UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
Form
10-K
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(Mark
One) |
ANNUAL
REPORT PURSUANT TO SECTION 13 OR 15(d) OF |
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THE
SECURITIES EXCHANGE ACT OF 1934 |
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For
the Fiscal Year ended December 31, 2004 |
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OR |
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o |
TRANSITION
REPORT PURSUANT TO SECTION 13 OR 15(d) OF |
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THE
SECURITIES EXCHANGE ACT OF 1934 |
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For
the transition period from _________ to __________
Commission
File Number: 000-26529
AUDIBLE,
INC.
(Exact
name of Registrant as specified in its Charter)
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DELAWARE
(State
or other jurisdiction of
incorporation
or organization) |
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22-3407945
(I.R.S.
Employer
Identification
Number) |
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65
WILLOWBROOK BLVD.
WAYNE,
NEW JERSEY
(Address
of principal executive offices) |
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07470
(Zip
Code) |
(973)
837-2700
(Registrant's
telephone number, including area code)
Securities
Registered Pursuant to Section 12(b) of the Act:
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Title
of Each Class: |
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Name
of Each Exchange on which Registered: |
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None |
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None |
Securities
Registered Pursuant to Section 12 (g) of the Act:
Common
Stock, par value $0.01
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
o
The
aggregate market value of voting stock held by non-affiliates of the registrant
was $127,948,560 based upon the closing price on the Over-the-Counter Market on
the last business day of the registrant's most recently completed second fiscal
quarter. (Based upon the closing price of $12.00 per share on June 30,
2004).
Indicate by checkmark whether the registrant is an accelerated filer (as defined
in Rule 12b-2 of the Exchange Act).
Yes x
No o
As of
March 23, 2005, 24,065,716 shares of common stock of the Registrant were
outstanding.
FORM
10-K
TABLE
OF CONTENTS
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PART
I |
PAGE |
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Item
1. |
Business |
3 |
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Item
2. |
Properties |
11 |
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Item
3. |
Legal
Proceedings |
11 |
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Item
4. |
Submission
of Matters to a Vote of Security Holders |
12 |
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PART
II |
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Item
5. |
Market
for the Registrant’s Common Equity, Related Stockholder Matters and Issuer
Purchases of Equity Securities |
12 |
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Item
6. |
Selected
Financial Data |
13 |
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Item
7. |
Management’s
Discussion and Analysis of Financial Condition and Results of
Operations |
16 |
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Item
7A. |
Quantitative
and Qualitative Disclosures about Market Risk |
31 |
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Item
8. |
Financial
Statements and Supplementary Data |
31 |
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Item
9. |
Changes
in and Disagreements with Accountants on Accounting and Financial
Disclosure |
31 |
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Item
9A. |
Controls
and Procedures |
31 |
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Item
9B. |
Other
Information |
32 |
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PART
III |
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Item
10 |
Directors
and Executive Officers of the Registrant |
33 |
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Item
11. |
Executive
Compensation |
33 |
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Item
12. |
Security
Ownership of Certain Beneficial Owners and Management and Related
Stockholder Matters |
33 |
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Item
13. |
Certain
Relationships and Related Transactions |
33 |
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Item
14 |
Principal
Accounting Fees and Services |
33 |
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PART
IV |
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Item
15 |
Exhibits,
Financial Statement Schedules |
33 |
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33 |
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Signatures |
36 |
Overview
We are
the leading provider of digitally delivered spoken word audio on the Web. We
specialize in the spoken word, selling membership-based spoken audio content,
such as audio versions of books, newspapers and magazines, original productions
and public radio subscriptions. Consumers shop, purchase and download audio
content from www.audible.com directly to personal computers for listening in a
variety of ways. Most of our customers download audio to their PCs and Macs and
then transfer the audio to MP3 players, personal digital assistants, or PDAs, or
to “smart” wireless telephones for mobile listening. Others transfer, or “burn,”
the content to audio CDs for playback on CD players. Others simply listen at
their computers or through a digital home entertainment network. Audible.com is
also the Apple iTunes Music Store’s exclusive provider of spoken word products
for downloading via the Web and Amazon.com’s pre-eminent provider of spoken word
content for digital distribution.
We offer
customers the opportunity to join AudibleListener, a monthly membership service.
For a fixed monthly fee, AudibleListener customers may download a specific
number of titles of their choice from our website. Customers may also purchase
individual titles, as well as subscribe to one of our 46 daily, weekly, or
monthly subscription products. Customers can select from more than 70,000 hours
of audio content, much of which is available in digital audio format only at our
website www.audible.com. The selection of audio in our store ranges from more
than 7,600 best-selling and classic audiobooks, to abridged audio editions of
national periodicals such as The
Wall Street Journal, Forbes, and
Scientific
American. Language
instruction, personal development, stand-up comedy, children’s audio and
historic speeches and readings, along with fiction, business, mystery and
romance are among the 145 categories of listening available to our
customers.
At
audible.com, new customers who commit to twelve months of the AudibleListener
service can receive a free MP3 player. We provide an MP3 player to new customers
as an incentive to join the AudibleListener program. Several manufacturers,
including Apple Computer, Creative Labs, palmOne, Hewlett-Packard, Kenwood,
Motorola, PhatNoise, Rio Audio, Samsung, Thomson, Inc. and Toshiba support and
promote the enjoyment of our audio on all or some of their MP3 players, PDAs or
cellular telephones. Manufacturers support us by including our AudibleReady
software on their devices and may also include audio samples on the device, as
well as insert marketing brochures in the device box. Our manufacturing partners
may also provide point-of-purchase sales support, after-market promotions, and
web-based and e-mail customer outreach. We work with original equipment
manufacturers of mobile audio devices, original design manufacturers, and
integrated circuit vendor partners to simply and rapidly adopt Audible’s
technology for use in manufactured devices.
Since
launching the service in 1997, over 467,000 customers in 120 countries have
purchased content at audible.com, and thousands more have purchased our content
at the Apple iTunes Music Store. We acquire new customers through a variety of
marketing methods, including e-mail, targeted web advertising, paid search,
word-of-mouth, marketing partnerships with device manufacturers and retailers,
and targeted radio advertising. Beyond leveraging our first-to-market technology
in the English language, together with our joint venture partners, we launched a
German language version of the Audible service in December 2004. We have also
entered into a license and service agreement to support the launch of a French
language version of the Audible service scheduled to launch in the second
quarter of 2005. Our plans for 2005 also include the launch of Audible UK, the
launch of Audible Education, and the launch of Audible Wireless.
The
market for the Audible service results from the increasing usage of the
internet, the growth of hand-held electronic devices that have digital audio
capabilities, and the increasing number of hours commuters spend in traffic when
they cannot read or look at a computer screen. In contrast to traditional radio
broadcasts or satellite radio, 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 a selection
that is readily available in a digital format that can be quickly delivered over
the internet directly to our customers.
