectly engage or participate in any business that is competitive in any manner with the business of the Company. Nothing in this letter is designed to prevent you from accepting speaking or presentation engagements consistent with Loudeye's business plan in exchange for honoraria or from serving on boards of charitable organizations, or from owning no more than one percent (1%) of the outstanding equity securities of a corporation whose stock is listed on a national stock exchange. Please seek my approval before accepting a speaking or presentation engagement. John Martin August 16, 2003 Page 2 of 4 2. Start Date. Subject to fulfillment of any conditions imposed by the accompanying Employment Agreement, you will commence this new position with the Company on August 18, 2003. 3. Proof of Right to Work. For purposes of federal immigration law, you are required to provide to the Company documentary evidence of your identity and eligibility for employment in the United States. 4. Compensation. a. Base Salary. You will be paid a monthly salary of $16,666.67 which is equivalent to $200,000.00 on an annualized basis. Your salary will be payable in two equal payments per month pursuant to the Company's regular payroll policy (or in the same manner as other employees of the Company). In the event that you are required to spend time transitioning from your current employer which takes your time away from Loudeye, your salary will be adjusted on a pro-rata basis during any such transition period to an amount agreeable to both parties. b. Signing Bonus. We are pleased to offer you a signing bonus of $65,000. This bonus will be paid to you in a lump sum on October 1, 2003. Please note that this signing bonus will be considered taxable income and payroll taxes will be withheld. In the unlikely event that you leave the Company of your own volition within 12 months of your start date, you will be responsible for reimbursement to the Company of the entire signing bonus, You hereby authorize the Company to withhold this amount from any monies owed to you upon the severance of your employment. c. Personal Objectives Bonus. You will be eligible to receive a bonus of up to a maximum of Fifty Percent (50%) of your base salary (the "Target Personal Objectives Bonus Amount"). The Target Personal Objectives Bonus Amount shall be subdivided into two or three separate performance specific targeting bonus amounts which shall be jointly determined by the CEO and you within the next 30 days. d. Company Objectives Bonus. You will be eligible to receive a bonus of up to a maximum of Fifty Percent (50%) of your base salary (the Target Company Objectives Bonus Amount"). The Target Company Objectives Bonus Amount shall be subdivided into two separate performance specific targeting bonus amounts which shall be awarded based upon the following: (i) Revenue: Twenty-five Percent (25%) of the Target Company Objectives Bonus Amount shall be earned upon the Company John Martin August 16, 2003 Page 3 of 4 delivering results in which revenue exceeds the Board of Directors' approved revenue plan, by not less than Ten Percent (10%) over the immediately preceding quarter. The measurement of this shall commence in the fourth quarter of 2003. (ii) Operational Breakeven: Twenty-five Percent (25%) of the Target Company Objectives Bonus Amount shall be earned at such time as the Company achieves breakeven EBIT for the applicable quarter. e. Annual Review. Your base salary will be reviewed annually as part of the Company's normal salary review process. f. Stock Options. During the employment period, you will be eligible to participate in the stock option or other incentive programs available to officers or employees of the Company and shall have the opportunity to purchase shares in accordance with its rules at a level commensurate with your position, all such grams being subject to the approval of the Board of Directors of Loudeye. Subject to approval, you will receive an award effective on the date established by the Board of Directors, of 350,000 options to purchase, to the extent available, incentive stock option (ISO) shares of Loudeye, and to the extent that ISO's are not available, non-qualified options with an exercise price based on the closing price for Loudeye shares on August 16, 2003. g. Vesting Period. This grant shall have a ten year term and shall be exercisable as follows: 125,000 over one year at the rate of 1/12th per month in arrears, and 225,000 over three years at the rate of 1/36th per month in arrears. Vesting will accelerate upon the first to occur of (i) a Change of Control, or (ii) the adoption by the Board of Directors of the Company of a plan of liquidation or dissolution of Loudeye. John Martin August 16, 2003 Page 4 of 4 5. Proprietary Information and Inventions Agreement. Your acceptance of this offer and commencement of employment with the Company is contingent upon the execution, and delivery to an officer of the Company, of the Company's Proprietary Information and Inventions Agreement, a copy of which is enclosed for your review and execution (the "Confidentiality Agreement"), prior to or on your Start Date. 6. Confidentiality of Terms. The Company maintains your personnel file, including information about your salary and benefits, in a private and confidential manner. Our policy to protect the privacy of such information is enhanced when you keep the information confidential. 7. At-Will Employment. Your employment with the Company will be on an "at will" basis, meaning that either you or the Company may terminate your employment at any time for any reason or no reason, without further obligation or liability. This letter summarizes the general terms and conditions of your potential employment with the Company and is provided as a courtesy. The accompanying Employment Agreement and the Proprietary Information and Inventions Agreement set forth the proposed contractual terms of your employment with the Company and supersede any prior representations or agreements, whether written or oral. To indicate your acceptance of the Company's offer, please sign and date the accompanying Employment Agreement and return it to me, along with a signed and dated copy of the Proprietary Information and Inventions Agreement, at your earliest convenience. John, I am delighted to be able to extend you this offer and we all look forward to working with you in your new capacity. Very only yours, LOUDEYE CORP. JEFF CAVINS PRESIDENT & CEO Enclosures: Employment Agreement Proprietary Information and Inventions Agreement EX-10.23 5 v96773exv10w23.txt EXHIBIT 10.23 EXHIBIT 10.23 THE 1130 RAINIER BUILDING STANDARD FORM OFFICE LEASE BETWEEN 1130 RAINIER LLC, A WASHINGTON LIMITED LIABILITY COMPANY Landlord and LOUDEYE CORP., A DELAWARE CORPORATION AND LOUDEYE ENTERPRISE COMMUNICATIONS, INC., A DELAWARE CORPORATION Tenant TABLE OF CONTENTS 1. Terms and Definitions....................................................... 4 2. Premises and Common Areas Leased............................................ 5 3. Term........................................................................ 5 4. Possession.................................................................. 5 5. Annual Basic Rent........................................................... 5 6. Rental Adjustment........................................................... 6 7. Security Deposit............................................................ 7 8. Use......................................................................... 7 9. Payment and Notices......................................................... 7 10. Brokers..................................................................... 7 11. Holding Over................................................................ 7 12. Taxes on Tenant's Property.................................................. 8 13. Condition of Premises....................................................... 8 14. Alterations................................................................. 8 15. Repairs..................................................................... 9 16. Liens....................................................................... 9 17. Entry by Landlord.......................................................... 9 18. Utilities and Services...................................................... 9 19. Bankruptcy.................................................................. 10 20. Indemnification............................................................. 10 21. Damage to Tenant's Property................................................. 10 22. Tenant's Insurance.......................................................... 10 23. Damage or Destruction....................................................... 11 24. Eminent Domain.............................................................. 12 25. Defaults and Remedies....................................................... 12 26. Assignment and Subletting................................................... 13 27. Subordination............................................................... 14 28. Estoppel Certificate........................................................ 14 29. Building Planning - Deleted................................................. 14 30. Rules and Regulations....................................................... 14 31. Governing Law............................................................... 14 32. Successors and Assigns...................................................... 14 33. Surrender of Premises....................................................... 14 34. Attorney's Fees............................................................. 14 35. Performance by Tenant....................................................... 15 36. Mortgage Protection......................................................... 15 37. Definition of Landlord...................................................... 15 38. Waiver...................................................................... 15

2 39. Identification of Tenant.................................................... 15 40. Parking..................................................................... 15 41. Terms and Headings.......................................................... 15 42. Examination of Lease........................................................ 15 43. Time........................................................................ 15 44. Prior Agreement; Amendments................................................. 16 45. Separability................................................................ 16 46. Recording................................................................... 16 47. Limitation on Liability..................................................... 16 48. Riders...................................................................... 16 49. Modification for Lender..................................................... 16 50. Accord and Satisfaction..................................................... 16

