SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(MARK ONE)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2003
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM _________ TO __________
COMMISSION FILE NUMBER: 000-26529
AUDIBLE, INC.
(Exact name of Registrant as specified in its Charter)
DELAWARE 22-3407945
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification Number)
65 WILLOWBROOK BLVD.
WAYNE, NEW JERSEY 07470
(Address of Principal Executive Offices) (Zip Code)
(973) 837-2700
(Registrant's Telephone Number, Including Area Code)
NONE
(Former Name, Former Address and Former
Fiscal Year - if Changed Since Last Report)
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. YES X NO
--- ---
Indicate by checkmark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). YES NO X
--- ---
As of November 10, 2003, 32,280,152 shares of common stock ("Common
Stock"), 3,473,967 shares of Series A Convertible Preferred Stock, 1,250,000
shares of Series B Convertible Preferred Stock, and 1,111,111 shares of Series C
Convertible Preferred Stock of the Registrant were outstanding.
1
AUDIBLE, INC.
INDEX
FORM 10-Q
PART I - FINANCIAL INFORMATION Page
----
Item 1. Financial Statements:
Condensed Balance Sheets as of September 30, 2003
(unaudited) and December 31, 2002 . . . . . . . . . . . . . . 3
Condensed Statements of Operations for the three and nine
months ended September 30, 2003 and 2002 (unaudited). . . . . 4
Condensed Statements of Cash Flows for the nine months ended
September 30, 2003 and 2002 (unaudited) . . . . . . . . . . . 5
Notes to Condensed Financial Statements (unaudited) . . . . . 6
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations . . . . . . . . 17
Item 3. Qualitative and Quantitative Disclosure
about Market Risk . . . . . . . . . . . . . . . . . . . . . . 25
Item 4. Controls and Procedures . . . . . . . . . . . . . . . . . . . 25
PART II - OTHER INFORMATION
Item 1. Legal Proceedings . . . . . . . . . . . . . . . . . . . . . . 25
Item 2. Changes in Securities and Use of Proceeds . . . . . . . . . . 26
Item 3. Defaults Upon Senior Securities . . . . . . . . . . . . . . . 26
Item 4. Submission of Matters to a Vote of Security Holders . . . . . 26
Item 5. Other Information . . . . . . . . . . . . . . . . . . . . . . 26
Item 6. Exhibits and Reports on Form 8-K. . . . . . . . . . . . . . . 27
Signatures. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30
2
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
AUDIBLE, INC.
CONDENSED BALANCE SHEETS
SEPTEMBER 30, 2003 DECEMBER 31, 2002
-------------------- -------------------
ASSETS (UNAUDITED)
Current assets:
Cash and cash equivalents. . . . . . . . . . . . . . . . . . . . . . $ 6,882,519 $ 2,822,080
Accounts receivable, net . . . . . . . . . . . . . . . . . . . . . . 250,593 189,263
Royalty advances . . . . . . . . . . . . . . . . . . . . . . . . . . 46,664 58,425
Prepaid expenses and other current assets. . . . . . . . . . . . . . 342,168 736,823
Inventory. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 200,324 77,262
-------------------- -------------------
Total current assets . . . . . . . . . . . . . . . . . . . . . . . 7,722,268 3,883,853
Property and equipment, net. . . . . . . . . . . . . . . . . . . . . . . . 323,824 633,400
Other assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 329,232 90,805
-------------------- -------------------
Total assets . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 8,375,324 $ 4,608,058
==================== ===================
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current liabilities:
Accounts payable . . . . . . . . . . . . . . . . . . . . . . . . . . $ 615,893 $ 1,077,509
Accrued expenses and compensation. . . . . . . . . . . . . . . . . . 2,378,555 3,231,893
Royalty obligations, current . . . . . . . . . . . . . . . . . . . . 418,500 598,500
Advances, current. . . . . . . . . . . . . . . . . . . . . . . . . . 680,891 476,053
Accrued dividends on convertible preferred stock . . . . . . . . . . 582,686 125,257
-------------------- -------------------
Total current liabilities. . . . . . . . . . . . . . . . . . . . . 4,676,525 5,509,212
Deferred cash compensation . . . . . . . . . . . . . . . . . . . . . . . . 58,750 90,550
Royalty obligations, non current . . . . . . . . . . . . . . . . . . . . . 72,500 25,000
Advances, non current. . . . . . . . . . . . . . . . . . . . . . . . . . . -- 19,448
Redeemable convertible preferred stock;
Series A, par value $.01, 4,500,000 shares authorized, none and
3,277,327 shares issued and outstanding at September 30, 2003 and
December 31, 2002, respectively. . . . . . . . . . . . . . . . . . . . -- 12,289,976
Commitments and contingencies (see note 9)
Stockholders' equity (deficit):
Convertible preferred stock; Series A, par value $.01, 4,500,000
shares authorized, 3,473,967 and no shares issued and outstanding at
September 30, 2003 and December 31, 2002, respectively. . . . . . . . 13,027,375 --
Convertible preferred stock; Series B, par value $.01, 1,250,000
shares authorized, 1,250,000 shares issued and outstanding at
September 30, 2003 and December 31, 2002, respectively. . . . . . . . 1,137,500 1,137,500
Convertible preferred stock; Series C, par value $.01, 1,111,111
shares authorized, 1,111,111 and no shares issued and outstanding at
September 30, 2003 and December 31, 2002, respectively. . . . . . . . 5,859,772 --
Common stock, par value $.01. 120,000,000 and 75,000,000 shares
authorized; 31,768,304 and 31,687,169 shares issued at September
30, 2003 and December 31, 2002, respectively. . . . . . . . . . . . . 317,683 316,779
Additional paid-in capital . . . . . . . . . . . . . . . . . . . . . . 101,712,718 98,033,060
Deferred compensation and services . . . . . . . . . . . . . . . . . . (273,538) (591,155)
Notes due from stockholders for common stock . . . . . . . . . . . . . (58,750) (289,545)
Treasury stock at cost: 689,225 shares of common stock at September
30, 2003 and December 31, 2002, respectively. . . . . . . . . . . . . (184,740) (184,740)
Accumulated deficit. . . . . . . . . . . . . . . . . . . . . . . . . . (117,970,471) (111,748,027)
-------------------- -------------------
Total stockholders' equity (deficit) . . . . . . . . . . . . . . . . . 3,567,549 (13,326,128)
-------------------- -------------------
-------------------- -------------------
Total liabilities and stockholders' equity (deficit) . . . . . . . . . $ 8,375,324 $ 4,608,058
==================== ===================
See accompanying notes to condensed financial statements.
3
AUDIBLE, INC.
CONDENSED STATEMENTS OF OPERATIONS
-------------------------
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
-------------------------- ---------------------------
2003 2002 2003 2002
------------ ------------ ------------ -------------
(UNAUDITED) (UNAUDITED) (UNAUDITED) (UNAUDITED)
Revenue, net:
Content and services
Consumer content. . . . . . . . . . . . . $ 4,789,921 $ 3,002,039 $12,882,505 $ 7,442,070
Services. . . . . . . . . . . . . . . . . 20,337 64,316 78,918 299,942
------------ ------------ ------------ -------------
Total content and services. . . . . . . . . 4,810,258 3,066,355 12,961,423 7,742,012
Hardware. . . . . . . . . . . . . . . . . . 136,198 152,243 488,522 734,877
Other . . . . . . . . . . . . . . . . . . . 16,126 68,709 48,378 100,961
------------ ------------ ------------ -------------
Total revenue, net. . . . . . . . . . . . 4,962,582 3,287,307 13,498,323 8,577,850
------------ ------------ ------------ -------------
Operating expenses:
Cost of content and services revenue. . . . 1,351,606 1,475,558 3,493,540 3,596,012
Cost of hardware revenue. . . . . . . . . . 444,544 604,644 1,505,356 2,053,196
Production expenses . . . . . . . . . . . . 1,034,313 1,029,185 2,785,469 2,946,614
Development . . . . . . . . . . . . . . . . 590,434 702,463 1,808,422 1,778,349
Sales and marketing . . . . . . . . . . . . 1,514,568 3,016,255 4,924,963 9,264,769
General and administrative. . . . . . . . . 904,692 1,005,882 2,578,928 2,850,421
------------ ------------ ------------ -------------
Total operating expenses. . . . . . . . . 5,840,157 7,833,997 17,096,678 22,489,361
------------ ------------ ------------ -------------
Loss from operations. . . . . . . . . . . . (877,575) (4,546,690) (3,598,355) (13,911,511)
Other income, net . . . . . . . . . . . . . 5,171 17,134 15,183 76,399
------------ ------------ ------------ -------------
Net loss. . . . . . . . . . . . . . . . . . (872,404) (4,529,556) (3,583,172) (13,835,112)
------------ ------------ ------------ -------------
Accrued dividends on convertible preferred
stock . . . . . . . . . . . . . . . . . . . (454,197) (354,195) (1,194,828) (1,014,942)
Preferred stock discount. . . . . . . . . . (1,444,444) -- (1,444,444) --
------------ ------------ ------------ -------------
Total dividends . . . . . . . . . . . . . (1,898,641) (354,195) (2,639,272) (1,014,942)
------------ ------------ ------------ -------------
Net loss applicable to common stockholders. $(2,771,045) $(4,883,751) $(6,222,444) $(14,850,054)
============ ============ ============ =============
Basic and diluted net loss per common share . $ (0.09) $ (0.16) $ (0.20) $ (0.49)
============ ============ ============ =============
Weighted average common shares outstanding. . 31,023,059 30,947,340 31,006,408 30,352,908
============ ============ ============ =============
See accompanying notes to condensed financial statements.