We
provide new sources of revenue for publishers, writers and producers of books,
newspapers, magazines, newsletters, radio shows, professional journals and
business information. We add the utility of audio information, entertainment and
education to a broad array of manufactured devices primarily designed to play
music or provide mobile organizational or telephone applications. In addition,
our service provides companies that distribute or promote our service with a
wide selection of digital audio content to offer to their customers.
Demand
for new sources of entertainment, information and educational media continues to
grow as the quantity and variety of content and its sources proliferate. Veronis
Suhler Stevenson estimates that total communications spending in the U.S. was
$610 billion in 2002. During 2002, Americans on average spent more than 3,500
hours reading, watching or listening to media content. We believe that many
consumers seek a better way to manage and personalize consumption of this
content.
According
to Harris Interactive, from 1973 to 2002 the median number of hours that people
say they work jumped from 41 hours a week to 49. Over the same period, Harris
reports that people’s leisure time has dropped from 26 to 19 hours per week.
Listening is a way for individuals to consume content at times when they are
unable to read, such as when they are driving. The Veronis Suhler Stevenson
Communications Industry Forecast for 2003 estimated that on average Americans
spent more than 20 hours a week listening to the radio, compared to 17.7 hours
in 1998. In comparison, Veronis Suhler Stevenson estimated that book reading
declined among Americans from an average of 2.3 hours in 1998 to 2.1 hours per
week in 2003. According to the 2000 United States Census, 97 million people
drive to and from work alone, an increase of 15% from 1989. The Census also
reported that average travel time to work increased to 25.5 minutes each way, an
increase of 7% from 1990. In addition, according to the Census more than 42
million individual drivers have a commute of at least 30 minutes or more each
way. As individuals look to use their commuting time more efficiently and manage
an increasing amount of available content, audiobooks have emerged as a
personalized “pay-to-listen” alternative to radio, because radio does not allow
listeners to control when they listen to a particular program. A study by the
Audio Publishers Association in 2001 indicated that 23 million American
households listened to audiobooks in 2001. An eBrain survey conducted in July
2002 for the Consumer Electronics Association found 20% of their sample
currently listens to audiobooks and 24% expect to increase their consumption in
coming months.
According
to the Audio Publishers Association, the U.S. market for audiobooks on cassette
and CD sold in retail stores grew to $800 million in 2003. This increasing usage
of audiobooks exists despite limited types of content, high prices and the
limitations of cassette tapes and CDs. For instance, the audiobook market based
on retail sales does not include the many audiobooks and other spoken word
products sold to consumers directly or in vertical markets such as personal
improvement, training, and educational markets, nor does it address the emerging
market in personalized “time-shifted” radio programming or timely print content
such as newspapers, newsletters, magazines and journals.
The
internet has emerged as a powerful global communications and entertainment
medium, giving millions of people the ability to access large amounts of
valuable, pay-for-access media. Jupiter Research reported that as of the end of
2003, 21.5 million households, or about one-fifth of U.S. households, were
connected to the internet via broadband. Based on historic growth rates and
current trends around broadband availability, interest, and pricing, Jupiter
Research forecasted that by 2008, 46 million households, representing half of
online households and 40% of all U.S. households will connect via high-speed,
always-on technologies. Through the internet, people can buy various forms of
information and entertainment, from books to music and video for usage both at
and away from the computer.
According
to the International Data Corporation, or IDC, in an April 2004 report, the
worldwide converged handheld device market, which includes smartphones, will
grow at a CAGR (Compound Annual Growth Rate) of 43% between 2003 and 2008. The
report predicts that the worldwide market for converged mobile devices will
expand from 3.2 billion in 2003 to 19.2 billion in 2008.
A key
driving force in Audible’s growth is the emerging market for handheld devices
that play digital or compressed audio. The AudibleReady initiative was designed
to exploit this market by entering into multiple technology and co-marketing
relationships with companies that manufacture digital audio-enabled devices. The
AudibleReady brand exists as a spoken word digital download and playback
standard that insures satisfactory interoperability between the Audible service
and digital audio-enabled devices. The AudibleReady program for digital audio
device manufacturers also creates a business structure by which the manufacturer
markets the Audible service to its user base in return for a percentage of
revenues generated by that user base or coordinated retail sales rebates and
promotional programs.
Currently
Audible is focused on two primary device categories and one emerging device
category for the AudibleReady initiative. The primary categories are commonly
referred to as “MP3 players” and “personal digital assistants” or PDAs. The
emerging device category is commonly known as “smartphones” because they combine
the function of PDAs such as on-board memory, and the ability to play digital
audio with cellular phone services.
Within
the MP3 player market, there are players that are referred to as ‘hard drive
players’ - such as the Apple iPod - that have hard drive-based memory capacities
of more than 1GB, and ‘flash-based players’ such as select Creative Labs and Rio
Audio devices that store audio files on rewritable flash memory chips of 1GB or
less.
In
December 2003 Jupiter Research published a report that predicted the demand for
MP3 players in the U.S. would grow at a rate of 50% a year through 2006.
According to Jupiter, shipments of MP3 players in the U.S. were about 3.5
million in 2003, which is almost double 2002 figures. Jupiter also predicted
that there would be more than 26 million MP3 players in use by 2006. According
to Jupiter, starting in 2004, the demand for players with hard drives will
surpass that of players with flash memory. The DVD player market, which we
believe is a valid comparative model, has grown from 11.4 million U.S.
households in 2000 to 39.3 million in 2003 according to the Consumer Electronics
Association, with an average price of $490 in 1997 to an estimated $138 in 2003.
The
market for personal digital assistants that have digital audio capabilities had
been led by Pocket PCs -devices running on Microsoft operating systems which are
manufactured by Hewlett-Packard, Toshiba, and Dell among others. In 2003 palmOne
joined the audio-enabled Pocket PC market. Audible now has AudibleReady
relationships with palmOne, as well as other Pocket PC manufacturers for all
their devices that have audio capabilities. While research firm IDC estimated
that worldwide PDA shipments in 2003 totaled less than 10 million units, the
percentage of these devices that are AudibleReady increased dramatically because
of the introduction of AudibleReady hand-held devices from palmOne.
In 2002
Gartner Group reported that sales of smartphones such as the Treo 600 from
palmOne - the first AudibleReady smartphone - were significant enough in the
U.S. to slow the sales of PDAs. IDC published a report in February 2004 that
estimated that smartphones showed significant growth and future promise. In such
report IDC estimated that in 2003, the worldwide smartphone market grew 181%
year-over-year to 9.6 million units. IDC also reported that the smartphone
market is expected to grow from 9.6 million units in 2003 to 99.4 million in
2008. Additionally, IDC reported that mobile phones with a removable card slot
accounted for 70.4 million units or 15% of global handset sales. IDC expects
this figure to rise to 420.6 million units or 64% in 2008.
