AUDIBLE, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
June 30, 2004 and 2003
(unaudited)
Common Stock
On February 6, 2004, in connection with the conversion of the outstanding Series A Preferred Stock ("Series A"), the Company issued 5,836,013 shares of common stock to Apax Partners ("Apax"). The Series A conversion was the result of a negotiated agreement where, in addition to the 4,669,347 shares of common stock issuable upon conversion of the outstanding Series A shares in accordance with the terms of conversion, the Company issued to Apax 1,166,666 common shares of common stock and warrants to purchase 333,333 shares of common stock. Of the additional 1,166,666 shares issued, 389,863 shares were issued in payment of cumulative accrued dividends at the date of conversion, and 776,803 shares together with the 333,333 warrants were issued as an inducement to Apax to conve
rt its Series A shares. The warrants are exercisable at $21.00 a share and expire on February 5, 2011. The fair value of the 776,803 shares of common stock and the 333,333 warrants of approximately $9,873,394 has been recorded as an inducement charge in the Statement of Operations for the six months ended June 30, 2004.
On February 6, 2004, the Company issued 416,666 shares of common stock to Random House upon conversion of their outstanding Series B Preferred Stock ("Series B") in accordance with the original terms of conversion.
As of June 30, 2004 and December 31, 2003, the Company had issued 21,493,458 and 15,015,561, respectively, shares of common stock. As of June 30, 2004 and December 31, 2003, the Company had 3,152,883 and 2,483,633 shares of common stock, respectively, reserved for issuance upon exercise of outstanding common stock options, and 1,055,439 and 1,180,757 shares of common stock, respectively, reserved for issuance upon exercise of outstanding warrants. As of December 31, 2003, the Company had 4,669,359 shares of common stock reserved for issuance upon conversion of outstanding Series A stock, and 416,666 shares of common stock reserved for issuance upon conversion of outstanding Series B stock.
The Company has on occasion issued options to purchase shares of common stock to employees at a price less than the fair value of the stock at the time of issuance. The difference between the fair value and the price of options issued is recorded as deferred compensation, a component of stockholders’ equity, and is amortized as an expense straight-line over the vesting term of the option. When employees who have these options leave the Company, the remaining unexpensed deferred compensation is reversed against additional paid-in-capital.
AUDIBLE, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
June 30, 2004 and 2003
(unaudited)
Convertible Preferred Stock
In February 2001, Microsoft purchased 2,666,666 shares of Series A stock for $10,000,000 at a per share price of $3.75. Each share of Series A was originally convertible into four shares of Common Stock, (equivalent to a price of $.9375 per share), subject to adjustment under certain conditions. As a result of the investment in the Company made by Special Situations Funds in the first quarter of 2002, the conversion rate was adjusted as per the Series A Certificate of Designation to 4.0323 shares of Common Stock. The stock was convertible at the option of the holder at any time. Dividends were payable semi-annually at an annual rate of 12% in either additional preferred shares or in cash at the option of the Company. On the fifth anniversary of the original issue date, the
Company was required to redeem all remaining outstanding shares at a per share price of $3.75 plus all accrued and unpaid dividends. As of August 2003, the Company had issued to Microsoft an aggregate of 807,301 additional shares of Series A covering the dividends payable through June 1, 2003.
In August 2003, Apax purchased from Microsoft the 3,473,967 outstanding shares of Audible Series A stock and agreed to certain amendments to the security. As amended, the Series A was no longer mandatorily redeemable, was convertible at any time by the holders into shares of common stock, and dividends would accrue and compound semi-annually for a period of four years at the rate of 12% per annum. In the event of the conversion of the Series A stock, all accrued but unpaid preferred dividends would be converted into shares of Common Stock. In liquidation, the Audible Series A stock was ranked pari passu with the Company’s Series B and Series C stock.
On February 6, 2004, Apax converted all of its Series A as previously described.
During the three and six months ended June 30, 2004, none and $614,116, respectively, was recognized as dividends on the Series A stock. During the three and six months ended June 30, 2003, $376,982 and $740,631, respectively, was recognized as dividends on the Series A stock.
In March 2002, the Company issued 1,250,000 shares of Series B stock in connection with an amendment to its contract with Random House (see note 6). At any time on or after March 26, 2004, subject to certain conditions, all outstanding shares of Series B stock would have automatically converted to shares of common stock at the then effective conversion price. Effective August 2003, the Audible Series B stock was ranked pari passu with the Company’s Series A stock and Series C stock. On February 6, 2004, Random House converted all of its outstanding Series B stock into 333,333 shares of common stock in accordance with the original terms of conversion.
As of February 6, 2004, following the conversion of all preferred Stock, the Company no longer has any special preferences or privileges in the its capital structure.
AUDIBLE, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
June 30, 2004 and 2003
(unaudited)
(5) Amazon Agreements
In January 2000, the Company entered into two agreements with Amazon.com. Under the Co-Branding, Marketing and Distribution Agreement the Company was the exclusive provider of digital spoken audio (as defined) to Amazon.com. On January 24, 2002, the Company signed Amendment No.1 to its Co-Branding, Marketing, and Distribution Agreement with Amazon.com. Under the amendment, the annual fee for Year 3 (which ended January 24, 2003) of the agreement was reduced from $10,000,000 to $1,500,000 and an additional fee of $1,000,000 was payable in Year 2 of the agreement. Also in connection with Amendment No.1, the Company issued 500,000 fully vested common stock warrants to Amazon.com at an exercise price of $1.50 per share, which are exercisable after January 31, 2003. The fair va
lue of these warrants was determined in accordance with EITF Issue No. 96-18 and was being amortized as an expense on a straight-line basis over the remaining term of the agreement which ended in January 2003. During the six months ended June 30, 2004 and 2003, none and $14,400, respectively, was recorded as a marketing expense related to these warrants with the non-cash credit for services to additional paid-in capital. There was no expense related to this agreement during the three months ended June 30, 2004 and 2003.
During the three-year term of this agreement, as amended, in consideration for certain services, Amazon received $22,500,000 plus a specified percentage of revenue earned over a specified amount. Under the Securities Purchase Agreement, Amazon.com purchased 446,677 shares of common stock from the Company for $20,000,000. Under the agreements, the consideration due from Amazon for the purchase of the common stock, and the Company’s obligation for the annual fee for the first two years per the original Co-Branding, Marketing, and Distribution Agreement, which are identical amounts, were offset and no cash was exchanged. Accordingly, $20,000,000 was recorded as deferred services, a component of stockholders’ equity, and was being amortized over the first two years o
f the agreement on a straight-line basis. Prior to Amendment No. 1, through January 2002, $10,000,000 had been amortized as a marketing expense related to the initial $20,000,000 of deferred services. Subsequent to Amendment No. 1, the unamortized payment for year 2 of $10,000,000 plus the additional $2,500,000 payment required under the amendment, or $12,500,000, was being amortized on a straight-line basis over the remaining term of the agreement of 24 months which ended in January 2003. During the six months ended June 30, 2004 and 2003, none and $416,667, respectively, was recorded as a marketing expense related to the straight-line amortization of the non-cash portion of deferred services. There was no expense related to this agreement during the three months ended June 30, 2004 and 2003.