4
AUDIBLE, INC.
CONDENSED STATEMENTS OF CASH FLOWS
-------------------------
NINE MONTHS ENDED
SEPTEMBER 30,
---------------------------
2003 2002
------------ -------------
(UNAUDITED) (UNAUDITED)
Cash flows from operating activities:
Net loss . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $(3,583,172) $(13,835,112)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization. . . . . . . . . . . . . . . . . . . . . . . 403,555 1,212,744
Services rendered for common stock and warrants. . . . . . . . . . . . . . 884,068 4,594,223
Services rendered for preferred stock. . . . . . . . . . . . . . . . . . . -- 454,998
Non-cash compensation charge . . . . . . . . . . . . . . . . . . . . . . . 139,630 219,834
Deferred cash compensation . . . . . . . . . . . . . . . . . . . . . . . . -- (3,000)
Non-cash forgiveness of notes due from stockholders for common stock . . . 198,995 --
Changes in assets and liabilities:
Interest receivable on short-term investments. . . . . . . . . . . . . . -- 1,260
Accounts receivable, net . . . . . . . . . . . . . . . . . . . . . . . . (61,330) (74,588)
Royalty advances . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11,761 (36,318)
Prepaid expenses and other current assets. . . . . . . . . . . . . . . . 394,655 140,573
Inventory. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (123,062) 50,501
Other assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (238,427) (75,000)
Accounts payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . (461,616) (304,395)
Accrued expenses and compensation. . . . . . . . . . . . . . . . . . . . 646,662 1,057,602
Royalty obligations. . . . . . . . . . . . . . . . . . . . . . . . . . . (132,500) (254,950)
Advances . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 185,390 (170,991)
------------ -------------
Net cash used in operating activities. . . . . . . . . . . . . . . . . (1,735,391) (6,982,369)
------------ -------------
Cash flows from investing activities:
Purchases of property and equipment. . . . . . . . . . . . . . . . . . . . . (93,979) (145,133)
------------ -------------
Net cash used in investing activities. . . . . . . . . . . . . . . . . (93,979) (145,133)
------------ -------------
Cash flows from financing activities:
Proceeds from sale of Series C Convertible Preferred Stock, net. . . . . . . 5,859,772 --
Proceeds from sale of common stock, net. . . . . . . . . . . . . . . . . . . -- 3,159,250
Proceeds from exercise of common stock options . . . . . . . . . . . . . . . 30,037 5,556
Payments received on notes due from stockholders for common stock. . . . . . -- 4,911
------------ -------------
Net cash provided by financing activities. . . . . . . . . . . . . . . 5,889,809 3,169,717
------------ -------------
Increase (decrease) in cash and cash equivalents . . . . . . . . . . . 4,060,439 (3,957,785)
Cash and cash equivalents at beginning of period . . . . . . . . . . . . . . . 2,822,080 7,627,802
------------ -------------
Cash and cash equivalents at end of period . . . . . . . . . . . . . . . . . . $ 6,882,519 $ 3,670,017
============ =============
See accompanying notes to condensed financial statements.
5
AUDIBLE, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
SEPTEMBER 30, 2003 AND 2002
(UNAUDITED)
(1) DESCRIPTION OF BUSINESS AND BUSINESS CONDITIONS
Audible, Inc. (Audible or the Company), incorporated on November 3,
1995, was formed to create the Audible service, a solution delivering
premium digital spoken audio content. The Company commenced commercial
operations in October 1997.
The Company has experienced recurring losses since its inception and
as a result as of September 30, 2003, has an accumulated deficit of
$117,970,471. The Company raised $5,859,772, net of direct costs, from the
sale of Series C Convertible Preferred ("Series C") stock in August 2003
(see note 3). The Company's cash and cash equivalent balances as of
September 30, 2003 was $6,882,519. The Company believes that its cash and
cash equivalents balance will enable it to meet its anticipated cash
requirements for operations and capital expenditures for the foreseeable
future.
The accompanying financial statements have been prepared assuming that
the Company will continue as a going concern. While the Company believes
that its cash and cash equivalents balance will enable it to meet its
anticipated cash requirements for operations and capital expenditures for
the foreseeable future, beyond that the Company 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 the Company or to the stockholders, if
at all. The accompanying financial statements do not include any
adjustments that might result from the outcome of this uncertainty.
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Reclassifications
Certain items in the 2002 financial statements have been reclassified
to conform to the 2003 presentation.
Basis of Presentation
The accompanying condensed financial statements as of September 30,
2003, and for the three and nine months ended September 30, 2003 and 2002,
are unaudited and, in the opinion of management, include all adjustments
(consisting of normal recurring adjustments and accruals) necessary to
present fairly the results for the periods presented in accordance with
accounting principles generally accepted in the United States of America.
Operating results for the three and nine months ended September 30, 2003
are not necessarily indicative of the results that may be expected for the
year ending December 31, 2003. These financial statements should be read in
conjunction with the audited financial statements and notes thereto for the
year ended December 31, 2002, from the Company's Annual Report on Form
10-K.
6
AUDIBLE, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
SEPTEMBER 30, 2003 AND 2002
(UNAUDITED)
Basic and Diluted Net Loss Per Common Share
Basic and diluted net loss per common share is presented in accordance
with the provisions of SFAS No. 128, ''Earnings Per Share.'' Basic net loss
per common share is computed by dividing net loss applicable to common
stockholders by the weighted average number of common shares outstanding
for the period. Diluted net loss per common share reflects the potential
dilution that could occur if securities or other contracts to issue common
stock were exercised or converted into common stock and resulted in the
issuance of common stock. Diluted net loss per common share is equal to
basic net loss per common share, since all common stock equivalents are
antidilutive for each of the periods presented.
Diluted net loss per common share for the three and nine months ended
September 30, 2003 does not include the effects of outstanding options to
purchase 10,692,400 shares of common stock; warrants outstanding to
purchase 3,506,271 shares of common stock; 14,008,078 shares of common
stock issuable on conversion of outstanding Series A Redeemable Convertible
Preferred ("Series A") stock; 1,250,000 shares of common stock issuable on
conversion of outstanding Series B Convertible Preferred ("Series B")
stock, and 11,111,110 shares of common stock issueable on conversion of
outstanding Series C stock, as the effect of their inclusion is
antidilutive during the periods. Diluted net loss per common share for the
three and nine months ended September 30, 2002 does not include the effects
of outstanding options to purchase 7,372,150 shares of common stock,
outstanding warrants to purchase 3,511,271 shares of common stock,
12,467,138 shares of common stock issuable on conversion of outstanding
Series A, and 1,250,000 shares of common stock issuable on conversion of
outstanding Series B, as the effect of their inclusion is antidilutive
during the periods.
Stock-Based Compensation
In December 2002, the Financial Accounting Standards Board (FASB)
issued Statement No. 148, "Accounting for Stock Based Compensation-
Transition and Disclosure, ("SFAS 148"). SFAS 148 provides alternative
methods of transition for a voluntary change to the fair value method of
accounting for stock-based compensation as originally provided by SFAS No.
123 "Accounting for Stock-Based Compensation". Additionally, SFAS 148
amends the disclosure requirements of SFAS 123 to require prominent
disclosure in both the annual and interim financial statements about the
method of accounting for stock-based compensation and the effect of the
method used on reported results. The transitional requirements of SFAS 148
are effective for all financial statements for fiscal years ending after
December 15, 2002. We adopted the disclosure portion of this statement for
the year ended December 31, 2002. The application of the disclosure portion
of this standard had no impact on our financial position or results of
operations. The FASB recently indicated that they will require stock-based
employee compensation to be recorded as a charge to earnings beginning in
2004. We will continue to monitor their progress on the issuance of this
standard as well as evaluate our position with respect to current guidance.
7
AUDIBLE, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
SEPTEMBER 30, 2003 AND 2002
(UNAUDITED)
The Company's 1999 Stock Incentive Plan (the "Plan") permits the
granting of stock options, stock appreciation rights, restricted or
unrestricted stock awards, performance rights and other stock based awards
to employees. For options granted to new Audible employees as part of their
compensation package, the exercise price is determined by the closing price
of Audible's common stock on the day immediately preceding the employees
start date. For additional option grants made to existing employees, the
exercise price is determined based on the closing price of the day
immediately preceding the grant date. The majority of the options granted
vest over a fifty-month period and expire ten years from the date of the
grant.
The Plan originally permitted up to 9,000,000 common stock shares to
be issued under the Plan. In September 2003, at the annual meeting of
stockholders, the stockholders approved an amendment to the Plan increasing
the number of authorized common shares available for issuance under the
plan to 12,600,000 shares. As of September 30, 2003 and 2002, options to
purchase 10,692,400 and 7,372,150, respectively, common stock shares were
outstanding.
Compensation expense, if any, based on the intrinsic value method is
recognized on a straight-line basis over the vesting term. Had the Company
elected to recognize compensation cost based on fair value of the stock
options at the date of grant under SFAS 148, such costs would have been
recognized ratably over the vesting period of the underlying instruments
and the Company's net loss and net loss per common share would have changed
to the pro forma amounts indicated in the table below.