The key
characteristic of smartphones that enable support for the Audible service is the
inclusion of enough internal memory to store our audio content. Since most
smartphones “dock” to computers, allowing for data exchange of contact and
schedule information, Audible audio can be transferred to smartphones via a
personal computer. Audible’s technology also supports full wireless downloads of
spoken word audio content, a capability that we expect will enable universal
access to audible.com via broadband wireless and local “Wi-Fi” networks in the
future.
Beyond
the family of AudibleReady devices, our CD burning feature makes the Audible
service attractive to a wide audience. IDC estimates that the number of CD
burners for use with personal computers will increase from 180 million in 2002
to 546 million in 2005. IDC has also stated that sales of blank audio CDs have
surpassed sales of music CDs.
We are
also developing relationships with cell phone companies and other high
technology providers. We believe wireless handheld technology is the ideal match
for our business. The combination of wireless freedom and digital transmission
is expected in the future to allow a consumer to download from a library of
audio recordings and bypass the anchored desktop PC. This freedom to download
wirelessly will allow unprecedented convenience for consumers.
The
confluence of the internet as an increasingly accepted media distribution
channel, the widespread adoption of audio-enabled mobile devices and the
continuing growth in consumer demand for content in a variety of formats has
resulted in new challenges for the media industry. These challenges include
creating a system for selling media over the internet and compensating
publishers and other content creators for quality entertainment and information
while preventing unauthorized duplication and distribution. This created the
opportunity for a content creator, aggregator and distributor such as Audible to
establish a secure technology system and an attractive consumer service focused
on the delivery of premium audio content.
We have
created the Audible service to give consumers the ability to download spoken
audio content of their choice and to listen to this audio when, where and how
they want. The Audible service addresses the market opportunity created by
consumer demand for audio content, the emergence of the commercial internet and
the availability of a wide range of mobile, audio-enabled digital devices. We
created the first service and platform for secure, digital delivery of premium
spoken audio content over the internet for playback on personal computers and
mobile devices. Our service allows customers to program their listening time
with personalized selections from a wide collection of spoken audio content
available at audible.com, including entertainment, news, education and business
information. We believe that we have assembled the largest and most diverse
collection of premium spoken audio content available for download on the
internet for playback on personal computers, hand-held digital audio players, or
to burn to CD for playback on a CD player.
We have
more than 70,000 hours of audio content currently available on our website,
featuring abridged daily audio editions of The
Wall Street Journal and
The
New York Times -
available on a subscription basis in time for the morning drive to work each day
— as well as abridged Forbes,
Harvard Business Review, Scientific American and
Fast
Company audio
editions. The site offers a broad collection of audiobook best sellers and
classics by authors such as Tom Clancy, Stephen King, John Grisham, Mary Higgins
Clark, James Patterson, the Dalai Lama, David McCullough, Stephen Hawking,
William Shakespeare, Emily Dickinson and Jane Austen. There are also speeches,
lectures, and on-demand radio programs including Marketplace,
All Things Considered, Car Talk, Fresh Air and
This
American Life, and
original shows such as RobinWilliams@audible.com.
We
believe that our extensive audio content collection and our secure delivery
system provide benefits to our customers, content providers, manufacturers of
AudibleReady hand-held electronic devices and other companies, which distribute
or promote our service.
Benefits
to Customers
Unlike
the traditional ways consumers select, organize and consume spoken audio
content, Audible customers can access content of their choice and listen when,
where and how they want - whether commuting, exercising, relaxing or sitting at
their personal computers.
Selection
At our
website, www.audible.com, customers can browse and purchase from a large and
diverse collection of readily available premium spoken audio content, most of
which is currently available in digital format for internet distribution only
through us either pursuant to exclusive arrangements or because, to our
knowledge, no one else currently has or is exploiting these rights. Our
collection currently includes more than 7,600 digital audiobooks in a wide
variety of categories. We are the only source of timely digital audio editions
of leading newspapers and selected periodicals. We also offer popular and
special interest radio programming, including interviews, commentaries and talk
radio. Our collection also contains selections that are difficult to find or may
not otherwise be readily or conveniently available to consumers elsewhere.
Convenience
Audible.com
provides customers with one-stop shopping for their premium digital spoken
audio. Our customers can browse and sample spoken audio selections through our
easy-to-navigate website. They can enroll in AudibleListener, a monthly
subscription program entitling customers to download content of their choice,
purchase bundled packages of selected audio titles as well as choose automated
delivery of timely audio content on a subscription basis. Unlike traditional and
online bookstores, which are subject to physical inventory constraints and
shipping delays, we are never “out of stock” and we provide a service that is
readily available in digital format and can be quickly delivered over the
internet directly to our customers.
Listening
Experience
Unlike
terrestrial and satellite radio, which offer limited programming and no ability
for the listener to control broadcast times, our service enables customers to
take greater control of their time and their listening experience. Customers
choose to listen to what, when and where they want. Additionally, customers can
choose from four different fidelity options for their listening. Our service
also allows customers to skip between selections or individual articles or
chapters within selections. Customers can pause and resume listening where they
left off and can “bookmark” multiple sections of content, rather than be
constrained by the rewind and fast forward functions of cassette tape players.
Mobility
We offer
our customers a choice of listening options tailored to their lifestyle while
driving, exercising, relaxing or multi-tasking. Customers can listen to their
audio with an AudibleReady MP3 player or PDA, using a CD player, certain
cellular telephones, via an automobile jukebox or from their audio equipped
desktop computer. Customers who subscribe to a recurring title (newspaper,
magazine, radio program, etc.) can have it automatically delivered to their PC,
Mac, or mobile device before they get up in the morning or leave the office for
the day.
Value
We
provide customers with what we believe is a strong value proposition in our
AudibleListener program, where for a fixed monthly fee, the customer downloads a
prescribed number of audio titles of their choice. Individual titles are
typically priced 20 to 30% less than the same audiobook on cassette or CD, and
if purchased within the AudibleListener membership plan, discounts can be more
than 60% compared to cassette or CD.
Benefits
to Business Affiliates
We help
content creators, device manufacturers, online e-commerce companies, consumer
electronics retailers and other companies that distribute our products or
promote our service to their customers to create incremental sources of revenue
by aggregating premium audio content and providing a widely-accepted system for
digital spoken audio distribution.