3 THE 1130 RAINIER BUILDING STANDARD FORM OFFICE LEASE This Lease is made as of the 20th day of December, 2003, by and between Landlord and Tenant, hereinafter designated. 1. TERMS AND DEFINITIONS. For the purpose of this Lease, the following Terms shall have the following definitions and meanings: a. LANDLORD: 1130 Rainier LLC, a Washington Limited Liability Company b. LANDLORD'S ADDRESS: c/o Seavest Realty Inc. 5030 Roosevelt Way NE Suite 300 P.O. Box 95430 Seattle, WA 98145-2430 c. TENANT: Loudeye Corp., a Delaware corporation and Loudeye Enterprise Communications, Inc., a Delaware corporation d. TENANT'S ADDRESS: 1130 Rainier Ave So. Suite_200 Seattle, WA 98144 e. PREMISES: Those certain premises outlined on the floor plan attached hereto as Exhibit A and by this reference incorporated herein, consisting of approximately 41,753 rentable square feet, being the entire first and second floors of the Building, designated as Suite No. 200. The address of the Building is 1130 Rainier Ave. So., Seattle, WA 98144. Provided however, only during the period January 1, 2003, through March 31, 2004, the premises shall include the entire first floor and only the east side of the second floor , totaling 31,572 square feet. f. TERM: A period of 2 years and 0 months, beginning on the Commencement Date and ending on December 31, 2005, if not sooner terminated by Landlord in accordance with the provisions of Addendum A, attached hereto and by this reference incorporated herein. g. BUILDING STANDARD WORK: All the work to be done, or which has been done, at Landlord's expense in the Premises pursuant to the provisions of the Work Letter Agreement, described in Paragraph 2 below. h. BUILDING NONSTANDARD WORK: All the work to be done, or which has been done, in the Premises by Landlord pursuant to the provisions of the Work Letter Agreement, other than Building Standard Work. i. LEASEHOLD IMPROVEMENTS: The aggregate of the Building Standard Work and the Building Nonstandard Work. j. COMMENCEMENT DATE: The earlier of the following dates: (i) January 1, 2004. (ii) (iii) k. ANNUAL BASIC RENT: PER ADDENDUM A, ATTACHED HERETO AND INCORPORATED HEREIN BY THIS REFERENCE. l. DIRECT EXPENSES BASE: Year 2000 m. TENANT'S PERCENTAGE: 67.12% n. SECURITY DEPOSIT:. $153,058, payable, along with the first month's rent, no later than 10:00 a.m. on January 2, 2004. o. PARKING: 31.5 numbered and reserved uncovered parking spaces, plus half the guest and handicapped uncovered spaces available for $25.00 each per parking stall per month during the term of this Lease. p. BROKERS: LANDLORD'S: Seavest Realty Inc. TENANT'S: NONE Landlord's Initials Tenant's Initials __________________ __________________ 4 2. PREMISES AND COMMON AREAS LEASED. a. Landlord hereby leases to Tenant and Tenant hereby leases from Landlord, the Premises contained within the suite designated in Subparagraph 1.e. The Premises are, or shall be, improved by Landlord with the Leasehold improvements described in the Work Letter Agreement, a copy of which is attached hereto and marked Exhibit "B" and Exhibit "B-1" and incorporated herein by this reference. It is agreed for the purpose of this Lease, that the Premises have an area of approximately the number of square feet designated in Subparagraph 1.e., situated on the floor(s) designated in Subparagraph 1.e., of that certain office building located at the address designated in Subparagraph 1.e. (hereinafter called the "Building"). The Premises exclude the common stairways, stairwells, access ways and pipes, conduits, wires and appurtenant fixtures serving exclusively or in common other parts of the Building. The parties hereto agree that said letting and hiring is upon and subject to the terms, covenants and conditions herein set forth and Tenant covenants as a material part of the consideration for this Lease to keep and perform each and all of said terms, covenants and conditions by it to be kept and performed and that this Lease is made upon the condition of such performance. b. Tenant shall have the nonexclusive right to use, in common with other tenants in the Building and subject to the Rules and Regulations referred to in Paragraph 30 below, the following areas appurtenant to the Premises: (i) The common entrances, lobbies, rest rooms, elevators, stairways and access ways, loading docks, ramps, drives and platforms and any passageways and service ways thereto, and the common pipes, conduits, wires and appurtenant equipment serving the Premises, which Landlord shall exercise reasonable diligence to timely maintain and repair; (ii) Common walkways and sidewalks necessary for access to the Building maintained by Landlord. c. Upon reasonable advance notice to Tenant, Landlord reserves the right from time to time without unreasonable interference with Tenant's use: (i) To install, use, maintain, repair and replace pipes, ducts, conduits, wires and appurtenant meters and equipment included in the Premises which are located in the Premises or located elsewhere outside the Premises, and to expand the Building. (ii) To alter or relocate any other common facility. 3. TERM. The Term of this Lease shall be for the period designated in Subparagraph 1.f., commencing on the Commencement Date and ending on the expiration of such period, unless the Term hereby demised shall be sooner terminated as hereinafter provided. Upon commencement of the Term, this Lease shall be amended to set forth the actual date of commencement and expiration of the Term. 4. POSSESSION. Tenant agrees that in the event of the inability of Landlord to deliver possession of the Premises to Tenant on the date above specified for the commencement of the Term of this Lease, this Lease shall not be void or voidable, unless Landlord shall be unable to deliver possession of the Premises to Tenant by July 1, 1999, nor shall Landlord be liable to Tenant for any loss or damage resulting therefrom, (but the expiration date of the above Term shall be extended by the number of days of such delay) but in such event Tenant shall not be liable for any rent until such time as Landlord tenders delivery of possession of the Premises to Tenant with Landlord's work therein, if any, substantially completed. Should Landlord tender possession of the Premises to Tenant prior to the date specified for commencement of the Term hereof, and Tenant elects to accept such prior tender, such prior occupancy shall be subject to all the terms, covenants and conditions of this Lease, including the payment of rent. 5. ANNUAL BASIC RENT. a. Tenant agrees to pay Landlord as Annual Basic Rent for the Premises the Annual Basic Rent designated in Subparagraph l.k. (subject to adjustment as hereinafter provided) in twelve (12) equal monthly installments, each in advance on the first day of each and every calendar month during the Term, except that the first month's Rent shall be paid upon execution hereof. Landlord shall consider the payment of Annual Basic Rent to be in arrears if it has not been received on or before the fifth (5th) day of each month. In the event the Term of this Lease commences or ends on a day other than the first or last day of a calendar month, then the Rent for such period shall be prorated in the proportion that the number of days this Lease is in effect during such periods bears to thirty (30), and such Rent shall be paid at the commencement of such period. In addition to the Annual Basic Rent, Tenant agrees to pay the amount of the Rental Adjustments as and when hereinafter provided in this Lease. Said rental shall be paid to Landlord, without any prior demand therefor and without any deduction or offset whatsoever in lawful money of the United States of America, which shall be legal tender at the time of payment, at the address of Landlord designated in Subparagraph 1.b. or to such other person or at such other place as Landlord may from time to time designate in writing. Tenant agrees to pay as Additional Rent to Landlord, upon demand, Tenant's percentage of any parking charges, utility surcharges, or any other costs levied, assessed or imposed by, or at the direction of, or resulting from statutes or regulations, or interpretations hereof, promulgated by any federal, state, regional, municipal or local governmental authority in connection with the use or occupancy of the Building or the Premises or the parking facilities serving the Building or the Premises. Further, all charges to be paid by Tenant hereunder, including, without limitation, payments for real property taxes, insurance and repairs, shall be considered Additional Rent for the purposes of this Lease, and the word "Rent" in this Lease shall include such Additional Rent unless the context specifically or clearly implies that only the Annual Basic Rent is referenced. 5 b. Deleted. c. LATE CHARGES. In the event Tenant fails to pay any installment of Rent when due, including any grace period, or in the event Tenant fails to make any other payment to be made under this Lease when due, including any grace period, then Tenant shall pay to Landlord a late charge equal to five percent (5%) of the amount due to compensate Landlord for the extra cost incurred as a result of such late payment. 6. RENTAL ADJUSTMENT. a. For the purpose of this Subparagraph 6.a. the following Terms are defined: (i) LEASE YEAR: Each calendar year of the Term of this Lease. (ii) TENANT'S PERCENTAGE: That portion of the building occupied by Tenant divided by the total square footage of the Building available for occupancy, which result is set forth as a percentage in Subparagraph 1.m. (iii) DIRECT EXPENSE BASE: The amount of the annual Direct Expenses which Landlord has included in the Annual Basic Rent and which amount is set forth in Subparagraph 1.1. (iv) DIRECT EXPENSES: The Term "Direct Expenses" shall include: (a) Property tax costs consisting of real and personal property taxes and assessments upon the Building and the land upon which it is located or assessments levied in lieu thereof imposed by any governmental authority or agency, and non-progressive tax on or measured by gross rental received from the rental of space in the Building; any parking charges, utilities surcharges, or any other costs levied, assessed or imposed by, or at the direction of, or resulting from statutes or regulations, interpretations thereof, promulgated by any federal, state, regional, municipal or local government authority in connection with the use or occupancy of the Premises or the parking facilities serving the Premises; any tax on this transaction or any document to which Tenant is a party creating or transferring an interest in the Premises, and any expenses, including cost of attorneys or expert reasonably incurred by Landlord in seeking reduction by the taxing authority of the above-referenced taxes, less tax refunds obtained as a result of an application for review thereof; but shall not include any net income, franchise, capital stock, estate or inheritance taxes. (b) Operating costs consisting of costs incurred by Landlord in maintaining and operating the Building and the land upon which it is located, exclusive of costs required by this Lease to be paid by Tenant such as all its utilities or required to be capitalized for federal income tax purposes, and including (without limiting the generality of the foregoing) the following: cost of insurance, supplies, services of independent contractors, managers, other suppliers, the fair rental value of the Building office, cost of compensation (including employment taxes and fringe benefits) of all persons who perform duties connected with the management, operation maintenance, and repair of the Building, its equipment, parking facilities and the Common Areas, including, without limitation, engineers, janitors, foremen, floor waxers, window washers, watchmen and gardeners, but excluding persons performing services not uniformly available to or performed for substantially all Building tenants. (c) Amortization of such reasonable capital improvements as Landlord may have constructed: (1) for the purpose of reducing operating costs and (2) to comply with governmental rules and regulations promulgated after completion of the Building. b. If Tenant's Percentage of the Direct Expenses paid or incurred by Landlord for any Lease Year exceeds Tenant's percentage of the Direct Expense Base, then Tenant shall pay such increase as additional rent. As soon as possible each year Landlord shall give to Tenant an unaudited written statement of the increase in rent payable by Tenant hereunder which shall be due and payable upon receipt. In addition, for each year after the First Lease Year, Tenant shall pay its percentage of Landlord's estimate of the amount by which Direct Expenses for that year shall exceed the Direct Expense Base. This amount shall be divided into twelve (12) equal monthly installments. Tenant shall pay to Landlord concurrently with the regular monthly rent payments next due following the receipt of such statement, an amount equal to one (1) monthly installment multiplied by the number of months from January in the calendar year in which said statement is submitted to the month of such payment, both months inclusive. Subsequent installments shall be payable concurrently with the regular monthly rent payments for the balance of that calendar year and shall continue until the next calendar year's statement is rendered. If in any calendar year Tenant's Percentage of actual Direct Expenses is less than the estimate for that year, then upon receipt of Landlord's statement, any overpayment made by Tenant on the monthly installment basis provided above shall be credited towards the next monthly rent falling due and the estimated monthly installments of Tenant's Percentage of Direct Expenses to be paid shall be adjusted to reflect such lower Direct Expenses for the most recent Lease Year. c. Even though the Term has expired and Tenant has vacated the Premises, when the final determination is made of Tenant Percentage of Direct Expenses for the year in which this Lease Terminates, Tenant shall immediately pay any increase due over the estimated expenses paid and conversely any overpayment made in the event said expenses decrease shall be immediately rebated by Landlord to Tenant. 7. SECURITY DEPOSIT. Tenant has deposited with Landlord the Security Deposit designated in Subparagraph 1.n. Said sum shall be held by Landlord as security for the faithful performance by Tenant of all the terms, covenants, and conditions of this Lease to be kept and performed by Tenant during the Term hereof. If Tenant defaults with respect to any provision of this Lease, including but not limited by the provisions relating to the payment of Rent, Landlord may (but shall not be required to) use, apply or retain all or any part of this Security Deposit for the payment of any Rent or any other sum in default, or for the payment of any other such amount which Landlord may spend or become obligated to spend by reason of Tenant's default or to compensate Landlord for any loss or damage which Landlord may suffer by reason of Tenant's default. If any portion of said deposit is so used or applied, Tenant shall, within 6 ten (10) days after demand therefor, deposit cash with Landlord in an amount sufficient to restore the Security Deposit to its original amount. Tenant's failure to do so shall be a material breach of this Lease. Landlord shall not be required to keep the Security Deposit separate from its general funds, and Tenant shall not be entitled to interest on such Security Deposit. Should Landlord sell its interests in the Premises during the Term hereof and if Landlord deposits with the purchaser thereof the then unappropriated funds deposited by Tenant as aforesaid, thereupon Landlord shall be discharged from any further liability with respect to the Security Deposit. 8. USE. Tenant shall use the Premises for general business office and internet broadcast purposes and uses incidental thereto, and shall not use the Premises, or permit or suffer the Premises to be used for any other purpose without the written consent of Landlord, which consent will not be unreasonably withheld, delayed, or conditioned. Tenant shall not use or occupy the Premises in violation of law or of the certificate of occupancy issued for the Building, or any master lease underlying the Premises which Tenant has been notified, and shall, upon five (5) days written notice from Landlord, discontinue any use of the Premises which is declared by any governmental authority having jurisdiction to be in violation of law or of said certificate of occupancy or ground lease. Tenant shall comply with any direction of any governmental authority having jurisdiction which shall, by reason of the nature of Tenant's use or occupancy of the Premises, impose any duty upon Tenant or Landlord with respect to the Premises or with respect to the use or occupation thereof. Tenant shall not do or permit to be done anything which will invalidate, restrict or increase the cost of any fire, "All-Risk", extended coverage or other insurance policy covering the Building and/or property located therein, and shall comply with all rules, orders, regulations and requirements of the Insurance Service Offices, formerly known as the Pacific Fire Rating Bureau, or any other organization performing a similar function. Tenant shall, promptly, upon demand, reimburse Landlord for any additional premium charged to Landlord for such policy by reason of Tenant's failure to comply with the provisions of this Paragraph 8, and upon such payment, shall not be in breach of the preceding sentence. Tenant shall not do or permit anything to be done in or about the Premises which will in any way obstruct or interfere with the rights of other tenants or occupants of the Building, or injure or annoy them, or use or allow the Premises to be used for any improper, immoral, unlawful or objectionable purpose, nor shall Tenant cause, maintain or permit any nuisance in, on or about the Premises. Tenant shall not commit or suffer to be committed any waste in, on or about the Premises. 9. PAYMENT AND NOTICES. All Rent and other sums payable by Tenant to Landlord hereunder shall be paid to Landlord at the address designated by Landlord in Subparagraph l.b. or at such other places as Landlord may hereafter designate in writing. Any notice required or permitted to be given hereunder must be in writing and may be given by personal delivery or by mail, and if given by mail shall be deemed sufficiently given if sent by registered or certified mail, return receipt requested, postage prepaid, addressed to Tenant at the Building of which the Premises are a part; or to Landlord at its address designated in Subparagraph l.b. Either party may, by written notice to the other, specify a different address for notice purposes except that Landlord may in any event use the Premises as Tenant's address for notice purposes. If more than one tenant is named under this Lease, service of any notice upon any one of said tenants shall be deemed as service upon all said tenants. 10. BROKERS. The parties recognize that the brokers who negotiated this Lease are the brokers whose names are stated in Subparagraph l.p., and agree that Landlord shall be solely responsible for the payment of brokerage commissions to said brokers, and that Tenant shall have no responsibility therefor. If Tenant has dealt with any other person or real estate broker with respect to leasing or renting space in the Building, Tenant shall be solely responsible for the payment of any fee due said person or firm and Tenant shall hold Landlord free and harmless against any liability in respect thereto, including attorney's fees and costs. 11. HOLDING OVER. If Tenant holds over after the expiration or earlier Termination of the Term hereof without the express written consent of Landlord, Tenant shall become a Tenant at sufferance only, at a rental rate equal to one hundred twenty-five percent (125%) of the Rent in effect upon the date of such expiration, and otherwise subject to the terms, covenants and conditions herein specified so far as applicable. Acceptance by Landlord of Rent after such expiration or earlier termination shall not constitute a holdover hereunder or result in a renewal or extension of this Lease. The foregoing provisions of this Paragraph 11 are in addition to and do not affect Landlord's right of re-entry or any rights of Landlord hereunder or as otherwise provided by law. If Tenant fails to surrender the Premises upon the expiration of this Lease despite demand to do so by Landlord, Tenant shall indemnify and hold Landlord harmless from all loss or liability, including without limitation, any claim made by any succeeding tenant founded on or resulting from such failure to surrender, including attorney's fees and costs incurred by Landlord in evicting Tenant. 12. TAXES ON TENANT'S PROPERTY. a. Tenant shall be liable for and shall pay at least ten (10) days before delinquency, taxes levied against any personal property or trade fixtures placed by Tenant in or about the Premises. If any such taxes on Tenant's personal property or trade fixtures are levied against Landlord or Landlord's property or if the assessed value of the Premises is increased by the inclusion therein of a value placed upon such personal property or trade fixtures of Tenant, then Landlord, after written notice to Tenant, shall have the right to pay the taxes based upon such increased assessments, regardless of the validity thereof, but only under proper protest if requested by Tenant in writing. If Landlord shall do so, then Tenant shall, upon demand, repay to Landlord the taxes levied against Landlord, or the proportion of such taxes resulting from such increase in the assessment. b. If the Leasehold Improvements in the Premises, whether installed and/or paid for by Landlord or Tenant and whether or not affixed to the real property so as to become a part thereof, are assessed for real property tax purposes at a valuation higher than the valuation at which Leasehold Improvements conforming to Landlord's "Building Standard" in other space in the Building are assessed, then the real property taxes and assessments levied against Landlord or the property by reason of such excess assessed valuation shall be deemed to be real property taxes and assessments levied against personal property of Tenant and shall be governed by the provisions of Subparagraph 12.a. If the records of the County Assessors are available and sufficiently detailed to serve as a basis for determining whether said Leasehold improvements are assessed at a higher valuation than Landlord's "Building Standard", such records shall be binding on both Landlord and Tenant. If the records of the County Assessor are not 7 available or sufficiently detailed to serve as a basis for making said determination, the actual costs of construction shall be used. 13. CONDITION OF PREMISES. Tenant acknowledges that neither Landlord nor any agent of Landlord has made any representation or warranty with respect to the Premises or the Building or with respect to the suitability of either for the conduct of Tenant's business. The taking of possession of the Premises by Tenant shall conclusively establish that the Premises and the Building were at such time in satisfactory condition except for leasehold improvements yet to be completed, if any. Tenant accepts the premises "As Is". 14. ALTERATIONS. a. Tenant shall make no alterations, decorations, additions or improvements in or to the Premises without Landlord's prior written consent, and then only by contractors or mechanics first approved by Landlord in writing. Tenant agrees that there shall be no construction of partitions or other obstructions which might interfere with Landlord's free access to mechanical installations or service facilities of the Building or interfere with the moving of Landlord's equipment to or from the enclosures containing said installations or facilities. All such work shall be done at such times and in such manner as Landlord may from time to time designate. Tenant covenants and agrees that all work done by Tenant shall be performed in full compliance with all laws, rules, orders, ordinances, directions, regulations and requirements of all governmental agencies, offices, departments, bureaus and boards having jurisdiction. Before commencing any work, Tenant shall give Landlord at least five (5) days written notice of the proposed commencement of such work, and shall, if required by Landlord, secure at Tenant's own cost and expense, a completion and lien indemnity bond, satisfactory to Landlord, for said work. Tenant further covenants and agrees that any mechanic's liens filed against the Premises or against the Building for work claimed to have been done, or materials claimed to have been furnished to Tenant, will be discharged by Tenant, by bond or otherwise, within ten (10) days after the filing thereof, at the cost and expense of Tenant. All alterations, decorations, additions or improvements upon the Premises, made by either party, including (without limiting the generality of the foregoing) all wall covering, built-in cabinet work, paneling and the like, shall, unless Landlord elects otherwise, become the property of Landlord, and shall remain upon, and be surrendered with the Premises, as a part thereof, at the end of the Term hereof. However, Landlord may, by written notice to Tenant, given at least thirty (30) days prior to the end of the Term, require Tenant to remove all partitions, counters, railings, and the like, installed by Tenant, and Tenant shall repair any damage to the Premises arising from such removal or, at Landlord's option, shall pay to Landlord all of Landlord's costs of such removal and repair. Such removal by Tenant of any such improvements shall not interfere, in any way, with any other tenant's quiet enjoyment of the Building. b. All moveable articles of personal property and all moveable, unattached business and trade fixtures, machinery and equipment, furniture and partitions owned by Tenant or installed by Tenant at its expense in the Premises shall be and remain the property of Tenant and may be removed by Tenant at any time during the Term, provided Tenant is not in default hereunder, and provided further that Tenant shall repair any damage caused by such removal. If Tenant shall fail to remove all of its effects from the Premises upon termination of this Lease for any cause whatsoever, Landlord may, at its option, remove the same in any manner that Landlord shall choose, and store said effects without liability to Tenant for loss thereof. Tenant agrees to pay Landlord upon demand any and all expenses incurred in such removal, including court costs and attorney's fees and storage charges on such effects for any length of time that the same shall be in Landlord's possession. Landlord may, at its option and without notice, sell said effects, or any of the same, at private sale and without legal process, for such price as Landlord may obtain and apply the proceeds of such sale upon (i) any amounts due under this Lease from Tenant to Landlord and (ii) the expenses incident to the removal and sale of said effects. c. Landlord reserves the right at any time and from time to time without the same constituting an actual or constructive eviction and without insuring any liability to Tenant therefor or otherwise affecting Tenant's obligations under this Lease, to make such reasonable changes, alterations, additions, improvements, repairs or replacements in or to the Building (including the Premises, if required so to do by any law or regulation) and the fixtures and equipment thereof, as well as in or to the street entrances, halls, passages and stairways thereof, and to change the name by which the Building is commonly known, as Landlord may deem necessary or desirable. Nothing contained in this Subparagraph 14.c. shall be deemed to relieve Tenant of any duty, obligation or liability of Tenant with respect to making any repair, replacement or improvement or complying with any law, order or requirement of any government or other authority. Nothing contained in this Subparagraph 14.c. shall be deemed or construed to impose upon Landlord any obligation, responsibility or liability whatsoever, for the care, supervision or repair of the Building or any part other than as expressly provided in this Lease. 15. REPAIRS. a. By entry hereunder, Tenant accepts the Premises as being in good and sanitary order, condition and repair. Tenant shall keep, maintain and preserve the Premises in first class condition and repair, and shall, when and if needed or whenever requested by Landlord to do so, at Tenant's sole cost and expense, make all repairs to the Premises and every part thereof, including all interior windows and doors. Tenant shall, upon the expiration or sooner termination of the Term hereof, surrender the Premises to Landlord in the same condition as when received, except for normal wear and tear or any alterations that have been approved by Landlord as designated in advance in writing at the time of Landlord's approval. Landlord shall have no obligation to alter, remodel, improve, repair, decorate or paint the Premises or any part thereof except as specifically provided in Exhibits "B" and "B-1". The parties hereto affirm that Landlord has made no representations to Tenant respecting the condition of the Premises or the Building except as specifically set forth. b. Anything contained in Subparagraph 15.a. above to the contrary notwithstanding, Landlord shall repair and maintain the structural portions of the Building, the foundation, the structural roof lid ( including its water tightness), the basic plumbing, heating, ventilating, air conditioning, and electrical systems furnished or installed by Landlord unless such maintenance and repair is caused in whole or in part by the negligent act, neglect, fault of or the omission of any duty by Tenant, its agents, servants, employees, guests, invitees, officers or directors, in which 8 case Tenant shall pay to Landlord as additional rent the reasonable cost of such maintenance or repair. The reasonable cost of all such repair and maintenance shall be included in the expenses passed through to Tenant by Landlord as Additional rent. Landlord shall not be liable for any failure to make any such repairs or to perform any maintenance unless such failure shall persist for an unreasonable time not to exceed twenty one (21) days, unless said repair or maintenance cannot be reasonably completed within said twenty one day period, in which case Landlord shall diligently make such repair, in no event later than ninety (90) days from the effective date of Tenant's notice to Landlord. 16. LIENS. Tenant shall not permit any mechanic's, material men's or other liens to be filed against the real property of which the Premises form a part nor against Tenant's leasehold interest in the Premises. If any such liens are filed, Landlord may, without waiving its rights and remedies based on such breach of Tenant, and without releasing Tenant from any of its obligations, cause such liens to be released by any means it shall deem proper, including payments in satisfaction of the claim giving rise to such lien. Tenant shall pay to Landlord at once, upon notice by Landlord, any sum paid by Landlord to remove such liens, together with interest at the maximum rate per annum permitted by law from the date of such payment by Landlord. 17. ENTRY BY LANDLORD. Landlord reserves and shall at any and all times, upon reasonable advance notice to Tenant, have the right to enter the Premises to inspect the same, to supply janitor service and any other service to be provided by Landlord to Tenant hereunder, to submit said Premises to prospective purchasers or tenants (as to whom four (4) hours advance notice shall be deemed reasonable), improve or repair the Premises or any other portion of the Building, all without being deemed guilty of any eviction of Tenant and without abatement of Rent, and may, in order to carry out such purposes, erect scaffolding and other necessary structures where reasonably required by the character of the work to be performed, provided that the business of Tenant shall be interfered with as little as is reasonably practicable. For each of the aforesaid purposes, Landlord shall at all times, have and retain a key with which to unlock all of the doors in, upon and about the Premises, excluding Tenant's vaults and safes. Landlord shall have the right to use any and all means which Landlord may deem proper to open said doors in an emergency in order to obtain entry to the Premises, and any entry to the Premises obtained by Landlord by any of said means, or otherwise, shall not under any circumstances be construed or deemed to be a forcible or unlawful entry into, or a detainer of, the Premises, or an eviction of Tenant from the Premises or any portion thereof, and any damages caused on account thereof shall be paid by Tenant. It is understood and agreed that no provision of this Lease shall be construed as obligating Landlord to perform any repairs, alterations or decorations except as otherwise expressly agreed herein to be performed by Landlord. 18. UTILITIES AND SERVICES. Provided that Tenant is not in default of this Lease, Landlord agrees to furnish or cause to be furnished to the Premises the utilities and services described in the Standards for Utilities and Services, attached hereto as Exhibit "D", subject to the conditions and in accordance with the standards set forth therein. Landlord shall not be liable for, Tenant shall not be entitled to any abatement or reduction of rent by reason of, and no eviction of Tenant shall result from, and Tenant shall not be relieved from the performance of any covenant or agreement in this Lease because of, Landlord's failure to furnish any of the foregoing when such failure is caused by accident, breakage, repairs, strikes, lockouts or other labor disturbances or labor dispute of any character, governmental regulation, moratorium or other cause beyond Landlord's reasonable control. In the event of any failure, stoppage or interruption thereof, Landlord shall diligently attempt to promptly resume service. Tenant shall pay for the entire cost of the utilities furnished to it to be billed to Tenant by Landlord as additional rent. If any such utilities are not separately metered, Lessor shall pro rate the same on an equitable basis. 19. BANKRUPTCY. If Tenant shall file a petition of bankruptcy under any Chapter of the Bankruptcy Act as then in effect, or if Tenant shall be adjudicated a bankrupt in involuntary bankruptcy proceedings and such adjudication shall not have been vacated within thirty (30) days from the date thereof, or if a receiver or trustee shall be appointed of Tenant's property, and the order appointing such receiver or trustee shall not be set aside or vacated within thirty (30) days after the entry thereof, or if Tenant shall assign Tenant's estate or effects for the benefit of creditors, or if this Lease shall by operation of law or otherwise devolve or pass to any person or persons other than Tenant, then in any such event Landlord may, if Landlord so elects, with or without notice of such election and with or without entry or action by Landlord, forthwith terminate this Lease. In such case, notwithstanding any other provisions of this Lease, Landlord, in addition to any and all rights and remedies allowed by law or equity, shall, upon such termination, be entitled to recover damages in the amount provided in Subparagraph 25.b. Neither Tenant nor any person claiming through or under Tenant or by virtue of any statute or order of any court shall be entitled to possession of the Premises, but shall forthwith quit and surrender the Premises to Landlord. Nothing herein contained shall limit or prejudice the right of Landlord to prove and obtain as damages by reason of any such termination an amount equal to the maximum allowed by any statute or rule of law in effect at the time when, and governing the proceedings in which, such damages are to be proved, whether or not such amount be greater, equal to, or less than the amount of damages recoverable under the provisions of this Paragraph 19. 20. MUTUAL INDEMNIFICATION. Tenant, (or Landlord, as the case may be) shall indemnify, defend and hold harmless Landlord (or Tenant) against and from any and all claims arising from Tenant's (or Landlord's) use of the Premises or the conduct of its business or from any activity, work, or thing done, permitted or suffered by Tenant (or Landlord) in or about the Premises. Tenant (or Landlord) shall further indemnify, defend and hold harmless Landlord (or Tenant) against and from any and all claims arising from any breach or default in the performance or any obligation on Tenant's (or Landlord's) part to be performed under the Terms of this Lease, or arising from any act, neglect, fault or omission of Tenant (or Landlord ) or of its agents or employees, and from and against all costs, attorney's fees, expenses and liabilities incurred in or about such claim or any action or proceeding brought thereon. In case any action or proceeding shall be brought against Landlord (or Tenant) by reason of any such claim, Tenant, (or Landlord) upon notice from Landlord, (or Tenant) shall defend the same at Tenant's (or Landlord) expense by counsel approved in writing by Landlord (or Tenant). Tenant, as a material part of the consideration to Landlord, hereby assumes all risk of damage to property or injury to person in, upon or about the Premises from any cause whatsoever, except that which is caused by the failure of Landlord to observe any of the terms and conditions of this Lease where such failure has persisted for an unreasonable period of time after written notice of such failure. 