Three Months Ended Nine Months Ended
September 30, September 30,
2003 2002 2003 2002
------------ ------------ ------------ -------------
Net loss applicable to common
stockholders as Reported . . . . . . . . $(2,771,045) $(4,883,751) $(6,222,444) $(14,850,054)
Add: Total stock based employee
compensation cost included in reported
net loss (based on intrinsic value
method). . . . . . . . . . . . . . . . . 29,142 19,200 67,542 57,600
Deduct: Total stock based employee
compensation expense determined
under fair value method for all
awards . . . . . . . . . . . . . . . . . (1,004,965) (1,531,682) (2,941,199) (4,285,800)
------------ ------------ ------------ -------------
Pro-forma net loss . . . . . . . . . . . $(3,746,868) $(6,396,233) $(9,096,101) $(19,078,254)
============ ============ ============ =============
Basic and diluted net loss per common share:
As Reported. . . . . . . . . . . . . . . $ (0.09) $ (0.16) $ (0.20) $ (0.49)
Pro Forma. . . . . . . . . . . . . . . . $ (0.12) $ (0.21) $ (0.29) $ (0.63)
8
AUDIBLE, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
SEPTEMBER 30, 2003 AND 2002
(UNAUDITED)
(3) STOCKHOLDERS' EQUITY
Common Stock
In March 1999, the Company issued 229,500 shares of common stock to
employees at a price less than the fair value of the stock at the time of
issuance. These shares, which are subject to vesting over four years, were
paid for by full recourse promissory notes executed by the employees. The
difference between the fair value and the issue price of these common
shares of $907,214 was recorded as deferred compensation, a component of
stockholders' deficit, and is being amortized as an expense straight-line
over the vesting term. When employees have left the Company, the remaining
unexpensed deferred compensation has been reversed against additional
paid-in-capital.
In March 2000, the Company issued 370,000 options to purchase shares
of common stock to employees at $1.00 less than the fair value of the
common stock at the time of issuance. These options are subject to vesting
over four years. The difference between the fair value and the issue price
of these options of $370,000 was recorded as deferred compensation, and is
being amortized as an expense straight-line over the vesting term. When
employees have left the Company, the remaining unexpensed deferred
compensation has been reversed against additional paid-in-capital.
In May 2002, the Company issued 50,000 options to purchase shares of
common stock to an employee at $0.50 less than the fair value of the common
stock at the time of issuance. These options are subject to vesting over
four years. The difference between the fair value and the issue price of
these options of $25,000 was recorded as deferred compensation, and was
being amortized as an expense straight-line over the vesting term. In July
2002, as a result of the employee no longer being employed by the Company,
the Company stopped recording any further expense related to these 50,000
options and reversed the remaining unexpensed deferred compensation against
paid-in-capital.
In August 2003, the Company issued 1,491,750 options to purchase
shares of common stock to employees at $0.16 less than the fair value of
the common stock at the time of issuance. These options are subject to
vesting over four years. The difference between the fair value and the
issue price of these options of $238,680 was recorded as deferred
compensation, and is being amortized as an expense straight-line over the
vesting term.
During the three months ended September 30, 2003 and 2002, $29,142 and
$73,278, respectively, of compensation expense was recognized related to
these transactions. During the nine months ended September 30, 2003 and
2002, $139,630 and $219,834, respectively, of compensation expense was
recognized related to these transactions.
In February 2002, the Company issued 4,069,768 shares of common stock
in connection with an investment in the Company made by Special Situations
Funds (see note 10).
9
AUDIBLE, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
SEPTEMBER 30, 2003 AND 2002
(UNAUDITED)
During the three and nine months ended September 30, 2003, the Company
issued 60,800 shares of common stock in connection with the exercise of
employee stock options and 20,335 shares of common stock in connection with
the cashless exercise of a warrant by a service provider. During the three
and nine months ended September 30, 2002, the Company issued none and
11,112, respectively, shares of common stock in connection with the
exercise of employee stock options. No warrants were exercised during the
three and nine months period ended September 30, 2002.
In March 2002, at a special meeting of stockholders of Audible Inc.,
the stockholders approved an increase in the number of shares of common
stock authorized from 50,000,000 to 75,000,000. In September 2003, at the
annual meeting of shareholders, the stockholders approved an increased in
the number of shares of common stock authorized from 75,000,000 to
120,000,000. As of September 30, 2003 and December 31, 2002, the Company
had issued 31,768,304 and 31,687,169, respectively, shares of common stock.
As of September 30, 2003 and December 31, 2002, the Company had 3,506,271
and 3,523,271 shares of common stock, respectively, reserved for issuance
upon exercise of outstanding common stock warrants, and 10,692,900 and
7,547,150 shares of common stock, respectively, reserved for issuance upon
exercise of outstanding options. As of September 30, 2003 and December 31,
2002, the Company had 14,008,078 and 13,215,166, respectively, shares of
common stock reserved for issuance upon conversion of outstanding Series A
stock, 1,250,000 shares of common stock reserved for issuance upon
conversion of outstanding Series B stock, and 11,111,110 and no shares,
respectively, reserved for issuance upon conversion of outstanding Series C
stock.
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 has been
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 September 30, 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 Partners 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 is no longer
mandatorily redeemable, is convertible at any time by the holders into
shares of common stock, and dividends will 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 will be converted into shares of Common Stock. In
liquidation, the Audible Series A stock ranks pari passu with the Company's
Series B and Series C stock.
10
AUDIBLE, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
SEPTEMBER 30, 2003 AND 2002
(UNAUDITED)
During the three months ended September 30, 2003 and 2002, $394,033
and $354,195, respectively, was recognized as accrued dividends on the
Series A stock. During the nine months ended September 30, 2003 and 2002,
$1,134,664 and $1,014,942, respectively, was recognized as accrued
dividends on the Series A stock. As of September 30, 2003, and December 31,
2002, $522,522 and $125,257, respectively, of these accrued dividends are
included as liabilities in the accompanying Balance Sheets.
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 will automatically convert to
shares of common stock at the then effective conversion price. Effective
August 2003, the Audible Series B stock ranks pari passu with the Company's
Series A stock and Series C stock.
In August 2003, Apax Partners purchased 740,741 shares, Bertelsmann
Multimedia, Inc. purchased 185,185 shares and Random House Ventures, LLC
purchased 185,185 shares of Audible Series C stock at a per share price of
$5.40. Proceeds received by the Company, net of estimated direct costs,
were approximately $5,859,772. Each share of Series C stock is currently
convertible into 10 shares of Common Stock. The Series C stock is entitled
to receive dividends. Such dividends accrue and compound semi-annually at
the rate of 6% per annum for four years from the date of issuance. In the
event of the conversion of the Series C stock, all accrued but unpaid
preferred dividends will be converted into shares of Common Stock. In
liquidation, the Audible Series C stock ranks pari passu with the Company's
Series A stock and Series B stock. At the time of issuance, the conversion
price of the Series C stock was $0.13 per share lower than the fair market
value of the Company's common stock. Since the Series C stock is
convertible at any time at option of the holder, the entire $1,444,444 in
preferred stock discount was recognized as a dividend at the time of
issuance, and is reflected in the net loss applicable to common
stockholders, with the credit to additional paid-in capital.
During the three and nine months ended September 30, 2003, $60,164 was
recognized as accrued dividends on the Series C stock. As of September 30,
2003, and December 31, 2002, $60,164 and none, respectively, of these
accrued dividends are included as liabilities in the accompanying Balance
Sheets.
(4) SERVICES AGREEMENT
In June 1999, in connection with a services agreement, the Company
issued a warrant to purchase 150,000 shares of common stock at $0.01 per
share, which is fully vested, and a warrant to purchase 500,000 shares of
common stock at $8.00 per share, which is subject to vesting over a
three-year period. The agreement allows for an additional warrant to
purchase 250,000 shares of common stock at $8.00 per share upon extension
of the agreement for an additional year, also subject to vesting. In
January 2001, this services agreement was amended. Under the terms of the
amended agreement, the previously issued warrant to purchase 500,000 shares
11
AUDIBLE, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
SEPTEMBER 30, 2003 AND 2002
(UNAUDITED)
at $8.00 was replaced with two new warrants. The first new warrant issued,
which is fully vested, is for the purchase of 200,000 shares of common
stock at $0.91 per share. The second warrant for the purchase of 200,000
shares of common stock at $0.91 per share, was subject to vesting over a
20-month period ending December 31, 2002.
The fair value 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 amended term of the service agreement which
ended in January 2003, using variable plan accounting for any unvested
portion of shares. Under variable plan accounting, the compensation costs
vary each accounting period until the final measurement date. During the
three months ended September 30, 2003 and 2002, none and $116,928,
respectively, of expense was recorded, primarily as a marketing expense,
related to this agreement with the non-cash credit for services to
additional paid-in capital. During the nine months ended September 30, 2003
and 2002, $20,296 and $354,564, respectively, of expense was recorded,
primarily as a marketing expense, related to this agreement with the
non-cash credit for services to additional paid-in capital.
(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 is reduced from $10,000,000 to $1,500,000 and an additional
fee of $1,000,000 is 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 value 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 three months ended
September 30, 2003 and 2002, none and $43,200, respectively, was recorded
as a marketing expense related to these warrants with the non-cash credit
for services to additional paid-in capital. During the nine months ended
September 30, 2003 and 2002, $14,400 and $129,600, respectively, was
recorded as a marketing expense related to these warrants with the non-cash
credit for services to additional paid-in capital.
12
AUDIBLE, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
SEPTEMBER 30, 2003 AND 2002
(UNAUDITED)
During the three-year term of this agreement, in consideration for
certain services, Amazon received $22,500,000 (as amended) plus a specified
percentage of revenue earned over a specified amount. Under the Securities
Purchase Agreement, Amazon.com purchased 1,340,033 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 of 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 three months ended
September 30, 2003 and 2002, none and $1,250,000, respectively, was
recorded as a marketing expense related to the straight-line amortization
of the non-cash portion of deferred services. During the nine months ended
September 30, 2003 and 2002, $416,667 and $3,750,000, respectively, was
recorded as a marketing expense related to the straight-line amortization
of the non-cash portion of deferred services.