AUDIBLE, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
June 30, 2004 and 2003
(unaudited)
(6) Random House Agreement
On May 5, 2000, Audible and Random House entered into a 50-month Co-Publishing, Marketing, and Distribution Agreement to form a strategic alliance to establish Random House Audible, a publishing imprint, as defined in the agreement, to produce spoken word content specifically suited for digital distribution. All titles published by the imprint are distributed exclusively over the Internet by Audible. As part of this alliance, Random House, through its Random House Ventures, LLC subsidiary, purchased 169,780 shares of Audible common stock from the Company for $1,000,000. Over the term of the agreement Audible was to contribute towards the funding the acquisition and creation of digital audio titles through Random House Audible. On March 26, 2002, the agreement was amended t
o waive the cash payment due to Random House in 2002 of $1,250,000, thereby reducing the total payments due under the agreement from $4,000,000 to $2,750,000. In exchange for this waiver, under the amendment the Company issued 1,250,000 shares of Series B stock. At any time on or after March 26, 2004, subject to certain conditions, all outstanding shares of Series B stock would have automatically converted to shares of common stock at the then effective conversion price. Through December 31, 2002, $1,250,000 of the $2,750,000 obligation had been paid, with the remaining amount of $1,500,000 due in 2003 and 2004. On February 10, 2003, the agreement was further amended so that Audible was no longer required to pay the $1,500,000 in imprint fees that were due in 2003 and 2004.
The fair value of the Series B stock issued was determined in accordance with EITF Issue No. 01-1, "Accounting for a Convertible Instrument Granted or Issued to a Nonemployee for Goods or Services or a Combination of Goods or Services and Cash". Accordingly, using the measurement date of March 26, 2002, the fair value of the Series B stock issued was determined to be $1,137,500. On April 1, 2002 when the Series B was issued, the Company recorded $547,500 (the difference between the fair value of the shares and the previously recognized accrued liability of $590,000) as deferred services, a component of stockholders’ equity. During the six months ended June 30, 2004 and 2003, none and a credit of $134,997 representing the reversal of the accrual was recorded as a credi
t to cost of content and services revenue related to this agreement. There was no expense related to this agreement during the three months ended June 30, 2004 and 2003.
The original agreement further provided for Random House to be granted a warrant to purchase 292,777 shares of Audible common stock at various exercise prices that vest over the term of the agreement as well as the granting of additional warrants to Random House to purchase Audible common shares based on future performance. The fair value of these warrants was determined in accordance with EITF Issue No. 96-18 and is being amortized as an expense on a straight-line basis over the 50-month term of the agreement. The warrants are accounted for using variable plan accounting whereby compensation costs vary each accounting period until the final measurement date. During the three and six months ended June 30, 2004, $163,246 and $165,256, respectively, was recorded as a cost of
content and services revenue related to these warrants with the non-cash credit for services to additional paid-in capital. During the three and six months ended June 30, 2003, $149,925 and $279,334, respectively, was recorded as a cost of content and services revenue related to these warrants with the non-cash credit for services to additional paid-in capital.
AUDIBLE, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
June 30, 2004 and 2003
(unaudited)
The Company and Random House continue to operate under the general terms of the agreement which expired on June 30, 2004, with the exception that the works produced under the imprint are no longer exclusive to Audible.
(7) Notes Due from Stockholders for Common Stock
Notes due from stockholders that are current employees and former directors were received by the Company for payment of shares of common stock purchased under the Company's Stock Restriction Agreements. The notes were full recourse promissory notes bearing interest at fixed rates ranging from 7.0% to 8.5% through December 31, 2002 and at 4% subsequent thereto until December 31, 2003. The notes began maturing in the year 2000.
Certain employee employment agreements prior to 1998 contained a provision whereby the employee would be awarded a one-time bonus if still employed by the Company on the due date of the promissory note equal to the amount of the promissory note and any accrued interest payable on the note. Compensation expense is recognized on a straight-line basis over the term of the promissory note. Deferred cash compensation related to bonuses in the accompanying balance sheets represents the earned, unpaid portion of such bonuses.
As of January 29, 2003, the unpaid principal and unpaid interest balance due on these notes to the Company from stockholders that were employees, net of deductions from the bonuses due to the employees, was $263,240. On January 29, 2003 the employees were notified that the Company would not require them to repay the unpaid principal nor the unpaid interest on the notes payable. The employees are individually responsible for the personal income tax consequences of this debt forgiveness. In connection with this debt forgiveness, the Company recorded a charge of $212,566 in the three months ended March 31, 2003 as a general and administrative expense. This expense is the net of the total amount forgiven by the Company, less the combined offset of all accrued interest. Of this
$212,566 forgiveness of debt charge, $198,995 is a non-cash charge, with the remaining $13,571 representing the Company’s payroll taxes obligations in connection with the bonuses paid.
In addition, for the remaining notes issued to former directors in the amount of $58,750 not covered under this debt forgiveness, the Company extended the due dates to December 31, 2003 and reduced the interest rate in 2003 to 4%. In January 2004, the Company received payment of $3,750 on one of the notes from a former director. In May 2004, the Company received payment of the last remaining $55,000 balance of notes outstanding.
AUDIBLE, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
June 30, 2004 and 2003
(unaudited)
(8) Contingencies
In September 2001, the Company and certain of our officers, directors, and former directors, were named as defendants in several putative class actions filed in the United States District Court for the Southern District of New York. The investment banking firms that were involved in the Company’s 1999 initial public offering (the "IPO") have also been named as defendants. The essence of the plaintiffs' claims is that the underwriter defendants allegedly allocated the opportunity to participate in the IPO by requiring their customers to pay "kickbacks" in excess of the normal commissions and to make subsequent purchases in the after market at prices in excess of the IPO price. Allegedly, the amounts of the "kickbacks" were sometimes calculated as a percentage of the cu
stomer's paper profits over some specified period of time after the IPO. It is alleged that these practices were not disclosed in the registration statement and prospectus for the IPO and that, as a result, the defendants violated various provisions of the federal securities laws. Certain of the complaints purport to set forth claims on behalf of persons who acquired the Company’s common stock from July 16, 1999 to September 11, 2001. One other complaint purports to represent a class of persons who acquired the Company’s common stock between July 16, 1999 and December 6, 2000. The complaints do not specify the amount of the compensatory damages the plaintiffs are seeking, but the market loss at issue was in excess of $50 million.
The cases have been consolidated and have been assigned to the same judge who is handling virtually identical cases filed against hundreds of other companies that completed initial public offerings between 1998 and 2000. The Company along with the individual defendants, have been given an indefinite extension of time to respond to the complaints while the plaintiffs focus on pursuing their claims against the underwriters. The Company believes that the claims have no merit and, more specifically, the Company and the individual defendants were not aware of the alleged practices, if they occurred. The Company along with the individual defendants has notified the underwriters who were involved in our IPO that the Company expects those underwriters to indemnify the Company and
the individual defendants pursuant to the terms of the underwriting agreement between the Company and the underwriters.