9 21. DAMAGE TO TENANT'S PROPERTY. Notwithstanding the provisions of Paragraph 20 to the contrary, Landlord or its agents shall not be liable for any damage to property entrusted to employees of the Building, not for loss or damage to any property by theft or otherwise, not for any injury or damage to persons or property resulting from fire, explosion, falling plaster, steam, gas, electricity, water or rain which may leak from any part of the Building or from the pipes, appliances or plumbing work therein or from the roof, street or sub-surface or from any other place or resulting from dampness or any other cause whatsoever except to the extent that such damage or loss is attributable to the breech of any of Landlord's obligations hereunder. Landlord or its agents shall not be liable for interference with light or other incorporeal heraditaments, nor shall Landlord be liable for any latent defect in the Premises or in the Building. Tenant shall give prompt notice to Landlord in case of fire or accidents in the Premises or in the Building or of defects therein or in the fixtures or equipment. 22. TENANT'S INSURANCE. a. Tenant shall, during the Term hereof and any other period of occupancy, at its sole cost and expense, obtain, maintain and keep in full force and effect the following insurance: (i) Standard Form Property Insurance insuring against the perils of fire, extended coverage, vandalism, malicious mischief, special extended coverage ("All-Risk") and sprinkler leakage. This insurance policy shall be upon property of every description and kind owned by Tenant, for which Tenant is legally liable or that was installed at Tenant's expense, and which is located in the Building, including without limitation, furniture, fittings, installations, fixture (other than Building Standard Work), and any other personal property, in an amount not less than ninety percent (90%) of the full replacement cost thereof. In the event that there shall be a dispute as to the amount which comprises full replacement cost, the parties shall submit their dispute to binding arbitration for resolution. This insurance policy shall also be upon direct or indirect loss of Tenant's earnings attributable to Tenant's inability to use fully or obtain access to the Premises or Building in an amount as will properly reimburse Tenant. Such policy shall name Landlord and any mortgagees of Landlord as Additional Insured as their respective interests may appear. (ii) Comprehensive General Liability Insurance insuring Tenant against any liability arising out of the lease, use, occupancy or maintenance of the Premises and all areas appurtenant thereto. Such insurance shall be in the amount of $3,000,000 Combined Single Limit for injury to, or death of one or more persons in an occurrence, and for damage to tangible property (including loss of use) in an occurrence. The policy shall insure the hazards of premises and operations, independent contractors, contractual liability (covering the indemnity contained in Paragraph 20 hereof) and shall (a) name Landlord as an Additional Insured, (b) contain a Cross Liability provision, and (c) contain a provision that "the insurance provided the Landlord hereunder shall be primary and non-contributing with any other insurance available to the Landlord". (iii) Workmen's Compensation and Employer's Liability Insurance (as required by state law). (iv) Any other form or forms of insurance as Tenant or Landlord or any mortgagees of Landlord may reasonably require from time to time in form, in amounts and for insurance risks against which a prudent tenant would protect itself. b. All policies shall be written in a form satisfactory to Landlord and shall be taken out with insurance companies holding a General Policyholders Rating of "A" and a Financial Rating of "X" or better, as set forth in the most current issue of Bests Insurance Guide. Tenant shall deliver to Landlord Certificates of Insurance satisfactory to Landlord. No such policy shall be cancelable or reducible in coverage except after thirty (30) days prior written notice to Landlord. Tenant shall, within ten (10) days prior to the expiration of such policies, furnish Landlord with renewals or "binders" thereof, or Landlord may order such insurance and charge the cost thereof to Tenant as Additional Rent. If Landlord obtains any insurance that is the responsibility of Tenant under this Paragraph 22, Landlord shall deliver to Tenant a written statement setting forth the amount of any such insurance cost increase and showing in reasonable detail the manner in which it has been computed. 23. DAMAGE OR DESTRUCTION. a. In the event the Building and/or Building Standard Work are damaged by fire or other perils covered by Landlord's extended coverage insurance Landlord shall: (i) In the event of total destruction, at Landlord's option, within a period of ninety (90) days thereafter, commence repair, reconstruction and restoration of the Building and/or Building Standard Work and prosecute the same diligently to completion, in which event this Lease shall remain in full force and effect; or within said ninety (90) day period elect not to so repair, reconstruct or restore the Building and/or Building Standard Work in which event this Lease shall terminate. In the event Landlord elects not to restore the Building and/or Building Standard Improvements, this Lease shall be deemed to have terminated as of the date of such total destruction. (ii) In the event of a partial destruction of the Building and/or Building Standard Improvements, to an extent not exceeding twenty-five percent (25%) of the full insurable value thereof and if the damage thereto is such that the building and/or the Building Standard Improvements may be repaired, reconstructed or restored within a period of ninety (90) days from the date of the happening of such casualty and Landlord will receive insurance proceeds sufficient to cover the cost of such repairs, Landlord shall commence and proceed diligently with the work of repair, reconstruction and restoration and this Lease shall continue in full force and effect. If such work or repair reconstruction and restoration is such as to require a period longer than ninety (90) days or exceeds twenty-five percent (25%) of the full insurable value thereof, or if said insurance proceeds will not be sufficient to cover the cost of such repairs, Landlord either may elect to so repair, reconstruct or restore and this Lease shall continue in full force and effect or Landlord may elect not to repair, reconstruct or restore and this Lease shall in such event terminate. Under any of the conditions of this Subparagraph 23. a. (ii), Landlord shall give written notice to Tenant of its intention within said ninety (90) day period. In the event Landlord elects not to restore said Building and/or 10 Building Standard Improvements, this Lease shall be deemed to have terminated as of the date of such partial destruction. b. Upon any termination of this Lease under any of the provisions of this Paragraph 23, the parties shall be released thereby without further obligation to the other from the date possession of the Premises is surrendered to Landlord except for items which have therefor accrued and are then unpaid. c. In the event of repair, reconstruction and restoration by Landlord as herein provided, the Rent provided to be paid under this Lease shall be abated proportionately with the degree to which Tenant's use of the premises is impaired during the period of such repair, reconstruction or restoration. Tenant shall not be entitled to any compensation or damages for loss in the use of the whole or any part of the Premises and/or any inconvenience or annoyance occasioned by such damage, repair, reconstruction or restoration. d. Tenant shall not be released from any of its obligations under this Lease, except to the extent and upon the conditions expressly stated in this Paragraph 23. Notwithstanding anything to the contrary contained in this Paragraph 23, should Landlord be delayed or prevented from repairing or restoring the damaged Premises within one (1) year after the occurrence of such damage or destruction by reason of acts of God, war, governmental restrictions, inability to procure the necessary labor or materials, or other cause beyond the control of Landlord, Landlord shall be relieved of its obligation to make such repairs or restoration and Tenant shall be released from its obligations under this Lease as of the end of said one (1) year period. e. In the event that damage is due to any cause other than fire or other peril covered by extended coverage insurance, Landlord may elect to terminate this Lease. f. It is hereby understood that if Landlord is obligated to or elects to repair or restore as herein provided, Landlord shall be obligated to make repair or restoration only to those portions of the Building and the Premises which were originally provided at Landlord's expense, and the repair and restoration of items not provided at Landlord's expense shall be the obligation of Tenant. g. Notwithstanding anything to the contrary contained in Paragraph 21, Landlord shall not have any obligation whatsoever to repair, reconstruct or restore the Premises when the damage resulting from any casualty covered under this Paragraph 23 occurs during the last twelve (12) months of the Term of this Lease. In the event Landlord exercises its rights hereunder, the lease shall terminate effective as of the date of the casualty. 24. EMINENT DOMAIN. In the case the whole of the Premises, or such part thereof as shall substantially interfere with Tenant's use and occupancy thereof, shall be taken for any public or quasi-public purpose by any lawful power or authority by exercise of the right of appropriation, condemnation or eminent domain, or sold to prevent such taking, either party shall have the right to terminate this Lease effective as of the date possession is required to be surrendered to said authority. Tenant shall not assert any claim against Landlord or the taking authority for any compensation because of such taking, and Landlord shall be entitled to receive the entire amount of the award without deduction for any estate or interest of Tenant, and Landlord, at its option, may terminate this Lease. If Landlord does not so elect, Landlord shall promptly proceed to restore the premises to substantially the same condition prior to such partial taking, and a proportionate allowance shall be made to Tenant of the Rent corresponding to the time during which, and to the part of the Premises of which, Tenant shall be so deprived on account of such taking and restoration. Nothing contained in this Paragraph 24 shall be deemed to give Landlord any interest in any award made to Tenant for the taking of personal property and fixtures belonging to Tenant. 25. DEFAULTS AND REMEDIES. a. The occurrence of any one or more of the following events shall constitute a default hereunder by Tenant: (i) The vacation or abandonment of the premises by Tenant. Abandonment is herein defined to include, but is not limited to, any absence from the Premises for five (5) business days or longer while in default of any provision of this Lease. (ii) The failure by Tenant to make any payment of Rent or Additional Rent or any other payment required to be made by Tenant hereunder, as and when due, where such failure shall continue for a period of three (3) days after written notice thereof from Landlord to Tenant. (iii) The failure by Tenant to observe or perform any of the express or implied covenants or provisions of this Lease to be observed or performed by Tenant, other than as specified in Subparagraph 25.a.(i) or (ii) above where such failure shall continue for a period of ten (10) days after written notice thereof from Landlord to Tenant; provided, however, that if the nature of Tenant's default is such that more than ten (10) days are reasonably required for its cure, then Tenant shall not be deemed to be in default if Tenant shall commence such cure within said ten (10) day period and thereafter diligently prosecute such cure to completion, which completion shall occur not later than ninety (90) days from the date of such notice from Landlord. (iv) The making by Tenant of any general assignment for the benefit of creditors. (v) The filing by or against Tenant of a petition to have Tenant adjudged as bankrupt or a petition for reorganization or arrangement under any law relating to bankruptcy (unless, in the case of a petition filed against Tenant, the same is dismissed within sixty (60) days). 11 (vi) The appointment of a trustee or receiver to take possession of substantially all of Tenant's assets located at the Premises or of Tenant's interest in this Lease, where possession is not restored to Tenant within thirty (30) days. (vii) The attachment, execution or other judicial seizure of substantially all of Tenant's assets located at the Premises or of Tenant's interest in this Lease where such seizure is not discharged within thirty (30) days. b. In the event of any such default by Tenant, in addition to any other remedies available to Landlord at law or in equity, Landlord shall have the immediate option to terminate this Lease and all rights of Tenant hereunder. In the event that Landlord shall elect to do so terminate this lease then Landlord may recover from Tenant: (i) the worth at the time of award of any unpaid Rent which had been earned at the time of such termination; plus (ii) the worth at the time of award of the amount by which the unpaid Rent which would have been earned after termination until the time of award exceeds the amount of such Rent loss that Tenant proves could have been reasonably avoided; plus (iii) the worth at the time of award of the amount by which the unpaid Rent for the balance of the Term after the time of award exceeds the amount of such Rent loss that Tenant proves could be reasonably avoided; plus (iv) any other amount necessary to compensate Landlord for all the detriment proximately caused by Tenant's failure to perform its obligations under this Lease or which in the ordinary course of things would be likely to result therefrom. As used in Subparagraphs 25.b(i) and (ii), the "worth at the time of award" is computed by allowing interest at the lesser of eighteen per cent (18%) per annum, compounded monthly, or the maximum rate permitted by law per annum. As used in subparagraph 25.b(iii), the "worth at the time of award" is computed by discounting such amount at the discount rate of the Federal Reserve Bank of San Francisco at the time of award plus one percent (1%). c. In the event of any such default by Tenant, Landlord shall also have the right, with or without terminating this Lease, to re-enter the Premises and remove all persons and property from the Premises; such property may be removed and stored in a public warehouse or elsewhere at the cost of and for the account of Tenant. No re-entry or taking possession of the Premises by Landlord pursuant to this Subparagraph 25.c. shall be construed as an election to terminate this Lease unless a written notice of such intention is given to Tenant or unless the termination thereof is decreed by a court or competent jurisdiction. d. All rights, options and remedies of Landlord contained in this Lease shall be construed and held to be cumulative, and no one of them shall be exclusive of the other, and Landlord shall have the right to pursue any one or all of such remedies or any other remedy or relief which may be provided by law, whether or not stated in this Lease. No waiver of any default of Tenant hereunder shall be implied from any acceptance by Landlord of any Rent or other payment due hereunder or any omission by Landlord to take any action on account of such default if such default persists or is repeated, and no express waiver shall affect defaults other than as specified in said waiver. The consent or approval of Landlord to or of any act by Tenant requiring Landlord's consent or approval shall not be deemed to waive or render unnecessary Landlord's consent or approval to or of any subsequent similar acts by Tenant. 26. ASSIGNMENT AND SUBLETTING. a. Tenant shall not, either voluntarily or by operation of law, assign, sublease, sell, hypothecate or transfer this Lease, or sublet the Premises or any part thereof, or permit or suffer the Premises or any part thereof to be used or occupied as work space, storage space, mail drop, concession or otherwise, by anyone other than Tenant or Tenant's employees without the prior written consent of Landlord in each instance, which consent will not be unreasonably withheld, delayed, or conditioned. Any merger, acquisition, lease, sale, or other conveyance, whether voluntary or involuntary, of : (1) thirty seven and one half percent (37.5%) or more of Tenant's voting stock; or (2) thirty seven and one half percent (37.5%) or more of Tenant's assets shall be deemed to be an event of assignment of this Lease requiring Landlord's prior written consent. For purposes of the preceding sentence, the term "Tenant" shall include, without limitation, all subsidiary corporations and all other entities owned or controlled by Tenant. In the event Tenant desires to assign, hypothecate or otherwise transfer this Lease or sublet the Premises, then at least thirty (30) days prior to the date when Tenant desires the assignment to sublease to be effective (the "Assignment Date"), Tenant shall give Landlord a notice (the "Assignment Notice"), which shall set forth the name, address and business of the proposed assignee or sublessee, information (including references) concerning the character, ownership, and financial condition of the proposed assignee or sublessee, the Assignment Date, any ownership or commercial relationship between Tenant and the proposed assignee or sublessee, and the consideration and all other material terms and conditions of the proposed assignment or sublease, all in such detail as Landlord shall reasonably require. If Landlord requests additional detail, the Assignment Notice shall not be deemed to have been received until Landlord receives such additional detail, and Landlord may withhold consent to any assignment or sublease until such information is provided to it. Any sale, assignment, sublease, hypothecation or transfer of this Lease or subletting of the Premises that is not in compliance with the provisions of this Subparagraph 26.a. shall be void and shall, at the option of Landlord, terminate this Lease. The consent by Landlord to any assignment or subletting shall not be construed as relieving Tenant or any assignee of this Lease or sublessee of the Premises from obtaining the express written consent of Landlord to any further assignment of subletting or as releasing Tenant or any assignee or sublessee of Tenant from any liability or obligation hereunder whether or not then accrued. In the event Landlord shall consent to an assignment or sublease, Tenant shall pay Landlord as Additional Rent a reasonable attorneys' and administrative fee 12 not to exceed $750.00 for costs incurred in connection with evaluating the Assignment Notice. This Subparagraph 26.a. shall be fully applicable to all further sales, hypothecations, transfers, assignments and subleases of any portion of the Premises by any successor or assignee of Tenant, or any sublessee of the Premises. b. Landlord shall not unreasonably withhold consent to any assignment, sublease, sale, hypothecation or transfer of this Lease. As used in this Paragraph 26, the subletting of substantially all of the Premises for substantially all of the remaining Term of this Lease shall be deemed an assignment rather than a sublease. Notwithstanding the foregoing, Landlord shall consent to the assignment, sublease, sale or transfer if the Assignment Notice states that Tenant desires to assign(or sublease) this Lease to any entity into which Tenant is merged, with which Tenant is consolidated or which acquires all of substantially all of the assets of Tenant, provided that the assignee first executes, acknowledges and delivers to Landlord an agreement whereby the assignee agrees to be bound by all of the covenants and agreements in this Lease which Tenant has agreed to keep, observe or perform, that the assignee agrees that the provisions of this Paragraph 26 shall be binding upon it as if it were the original Tenant hereunder and that the assignee shall have both a liquid and non liquid net worth (determined in accordance with generally accepted accounting principles consistently applied) immediately after such assignment which is at least equal to the liquid and non liquid net worth (as so determined) of Tenant immediately prior to the assignment. c. Except as provided above, Landlord's consent to any sublease shall not be unreasonably withheld. If Tenant shall sublet all or any portion of the Premises that Tenant has occupied for its own use at any time, then one half (1/2) of any consideration paid by the sublessee for the portion of the Premises being sublet that previously was occupied by Tenant that exceeds the Annual Basic Rent and Rental Adjustments provided by this Lease for such portion of the Premises being sublet shall be due, owing and payable by Tenant to Landlord when paid or owing by the sublessee under the sublease. Should the consideration paid by the sublessee exceed the rental amounts stated above, Tenant shall be entitled to reimbursement for Leasing Commissions or Landlord-approved Tenant Improvements Tenant paid to procure the sublease, amortized in equal, non-interest bearing, monthly installments over the term of the sublease only to the extent of the lesser of the amount of said lease commissions and/or Landlord - - approved Tenant Improvements or the amount of such excess. For the purpose of this Subparagraph 26.c., the rent for each square foot of floor space in the Premises shall be deemed equal. 27. SUBORDINATION. Without the necessity of any additional document being executed by Tenant for the purpose of effecting a subordination, and at the election of Landlord or any first mortgagee with a lien on the Building or any ground lessor with respect to the building, this Lease shall be subject and subordinate at all times to: a. all ground leases or underlying leases which may now exist or hereafter be executed affecting the Building or the land upon which the Building is situated or both, and b. the lien of any mortgage or deed of trust which may now exist or hereafter be executed in any amount for which the Building, land, ground leases or underlying leases, or Landlord's interest or estate in any of said items is specified as security. Notwithstanding the foregoing, Landlord shall have the right to subordinate or cause to be subordinated any such ground leases or underlying leases or any such liens to this Lease. In the event that any ground lease or underlying lease terminates for any reason or any mortgage or deed of trust is foreclosed or a conveyance in lieu of foreclosure is made for any reason, Tenant shall, notwithstanding any subordination, attorn to and become the Tenant of the successor in interest to Landlord, at the option of said successor in interest. Tenant covenants and agrees to execute and deliver, upon demand by Landlord and in the form requested by Landlord, and reasonably acceptable to Tenant any additional documents evidencing the priority or subordination of this Lease with respect to any such ground leases or underlying leases or the lien of any such mortgage or deed of trust and hereby irrevocably appoints Landlord as attorney-in-fact of Tenant to execute, deliver and record any such document in the name and on behalf of Tenant. Provided Tenant is not in default under this Lease, any such successor in interest to Landlord shall not disturb Tenant's occupancy and enjoyment of the Premises. 28. ESTOPPEL CERTIFICATE. a. Within ten (10) days following any written request which Landlord may make from time to time, Tenant shall execute and deliver to Landlord a statement certifying: (i) the Commencement Date of this Lease; (ii) the fact that this Lease is unmodified and in full force and effect (or, if there have been modifications hereto, that this Lease is in full force and effect, and stating the date and nature of such modifications); (iii) the date to which the Rent and other sums payable under this Lease have been paid: (iv) that there are no current defaults under this Lease by either Landlord or Tenant except as specified in Tenant' statement; and (v) such other matters reasonably requested by Landlord. Landlord and Tenant intend that any statement delivered pursuant to this Paragraph 28 may be relied upon by any mortgagee, beneficiary, purchaser, or prospective purchaser of the Building, property or any interest therein. b. Tenant's failure to deliver such statement within such time shall be conclusive upon Tenant: (i) that this Lease is in full force and effect, without modification except as may be represented by Landlord, (ii) that there are no uncured defaults in Landlord's performance, and (iii) that not more than one (1) month's Rent has been paid in advance. 29. BUILDING PLANNING - DELETED. 30. RULES AND REGULATIONS. Tenant shall faithfully observe and comply with the "Rules and Regulations", a copy of which is attached hereto and marked Exhibit "C", and all reasonable and nondiscriminatory modifications thereof and additions thereto from time to time put into effect by Landlord. Landlord shall not be responsible to Tenant for the violation or non-performance by any other tenant or occupant of the Building of any of said Rules and Regulations. 13 31. GOVERNING LAW. This Lease shall be governed by and construed pursuant to the laws of the State of Washington. 32. SUCCESSORS AND ASSIGNS. Except as otherwise provided in this Lease, all of the covenants, conditions and provisions of this Lease shall be binding upon and shall inure to the benefit of the parties hereto and their respective heirs, personal representatives, successors and assigns. 33. SURRENDER OF PREMISES. The voluntary or other surrender of this Lease by Tenant, or a mutual cancellation thereof, shall not work a merger, and shall, at the option of Landlord, operate as an assignment to it of any or all subleases or subtenancies. 34. ATTORNEY'S FEES. a. In the event that either party hereto should bring suit for the possession of the Premises, for the recovery of any sum due under this Lease, or because of the breach of any provision of this Lease, or for any other relief against the other party hereunder, then all costs and expenses, including reasonable attorney's fees, incurred by the prevailing party therein shall be paid by the other party, which obligation on the part of the other party shall be deemed to have accrued on the date of the commencement of such action and shall be enforceable whether or not the action is prosecuted to judgment. b. Should Landlord be named as a defendant in any suit brought against Tenant in connection with or arising out of Tenant's occupancy hereunder, Tenant shall pay to Landlord its costs and expenses incurred in such suit, including reasonable attorney's fees. 35. PERFORMANCE BY TENANT. All covenants and agreements to be performed by Tenant under any of the terms of this Lease shall be performed by Tenant at Tenant's sole cost and expense and without any abatement of rent. If Tenant shall fail to pay any sum of money, other than Annual Basic Rent, required to be paid by it hereunder or shall fail to perform any other act on its part to be performed hereunder, and such failure shall continue for ten (10) days after notice thereof by Landlord, Landlord may, without waiving or releasing Tenant from obligations of Tenant, but shall not be obligated to, make any such payment or perform any such other act on Tenant's part to be made or performed as in this Lease provided all sums so paid by Landlord and all necessary incidental costs together with interest thereon at the maximum rate permissible by law, from the date of such payment by Landlord, shall be payable to Landlord on demand. Tenant covenants to pay any such sums, and Landlord shall have (in addition to any other right or remedy of Landlord) the same rights and remedies in the event of the non-payment thereof by Tenant as in the case of default by Tenant in the payment of the Annual Basic Rent. 36. MORTGAGE PROTECTION. In the event of any default on the part of Landlord, Tenant will give notice by registered or certified mail to any beneficiary of a deed of trust or mortgage covering the Premises whose address shall have been furnished to Tenant, and shall offer such beneficiary or mortgagee a reasonable opportunity to cure the default on the same terms and conditions as are contained in the Lease beginning as of the date the notice from Tenant is received by such beneficiary or mortgage, including the time to obtain possession of the Premises by power of sale or a judicial foreclosure, if such should prove necessary to effect a cure. 37. DEFINITION OF LANDLORD. The term "Landlord" as used in this Lease, so far as covenants or obligations on the part of Landlord are concerned, shall be limited to mean and include only the owner or owners, at the time in question, of the fee title of the Premises or the Lessees under any ground lease, if any. In the event of any transfer, assignment or other conveyance or transfers of any such title, Landlord herein named (and in the case of any subsequent transfers or conveyances, the then grantor) shall be automatically freed and relieved from and after the date of such transfer, assignment or conveyance of all liability as respects the performance of any covenants or obligations on the part of Landlord contained in this lease thereafter to be performed. Without further agreement, the transferee of such title shall be deemed to have assumed and agreed to observe and perform any and all obligations of Landlord thereunder, during its ownership to the Premises. Landlord may transfer its interest in the Premises without the consent of Tenant and such transfer or subsequent transfer shall not be deemed a violation on Landlord's part of any of the terms and conditions of this Lease. 38. WAIVER. The waiver by Landlord of any breach of any term, covenant or condition herein contained shall not be deemed to be a waiver of any subsequent breach of the same or any other term, covenant or condition herein contained, nor shall any custom or practice which may grow up between the parties in the administration of the terms hereof be deemed a waiver of or in any way affect the rights of Landlord to insist upon the performance by Tenant in strict accordance with said terms. The subsequent acceptance of Rent hereunder by Landlord shall not be deemed to be a waiver of any preceding breach by Tenant of any term, covenant or condition of this Lease, other than the failure of Tenant to pay the particular Rent so accepted, regardless of Landlord's knowledge of such preceding breach at the time of acceptance of such Rent. 39. IDENTIFICATION OF TENANT. IF MORE THAN ONE PERSON OR ENTITY EXECUTES THIS LEASE AS TENANT: a. each of them is jointly and severally liable for the keeping, observing and performing of all of the terms, covenants, conditions, provisions and agreements of this Lease to be kept, observed and performed by Tenant; and b. the term "Tenant" as used in this Lease shall mean and include each of them jointly and severally. The act of or notice from, or notice or refund to, or the signature of any one or more of them, with respect to the tenancy of this Lease, including, but not limited to, any renewal, extensions, expiration, termination or modification of this Lease, shall be binding upon each and all of the persons executing this Lease as Tenant with the same force and effect as if each and all of them has so acted or so given or received such notice or refund or so signed. 14 40. PARKING. As an appurtenance to the Premises, Tenant is entitled to use the number of parking spaces in the parking facilities of the Building designated in Subparagraph 1.o. Tenant may use such parking spaces upon the terms and conditions provided in the Parking Rules attached hereto as Exhibit "E", if any, and all reasonable and nondiscriminatory modifications thereto from time to time put into effect by Landlord. Landlord may contract with a Parking Operator to operate the parking facilities. Landlord and the Parking Operator shall not be responsible for the violation or nonperformance by any other tenant or any agent, employee or invitee thereof of any of said terms and conditions. Tenant shall pay to Landlord, as and when billed and as Additional Rent, the amount per space designated in Paragraph 1.o., if any, times the number of spaces shown there, or such other nondiscriminatory charges for monthly parking set forth from time to time by Landlord. 41. TERMS AND HEADINGS. The words "Landlord" and "Tenant" as used herein shall include the plural as well as the singular. Words used in any gender include other genders. The paragraph headings of this Lease are not a part of this Lease and shall have no effect upon the construction or interpretation of any part hereof. 42. EXAMINATION OF LEASE. Submission of this instrument for examination or signature by Tenant does not constitute a reservation of or option for lease, and is not effective as a lease or otherwise until execution by and delivery to both Landlord and Tenant. 43. TIME. Time is of the essence with respect to the performance of every provision of this Lease in which time or performance is a factor. 44. PRIOR AGREEMENT; AMENDMENTS. This Lease contains all of the agreements of the parties hereto with respect to any matter covered or mentioned in this Lease, and no prior agreement or understanding pertaining to any such matter shall be effective for any purpose. No provisions of this Lease may be amended or added to except by an agreement in writing signed by the parties hereto or their respective successors in interest. 45. SEPARABILITY. Any provision of this lease which shall prove to be invalid, void or illegal in no way affect, impairs or invalidates any other provision hereof, and such other provisions shall remain in full force and effect. 46. RECORDING. Neither Landlord or Tenant shall record this Lease nor a short form memorandum thereof without the consent of the other. 47. LIMITATION ON LIABILITY. Deleted. 48. RIDERS. Clauses, plats and riders, if any, signed by Landlord and Tenant and affixed to this Lease are a part hereof. 49. MODIFICATION FOR LENDER. If, in connection with obtaining construction, interim or permanent financing for the Building, the lender shall request reasonable modifications to this Lease as a condition to such financing, Tenant will not unreasonably withhold, delay or defer its consent thereto, provided that such modifications do not increase the obligations of Tenant hereunder or materially adversely affect the leasehold interest hereby created or Tenant's rights hereunder. 50. ACCORD AND SATISFACTION. No payment by Tenant or receipt by Landlord of a lesser amount than the Rent payment herein stipulated shall be deemed to be other than on account of the Rent, nor shall any endorsement or statement on any check or any letter accompanying any check or payment as Rent be deemed an accord and satisfaction, and Landlord's right to recover the balance of such Rent or pursue any other remedy provided in this Lease. Tenant agrees that each of the foregoing covenants and agreements shall be applicable to any covenant or agreement either expressly contained in this Lease or imposed by any statute or a common law. IN WITNESS WHEREOF, the parties have executed the Lease as of the date first above written. LANDLORD: TENANT: 1130 Rainier LLC, a Washington limited Loudeye Corp., a Delaware corporation liability company by SEAVEST FINANCIAL CORPORATION a Washington Corporation, managing member by:__________________________________ by__________________________________ Its:_________________________________ Paul E. Krug, President LOUDEYE ENTERPRISE COMMUNICATIONS, INC., A DELAWARE CORPORATION by:__________________________________ Its:_________________________________ 15 THE 1130 RAINIER BUILDING EXHIBIT "A" Floor Plan 16 EXHIBIT "A-1" Legal Description Lots 17 through 28 in Block 24 of Rainier Boulevard Addition to the city of Seattle, as per plat recorded in Volume 9 of Plats, Page 59, records of King County, Washington; all situated in the City of Seattle, County of King, State of Washington 17 THE 1130 RAINIER BUILDING EXHIBIT "B" WORK LETTER AGREEMENT Ladies and Gentlemen: You (hereinafter called "Tenant") and we (hereinafter called "Landlord") are executing simultaneously with this Work Letter Agreement, a written lease (the "Lease") covering those certain premises more particularly described in Exhibit "A" to the Lease, (hereinafter referred to as the "Premises") in the building addressed at 1130 Rainier Ave So, Seattle, Washington 98144. To induce Tenant to enter into the Lease (which is hereby incorporated by reference to the extent that the provisions of this Agreement may apply thereto) and in consideration of the mutual covenants hereinafter contained, Landlord and Tenant mutually agree as follows: NO WORK- THE PREMISES ARE LEASED "AS IS" 1. TENANT'S PLANS AND SPECIFICATIONS. a. Except to the extent otherwise provided in Subparagraph 1.b. and 1.c., Landlord agrees that, at its sole cost and expense, through its architect or space planner, Landlord will furnish all architectural, mechanical and electrical engineering plans required for the performance of the work (hereinafter referred to as "Building Standard Work", Exhibit "B-1") herein below described, including complete detailed plans and specifications for Tenant's partition layout, reflected ceiling, heating and air conditioning, electrical outlets and switches and telephone outlets. b. It is understood and agreed that Tenant may require work (hereinafter referred to as "Building Nonstandard Work") different from or in addition to the Building Standard Work. In such event, any architectural, mechanical, electrical and plumbing plans and specifications required shall be furnished, at Tenant's sole cost and expense, by Landlord's architect or space planner. c. It is understood and agreed that any interior decorating service, such as selection of wall paint colors and/or wall coverings, fixtures, carpeting, and any or all other decorator items required by Tenant in the performance of said work referred to hereinabove in Subparagraphs 1.a. and 1.b. shall be at Tenant's sole cost and expense. d. It is understood and agreed that all plans and specifications referred to hereinabove in Subparagraphs 1.a. and 1.b. are subject to Landlord's approval, which Landlord agrees shall not be unreasonably withheld. 