During the three months ended September 30, 2003 and 2002, none and
$312,500, respectively, was recorded as a marketing expense representing
the straight-line amortization of the cash portion of payments due under
this agreement. During the nine months ended September 30, 2003 and 2002,
$104,167 and $937,500, respectively, was recorded as a marketing expense
representing the straight-line amortization of the cash portion of payments
due under this agreement.
Prior to the agreement reached with Amazon.com in August 2003, a total
of $1,500,000 in cash obligations, which was payable in four installments
of $375,000 each due on January 30, April 30, and July 31, and October 30,
2002, respectively, remained unpaid. As of December 31, 2002, $1,395,500
had been accrued based on the straight-line amortization and was included
in Accrued Expenses on the accompanying December 31, 2002 Balance Sheet.
Under an agreement reached with Amazon.com in August 2003, the Company was
released from this $1,500,000 cash obligation. This $1,500,000 has been
recorded as an addition to paid-in-capital on the accompanying September
30, 2003 Balance Sheet.
13
AUDIBLE, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
SEPTEMBER 30, 2003 AND 2002
(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
to 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
agreed to issue 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 will automatically convert 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 is no longer required to pay the $1,500,000
in imprint fees that were due in 2003 and 2004. At December 31, 2002,
$134,997 of this obligation had been expensed and was included in Accrued
Expenses in the accompanying December 31, 2002 Balance Sheet.
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' deficit.
During the three and nine months ended September 30, 2003, none and a
credit of $134,997 representing the reversal of the accrual was recorded as
a credit to cost of content and services revenue related to this agreement.
During the three and nine months ended September 30, 2002, $227,499 and
$694,998, respectively, was recorded as an expense to cost of content and
services revenue related to this agreement.
14
AUDIBLE, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
SEPTEMBER 30, 2003 AND 2002
(UNAUDITED)
The original agreement further provides for Random House to be granted
a warrant to purchase 878,333 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 months ended September 30, 2003 and
2002, $149,438 and $124,079, 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 nine months
ended September 30, 2003 and 2002, $428,772 and $694,998, 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
(7) RELATED PARTY TRANSACTIONS
On April 11, 2001, the Company amended the payment terms of the
$50,000 note receivable due from a stockholder-employee due on March 27,
2001. The amendment required semi-annual principal payments of at least
$5,000 beginning July 15, 2001 until the note and all accrued interest is
repaid. The interest rate on the note was 5.42% annually. On September 3,
2002, the remaining outstanding principal balance of $45,000 and all
accrued interest was paid to the Company by the stockholder-employee giving
the Company 12,500 shares of Audible common stock with the fair value at
the date of the transaction of $4,750, and with the proceeds of a salary
bonus paid to the stockholder-employee on the same date.
(8) NOTES DUE FROM STOCKHOLDERS FOR COMMON STOCK
Notes due from stockholders that are current employees and former
directors of $289,545 at December 31, 2002, were received by the Company
for payment for shares of common stock purchased under the Company's Stock
Restriction Agreements. These notes have been reflected as a reduction to
stockholders' equity. The notes are 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.
15
AUDIBLE, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
SEPTEMBER 30, 2003 AND 2002
(UNAUDITED)
As of January 29, 2003, the unpaid principal and unpaid interest
balance due on these notes to the Company from stockholders that are
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 will be 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 has
extended the due dates to December 31, 2003 and reduced the interest rate
in 2003 to 4%.
(9) CONTINGENCIES
In September 2001, the Company was named as a defendant in a
securities class action filed in United States District court for the
Southern District of New York related to its initial public offering
("IPO") in July 1999. The lawsuits also named certain of the underwriters
of the IPO, including Credit Suisse First Boston Corporation, J.P. Morgan
Chase & Co., Volpe Brown Whelan & Co., LLC, and Wit Capital Corporation, as
well as certain Officers and Directors and former Directors of the Company
as defendants. Approximately 300 other issuers and their underwriters have
had similar suits filed against them, all of which are included in a single
coordinated proceeding in the Southern District of New York (the "IPO
Litigation"). The complaints allege that the prospectus and the
registration statement for the IPO failed to disclose that the underwriters
allegedly solicited and received "excessive" commissions from investors and
that some investors in the IPO allegedly agreed with the underwriters to
buy additional shares in the aftermarket in order to inflate the price of
the Company's stock. A consolidated amended complaint was filed April 19,
2002. The Company and certain officers, directors and former directors are
named in the suits pursuant to Section 11 of the Securities Act of 1933.
The complaints seek unspecified damages, attorney and expert fees, and
other unspecified litigation costs.
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, the Company, along with other
non-underwriter defendants in the coordinated cases, also moved to dismiss
the litigation. On February 19, 2003, the Court ruled on the motions. The
Court granted the Company's motion to dismiss the claims against it under
Rule 10b-5, due to the insufficiency of the allegations against the
Company. The motions to dismiss the claims under Section 11 of the
Securities Act were denied as to virtually all of the defendants in the
consolidated cases, including the Company. In addition, the individual
defendants in the IPO Litigation, Donald R. Katz, Andrew P. Kaplan, Richard
Brass, R. Bradford Burnham, W. Bingham Gordon, Thomas P. Hirschfeld,
Winthrop Knowlton, and Timothy Mott signed a tolling agreement and were
dismissed from the action without prejudice on October 9, 2002.
16
AUDIBLE, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
SEPTEMBER 30, 2003 AND 2002
(UNAUDITED)
On June 26, 2003, a committee of the Company's Board of Directors
conditionally approved a proposed partial settlement with the plaintiffs in
this matter. The settlement would provide, among other things, a release of
the Company and of the individual defendants for the conduct alleged in the
action to be wrongful in the amended complaint. The Company would agree to
undertake other responsibilities under the partial settlement, including
agreeing to assign away, not assert, or release certain potential claims
the Company may have against its underwriters. Any direct financial impact
of the proposed settlement is expected to be borne by the Company's
insurance carriers. The committee agreed to approve the settlement subject
to a number of conditions, including the participation of a substantial
number of other Issuer Defendants in the proposed settlement, the consent
of the Company's insurers to the settlement, and the completion of
acceptable final settlement documentation. Furthermore, the settlement is
subject to a hearing on fairness and approval by the Court overseeing the
IPO Litigations.
Due to the inherent uncertainties of litigation and because the
settlement approval process is at a preliminary stage, the Company cannot
accurately predict the ultimate outcome of the matter.
Other than what is disclosed above, the Company is not a party to any
lawsuit or proceeding, which management believes is likely to have a
material effect on us.
(10) SPECIAL SITUATION FUNDS INVESTMENT
On February 15, 2002, Special Situations Funds purchased 4,069,768
shares of common stock for $3,500,000 at a per share price of $0.86. Net
proceeds received by the Company was $3,159,000 after deducting direct
costs of $331,000 in finders fees and $10,000 in legal fees. In connection
with this transaction, the Company issued warrants to purchase an
additional 1,220,930 shares of common stock. The warrants were exercisable
at a price of $1.15 per share anytime prior to the fifth anniversary of the
issue date. As a result of the issuance of the Series C stock at a
conversion price of $0.54, the exercise price of the Special Situation
Funds warrants was adjusted down to $1.01 per share. The Company may demand
the warrantholder exercise its rights in the event that the closing bid
price of a share of the Company's common stock exceeds $2.30 for twenty
consecutive trading sessions.
17
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 2002 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
We are the leading provider of premium spoken audio content, such as audio
versions of books, newspapers and radio programs, that is delivered over the
Internet and can be streamed, burned to CD or played back on personal computers
and hand-held electronic devices that have digital audio capabilities. The
Audible service allows consumers to purchase and download content from our Web
site at www.audible.com(TM). We offer customers the opportunity to subscribe to
AudibleListener, a monthly audio service. For a fixed monthly fee,
AudibleListener customers may download their choice of programs from our Web
site. More than 34,000 hours of audio content, much of which is only available
in digital audio format at www.audible.com, is currently available on our Web
site. We also sell at our Web site our own digital audio player under the brand
name of Otis, which is manufactured to our specifications in Korea. Customers
can also access Audible content products through the Apple-iTunes Music store
and at Amazon.com. Several manufacturers, including Apple Corp., Palm, Sony
Electronics, Kenwood, Handspring, Hewlett-Packard, Franklin Electronic
Publishers, and Digisette, LLC., have agreed to support and promote the playback
of our content by including the Audible software on their devices.
The market for the Audible service results from the increasing usage of
the Internet and the introduction of hand-held electronic devices that have
digital audio capabilities. In contrast to traditional radio broadcasts, the
Audible service offers customers access to content of their choice and the
ability to listen to what they want, when and where they want--whether
commuting, exercising, relaxing or sitting at their personal computers. Unlike
traditional and online bookstores, which are subject to physical inventory
constraints and shipping delays, we provide customers a selection that is
readily available in digital format that can be quickly delivered over the
Internet.
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 base.
As of September 30, 2003, more than 280,000 customers in over 100 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 attain profitability or, if increases in
revenue and profitability are achieved, that they 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.
18
Consumer content revenue consists of content sales made from our website.
Revenue from the sale of individual content titles is recognized in the period
when the content is downloaded and the customer's credit card is processed.
Revenue from the sale of content subscriptions is recognized pro rata over the
term of the subscription period. Revenue from the sale of AudibleListener
memberships is recognized each month the customer participates in the program.
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. Rebates and refunds are recorded as a reduction of
revenue over the period in which the related revenue is recognized.
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. Under multiple element arrangements, the
fair value of different elements cannot usually be determined since we do not
sell the items separately, therefore revenue is recognized on a straight-line
basis over the term of the agreement.