Content
Creators
We
provide a new source of revenue for publishers of newspapers, magazines,
journals, newsletters, professional publications and business information and
producers of radio broadcasts by creating a new market for content that is too
timely for distribution on cassette tape or compact disc and generally too
specialized for widely-broadcast radio programs. Additionally, our electronic
delivery service offers publishers of audiobooks a new distribution channel for
their existing audiobook content. In a strategic alliance with Random House,
Inc., Random House Audible has been established as a publishing imprint within
Random House, Inc.’s Random House Audio Publishing Group Division.
Older
publications, including archived or out-of-print content, when converted to
digital audio form, can also provide additional revenue while incurring
relatively low costs for storing and delivering electronic inventory. Our
solution has the benefit of reducing the risk of audio files being copied
without authorization by employing a system designed to limit playback of audio
files to specifically identified personal computers and digital audio players.
CD
Burning Software Providers
Leading
CD burning software providers have agreed to support and promote the capability
for our customers to burn the content they purchase to CD for playback in
portable CD players or in CD players installed in automobiles. These CD burning
software providers usually receive a percentage of revenue Audible receives from
customers who burn their content to CD.
Device
Manufacturers
Major
manufacturers of audio-enabled digital players, such as Apple Corp., Creative
Labs, Hewlett-Packard, Kenwood, Motorola, palmOne, PhatNoise, Rio Audio, Thomson
Inc. and Toshiba have agreed to support and promote the secure playback of our
content on their devices. The PhatNoise Car Audio System, among the first
high-capacity media jukeboxes designed specifically for automobiles, is capable
of playing content purchased from us. In addition, new customers who agree to
join the AudibleListener program for a twelve-month period have the option of
receiving Creative Lab’s Muvo digital audio player. The Muvo is also available
for sale at our website. Our service provides these manufacturers with an
attractive application that takes advantage of the audio capability of their
digital audio devices, which may in turn increase their sales. In most cases,
these manufacturers receive a percentage of the revenue generated over a
specified period of time by each new customer referred by them. Such costs are
recorded in marketing expenses.
Companies
That Distribute Our Products or Promote Our Service
We have
entered into marketing agreements with Apple Corp., palmOne, Toshiba, Cox
Communications, Cablevision System’s Optimum Online broadband service, Time
Warner Cable’s Roadrunner broadband service, Amazon.com, Microsoft, The New York
Times Company, Dow Jones (The
Wall Street Journal) and
others to promote our content to their customers, either directly or indirectly.
We have agreed with these companies to compensate them from sales of our content
to their customers. In return, we have access to additional distribution
channels. We have also established relationships with electronics retailers such
as Crutchfield, J&R ComputerWorld, Micro Center, MobilePlanet.com,
Amazon.com, BestBuy and Tweeter to promote our AudibleListener membership plan
by offering consumers either a discount on the purchase of an AudibleReady
device, a cash rebate on the purchase of an AudibleReady device, or a gift card
to be honored by the retailer on a future purchase.
Our
objective is to enhance our position as the leading provider of subscription
based, internet-delivered, premium spoken audio content. Key elements of our
strategy to achieve this goal include:
Increase
Brand Awareness
We seek
to make “Audible” a more recognizable brand. We continue to use the AudibleReady
brand to signify that a player is enabled to play back Audible content. We are
working to enhance brand awareness of the Audible service and increase visitors
to our website by expanding our marketing efforts through online initiatives as
well as co-marketing agreements. Online initiatives include a wide range of
promotional vehicles that we use to communicate with existing customers as well
as prospective customers. We also have a well-developed “customer-get-customer”
program. Our co-marketing agreements and business relationships with our content
partners, cable television operators, CD burning software providers, retail
partners, the Apple iTunes Music Store, Amazon.com and AudibleReady player
manufacturers are key elements of our plans to make potential customers aware
of, and to encourage them to use our service. We continue to seek to enter into
agreements with content providers as well as owners of internet portals and
e-commerce sites to promote the Audible service to internet users.
Expand
Content Collection
We plan
to acquire more digital distribution rights to audio versions of books,
newspapers, radio broadcasts, magazines, journals, newsletters, conferences,
performances, comedy, lectures, speeches, as well as other educational and
original programming. With selected content providers, we plan to create
additional timely digital audio editions of newspapers, periodicals and other
content not otherwise available to consumers in audio format. We intend to
continue to differentiate our service by expanding our collection of exclusive,
original and topic-specific content, building a collection unconstrained by
traditional physical inventory concerns.
Enable
Additional Electronic Devices, Wireless Phones and Systems to be AudibleReady
We intend
to continue to work with the manufacturers of hand-held electronic devices to
support and promote the playback of Audible content on their players. We also
seek to make future generations of AudibleReady audio players that use the MP3
audio format, a digital compression format that is currently used primarily for
music playback. AudibleReady technology is compliant with leading operating
systems. We are seeking to expand the AudibleReady program within a variety of
mobile players, such as wireless phones, other hand-held computing devices as
they become audio-enabled, automobile-based media jukeboxes, personal computers
and in-home digital entertainment systems. We continue to offer a packaged
software library to partners who wish to add Audible support to their desktop
end-user audio management applications.
Continue To
Improve the Customer Experience
We intend
to make the Audible service increasingly easy for customers to use and
personalize. We intend to take advantage of the flexibility of our online
distribution system to offer various pricing, membership, and subscription
models designed to maximize customer satisfaction and to generate recurring
revenue. We continue to enhance audible.com to make it easier for customers to
find specific selections and to actively suggest selections that might be of
interest to them based on their prior purchasing patterns. We also are enhancing
our AudibleManager software to make it simpler for customers to manage their
personal audio content selections and automate downloads and transfers of
content to mobile players. We provide customer service via telephone, online
chat and email.
Continue
International Expansion
In December
2004, together with our joint venture partners, we launched Audible
Germany. France Loisirs, via a licensing and services agreement with
Audible, launched Audible France in the first quarter of 2005. We also intend to
launch Audible UK in the second quarter of 2005. In addition, we recently
announced that our strategic initiatives for 2005 will include the launch of
Audible UK, which will be a spoken audio website focused on the UK
marketplace.
Pursue New
Strategic Initiatives
We
recently announced that our strategic initiatives for 2005 will include the
launch of Audible UK, the launch of Audible Education and the launch of Audible
Wireless. Audible Education’s focus will be to bring the benefits of spoken
audio to the consumer and institutional learning markets. Audible Wireless will
bring direct to handset over-the-air delivery of Audible content to our
customers.
Audible’s
integrated spoken audio delivery service includes five components: (1) our
website, www.audible.com, (2) our collection of digital audio content, (3) our
software for securing, downloading, managing, transferring, burning and playing
audio selections, (4) a variety of AudibleReady players which include our
technology and features that manage the listening experience, and (5) other
services.