On July 1, 2002, the underwriter defendants in the consolidated actions moved to dismiss all of the IPO Litigations, including the action involving the Company. On July 15, 2002, the Company along with other non-underwriter defendants in the coordinated cases also moved to dismiss the litigation. Those motions were fully briefed on September 13 and September 27, 2002, respectively. Those motions have not yet been decided. Due to the inherent uncertainties of litigation and because the litigation is at a preliminary stage, the Company cannot accurately predict the ultimate outcome of the motions. In addition, the individual defendants in the IPO Litigation signed a tolling agreement and were dismissed from the action without prejudice on October 9, 2002.
The Company is not otherwise a party to any lawsuit or proceeding, which management believes is likely to have a material effect on its business.
AUDIBLE, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
June 30, 2004 and 2003
(unaudited)
(9) Supplemental Disclosure of Cash Flow Information
Non-Cash Financing and Investing Activities
Capital lease obligations of $743,302 were incurred during the six month period ended June 30, 2004, when the Company entered into leases for new property and equipment. No capital leases were entered into during the 2003 period.
Reversal of unused accrued expense related to Series C financing of $7,500 was recorded to additional paid in capital during the six month period ended June 30, 2004.
Cash Paid for Interest and Taxes
Interest expense paid was $14,090 during the six month period ended June 30, 2004. No interest expense was paid during the 2003 period.
No income taxes were paid in the six month period ended June 30, 2004 and 2003.
ITEM 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our audited financial statements and notes thereto appearing in our 2003 Annual Report on Form 10-K. This discussion and analysis contains forward-looking statements that involve risks and uncertainties. Our actual results may differ materially from those anticipated in these forward-looking statements as a result of a number of factors.
Overview
Audible is the Internet’s largest, most diverse provider of premium spoken audio services for content download and playback on personal computers, CD or AudibleReady computer based mobile listening devices. Our customers purchase and download their choice of content, and generally listen during their daily commute or while exercising, when "their eyes are busy but their minds are free." We believe that the Audible service allows our customers to make better use of their time, allowing them to listen to books, newspapers, magazines and time shifted radio programs that due to their busy lives, they would not have the time to read. Our online store is located at www.aud
ible.com and our single location of operations is Wayne, New Jersey.
Audible has more than 50,000 hours of audio programs and 165 content partners that include leading audiobook publishers, broadcasters, entertainers, magazine and newspaper publishers and business information providers. Most of our customers join the AudibleListener program, where for a monthly fee of either $14.95 or $19.95, they may download and listen to the content of their choice. AudibleListeners provide us with their credit card information and are billed monthly in advance for the AudibleListener service. Customers may also purchase individual audio titles from us on an a la carte basis.
Our customer count has grown to approximately 379,000 as of June 30, 2004. We believe our growth has been driven primarily by our strong collection of content, by the growing trends of downloading and listening to audio on-the-go, and by the growing market for digital audio devices that securely play content from Audible.com. We promote the Audible service through co-marketing partnerships with device manufactures, online promotions, promotions with retailers and our customer-get-customer referral program. In addition, customers at Amazon.com and the Apple iTunes music store can purchase and download Audible content of their choice.
The key drivers of our business include new customer growth, the cost of acquiring a customer, the customer cancellation rate, controlling our costs and sales of Audible content through the Apple iTunes music store.
Our new customer growth is a function of developing compelling advertising and promotion programs to encourage people to try the Audible service for the first time, as well as the creation of marketing partnerships that similarly encourage consumers to try our service. One of our growing sources of new AudibleListeners is via our device rebate program. Under this program, AudibleListeners that subscribe to our AudibleListener service for twelve months qualify for a $75 or $100 rebate on their AudibleReady device purchase. Other sources of new AudibleListeners include our "tell a friend" customer-get-customer program and our marketing efforts directed at converting a la carte purchasers to AudibleListener members. We manage customer acquisition costs by entering primarily i
nto co-marketing deals where we pay for results, rather than advertising impressions. We believe that the customer cancellation rate is minimized by providing the customer with a wide range of high value content, a compelling value proposition and solid customer service.
We plan to continue to focus on new customer growth, expanding our content selection, improving the Audible service, broadening the range of AudibleReady listening devices, broadening our range of marketing and sales partnerships, providing solid customer service and controlling our costs.
Revenue from the sale of consumer content has increased in each of the last four quarters. We expect this trend to continue as we expand our customer count. As of June 30, 2004, more than 379,000 customers in over 120 countries had purchased content from our Web site.
Although we have experienced revenue growth in our content sales in recent periods, there can be no assurance that such growth rates are sustainable, and therefore such growth rates should not be considered indicative of future operating results. There can also be no assurance that we will be able to continue to increase our revenue, or maintain profitability as we did in the three month period ended June 30, 2004, or if increases in revenue and profitability can be sustained. We believe that period-to-period comparisons of our historical operating results are not meaningful and should not be relied upon as an indication of future performance.
Our revenue is derived from three main categories: (1) content and services revenue, which includes consumer content and corporate services; (2) hardware revenue; and (3) other revenue.
Consumer content revenue consists of content sales made from our website and content sold through our agreement with the Apple iTunes Music Store. Revenue from the sale of individual content titles is recognized in the period when the content is purchased. Revenue from the sale of content subscriptions is recognized pro rata over the term of the subscription period. Revenue from the sale of monthly AudibleListener memberships is recognized ratably over the AudibleListener’s monthly membership period. This results in approximately 50% of the AudibleListener membership fees received during each calendar month being deferred and recognized as content revenue in the following month. At the end of each reporting period, approximately 50% of the AudibleListener membership f
ees received during the last calendar month in the period is deferred as Deferred Revenue. Revenue from the sale of UltimateListener, our prepaid discounted content package, and gift programs are recognized the earlier of when the content is downloaded or expiration.
Part of our marketing strategy to acquire new AudibleListeners includes retail promotions in which we pay retailers to offer discounts to consumers on their purchase of AudibleReady devices if they become AudibleListener members for twelve months. We also have retail promotions in which we purchase gift certificates from retailers and give them away to our customers for free when they sign up to be AudibleListeners for twelve months. The point of sale rebates which are discounts given by a third party retailer to a customer on the purchase of a digital audio player at the point of sale of the Audible membership, are recorded as a reduction of revenue in the period the discount is given in accordance with Emerging Issues Task Force ("EITF") Issue No. 01-9, "Accounting for C
onsideration Given by a Vendor to a Customer (Including a Reseller of the Vendor’s Products)". The cost of discount certificate rebates which relate to retailer gift certificates that are given to a customer by Audible at the time the customer purchases the Audible membership, are recorded as a cost of content and services revenue in accordance with EITF 01-9. As a result of this GAAP accounting treatment, these costs, which we consider marketing, are not included in Marketing expense, but instead, are recorded either as a reduction of revenue, or as part of cost of content and services revenue as described above. Customer refunds, although not material, are also recorded as a reduction in revenue in the period the refund is paid.