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(R) Membership. For these multiple-element
arrangements in which a customer signs up for a one year membership and receives
an audio player, revenue is recognized using the residual method whereby the
fair value of the undelivered content element is deferred until the content is
delivered and the remaining revenue (if any) is recognized on the delivered
hardware element. The discounted selling price of the hardware device reflects
the subsidy that we incur to acquire a customer with a one year commitment to
AudibleListener(R). 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 are party to several joint marketing agreements with device and media
storage manufacturers such as Apple, Palm, and Hewlett-Packard. Under these
agreements, device manufacturers may receive a portion of the content revenue
generated over a specified period of time from each new Audible customer
referred by them through the purchase of a 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 two years from the date the device user
becomes an Audible customer.
In January 2000, we entered into two agreements with Amazon.com. We were
the exclusive provider of digital spoken audio to Amazon.com, as defined in the
Co-Branding, Marketing and Distribution Agreement, as amended. During the
three-year term of this agreement, in consideration for certain services, Amazon
is entitled to $22,500,000 plus a specified percentage of revenue earned over a
threshold amount in addition to common stock warrants. Under the Securities
Purchase Agreement dated January 30, 2000, Amazon.com purchased 1,340,033 shares
of our common stock for $20,000,000. The first $20,000,000 in payments due to
Amazon.com under the amended Co-Branding, Marketing and Distribution Agreement,
were offset against the $20,000,000 in consideration due to us for the purchase
of common stock and no cash was exchanged. Of the remaining $2,500,000 due in
cash to Amazon.com under the agreement, $1,000,000 had been paid through
September 30, 2003 with the remaining $1,500,000 released under an agreement
reached with Amazon.com in August 2003. This $1,500,000 has been recorded as a
capital contribution as an addition to paid-in capital in the third quarter of
2003.
19
In May 2000, we entered into a 50-month Co-Publishing, Marketing, and
Distribution Agreement with Random House 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 will be distributed
exclusively on the Internet by us. As part of this alliance, Random House,
through its Random House Ventures, LLC subsidiary, purchased 169,780 shares of
our common stock for $1,000,000. Over the term of the agreement we will be
contributing towards funding the acquisition and creation of digital audio
titles through Random House Audible. On March 26, 2002, the agreement was
amended to 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 on April 1, 2002,
we issued 1,250,000 shares of Series B stock to Random House. 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 we no longer are required to pay the
$1,500,000 imprint fees that were due in 2003 and 2004. At December 31, 2002,
$134,997 of this obligation had been expensed and was included in Accrued
Expenses in the accompanying December 31, 2002 Balance Sheet. This accrual was
reversed during the nine months ended September 30, 2003.
In February 2001, Microsoft purchased 2,666,666 shares of Audible Series A
stock for $10,000,000 at a per share price of $3.75. Each share of Series A
stock was originally convertible into four shares of Common Stock (equivalent to
a price of $.9375 per share, which was greater than the common stock price at
the date of grant, therefore, there was no beneficial conversion feature
associated with these preferred shares), subject to adjustment under certain
conditions. As a result of the investment in us by Special Situations in
February 2002, the conversion rate has been adjusted as per the Stock Purchase
Agreement to 4.0323 shares of Common Stock. The Series A stock was convertible
at the option of the holder at any time prior to the fifth anniversary of the
original issue date. Dividends were payable semi-annually at an annual rate of
12% in either additional preferred shares or in cash at our option. On the fifth
anniversary of the original issue date, we were required to redeem all remaining
outstanding shares at a per share price of $3.75 plus all accrued and unpaid
dividends. In August 2003, Apax Partners purchased from Microsoft all 3,473,967
outstanding shares of Audible's Series A stock and agreed to certain amendments
to that security. As amended, the Series A stock is no longer mandatorily
redeemable, is convertible at any time by the holders into shares of Common
Stock, and dividends will 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 will be converted
into shares of Common Stock.
In February 2002, Special Situations Funds purchased 4,069,768 shares of
common stock for $3,500,000 at a per share price of $0.86. Proceeds received by
us net of direct costs were $3,159,000. In connection with this transaction, we
issued warrants to purchase an additional 1,220,930 shares of common stock. The
warrants were exercisable at a price of $1.15 anytime prior to the fifth
anniversary of the issue date. As a result of the issuance of the Series C stock
at a conversion price of $0.54, the exercise price of the Special Situation
Funds warrants was adjusted down to $1.01 per share. We may demand the
warrantholder exercise its rights in the event that closing bid price of a share
of our common stock exceeds $2.30 for twenty consecutive trading sessions.
In August 2003, Apax Partners purchased 740,741 shares, Bertelsmann
Multimedia, Inc. purchased 185,185 shares and Random House Ventures, LLC
purchased 185,185 shares of Audible Series C stock at a per share price of
$5.40. Proceeds received by the Company, net of estimated direct costs, were
approximately $5,839,772. Each share of Series C stock is currently convertible
into 10 shares of Common Stock. The Series C stock is entitled to receive
dividends. Such dividends accrue and compound semi-annually at the rate of 6%
per annum for four years following the date of initial issuance. In the event
of the conversion of the Series C stock, all accrued but unpaid preferred
dividends will be converted into shares of Common Stock. In liquidation, the
Audible Series C stock ranks pari passu with the Company's Series A stock and
Series B stock.
20
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 nine months ended
September 30, 2003 and 2002.
========================================================================================================
THREE MONTHS NINE MONTHS
ENDED SEPTEMBER 30, ENDED SEPTEMBER 30,
------------------------- --------------------
2003 2002 2003 2002
(UNAUDITED) (UNAUDITED)
Revenue:
Content and services
Consumer content . . . . . . . . . . . . . . 97% 91% 95% 87%
Services . . . . . . . . . . . . . . . . . . - 2 1 3
----------- ------------ ------------ ------
Total content and services . . . . . . . . . . 97 93 96 90
Hardware . . . . . . . . . . . . . . . . . . . 3 5 4 9
Other. . . . . . . . . . . . . . . . . . . . . - 2 - 1
----------- ------------ ------------ ------
Total revenue. . . . . . . . . . . . . . . 100% 100% 100% 100%
Operating expenses:
Cost of content and services revenue . . . . . 27 45 26 42
Cost of hardware revenue . . . . . . . . . . . 9 18 11 24
Production expenses. . . . . . . . . . . . . . 21 31 21 34
Development. . . . . . . . . . . . . . . . . . 12 21 13 21
Sales and marketing. . . . . . . . . . . . . . 31 92 36 108
General and administrative . . . . . . . . . . 18 31 19 33
----------- ------------ ------------ ------
Total operating expenses . . . . . . . . . 118 238 126 262
----------- ------------ ------------ ------
Loss from operations.. . . . . . . . . . . . . . . (18) (138) (27) (162)
Other income, net. . . . . . . . . . . . . - - - 1
----------- ------------ ------------ ------
Net loss . . . . . . . . . . . . . . . . . . . . . (18) (138) (27) (161)
Accrued dividends on convertible preferred stock.. (9) (11) (9) (12)
Discount on preferred stock. . . . . . . . . . . . (29) - (10) -
----------- ------------ ------------ ------
Net loss applicable to common stockholders . . . . (56)% (149)% (46)% (173)%
========================================================================================================
THREE MONTHS ENDED SEPTEMBER 30, 2003 COMPARED TO THREE MONTHS ENDED SEPTEMBER
30, 2002.
Total revenue, net. Total revenue, net for the three months ended
September 30, 2003 was $4,963,000, as compared to $3,287,000 for the three
months ended September 30, 2002, an increase of $1,676,000, or 51%.
Total content and services revenue. Total content and services revenue
for the three months ended September 30, 2003 was $4,810,000, as compared to
$3,066,000 for the three months ended September 30, 2002, an increase of
$1,744,000, or 57%.
Consumer content. Consumer content revenue for the three months ended
September 30, 2003 was $4,790,000, as compared to $3,002,000 for the three
months ended September 30, 2002, an increase of $1,788,000, or 60%. This
increase was primarily the result of our customer base growing to over 280,000
customers.
21
Services. Services revenue for the three months ended September 30, 2003
was $20,000, as compared to $64,000 for the three months ended September 30,
2002, a decrease of $44,000, or 69%. This decrease was primarily the result of
fewer corporate projects.
Hardware. Hardware revenue for the three months ended September 30, 2003
was $136,000, as compared to $152,000 for the three months ended September 30,
2002, a decrease of $16,000, or 11%. Hardware revenue decreased as the result
of selling fewer AudibleReady hand-held devices, primarily the Audible Otis, in
the 2003 period as compared to the 2002 period.
Other. Other revenue for the three months ended September 30, 2003 was
$16,000, as compared to $69,000 for the three months ended September 30, 2002, a
decrease of $53,000, or 77%. Other revenue in both periods consisted of $16,000
in royalties earned from a license granted for certain technology rights to a
device manufacturer. Other revenue in the 2002 period also included $53,000 of
revenue earned from our profit participation from hard copy sales of products in
connection with our agreement with Random House. There was no revenue from this
agreement in the 2003 period as a result of the agreement being amended in March
2002.
Operating expenses.
Cost of content and services revenue. Cost of content and services
revenue was $1,352,000, or 28% of content and services revenue, for the three
months ended September 30, 2003, as compared to $1,476,000, or 48% of content
and services revenue, for the three months ended September 30, 2002. The
decrease in the 2003 period was primarily due to a reduction in expenses as a
result of our amended agreement with Random House, offset in part by additional
expenses corresponding to an increase in content and services revenue.