2. BUILDING STANDARD WORK AT LANDLORD'S COST AND EXPENSE. Landlord agrees, at its sole cost and expense to furnish and install all of the following "Building Standard Work" limited to the quantities and/or dollar amount specified on the attached Exhibit "B-1", and as selected and specified by Landlord and as indicated on Tenant's final approved plans. 3. BUILDING NONSTANDARD WORK AT TENANT'S COST AND EXPENSE. Provided Tenant's plans and specifications are furnished by the date required hereinabove in Subparagraph 1.e., Landlord shall cause Tenant's "Building Nonstandard Work" to be installed by Landlord's contractor, but at Tenant's sole cost and expense. Prior to commencing any such work, Landlord, its contractor, or its architects shall submit to Tenant a written estimate of the cost thereof. If Tenant fails to provide to Landlord written notice of its approval of such costs within five (5) days after submission thereto to Tenant, such failure shall be deemed a disapproval thereof, and Landlord's contractor shall not proceed with such work. 4. SUBSTITUTION AND CREDITS. Tenant may, with Landlord's approval and provided that Landlord has not previously purchased said material, select different new materials (except window coverings) in place of "Building Standard Work" materials which would otherwise be initially furnished and installed by Landlord for or in the interior of the Premises under the provisions of this Work Letter Agreement, provided such selection is indicated on said Tenant's final plans. If Tenant shall make any such selection and if the cost of such different new materials of Tenant's selection shall exceed Landlord's cost of the "Building Standard Work" materials thereby replaced, Tenant shall pay to Landlord, as hereinafter provided, the difference between the cost of such different new materials and the credit given by Landlord for the materials thereby replaced. No such different new materials shall be furnished and installed in replacement for any of Landlord's "Building Standard Work" materials until Landlord or its contractor and/or its architect or space planner shall have 18 advised Tenant in writing of, and Landlord or this contractor and/or it architect or space planner have agreed in writing on, the cost of such different materials and Landlord's cost of such replaced Landlord's "Building Standard Work" materials. One hundred percent (100%) of all amounts payable by Tenant to Landlord pursuant to Paragraphs 3. and 4. of this Work Letter Agreement shall be paid by Tenant upon Tenant's execution of the written estimate for the work required. 5. COMPLETION AND RENTAL COMMENCEMENT DATE. It is agreed that Tenant's obligation for the payment of rent under the Lease shall not commence until Landlord has substantially completed all work to be performed by Landlord as hereinabove set forth in Paragraphs 2. and 3.; provided, however, that if Landlord shall be delayed in substantially completing said work as a result of: a. Tenant's failure to furnish plans and specifications in accordance with the date specified hereinabove in Subparagraph 1.e.; or b. Tenant's request for materials, finishes or installations other than Landlord's "Building Standard Work"; or c. Tenant's changes in the said plans and specifications after their submission to Landlord in accordance with the provisions of Subparagraph 1.e. hereinabove; or d. Tenant's failure to approve estimates pursuant to Paragraph 3. hereinabove covering "Building Nonstandard Work"; then the commencement of the term of said lease shall be accelerated by the number of days of such delay. If the foregoing correctly sets forth our understanding, kindly sign copies of this Work Letter Agreement where indicated. LANDLORD: TENANT: 1130 Rainier LLC, a Washington limited _____________________________________ liability company by SEAVEST FINANCIAL CORPORATION a Washington Corporation, managing member by:__________________________________ by:_________________________________ Its:_________________________________ Paul E. Krug, President 19 THE 1130 RAINIER BUILDING EXHIBIT "B-1" Building Standard Work Landlord shall build, per a mutually agreed upon space plan and working drawings, all Tenant Improvement at a cost not to exceed N/A and no/100 Dollars ($ N/A ). This allowance shall include the cost of all construction, taxes, permits, contractor profits, construction drawing preparation, and the cost of standard space planning. THE PREMISES ARE LEASED "AS IS " All Tenant Improvements shall utilize building standard materials unless specified in writing by the Tenant and agreed to by the Landlord. Landlord will use its best efforts to expedite the construction process and minimize the disruption to Tenant's business activity. Tenant agrees to cooperate, as is reasonable, with Landlord in completing the required Tenant Improvements. 20 THE 1130 RAINIER BUILDING EXHIBIT "C" Rules and Regulations 1. No sign, placard, picture, name or notice shall be installed or displayed on any part of the outside or inside of the Building without the prior written consent of Landlord. Landlord shall have the right to remove, at Tenant's expense and without notice, any sign installed or displayed in violation of this rule. All approved signs or lettering on doors and walls shall be printed, painted, affixed or inscribed at the expense of Tenant by a person chosen by Landlord. Tenant shall have the non exclusive right to place signs on the exterior of the Building, subject to Landlord, City of Seattle, and Historical Preservation Board approval. All Costs associated with Tenant's signage, including, without limitation, all repair and maintenance costs occasioned by the installation of the signage and all repair and maintenance subsequently occasioned to the Building or the signage as a result of the Tenant's signage shall be borne by the Tenant. 2. If Landlord objects in writing to any curtain, blinds, shades, screens or hanging plants or other similar objects attached to or used in connection with any window or door of the premises, Tenant shall immediately discontinue such use. No awning shall be permitted on any part of the Premises. Tenant shall not place anything against or near glass partitions or doors or windows which may appear unsightly from outside the Premises. 3. Tenant shall not obstruct any sidewalk, halls, passages, exits, entrances, elevators, escalators and stairways of the Building. The halls, passages, exits, entrances, elevators, escalators and stairways are not open to the general public. Landlord shall in all cases retain the right to control and prevent access thereto of all persons whose presence in the judgment of Landlord would be prejudicial to the safety, character, reputation and interest of the Building and its tenants; provided that nothing herein contained shall be construed to prevent such assess to persons with whom any tenant normally deals in the ordinary course of its business, unless such persons are engaged in illegal activities. No tenant and no employee or invitee of any tenant shall go upon the roof of the Building. 4. The directory of the Building will be provided exclusively for the display of the name and location of Tenants only, and Landlord reserves the right to exclude any other names therefrom. 5. All cleaning and janitorial services for the Building and the Premises shall be provided exclusively through Landlord, and except with the written consent of Landlord, no person or persons other than those approved by Landlord shall be employed by Tenant or permitted to enter the Building for the purpose of cleaning the same. Tenant shall not cause any unnecessary labor by carelessness or indifference to the good order and cleanliness of the Premises. Landlord shall not in any way be responsible to any Tenant for any loss of property on the Premises, however occurring, or for any damage to any Tenant's property by the janitor or any other employee or any other person. 6. Landlord will furnish to Tenant, free of charge, two keys to each door lock in the Premises. Landlord may make a reasonable charge for any additional keys. Tenant shall not make or have made additional keys, and Tenant shall not alter any lock or install a new additional lock or bolt on any door of its Premises. Tenant, upon termination of its tenancy, shall deliver to Landlord the keys of all doors which have been furnished to Tenant, and in the event of loss of any key so furnished, shall pay Landlord therefor. 7. If Tenant requires telegraphic, telephonic, burglar alarm or similar services, it shall first obtain, and comply with, Landlord's instructions in their installation. 8. Any freight elevator shall be available for use by all tenants in the Building, subject to such reasonable scheduling as Landlord in its discretion shall deem appropriate. No equipment, materials, packages, supplies, merchandise or other property will be received in the Building or carried in the elevators except between such hours and in such elevators as may be designated by Landlord. 9. Tenant shall not place a load on any floor of the Premises which exceeds the load per square foot which such floor was designed to carry and which is allowed by law. Landlord shall have the right to prescribe the weight, size and position of all equipment, materials, furniture or other property brought into the building. Heavy objects shall, if considered necessary by Landlord, stand on such platforms as determined by Landlord to be necessary to properly distribute the weight. Business machines and mechanical equipment belonging to Tenant, which cause noise or vibration that may be transmitted to the structure of the Building or to any space therein to any tenants in the Building, shall be placed and maintained by Tenant, at Tenant's expense, on vibration eliminators or other devices sufficient to eliminate noise or vibration. The persons employed to move such equipment in or out of the Building must be acceptable to Landlord. Landlord will not be responsible for loss of, or damage to, any such equipment or other property from any cause, and all damage done to the Building by maintaining or moving such equipment or other property shall be repaired at the expense to Tenant. 10. Tenant shall not use or keep in the Premises any kerosene, gasoline or inflammable or combustible fluid or material other than those limited quantities necessary for the operation or maintenance of office equipment. Tenant shall not use of permit to be used in the Premises any foul or noxious gas or substance, or permit or allow the premises to be occupied or used in a manner offensive or objectionable to Landlord or other occupants of the Building by reason of noise, odors or vibrations, nor shall Tenant bring into or keep in or about the Premises any birds or animals. 11. Tenant shall not use any method of heating or air conditioning other than that supplied by Landlord. 12. Tenant shall not waste electricity, water or air conditioning and agrees to cooperate fully with Landlord to assure the most effective operation of the Building's heating and air conditioning and to comply with any government energy-saving rules, laws or regulations of which Tenant has actual notice, and shall refrain from attempting to adjust controls. Tenant shall keep corridor doors closed, and shall use best efforts to close window coverings at the end of each business day. 13. Landlord reserves the right, exercisable without notice and without liability to Tenant, to change the name and street address of the Building. 21 14. Landlord reserves the right to exclude from the Building between the hours of 6 p.m. and 7 a.m. the following day, or such other hours as may be established from time to time by Landlord, and on Sundays and legal holidays, any person unless that person is known to the person or employee in charge of the Building and has a pass or is properly identified. Tenant shall be responsible for all persons for whom it requests passes and shall be liable to Landlord for all acts of such persons. Landlord reserves the right to prevent access to the Building in case of invasion, mob, riot, public excitement or other commotion by closing the doors or by other appropriate action. 15. Tenant shall close and lock the doors of its Premises and entirely shut off all water faucets or other water apparatus, and electricity, gas or air outlets before Tenant and its employees leave the Premises. Tenant shall be responsible for any damage or injuries sustained by other tenants or occupants of the Building or by Landlord for noncompliance with this rule. 16. Tenant shall not obtain for use on the Premises ice, drinking water, food, beverage, towel or other similar services or accept barbering or boot blacking service upon the Premises, except at such hours and under such regulations as may be fixed by Landlord. 17. The toilet rooms, toilets, urinals, wash bowls and other apparatus shall not be used for any purpose other than that for which they were constructed and no foreign substance of any kind whatsoever shall be thrown therein. The expense of any breakage, stoppage or damage resulting from the violation of this rule shall be borne by the tenant who, or whose employees or invitees, shall have caused it. 18. Tenant shall not sell, or permit the sale at retail, of newspapers, magazines, periodicals, theater tickets or any other goods or merchandise to the general public in or on the Premises. Tenant shall not make any room-to-room solicitation of business from other tenants in the Building. Tenant shall not use the Premises for any business or activity other than that specifically provided for in Tenant's Lease. 19. Except for equipment reasonably required for Tenant's Business (with Landlord's prior consent which shall not be unreasonably withheld), Tenant shall: (i) not install any radio or television antenna, loudspeaker or other device on the roof or exterior walls of the Building; or (ii) interfere with radio or television broadcasting or reception from or in the Building or elsewhere. 20. Other than to hand pictures/paintings, photographs, marking or bulletin boards, and the like, Tenant shall not mark, drive nails, screws or drill into the partitions, woodwork or plaster or any way deface the Premises or any part thereof. Landlord reserves the right to direct electricians as to where and how telephone and telegraph wires are to be introduced to the Premises. Tenant shall not cut or bore holes for wires. Tenant shall not affix any floor covering to the floor of the Premises in any manner except as approved by Landlord. Tenant shall repair any damage resulting from noncompliance with this rule. 21. Deleted.. 22. Canvassing, soliciting and distribution of handbills or any other written material, and peddling in the Building are prohibited, and each tenant shall cooperate to prevent same. 23. Landlord reserves the right to exclude or expel from the Building any person who, in Landlord's judgment, is intoxicated or under the influence of liquor or drugs or who is in violation of the Rules and Regulations of the Building. 24. Tenant shall store all its trash and garbage within its Premises. Tenant shall not place in any trash box or receptacle any material which cannot be disposed of in the ordinary and customary manner of trash and garbage disposal. All garbage and refuse disposal shall be made in accordance with directions issued from time to time by Landlord. 25. The Premises shall not be used for the storage of merchandise held for sale to the general public, or for lodging or for manufacturing of any kind, nor shall the Premises be used for any improper, immoral or objectionable purpose. No cooking shall be done or permitted by any tenant on the Premises except that use by Tenant of Underwriter's Laboratory approved equipment for brewing coffee, tea, hot chocolate and similar beverages shall be permitted, provided that such equipment and use is in accordance with all applicable federal, state, county and city laws, codes, ordinances, rules and regulations. In addition, Tenant and its employees shall be permitted to use a microwave oven to heat or re-heat common consumable foods. 26. Tenant shall not use in any space or in the public halls of the Building any hand truck except those equipped with rubber tires and side guards or such other material-handling equipment as Landlord may approve. Tenant shall not bring any other vehicles of any kind into the Building. 27. Without the written consent of Landlord, Tenant shall not use the name of the Building in connection with or in promoting or advertising the business of Tenant except as Tenant's address. 28. Tenant shall comply with all safety, fire protection and evacuation procedures and regulations established by Landlord or any governmental agency. 29. Tenant assumes any and all responsibility for protecting its Premises from theft, robbery and pilferage, which includes keeping doors locked and other means of entry to the Premises closed. 30. The requirements of Tenant will be attended to only upon appropriate application to the office of the Building by an authorized individual. Employees of Landlord shall not perform any work or do anything outside of their 22 regular duties unless under special instructions from Landlord, and no employee of Landlord will admit any person (Tenant or otherwise) to any office without specific instructions. 31. Tenant shall not park its vehicles in parking areas designated by Landlord as areas for parking by visitors to the Building. Tenant's visitors shall park in the designated visitor spaces.. 32. Landlord may waive one or more of these Rules and Regulations for the benefit of Tenant or any other tenant, but no such waiver by Landlord shall be construed as a waiver of such Rules and Regulations against any or all of the tenants in the Building. 33. These Rules and Regulations are in addition to, and shall not be construed to in any way modify or amend, in whole or in part, the terms, covenants, agreements and conditions of any lease of premises in the Building. 34. Landlord reserves the right to make such other and reasonable Rules and Regulations as, in its judgment, may from time to time be needed for the safety and security, for care and cleanliness of the Building and for the preservation of good order therein. Tenant agrees to abide by all such Rules and Regulations hereinabove stated and any additional rules and regulations which are adopted. 35. Tenant shall be responsible for the observance of all to the foregoing rules by Tenant's employees, agents, clients, customers, invitees and guests. 23 EXHIBIT D STANDARDS FOR UTILITIES AND SERVICES The following Standards for Utilities and Services are in effect. Landlord reserves the right to adopt nondiscriminatory modifications and additions hereto: As long as Tenant is not in default under any of the terms, covenants, conditions, provisions or agreements of this Lease, at Tenant's sole cost, Landlord shall: (a) Provide non-attended automatic passenger and one non-attended freight elevator facility twenty four (24) hours per day, seven (7) days per week. (b) On all days of the year ("24/7") as requested by Tenant, ventilate the Premises and furnish air conditioning or heating on such days and hours, when in the reasonable judgment of Landlord it may be required for the comfortable occupancy of the Premises. The building standard comfortable occupancy temperature shall range between 68 degrees F and 78 degrees F during usual business hours. The air conditioning system achieves maximum cooling when the window coverings are closed. Landlord shall not be responsible for room temperatures if Tenant does not keep all window covering in the Premises closed whenever the system is in operation. Tenant agrees to co-operate fully at all times with Landlord, and to abide by all regulations and requirements which Landlord may prescribe for the proper function and protection of said air conditioning system. Tenant agrees not to connect any apparatus, device, conduit or pipe to the Building chilled and hot water air conditioning supply lines. Tenant further agrees that neither Tenant nor its servants, employees, agents, visitors, licensees or contractors shall at any time enter mechanical installations or facilities of the Building or adjust, tamper with, touch or otherwise in any manner affect said installations or facilities. (c) Landlord shall furnish to the Premises, during the usual business hours on business days, electric current as required by the Building standard office lighting, the computer center known as "Grand Central", and fractional horsepower office business machines in the amount of the number of watts per square foot requested by Tenant, but in no event more than the total current size of the electrical service to the building less the amount of power needed for like purposes for the remainder of the Building not occupied by Tenant. If a separate meter is not installed at Tenant's cost, such excess cost will be established by an estimate agreed upon by Landlord and Tenant, and if the parties fail to agree, as established by independent licensed engineer. Tenant agrees not to use any apparatus or device in, or upon, or about the Premises which may in any way increase the amount of such services usually furnished or supplied to said Premises, and Tenant and Tenant further agrees not to connect any apparatus or device with wires, conduits or pipes, or other means by which such services are supplied, for the purpose of using additional or unusual amounts of such services without written consent of Landlord. Should Tenant use the same to excess, the refusal on the part of Tenant to pay upon demand of Landlord the amount established by Landlord for such excess charge shall constitute a breach of the obligation to pay rent under this Lease and shall entitle Landlord to the rights therein granted for such breach. At all times Tenant's use of electric current shall never exceed the capacity of the feeders to the Building or the risers or wiring installation and other than Tenant's existing equipment (including desk-top personal computers and other similar devices), Tenant shall not install or use or permit the installation or use of any computer or electronic data processing equipment in the Premises without the prior written consent of Landlord, which consent will not be unreasonably withheld, delayed, or conditioned. (d) Water will be available in public areas for drinking and lavatory purposes only, but if Tenant requires, uses or consumes water for any purposes in addition to ordinary drinking and lavatory purposes of which fact Tenant constitutes Landlord to be the sole judge, Landlord may install a water meter and thereby measure Tenant's water consumption for all purposes. Tenant shall pay Landlord for the cost of the meter and the cost of the installation thereof and throughout the duration of Tenant's occupancy Tenant shall keep said meter and installation equipment in good working order and repair at Tenant's own cost and expense, in default of which Landlord may cause such meter and equipment to be replaced or repaired and collect the cost thereof from Tenant. Tenant agrees to pay for water consumed, as shown on said meter, as and when bills are rendered, and on default in making such payment, Landlord may pay such charges and collect the same from Tenant. Any such costs or expenses incurred, or payments made by Landlord for any of the reasons or purposes hereinabove stated shall be deemed to be additional rent payable by Tenant and collectible by Landlord as such. (e) Provide janitor service to the Premises, provided the same are used, exclusively as offices, and are kept reasonably in order by Tenant, and if to be kept clean by Tenant, no one other than persons approved by Landlord shall be permitted to enter the Premises for such purposes. If the Premises are not used exclusively as offices, they shall be kept clean and in order by Tenant, at Tenant's expense, and to the satisfaction of Landlord, and by persons approved by Landlord, Tenant shall pay to Landlord the cost of removal of any of Tenant's refuse and rubbish usually attendant upon the use of the Premises as offices. Landlord reserves the right to stop services of the elevator, plumbing, ventilation, air conditioning and electric systems, when necessary (upon reasonable advance notice when possible), by reason of accident or emergency or for repairs, alterations or improvements, in the reasonable judgment of Landlord, desirable or necessary to be made, until said repairs, alterations or improvements shall have been completed, and shall further have no responsibility or liability for failure to supply elevator facilities, plumbing, ventilating, air conditioning or electric service, when prevented from so doing by strike or accident or by any cause beyond Landlord's reasonable control, or by laws, rules, orders, ordinances, directions, regulations or requirements of any federal, state, county or municipal authority or failure of gas, oil or other suitable fuel supply or inability by exercise of reasonable diligence to obtain gas, oil or other suitable fuel. It is expressly understood and agreed that any covenants on Landlord's part to furnish any service pursuant to any of the terms, covenant, conditions, 24 provisions or agreements of this Lease, or to perform any act or thing for the benefit of Tenant, shall not be deemed breached if Landlord is unable to furnish or perform the same by virtue of a strike or labor trouble or any other cause whatsoever beyond Landlord's control. 25 Addendum A Lease Between 1130 Rainier LLC and Loudeye Corp. et. al. Dated: December 20, 2003 The following terms and conditions shall supercede any terms and conditions to the contrary which may be contained in the above described lease to which this Addendum is attached: 1 .ANNUAL BASIC RENT; The annual basic rent per square foot leased shall be:
Year Annual Rent per square foot ~~1 $21.00 2 $22.05~~
Provided however, Landlord shall have the option to accept in lieu of cash warrants or other equity instruments offered by Tenant which are acceptable to Landlord in partial payment of the rent based on the following formula: During the first year of the term only, Tenant shall pay to Landlord $43,000 of the total monthly rent in cash (but only $33,000 per month during the period January 1, 2004, through March 31, 2004) in the manner set forth in paragraph 3, below, and the balance of the first year's annual rent due, $337,363, shall be paid on lease execution by warrants, options, or other equity instruments acceptable to Landlord and approved by the Tenant's board of directors, the total value of which shall equal $337,363 on the day this agreement is approved by Tenant's board of directors. Landlord shall exercise this option, if at all, by a written notification (or by e-mail) to Tenant on the same day of approval by Tenant's board of directors and receipt of written notification(or by e-mail) thereof by Landlord. 2. LANDLORD'S RIGHT TO TERMINATE LEASE. The Landlord shall have the continuing right to terminate this Lease as to either or both floors 1 or 2, or any portion thereof, upon one hundred and fifty (150) days prior written notice to Tenant in the event Landlord leases all or a portion of either or both floors. 3. TIMING OF TENANT'S PAYMENTS. Rent, utilities, and expenses shall be prepaid monthly, in advance, so long as Tenant has not defaulted on its lease obligations and Tenant's unrestricted cash on hand covers its current burn rate for the next two (2) years. If either of these conditions is not met, Tenant thereafter shall pay rent, utilities, and expenses quarterly, in advance. 4. ADDITIONAL EXPENSE REIMBURSEMENTS. Tenant shall pay for all utilities relating to its entire space and the following additional extraordinary costs relating to its computer room: (a) UPS, generator, wiring, and HVAC repair and maintenance; (b) security; (c) life safety; (d) insurance; and (e) damage to its equipment not otherwise covered by Landlord's or Tenant's insurance. 5. ROOF RIGHTS. Tenant shall have the right to use the existing communication dishes and/or antennae on the roof of the Building at no charge throughout the term of this Lease. 6. FINANCIAL REPORTING. In the event Tenant ceases to be a publicly traded company, Tenant shall provide Landlord with such quarterly operating and balance sheet reports as may be required by Landlord or Landlord's lenders. 7. CONFLICT. In the event of a conflict between any term or condition contained in this Addendum and a term or condition contained in the Lease to which this Addendum is attached, the term or condition contained in this Addendum shall prevail. 26 STATE OF WASHINGTON ) )ss. COUNTY OF.......... ) On this day of _______20______ before me, the undersigned, a Notary Public in and for the State of_________ duly commissioned and sworn, personally appeared ____________to me known to be the individual described in and who executed the within and foregoing instrument, and acknowledged that _____ signed the same as ______ free and voluntary act and deed, for the uses and purposes therein mentioned. WITNESS my hand and official seal hereto affixed the day and year in this certificate above written. _____________________________________ Notary Public in and for the State of Washington, STATE OF WASHINGTON ) )ss COUNTY OF KING ) On this ____ day of ______________________, 20____, before me personally appeared Paul E. Krug, to me known to be the President of Seavest Financial Corporation, managing member of 1130 Rainier LLC, the limited liability company that executed the within and foregoing instrument and acknowledged the same instrument to be the free and voluntary act of said partnership, for the uses and purposes therein mentioned and on oath stated that he is authorized to execute said instrument. IN WITNESS WHEREOF I have hereunto set my hand and affixed my official seal, the day and year first above written. _____________________________________________ NOTARY PUBLIC in and for the State of _______ Residing at:___________________________________ My Commission expires:_________________________ 27 EX-10.24 6 v96773exv10w24.txt EXHIBIT 10.24 EXHIBIT 10.24 ASSET PURCHASE AGREEMENT BY AND BETWEEN GAIL CLARKE ACQUISITION CO. INC. AS PURCHASER AND VIDIPAX, INC. AS SELLER DATED AS OF OCTOBER 31, 2003 Table of Contents
Page ARTICLE I DEFINITIONS Section 1.1 Definitions...................................................... 1 Section 1.2 Interpretation................................................... 9 ARTICLE II PURCHASE AND SALE OF ASSETS Section 2.1 Purchase and Sale of Assets...................................... 10 Section 2.2 Assumption of Liabilities........................................ 11 Section 2.3 The Purchase Price............................................... 12 Section 2.4 Earn Out Payments................................................ 12 Section 2.5 Allocation of Purchase Price; Tax Filings........................ 13 ARTICLE III REPRESENTATIONS AND WARRANTIES OF SELLER Section 3.1 Organization; Qualification of Seller............................ 14 Section 3.2 Authorization.................................................... 14 Section 3.3 Binding Agreements............................................... 14 Section 3.4 Good Title Conveyed.............................................. 14 Section 3.5 Consents and Approvals; No Violations............................ 14 Section 3.6 Compliance with Laws............................................. 15 Section 3.7 Title to Assets; Necessary Assets................................ 15 Section 3.8 Financial Statements............................................. 15 Section 3.9 Absence of Certain Changes or Events............................. 15 Section 3.10 Accounts Receivable.............................................. 16 Section 3.11 Assumed Contracts................................................ 16 Section 3.12 Miscellaneous Assets............................................. 16 Section 3.13 Litigation....................................................... 16 Section 3.14 Labor Matters.................................................... 16 Section 3.15 Employee Benefit Plans........................................... 17 Section 3.16 Tax Matters...................................................... 17 Section 3.17 Intellectual Property............................................ 17 Section 3.18 Personal Property................................................ 18 Section 3.19 Accounts Payables................................................ 19 Section 3.20 Prepaid Expenses................................................. 19 Section 3.21 Seller's Customers............................................... 19 Section 3.22 Suppliers........................................................ 19 Section 3.23 Owned Real Property.............................................. 19 Section 3.24 Real Property Leases............................................. 19 Section 3.25 Environmental Matters............................................ 20 Section 3.26 Brokers or Finders............................................... 21 Section 3.27 Books and Records................................................ 21
- i - Section 3.28 Full Disclosure.................................................. 21 Section 3.29 Distributions or Dividends....................................... 21 ARTICLE IV REPRESENTATIONS AND WARRANTIES OF PURCHASER Section 4.1 Organization..................................................... 21 Section 4.2 Authorization.................................................... 22 Section 4.3 Binding Agreement................................................ 22 Section 4.4 Consents and Approvals; No Violations............................ 22 Section 4.5 Brokers or Finders............................................... 22 ARTICLE V COVENANTS Section 5.1 General Conduct of the Business.................................. 22 Section 5.2 Gail H. Clarke................................................... 24 Section 5.3 Access Before Closing............................................ 24 Section 5.4 Reasonable Efforts and Further Assurances........................ 24 Section 5.5 Employee Benefits................................................ 25 Section 5.6 Publicity........................................................ 25 Section 5.7 Access to Books and Records After Closing........................ 25 Section 5.8 Noncompetition................................................... 26 Section 5.9 Designated Prospects............................................. 26 Section 5.10 Government Contracts............................................. 26 Section 5.11 Museum Equipment................................................. 27 Section 5.12 Notification of Certain Matters.................................. 28 Section 5.13 Subsequent Actions............................................... 28 Section 5.14 Waiver of Bulk Sales Requirement................................. 29 Section 5.15 Purchaser's Conduct of the Business.............................. 29 Section 5.16 Change of Seller's and Affiliates' Names......................... 29 Section 5.17 Email Forwarding and Transfer of Old Emails...................... 29 Section 5.18 Reimbursements................................................... 29 ARTICLE VI CONDITIONS Section 6.1 Conditions to Each Party's Obligation to Effect the Closing...... 30 Section 6.2 Conditions to the Obligation of Purchaser to Effect the Closing.. 30 Section 6.3 Conditions to the Obligation of Seller to Effect the Closing..... 31 ARTICLE VII THE CLOSING Section 7.1 The Closing...................................................... 32 Section 7.2 Deliveries by Seller............................................. 32 Section 7.3 Deliveries by Purchaser.......................................... 33