Corporate service revenue consists of library sales and audio production services. Where applicable, corporate service revenue is recognized as services are performed after the agreement has been finalized, the price is fixed, and collectibility is assured. Collectibility is based on past transaction history and credit-worthiness of the customer.
Hardware revenue consists of sales of AudibleReady digital audio players sold primarily at a discount or given away when a customer signs up for a one year commitment to our AudibleListener Membership. For multiple-element arrangements in which a customer signs up for a one year membership and receives an audio player for free, revenue is recognized using the relative fair value method under EITF Issue No. 00-21, "Revenue Arrangements with Multiple Deliverables", whereby each separate unit of accounting is recognized as revenue at its relative fair value, whereby the delivered item (hardware) is limited to the non-contingent consideration. Since all the consideration paid by the customer is contingent upon delivery of the content, no amount is recorded as hardware revenue
under these multiple-element arrangements. The free hardware device reflects the subsidy that we incur to acquire a customer with a one year commitment to AudibleListener. For players sold separately, hardware revenue is recognized upon shipment of the device, pursuant to a customer order and credit card authorization and includes amounts received for shipping and handling. Cost of hardware revenue, regardless of whether the player is bundled with a membership or sold separately, is recognized upon shipment.
Other revenue consists of revenue from a license granted for certain technology rights to a device manufacturer which is being recognized on a straight-line basis over the term of the agreement.
We have joint marketing agreements with device manufacturers such as Apple Corp., Creative Labs, Rio Audio, palmOne, and Hewlett-Packard. Under these agreements, the device manufacturer will receive a portion of the content revenue generated over a specified period of time from each new Audible customer referred by them or using their hand-held electronic device. For example, a purchaser of Hewlett-Packard's hand-held electronic device will be able to use the device and our AudibleManager software to access audible.com and download content. Hewlett-Packard will receive a percentage of the revenue related to content downloaded by this purchaser. These revenue sharing arrangements typically last one or more years from the date the device user becomes an Audible customer.
We have entered into co-marketing agreements whereby where our marketing partners will receive payments from us. The payments to these marketing partners are generally based upon driving potential customers to the Audible website who then become customers.
As of February 6, 2004, following the conversion of all preferred stock, we no longer have any special preferences or privileges in our capital structure.
Results of Operations
The following table sets forth certain financial data for the periods indicated as a percentage of total revenue for the three and six months ended June 30, 2004 and 2003.
| |
|
Three Months |
|
Six Months |
|
| |
|
Ended June 30, |
|
Ended June 30, |
|
| |
|
2004 |
|
2003 |
|
2004 |
|
2003 |
|
| |
|
(unaudited) |
|
(unaudited) |
|
|
Revenue: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Content and services |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consumer content |
|
|
98 |
% |
|
95 |
% |
|
98 |
% |
|
95 |
% |
|
Point of sale rebates |
|
|
0 |
|
|
- |
|
|
(1 |
) |
|
- |
|
|
Services |
|
|
0 |
|
|
1 |
|
|
0 |
|
|
1 |
|
|
Net content and services |
|
|
98 |
|
|
96 |
|
|
97 |
|
|
96 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Hardware |
|
|
2 |
|
|
4 |
|
|
3 |
|
|
4 |
|
|
Other |
|
|
0 |
|
|
0 |
|
|
0 |
|
|
0 |
|
|
Total revenue, net |
|
|
100 |
% |
|
100 |
% |
|
100 |
% |
|
100 |
% |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of content and services revenue |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Royalties and other content charges |
|
|
32 |
|
|
26 |
|
|
31 |
|
|
25 |
|
|
Discount certificate rebates |
|
|
4 |
|
|
- |
|
|
3 |
|
|
- |
|
|
Total cost of content and services revenue |
|
|
36 |
|
|
26 |
|
|
34 |
|
|
25 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of hardware revenue |
|
|
8 |
|
|
12 |
|
|
8 |
|
|
12 |
|
|
Operations |
|
|
15 |
|
|
20 |
|
|
16 |
|
|
22 |
|
|
Technology and development |
|
|
16 |
|
|
27 |
|
|
17 |
|
|
29 |
|
|
Marketing |
|
|
12 |
|
|
25 |
|
|
14 |
|
|
30 |
|
|
General and administrative |
|
|
10 |
|
|
11 |
|
|
9 |
|
|
14 |
|
|
Total operating expenses |
|
|
97 |
|
|
121 |
|
|
98 |
|
|
132 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from operations. |
|
|
3 |
|
|
(21 |
) |
|
2 |
|
|
(32 |
) |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other income, net |
|
|
0 |
|
|
0 |
|
|
0 |
|
|
0 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) before taxes |
|
|
3 |
|
|
(21 |
) |
|
2 |
|
|
(32 |
) |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income taxes |
|
|
0 |
|
|
-- |
|
|
0 |
|
|
-- |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) |
|
|
3 |
|
|
(21 |
) |
|
2 |
|
|
(32 |
) |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dividends on convertible preferred stock. |
|
|
-- |
|
|
(8 |
) |
|
(4 |
) |
|
(8 |
) |
|
Charges related to conversion of convertible preferred stock |
|
|
-- |
|
|
-- |
|
|
(66 |
) |
|
-- |
|
|
Total preferred stock expense |
|
|
-- |
|
|
(8 |
) |
|
(70 |
) |
|
(8 |
) |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) applicable to common stockholders |
|
|
3 |
% |
|
(29 |
)% |
|
(68 |
)% |
|
(40 |
)% |
Three months ended June 30, 2004 compared to three months ended June 30, 2003.
Content and Services Revenue
The following is our net content and services revenue for the three months ended June 30, 2004, and 2003:
|
Three Months Ended June 30, |
Percentage Change |
|
2004 |
2003 |
2004 vs. 2003 |
|
$7,883,000 |
$4,235,000 |
86.1% |
Net content and services revenue consists of AudibleListener membership revenue, revenue from single title sales, revenue from sales at the Apple iTunes music store, library revenue, point of sale rebates and corporate services revenue.
Net content and services revenue has grown due to the growth in our customer count, revenue from sales at the Apple iTunes music store, and strong results from single titles sold during our summer sale in June 2004. Our customer count has grown from 253,000 as of June 30, 2003 to 379,000 as of June 30, 2004. Our customer count includes all customers that have purchased Audible content at www.audible.com. Our customer count does not include customers that purchased our content at the Apple iTunes Music Store. We believe continuing consumer adoption of digital downloading, increased consumer awareness of the Audible service, customer satisfaction and improved marketing drove the increase in our customer count.
The following is our hardware revenue for the three months ended June 30, 2004, and 2003:
|
Three Months Ended June 30, |
Percentage Change |
|
2004 |
2003 |
2004 vs. 2003 |
|
$163,000 |
$175,000 |
(6.9%) |
Hardware revenue consists of revenue derived primarily from the shipping and handling charge to customers on devices that Audible provides for free to AudibleListeners that commit to a twelve month AudibleListener membership. Also included are separate sales of digital audio players to consumers and libraries.