Cost of hardware revenue. Cost of hardware revenue was $445,000, or 326%
of hardware revenue, for the three months ended September 30, 2003, as compared
to $605,000, or 397% of hardware revenue, for the three months ended September
30, 2002. This decrease was primarily due to selling fewer Otis devices in the
2003 period as compared to the 2002 period. The decrease in cost of hardware
revenue as a percentage of hardware sales was primarily due to the reduced
average unit cost of the devices purchased in the 2003 period.
Production expenses. Production expenses were $1,034,000 for the three
months ended September 30, 2003, as compared to $1,029,000 for the three months
ended September 30, 2002, an increase of $5,000, or 1%. This increase was
primarily due to a $200,000 payment made in the 2003 period to an officer of the
Company, and increased hosting expenses, offset in part by a reduction in
depreciation expense during the 2003 period. The payment in the 2003 period was
made pursuant to a plan that was put in place in calendar year 2000 and provided
that if Audible was successful in the future raising an additional $15 million
in equity, an incentive payment would be earned. In a series of three rounds of
financing beginning in 2001 and ending with the Series C this past August, a
total of $19.5 million was raised, thus triggering the payment.
Development. Development costs were $590,000 for the three months ended
September 30, 2003, as compared to $702,000 for the three months ended September
30, 2002, a decrease of $112,000, or 16%. This decrease was primarily due to
reduced expenses associated with a technology license and reduced personnel
related expenses in the 2003 period.
Sales and marketing. Sales and marketing expenses were $1,515,000 for
the three months ended September 30, 2003, as compared to $3,016,000 for the
three months ended September 30, 2002, a decrease of $1,501,000, or 50%. This
decrease was primarily due to a reduction in expenses related to our agreement
with Amazon as we have fully expensed the costs associated with the Amazon
agreement and the related warrant charges, as well as lower web related
advertising in the 2003 period, offset in part by increased expenses related to
co-marketing and revenue share agreements, personnel and customer service.
22
General and administrative. General and administrative expenses were
$905,000 for the three months ended September 30, 2003, as compared to
$1,006,000 for the three months ended September 30, 2002, a decrease of
$101,000, or 10%. The decrease was primarily due to reduced depreciation
expense, reduced legal fees, and a reduction in investor relation expenses in
the 2003 period, offset in part by a $200,000 payment made in the 2003 period to
an officer of the Company. The payment in the 2003 period was made pursuant to a
plan was put in place in calendar year 2000 and provided that if Audible was
successful in the future raising an additional $15 million in equity, an
incentive payment would be earned. In a series of three rounds of financing
beginning in 2001 and ending with the Series C this past August, a total of
$19.5 million was raised, thus triggering the payment.
Other income, net. Other income, net in both periods consisted of
interest income. Interest income was $5,000 for the three months ended
September 30, 2003, as compared to $17,000 for the three months ended September
30, 2002, a decrease of $12,000. This decrease was due to less interest income
being earned from lower cash and cash equivalent balances available in the 2003
period.
Accrued dividends on preferred stock. Accrued dividends on redeemable
preferred stock was $454,000 for the three months ended September 30, 2003 as
compared to $377,000 for the three months ended September 30, 2002. This
increase was due to the additional shares of Audible Series A stock outstanding
during the 2003 period, and the accrued dividends on shares of Audible Series C
stock issued in the 2003 period.
Preferred Stock Discount . In August 2003, we issued 1,111,111 shares of
Audible Series C stock convertible into 10 shares of common stock at a
conversion price of $0.13 per share lower than the fair market value of our
common stock at the time of issuance. The Series C stock is convertible at any
time at option of the holder. As a result, the entire $1,444,444 in preferred
stock discount was recognized in the 2003 period on the date of issuance.
NINE MONTHS ENDED SEPTEMBER 30, 2003 COMPARED TO NINE MONTHS ENDED SEPTEMBER 30,
2002.
Total revenue, net. Total revenue, net for the nine months ended
September 30, 2003 was $13,498,000, as compared to $8,578,000 for the nine
months ended September 30, 2002, an increase of $4,920,000, or 57%.
Total content and services revenue. Total content and services revenue
for the nine months ended September 30, 2003 was $12,961,000, as compared to
$7,742,000 for the nine months ended September 30, 2002, an increase of
$5,219,000, or 67%.
Consumer content. Consumer content revenue for the nine months ended
September 30, 2003 was $12,883,000, as compared to $7,442,000 for the nine
months ended September 30, 2002, an increase of $5,441,000, or 73%. This
increase was primarily the result of our increased customer base.
Services. Services revenue for the nine months ended September 30, 2003
was $79,000, as compared to $300,000 for the nine months ended September 30,
2002, a decrease of $221,000, or 74%. This decrease was primarily the result of
fewer corporate customers.
Hardware. Hardware revenue for the nine months ended September 30, 2003
was $489,000, as compared to $735,000 for the nine months ended September 30,
2002, a decrease of $246,000, or 34%. Hardware revenue decreased as a result of
the combined effect of selling fewer AudibleReady hand-held electronic devices
in the period, primarily the Audible Otis, as well as selling a greater
percentage of those sold in the 2003 period at a deeper discount when the
customer signed up for a one-year commitment to AudibleListener Membership.
23
Other. Other revenue for the nine months ended September 30, 2003 was
$48,000, as compared to $101,000 for the nine months ended September 30, 2002, a
decrease of $53,000. Other revenue in both periods consisted of $48,000 in
royalties earned from a license granted for certain technology rights to a
device manufacturer. Other revenue in the 2002 period also included $53,000 of
revenue earned from our profit participation from hard copy sales of products in
connection with our agreement with Random House. There was no revenue from this
agreement in the 2003 period as a result of the agreement being amended in March
2002
Operating expenses.
Cost of content and services revenue. Cost of content and services
revenue was $3,494,000, or 27% of content and services revenue, for the nine
months ended September 30, 2003, as compared to $3,596,000, or 46% of content
and services revenue, for the nine months ended September 30, 2002. The
decrease in the 2003 period was primarily due to a reduction in expenses as a
result of our amended agreement with Random House, offset in part by additional
expenses corresponding to an increase in content and services revenue.
Cost of hardware revenue. Cost of hardware revenue was $1,505,000, or
308% of hardware revenue, for the nine months ended September 30, 2003, as
compared to $2,053,000, or 279% of hardware revenue, for the nine months ended
September 30, 2002. This decrease was primarily due to reduced per unit costs
in acquiring hand-held electronic devices in the 2003 period versus the 2002
period. Cost of hardware revenue as a percentage of hardware revenue increased
as we sold these hand-held electronic devices at a deeper discount from normal
retail price in the 2003 period than in the 2002 period, when a customer
enrolled in AudibleListener for a 12-month period.
Production expenses. Production expenses were $2,785,000 for the nine
months ended September 30, 2003, as compared to $2,946,000 for the nine months
ended September 30, 2002, a decrease of $161,000, or 6%. This decrease was
primarily due to a reduction in depreciation expense during the 2003 period,
offset in part by increased hosting expenses and a $200,000 payment made in the
2003 period to an officer of the Company. The payment in the 2003 period was
made pursuant to a plan that was put in place in calendar year 2000 and provided
that if Audible was successful in the future raising an additional $15 million
in equity, an incentive payment would be earned. In a series of three rounds of
financing beginning in 2001 and ending with the Series C this past August, a
total of $19.5 million was raised, thus triggering the payment.
Development. Development costs were $1,808,000 for the nine months ended
September 30, 2003, as compared to $1,778,000 for the nine months ended
September 30, 2002, an increase of $30,000, or 2%. This increase was primarily
due to increased personnel and related expenses and expenses in the 2003 period,
offset in part by reduced outside consultants.
Sales and marketing. Sales and marketing expenses were $4,925,000 for
the nine months ended September 30, 2003, as compared to $9,265,000 for the nine
months ended September 30, 2002, a decrease of $4,340,000, or 47%. This
decrease was primarily due to a reduction in expenses related to our agreement
with Amazon as we had fully expensed the costs associated with the agreement and
the related warrant charges upon its expiration on January 24, 2003, and lower
web related advertising in the 2003 period, offset in part by increased expenses
related to co-marketing and revenue share agreements, personnel, consultants and
customer service.
24
General and administrative. General and administrative expense was
$2,578,000 for the nine months ended September 30, 2003, as compared to
$2,788,000 for the nine months ended September 30, 2002, a decrease of $210,000,
or 7%. This decrease was primarily due to reduced depreciation expense, as well
as reduced consultants, investor relations expenses and legal fees in the 2003
period, offset in part by the forgiveness of debt charge in connection with the
notes due from employees for common stock and a $200,000 payment made in the
2003 period to an officer of the Company. This payment was made pursuant to a
plan was put in place in calendar year 2000 and provided that if Audible was
successful in the future raising an additional $15 million in equity, an
incentive payment would be earned. In a series of three rounds of financing
beginning in 2001 and ending with the Series C this past August, a total of
$19.5 million was raised, thus triggering the payment.
Other income, net. Other income, net in both periods consisted of
interest income. Interest income was $15,000 for the nine months ended
September 30, 2003, as compared to $76,000 for the nine months ended September
30, 2002, a decrease of $61,000. This decrease was due to less interest income
being earned from lower cash and cash equivalent balances available.
Accrued dividends on preferred stock. Accrued dividends on redeemable
preferred stock was $1,195,000 for the nine months ended September 30, 2003 as
compared to $1,015,000 for the nine months ended September 30, 2002. This
increase was due to the additional shares of Audible Series A stock outstanding
during the 2003 period, and accrued dividends on shares of Audible Series C
stock issued in the 2003 period.