- ii - ARTICLE VIII TERMINATION Section 8.1 Termination...................................................... 33 Section 8.2 Effect of Termination............................................ 34 ARTICLE IX INDEMNIFICATION Section 9.1 Survival of Representations and Warranties....................... 34 Section 9.2 Terms of Indemnification......................................... 34 Section 9.3 Indemnification Procedures....................................... 35 Section 9.4 Limitations on Indemnification................................... 36 Section 9.5 Additional Indemnification Provisions............................ 36 ARTICLE X MISCELLANEOUS Section 10.1 Fees and Expenses................................................ 37 Section 10.2 Taxes............................................................ 37 Section 10.3 Amendment and Modification....................................... 37 Section 10.4 Notices.......................................................... 38 Section 10.5 Counterparts; Facsimile Signatures............................... 39 Section 10.6 Entire Agreement; No Third Party Beneficiaries................... 39 Section 10.7 Severability..................................................... 39 Section 10.8 Governing Law.................................................... 39 Section 10.9 Enforcement; Venue............................................... 39 Section 10.10 Extension; Waiver................................................ 40 Section 10.11 Election of Remedies............................................. 40 Section 10.12 Assignment....................................................... 40 Section 10.13 Tax Disclosure................................................... 40

EXHIBIT A BILL OF SALE AND ASSIGNMENT EXHIBIT B INSTRUMENT OF ASSUMPTION OF LIABILITIES EXHIBIT C GUARANTY - iii - ASSET PURCHASE AGREEMENT This Asset Purchase Agreement dated as of October 31, 2003 (this "Agreement") is by and between Gail Clarke Acquisition Co. Inc., a New York corporation ("Purchaser"), and VidiPax, Inc., a New York corporation ("Seller"). Capitalized terms used in this Agreement have the meanings assigned to them in Article I hereof. WHEREAS, VidiPax is a wholly-owned subsidiary of Loudeye Corp., a Delaware corporation ("Parent"); WHEREAS, Seller wishes to sell to Purchaser, and Purchaser wishes to purchase from Seller, substantially all of the assets of Seller upon the terms and conditions set forth herein; and WHEREAS, the Board of Directors and sole stockholder of Seller have approved, and deem it advisable and in the best interests of their respective shareholders to consummate the acquisition of substantially all of the assets of Seller by Purchaser, subject only to those liabilities expressly assumed by Purchaser pursuant hereto, and otherwise upon the terms and subject to the conditions set forth herein; NOW, THEREFORE, in consideration of the foregoing and the mutual representations, warranties, covenants and agreements set forth herein and intending to be legally bound hereby, the parties hereto agree as follows: ARTICLE I DEFINITIONS Section 1.1 Definitions. For all purposes of this Agreement, except as otherwise expressly provided or unless the context clearly requires otherwise: "Accounts Payables" shall have the meaning set forth in Section 3.19. "Accounts Receivable" shall have the meaning set forth in Section 3.10. "Affiliate" of any Person shall mean any other Person that directly or indirectly, through one or more intermediaries, controls, is controlled by, or is under common control with, such first Person. "Agreement" shall have the meaning set forth in the preamble. "Allocation" shall have the meaning set forth in Section 2.5. "Ancillary Agreements" shall mean the Bill of Sale and Assignment, the Guaranty, the Instrument of Assumption of Liabilities, the Co-Marketing and Reseller Agreement, the Escrow Agreement, the Museum Lease and the Assignment and Assumption of Lease Agreement. "Arbitrator" shall have the meaning set forth in Section 2.4(c). "Assets" shall have the meaning set forth in Section 2.1. "Assignment and Assumption of Lease Agreement" shall mean an Assignment and Assumption of Lease Agreement between Purchaser and Parent with respect to the Fourth Floor Lease and the Fifth Floor Lease in form and substance mutually acceptable to the parties. "Assumed Accounts Payable" shall have the meaning set forth in Section 3.19. "Assumed Contracts" shall have the meaning set forth in Section 3.11. "Assumed Liabilities" shall have the meaning set forth in Section 2.2. "Bids" shall have the meaning set forth in Section 2.1(a). "Bill of Sale and Assignment" shall mean the Bill of Sale and Assignment between Seller and Purchaser in substantially the form attached hereto as Exhibit A. "Business" shall mean the magnetic media restoration business heretofore conducted by Seller under the name "VidiPax," including the Assets and the goodwill appurtenant to such business and assets. "CERCLA" shall have the meaning set forth in Section 3.25. "Claim" shall mean any claim, proceeding or other matter which may give rise to a Loss. "Closing" shall have the meaning set forth in Section 7.1. "Closing Date" shall have the meaning set forth in Section 7.1. "Co-Marketing and Reseller Agreement" shall mean the Co-Marketing and Reseller Agreement between Purchaser and Parent in form and substance mutually acceptable to the parties. "Computer Software" shall mean computer software programs and applications, databases and all documentation related thereto. "Consent" shall mean any consent, approval, authorization, clearance, exemption, waiver or similar affirmation by a Person pursuant to any Contract, Law, Order or Permit. "Contract" shall mean any agreement, valid quotation, purchase order, arrangement or commitment, contract, indenture, instrument, lease or other obligation of any kind, including obligations binding on a Person, its capital stock, assets, properties or business. "Current Portion" shall have the meaning set forth in Section 2.3. "Designated Employees" shall have the meaning set forth in Section 5.5. - 2 - "Disclosure Schedule" shall mean the disclosure schedule prepared and signed by Seller and delivered to Purchaser simultaneously with the execution hereof. "Domain Names" shall mean the Internet domain names, videopreservation.com, videopreservation.org, videotape.org, vidipax.com, vidipax.org and vidipax.net. "Earn Out Payment" shall have the meaning set forth in Section 2.4. "Earn Out Payment Statement" shall have the meaning set forth in Section 2.4(b). "Earn Out Period" shall mean the two year period commencing on the first day of the fiscal quarter next succeeding the Closing Date and ending on the date that shall be two years thereafter. "Electronic Records" shall mean all electronic accounting records, all electronic correspondence and emails and the like. "Environmental Law" shall have the meaning set forth in Section 3.25. "Equipment" shall mean all of the machinery, equipment, including, but not limited to magnetic media restoration equipment, magnetic media playback equipment, video encoding equipment and magnetic recorders, and computer hardware, printers, copiers, fax machines, telephone system used by the Business and all related equipment, repair parts, tools and all other office or other equipment used in the Business. The term "Equipment" shall include any lease or license pursuant to which the Business currently uses the Equipment, any maintenance or service contracts relating thereto and the Museum Equipment, but shall not include any machinery or equipment owned by any of Seller's Affiliates, including without limitation TEN. "ERISA" shall mean the Employee Retirement Income Security Act of 1974, as amended. "ERISA Affiliate" shall mean any trade or business, whether or not incorporated, that together with Seller would be deemed a "single employer" within the meaning of Section 4001(b) of ERISA or within the meaning of Section 414(b), (c), (m) or (o) of the Internal Revenue Code of 1986, as amended. "Escrow Agreement" shall mean the escrow agreement in form and substance to be mutually agreed. "Escrow Fund" shall have the meaning set forth in the Escrow Agreement. "Escrow Termination Date" shall have the meaning set forth in Section 5.11(c). "Excluded Assets" shall mean the following assets of Seller: (i) the consideration received by Seller pursuant to this Agreement; - 3 - (ii) all of Seller's rights, claims, actions, causes of action, judgments and demands of whatever nature relating to the Excluded Assets; (iii) all guarantees, letters of credit, bank drafts and similar items given by Seller for the benefit of the Business, including but not limited to any guarantees of bank loans or lines of credit; (iv) all of Seller's deferred charges, advance payments, prepaid items and assets, security and other deposits, claims for refunds, rights of offset and credits of all kinds, relating to the Excluded Assets, including without limitation the security deposit made in connection with the Loft Lease; (v) the assets of TEN; and (vi) all other Assets set forth on Schedule 1.1 - Excluded Assets hereto. "Excluded Liabilities" shall mean any liability or obligation of Seller that is not an Assumed Liability expressly assumed by Purchaser pursuant to this Agreement, including, in particular, the Loft Lease and certain accounts payable accrued in connection therewith relating to architects' fees and engineering and contractor fees as more fully set forth on Schedule 3.19. "Fifth Floor Landlord" shall mean SM Holding Corp., the landlord of the Fifth Floor Premises. "Fifth Floor Lease" shall mean that certain Lease Agreement of the Fifth Floor Premises, dated as of June 13, 2000, between Fifth Floor Landlord and Seller and all rights of Seller thereunder. "Fifth Floor Premises" shall mean the Seller's place of business located at 450 West 31st Street, 5th Floor, New York, New York 10001. "Financial Statements" shall mean (i) the Interim Balance Sheet and (ii) the unaudited balance sheet of Seller as of December 31 for the year 2002, together with the statements of income, shareholders' equity and cash flows for the year then ended. "Fourth Floor Landlord" shall mean Brown Bear Realty Corp., the landlord of the Fourth Floor Premises. "Fourth Floor Lease" shall mean that certain Lease Agreement of the Fourth Floor Premises, dated as of June 13, 2000, between Fourth Floor Landlord and Seller and all rights of Seller thereunder. "Fourth Floor Premises" shall mean Seller's place of business located at 450 West 31st Street, 4th Floor, New York, New York 10001. "GAAP" shall mean United States generally accepted accounting principles as in effect from time to time, consistently applied. - 4 - "Governmental Authority" shall mean any federal, state, local or foreign court, arbitral tribunal, agency, authority, board, commission, legislature or office of any federal, state, county, district, municipality, city, foreign or other government unit. "Government Contracts" shall mean the Federal Supply Service Contract, contract number GS-25F-, issued by the General Services Administration Office on October 1, 2001, the Solicitation/Contract/Order for Commercial Items, contract number GS-25F-0072M, issued by USACA United States Military Academy on September 18, 2003, the National Archives Presidential Libraries contract and any other contracts of any Governmental Authority awarded to Seller prior to the Closing Date. "Guaranty" shall mean the Guaranty between Parent and Purchaser in substantially the form attached hereto as Exhibit C. "Indemnification Threshold" shall have the meaning set forth in Section 9.4(c). "Instrument of Assumption of Liabilities" shall mean the Instrument of Assumption of Liabilities between Seller and Purchaser in substantially the form attached hereto as Exhibit B. "Intellectual Property" shall mean patents, trademarks, trade names (including "VidiPax"), service marks, Domain Names, copyrights and applications for and registrations of any of the foregoing, and copyrights, and all technology, know-how, Computer Software and proprietary information used in, relating to, or associated with, the Business. "Intellectual Property Claims" shall have the meaning set forth in Section 3.17(d). "Interim Balance Sheet" shall mean the unaudited balance sheet and statements of income, stockholders' equity and cash flows of Seller for the six (6) month period ended June 30, 2003. "Interim Balance Sheet Date" shall mean June 30, 2003. "Knowledge" shall mean (a) with respect to an individual, an individual will be deemed to have "Knowledge" of a particular fact or other matter if such individual is actually aware of such fact or other matter and (b) with respect to an entity, an entity (other than an individual) will be deemed to have "Knowledge" of a particular fact or other matter if any of the senior management or directors of such entity or such entity's businesses or segments has Knowledge of such fact or other matter. "Law" shall mean any federal, state, local or foreign law, statute, ordinance, rule, regulation and any other executive or legislative proclamation. "Lien" shall mean any lien, charges, security interest, attachment, encumbrance or charge of any kind, mortgage and pledge (including any agreement to give any of the foregoing); provided, however, that the term "Lien" shall not include (i) statutory liens for Taxes, which are not yet due and payable or are being contested in good faith by appropriate proceedings; (ii) statutory or common law liens to secure landlords, lessors or renters under leases or rental - 5 - agreements confined to the premises rented; (iii) deposits or pledges made in connection with, or to secure payment of, worker's compensation, unemployment insurance, old age pension or other social security programs mandated under applicable Laws; (iv) statutory or common law liens in favor of carriers, warehousemen, mechanics and material men to secure claims for labor, materials or supplies and other like liens; and (v) restrictions on transfers of securities imposed by applicable securities Laws. "Lindner" shall mean James Lindner, an individual residing at 15 Washington Place - #2M, New York, New York 10003. "Lindner Stock Purchase Agreement" shall have the meaning set forth in Section 5.11(a). "List Price" shall mean the list price of the applicable services as from time to time established by Purchaser for customers of similar type. "Litigation" shall mean any suit, action, arbitration, cause of action, Claim, complaint, criminal prosecution, investigation, demand letter, governmental or other administrative proceeding, whether at law or at equity, before or by any federal, state, local or foreign court, tribunal or agency or before any arbitrator. "Loft Lease" shall mean the Loft Lease dated as of December 2002, between the Loft Lease Landlord and Seller for the entire seventh floor of 111 West 19th Street, New York, New York 10011. "Loft Lease Landlord" shall mean 19th Street Associates, LLC. "Losses" shall mean actual, direct and out-of-pocket losses, liabilities, damages, costs and expenses (including reasonable attorney's fees and costs of investigation). "Material Adverse Effect" shall mean any adverse change that is or is reasonably likely to materially impair the value of the Assets or materially increase the obligations pursuant to the Assumed Liabilities or materially interfere with Purchaser's use of the Assets in substantially the same manner as currently used by the Business. "Materials of Environmental Concern" shall have the meaning set forth in Section 3.25. "Miscellaneous Assets" shall mean all telephone numbers of the Business, all Electronic Records, and all other assets of the Business not constituting an Excluded Asset. "Multiemployer Plan" shall mean "multiemployer plan" as defined in Section 4001(a)(3) of ERISA to which Seller or any ERISA Affiliate is making, or is accruing an obligation to make, contributions or has made, or been obligated to make, contributions within the preceding six (6) years. - 6 - "Museum Equipment" shall mean the collection of functional and non-functional wire recorders, reel-to-reel audio decks and video recorders, machines and artifacts as set forth in Schedule 1.1 - Museum Equipment. "Museum Lease" shall mean the lease agreement relating to the Museum Equipment between Seller, as lessor, and Purchaser, as lessee, in form and substance to be mutually agreed. "Net Income" shall mean the net income of Purchaser as and for the four fiscal quarters commencing on the date on which the Earn Out Period commences or the following four fiscal quarters, as applicable, before the effect of the payment of any dividends in respect of the preferred or common stock of Purchaser, and excluding any extraordinary gains and losses for such period, all as determined in accordance with GAAP consistently applied. "Old Emails" shall mean all emails sent to and from Designated Employees and to and from any and all former employees of Seller that are not accessible from the Microsoft Outlook folder on each such Designated Employee's or former employee's computer as of the Closing Date, including, but not limited to emails sent to and from the email addresses set forth on Schedule 1.1 - Old Email Addresses. "Order" shall mean any decision or award, decree, injunction, judgment, order, quasi-judicial decision or award, ruling or writ of any Governmental Authority. "Parent" shall have the meaning set forth in the preamble. "Permit" shall mean any federal, state, local or foreign governmental approvals, authorization, certificate, license or permit. "Person" shall mean a natural person, partnership, corporation, limited liability company, business trust, joint stock company, trust, unincorporated association, joint venture, Governmental Authority or other entity or organization. "Personal Property" shall mean all furniture, work stations, filing cabinets, fixtures, Equipment, office supplies and other tangible personal property associated with the Business, including, without limitation, any tenant improvements. "Plan" shall mean each defined benefit plan, deferred compensation and each incentive compensation, stock purchase, stock option and other equity compensation plan, program, agreement or arrangement; each severance or termination pay, medical, surgical, hospitalization, life insurance and other "welfare" plan, fund or program (within the meaning of Section 3(1) of ERISA); each profit-sharing, stock bonus or other "pension" plan, fund or program (within the meaning of Section 3(2) of ERISA); each employment, termination or severance agreement; and each other employee benefit plan, fund, program, agreement or arrangement, in each case, that is sponsored, maintained or contributed to or required to be contributed to by Seller or by any ERISA Affiliate, or to which Seller or an ERISA Affiliate is party, whether written or oral, for the benefit of any employee of the Business. - 7 - "Post-Closing Tax Period" shall mean any Tax period (or portion thereof) beginning on or after the Closing Date. "Pre-Closing Tax Period" shall mean any Tax period (or any portion thereof) ending on or after the Closing Date. "Prepaid Expenses" shall mean any operating costs, prepaid expenses, credits, deferred charges, advance payments, security deposits other than the security deposit made in connection with the Loft Lease and other prepaid items incurred or which may be incurred in connection with the Business after the date hereof and which were paid by Seller on or prior to the date hereof, including, in particular, the security deposit paid on the Fourth Floor Lease and the deposit paid to ConEdison for the provision of electricity to Seller. "Proceeding" shall mean any action, claim, complaint, charge, arbitration, audit, hearing, investigation, inquiry, suit, litigation or other proceeding (whether civil, criminal, administrative, investigative or informal) commenced, brought, conducted or heard by or before, or otherwise involving, any Governmental Authority or other entity. "Profit Earn Out" shall have the meaning set forth in Section 2.4. "Profit Earn Out Amounts" shall have the meaning set forth in Section 2.4(a)(ii). "Profit Earn Out Payment Date" shall mean that date that shall not be later than 90 days following the fourth quarter of each of the first four fiscal quarters, the first of which commences on the first day of the Earn Out Period, and the second four fiscal quarter period of Purchaser. "Purchase Price" shall have the meaning set forth in Section 2.3. "Purchaser" shall have the meaning set forth in the preamble. "Purchaser Cap" shall have the meaning set forth in Section 9.4(b). "Purchaser Parties" shall have the meaning set forth in Section 9.2. "Reseller Earn Out Amounts" shall have the meaning set forth in Section 2.4(a)(i). "Reseller Earn Out Payment Date" shall mean not later than 30 days after the date on which Parent has notified Purchaser of the Reseller Margin as and for the applicable fiscal quarter. "Reseller Margin" shall mean the difference, if positive, between Purchaser's List Price (with respect to any so-called "bundled services") or Parent's sales price (with respect to any resale of Purchaser's services not at that time bundled with any of Parent's services) for the applicable services and the Vidipax Wholesale Price with respect to such services. "Seller" shall have the meaning set forth in the preamble. - 8 - "Seller Cap" shall have the meaning set forth in Section 9.4(a). "Seller Parties" shall have the meaning set forth in Section 9.2. "Taxes" shall mean all taxes, charges, fees, duties, levies, penalties or other assessments imposed by any Governmental Authority, including, without limitation, all income, gross receipts, excise, property, sales, gain, use, license, custom duty, unemployment, capital stock, transfer, franchise, payroll, withholding, social security, minimum estimated, profit, gift, severance, value added, disability, premium, recapture, credit, occupation, service, leasing, employment, stamp and other taxes, and shall include interest, penalties or additions attributable thereto or attributable to any failure to comply with any requirement regarding Tax Returns. "Tax Authority" shall mean any domestic, foreign, federal, national, state, provincial, county or municipal or other local government or any subdivision, agency, commission or authority thereof, exercising Tax regulatory authority. "Tax Return" shall mean any return, report or similar statement required to be filed with respect to any Tax (including any attached schedules), including any information return, claim for refund, amended return or declaration of estimated Tax. "TEN" shall mean Technology Education Network, Inc., an Affiliate of Seller. "Third Party" shall mean any Person other than Seller, Purchaser, Parent or their respective Affiliates. "Third Party Claim" shall have the meaning set forth in Section 9.3. "Transaction" shall have the meaning set forth in Section 2.2. "Transfer Taxes" shall mean all sales, use, transfer, recording, ad valorem, documentary, registration, conveyance, excise, license, stamp or similar Taxes and fees. "Transferred Employees" shall have the meaning set forth in Section 5.5. "VidiPax Wholesale Price" shall have the meaning set forth in the Co-Marketing and Reseller Agreement. Section 1.2 Interpretation. (a) Whenever the words "include," "includes" or "including" are used in this Agreement they shall be deemed to be followed by the words "without limitation." (b) When a reference is made in this Agreement to a section or article, such reference shall be to a section or article of this Agreement unless otherwise clearly indicated to the contrary. (c) The words "hereof," "herein" and "herewith" and words of similar import shall, unless otherwise stated, be construed to refer to this Agreement as a whole and not to any - 9 - particular provision of this Agreement, and article, section, paragraph, exhibit and schedule references are to the articles, sections, paragraphs, exhibits and schedules of this Agreement unless otherwise specified. (d) The meaning assigned to each term defined herein shall be equally applicable to both the singular and the plural forms of such term, and words denoting any gender shall include all genders. Where a word or phrase is defined herein, each of its other grammatical forms shall have a corresponding meaning. (e) A reference to any party to this Agreement or any other agreement or document shall include such party's successors and permitted assigns. (f) A reference to any legislation or to any provision of any legislation shall include any amendment to, and any modification or re-enactment thereof, any legislative provision substituted therefore and all regulations and statutory instruments issued thereunder or pursuant thereto. (g) In the event of any inconsistency between statements in the body of this Agreement and statements in the Disclosure Schedule (excluding exceptions expressly set forth in the Disclosure Schedule with respect to a specifically identified representation or warranty), the statements in the body of this Agreement shall control. (h) The parties have participated jointly in the negotiation and drafting of this Agreement. In the event an ambiguity or question of intent or interpretation arises, this Agreement shall be construed as if drafted jointly by the parties, and no presumption or burden of proof shall arise favoring or disfavoring any party by virtue of the authorship of any provisions of this Agreement. ARTICLE II PURCHASE AND SALE OF ASSETS Section 2.1 Purchase and Sale of Assets. Subject to the terms and conditions of this Agreement, at the Closing, Seller shall sell, convey, assign, transfer and deliver to Purchaser and Purchaser shall purchase, acquire and accept from Seller, all of Seller's right, title and interest in and to all of the assets and properties of Seller, except for the Excluded Assets and except as otherwise specifically provided herein (such right, title and interest collectively referred to herein as the "Assets"), including, without limitation, the following: (a) the Assumed Contracts, together with all rights to bids, proposals and discussions that have not yet ripened into contracts or agreements, whether written or oral ("Bids") (a list of all Bids is attached hereto as Schedule 2.1(a)); (b) the Intellectual Property, including, without limitation, the Domain Names, patents and patent applications, the rights to Seller's business trade names, including, without limitation, "VidiPax" and trademarks and all technical drawings, descriptions, documentation, know-how and technology with respect to the foregoing; - 10 - (c) all client, customer and supplier lists relating to the Business; (d) the Accounts Receivable; (e) the Transferred Employees; (f) the cash, marketable or other securities, commercial paper and cash equivalents or other investments on hand or in bank accounts and all of Seller's bank accounts as of the Closing; (g) the Personal Property; (h) the Prepaid Expenses; (i) the Fourth Floor Lease and the Fifth Floor Lease; (j) the Miscellaneous Assets; provided, however, that Seller shall be entitled to keep copies of all Miscellaneous Assets; (k) all guarantees, warranties, indemnities and similar rights in favor of Seller with respect to any Asset; (l) books and records related solely to the Assets transferred to Purchaser pursuant to this Agreement, including books and records relating to past or current clients, customers and vendors, future prospects, and employment and personnel records relating to past or current employees, and books and records currently maintained on the Great Plains Accounting Program; and (m) all rights, claims, credits, causes of action or rights of set-off against Third Parties related primarily to the Assets or the Assumed Liabilities, including, without limitation, rights under manufacturers' and vendors' warranties and rights under insurance policies covering the Assets. Section 2.2 Assumption of Liabilities. Subject to the terms and conditions of this Agreement, at the Closing, Purchaser shall assume only the liabilities and obligations of Seller as of the Closing Date with respect to each of the following, which are collectively referred to herein as the "Assumed Liabilities": (a) any obligation or liability relating to the Assets or their use to the extent arising out of events or circumstances occurring after the Closing; (b) any obligation or liability pursuant to the Assumed Contracts to the extent arising after the Closing and any warranty liabilities with respect to performance by Seller under such Assumed Contracts prior to the Closing Date; (c) any obligation or liability pursuant to the Assumed Accounts Payable; - 11 - (d) any obligation or liability pursuant to the Fourth Floor Lease and the Fifth Floor Lease; and (e) any liabilities relating to the Transferred Employees to the extent arising out of any events or circumstances occurring after the Closing. Purchaser shall assume none of the Excluded Liabilities. The transactions referred to in Sections 2.1 and 2.2 are referred to herein as the "Transaction." Section 2.3 The Purchase Price. The consideration for the Assets (the "Purchase Price") shall be (a) One Million Two Hundred Thousand Dollars ($1,200,000) (the "Current Portion") plus (b) the amount of Earn Out Payments, if any, to be paid in accordance with Section 2.4. The Current Portion shall be payable by a cash payment of $1,200,000 in immediately available funds to an account designated by the Escrow Agent, which funds will be disbursed in accordance with the terms of the Escrow Agreement. Section 2.4 Earn Out Payments. (a) Purchaser shall pay to Seller earn out payments (each an "Earn Out Payment") as follows: (i) Purchaser shall pay to Seller on the Reseller Earn Out Payment Date an amount equal to fifty percent (50%) of the Reseller Margin (any such amounts are hereinafter referred to as "Reseller Earn Out Amounts"), provided that (A) no such payment shall be made unless Purchaser shall have rendered the applicable services during the applicable quarter and received payment of the applicable Vidipax Wholesale Price from Parent during such quarter, except that to the extent that Purchaser has rendered services prior to the end of the Earn Out Period but has not received the applicable Vidipax Wholesale Price by such date, then, notwithstanding the passage of the end of the Earn Out Period, Purchaser shall be obligated to pay Seller the Reseller Earn Out Amount with respect thereto within 15 days of its receipt of the applicable Vidipax Wholesale Price, and (B) the Reseller Earn Out Amounts shall not exceed, in the aggregate, $250,000; and (ii) Purchaser shall pay to Seller on the Profit Earn Out Payment Date an amount equal to 25% of the Net Income of Purchaser during the Earn Out Period (any such amounts are hereinafter referred to as "Profit Earn Out Amounts"); provided, however, the aggregate Profit Earn Out Amount shall not exceed, in the aggregate, $250,000. (b) Purchaser shall deliver to Seller, on each Reseller Earn Out Payment Date and Profit Earn Out Payment Date, whether or not any amount is due to Seller hereunder, a written statement (each an "Earn Out Payment Statement"), setting forth calculations made by Purchaser to determine the Reseller Earn Out Amount or the Profit Earn Out Amount or both, as applicable, in detail reasonably acceptable to Seller, including appropriate supporting documentation. - 12 - (c) In the event that Seller disputes the Earn Out Payment Statement or the calculation of the Earn Out Payments, Seller shall notify Purchaser in writing of the amount, nature and basis of such dispute, within thirty (30) days after delivery of the Closing Earn Out Payment Statement. In the event of such a dispute, Seller and Purchaser shall first use their diligent good faith efforts to resolve the dispute within ten (10) days after delivery of the notice of dispute. Purchaser shall furnish Seller's or its Affiliates' representatives commercially reasonably access to Purchaser's relevant personnel and books and records to audit same in connection with any such dispute. Such audit shall be conducted at Seller's sole cost and expenses, provided, however, that if Seller or any of its Affiliates identifies a discrepancy from the Earn Out Payment Statement or the calculation of the Earn Out Payments of more than ten percent (10%), then Purchaser shall be responsible for the cost of the audit and shall pay same to Seller or its Affiliate within ten (10) days following notice to Purchaser of identification of discrepancy. In the event that the dispute is not resolved within the aforementioned ten (10) day period, any remaining items in dispute shall be submitted to the New York office of McGladrey & Pullen, LLP (the "Arbitrator"), which arbitration shall be conducted in New York, to be finally resolved by the Arbitrator within thirty (30) days of such submission. All determinations pursuant to this paragraph (c) shall be in writing and shall be delivered to the parties. The determination by the Arbitrator as to the resolution of any dispute shall be binding and conclusive upon the parties. The fees and expenses of the Arbitrator in connection with the resolution of disputes pursuant to this paragraph (c) shall be shared equally by Seller and Purchaser; provided that if the Arbitrator determines that one party has adopted a position or positions with respect to the Earn Out Payment Statement or the calculation of the Earn Out Payments that is frivolous or clearly without merit, the Arbitrator may, in its discretion, assign a greater portion of any such fee or expense to such party. Section 2.5 Allocation of Purchase Price; Tax Filings. The Purchase Price shall be allocated among the Assets in accordance with the allocation set forth on Schedule 2.5 (the "Allocation"). Each of Purchaser and Seller shall (i) timely file all forms (including Internal Revenue Service Form 8594) and Tax Returns required to be filed in connection with the Allocation, (ii) be bound by the Allocation for purposes of determining Taxes, (iii) prepare and file, and cause its Affiliates to prepare and file, its Tax Returns on a basis consistent with the Allocation and (iv) take no position, and cause its Affiliates to take no position, inconsistent with the Allocation on any applicable Tax Return, in any audit or proceeding before any taxing authority, in any report made for Tax, financial accounting or any other purposes, or otherwise. In the event that the Allocation is disputed by any Tax Authority, the party receiving notice of such dispute shall promptly notify the other party hereto concerning the existence and resolution of such dispute. ARTICLE III REPRESENTATIONS AND WARRANTIES OF SELLER Except as specifically set forth in the Disclosure Schedule prepared and signed by Seller and delivered to Purchaser simultaneously with the execution hereof, Seller represents and warrants to Purchaser that all of the statements contained in this Article III are true and complete - 13 - as of the date of this Agreement in all material respects (or, if made as of a specified date, as of such date). Section 3.1 Organization; Qualification of Seller. Seller (i) is a corporation duly organized, validly existing and in good standing under the laws of New York, (ii) has the requisite corporate power and authority to carry on the Business as it is now being conducted and to own and operate the Assets, and (iii) is duly qualified or licensed to do business as a foreign corporation in good standing in every jurisdiction in which the conduct of the Business requires such qualification and where the absence of such qualification would not be a Material Adverse Effect. Section 3.2 Authorization. Seller has the requisite corporate power and authority to execute and deliver this Agreement and the Ancillary Agreements to which it is a party and to consummate the Transaction. No further corporate action on the part of Seller is necessary to authorize the execution, delivery and performance by Seller of the foregoing agreements and the consummation by it of the Transaction. Section 3.3 Binding Agreements. This Agreement and each Ancillary Agreement to which Seller is a party has been or will be duly executed and delivered by Seller and, assuming due and valid authorization, execution and delivery thereof by Purchaser, each of the foregoing agreements is a valid and binding obligation of Seller, enforceable against Seller in accordance with its terms, except as such enforcement may be limited by (a) applicable bankruptcy, insolvency, reorganization, moratorium, fraudulent conveyance and other similar laws of general application now or hereinafter in effect relating to or affecting creditors' rights generally and (b) general principles of equity (regardless of whether enforceability is considered in a proceeding at equity or at law). Section 3.4 Good Title Conveyed. The Bill of Sale and Assignment and the endorsements, assignments and other instruments to be executed and delivered by Seller to Purchaser at the Closing will be valid and binding obligations of Seller, enforceable in accordance with their respective terms, and will effectively vest in Purchaser good, valid and marketable title to all of the Assets free and clear of all Liens. Section 3.5 Consents and Approvals; No Violations. None of the execution, delivery or performance by Seller of this Agreement and each Ancillary Agreement to which Seller is a party, the consummation by Seller of the Transaction, or compliance by Seller with any of the provisions hereof or thereof will (a) conflict with or result in any breach of any provision of the certificate of incorporation or articles of organization, by-laws or similar organizational documents of Seller, (b) require any filing with, Permit or Consent of, any Governmental Authority or other Person (including, without limitation, Consents from parties to loans, contracts, leases and other agreements to which Seller is a party), except with respect to the Government Contracts, (c) require any Consent or notice under, or result in a violation or breach of, or constitute (with or without due notice or the passage of time or both) a default (or give rise to any right of termination, amendment, cancellation or acceleration) under, any of the terms, conditions or provisions of any agreement to which Seller is a party, or (d) violate any Order, statute, rule or regulation applicable to Seller or the Assets or Assumed Liabilities. - 14 - Section 3.6 Compliance with Laws. Seller has complied in a timely manner and in all material respects with all Laws, Orders and Permits with respect to the Business and Assets the absence of which compliance would not have a Material Adverse Effect, no notice, charge, Claim, action or assertion has been received by Seller (with respect to the Business or Assets) or has been filed, commenced or threatened against Seller alleging any violation of any of the foregoing. Section 3.7 Title to Assets; Necessary Assets. Seller has good and marketable title to, or valid leasehold or other relevant interest in, all the Assets, free and clear of all Liens. The Assets include all rights, properties and other assets necessary to permit Purchaser to conduct the business of the Business after the Closing in materially the same manner as it has been conducted by Seller prior to the date hereof, except to the extent that Seller has been using assets owned by TEN and except for the Museum Equipment. Section 3.8 Financial Statements. True and complete copies of the Financial Statements of Seller, together with the related auditor's reports, are included in Schedule 3.8(a). The Financial Statements have been prepared from, are in accordance with and accurately reflect, the books and records of the Business and Seller, comply in all material respects with applicable accounting requirements, have been prepared in accordance with GAAP applied on a consistent basis during the periods involved (except as may be stated in the notes thereto) and fairly present the financial position and the results of operations and cash flows (and changes in financial position, if any) of the Business and Seller. Section 3.9 Absence of Certain Changes or Events. Since the Interim Balance Sheet Date, Seller has conducted its business only in the ordinary and usual course consistent with past practice, and neither the Business nor Seller has: (a) suffered any material adverse change in its working capital, financial condition, results of operation, assets, liabilities (absolute, accrued, contingent or otherwise), reserves, business, operations or prospects; (b) incurred any liability or obligation (absolute, accrued, contingent or otherwise) except non-material items incurred in the ordinary course of business and consistent with past practice, none of which exceeds $25,000 (counting obligations or liabilities arising from one transaction or a series of similar transactions, and all periodic installments or payments under any lease or other agreement providing for periodic installments or payments, as a single obligation or liability), or increased, or experienced any change in any assumptions underlying or methods of calculating, any bad debt, contingency or other reserves; (c) permitted or allowed any of its property or assets (real, personal or mixed, tangible or intangible) to be subjected to any mortgage, pledge, lien, security interest, encumbrance, restriction or charge of any kind, except for liens for current taxes not yet due; (d) disposed of or permitted to lapse any rights to the use of any Intellectual Property, or disposed of or disclosed to any Person other than representatives of Purchaser any trade secret, formula, process, know-how or other Intellectual Property not theretofore a matter of public knowledge; - 15 - (e) granted any general increase in the compensation of officers or employees (including any such increase pursuant to any bonus, pension, profit-sharing or other plan or commitment) or any other increase in the compensation payable or to become payable to any officer or employee, and no such increase is customary on a periodic basis or required by agreement or understanding; (f) neglected or failed to maintain the Assets in a state of repair and condition that materially complies with Law; or (g) agreed, whether in writing or otherwise, to take any action described in this section. Section 3.10 Accounts Receivable. Schedule 3.10 a complete and accurate list of all trade and accounts receivable of Seller, as determined in accordance with GAAP (the "Accounts Receivable"). All Accounts Receivable, whether reflected in the Interim Balance Sheet or otherwise, represent sales actually made in the ordinary course of business, and are collectible net of any reserves shown on the Interim Balance Sheet. Section 3.11 Assumed Contracts. Schedule 3.11 is a list of all the Contracts relating to the Business and Schedule 3.11 sets forth a list of all Contracts being transferred to Purchaser pursuant to this Agreement (such Contracts, the "Assumed Contracts"). Each Assumed Contract is in full force and effect, and is a legal, valid and binding obligation of Seller and each of the parties thereto, enforceable in accordance with its terms. No condition exists or event has occurred which would constitute a material default by Seller or result in a right of termination under any Assumed Contract. Section 3.12 Miscellaneous Assets. Schedule 3.12 is a complete and accurate list of the Miscellaneous Assets. Section 3.13 Litigation. There is no Litigation pending or, to the Knowledge of Seller, threatened against or affecting the Assets, or which questions or challenges the validity of this Agreement or any action taken or to be taken by Seller pursuant to this Agreement or in connection with the Transaction; and there is no valid basis for any such action, proceeding or investigation. Seller is not subject to any judgment, order or decree which may have a Material Adverse Effect. Section 3.14 Labor Matters. (a) Seller is, and has at all times been, in compliance, in all material respects, with all applicable Laws respecting employment and employment practices, terms and conditions of employment, wages, hours of work and occupational safety and health; and there are no complaints, lawsuits or other proceedings pending or, to the Knowledge of Seller, threatened in any forum by or on behalf of any Designated Employees alleging breach of any express or implied contract of employment, any laws governing employment or the termination thereof or other discriminatory, wrongful or tortious conduct in connection with the employment relationship. - 16 - (b) There is no labor strike, dispute, corporate campaign, slowdown, stoppage or lockout actually pending, or to the Knowledge of Seller, threatened against or affecting the Business, and during the past five (5) years there has not been any such action. (c) Seller is not a party to or bound by any collective bargaining or similar agreement with any labor organization or work rules or practices agreed to with any labor organization or employee association applicable to the Designated Employees. (d) Schedule 3.14(d) is a complete and accurate list of the date of hire, base salary, title and annual cash bonus opportunity of each Designated Employee as well as group insurance programs in effect for such Designated Employees as of the date hereof. (e) A true and complete copy of each written personnel policy, rule and procedure applicable to the Designated Employees is included in Schedule 3.14(e). Section 3.15 Employee Benefit Plans. Schedule 3.15 is a complete and accurate list of all Plans. None of the Plans are Multiemployer Plans. All obligations of any nature under any Plan arising prior to or after the Closing will constitute a liability of Seller, and Purchaser shall have no obligation or duty with respect thereto. Section 3.16 Tax Matters. (a) Seller has timely filed all Tax Returns relating to the Business and the Assets that are required to be filed, and all such Tax Returns are true, complete and accurate in all material respects. Seller has timely paid, or provided adequate accrual for, all Taxes which are due (whether or not shown as due on a Tax Return), or claimed or asserted by any Tax Authority to be due. (b) There has been no issue raised or adjustment proposed (and none is pending) by any Tax Authority with respect to Taxes attributable to the Assets or the Business. There are no encumbrances for Taxes upon any of the Assets except for liens for Taxes not yet due. There is no pending Tax audit or examination, nor any action, suit, investigation, claim or deficiency asserted with respect to the Assets or the Business. (c) All amounts required to be withheld or collected for Taxes for payments made to employees of the Business or others have been withheld or collected and have been or will be remitted to the appropriate Tax Authority when due. Section 3.17 Intellectual Property. (a) Schedule 3.17(a) sets forth a complete and accurate list of the Intellectual Property, together with all licenses related to such Intellectual Property, whether Seller is the licensee or licensor thereunder. (b) Seller is the sole and exclusive owner or valid licensee of all Intellectual Property, free and clear of all Liens. - 17 - (c) All patents, registrations and applications for Intellectual Property (i) are valid, subsisting, in proper form and enforceable, and have been duly maintained, including the submission of all necessary filings and fees in accordance with the legal and administrative requirements of the appropriate jurisdictions, and (ii) have not lapsed, expired or been abandoned, and no patent, registration or application therefor is the subject of any opposition, interference, cancellation proceeding or other legal or governmental proceeding before any Governmental Authority. (d) To the