Audible.com
Our
website, www.audible.com, offers a large and diverse selection of premium
digital spoken audio content in a secure format for download by customers. At
audible.com, visitors can browse, search for, sample, purchase, subscribe to,
schedule, stream and download digital audio content. Customers can also
contribute reviews and rate the content at audible.com, which other customers
may use as part of their purchasing decision. One hour of spoken audio in our
most popular format, requires about eight megabytes of storage, and
downloads to a listener’s computer in
approximately ten seconds using a high speed internet connection, and less than
thirty seconds to transfer the content from the computer to an AudibleReady
player. Customers are offered up to four different fidelity options, allowing
them to trade off between fidelity and speed of download from the internet.
According to The Wall Street Journal, more than 15 million American households
have broadband connections. Veronis Suhler Stevenson projects that by 2005, 68.4
million U.S. households will be online and that by 2006, 41% of online
households will subscribe to a broadband internet connection.
Digital
Audio Content
We
currently offer more than 7,600 digital audiobooks and more than 15,000 other
audio selections comprising over 70,000 hours of digital spoken audio content,
segmented in four major categories:
| |
• |
Audiobooks.
We
offer a wide selection of audiobooks. We offer both abridged (typically
three to 10 hours long) and unabridged (typically five to 20 hours long)
versions of books, read by the authors or by professional narrators.
|
| |
• |
Timely
audio editions of print publications. Our
service enables the timely distribution of audio editions of newspapers,
magazines and newsletters previously available only in print. We offer a
40-minute daily audio edition of The
New York Times and
selected audio content from The
Wall Street Journal. We
also offer audio editions of Forbes,
Scientific American, Science News, Harvard
Management Update, Harvard Health Letter, and
others. |
| |
• |
Radio
broadcasts. We
offer popular and special-interest public radio programs shortly after
they are originally broadcast so our customers have the flexibility to
listen to these programs when and where they want. We offer audio versions
of broadcasts such as Fresh
Air, Marketplace, This American Life, The News from Lake Wobegon, Car Talk
and
Science
Friday. |
| |
• |
Lectures,
speeches, performances and other audio. We
offer a broad selection of lectures, speeches, dramatic and comedic
performances, educational and self-improvement materials, religious and
spiritual content, and other forms of spoken audio, many of which are
difficult to find from any other source. We also offer specialty content
created exclusively for audible.com, for example, programs featuring actor
Robin Williams. |
We
currently have licensed internet distribution rights to audio content from more
than 200 publishers, producers of radio content and other content creators. Our
license agreements are typically for terms of one to five years, and many
provide us with exclusive internet distribution rights. Under most licensing
arrangements, we pay the content creator a portion of the revenue we receive. In
some of our arrangements, we also pay a guaranteed advance against the content
creator’s revenue share.
In most
cases, we license audio recordings from publishers and content creators. In
other cases, such as with The
New York Times and
The
Wall Street Journal, we record
and produce audio versions from the print publications. In all cases, we convert
the audio into our compressed, secure, digital format.
Audible
Software
Our
software consists of AudibleManager for downloading, managing, scheduling and
playing audio selections and AudiblePlayer for Pocket PC PDAs and for devices
running the palmSource 5 or 6 Operating System, such as the palmOne Zire,
Tungsten or Treo 600.
AudibleManager
enables our customers to download and listen to spoken audio content and
transfer it to AudibleReady players for mobile playback. AudibleManager
implements Audible’s security system for ensuring that downloaded content is
playable only by authorized players and devices. AudibleManager can also be used
to organize individual selections, to specify listening preferences, to manage
delivery options for subscriptions, and to burn purchased audio to audio CDs.
Selections that exceed playback time limitations on a customer’s hand-held
electronic device can be listened to over successive sessions by reconnecting
the player to the customer’s personal computer and initiating a synchronization
command that automatically replaces the sections that have been played with new
content.
Our
AudiblePlayer software enables users of hand-held PDAs to control and customize
their listening experience. Unlike cassette tapes, AudibleReady players allow
fast navigation of the content through section markers and bookmarks that can be
set by the user. Users can skip between selections, individual articles or
chapters, effectively allowing them to control their listening experience.
AudibleReady
Devices
AudibleReady
devices are personal computers and other electronic devices that have a speaker
or an audio output jack and can play back our audio content. The AudibleManager
and AudiblePlayer software enable these devices to receive and play back Audible
content and are available for download for free from audible.com. Several device
manufacturers have bundled the AudibleManager and AudiblePlayer software with
their devices. The audio output jack of these players can work with headphones
or a cassette adapter to enable the content to be played through a car stereo
system. Audible customers may also burn their audio to CDs for listening through
a CD player. The Apple iTunes jukebox software incorporates AudibleReady
features to enable owners of personal computers and the Apple iPod to download
and listen to spoken audio from audible.com.
A formal set
of specifications defines the technical requirements that must be met by devices
and by application software before they can be deemed AudibleReady. These
requirements define internal functions, user experience related features, and
aspects of the communication protocol between a device and the host software
used to update its digital content. These specifications are provided to our
partners when additional work is required to have their devices and/or
applications meet the requirements.
We have
formed co-marketing relationships with a number of consumer electronics and
computer companies to promote AudibleReady electronic devices and our content to
consumers. The device manufacturers are generally required to promote the
Audible service through a variety of means, which may include (1) providing
audio samples, (2) displaying the AudibleReady logo on the outside of the player
package, (3) including our brochures inside the player package and (4)
referring to Audible and AudibleReady in their software, brochures and manuals.
In most cases, the device manufacturers receive a percentage of the revenue
related to the content purchased by owners of their AudibleReady players. These
revenue sharing arrangements typically last one or more years from the date the
device owner becomes an Audible customer.
Other
Services
We also
provide the Audible service to over 50 public library and school library
systems.
The
market for the sale and delivery of spoken audio is highly competitive and
rapidly changing. Principal competitive factors in the spoken audio market
include:
| |
• |
protection
of intellectual property; |
Although
we believe that we currently address these factors favorably with our technology
and audio service elements, we cannot be sure that we can maintain our
competitive position against current or new competitors, especially those new
competitors with longer operating histories, greater name recognition and
substantially greater financial, technical, marketing, management, service,
support and other resources.
We
compete with (1) traditional and online retail stores, catalogs, clubs and
libraries that sell, rent or loan audiobooks on cassette tape or compact disc,
(2) websites that offer streaming access to spoken audio content using tools
such as the RealPlayer or Windows Media Player and (3) other companies vying for
consumers’ time, such as satellite radio, as well as digital music streaming and
download services.
Audiobooks
on cassette tape or compact disc have been available from a variety of sources
for a number of years. Traditional bookstores, such as Borders and Barnes &
Noble, and online bookstores, such as barnesandnoble.com offer a variety of
audiobooks. The Audio Book Club offers discounted audiobooks by mail order.