Hardware revenue has decreased during the period as we gave away for free more digital audio players s to customers who commit to a 12-month AudibleListener membership. Under EITF No. 00-21, with these multiple-element arrangements, no revenue is recognized for the delivery of hardware because all consideration paid by the customer is contingent upon delivery of the content.
Other Revenue:
The following is our other revenue for the three months ended June 30, 2004, and 2003:
|
Three Months Ended June 30, |
Percentage Change |
|
2004 |
2003 |
2004 vs. 2003 |
|
$16,000 |
$16,000 |
-- % |
Other revenue consists of the straight-line amortization of revenue derived from technology licensing fees and was consistent period to period.
Cost of Content and Services Revenue:
The following is our cost of content and services revenue for the three months ended June 30, 2004, and 2003:
|
Cost of Content and Services |
|
Three Months Ended June 30, |
|
As a Percentage of Content and Services Revenue |
|
| |
|
2004 |
|
2003 |
|
2004 |
|
2003 |
|
|
Royalties and other content charges |
|
$ |
2,601,000 |
|
$ |
1,138,000 |
|
|
33.3 |
% |
|
26.9 |
% |
|
Discount certificate rebates |
|
$ |
305,000 |
|
$ |
--- |
|
|
3.9 |
% |
|
--- |
|
|
Total cost of content and services revenue |
|
$ |
2,906,000 |
|
$ |
1,138,000 |
|
|
36.9 |
% |
|
26.9 |
% |
Cost of content and services revenue consists primarily of royalties paid to publishers, the amortization of publisher royalty advances and equity securities issued in connection with Random House Audible, as well as discount certificate rebates.
Cost of content and services increased in the 2004 period as a percentage of content and services revenue increased in part due to the addition of $305,000 in discount certificate rebates, the mix of titles sold in the period, as well as the introduction of sales at the Apple iTunes Music Store which began in October 2003 which have a lower margin for us.
Cost of Hardware Revenue:
The following is our cost of hardware revenue for the three months ended June 30, 2004, and 2003:
|
Three Months Ended June 30, |
Percentage Change |
|
2004 |
2003 |
2004 vs. 2003 |
|
$614,000 |
$513,000 |
19.7% |
Cost of hardware revenue consists of the cost of digital audio players that are given away or sold to customers.
The cost of hardware revenue increased as we gave away for free more digital audio players to customers who commit to a 12-month AudibleListerner membership.
Operations:
The following is our operations expense for the three months ended June 30, 2004, and 2003:
|
Three Months Ended June 30, |
Percentage Change |
|
2004 |
2003 |
2004 vs. 2003 |
|
$1,197,000 |
$912,000 |
31.3% |
Operations expense consists of payroll and related expenses for content acquisition, editorial, audio conversion and customer service and credit card fees.
Operation expenses increased primarily due to $142,000 in higher credit card fees, $74,000 in higher customer service costs, and $38,000 in higher allocated overhead expenses. These increases are related to customer and revenue growth.
Technology and Development:
The following is our technology and development expense for the three months ending June 30, 2004 and 2003:
|
Three Months Ended June 30, |
Percentage Change |
|
2004 |
2003 |
2004 vs. 2003 |
|
$1,281,000 |
$1,188,000 |
7.8% |
Technology and development expense consists of payroll and related expenses for information technology, systems and telecommunications infrastructure, as well as technology licensing fees.
The increase in technology and development expenses was primarily due to $95,000 in higher bandwidth costs and $54,000 in higher consultant expenses offset in part by a decline in personnel expenses. As our customer count grows and the number of titles downloaded increases, we continually expand our bandwidth in order for our customers to be able to download their content.
Marketing:
The following is our marketing expense for the three months ended June 30, 2004, and 2003:
|
Three Months Ended June 30, |
Percentage Change |
|
2004 |
2003 |
2004 vs. 2003 |
|
$1,000,000 |
$1,095,000 |
(8.7%) |
Marketing expense consists of payroll and related expenses for personnel in marketing and business development, as well as advertising expenditures and other promotional activities. Also included are revenue sharing and bounty payments which we make to our marketing partners.
Marketing expenses were lower in the 2004 period primarily due to $101,000 in reduced consultant expense and $65,000 in lower co-marketing and bounty payments, offset in part by higher advertising and personnel expenses.
General and Administrative:
The following is our general and administrative expense for the three months ended June 30, 2004, and 2003:
|
Three Months Ended June 30, |
Percentage Change |
|
2004 |
2003 |
2004 vs. 2003 |
|
$841,000 |
$497,000 |
69.2% |
General and administrative expenses consist primarily of payroll and related expenses for executive, finance and administrative personnel. Also included are legal fees, audit fees, public company expenses and other general corporate expenses.
The increase in expense in the 2004 period is primarily due to $253,000 in increased legal fees related to our international expansion plans, $50,000 in NASDAQ relisting fees, $37,000 in increased professional fees, and $28,000 in increased audit fees, offset in part by reduced compensation expense.
Six months ended June 30, 2004 compared to six months ended June 30, 2003.
Net Content and Services Revenue
The following is our content and services revenue for the six months ended June 30, 2004, and 2003:
|
Six Months Ended June 30, |
Percentage Change |
|
2004 |
2003 |
2004 vs. 2003 |
|
$14,460,000 |
$8,152,000 |
77.4% |
Net content and services revenue consists of AudibleListener membership revenue, revenue from single title sales, revenue from sales at the Apple iTunes music store, library revenue, point of sale rebates and corporate services revenue.
Net content and services revenue has grown due to the growth in our customer count, revenue from sales at the Apple iTunes music store, and strong results from single titles sold during our summer sale in June 2004. Our customer count has grown from 253,000 as of June 30, 2003 to 379,000 as of June 30, 2004. Our customer count includes all customers that have purchased Audible content at www.audible.com. Our customer count does not include customers that purchased our content at the Apple iTunes Music Store. We believe continuing consumer adoption of digital downloading, increased consumer awareness of the Audible service, customer satisfaction and improved marketing drove the increase in our customer count
Hardware Revenue:
The following is our hardware revenue for the six months ended June 30, 2004, and 2003:
|
Six Months Ended June 30, |
Percentage Change |
|
2004 |
2003 |
2004 vs. 2003 |
|
$344,000 |
$352,000 |
(2.3%) |
Hardware revenue consists of revenue derived primarily from the shipping and handling charge to customers on devices that Audible provides for free to AudibleListeners that commit to a twelve month AudibleListener membership. Also included are separate sales of digital audio players to consumers and libraries.
Hardware revenue has decreased as we gave more digital audio players away for free to customers who commit to a 12-month AudibleListener membership. Under EITF No. 00-21, with these multiple-element arrangements, no revenue is recognized for the delivery of hardware because all consideration paid by the customer is contingent upon delivery of the content.