Knowledge of Seller, there are no conflicts with or infringements of any Intellectual Property by any Third Party. The conduct of the Business as currently conducted does not conflict with or infringe in any way on any proprietary right of any Third Party. There is no claim, suit, action or proceeding pending, or to the Knowledge of Seller, threatened against Seller ("Intellectual Property Claims") (i) alleging any such conflict or infringement with any Third Party's proprietary rights or (ii) challenging the ownership, use, validity or enforceability of the Intellectual Property. (e) The Computer Software used in the Business was either (i) developed by employees of Seller within the scope of their employment, (ii) developed on behalf of Seller by a Third Party, and all ownership rights therein have been assigned or otherwise transferred to or vested in Seller pursuant to written agreements, or (iii) licensed or acquired from a Third Party pursuant to a written license, assignment, or other contract that is in full force and effect and of which Seller is not in material breach. (f) All consents, filings, and authorizations by or with Governmental Entities or third parties necessary with respect to the consummation of the Transaction, as they may affect the Intellectual Property, have been obtained. (g) Seller has not entered into any consent, indemnification, forbearance to sue, settlement agreement or cross-licensing arrangement with any Person relating to the Intellectual Property or, to the Knowledge of Seller, any Intellectual Property licensed by Seller for use in the Business, or the Intellectual Property of any Third Party, except as contained in any license agreements listed in Schedule 3.17(a). (h) Seller is not, and will not be as a result of the execution and delivery of this Agreement or the performance of its obligations under this Agreement, in breach of any license, sublicense or other agreement relating to the Intellectual Property. Section 3.18 Personal Property. (a) Schedule 3.18(a) is a complete and accurate list of the Personal Property. All Personal Property conforms with all applicable Laws except where failure to conform would not have a Material Adverse Effect is fit for its intended use, and Seller has no Knowledge of any pending or threatened change of any applicable Law with which any of such property would not conform. (b) Schedule 3.18(b) lists each item of Equipment which is not in the possession of Seller, if any, together, in each case, with the name, address and telephone number of each Person who holds such property. - 18 - Section 3.19 Accounts Payables. Schedule 3.19 is a complete and accurate list of all accounts payable relating to the Business (such accounts payables as set forth on Schedule 3.19, the "Accounts Payables") and Schedule 3.19 sets forth a list of all Accounts Payable being assumed by Purchaser pursuant to this Agreement (such Accounts Payable, the "Assumed Accounts Payable"). Section 3.20 Prepaid Expenses. Schedule 3.20 is a complete and accurate list of all Prepaid Expenses. Section 3.21 Seller's Customers. Seller has no Knowledge that any such customer intends to cancel or otherwise substantially modify its relationship with Seller as a result of the Transaction or otherwise. Section 3.22 Suppliers. Schedule 3.22 sets forth the lists of all suppliers whose supplies to Seller and the Business exceeded $15,000 during calendar year 2002. Except as set forth in Schedule 3.22, during the period from January 1, 2003 through the date hereof, none of such suppliers has canceled or substantially modified its agreements with, or commitments to, Seller (or threatened in writing to do any of the foregoing). Except as set forth in Schedule 3.22, Seller has no Knowledge that any such supplier intends to cancel or otherwise substantially modify its relationship with Seller or limit materially its services, supplies or materials to Seller either as a result of the Transactions or otherwise. Section 3.23 Owned Real Property. Seller does not own any real property. Section 3.24 Real Property Leases. Schedule 3.24 lists all real property leased or subleased to Seller and lists the term of such lease, any extension and expansion options, and the rent payable thereunder. Seller has delivered to the Purchaser true, correct and complete copies of the leases and subleases (as amended to date) listed in Schedule 3.24. With respect to each lease and sublease listed in Schedule 3.24 (except the Loft Lease): (a) the lease is legal, valid, binding, enforceable and in full force and effect with respect to Seller, and to the Knowledge of Seller, is legal, valid, binding, enforceable and in full force and effect with respect to each other party thereto, subject, in each case, to (i) laws of general application relating to bankruptcy, insolvency and the relief of debtors, and (ii) rules of law governing specific performance, injunctive relief and other equitable remedies; (b) the lease or sublease will continue to be legal, valid, binding, enforceable and in full force and effect immediately following the Closing in accordance with the terms thereof as in effect prior to the Closing, subject to (i) laws of general application relating to bankruptcy, insolvency and the relief of debtors, and (ii) rules of law governing specific performance, injunctive relief and other equitable remedies; (c) Seller is not in breach or default thereunder, to the Knowledge of Seller, no other party to the lease or sublease is in breach or default, and no event has occurred which, with notice or lapse of time, would constitute a breach or default or permit termination, modification, or acceleration thereunder; - 19 - (d) there are no disputes, oral agreements or enforceable forbearance programs in effect as to the lease or sublease; (e) Seller has not assigned, transferred, conveyed, mortgaged, deeded in trust or encumbered any interest in the leasehold or subleasehold; (f) all facilities leased or subleased thereunder are supplied with utilities and other services necessary for the operation of said facilities; and (g) no construction, alteration or other leasehold improvement work with respect to the lease or sublease remains to be paid for or performed by Seller. Section 3.25 Environmental Matters. Seller has complied and is in compliance with all applicable Environmental Laws (as defined below). There is no pending or, to the Knowledge of Seller, threatened civil or criminal litigation, written notice of violation, formal administrative proceeding, or investigation, inquiry or information request by any Governmental Entity, relating to any Environmental Law involving Seller, the Assets or the Business. For purposes of this Agreement, "Environmental Law" means any federal, state or local law, statute, rule or regulation or the common law relating to the environment or occupational health and safety, including without limitation any statute, regulation or order pertaining to (i) treatment, storage, disposal, generation and transportation of toxic or hazardous substances or solid or hazardous waste; (ii) air, water and noise pollution; (iii) groundwater and soil contamination; (iv) the release or threatened release into the environment of toxic or hazardous substances, or solid or hazardous waste, including without limitation emissions, discharges, injections, spills, escapes or dumping of pollutants, contaminants or chemicals; (v) the protection of wild life, marine sanctuaries and wetlands, including without limitation all endangered and threatened species; (vi) storage tanks, vessels and containers; (vii) underground and other storage tanks or vessels, abandoned, disposed or discarded barrels, containers and other closed receptacles; (viii) health and safety of employees and other persons; and (ix) manufacture, processing, use, distribution, treatment, storage, disposal, transportation or handling of pollutants, contaminants, chemicals or industrial, toxic or hazardous substances or oil or petroleum products or solid or hazardous waste. As used above, the terms "release" and "environment" shall have the meaning set forth in the federal Comprehensive Environmental Response, Compensation and Liability Act of 1980 ("CERCLA"). There have been no releases of any Materials of Environmental Concern (as defined below) into the environment at any parcel of real property or any facility formerly or currently owned, leased, operated or controlled by Seller for which Seller may be liable under any Environmental Law. With respect to any such releases of Materials of Environmental Concern, Seller has given all required notices to Governmental Entities (copies of which have been provided to Purchaser). Seller is not aware of any other releases of Materials of Environmental Concern at parcels of real property or facilities (including, without limitation, those owned, leased, operated or controlled by Seller) that could reasonably be expected to have an impact on the real property or facilities owned, operated or controlled by Seller. For purposes of this Agreement, "Materials of Environmental Concern" means any chemicals, pollutants or contaminants, hazardous substances (as such term is defined under CERCLA or any Environmental Law), solid wastes and hazardous wastes (as such terms are defined under the - 20 - federal Resources Conservation and Recovery Act or any Environmental Law), toxic materials, oil or petroleum and petroleum products, asbestos, or any other material subject to regulation under any Environmental Law. Set forth in Schedule 3.25 is a list of all environmental reports, investigations and audits possessed or controlled by Seller (whether conducted by or on behalf of Seller or a Third Party, and whether done at the initiative of Seller or directed by a Governmental Entity or other Third Party) issued or conducted during the past ten (10) years and relating to premises currently or previously owned, leased, or operated by Seller. Complete and accurate copies of each such report, and the results of each such investigation or audit, have been provided to Purchaser Seller is not aware of any material environmental liability on the part of any of the solid or hazardous waste transporters and treatment, storage and disposal facilities that have been utilized by Seller. Section 3.26 Brokers or Finders. Seller has not entered into any agreement or arrangement entitling any agent, broker, investment banker, financial advisor or other firm or Person to any broker's or finder's fee or any other commission or similar fee in connection with the Transaction. Section 3.27 Books and Records. The books of account, minute books and other records of Seller relating to the Business are complete and correct in all material respects. Section 3.28 Full Disclosure. Seller has not failed to disclose to Purchaser any facts material to the business, results of operations, assets, liabilities, financial condition or prospects of the Business. No representation or warranty by Seller contained in this Agreement and no statement contained in any document (including, without limitation, financial statements and the Disclosure Schedule), certificate, or other writing furnished or to be furnished by Seller to Purchaser or any of its representatives pursuant to the provisions hereof or in connection with the Transaction, contains or will contain any untrue statement of material fact or omits or will omit to state any material fact necessary, in light of the circumstances under which it was made, in order to make the statements herein or therein not misleading. Section 3.29 Distributions or Dividends. Seller has not made any distributions or dividends to Parent outside of the ordinary course of its business or inconsistent with past practice on or after the Interim Balance Sheet Date through the Closing Date. ARTICLE IV REPRESENTATIONS AND WARRANTIES OF PURCHASER Purchaser represents and warrants to Seller that all of the statements contained in this Article IV are true and complete as of the date of this Agreement in all material respects (or, if made as of a specified date, as of such date): Section 4.1 Organization. Purchaser is a corporation duly organized, validly existing and in good standing under the laws of New York. - 21 - Section 4.2 Authorization. Purchaser has the requisite corporate power and authority to execute and deliver this Agreement and each Ancillary Agreement to which it is a party and to consummate the Transaction. No further action on the part of Purchaser is necessary to authorize the execution, delivery and performance by Purchaser of the foregoing agreements or the consummation of the Transaction. Section 4.3 Binding Agreement. This Agreement and each Ancillary Agreement to which Purchaser is party have been duly executed and delivered by Purchaser and, assuming due and valid authorization, execution and delivery thereof by Seller, each of the foregoing agreements is a valid and binding obligation of Purchaser, enforceable against Purchaser in accordance with its terms, except as such enforcement may be limited by (a) applicable bankruptcy, insolvency, reorganization, moratorium, fraudulent conveyance and other similar laws of general application now or hereinafter in effect relating to or affecting creditors' rights generally and (b) general principles of equity (regardless of whether enforceability is considered in a proceeding at equity or at law). Section 4.4 Consents and Approvals; No Violations. None of the execution, delivery or performance by Purchaser of this Agreement and each Ancillary Agreement to which Purchaser is party, the consummation by Purchaser of the Transaction, or compliance by Purchaser with any of the provisions hereof or thereof will (a) require any filing with Consent or Permit of any Governmental Authority, (b) result in a violation or breach of, or constitute (with or without due notice or the passage of time or both) a default (or give rise to any right of termination, amendment, cancellation or acceleration) under any Contract to which either Purchaser is party, or (c) violate any Order, statute, rule or regulation applicable to Purchaser, excluding from the foregoing clauses such violations, breaches or defaults which would not, individually or in the aggregate, have a material adverse effect on the ability of Purchaser to consummate the Transaction. Section 4.5 Brokers or Finders. Purchaser has not entered into any agreement or arrangement entitling any agent, broker, investment banker, financial advisor or other firm or Person to any broker's or finder's fee or any other commission or similar fee in connection with the Transaction, except for David Weld & Co. LLC, for which Purchaser shall be solely responsible. ARTICLE V COVENANTS Section 5.1 General Conduct of the Business. Except as otherwise required by this Agreement, during the period from the date of this Agreement to the Closing, Seller shall conduct its operations in the ordinary course of business consistent with recent past practice and in compliance with all material laws and regulations and use commercially reasonable efforts to preserve intact the business organization, keep its physical assets in reasonable condition, keep available the services of its current officers and employees and preserve its relationships with customers, suppliers and others having business dealings with it to the end that its goodwill and ongoing business shall not be impaired in any material respect. Without limiting the generality of the foregoing, prior to the Closing and except as required by this Agreement, Seller shall not, - 22 - without the prior written consent of Purchaser which consent shall not be unreasonably withheld or delayed: (a) issue, sell or deliver, or agree or commit to issue, sell or deliver (whether through the issuance or granting of options, warrants, commitments, subscriptions, rights to Purchaser or otherwise) or authorize the issuance, sale or delivery of, or redeem or repurchase, any stock or other securities of Seller or any rights, warrants or options to acquire any such stock or other securities; (b) create, incur or assume any indebtedness (including obligations in respect of capital leases) other than ordinary trade payables incurred in the ordinary course of business; assume, guarantee, endorse or otherwise become liable or responsible (whether directly, contingently or otherwise) for the obligations of any other person or entity; or make any loans, advances or capital contributions to, or investments in, any other person or entity; (c) increase any manner the compensation or fringe benefits of, or materially modify the employment terms of, its directors, officers or employees, generally or individually, or pay any bonus or other benefit to its directors, officers or employees; (d) hire any new or additional employees; (e) acquire, sell, lease, license or dispose of any assets or property (including without limitation any shares or other equity interests in or securities of any corporation, partnership, association or other business organization or division thereof), other than licenses, purchases and sales of assets in the ordinary course of business and consistent with past practice; (f) mortgage or pledge any of its property or assets or subject any such property or assets to any security interest or encumbrance; (g) discharge or satisfy any security interest or encumbrance or pay or assume any obligation or liability other than in the ordinary course of business and consistent with past practice; (h) enter into any contract, agreement or commitment where Seller would have monetary obligations in excess of $10,000 individually or $50,000 in the aggregate (except for renewals of client contracts existing on the date hereof); (i) amend, terminate, take or omit to take any action that would constitute a violation of or default under, or waive any rights under, any material contract or agreement; (j) make or commit to make any capital expenditure in excess of $10,000 per item or $50,000 in the aggregate; (k) institute or settle any action, suit, proceeding, claim, arbitration or investigation before any Governmental Authority or arbitrator; (l) take any action or fail to take any action permitted by this Agreement with the knowledge that such action or failure to take action would result in (i) any of the - 23 - representations and warranties of Seller set forth in this Agreement becoming untrue or (ii) any of the conditions set forth in Article VI not being satisfied; (m) agree in writing or otherwise to take any of the foregoing actions; or (n) make or commit to make any distributions or dividends to Parent outside the ordinary course of business or inconsistent with past practice. Section 5.2 Gail H. Clarke. Seller agrees that Gail H. Clarke, as General Manager of Seller, shall report directly to Jeffrey Cavins, President and Chief Executive of Seller, with respect to the day-to-day operations of the Business, provided, however, that, to the extent consistent with Seller's obligations under Law, Seller shall permit Gail H. Clarke, in her role as its General Manager, operational autonomy with respect to the operation of the Business and autonomy from the Seller's requisition process, including, but not limited to the "EREQ" process; provided, however, that Ms. Clarke shall not take any action or omit to take any action that will directly violate or breach or cause Seller to violate or breach any of the terms or provisions of Section 5.1 hereof. Notwithstanding anything herein to the contrary, nothing herein shall be deemed to alter Gail H. Clarke's status as an employee at will of Seller and nothing herein shall be deemed to alter or diminish Gail H. Clarke's fiduciary duty to Seller. Section 5.3 Access Before Closing. (a) From the date of this Agreement through the Closing, upon reasonable advance notice, Seller shall (i) permit Purchaser to make such inspections and to make copies of such books and records relating to the Business at its own expense as it may reasonably require; and (ii) furnish Purchaser with such financial and operating data and other information concerning the Business as Purchaser may from time to time reasonably request. Purchaser and its authorized representatives shall conduct all such inspections in a manner that will minimize disruptions to the operation of the Business. (b) Purchaser agrees that it will, and will cause its representatives to, use any information obtained pursuant to this Section 5.3 only in connection with the consummation of the Transaction and the other transactions contemplated by this Agreement. Section 5.4 Reasonable Efforts and Further Assurances. (a) Prior to the Closing, upon the terms and subject to the conditions of this Agreement, Purchaser and Seller shall use their respective commercially reasonable efforts to take, or cause to be taken, all actions, and to do, or cause to be done and cooperate with each other in order to do, all things necessary, proper or advisable (subject to any applicable laws) to satisfy the conditions to Closing and to consummate the Closing and the Transaction as promptly as practicable, including, but not limited to, (i) the preparation and filing of all forms, registrations and notices required to be filed to consummate the Closing and the Transaction; (ii) the taking of such actions as are necessary to obtain any Permits or Consents required to be made or obtained in connection with the Transaction; and (iii) the execution of any additional documents or instruments which may be necessary or appropriate to carry out the provisions of this Agreement. In addition, no party hereto shall take any action after the date hereof that could - 24 - reasonably be expected to materially delay the obtaining of, or result in not obtaining, any Permit or Consent required to be obtained prior to Closing. (b) Prior to the Closing, each party shall promptly consult with the other party hereto with respect to, provide any necessary information with respect to and provide the other party (or their respective counsel) with copies of, all filings made by such party with any Governmental Authority or any other information supplied by such party to a Governmental Authority in connection with this Agreement and the Transaction. Each party hereto shall promptly inform the other party, and if applicable, provide the other party with copies, of any written or oral communication received by such party, from any Governmental Authority regarding the Transaction. If any party hereto or Affiliate thereof receives a request for additional information or documentary material from any such Governmental Authority with respect to the Transaction, then such party shall endeavor in good faith to make, or cause to be made, as soon as reasonably practicable and after consultation with the other party, an appropriate response in compliance with such request. To the extent that transfers, amendments or modifications of Permits are required as a result of the execution of this Agreement or consummation of the Transaction, Seller shall use commercially reasonable efforts to effect such transfers, amendments or modifications. Section 5.5 Employee Benefits. Schedule 3.14(d) sets forth the employees of the Business to whom Purchaser will make offers of employment (the "Designated Employees"). Prior to the Closing Date, Purchaser shall make an offer of employment (to be effective as of the Closing Date) to each Designated Employee on terms substantially comparable to those set forth on Schedule 3.14(d). Those Designated Employees who accept such offers of employment shall be referred to herein as the "Transferred Employees." Purchaser's employment of those Designated Employees who accept offers of employment shall commence on the Closing Date. Section 5.6 Publicity. (a) Seller and Purchaser will consult with each other and will mutually agree upon any press release or public announcement pertaining to the Transaction and shall not issue any such press release or public announcement prior to such consultation and agreement, except as may be required by applicable Law, including federal and state securities laws, or reasonably deemed necessary or appropriate by Seller or its Parent as a result of it being a publicly-traded company. (b) Seller shall cause Parent to issue a public announcement regarding the execution of this Agreement, which public announcement shall be made within three business days after the execution hereof. Section 5.7 Access to Books and Records After Closing. (a) On and for so long as the statute of limitations of any Third Party Claims as it relates to this Agreement would apply after the Closing, during normal business hours, Seller shall cooperate with Purchaser and its authorized representatives to provide them with access to, examine and/or make copies of all books and records of Seller relating to the Business which are not delivered to Purchaser pursuant hereto (including correspondence, memoranda, - 25 - books of account and the like) and relating to transactions or events occurring prior to the date hereof to the extent that such access is not prohibited by Law. (b) On and for so long as the statute of limitations of any Third Party Claims as it relates to this Agreement would apply after the Closing, during normal business hours, Purchaser shall cooperate with Seller and make available to Seller such documents, books, records or information transferred to Purchaser and relating to the Business prior to the Closing as Seller or any of its Affiliates may reasonably request after the Closing in connection with any Tax determination or contractual obligations to Third Parties or to defend or prepare for the defense of any Claim against Seller or to prosecute or prepare for the prosecution of Claims against Third Parties by Seller relating to the Business prior to the Closing or in connection with any governmental investigation of Seller or any of its Affiliates by a Governmental Authority. (c) Each party will direct its employees to render reasonable assistance which the other party may request in examining or utilizing records referred to in this section, provided that each party shall be reimbursed by the other for any out-of-pocket costs and expenses which it may incur in rendering the services provided for in this section. Section 5.8 Noncompetition. Except as otherwise contemplated by this Agreement, Seller shall not, and shall not permit its Parent, any Subsidiary, or any other Affiliate to, without the written consent of Purchaser, at any time during the three-year period after Closing, directly or indirectly own, manage, control, or participate in the ownership, management or control of any business that is competitive with the Business, including the restoration, preservation and remastering of analog magnetic audio and video tapes into newer analog and digital tape formats (other than ownership of 5% or less of any publicly-traded company that engages in such business), except that nothing in this covenant shall be deemed to prevent Parent and/or any Affiliate of Parent from engaging in the ordinary course of its business in any business historically conducted by Parent or its Affiliates (except those that were performed solely by Seller), including, without limitation, providing music and video encoding and hosting services, webcasting services, digital media distribution and promotional services, digital media content management services, music and video samples, or online radio solutions, or restoring and remastering magnetic audio or video tapes owned by Seller or Parent. Section 5.9 Designated Prospects. Seller and Purchaser agree that to the extent that any of Seller's previous discussions with The Boeing Company or Yahoo! Inc. or any of their Affiliates mature into a contract to perform services, Seller shall cause Parent to direct to Purchaser the business which the parties previously contemplated would be performed by Seller. Section 5.10 Government Contracts. Seller shall be responsible for and manage any and all efforts related to the novation and transfer of the Government Contracts from Seller to Purchaser. Any and all costs and expenses authorized by Seller relating to the transfer of the Government Contracts shall be borne by Parent. To the extent that all right, title and interest in and to the Government Contracts and any related Bids have not been irrevocably transferred on the Closing Date to Purchaser, Seller agrees not to dissolve its business and not to take any other action that would impede the transfer of such rights to Purchaser. - 26 - Section 5.11 Museum Equipment. (a) Seller shall promptly commence diligent negotiations with Lindner with respect to Seller's rights and title to the Museum Equipment, and Purchaser and Gail H. Clarke shall continue to refrain from any and all contact with Lindner with respect to the Museum Equipment. In the event Seller is unable to achieve a negotiated agreement with Lindner satisfactory to Seller and Purchaser within 45 days of the Closing Date, Seller shall commence arbitration proceedings with Lindner pursuant to the terms of the Stock Purchase Agreement, dated June 14, 2000, among Parent, Seller and Lindner (the "Lindner Stock Purchase Agreement"). (b) Purchaser and Seller agree that the Escrow Funds held in escrow pursuant to the Escrow Agreement shall be released to Seller if the following events occur: (i) in the event and to the extent Seller obtains the ability to transfer good and marketable title to all (but not less than all) the Museum Equipment, free and clear of all Liens, pursuant to a binding decision of an arbitrator or a nonappealable order of a court; or (ii) in the event that Lindner consents in writing to the transfer of all (but not less than all) the Museum Equipment by Seller to Purchaser and such consent is subject to only two conditions: (1) so long as Purchaser's business is financially solvent (defined to mean it has a positive net worth), which solvency shall be conclusively presumed by the delivery to Lindner of a certificate to such effect executed by Purchaser's independent accounting firm not more frequently than once per year after the end of Purchaser's fiscal year, Purchaser may possess and use the Museum Equipment in its business at any location in the discretion of Purchaser without interruption by Lindner or any Third Parties claiming by or through him, and (2) at such time as Purchaser should sell its business (either through a stock sale or an asset sale), Lindner shall be granted a one time option to compel Purchaser to transfer the Museum Equipment to a non-profit museum entity, all of which rights shall expire if the option is not exercised within twenty (20) days of written notice or if Lindner is unable to provide Purchaser with a written commitment of a museum to take delivery of the Museum Equipment within such twenty (20) day period, and, in the event of any such exercise of such option, Lindner shall or shall cause the recipient of the Museum Equipment to pay all of Purchaser's out of pocket costs and expenses in connection with its compliance herewith; provided, however, if Seller presents conditions that are different from but substantially similar to the conditions above, Purchaser hereby agrees that it shall work in good faith with Seller to accomplish the mutual objectives of the parties. (c) If, (i) by that date which shall be the twelve-month anniversary of the date of execution of this Agreement (the "Escrow Termination Date"), Seller has failed to achieve either (b)(i) or (ii) above, or (ii) at any time Seller is unable to provide Purchaser with free access and use of all (but not less than all) the Museum Equipment pursuant to the terms of the Museum Lease, then the Escrow Fund shall be returned to Purchaser, and Seller shall dispose of or have - 27 - free use of the Museum Equipment as it deems fit and any such disposition or use of the Museum Equipment shall not be deemed to violate the non-competition provisions of Section 5.8. Section 5.12 Notification of Certain Matters. (a) From time to time prior to the Closing, Seller shall promptly supplement or amend the Disclosure Schedule with respect to any matter arising after the delivery thereof pursuant hereto that, if existing at, or occurring on, the date of this Agreement, would have been required to be set forth or described in the Disclosure Schedule. No supplement or amendment of the Disclosure Schedule made after the execution hereof by Purchaser pursuant to this section or otherwise shall be deemed to cure any breach of any representation of or warranty made pursuant to this Agreement. (b) Each party shall give notice to the other promptly after becoming aware of (i) the occurrence or non-occurrence of any event whose occurrence or non-occurrence would be likely to cause either (A) any representation or warranty made by the notifying party contained in this Agreement to be untrue or inaccurate in any material respect at any time from the date hereof to the Closing Date or (B) any condition set forth in Article VI to be satisfied by the notifying party to be unsatisfied in any material respect at any time from the date hereof to the Closing Date and (ii) any failure of the notifying party or any officer, director, employee or agent thereof, to comply with or satisfy any covenant, condition or agreement to be complied with or satisfied by it hereunder; provided, however, that (x) the delivery of any notice pursuant to this section shall not limit or otherwise affect the remedies available hereunder to the party receiving such notice and (y) such notice shall not be required from and after the time the party to whom such notice is to be given has Knowledge of the information required to be included in such notice. (c) Seller shall deliver to Purchaser copies of (i) all audit reports, letter rulings, technical advice memoranda and similar documents issued by a Governmental Authority relating to Taxes due from or with respect to the Business and (ii) any closing agreements entered into by or on behalf of Seller relating to the Business with any taxing authority, which come into the possession of Seller after the date hereof. Section 5.13 Subsequent Actions. (a) If at any time after the Closing Purchaser will consider or be advised that any deeds, bills of sale, instruments of conveyance, assignments, assurances or any other actions or things are necessary or desirable to vest, perfect or confirm ownership (of record or otherwise) in Purchaser, its right, title or interest in, to or under any or all of the Assets or otherwise to carry out this Agreement, Seller shall execute and deliver all deeds, bills of sale, instruments of conveyance, powers of attorney, assignments and assurances and take and do all such other actions and things as may be reasonably requested by Purchaser in order to vest, perfect or confirm any and all right, title and interest in, to and under such rights, properties or assets in Purchaser or otherwise to carry out this Agreement. (b) In case at any time after the Closing Date any further action is necessary, proper or advisable to carry out the purposes of this Agreement, as soon as reasonably - 28 - practicable, each party hereto shall take, or cause its proper officers or directors to take, all such necessary, proper or advisable actions. Section 5.14 Waiver of Bulk Sales Requirement. Each of the parties waives compliance with any applicable bulk sales laws, including, without limitation, the Uniform Commercial Code Bulk Transfer provisions. Seller agrees to pay and discharge in due course and will indemnify and save harmless Purchaser, from and against all claims made by creditors of Seller, including expenses and attorneys' fees incurred by Purchaser in defending against such claims, except those expressly assumed by Purchaser pursuant hereto. The indemnification process set forth in Section 9.3 shall govern any indemnification required pursuant to this Section 5.14. Section 5.15 Purchaser's Conduct of the Business. From the Closing Date until the end of the Earn Out Period, Purchaser shall conduct its business in a commercially reasonable manner and not (i) accelerate or delay the sale of the products of, or provision of services by, Purchaser or the collection of accounts receivable or payment of accounts payable, except in the ordinary course of business consistent with past practice; or (ii) make any material change in accounting methods or principles or cost allocation procedures that affect in any material respect the financial statements of Purchaser. Section 5.16 Change of Seller's and Affiliates' Names. Immediately after Closing, Seller shall change its corporate name and that of any Affiliate, including Vidipax Inc. of Canada with a name containing the word "Vidipax" to such name not containing the word "VidiPax" or the words "VidiPax, Inc." Section 5.17 Email Forwarding and Transfer of Old Emails. (a) Seller agrees that, for up to one year, it will forward any and all emails sent to any of the Designated Employees that are received by Seller without any notation back to the sender that such employees are "former employees" or any similar designation. (b) Seller agrees that upon request by Purchaser at any time during the two-year period after Closing, which request shall be made in good faith and be commercially reasonable, Seller shall cause Parent to transfer to Purchaser such requested Old Emails using good faith and commercially reasonable efforts. The first eight hour period spent by Parent to effectuate the transfer of each category of Old Emails (i.e., by transaction or by recipient name) shall be free of charge to Purchaser, thereafter, the work shall be performed at a reasonable fee to be agreed upon by Parent and Purchaser. To the extent work to effectuate such transfer will exceed the eight hour period, Seller shall cause Parent to notify Purchaser of the number of hours such request may exceed the eight hour period and shall proceed with the portion of the transfer that extends beyond the eight hour period only upon prior approval from Purchaser. Section 5.18 Reimbursements. As soon as practicable after the date hereof and prior to the Closing, Seller shall cause Parent to fund Seller (i) an amount equal to the rental payment made by Seller to the Loft Lease Landlord in August, 2003 in the amount of $41,376.65, and (ii) an amount not greater than $14,000 representing sums for which Gail H. - 29 - Clarke personally expended on behalf of Seller and for which Seller will reimburse Ms. Clarke upon delivery to it of appropriate backup documentation. ARTICLE VI CONDITIONS Section 6.1 Conditions to Each Party's Obligation to Effect the Closing. The respective obligation of each party to effect the Closing is subject to the condition that there shall not be in effect at or prior to the Closing Date any Law or Order of any Governmental Authority of competent jurisdiction that prohibits the consummation of the Closing as provided herein; and there shall be no Order or injunction of a court of competent jurisdiction in effect precluding consummation of the Closing or the Transaction. Section 6.2 Conditions to the Obligation of Purchaser to Effect the Closing. The obligation of Purchaser to effect the Closing is subject to the satisfaction at or prior to the Closing Date of the following conditions, any one or more of which may be waived by Purchaser: (a) Representations and Warranties. All representations and warranties set forth in Article III shall be true and correct in all material respects, in each case, as of the date of this Agreement; (b) Performance. Seller shall have performed in all material respects all of its covenants and agreements under this Agreement to be performed or complied with on or prior to the Closing Date; (c) Material Adverse Effect. Except as a consequence of or as contemplated by the Agreement, since the date of the Agreement, there shall have not occurred any change or event which would be reasonably likely to have a Material Adverse Effect; (d) Officer's Certificate. Purchaser shall have received on the Closing Date a certificate dated the Closing Date and executed by the Chief Executive Officer or Chief Financial Officer of Seller certifying the fulfillment of the conditions specified in Sections 6.2(b), (c) and (e) hereof; (e) Consents. All Consents necessary to the consummation of the Closing and the Transaction, including Consents from Third Parties to Contracts and Consents from Governmental Authorities, shall have been obtained, and a copy of each such Consent shall have been provided to Purchaser at or prior to the Closing; (f) Lien Search; Release of Liens. Seller shall have delivered to Purchaser Lien searches in all applicable jurisdictions in which a security interest can be perfected relating to the Assets and any and all Liens on the Assets, including but not limited to Liens held by Silicon Valley Bank, and the tax judgment Lien held by the New York City Department of Finance, shall have been released and evidence of the same (satisfactory to Purchaser in its sole - 30 - discretion) shall have been delivered to Purchaser, provided, however, that the release of the Lien held by The Terminal Marketing Group, Inc. shall not be a condition to Closing; (g) Leaseholds. (i) The Fourth Floor Landlord shall have been provided with written notice in respect to the assignment of the Fourth Floor Lease to Purchaser; and (ii) The Fifth Floor Landlord shall have granted any required consent in respect to the assignment of the Fifth Floor Lease to Purchaser; (h) Corporate Approvals. The Board of Directors and the shareholder of Seller shall have approved the Transaction and the Board of Directors of Parent shall have approved the Guaranty, and respective resolutions evidencing same shall have been delivered to Purchaser, together with an incumbency certificate and other standard documentation; (i) Legal Opinion. Seller's counsel and Parent's counsel shall have delivered to Purchaser an opinion of counsel in form and substance reasonably acceptable to Purchaser; (j) Government Contracts Schedule. Seller shall have received consent from the relevant Governmental Authority pursuant to its applicable rules and regulations, with respect to the transfer of the Government Contracts (and related Bids) to Purchaser that permits Purchaser to be listed on the Government Contracts schedule. (k) Transfer of Records. Seller shall have transferred any and all Electronic Records (excluding the Old Emails) and hosting of Purchaser's website to a new server designated by Purchaser and evidence of same (satisfactory to Purchaser in its sole discretion) shall have been delivered to Purchaser and Seller shall have delivered to Purchaser any and all hard copies of all other books and records relating to the Business not otherwise expressly excluded from the Assets and Assumed Liabilities. (l) Consent to Name. Seller shall have executed and delivered to Purchaser a letter in form and substance acceptable to Purchaser consenting to Purchaser's use of the Name "VidiPax, Inc." (m) Ancillary Agreements. Seller and Parent shall have executed each Ancillary Agreement to which they are parties. Section 6.3 Conditions to the Obligation of Seller to Effect the Closing. The obligation of Seller to effect the Closing is subject to the satisfaction at or prior to the Closing Date of the following conditions, any one or more of which may be waived by Seller: (a) Representations and Warranties. All representations and warranties set forth in Article IV shall be true and complete in all material respects as of the date of this Agreement and as of the Closing Date; - 31 - (b) Performance. Purchaser shall have performed in all material respects all of its covenants and agreements under this Agreement to be performed or complied with on or prior to the Closing Date; (c) Material Adverse Effect. Except as a consequence of or as contemplated by the Agreement, since the date of the Agreement, there shall have not occurred any change or event which would be reasonably likely to have a material adverse effect on the condition, financial or otherwise, of Purchaser; (d) Officer's Certificate. Seller shall have received on the Closing Date a certificate dated the Closing Date and executed by the Purchaser certifying the fulfillment of the conditions specified in Sections 6.3(b) and (c) hereof; (e) Corporate Approvals. The Board of Directors of Purchaser shall have approved the Transaction and resolutions evidencing same shall have been delivered to Seller, together with an incumbency certificate and other standard documentation; (f) Legal Opinion. Purchaser's counsel shall have delivered to Seller an opinion of counsel in form and substance reasonably acceptable to Seller; (g) Leasehold. Seller shall have terminated the Loft Lease; (h) Ancillary Agreements. Purchaser shall have executed each Ancillary Agreement to which it is a party; and (i) Transferred Employees. Each of the Transferred Employees shall have executed resignations and releases in form and substance acceptable to Seller. ARTICLE VII THE CLOSING Section 7.1 The Closing. The closing of the Transaction (the "Closing") shall take place at the offices of Nixon Peabody LLP, 437 Madison Avenue, New York, New York 10022, on December 15, 2003 or as promptly as practicable following the execution of this Agreement and the satisfaction or waiver of each of the conditions set forth in Article VI. The date on which the Closing occurs is referred to herein as the "Closing Date." Section 7.2 Deliveries by Seller. At the Closing, Seller shall deliver or cause to be delivered to Purchaser: (a) a duly executed Bill of Sale and Assignment; (b) all documents of title and instruments of conveyance necessary to transfer to Purchaser all of Seller's rights, title and interest in and to the Assets, including assignments of all of Seller's rights in the Domain Names and any registrations of patents, trademarks, trade names, assumed names, service marks and copyrights, and all applications for any registration of - 32 - any of the foregoing, and all other Intellectual Property which are in each case owned by Seller and are Intellectual Property; (c) updated Disclosure Schedules; (d) the documents and instruments referred to in Section 6.2 hereof; and (e) such other documents as Purchaser may reasonably request. Section 7.3 Deliveries by Purchaser. At the Closing, Purchaser shall deliver or cause to be delivered to Seller: (a) The Purchase Price, less the amount to be retained by the Escrow Agent pursuant to the terms thereof and hereof; (b) a duly executed Instrument of Assumption of Liabilities; (c) the documents and instruments referred to in Section 6.3 hereof; and (d) such other documents as Seller may reasonably request. ARTICLE VIII TERMINATION Section 8.1 Termination. This Agreement may be terminated and the transactions contemplated hereby abandoned at any time prior to the Closing: (a) By mutual written consent of Purchaser and Seller; (b) By Purchaser or Seller if the Closing shall not have occurred on or before February 1, 2004 (provided that the right to terminate this Agreement under this Section 8.1(b) shall not be available to any party whose failure to fulfill any obligation under this Agreement has been the cause of, or resulted in, the failure of the Transaction to be consummated on or before such date); (c) By Seller, if (i) on the date of this Agreement, there shall have been a breach of any of the representations or warranties on the part of Purchaser contained in this Agreement which, individually or in the aggregate, has had or would reasonably be expected to have a material adverse effect on the ability of Purchaser to consummate the Transaction or (ii) prior to the Closing, there shall have been a breach of any covenant or agreement on the part of Purchaser contained in this Agreement which individually or in the aggregate has had or would reasonably be expected to have a material adverse effect on the ability of