MediaBay.com offers a small number of digital downloads of spoken audio and has
announced its intention to supply MSN Music with spoken audio content. Various
rental services offer low pricing for time-limited usage of physical audiobooks
on tape or CD, and libraries loan a limited selection of audiobooks. One or more
of these competitors might develop a competing electronic service for delivering
audio content.
Companies
and portal companies including America Online, Yahoo! or MSN may in the future
compete directly with us by selling premium spoken audio content for digital
download. Competition from websites that provide streaming audio content is
intense and is expected to increase significantly in the future. Online music
services such as the Apple iTunes Music Store and Real Network’s Rhapsody offer
a wide selection of streaming and downloadable music content. Other companies
have announced their intention to launch music services in the future.
Our
content providers and other media companies may choose to provide digital audio
content directly to consumers. In addition, a small number of companies control
primary or secondary access to a significant percentage of internet users and
therefore have a competitive advantage in marketing to those users. These
providers could use or adapt their current technology, or could purchase
technology, to provide a service that directly competes with the Audible
service.
Many of
these companies have significantly greater brand recognition and financial,
technical, marketing and other resources than we do. We also expect competition
to intensify and the number of competitors to increase significantly in the
future as technology advances, providing alternative methods to deliver digital
audio content through the internet, satellite, wireless data, digital radio or
other means.
We regard
our patents, copyrights, service marks, trademarks, trade dress, trade secrets
and similar intellectual property as critical to our success. To protect our
proprietary rights, we rely on a combination of patent, trademark and copyright
law, trade secret protection and confidentiality and license agreements with our
employees, customers, business affiliates and others. Notwithstanding these
precautions, others may be able to use our intellectual property or trade
secrets without our authorization. If we are unable to adequately protect our
intellectual property, it could materially affect our financial performance. In
addition, potential competitors may be able to develop technologies or services
similar to ours without infringing our patents.
We hold
ten patents and have filed several continuations cases containing multiple
claims covering and further expanding various aspects of the Audible system. We
do not know if the other pending patents will ever be issued and, if issued, if
they will survive legal challenges. Legal challenges to our patents, whether
successful or not, may be very expensive to defend.
Audible’s
patent portfolio concerns systems that author and deliver content for secure
delivery to portable devices. Audible has maintained open continuation cases
based on the original disclosure and continues to craft claims that match
industry practice as it evolves. In addition to content security, Audible has
pioneered the updating of a portable digital device’s contents based on user
preferences and content types (e.g. recurrent subscription content). Audible has
a separate family of patents that applies to relevant methods and systems,
including claims for portable devices with the characteristics needed to support
these usage models, notably maintenance of the state of the user’s consumption
of media stored on a device. Audible’s patents are not limited to audio content
but instead apply to a broad range of media types, and the device types include
not only tethered but untethered (e.g. wireless) devices as well.
We have
registered in the United States several of our trademarks and service marks,
including but not limited to “Audible Entertainment,” “Audible Entertainment
Network,” “Audible Hear, There, and Everywhere,” “Audible,” “audible.com,”
“AudibleManager,” “AudibleReady,” “AudibleMobilePlayer,” “AudibleListener,”
“Internet Theatre,” “Click.Hear,” and “AudiblePlayer.” In addition, we have
begun to take affirmative steps to protect our trademarks outside of the United
States as effective trademark, service mark, and copyright protection is not
necessarily available in every country in which our services are available
online.
We also
license some of our intellectual property to others, including our AudibleReady
technology and various trademarks and copyrighted material. While we attempt to
ensure that the quality of our brand is maintained, others might take actions
that materially harm the value of either these proprietary rights or our
reputation.
We
license technology from others, including elements of our
compression-decompression technology that we incorporate into the Audible
system. If these technologies become unavailable to us, we would need to license
other technology, which would require us to redesign our system and recode our
content. Although we are generally indemnified against claims that technology
licensed by us infringes the intellectual property rights of others, such
indemnification is not always available for all types of intellectual property
and proprietary rights and in some cases the scope of such indemnification is
limited. Even if we receive broad indemnification, third party indemnitors may
not have the financial resources to fully indemnify us in the event of
infringement, resulting in substantial exposure to us. We cannot assure you that
infringement or invalidity claims arising from the incorporation of this
technology, resulting from these claims, will not be asserted or prosecuted
against us. These claims, even if not meritorious, could result in the
expenditure of significant financial and managerial resources in addition to
potential redevelopment costs and delays, all of which could materially and
adversely affect our business, operating results, and financial condition.
As of
December 31, 2004, we had a total of 97 full-time employees: 53 in operations,
24 in technology and development, 15 in marketing, and 5 in general and
administrative.
Our
principal administrative, marketing, technology and development, and operations
facility is located at 65 Willowbrook Boulevard, Wayne, New Jersey, 07470, where
we lease approximately 22,000 square feet. Our lease expires on December 31,
2008. We
anticipate leasing approximately an additional 7,600 square feet at this
facility in the beginning of 2005.
On
February 22, 2005, a purported class action complaint was filed in the United
States District Court for the District of New Jersey by Dennis Carter on behalf
of himself and all other similarly situated investors against us, our Chief
Executive Officer and our Chief Financial Officer. The complaint alleges
violations of sections 10(b) and 20(a) of the Securities Exchange Act of 1934,
and Securities and Exchange Commission Rule 10b-5, and alleges that the
defendants did not make complete and accurate disclosures concerning our
future plans and prospects. The plaintiff seeks unspecified damages on behalf of
a purported class of purchasers of our securities during the period from
November 2, 2004 through February 15, 2005. It is possible that additional
complaints may be filed in the future. We expect that all individual lawsuits
will be consolidated into a single civil action. We believe that the complaint
is without merit and intend to defend the litigation vigorously. Due to the
inherent uncertainties of litigation and because the litigation is at a
preliminary stage, we cannot accurately predict the ultimate outcome of this
matter.
In June
2001, we and certain of our officers 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 our initial public offering (“IPO”) in July 1999. The
lawsuits also named certain of the underwriters of the IPO as well as certain of
our 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 Litigations”). The complaints allege that the prospectus
and the registration statement for our IPO failed to disclose that the
underwriters allegedly solicited and received “excessive” commissions from
investors and that some investors in our IPO allegedly agreed with the
underwriters to buy additional shares in the aftermarket in order to inflate the
price of our stock. An amended complaint was filed April 19, 2002. We and
certain of our officers, directors, and former directors were named in the suits
pursuant to Section 11 of the Securities Act of 1933, Section 10(b) of the
Exchange Act of 1934, and other related provisions. 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 other non-underwriter defendants in the coordinated cases also moved to
dismiss the IPO Litigations. 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. Our
individual officers, directors and former director defendants in the IPO
Litigation signed a tolling agreement and were dismissed from the action without
prejudice on October 9, 2002.