Other Revenue:
The following is our other revenue for the six months ended June 30, 2004, and 2003:
|
Six Months Ended June 30, |
Percentage Change |
|
2004 |
2003 |
2004 vs. 2003 |
|
$32,000 |
$32,000 |
-- % |
Other revenue consists of the straight-line amortization of revenue derived from technology licensing fees and was consistent period to period.
Cost of Content and Services Revenue:
The following is our cost of content and services revenue for the six months ended June 30, 2004, and 2003:
|
Cost of Content and Services |
|
Six Months Ended June 30, |
|
As a Percentage of Content and Services Revenue |
|
| |
|
|
2004 |
|
|
2003 |
|
|
2004 |
|
|
2003 |
|
|
Royalties and other content charges |
|
$ |
4,655,000 |
|
$ |
2,104,000 |
|
|
32.1 |
% |
|
25.8 |
% |
|
Discount certificate rebates |
|
$ |
344,000 |
|
$ |
--- |
|
|
2.4 |
% |
|
--- |
|
|
Total cost of content and services revenue |
|
$ |
4,999,000 |
|
$ |
2,104,000 |
|
|
34.5 |
% |
|
25.8 |
% |
Cost of content and services revenue consists primarily of royalties paid to publishers, the amortization of publisher royalty advances and equity securities issued in connection with Random House Audible, as well as discount certificate rebates.
Cost of content and services increased in the 2004 period as a percentage of content and services revenue increased in part due to the addition of $344,000 in point of sale rebates, the mix of titles sold in the period, as well as the introduction of sales at the Apple iTunes Music Store which began in October 2003.
Cost of Hardware Revenue:
The following is our cost of hardware revenue for the six months ended June 30, 2004, and 2003:
|
Six Months Ended June 30, |
Percentage Change |
|
2004 |
2003 |
2004 vs. 2003 |
|
$1,132,000 |
$1,061,000 |
6.7% |
Cost of hardware revenue primarily consists of the cost of digital audio players that are given away or sold to customers.
The cost of hardware revenue increased primarily due to additional costs associated with more digital audio players given away for free when customers commit to a 12-month AudibleListener Membership.
Operations:
The following is our operations expense for the six months ended June 30, 2004, and 2003:
|
Six Months Ended June 30, |
Percentage Change |
|
2004 |
2003 |
2004 vs. 2003 |
|
$2,340,000 |
$1,886,000 |
24.1% |
Operations expense consists of payroll and related expenses for content acquisition, editorial, audio conversion and customer service and credit card fees.
Operation expenses increased primarily due to $255,000 in higher credit card fees, $166,000 in higher customer service costs, and $73,000 in higher allocated overhead costs, offset in part by lower content acquisition and audio conversion costs. These increases are related to customer and revenue growth.
Technology and Development:
The following is our technology and development expense for the six months ended June 30, 2004 and 2003:
|
Six Months Ended June 30, |
Percentage Change |
|
2004 |
2003 |
2004 vs. 2003 |
|
$2,536,000 |
$2,440,000 |
3.9% |
Technology and development expense consists of payroll and related expenses for information technology, systems and telecommunications infrastructure, as well as technology licensing fees.
The increase in technology and development expenses was primarily due to $155,000 in higher bandwidth costs and $126,000 in higher consultant expenses offset in part by a decline in personnel expenses. As our customer count grows and the number of titles downloaded increases, we need to expand the bandwidth in order for our customers to be able to download their content.
Marketing:
The following is our marketing expense for the six months ending June 30, 2004, and 2003:
|
Six Months Ended June 30, |
Percentage Change |
|
2004 |
2003 |
2004 vs. 2003 |
|
$2,152,000 |
$2,558,000 |
(15.9%) |
Marketing expense consists of payroll and related expenses for personnel in marketing and business development, as well as advertising expenditures and other promotional activities. Also included are revenue sharing and bounty payments which we make to our marketing partners.
Marketing expenses were lower in the 2004 period primarily due to the elimination of $535,000 in amortization related to the expiration of our amended agreement with Amazon.com, and the reduction of $221,000 in consultant expenses, offset in part by $257,000 in new warrant charges issued in connection with a services agreement and higher personnel costs.
General and Administrative:
The following is our general and administrative expense for the six months ending June 30, 2004, and 2003:
|
Six Months Ended June 30, |
Percentage Change |
|
2004 |
2003 |
2004 vs. 2003 |
|
$1,408,000 |
$1,208,000 |
16.6% |
General and administrative expenses consist primarily of payroll and related expenses for executive, finance and administrative personnel. Also included are legal fees, audit fees, public company expenses and other general corporate expenses.
The increase in expense in the 2004 period is primarily due to $293,000 in increased legal fees, related to our international expansion plans, $60,000 in increased professional fees, $50,000 in NASDAQ relisting fees, and $53,000 in increased audit fees, offset in part by the absence of $213,000 in forgiveness of debt which occurred in the 2003 period in connection with promissory notes issued for shares of common stock to stockholders, and $45,000 in lower depreciation charges on leasehold improvements due to certain leasehold improvements becoming fully depreciated.
Factors Affecting Operating Results
We have only a limited operating history with which to evaluate our business and prospects. Our limited operating history and emerging nature of the market for Internet-delivered audio content makes predicting our future operating results difficult. In addition, our prospects must be considered in light of the risks and uncertainties encountered by companies in the early stages of development in new and rapidly evolving markets, specifically the rapidly evolving market for delivery of audio content over the Internet. These risks include our ability to:
• acquire and retain customers;
• sell Audible content through the Apple iTunes Music Store
• control customer acquisition costs
• minimize customer cancellation rates
• build awareness and acceptance of audible.com, the AudibleReady format and AudibleReady devices;
• extend existing and acquire new content provider relationships;
• manage growth to stay competitive and fulfill customer demand; and
• generate cash from operations and/or raise capital.
If we fail to manage these risks successfully, it would materially adversely affect our financial performance.
As of June 30, 2004, we had not entered into any derivative financial instruments, other financial instruments or derivative commodity investments that expose us to material market risk. We currently do not and do not plan to engage in derivative instruments or hedging activities.
We have incurred significant losses since inception, and as of June 30, 2004, we had an accumulated deficit of approximately $131,791,000. We believe that our success will depend largely on our ability to extend our leadership position as a provider of premium digital spoken audio content over the Internet. Accordingly, we plan to continue to invest in marketing, content acquisition and operations.
Our operating results have varied on a quarterly basis during our short operating history and may fluctuate significantly in the future as a result of a variety of factors, many of which are outside of our control. Factors that may affect our operating results include but are not limited to: (1) the demand for the Audible service; (2) Sales of Audible content through the Apple iTunes Music Store, (3) the availability of premium audio content; (4) sales and consumer usage of AudibleReady devices; (5) our ability to acquire new customers; (6) our ability to retain existing customers (7) the introduction of new products or services by a competitor; (8) the cost and availability of acquiring sufficient Web site capacity to meet our customers' needs; (9) technical difficulties
with our computer system or the Internet or system downtime; (10) the cost of acquiring audio content; (11) the amount and timing of capital expenditures and other costs relating to the expansion of our operations; and (12) general economic conditions and economic conditions specific to electronic commerce and online media. In the past, we experienced fluctuations in demand for the Audible service based on the level of marketing expenditures, the occurrence of external publicity and the quality of our software and Web site. Any one of these factors could cause our revenue and operating results to vary significantly in the future. In addition, as a strategic response to changes in the competitive environment, we may from time to time make pricing, service or marketing decisions that could cause significant declines in our quarterly revenue.