Purchaser to consummate the Transaction, in either case which breach, if capable of cure, shall not have been cured prior to thirty (30) days following notice thereof to Purchaser; or (d) By Purchaser, if (i) on the date of this Agreement, there shall have been a breach of any of the representations or warranties on the part of Seller contained in this - 33 - Agreement which, individually or in the aggregate, has had or would reasonably be expected to have a Material Adverse Effect, (ii) prior to the Closing, there shall have been a breach of any covenant or agreement on the part of Seller contained in this Agreement which, individually or in the aggregate, has had or would reasonably be expected to have a Material Adverse Effect, which breach, if capable of cure, shall not have been cured prior to thirty (30) days following notice thereof to Seller. Section 8.2 Effect of Termination. If this Agreement is terminated in accordance with Section 8.1, this Agreement shall become null and void and of no further force and effect, except that (i) the terms and provisions of this Section 8.2, Article IX (Indemnification), Section 10.1 (Fees and Expenses), Section 10.3 (Amendment and Modification), Section 10.4 (Notices), Section 10.6 (Entire Agreement; No Third Party Beneficiaries), Section 10.7 (Severability), Section 10.8 (Governing Law), Section 10.9 (Enforcement; Venue) and Section 10.12 (Assignment) shall remain in full force and effect and (ii) any termination of this Agreement shall not relieve any party hereto from any liability for any breach of its obligations hereunder. ARTICLE IX INDEMNIFICATION Section 9.1 Survival of Representations and Warranties. All of the representations and warranties of the parties contained in this Agreement, including the schedules hereto, shall survive the Closing and shall continue in full force and effect until the 12-month anniversary of the Closing Date, except that the representations and warranties contained in Section 3.15 (Employee Benefit Plans) and Section 3.16 (Tax Matters) shall survive until the expiration of the applicable statute of limitations. (a) Covenants and Agreements. All of the covenants and agreements of the parties shall survive the Closing and continue in full force and effect forever, or otherwise in accordance with their respective terms. (b) Timely Claims. Any claim for indemnification arising out of the breach of or inaccuracy of any representation or warranty contained in this Agreement, including the schedules hereto, must be made prior to the termination of the applicable time periods set forth under Section 9.1(a). Any representation or warranty as to which a claim for indemnification (including a contingent claim) shall have been asserted during the survival period shall continue in effect with respect to such claim until such claim shall have been finally resolved or settled. Section 9.2 Terms of Indemnification. Subject to the terms and provisions of this Article 9, (a) Seller shall indemnify the Purchaser, its Affiliates and its respective directors, officers, employees and agents (collectively, the "Purchaser Parties") against, and shall protect, defend and hold harmless the Purchaser Parties from, all Losses (whether arising from claims by third parties or otherwise incurred or suffered by the Purchaser Parties) arising out of, relating to or resulting from (i) any breach or inaccuracy of any of Seller's representations or warranties contained in this Agreement, including the schedules hereto (without giving effect to any amendment to the schedules), (ii) any failure by Seller to perform or comply with its covenants - 34 - or agreements contained in this Agreement, (iii) any claims brought by Lindner pursuant to the Lindner Stock Purchase Agreement; (iv) any failure by Seller to pay or perform when due the Excluded Liabilities, (v) any Losses arising from any Proceeding based on events or circumstances occurring prior to the Closing, and (vi) the Lien held by The Terminal Marketing Group, Inc. to the extent that the same has not been released prior to the Closing; and (b) Purchaser shall indemnify Seller, its Affiliates and their respective directors, officers, employees and agents (collectively, the "Seller Parties") against, and shall protect, defend and hold harmless the Seller Parties from, all Losses arising out of or resulting from (i) any breach or inaccuracy of any of Purchaser's representations or warranties contained in this Agreement, (ii) any failure by Purchaser to perform or comply with its covenants or agreements contained in this Agreement, (iii) any failure by Purchaser to pay or perform when due the Assumed Liabilities, and (iv) any Losses arising from any Proceeding based on events or circumstances occurring after the Closing. Section 9.3 Indemnification Procedures. The following provisions shall apply to claims for indemnification from and against Losses arising out of or related to any and all Proceedings made or brought by a Third Party (each, individually, a "Third Party Claim") against any indemnified party hereunder. The indemnified party shall promptly furnish the indemnifying party with notice of the Third Party Claim, including any documentation received by the indemnified party with respect to such claim, provided that the failure to notify the indemnifying party will not relieve the indemnifying party of any liability that it may have to the indemnified party, except to the extent that the indemnifying party demonstrates that the defense of such Third Party Claim is prejudiced by the indemnified party's failure to give such notice. The indemnifying party shall have the absolute right, in its sole discretion and expense, to elect to defend, contest or otherwise protect against any such Third Party Claim with legal counsel of its own selection. The indemnified party shall have the right, but not the obligation, to participate, at its own expense, in the defense of such Third Party Claim through counsel of its own selection and shall have the right, but not the obligation, to assert any and all cross-claims or counterclaims it may have in connection therewith. The indemnified party shall, and shall cause its Affiliates (and their respective directors, officers, employees, consultants and agents), to at all times cooperate in all reasonable ways with, make their relevant files and records available for inspection and copying by, and otherwise render reasonable assistance to, the indemnifying party in connection with (a) its defense of any Third Party Claim for which indemnity is sought under this Article 9 and (b) its prosecution under the immediately preceding sentence of any related claim, cross-claim, counterclaim or right of subrogation. In the event the indemnifying party fails to timely or properly defend, contest or otherwise protect against any such claim, the indemnified party shall have the right, but not the obligation, to defend, contest, assert cross-claims or counterclaims or otherwise protect against such Third Party Claim at the indemnifying party's expense. No Third Party Claim may be settled unless the indemnified party and the indemnifying party consent thereto in writing signed by or on behalf of each of them, such consent not to be unreasonably withheld. The indemnifying parties shall be subrogated to the claims or rights of the indemnified parties with respect to any Losses paid by any of the indemnifying parties under this Article 9. - 35 - Section 9.4 Limitations on Indemnification. (a) The maximum aggregate Losses payable by Seller in connection with claims for indemnification made pursuant to this Article IX shall be limited to an amount equal to the Purchase Price (the "Seller Cap"), provided that for the purpose of calculating the Seller Cap, the portion of the Purchase Price represented by amounts described in Section 2.3 shall be limited to amounts actually paid to and received by Seller or any Affiliate of Seller. (b) The maximum aggregate Losses payable by Purchaser in connection with claims for indemnification made pursuant to this Article IX shall be limited to an amount equal to the Purchase Price (the "Purchaser Cap"). (c) No Purchaser Party or Seller Party shall be entitled to make any claim for indemnification pursuant to this Article IX unless and until the aggregate amount of Losses with respect to all such claims that may be made by Purchaser Parties on the one hand, or Seller Parties on the other hand, pursuant to this Article IX exceeds Twenty-Five Thousand Dollars ($25,000) (the "Indemnification Threshold"), after which Seller or Purchaser, as the case may be, shall be liable only for the amount of Losses that exceed the Indemnification Threshold. Section 9.5 Additional Indemnification Provisions. (a) Notwithstanding anything in this Article IX to the contrary, none of the Seller Cap, the Purchaser Cap or the Indemnification Threshold shall apply to or against, and Seller or Purchaser, as applicable, shall be liable under this Article IX for, the entirety of any Losses resulting from, arising out of, in the nature of, or caused by: (i) any fraudulent, willful or intentional breach by a party of its representations or warranties set forth herein; (ii) any breach or inaccuracy in the representations and warranties of Seller contained in Section 3.16 (Tax Matters); or (iii) any breach or failure of a party to perform its obligations under Section 10.2. (b) The right to indemnification or other remedy based on any representations, warranties, obligations, covenants and agreements set forth in this Agreement, including the schedules hereto, will not be affected by any investigation conducted with respect to, or any notice or knowledge acquired (or capable of being acquired) at any time, whether before or after the date hereof or the Closing Date, with respect to the accuracy or inaccuracy of or compliance with, any such representation, warranty, covenant or agreement; provided, however, that Purchaser shall not have the right to seek indemnification for any breach or inaccuracy in the representations and warranties of Seller to the extent that Gail H. Clarke had actual knowledge prior to the Closing of such breach or inaccuracy. The waiver of any condition based on the accuracy of any representation or warranty, or on the performance of or compliance with any covenant or agreement, will not affect the right to indemnification or other remedy based on such representations, warranties, covenants and agreements. - 36 - (c) The indemnification obligations of the parties hereto shall constitute the sole and exclusive remedies of Purchaser and Seller, respectively, for the recovery of money damages with respect to matters described in this Agreement. Nothing in this Section 9.5(c) is intended to waive or otherwise limit any equitable or other remedies to which a party hereto may be entitled. (d) The parties hereto intend that each representation, warranty, covenant and agreement contained in this Agreement shall have independent significance. If any party hereto has breached any representation, warranty, covenant or agreement contained herein in any respect, the fact that there exists another representation, warranty, covenant or agreement relating to the same subject matter (regardless of the relative levels of specificity) which such party has not breached shall not detract from or mitigate the fact that such party is in breach of the first representation, warranty, covenant or agreement. ARTICLE X MISCELLANEOUS Section 10.1 Fees and Expenses. All costs and expenses incurred in connection with this Agreement and the consummation of the Transaction shall be paid by the party incurring such expenses, including, without limitation, all legal and accounting fees and expenses, except that Seller hereby agrees to pay up to $5,000 of Purchaser's out of pocket legal and accounting fees and expense related to the transaction contemplated by this Agreement. Section 10.2 Taxes. All Transfer Taxes arising out of, in connection with, or attributable to the Transaction, shall be borne and paid by Seller. Purchaser shall be responsible for all other Taxes attributable to, levied upon or incurred in connection with the Assets pertaining to the period (or that portion of the period) beginning immediately after the Closing Date. Seller shall be responsible for all other Taxes attributable to, levied upon or incurred in connection with the Assets pertaining to the period (or that portion of the period) prior to or on the Closing Date. The portion of Taxes attributable to, levied upon, or incurred in connection with the Assets related to the Pre-Closing Tax Period shall be deemed to be: (a) in the case of Taxes other than income and sales and use Taxes, the amount of such Taxes for the entire applicable Tax period multiplied by a fraction, the numerator of which is the number of days during the applicable Tax period that are in the Pre-Closing Tax Period, and the denominator of which is the number of days in the applicable Tax Period; and (b) in the case of income Taxes and sales and use Taxes, as determined from the books and records of Seller, between Pre-Closing and Post-Closing Tax Periods as though the taxable year of Seller terminated at the close of business on the Closing Date, and based on accounting methods, elections, and conventions that do not have the effect of distorting income and expenses. Section 10.3 Amendment and Modification. This Agreement may be amended, modified and supplemented in any and all respects, but only by a written instrument signed by all of the parties hereto expressly stating that such instrument is intended to amend, modify or supplement this Agreement. - 37 - Section 10.4 Notices. All notices and other communications hereunder shall be in writing and shall be deemed given when mailed, delivered personally, sent by facsimile (which is confirmed) or sent by an overnight courier service, such as Federal Express, to the parties at the following addresses (or at such other address for a party as shall be specified by such party by like notice): if to Purchaser, to: Gail Clarke Acquisition Co. Inc. 450 West 31st Street, 4th Floor New York, New York 10001 Attention: Gail H. Clarke Title: President and CEO Telephone: (212) 563-1999 Facsimile: (212) 563-1994 with a copy to: Nixon Peabody LLP 101 Federal Street Boston, Massachusetts 02110 Attention: Craig D. Mills Telephone: (617) 345-1219 Facsimile: (866) 947 1553 and if to Seller, to: VidiPax, Inc. c/o Loudeye Corp. 1130 Rainier Avenue South Seattle, Washington 98144 Attention: Jeffrey M. Cavins Title: President and Chief Executive Officer Telephone: (206) 832-4000 Facsimile: (206) 832-4020 - 38 - with a copy to: Robinson & Cole, LLP 695 East Main Street Stamford, Connecticut 06904 Attention: Eric J. Dale Telephone: (203) 462-7568 Facsimile: (203) 462-7599 Section 10.5 Counterparts; Facsimile Signatures. This Agreement may be executed in counterparts, all of which shall be considered one and the same agreement and shall become effective when two or more counterparts have been signed by each of the parties and delivered to the other parties. This Agreement may be executed by facsimile signatures which shall be considered originals. Section 10.6 Entire Agreement; No Third Party Beneficiaries. This Agreement and the Ancillary Agreements (a) constitute the entire agreement and supersede all prior agreements and understandings, both written and oral, among the parties with respect to the subject matter hereof and thereof and (b) are not intended to confer upon any Person other than the parties hereto and thereto any rights or remedies hereunder. Section 10.7 Severability. Any term or provision of this Agreement that is held by a court of competent jurisdiction or other authority to be invalid, void or unenforceable in any situation in any jurisdiction shall not affect the validity or enforceability of the remaining terms and provisions hereof or the validity or enforceability of the offending term or provision in any other situation or in any other jurisdiction. If the final judgment of a court of competent jurisdiction or other authority declares that any term or provision hereof is invalid, void or unenforceable, the parties agree that the court making such determination shall have the power to reduce the scope, duration, area or applicability of the term or provision, to delete specific words or phrases, or to replace any invalid, void or unenforceable term or provision with a term or provision that is valid and enforceable and that comes closest to expressing the intention of the invalid or unenforceable term or provision. Section 10.8 Governing Law. This Agreement shall be governed by and construed in accordance with the laws of the State of New York without giving effect to the principles of conflicts of law thereof. Section 10.9 Enforcement; Venue. The parties agree that irreparable damage would occur in the event that any of the provisions of this Agreement were not performed in accordance with their specific terms or were otherwise breached. It is accordingly agreed that the parties shall be entitled to an injunction or injunctions to prevent breaches of this Agreement and to enforce specifically the terms and provisions of this Agreement in any court of the United States located in the State of New York or in New York state court, this being in addition to any other remedy to which they are entitled at law or in equity. In addition, each of the parties hereto (a) consents to submit itself to the personal jurisdiction of any federal court located in the State of New York or any New York state court in the event any dispute arises out of this Agreement or the Transaction, (b) agrees that it shall not attempt to deny or defeat such personal jurisdiction - 39 - by motion or other request for leave from any such court and (c) agrees that it shall not bring any action relating to this Agreement or the Transaction in any court other than a federal or state court sitting in the State of New York Section 10.10 Extension; Waiver. At any time prior to the Closing Date, the parties may (a) extend the time for the performance of any of the obligations or other acts of the other parties, (b) waive any inaccuracies in the representations and warranties of the other parties contained in this Agreement or in any document delivered pursuant to this Agreement or (c) waive compliance by the other party with any of the agreements or conditions contained in this Agreement. Any agreement on the part of a party to any such extension or waiver shall be valid only if set forth in an instrument in writing signed on behalf of such party. The failure of any party to this Agreement to assert any of its rights under this Agreement or otherwise shall not constitute a waiver of those rights. Section 10.11 Election of Remedies. Neither the exercise of nor the failure to exercise a right of set-off or to give notice of a claim under this Agreement will constitute an election of remedies or limit Purchaser, or any of Purchaser Indemnified Parties, in any manner in the enforcement of any other remedies that may be available to any of them, whether at law or in equity. Section 10.12 Assignment. Except as expressly set forth herein, neither this Agreement nor any of the rights, interests or obligations hereunder shall be assigned by either of the parties hereto (whether by operation of law or otherwise) without the prior written content of the other party. Subject to the preceding sentence, this Agreement shall be binding upon, inure to the benefit of and be enforceable by the parties and their respective successors and assigns. Section 10.13 Tax Disclosure. Notwithstanding anything herein to the contrary, any party may disclose this Agreement (and any employee, representative or other agent of such party) may disclose to any and all persons, without limitation of any kind, the Tax treatment and Tax structure of the Transaction and all materials of any kind (including opinions or other tax analyses) that were provided to it relating to such Tax treatment and Tax Structure, except that (a) Tax treatment and Tax structure shall not include the identity of any existing or future party (or any Affiliate of such party) to this Agreement and (b) this provision shall not permit disclosure to the extent that non-disclosure is necessary in order to comply with applicable securities laws. [SIGNATURE PAGE TO FOLLOW] - 40 - IN WITNESS WHEREOF, Purchaser and Seller have executed this Agreement under seal as of the date first written above. PURCHASER: GAIL CLARKE ACQUISITION CO. INC. By:__________________________________ Name: Gail H. Clarke Title: President and Chief Executive Officer SELLER: VIDIPAX, INC. By:__________________________________ Name: Title: EXHIBIT A BILL OF SALE AND ASSIGNMENT BILL OF SALE AND ASSIGNMENT, made, executed and delivered as of __________ __, 2003 by VidiPax, Inc., a New York corporation ("Grantor"), in favor Gail Clarke Acquisition Co. Inc., a New York corporation ("Grantee"). WHEREAS, Grantor and Grantee are parties to an Asset Purchase Agreement, dated as of October 31, 2003 (the "Asset Purchase Agreement"), providing for, among other things, the sale, transfer, conveyance, assignment and delivery to Grantee of the entire right, title and interest of Grantor in the Assets, for consideration in the amount and on the terms and conditions provided in the Asset Purchase Agreement (capitalized terms used and not otherwise defined in this Bill of Sale and Assignment shall have the meanings ascribed to such terms in the Asset Purchase Agreement); WHEREAS, all of the terms and conditions precedent provided in the Asset Purchase Agreement have been met and performed or waived by the respective parties thereto, and such parties now desire to carry out the intent and purpose of the Asset Purchase Agreement by, among other things, Grantor's execution and delivery to Grantee of this Bill of Sale and Assignment; and WHEREAS, this Bill of Sale and Assignment is made, executed and delivered pursuant to and in accordance with the Asset Purchase Agreement, the terms of which shall not be merged hereinto but shall survive the execution hereof as and to the extent provided therein. NOW, THEREFORE, in consideration of the premises and of other valuable consideration to Grantor in hand paid by Grantee, at or before the execution and delivery hereof, the receipt and sufficiency of which by Grantor is hereby acknowledged, Grantor hereby agrees as follows: Section 1. Grantor does hereby sell, assign, transfer, convey and deliver to Grantee all of Grantor's right, title and interest in, the Assets. Section 2. Subject to the terms and conditions of the Asset Purchase Agreement, Grantor hereby covenants that, from time to time after the delivery of this Bill of Sale and Assignment, at Grantee's request and without further consideration, Grantor will do, execute, acknowledge and deliver, or will cause to be done, executed, acknowledged and delivered, all such further acts, deeds, transfers, conveyances, assignments, powers of attorney and instruments of further assurances as may reasonably be necessary to carry out the provisions of this Bill of Sale and Assignment, and to put Grantee in possession of, all of Grantor's right, title and interest in and to the Assets, except as specifically provided in the Agreement, and, in the case of Contracts and rights, if any, which cannot be effectively transferred to Grantee without the consent of Third Parties, to endeavor to obtain such consents promptly and if any be unobtainable, to use commercially reasonable efforts to assure to Grantee the benefits thereof A-1 (provided, that Grantee shall agree to perform the obligations of Grantor arising thereunder to the extent Grantee has control over the resources required to do so). Section 3. Notwithstanding any of the foregoing provisions, this instrument shall not constitute an assignment to Grantee of any claim (including claims for refunds of taxes), contract, license, lease, commitment, customer order or purchase order if an attempted assignment of the same without the consent of the other party thereto would constitute a breach thereof or in any way impair the rights of Grantee thereunder. Section 4. Nothing in this Bill of Sale and Assignment, express or implied, is intended or shall be construed to confer upon, or to give to, any person, firm or corporation other than Grantee and its successors and assigns, any remedy or claim under or by reason of this Bill of Sale and Assignment or any terms, covenants or conditions hereof, and all the terms, covenants and conditions, promises and agreements contained in this Bill of Sale and Assignment shall be for the sole and exclusive benefit of Grantee and its successors and assigns. Section 5. This Bill of Sale and Assignment is executed by Grantor and Grantee, and shall be binding upon, Grantor, Grantee and their respective successors and assigns, for the uses and purposes above set forth and referred to, effective immediately upon its delivery to Grantee. Section 6. This Bill of Sale and Assignment shall be governed by and construed and enforced in accordance with the laws of the State of New York without giving effect to the principles of conflicts of law thereof. [SIGNATURE PAGE TO FOLLOW] A-2 IN WITNESS WHEREOF, Grantor has caused this Bill of Sale and Assignment to be signed by its duly authorized officer under seal as of the date first written above. VIDIPAX, INC. By:__________________________________ Name: Title: Agreed and accepted as of the date first written above. GAIL CLARKE ACQUISITION CO. INC. By:__________________________________ Name: Gail H. Clarke Title: President and Chief Executive Officer EXHIBIT B INSTRUMENT OF ASSUMPTION OF LIABILITIES INSTRUMENT OF ASSUMPTION OF LIABILITIES made, executed and delivered as of __________ ___, 2003, by Gail Clarke Acquisition Co. Inc., a New York corporation ("Purchaser"), in favor of VidiPax, Inc., a New York corporation ("Seller"). WHEREAS, Seller and Purchaser are parties to an Asset Purchase Agreement, dated as of October 31, 2003 (the "Asset Purchase Agreement"), providing for, among other things, the assumption by Purchaser of certain liabilities and obligations of Seller on the terms and conditions provided in the Asset Purchase Agreement (capitalized terms used and not otherwise defined in this Instrument of Assumption of Liabilities shall have the meanings ascribed to such terms in the Asset Purchase Agreement); WHEREAS, all of the terms and conditions precedent provided in the Asset Purchase Agreement have been met and performed or waived by the respective parties thereto, and such parties now desire to carry out the intent and purpose of the Asset Purchase Agreement by, among other things, Purchaser's execution and delivery to Seller of this Instrument of Assumption of Liabilities; and WHEREAS, this Instrument of Assumption of Liabilities is made, executed and delivered pursuant to and in accordance with the Asset Purchase Agreement, the terms of which shall not be merged hereinto but shall survive the execution hereof as and to the extent provided therein. NOW, THEREFORE, in consideration of the premises and of other valuable consideration, the receipt and sufficiency of which is hereby acknowledged, Purchaser hereby agrees as follows: Section 1. Purchaser, by this Instrument of Assumption of Liabilities, hereby assumes the Assumed Liabilities. Section 2. The assumption by Purchaser of the Assumed Liabilities shall not be construed, as between Purchaser on the one hand and the obligees of such Assumed Liabilities on the other hand, to defeat, impair or limit in any way any rights or remedies of Purchaser to contest or dispute the validity or amount thereof; provided, that this provision shall not in any way impair Seller's rights to indemnification from Purchaser with respect to the Assumed Liabilities pursuant to the Asset Purchase Agreement. Section 3. Subject to the terms and conditions of the Asset Purchase Agreement, from time to time after the delivery of this Instrument of Assumption of Liabilities, without further consideration, Purchaser will do, execute, acknowledge and deliver, or will cause to be done, executed, acknowledged and delivered, all such further acts, deeds, assignments, transfers, conveyances, powers of attorney and instruments of further assurances which Seller may reasonably request in order to more fully effectuate the assumption of the Assumed B-1 Liabilities provided for in this Instrument of Assumption of Liabilities. This Instrument of Assumption of Liabilities is executed by, and shall be binding upon, Purchaser and its successors and assigns, for the uses and purposes above set forth and referred to, effective immediately upon its delivery to Seller. Section 4. This Instrument of Assumption of Liabilities shall be governed by and construed and enforced in accordance with the laws of the State of New York without giving effect to the principles of conflicts of law thereof. [SIGNATURE PAGE TO FOLLOW] B-2 IN WITNESS WHEREOF, Purchaser has caused this Instrument of Assumption of Liabilities to be signed under seal by its duly authorized officer as of the date first written above. GAIL CLARKE ACQUISITION CO. INC. By:__________________________________ Name: Gail H. Clarke Title: President and Chief Executive Officer Agreed and accepted as of the date first written above. VIDIPAX, INC. By:__________________________________ Name: Title: EXHIBIT C GUARANTY GUARANTY made, executed and delivered as of October 31, 2003 by Loudeye Corp., a Delaware corporation ("Guarantor"), in favor of Gail Clarke Acquisition Co. Inc., a New York corporation ("Company"). WHEREAS, VidiPax, Inc., a New York corporation and wholly owned subsidiary of Guarantor ("Seller") and Company are parties to an Asset Purchase Agreement dated as of October 31, 2003 (the "Asset Purchase Agreement"), pursuant to which the Seller has agreed to sell to Company, and Company has agreed to purchase, the Assets, for consideration in the amount and on the terms and conditions, provided in the Asset Purchase Agreement (capitalized terms used and not otherwise defined in this Guaranty shall have the meaning ascribed to such terms in the Asset Purchase Agreement); WHEREAS, Company has relied upon the execution and delivery of this Guaranty by Guarantor in entering into the Asset Purchase Agreement; and WHEREAS, the Guaranty is made, executed and delivered pursuant to and in accordance with the Asset Purchase Agreement, the terms of which shall not be merged hereinto but shall survive the execution hereof as and to the extent provided herein. NOW, THEREFORE, in consideration of the premises and of other valuable consideration accruing to Guarantor, the receipt and sufficiency of which are hereby acknowledged, and intending to be legally bound hereby, Guarantor hereby makes the following representations and warranties to Company and hereby covenants and agrees with Company as follows: Section 1. Guarantor, as primary obligor and not merely as surety, hereby absolutely, irrevocably and unconditionally guarantees the full and prompt payment and performance or discharge when due of all obligations and liabilities of Seller now existing, hereafter incurred under, arising out of or in connection with the Asset Purchase Agreement and the Ancillary Agreements related thereto (collectively, the "Guaranteed Obligations"). This Guaranty shall become effective upon execution and shall remain in full force and effect until all of the Guaranteed Obligations have been fully paid, performed or discharged by Guarantor. Section 2. Guarantor hereby waives notice of any obligation or liability to which this Guaranty may apply, and waives presentment, demand of payment, protest, notice of dishonor or non-payment of any such obligation or liability, suit or taking of other action by Seller against, and any other notice to any party liable thereon (including Guarantor). Section 3. The Guaranteed Obligations are absolute and unconditional and shall be enforceable against Guarantor to the fullest extent set forth herein. C-1 Section 4. While this Guaranty is in full force and effect pursuant to Section 1 hereof, it shall not be affected by or impaired by any of the following: (a) the occurrence or continuance of any event of bankruptcy, reorganization or insolvency with respect to Seller, or the dissolution, liquidation or winding up of Seller; (b) the exercise, non-exercise or delay in exercising, by Company or any of its rights and remedies under this Guaranty or the Asset Purchase Agreement; (c) any sale, transfer or other disposition by Guarantor of any direct or indirect interest it may have in Seller; or (d) the absence of any notice to, or knowledge by, Guarantor of the existence or occurrence of any of the matters or events set forth in the foregoing clauses. Section 5. Guarantor makes the following representations, warranties and agreements: (a) Guarantor is a duly organized and validly existing corporation in good standing under the laws of the State of Washington, has all requisite power and authority to own lease and operate its assets and properties and to carry on its business as it now is being conducted, and is duly qualified to do business and in good standing in each jurisdiction where failure to so qualify or be in good standing would have a material adverse effect on Guarantor. (b) Guarantor has all requisite power and authority to execute, deliver and perform the terms and provisions of this Guaranty. The execution and delivery of this Guaranty by Guarantor and the performance of the terms and provisions of the Guaranty have been duly and validly authorized by all necessary action required on the part of Guarantor and no other proceedings on the part of Guarantor are necessary to authorize this Guaranty. This Guaranty has been duly and validly executed and delivered by Guarantor and constitutes the legal, valid and binding obligation of Guarantor, enforceable against Guarantor, in accordance with its terms. (c) None of the execution, delivery or performance of the terms and provisions of this Guaranty (i) will contravene any provision of any law, statute, rule or regulation or any order, writ, injunction or decree of any court or governmental instrumentality, (ii) will conflict or be inconsistent with or result in any breach of any of the terms, covenants, conditions or provisions of or constitute a default under, or result in the creation or imposition of (or the obligation to create or impose) any lien upon any of the property or assets of Guarantor pursuant to the terms of any indenture, mortgage, deed of trust, credit agreement, loan agreement or any other agreement, contract or instrument to which Guarantor is a party or by which it or any of its property or assets is bound or which it may be subject or (iii) will violate any provision of its organizational documents. (d) No consent, authorization or approval of, declaration, filing or registration with, or notice to, any Governmental Authority is necessary for the execution, delivery or performance of the terms and provisions of this Guaranty, other than (i) such C-2 consents, authorizations, approvals, declarations, filings, registrations with, or notices, which, if not obtained or made, would not, individually or in the aggregate, prevent Guarantor from performing its material obligations under this Guaranty, (ii) such consents, authorizations, approvals, declarations, filings, registrations with, or notices which become applicable to Guarantor as a result of any facts that specifically relate to the business or activities in which Company (or any of its Affiliates) is or proposes to be engaged, and (iii) such consents, authorizations, approvals, declarations, filings, registrations with, or notices, which Seller is required to obtain in order to consummate the transactions contemplated by the Asset Purchase Agreement. (e) There are no actions, suits or proceedings pending or, to the knowledge of Guarantor, threatened, that are reasonably likely to materially and adversely affect the business, operations, property, assets or financial condition of Guarantor. (f) Guarantor is in compliance with all applicable statutes, regulations and orders of, and all applicable restrictions imposed by, all governmental bodies, domestic or foreign, in respect of the conduct of its business and the ownership or its property, except such noncompliance as would not, in the aggregate, have a material adverse effect on the business, operations, property, assets or financial condition of Guarantor or materially impair Guarantor's ability to perform its obligations hereunder. Section 6. The obligations of Guarantor hereunder are independent of the obligations of Seller with respect to all or any part of the Guaranteed Obligations and, in the event of any default hereunder, a separate action or actions may be brought and prosecuted against Guarantor. Section 7. All payments hereunder shall be made by Guarantor in currency and type of funds specified for payments in the Asset Purchase Agreement. Except as provided in the Asset Purchase Agreement, any and all payments made by Guarantor hereunder shall be made free and clear of and without deductions for any and all present and future taxes, levies, imposts, deductions, charges and withholdings, and all liabilities with respect thereto, or any set-off or counterclaim. Section 8. The obligations of Guarantor set forth herein constitute the full recourse obligations of Guarantor enforceable against Guarantor to the full extent of all the assets and the properties of Guarantor. Section 9. This Guaranty shall be binding upon Guarantor and its successors and assigns and shall inure to the benefit of Company and its successors and assigns; provided, however, that Guarantor may not assign or transfer any of its rights or obligations hereunder without the prior written consent of Company. Section 10. Neither this Guaranty nor any provision hereof may be changed, waived, discharged or terminated, except as specified in Section 1 or by an instrument in writing signed by Guarantor and Company. C-3 Section 11. Guarantor acknowledges that an executed (or conformed) copy of the Asset Purchase Agreement has been made available to its principal executive officers and such officers are familiar with the contents thereof. Section 12. All notices and other communications hereunder shall be made to Company or Guarantor, as the case may be, at the address, in the manner and with the effect provided in Section 10.4 of the Asset Purchase Agreement, or at such other address as may be notified in writing by Company or Guarantor, as the case may be, to the other. Section 13. This Guaranty and the rights and obligations of Company and Guarantor hereunder shall be governed by and construed and enforced in accordance with the laws of the State of New York without giving effect to the principles of conflicts of law thereof. [SIGNATURE PAGE TO FOLLOW] C-4 IN WITNESS WHEREOF, Guarantor has caused this Guaranty to be signed under seal by its duly authorized officer as of the date first written above. LOUDEYE CORP. By:__________________________________ Name: Title: Agreed and accepted as of the date first written above. GAIL CLARKE ACQUISITION CO. INC. By:__________________________________ Name: Gail H. Clarke Title: President and Chief Executive Officer EX-14.1 7 v96773exv14w1.txt EXHIBIT 14.1 EXHIBIT 14.1 CODE OF ETHICS This Code of Ethics is promulgated by the Board of Directors under Section 406 of the Sarbanes Oxley Act of 2002 and the rules of the SEC promulgated thereunder and applies to the chief executive officer, principal financial officer, principal accounting officer or controller, or persons performing similar functions. It contains standards reasonably necessary to promote: honest and ethical conduct, including the ethical handling of actual or apparent conflicts of interest between personal and professional relationships; full, fair, accurate, timely, and understandable disclosure in the periodic reports required to be filed by the issuer and in other public communications; and compliance with applicable governmental laws, rules and regulations. It should be read in conjunction with the company's Code of Business Conduct. You must: 1. Act with honesty and integrity, ethically handling actual or apparent conflicts of interest in personal and professional relationships. You should recognize that even the appearance of a conflict of interest can damage the company. A conflict of interest may exist because of a relationship of yours or of a family member that is inconsistent with the company's best interests or could cause a conflict with your ability to perform your job responsibilities. 2. Report to the Chairman of the Audit Committee any transaction that reasonably could be expected to give rise to a conflict of interest. 3. Produce, or cause to be produced, full, fair, accurate, timely, and understandable disclosure in reports and documents that the company files with or submits to the Securities and Exchange Commission and in other public communications. 4. Comply with applicable governmental laws, rules and regulations. 5. Promptly report any violation of this Code of Ethics to the Chairman of the Audit Committee. 6. Proactively promote ethical behavior by other company officers and employees involved in financial reporting. The Company reserves the right to determine when actual or potential conflicts of interest exist, and then to take any action, which in the sole judgment of the Company, is needed to prevent the conflict from continuing. You will be held accountable for your adherence to this Code of Ethics. Your failure to observe the terms of this Code of Ethics may result in disciplinary action, up to and including immediate termination of your employment. Any request by you for a waiver of any provision of this Code of Ethics must be in writing and addressed to the Chairman of the Audit Committee. The Board of Directors will have the sole and absolute discretionary authority to approve any waiver from this Code of Ethics. Any waiver for this Code of Ethics will be disclosed promptly on Form 8-K or any other means approved by applicable SEC rules or listing standards. [BY SIGNING BELOW, [WHICH YOU WILL DO ANNUALLY,] YOU ACKNOWLEDGE THAT YOU HAVE READ, UNDERSTAND, AND AGREE TO ADHERE TO THIS CODE OF ETHICS.] BY:_________________________ NAME: ______________________ Title: _______________________ 81 EX-21.1 8 v96773exv21w1.txt EXHIBIT 21.1 EXHIBIT 21.1 SUBSIDIARIES OF REGISTRANT Name: Vidipax, Inc. Jurisdiction of incorporation Or organization: New York - ------------------------------------------------ Other Business Names: N/A Name: Loudeye Technologies UK Ltd. Jurisdiction of incorporation Or organization: United Kingdom Other Business Names: N/A - ------------------------------------------------ Name: Loudeye Enterprise Communications Jurisdiction of incorporation Or organization: Delaware Other Business Names: N/A - ------------------------------------------------ Name: Loudeye Sample Services, Inc. Jurisdiction of incorporation Or organization: Delaware Other Business Names: N/A - ------------------------------------------------ Name: Monstar Labs Limited Jurisdiction of incorporation Or organization: New Zealand Other Business Names: N/A - ------------------------------------------------ Name: Addition Systems, Inc. Jurisdiction of incorporation Or organization: Delaware Other Business Names: N/A - ------------------------------------------------ Name: TT Holding Corp. Jurisdiction of incorporation Or organization: Delaware Other Business Names: N/A - ------------------------------------------------ Name: Technology Education Network, Inc. Jurisdiction of incorporation Or organization: Delaware Other Business Names: Streampipe - ------------------------------------------------ Name: Rapid Infusion Corp. Jurisdiction of incorporation Or organization: New York Other Business Names: N/A - ------------------------------------------------ Name: SOS Technology Corp. Jurisdiction of incorporation Or organization: New York Other Business Names: N/A - ------------------------------------------------ Name: SPI Acquisition Corp. Jurisdiction of incorporation Or organization: New York Other Business Names: N/A - ------------------------------------------------ Name: TEN International, Inc. Jurisdiction of incorporation Or organization: Delaware Other Business Names: N/A EX-23.2 9 v96773exv23w2.txt EXHIBIT 23.2 EXHIBIT 23.2 CONSENT OF INDEPENDENT ACCOUNTANTS We hereby consent to the incorporation by reference in the Registration Statements on Form S-3 (No. 333-109174) and Form S-8 (No. 333-55508) of Loudeye Corp. of our report dated March 18, 2004 relating to the 2003 and 2002 financial statements, which appears in this Form 10-K. PricewaterhouseCoopers LLP Seattle, Washington March 18, 2004 82 EX-31.1 10 v96773exv31w1.txt EXHIBIT 31.1 EXHIBIT 31.1 CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002 I, Jeffrey M. Cavins, certify that: 1. I have reviewed this annual report on Form 10-K of Loudeye Corp. 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; 4. The registrant's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have: (a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; (b) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and (c) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors: (a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and (b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. Date: March 19, 2004 --------------------------------------- Jeffrey M. Cavins President and Chief Executive Officer (Principal Executive Officer) 83 EX-31.2 11 v96773exv31w2.txt EXHIBIT 31.2 EXHIBIT 31.2 CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002 I, Jerold J. Goade Jr., certify that: 1. I have reviewed this annual report on Form 10-K of Loudeye Corp. 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; 4. The registrant's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have: (a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; (b) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and (c) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors: (a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and (b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. Date: March 19, 2004 -------------------------------------------- Jerold J. Goade Jr. Senior Vice President of Finance (Principal Financial and Accounting Officer) 84 EX-32.1 12 v96773exv32w1.txt EXHIBIT 32.1 EXHIBIT 32.1 CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 In connection with the Annual Report of Loudeye Corp. (the "Company") on Form 10-5 for the year ending December 31, 2003 as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, Jeffrey M. Cavins, Chief Executive Officer and President of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that to the best of my knowledge: 1) The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and 2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company as of the date of the financial statements contained therein. - ---------------------------------------------- Jeffrey M. Cavins Chief Executive Officer and President March 19, 2004 85 EX-32.2 13 v96773exv32w2.txt EXHIBIT 32.2 EXHIBIT 32.2 CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 In connection with the Annual Report of Loudeye Corp. (the "Company") on Form 10-K for the year ending December 31, 2003 as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, Jerold J. Goade, Jr., Senior Vice President of Finance of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that to the best of my knowledge: 1) The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and 2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company as of the date of the financial statements contained therein. - ----------------------------------------- Jerold J. Goade, Jr. Senior Vice President of Finance March 19, 2004 86 -----END PRIVACY-ENHANCED MESSAGE-----