Preferred Stock Discount . In August 2003, we issued 1,111,111 shares of
Audible Series C stock convertible into 10 shares of common stock at a
conversion price of $0.13 per share lower than the fair market value of our
common stock at the time of issuance. Since the Series C stock is convertible at
any time at option of the holder, the entire $1,444,444 in preferred stock
discount was recognized in the 2003 period on the date issuance.
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;
. 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.
We have incurred significant losses since inception, and as of September
30, 2003, we had an accumulated deficit of approximately $117,970,471. 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 sales and
marketing, content acquisition and production to the extent available cash
allows.
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) the availability of premium audio content; (3) sales
and consumer usage of AudibleReady devices; (4) our ability to acquire new
customers; (5) our ability to retain existing customers; (6) the introduction of
new products or services by a competitor; (7) the cost and availability of
acquiring sufficient Web site capacity to meet our customers' needs;
25
(8) technical difficulties with our computer system or the Internet or system
downtime; (9) the cost of acquiring audio content; (10) the amount and timing of
capital expenditures and other costs relating to the expansion of our
operations; and (11) 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 operating 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 results 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 preferred stock and warrants prior to our initial public offering
were $28,719,000.
On July 15, 1999, we completed an initial public offering of 4,600,000
shares of common stock at $9.00 per share. Total proceeds were $36,856,000,
net of underwriting discounts and commissions of $2,898,000 and offering costs
of $1,641,000. Concurrent with the offering, all outstanding shares of our
redeemable convertible preferred stock were converted into 13,400,985 shares of
common stock.
On February 8, 2001 Microsoft purchased 2,666,666 shares of Audible Series
A stock for $10,000,000 at a per share price of $3.75.
On February 15, 2002 Special Situations Fund purchased 4,069,768 shares of
Common stock for $3,500,000 at a per share price of $0.86. Proceeds received by
the Company net of direct costs were approximately $3,159,000.
On August 1, 2003, Apax Partners purchased 740,741 shares, Bertelsmann
Multimedia, Inc. purchased 185,185 shares and Random House Ventures, LLC
purchased 185,185 shares of Audible Series C stock at a per share price of
$5.40. Proceeds received by the Company, net of estimated direct costs, were
approximately $5,859,772.
At September 30, 2003, our principal source of liquidity was approximately
$6,883,000 in cash and cash equivalents.
At September 30, 2003, our principal commitments consisted of obligations
for operating lease commitments, contractual commitments with content
providers, and revenue sharing commitments pursuant to agreements with device
manufacturers.
Net cash used in operating activities for the nine months ended September
30, 2003 and 2002 was $1,735,000 and $6,982,000, respectively. Net cash used
during the 2003 period was primarily attributable to our net loss, a decrease in
accounts payable and royalty obligations, and an increase in other assets and
inventory, offset in part by services rendered for common stock and warrants, an
increase in accrued expenses and compensation, depreciation
26
and amortization, an increase in advances, and the non cash portion of the
forgiveness of employee notes. Net cash used during the 2002 period was
primarily attributable to our net loss and a decrease in accounts payable,
royalty
obligations and advances, offset in part by services rendered for common
stock and warrants, depreciation and amortization and an increase in accrued
expenses and compensation.
Net cash used in investing activities for the nine months ended September
30, 2003 and 2002, was $94,000 and $145,000, respectively. Net cash used during
both periods was related to purchases of property and equipment.
Net cash provided by financing activities for the nine months ended
September 30, 2003 and 2002, was $5,890,000 and $3,170,000, respectively. Net
cash provided by financing activities in the 2003 period was primarily
attributable to the sale of our Series C stock in the amount of $5,859,000, net
of direct costs and proceeds from the exercise of common stock options. Net cash
provided financing activities in the 2002 period resulting primarily from the
investment in the Company by Special Situations Fund of $3,159,000, net of
direct costs, the exercise of common stock options by an employee, and the
payment on notes due from stockholders for common stock.
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 additional cash to fund the
business and finance our continued growth. No assurance can be given that such
additional financing, when needed, will be available on terms favorable to the
Company or the stockholders, if at all.
NEW ACCOUNTING STANDARDS
In December 2002, the FASB issued Statement of Financial Accounting
Standards No. 148, "Accounting for Stock-Based Compensation - Transition and
Disclosure" ("SFAS 148"). SFAS 148 provides alternative methods of transition
for a voluntary change to the fair value method of accounting for stock-based
employee compensation as originally provided by SFAS No. 123 "Accounting for
Stock-Based Compensation". Additionally, SFAS 148 amends the disclosure
requirements of SFAS 123 to require prominent disclosure in both the annual and
interim financial statements about the method of accounting for stock-based
compensation and the effect of the method used on reported results. The
transitional requirements of SFAS 148 are effective for all financial statements
for fiscal years ending after December 15, 2002. We adopted the disclosure
portion of this statement for the year ended December 31, 2002. The application
of the disclosure portion of this standard had no impact on our financial
position or results of operations. The FASB recently indicated that they will
require stock-based employee compensation to be recorded as a charge to earnings
beginning in 2004. We will continue to monitor their progress on the issuance of
this standard as well as evaluate our position with respect to current guidance.
In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain
Financial Instruments with Characteristics of both Liabilities and Equity." SFAS
No. 150 clarifies the definition of a liability as currently defined in FASB
Concepts Statement No. 6, "Elements of Financial Statements," as well as other
revisions. This statement requires a financial instrument that embodies an
obligation of an issuer to be classified as a liability. In addition, the
statement establishes standards for the initial and subsequent measurement of
these financial instruments and disclosure requirements. SFAS No. 150 is
effective for financial instruments entered into or modified after May 31, 2003
and, for all other instruments, at the beginning of the first interim period
beginning after June 15, 2003. The Company adopted SFAS No. 150 on July 1, 2003,
which did not have an impact on our financial position or results of operations.
ITEM 3. QUALITATIVE AND QUANTITATIVE DISCLOSURE ABOUT MARKET RISK
27
We do not have operations subject to risk of foreign currency fluctuations,
or instruments subject to interest rate risk, nor do we use derivative financial
instruments in our operations or investment portfolio.
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 were named as a defendant in a securities class
action filed in United States District court for the Southern District of New
York related to its initial public offering ("IPO") in July 1999. The lawsuits
also named certain of the underwriters of the IPO, including Credit Suisse First
Boston Corporation, J.P. Morgan Chase & Co., Volpe Brown Whelan & Co., LLC, and
Wit Capital Corporation, as well as certain of our officers and directors and
former directors as defendants. Approximately 300 other issuers and their
underwriters have had similar suits filed against them, all of which are
included in a single coordinated proceeding in the Southern District of New York
(the "IPO Litigation"). The complaints allege that the prospectus and the
registration statement for the IPO failed to disclose that the underwriters
allegedly solicited and received "excessive" commissions from investors and that
some investors in the IPO allegedly agreed with
28
the underwriters to buy additional shares in the aftermarket in order to inflate
the price of our stock. A consolidated amended complaint was filed April 19,
2002. We and certain officers, directors and former directors are named in the
suits pursuant to Section 11 of the Securities Act of 1933. The complaints seek
unspecified damages, attorney and expert fees, and other unspecified litigation
costs.
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, we along with other non-underwriter defendants in the coordinated
cases, also moved to dismiss the litigation. On February 19, 2003, the Court
ruled on the motions. The Court granted our motion to dismiss the claims
against us under Rule 10b-5, due to the insufficiency of the allegations against
us. The motions to dismiss the claims under Section 11 of the Securities Act
were denied as to virtually all of the defendants in the consolidated cases,
including us. In addition, the individual defendants in the IPO Litigation,
Donald R. Katz, Andrew P. Kaplan, Richard Brass, R. Bradford Burnham, W. Bingham
Gordon, Thomas P. Hirschfeld, Winthrop Knowlton, and Timothy Mott signed a
tolling agreement and were dismissed from the action without prejudice on
October 9, 2002.
On June 26, 2003, a committee of our Board of Directors conditionally
approved a proposed partial settlement with the plaintiffs in this matter. The
settlement would provide, among other things, a release of the Company and of
the individual defendants for the conduct alleged in the action to be wrongful
in the amended complaint. We would agree to undertake other responsibilities
under the partial settlement, including agreeing to assign away, not assert, or
release certain potential claims we may have against our underwriters. Any
direct financial impact of the proposed settlement is expected to be borne by
our insurance carriers. The committee agreed to approve the settlement subject
to a number of conditions, including the participation of a substantial number
of other Issuer Defendants in the proposed settlement, the consent of our
insurers to the settlement, and the completion of acceptable final settlement
documentation. Furthermore, the settlement is subject to a hearing on fairness
and approval by the Court overseeing the IPO Litigations.
Due to the inherent uncertainties of litigation and because the settlement
approval process is at a preliminary stage, we cannot accurately predict the
ultimate outcome of the matter.
Other than what is disclosed above, we are not a party to any lawsuit or
proceeding, which we believe is likely to have a material effect on us.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
In August 2003, Apax Partners purchased from Microsoft all 3,473,967
outstanding shares of Audible's Series A stock and agreed to certain amendments
to that security. As amended, the Series A stock is no longer mandatorily
redeemable, is convertible at any time by the holders into shares of Common
Stock, and dividends will accrue and compound semi-annually for a period of four
years at the rate of 12% per annum.
On August 1, 2003, Apax Partners purchased 740,741 shares, Bertelsmann
Multimedia, Inc. purchased 185,185 shares and Random House Ventures, LLC
purchased 185,185 shares of Audible Series C stock at a per share price of
$5.40. Proceeds received net of estimated direct costs, were $5,859,772. Each
share of Series C stock is currently convertible into 10 shares of Common Stock.