Our limited operating history and the emerging nature of our market make prediction of future revenue difficult. We have no assurance that we will be able to predict our future revenue accurately. Because we have a number of fixed expenses, we may be unable to adjust our spending in a timely manner to compensate for unexpected revenue shortfalls. Accordingly, any significant shortfall in relation to our expectations could cause significant declines in our operating results. We believe that our quarterly revenue, expenses and operating results could vary significantly in the future, and that period-to- period comparisons should not be relied upon as indications of future performance. Due to the foregoing factors, it is likely that in some future quarters our operating resul
ts will fall below the expectations of securities analysts and investors, which could have a material adverse effect on the trading price of our common stock.
Liquidity and Capital Resources
From inception through the date prior to our initial public offering, we financed our operations through private sales of our redeemable convertible preferred stock and warrants. Net proceeds from the sales of redeemable convertible stock and warrants prior to our initial public offering were $28,719,000. In July 1999, we completed our IPO and received net proceeds of $38,856,000. Since our IPO, we have raised an additional $15,860,000 in net proceeds through the private sale of our redeemable convertible stock, and an additional $4,186,000 in net proceeds through the private sales of our common stock.
As of June 30, 2004, our cash and equivalents balance was approximately $10,412,000. Based on our currently proposed business plans and related assumptions, we believe that our cash and cash equivalents balance will enable us to meet our anticipated cash requirements for operations and capital expenditures for the foreseeable future. Beyond that, we may need to raise additional funds through public or private financing or other arrangements. No assurance can be given that such additional financing, when needed, will be available on terms favorable to us, if at all.
Cash Requirements:
At June 30, 2004, our principal source of liquidity was approximately $10,412,000 in cash and cash equivalents.
The following table shows future cash payments due under our commitments and obligations as of June 30, 2004.
|
Year |
|
Operating Leases |
Capital Leases |
Royalty Obligations |
Total |
| |
|
|
|
|
|
|
2004 (remaining) |
|
$ |
165,061 |
|
$ |
274,760 |
|
$ |
280,500 |
|
$ |
720,321 |
|
|
2005 |
|
$ |
352,889 |
|
$ |
149,977 |
|
|
- |
|
$ |
502,866 |
|
|
2006 |
|
$ |
375,656 |
|
|
- |
|
|
- |
|
$ |
375,656 |
|
|
2007 |
|
$ |
398,423 |
|
|
- |
|
|
- |
|
$ |
398,423 |
|
|
2008 |
|
$ |
398,423 |
|
|
- |
|
|
- |
|
$ |
398,423 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
1,690,452 |
|
$ |
424,737 |
|
$ |
280,500 |
|
$ |
2,395,689 |
|
Sources and Uses of Cash
Net cash provided by operating activities for the six months ended June 30, 2004 was approximately $1,479,000. Net cash provided by operating activities was primarily attributable to our net income, increase in accrued expenses and compensation, services rendered for common stock and warrants, and depreciation and amortization, offset in part by an increase in prepaid expenses and other current assets, accounts receivable and inventory and a decrease in royalty obligations. Net cash used in operating activities for the six months ended June 30, 2003 was approximately $1,195,000. Net cash used was primarily attributable to our net loss, an increase in inventory, an increase in royalty advances, and an increase in accounts receivable, offset in part by services rendered for
common stock and warrants, an increase in accrued expenses and compensation, depreciation and amortization, and the non-cash portion of the forgiveness of employee notes.
Net cash used in investing activities for the six months ended June 30, 2004 and 2003, was approximately $238,000 and $41,000, respectively. Net cash used during both periods was related to purchases of property and equipment.
Net cash provided by financing activities for the six months ended June 30, 2004 was approximately $96,000 resulting primarily from the exercise of common stock options by employees offset in part by principal payments made on capital lease obligations. There was no net cash provided by or used in financing activities for the six months ended June 30, 2003.
New Accounting Standards
In December 2003, the FASB issued Interpretation No. 46, Consolidation of Variable Interest Entities ("FIN 46") that addresses the consolidation of variable interest entities. FIN 46 provides guidance for determining when a primary beneficiary should consolidate a variable interest entity, or equivalent structure, that functions to support the activities of the primary beneficiary. We adopted FIN 46 on March 31, 2004. As a result of its continuing evaluation of the effect that the adoption of FIN 46 will have on the Company’s results of operations and financial condition, the Company believes t
hat it is reasonably possible that future agreements will qualify as variable interest entities. We hold no variable interests as of June 30, 2004.
ITEM 3. Qualitative and Quantitative Disclosure about Market Risk
We do not have operations subject to risk of foreign currency fluctuations, nor do we use derivative financial instruments in our operations or investment portfolio. The interest bearing portion of our cash and cash equivalent balances are kept in money-market accounts so we are exposed to interest risk only to the extent of interest income.
ITEM 4. Controls and Procedures
Our management, under the supervision and with the participation of Donald Katz, our Chief Executive Officer, and Andrew Kaplan, our Chief Financial Officer, performed an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures as of the end of the period covered by the report. Based on that evaluation, Messrs. Katz and Kaplan concluded that our disclosure controls and procedures were effective. There have been no significant changes in our internal controls or in other factors that could significantly affect internal controls subsequent to their evaluation.
PART II - OTHER INFORMATION
ITEM 1. Legal Proceedings.
In September 2001, we and certain of our officers, directors, and former directors, were named as defendants in several putative class actions filed in the United States District Court for the Southern District of New York. The investment banking firms that were involved in our 1999 initial public offering (the "IPO") have also been named as defendants. The essence of the plaintiffs' claims is that the underwriter defendants allegedly allocated the opportunity to participate in the IPO by requiring their customers to pay "kickbacks" in excess of the normal commissions and to make subsequent purchases in the after market at prices in excess of the IPO price. Allegedly, the amounts of the "kickbacks" were sometimes calculated as a percentage of the customer's paper profits o
ver some specified period of time after the IPO. It is alleged that these practices were not disclosed in the registration statement and prospectus for the IPO and that, as a result, the defendants violated various provisions of the federal securities laws. Certain of the complaints purport to set
forth claims on behalf of persons who acquired our common stock from July 16, 1999 to September 11, 2001. One other complaint purports to represent a class of persons who acquired our common stock between July 16, 1999 and December 6, 2000. The complaints do not specify the amount of the compensatory damages the plaintiffs are seeking, but the market loss at issue was in excess of $50 million.