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


Common		67,852,142
(Class)		(Outstanding at February 29, 2004)


	High		Low

Year Ended December 31, 2003
First Quarter 2003	$	0.50	$	0.22
Second Quarter 2003		1.31		0.21
Third Quarter 2003		2.65		0.77
Fourth Quarter 2003		2.77		1.41

Year Ended December 31, 2002
First Quarter 2002	$	1.10	$	0.61
Second Quarter 2002		0.70		0.35
Third Quarter 2002		0.38		0.27
Fourth Quarter 2002		0.49		0.30



			Years Ended December 31,

			2003			2002			2001			2000			1999

Consolidated Statements of Operations Data
REVENUES			$	11,948		$	12,681		$	10,388		$	11,537		$	2,645
COST OF REVENUES				7,206			13,313			12,737			12,388			2,870

		Gross profit (loss)		4,742			(632	)		(2,349	)		(851	)		(225	)
OPERATING EXPENSES
	Research and development			1,688			3,159			9,719			6,784			1,248
	Sales and marketing			3,286			7,667			9,409			14,621			3,982
	General and administrative			7,778			11,375			11,102			8,079			3,612
	Amortization of intangibles and other assets			1,100			3,043			8,173			7,693			302
	Stock-based compensation			1,298			(383	)		359			5,409			1,554
	Special charges(1)			8,699			6,846			37,261			947			—

		Total operating expenses		23,849			31,707			76,023			43,533			10,698

OPERATING LOSS				(19,107	)		(32,339	)		(78,372	)		(44,384	)		(10,923	)
Increase in fair value of common stock warrants				(248	)		—			—			—			—
Other, net				181			1,177			1,976			4,860			21

NET LOSS				(19,174	)		(31,162	)		(76,396	)		(39,524	)		(10,902	)
Beneficial conversion feature				—			—			—			—			(14,121	)

NET LOSS ATTRIBUTABLE TO COMMON STOCKHOLDERS			$	(19,174	)	$	(31,162	)	$	(76,396	)	$	(39,524	)	$	(25,023	)

Net loss per share — basic and diluted			$	(0.39	)	$	(0.75	)	$	(1.84	)	$	(1.33	)	$	(4.62	)

Weighted average shares — basic and diluted(2)				49,797			41,393			41,429			29,774			5,411


	2003		2002		2001		2000		1999

Consolidated Balance Sheet Data
Cash, cash equivalents, restricted cash, and short-term investments	$	22,256	$	13,258	$	60,941	$	94,989	$	49,803
Working capital		16,781		7,883		55,753		90,018		44,032
Total assets		27,044		29,529		80,883		132,676		76,775
Long-term obligations, less current portion		2,135		591		22,532		7,324		1,963
Total stockholders’ equity		17,033		20,352		49,194		116,068		67,489


		Page
		Number

PART I
Item 1	Business		1
Item 2	Properties		13
Item 3	Legal Proceedings		13
Item 4	Submission of Matters to a Vote of Security Holders		14
PART II
Item 5	Market for Registrant’s Common Equity and Related Stockholder Matters		15
Item 6	Selected Consolidated Financial Data		15
Item 7	Management’s Discussion and Analysis of Financial Condition and Results of Operations and Risk Factors		17
Item 7A	Quantitative and Qualitative Disclosures about Market Risk		47
Item 8	Financial Statements and Supplementary Data		49
Item 9	Changes in and Disagreements with Accountants on Accounting and Financial Disclosure		86
Item 9A	Controls and Procedures		86
PART III
Item 10	Directors and Executive Officers of the Registrant		87
Item 11	Executive Compensation		87
Item 12	Security Ownership of Certain Beneficial Owners and Management		87
Item 13	Certain Relationships and Related Transactions		87
Item 14	Principal Accountant Fees and Services		87
PART IV
Item 15	Exhibits, Financial Statement Schedules, and Reports on Form 8-K		87
Exhibit Index			88
EXHIBIT 10.10
EXHIBIT 10.15
EXHIBIT 10.23
EXHIBIT 10.24
EXHIBIT 14.1
EXHIBIT 21.1
EXHIBIT 23.2
EXHIBIT 31.1
EXHIBIT 31.2
EXHIBIT 32.1
EXHIBIT 32.2


Item 4	*Submission of Matters to a Vote of Security Holders*


Item 5	*Market for Registrant’s Common Equity and Related Stockholder Matters*


Item 7	*Management’s Discussion and Analysis of Financial Condition and Results of Operations*


						% Increase
		2003		2002		(Decrease)

Digital Media services		$	10,065	$	9,528		5.6	%
Media Restoration services			1,883		3,153		(40.3	)%

	Total Revenue	$	11,948	$	12,681		(5.8	)%


	2003		2002

Goodwill impairment	$	5,307	$	—
Intangible and other asset impairments		685		1,437
Property and equipment impairments		670		2,029
Facilities related charges		658		1,490
Employee severance and termination benefits		501		1,890
Other restructuring charges		878		—

	$	8,699	$	6,846


	December 31,		Additional								December 31,
	2002		Accruals		Payments			Adjustments			2003

Employee severance	$	104	$	501	$	(409	)	$	(196	)	$	—
Facilities related charges		2,799		1,220		(1,787	)		(562	)		1,670
Other restructuring charges		—		878		(878	)		—			—

Total	$	2,903	$	2,599	$	(3,074	)	$	(758	)	$	1,670


						%
						Increase
		2002		2001		(Decrease)

Digital Media services		$	9,528	$	7,713		23.5	%
Media Restoration services			3,153		2,675		17.9	%

	Total Revenue	$	12,681	$	10,388		22.1	%


	2002		2001

Goodwill impairments	$	—	$	9,418
Intangible and other asset impairments		1,437		11,938
Property and equipment write-downs		2,029		6,534
Facilities related charges and other		1,490		6,194
Employee severance		1,890		3,177

	$	6,846	$	37,261


	2002			2001

Balance, beginning of year	$	2,939		$	310
Accruals		2,668			3,790
Paid during year		(2,704	)		(1,161	)

Balance, end of year	$	2,903		$	2,939


	*Application Services*


	*Hosting and Streaming Services*


	*Encoding Services*


Item 2	*Properties*



	Payments Due by Period

			Less than						After
	Total		1 year		1-3 years		4-5 years		5 years

Contractual Obligations
Long-term debt	$	3,000	$	1,000	$	2,000	$	—	$	—
Line of credit		1,285		1,285		—		—		—
Capital lease obligations(1)		491		322		169		—		—
Operating leases		3,613		2,238		1,375		—		—
Commitment to purchase equipment		1,500		1,500		—		—		—
Bandwidth and co-location purchase obligations(2)		686		517		169		—		—

Total contractual obligations	$	10,575	$	6,862	$	3,713	$	—	$	—


	*Our company has a short operating history and our industry is new and rapidly evolving, which makes it difficult to evaluate our business.*


	*Our quarterly financial results will continue to fluctuate making it difficult to forecast our operating results.*


	We may need to raise additional capital in the future, and if we are unable to secure adequate funds on terms acceptable to us, we may be unable to execute our business plan. If we raise additional capital, current stockholders may experience significant dilution.


	*Because we expect to continue to incur net losses, we may not be able to implement our business strategy and the price of our stock may decline.*


	*Our success is dependent on the performance and retention of our executive officers and key employees.*


	We face competition from “free” peer-to-peer services such as KaZaA and Morpheus, from emerging paid online music services delivered electronically, and from traditional retail music distributors.


	*Many of our competitors have substantially greater capital resources than we do.*


	*Online music distribution services in general are new and rapidly evolving and may not prove to be viable business models.*


	*We must provide digital rights management solutions that are acceptable to both content providers and consumers.*


	*Our business could be harmed by a lack of availability of popular content.*


	*The growth of our business depends on the increased use of the Internet for communications, electronic commerce and advertising.*


	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.


	More consumers are utilizing non-PC devices to access digital content, and we may not be successful in developing versions of our products and services that will gain widespread adoption by users of such devices.


	We depend on a limited number of customers for a majority of our revenues so the loss of, or delay in payment from, one or a small number of customers could have a significant impact on our revenues and operating results.


	*Average selling prices of our products and services may decrease, which may harm our gross margins.*


	*We may be liable or alleged to be liable to third parties for music, software, and other content that we encode, distribute, or make available on to our customers.*


	*If we do not continue to add customers for our services, our revenues and business will be harmed.*


	*We cannot be certain that we will be able to protect our intellectual property, and we may be found to infringe on proprietary rights of others, which could harm our business.*


	We rely on strategic relationships to promote our services and for access to licensed technology; if we fail to maintain or enhance these relationships, our ability to serve our customers and develop new services and applications could be harmed.