In June
2003, a proposed settlement of this litigation was structured between the
plaintiffs, the issuer defendants in the consolidated actions, the issuer
officers and directors named as defendants, and the issuers’ insurance
companies. The settlement would provide, among other things, a release for us
and for the individual defendants for the conduct alleged 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 us that may have against our underwriters. Any direct
financial impact of the proposed settlement is expected to be borne by our
insurance carriers.
In June
2004, an agreement of settlement was submitted to the Court for preliminary
approval. The court requested that any objections to preliminary approval of the
settlement be submitted by July 14, 2004, and the underwriter defendants
formally objected to the settlement. The plaintiffs and issuer defendants
separately filed replies to the underwriter defendants’ objections to the
settlement on August 4, 2004. The court granted the preliminary approval motion
on February 15, 2005, subject to certain modifications. The parties are directed
to report back to the court regarding the modifications. If the parties are able
to agree upon the required modifications, and such modifications are acceptable
to the court, notice will be given to all class members of settlement, a
“fairness” hearing will be held and if the Court determines that the settlement
is fair to the class members, the settlement will be approved. There can be no
assurance that this proposed settlement would be approved and implemented in its
current form, or at all.
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.
On March
23, 2005, Digeo, Inc., a Delaware corporation, filed, but did not serve, a
complaint for patent infringement in Federal District Court in the State of
Washington. We believe the claims made in the complaint are without merit
and will not have a material adverse impact on our financial position or results
of operations.
Item 4. Submission of Matters to a Vote of Security
Holders.
None
Part
II
Item 5. Market for Registrant’s Common Equity, Related
Stockholder Matters and Issuer Purchases of Equity
Securities
Our
common stock was traded on the NASDAQ National Market under the symbol "ADBL"
from our public offering on July 16, 1999 through August 6, 2002, at which time
we moved to the NASDAQ Small Cap Market. On February 18, 2003, our stock was
delisted from the NASDAQ Small Cap Market and began trading on the
Over-the-Counter Market (OTCBB) under the symbol "ADBLD". On July 1, 2004, our
stock was relisted on the NASDAQ Small Cap Market under the symbol “ADBL”, and
on November 16, 2004, returned to trading on the NASDAQ National Market. Prior
to July 16, 1999, there was no established public trading market for any of our
securities.
The
following table sets forth, for the periods indicated, the range of high and low
closing sales prices for our common stock as reported on the NASDAQ National
Market, NASDAQ Small Cap Market or Over-the-Counter Market, as adjusted
for a one-for-three reverse stock split of our common stock
effective June 17, 2004.
|
|
High |
|
Low |
|
|
|
|
|
|
|
|
2003 |
|
|
|
|
|
|
|
|
First
Quarter |
|
$ |
1.05 |
|
$ |
0.60 |
|
|
Second
Quarter |
|
|
2.25 |
|
|
0.78 |
|
|
Third
Quarter |
|
|
4.38 |
|
|
1.56 |
|
|
Fourth
Quarter |
|
|
12.66 |
|
|
3.48 |
|
|
|
|
|
|
|
|
|
|
|
2004 |
|
|
|
|
|
|
|
|
First
Quarter |
|
$ |
12.42 |
|
$ |
8.88 |
|
|
Second
Quarter |
|
|
14.70 |
|
|
10.65 |
|
|
Third
Quarter |
|
|
17.93 |
|
|
10.60 |
|
|
Fourth
Quarter |
|
|
29.97 |
|
|
15.35 |
|
|
|
|
|
|
|
|
|
|
|
2005 |
|
|
|
|
|
|
|
|
First
Quarter (through March 23, 2005) |
|
$ |
28.90 |
|
$ |
12.37 |
|
On March
23, 2005, the last reported sale price of our common stock was $13.40 per share.
As of March 23, 2005, we had approximately 166 stockholders of record of our
common stock, although there are a significantly larger number of beneficial
owners of our common stock.
We have
never paid or declared any cash dividends on our common stock. Our present
policy is to retain any earnings to finance the growth and development of the
business and, therefore, we do not anticipate declaring or paying cash dividends
on our common stock in the foreseeable future.
Recent
Sales of Unregistered Securities
From
January 2004 through December 2004, we issued the following unregistered
securities, as adjusted for the reverse stock split of one for three that
occurred on June 17, 2004:
Warrants:
In
February 2004, in connection with the conversion of our preferred stock, we
issued warrants to purchase 333,333 shares of common stock at a price of $21.00
per share, which expire February 6, 2011.
In March
2004, in connection with a services agreement, we issued a warrant to purchase
25,000 shares of common stock at a price of $1.50 per share, and a warrant to
purchase 8,333 shares of common stock at a price of $9.75 per shares, which both
expire March 29, 2009.
In
October 2004, in connection with a hardware manufacturing agreement, we issued a
warrant to purchase 1,000 shares of common stock at a price of $17.00 per share,
which expires October 19, 2009.
The above
securities were offered and sold by us in reliance upon exemptions from
registration pursuant to Section 4(2) of the Securities Act of 1933 as
transactions not involving any public offering.
Item 6. Selected Financial Data
The
selected financial data set forth below should be read in conjunction with the
financial statements and related notes thereto and "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and other financial
information appearing elsewhere in this Form 10-K. The selected financial data
set forth below as of December 31, 2003 and 2004 and for the years ended
December 31, 2002, 2003 and 2004, are derived from, and are qualified by
reference to, our audited financial statements included elsewhere in this Form
10-K. The selected financial data set forth below as of December 31, 2000, 2001
and 2002, and for the years ended December 31, 2000 and 2001 are derived from
our audited financial statements not included in this Form 10-K. All share data
shown reflects the one for three reverse stock split that occurred on June 17,
2004.