The cases have been consolidated and have been assigned to the same judge who is handling virtually identical cases filed against hundreds of other companies that completed initial public offerings between 1998 and 2000. We along with the individual defendants, have been given an indefinite extension of time to respond to the complaints while the plaintiffs focus on pursuing their claims against the underwriters. We believe that the claims against us have no merit and, more specifically, we and the individual defendants were not aware of the alleged practices, if they occurred. We along with the individual defendants have notified the underwriters who were involved in our IPO that we expect those underwriters to indemnify us pursuant to the terms of the underwriting agreem
ent between us and the underwriters.
On July 1, 2002, the underwriter defendants in the consolidated actions moved to dismiss all of the IPO Litigations, including the action involving us. On July 15, 2002, we along with other non-underwriter defendants in the coordinated cases, also moved to dismiss the litigation. Those motions were fully briefed on September 13 and September 27, 2002, respectively. Those motions have not yet been decided. Due to the inherent uncertainties of litigation and because the litigation is at a preliminary stage, we cannot accurately predict the ultimate outcome of the motions. In addition, the individual defendants in the IPO Litigation signed a tolling agreement and were dismissed from the action without prejudice on October 9, 2002.
We are not otherwise party to any lawsuit or proceeding, which management believes is likely to have a material effect on us.
ITEM 2. Changes in Securities and Use of Proceeds
Recent Sales of Unregistered Securities
None
Report of Offering of Securities and Use of Proceeds There from
None
ITEM 3. Defaults Upon Senior Securities
Inapplicable
ITEM 4. Submission of Matters to a Vote of Security Holders
(a) The Company held its Annual Meeting of Stockholders on June 3, 2004 (the "Annual Meeting").
(b) Inapplicable
(c) The following matters were voted upon at the Annual Meeting:
(i) The election of two directors to serve until the 2007 annual meeting of stockholders, and until their successors are elected and duly qualified, by 98.6% of the common stock present and voting at the meeting voting for Messers Knowlton, Patricof, and Zeev as follows:
| |
Nominee |
For |
Against or Withheld |
|
| |
Winthrop Knowlton |
11,367,170 |
184,298 |
|
| |
Allan Patricof |
11,419,120 |
132,348 |
|
| |
Oren Zeev |
11,369,807 |
181,662 |
|
(ii) The appointment of KPMG LLP as our independent auditors for the year ending December 31, 2004 was ratified by 99.9% of the shares of common stock present and voting at the meeting (votes for: 11,616,657; votes against or withheld: 728; abstention 750).
(iii) An amendment to the Company’s Amended and Restated Certificate of Incorporation to Effect Reverse Stock Split and Decrease the Authorized Number of Shares of the Company’s Common Stock on a Proportional Basis was ratified by the holders of 53.8% of the shares of Company’s outstanding shares of common stock (votes for: 11,415,110; votes against or withheld: 135,455; abstention: 903.)
(d) Inapplicable
None
ITEM 5. Other Information
None
ITEM 6. Exhibits and Reports on Form 8-K
(a) Exhibits
| |
3.1* |
Amended and Restated Certificate of Incorporation of Audible |
| |
3.1.2 ! |
Certificate of Amendment to the Amended and Restated Certificate of Incorporation. |
| |
3.2* |
Amended and Restated Bylaws of Audible |
| |
10.1+* |
License Agreement dated November 4, 1998, by and between Microsoft Corporation and Audible |
| |
10.15* |
1999 Stock Incentive Plan |
| |
10.15.1 |
Amendment No. 1 to Stock Incentive Plan |
| |
10.19* |
Office Lease dated June 20, 1997, by and between Audible, as tenant, and Passaic Investment LLC, Sixty-Five Willowbrook Investment LLC and Wayne Investment LLC, as tenants-in-common, as landlord |
| |
10.20* |
Sublease Agreement dated July 19, 1996, by and between Audible, as sublessee, and Painewebber |
| |
|
Incorporated, as sublessor |
| |
10.26* |
Employment Offer Letter from Audible to Andrew Kaplan dated May 25, 1999 |
| |
10.28** |
Warrant Agreement to purchase 3,333 shares of Common Stock at a price of $22.95 per share, dated October 8, 1999, issued by Audible to National Public Radio, Inc. |
| |
10.29* |
Common Stock Purchase Warrant, W-1, issued June 17, 1999, to Robin Williams |
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10.30* |
Common Stock Purchase Warrant, W-2, issued June 17, 1999, to Robin Williams |
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10.30.1## |
Amendment No. 1 to Common Stock Purchase Warrant, W-2, issued January 25, 2002, to Robin Williams (relating to Exhibit 10.30) |
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10.40*** |
Settlement Agreement by and between Audible Inc. and investor parties thereto dated February 6, 2004. |
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10.41*** |
Form of common stock warrant issued by Audible Inc. to investor parties in connection with the Series A Settlement Agreement dated February 6, 2004. |
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31.1 |
Quarterly Certifications of the Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2003. |
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31.2 |
Quarterly Certifications of the Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2003. |
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32.1 |
Quarterly Certifications of the Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2003. |
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32.2 |
Quarterly Certifications of the Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2003. |
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* |
Incorporated by reference from the Company's Registration Statement on Form S-1 (No. 333-76985) |
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** |
Incorporated by reference from the Company’s Form 10K/A for the fiscal year ended December 31, 1999 |
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# |
Incorporated by reference from the Company’s Form 10-Q for the quarterly period ended September 30, 2000 |
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## |
Incorporated by reference from the Company’s Form 10-Q for the quarterly period ended September 30, 2001 |
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! |
Incorporated by reference from the Company’s Form 10-K for the fiscal year ended December 31, 2001. |
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> |
Incorporated by reference from the Company’s Form 8-K filed on August 5, 2003. |
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*** |
Incorporated by reference from the Company’s Form 10-K for the fiscal year ended December 31, 2003. |
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& |
Incorporated by reference from the Company’s Definitive Proxy Statement on Schedule 14A filed with the Commission on September 2, 2003. |
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+ |
Portions of these Exhibits were omitted and have been filed separately with the Secretary of the Commission pursuant to the Company’s Application requesting Confidential Treatment under Rule 406 of the Securities Act of 1933. |
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++ |
Portions of these Exhibits were omitted and have been filed separately with the Secretary of the Commission pursuant to the Company’s Application requesting Confidential Treatment under Rule 24b-2 of the Securities Exchange Act of 1934. |
(b) Reports on Form 8-K
(1) On May 4, 2004, we filed a Form 8-K containing the press release we issued on May 4, 2004, announcing our financial results for the quarter ended March 31, 2004.
(2) On June 3, 2004, we filed a Form 8-K containing the press release we issued on June 3, 2004, announcing the approval by the Company’s stockholders of the reverse split at the Company’s annual meeting.
(3) On June 17, 2004, we filed a Form 8-K containing the press release we issued on June 16, 2004, announcing the June 17, 2004 effectiveness of the one for three reverse split of the Company’s Common Stock.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this Report to be signed on its behalf by the undersigned thereunto duly authorized.
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AUDIBLE, INC. |
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| Date: August 13, 2004 |
By: |
/s/ |
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Name: |
Andrew P. Kaplan |
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Title: |
Chief Financial Officer and Executive Vice President, Finance and Administration |
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