The Series C stock is entitled to receive dividends. Such dividends accrue and
compound semi-annually at the rate of 6% per annum for four years following the
date of initial issuance. In the event of the conversion of the Series C stock,
all accrued but unpaid preferred dividends will be converted into shares of
Common Stock. In liquidation, the Audible Series C stock ranks pari passu with
the Company's Series A stock and Series B stock. In conducting this offering,
the Company relied upon the exemption from the registration
29
requirements of the Securities Act of 1933, as amended (the "Act"), available
under Rule 506 of Regulation D of the Act.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Inapplicable
ITEM 4. SUBMISSION OF MATTERS TO VOTE OF SECURITY HOLDERS
(a) The Company held its Annual Meeting of Stockholders on September
25, 2003 (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 2006 annual
meeting of stockholders, and until their successors are elected and duly
qualified, with 93.7% of the preferred and common stock present and voting at
the meeting voting for Messers Ginsberg and Mohn as follows:
Nominee For Against or Withheld
------- --- -------------------
Gary L. Ginsberg 53,637,333 101,850
Johanness Mohn . 53,645,448 93,735
(ii) The appointment of KPMG LLP as our independent auditors for the
year ending December 31, 2003 was ratified by 99.7% of the shares of the
preferred and common Stock present and voting at the meeting (votes for:
53,574,432; votes against or withheld: 23,572; abstention 141,179).
(iii) An amendment to the Company's Amended and Restated Certificate
of Incorporation increasing the Company's authorized number of common stock from
75,000,000 shares to 120,000,000 shares was ratified by 92.8% of the shares of
the preferred and common stock present and voting at the meeting (votes for:
53,245,456; votes against or withheld: 457,724; abstention 36,000.), 88.3% of
the common stock present and voting at the meeting (votes for: 26,876,268 votes
against or withheld: 457,724; abstention 36,000).
30
(iv) An amendment to the Company's 1999 Stock Incentive Plan which
will increase the authorized number shares of common stock available for
issuance under the plan from 9,000,000 shares to 12,600,000 shares was ratified
by 89.3% of the shares of the preferred and common Stock present and voting at
the meeting. (votes for: 32,884,518; votes against or withheld: 3,815,000;
abstention 36,600).
(d) Inapplicable
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
3.1.1*** Certificate of Designation of Designations, Limitations,
Restrictions And Relative Rights of the Series A Convertible
Preferred Stock of Audible, Inc.
3.1.2 ! Certificate of Amendment to the Amended and Restated
Certificate of Incorporation.
3.1.3 !! Certificate of Designation of Designations, Limitations,
Restrictions and Relative Rights of the Series B Convertible
Preferred Stock of Audible, Inc.
3.1.4 > Certificate of Designation of Designations, Limitations,
Restrictions and Relative Rights of the Series C Convertible
Preferred Stock of Audible, Inc.
3.1.5 > First Amended and Restated Certificate of Designation of
Designations, Limitations, Restrictions and Relative Rights
of the Series A Convertible Preferred Stock of Audible, Inc.
3.1.6 > Certificate of Amendment to Certificate of Designation of
Designations, Limitations, Restrictions and Relative Rights
of the Series B Convertible Preferred Stock of Audible, Inc.
3.2* Amended and Restated Bylaws of Audible
10.1+* License Agreement dated November 4, 1998, by and between
Microsoft Corporation and Audible
10.2+* Digital Rights Management Agreement dated November 4, 1998,
between Microsoft Corporation and Audible
10.3+* Development Agreement dated November 12, 1998, by and
between RealNetworks, Inc. and Audible
10.4* RealMedia Architecture Partner Program Internet Agreement
dated November 12, 1998, between RealNetworks, Inc. and
Audible
10.5* Master Lease Agreement dated November 19, 1996, by and
between Comdisco, Inc. as lessor, and Audible as lessee
10.5.1* Addendum to Master Lease Agreement dated November 20,
1996, by and between Comdisco, Inc., as lessor, and Audible,
as lessee (relating to Exhibit 10.5)
10.8* Loan and Security Agreement dated April 6, 1998, by and
between Silicon Valley Bank, as lender, and Audible, as
borrower, for a revolving line of credit of up to $1,000,000
10.10* Security and Loan Agreement dated November 20, 1996,
between Audible, as borrower, and Imperial Bank, as lender,
for up to $500,000
10.14* Amended and Restated Registration Rights Agreement dated
February 26, 1998, by and among Audible and certain
stockholders named therein
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10.14.1* Amendment No. 1 to Amended and Restated Registration Rights
Agreement dated December 18, 1998 (relating to Exhibit
10.14)
10.14.2* Amendment No. 2 to Amended and Restated Registration Rights
Agreement dated June 17, 1999 (relating to Exhibit 10.14)
10.15* 1999 Stock Incentive Plan
10.16* Form of Common Stock Warrants issued June 30, 1997 by
Audible to various investors in connection with the Series C
preferred stock financing
10.17* Form of Stock Restriction Agreement by and between Audible
and the Named Executive Officers made in connection with
various purchases and sales of shares of restricted common
stock
10.18* Form of Promissory Note made by the Named Executive Officers
in favor of Audible in connection with various purchases and
sales of shares of restricted common stock
10.19* Office Lease dated March 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
10.21+* Agreement dated April 3, 1999 by and between Audible and
Diamond Multimedia Systems, Inc.
10.22* Common Stock Purchase Warrant, issued April 22, 1999, to
Microsoft Corporation
10.23* Employment Offer Letter from Audible to Guy Story dated
March 10, 1996
10.24* Employment Offer Letter from Audible to Brian Fielding dated
April 25, 1997
10.25 Omitted.
10.26* Employment Offer Letter from Audible to Andrew Kaplan dated
May 25, 1999
10.27 Omitted.
10.28** Warrant Agreement to purchase 10,000 shares of Common Stock
at a price of $7.65 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
10.30* Common Stock Purchase Warrant, W-2, issued June 17, 1999, to
Robin Williams
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)
10.31++# Securities Purchase Agreement dated January 30, 2002, by and
between Audible and Amazon.com Commerce Services, Inc.
10.32++# Co-Branding, Marketing and Distribution Agreement dated
January 30, 2002, by and between Audible and Amazon.com
Commerce Services, Inc.
10.33*** Series A Convertible Preferred Stock Purchase Agreement by
and between Audible Inc. and Microsoft Corporation dated as
of February 8, 2002.
10.34++! Amendment No. 1 to Co-Branding, Marketing and Distribution
Agreement dated as of January 24, 2002 by and between
Amazon.com Commerce Services, Inc. and Audible (relating to
Exhibit 10.32)
10.35! Securities Purchase Agreement dated January 25, 2003 by and
between Audible Inc., and Special Situations Fund III, L.P.,
Special Situations Cayman Fund, L.P., Special Situations
Private Equity Fund, L.P. and Special Situations Technology
Fund, L.P.
10.36! Registration Rights Agreement dated January 25, 2003 by and
between Audible Inc., and Special Situations Fund III, L.P.,
Special Situations Cayman Fund, L.P., Special Situations
Private Equity Fund, L.P. and Special Situations Technology
Fund, L.P.
10.37! Form of Common Stock Warrant issued in connection with the
sale of common stock to Special Situation Funds.
10.38 > Series C Convertible Preferred Stock Purchase Agreement by
and between Audible, Inc. and the investor parties thereto
dated as of August 1, 2003.
10.39 > Series A Investor Rights Agreement.
31.1 Quarterly Certifications of the Chief Executive Officer
pursuant to Section 302 of the Sarbanes-Oxley Act of 2003.
31.2 Quarterly Certifications of the Chief Financial Officer
pursuant to Section 302 of the Sarbanes-Oxley Act of 2003.
32
32.1 Quarterly Certifications of the Chief Executive Officer
pursuant to Section 906 of the Sarbanes-Oxley Act of 2003.
32.2 Quarterly Certifications of the Chief Financial Officer
pursuant to Section 906 of the Sarbanes-Oxley Act of 2003.
* Incorporated by reference from the Company's Registration
Statement on Form S-1 (No. 333-76985)
** Incorporated by reference from the Company's Form 10K/A for the
fiscal year ended December 31, 1999
*** Incorporated by reference from the Company's Form 10-K for the
fiscal year ended December 31, 2000.
# Incorporated by reference from the Company's Form 10-Q for the
quarterly period ended September 30, 2000
## Incorporated by reference from the Company's Form 10-Q for the
quarterly period ended September 30, 2001
### Incorporated by reference from the Company's Form 10-Q for the
quarterly period ended September 30, 2001
! Incorporated by reference from the Company's Form 10-K for the
fiscal year ended December 31, 2001.
!! Incorporated by reference from the Company's Form 10-Q for the
quarterly period ended June 30, 2002.
!!! Incorporated by reference from the Company's Form 10-Q for the
quarterly period ended September 3, 2002.
> Incorporated by reference from the Company's Form 8-K filed on
August 5, 2003.
+ 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.
++ 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.
33
(b) Reports on Form 8-K
Form 8-K, dated August 5, 2003, announcing the purchase by Apax Partners
and Bertelsmann of the Company's Series C stock and the acquisition by Apax of
the Company's outstanding Series A stock from Microsoft.
Form 8-K, dated August 6, 2003, announcing certain financial results for
the quarter ended June 30, 2003.
Form 8-K, dated August 25, 2003, announcing the Company's new marketing
alliance with Amazon.com.
Form 8-K, dated September 17, 2003, announcing the immediate resignation of
Robert Kramer.
34
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.
AUDIBLE, INC.
By:
---------------------------------------
Name: Andrew P. Kaplan
Title: Chief Financial Officer and
Executive Vice President, Finance and
Administration
Dated: November ___, 2003
35