Certain
operating expenses within the following selected financial data for 2000, 2001,
and 2002 have been reclassified to conform to the presentation for later
periods. These reclassifications had no effect on net income or net
loss.
| |
|
Year
Ended December 31, |
|
| |
|
|
|
|
|
|
|
|
|
|
|
| |
|
2000 |
|
2001 |
|
2002 |
|
2003 |
|
2004 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
Statement
of operations data: |
|
|
|
|
|
|
|
|
|
|
|
Revenue,
net: |
|
|
|
|
|
|
|
|
|
|
|
Content
and services revenue: |
|
|
|
|
|
|
|
|
|
|
|
|
Consumer
content |
|
$ |
1,443,554 |
|
$ |
5,143,002 |
|
$ |
10,939,871 |
|
$ |
18,594,531 |
|
$ |
33,838,272 |
|
|
Point
of sales rebates |
|
|
— |
|
|
—
|
|
|
—
|
|
|
(104,710 |
) |
|
(696,044 |
) |
|
Services |
|
|
575,791 |
|
|
883,921
|
|
|
347,816
|
|
|
104,569
|
|
|
68,127
|
|
|
Bulk
content |
|
|
500,000 |
|
|
1,435,048
|
|
|
—
|
|
|
—
|
|
|
—
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
content and service revenue |
|
|
2,519,345 |
|
|
7,461,971
|
|
|
11,287,687
|
|
|
18,594,390
|
|
|
33,210,355 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Hardware |
|
|
1,273,117 |
|
|
1,293,533
|
|
|
931,785
|
|
|
665,584
|
|
|
694,900
|
|
|
Related
party revenue |
|
|
— |
|
|
—
|
|
|
—
|
|
|
—
|
|
|
362,170
|
|
|
Other |
|
|
756,518 |
|
|
315,909
|
|
|
150,067
|
|
|
64,504
|
|
|
52,144
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
revenue, net |
|
|
4,548,980 |
|
|
9,071,413
|
|
|
12,369,539
|
|
|
19,324,478
|
|
|
34,319,569 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost
of content and services revenue: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Royalties
and other content charges |
|
|
3,637,683 |
|
|
4,843,720
|
|
|
4,904,245
|
|
|
5,318,919
|
|
|
10,650,382
|
|
|
Discount
certificate rebates |
|
|
— |
|
|
—
|
|
|
—
|
|
|
—
|
|
|
1,461,719 |
|
|
Total
cost of content and services revenue |
|
|
3,637,683 |
|
|
4,843,720
|
|
|
4,904,245
|
|
|
5,318,919
|
|
|
12,112,101 |
|
|
Cost
of hardware revenue |
|
|
2,571,994 |
|
|
2,858,495
|
|
|
2,717,542
|
|
|
2,085,254
|
|
|
2,197,013 |
|
|
Operations |
|
|
4,901,457 |
|
|
4,528,783
|
|
|
3,742,713
|
|
|
3,843,311
|
|
|
5,145,855
|
|
|
Technology
and development |
|
|
7,161,815 |
|
|
6,353,932
|
|
|
4,997,860
|
|
|
4,784,648
|
|
|
5,058,314
|
|
|
Marketing |
|
|
16,087,187 |
|
|
14,210,142
|
|
|
11,107,981
|
|
|
4,494,702
|
|
|
5,184,618
|
|
|
General
and administrative |
|
|
4,382,118 |
|
|
3,837,677
|
|
|
2,485,434
|
|
|
2,633,031
|
|
|
3,540,016
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
operating expenses |
|
|
38,742,254 |
|
|
36,632,749
|
|
|
29,955,775
|
|
|
23,159,865
|
|
|
33,237,917 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Loss)
income from operations |
|
|
(34,193,174 |
) |
|
(27,561,336 |
) |
|
(17,586,236 |
) |
|
(3,835,387 |
) |
|
1,081,652 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
income, net |
|
|
1,601,830 |
|
|
565,565
|
|
|
85,158
|
|
|
25,451
|
|
|
220,652
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Loss)
income before income tax expense and state income tax
benefit |
|
|
(32,591,444 |
) |
|
(26,995,771 |
) |
|
(17,501,078 |
) |
|
(3,809,936 |
) |
|
1,302,304 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
tax expense |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
(1,330 |
) |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
State
income tax benefit |
|
|
316,310 |
|
|
326,898
|
|
|
313,580
|
|
|
250,408
|
|
|
723,724
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
(loss) income |
|
|
(32,275,134 |
) |
|
(26,668,873 |
) |
|
(17,187,498 |
) |
|
(3,559,528 |
) |
|
2,024,698 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dividends
on preferred stock |
|
|
— |
|
|
(1,049,516 |
) |
|
(1,365,720 |
) |
|
(5,656,894 |
) |
|
(614,116 |
) |
|
Preferred
stock discount |
|
|
— |
|
|
—
|
|
|
—
|
|
|
(1,444,444 |
) |
|
— |
|
|
Charges
related to conversion of convertible preferred stock |
|
|
— |
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(9,873,394 |
) |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
preferred stock expense |
|
|
— |
|
|
(1,049,516 |
) |
|
(1,365,720 |
) |
|
(7,101,338 |
) |
|
(10,487,510 |
) |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
loss applicable to common shareholders |
|
|
($32,275,134 |
) |
|
($27,718,389 |
) |
|
($18,553,218 |
) |
|
($10,660,866 |
) |
|
($8,462,812 |
) |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
and diluted net loss applicable to common shareholders per common
share |
|
|
($3.63 |
) |
|
($3.09 |
) |
|
($1.82 |
) |
|
($1.01 |
) |
|
($0.40 |
) |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
average basic and diluted common shares outstanding |
|
|
8,881,196 |
|
|
8,972,504
|
|
|
10,169,406
|
|
|
10,506,704 |
|
|
20,912,997 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
As
of December 31, |
|
| |
|
|
|
|
|
|
|
|
|
| |
|
2000 |
|
2001 |
|
2002 |
|
2003 |
|
2004 |
|
| |
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
Balance
sheet data: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
and cash equivalents |
|
$ |
14,149,027 |
|
$ |
7,627,802 |
|
$ |
2,822,080 |
|
$ |
9,074,987 |
|
$ |
13,296,006 |
|
|
Short-term
investments |
|
|
1,957,733 |
|
|
—
|
|
|
—
|
|
|
—
|
|
|
48,386,399
|
|
|
Total
assets |
|
|
20,731,849 |
|
|
10,999,493
|
|
|
4,608,058
|
|
|
10,780,997
|
|
|
64,773,790
|
|
|
Noncurrent
liabilities |
|
|
713,065 |
|
|
219,830
|
|
|
134,999
|
|
|
58,750
|
|
|
38,000
|
|
|
Redeemable
convertible preferred stock |
|
|
—
|
|
|
10,318,902
|
|
|
12,289,976
|
|
|
—
|
|
|
—
|
|
|
Total
stockholders’ equity (deficit) |
|
|
14,593,102 |
|
|
(5,549,488 |
) |
|
(13,326,129 |
) |
|
6,104,508
|
|
|
57,090,709
|
|
Item 7. 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 financial statements and
related notes thereto, and other financial information included elsewhere in
this report on Form 10-K.
This
Annual Report on Form 10-K contains forward-looking statements and information
relating to our Company. We generally identify forward-looking statements using
words like “believe,” “intend,” “will,” “expect,” “may,” “should,” “plan,”
“project,” “contemplate,” “anticipate,” “seek” or similar terminology. These
statements are based on our beliefs as well as assumptions we made using
information currently available to us. Because these statements reflect our
current views concerning future events, these statements involve risks,
uncertainties and assumptions. Actual results may differ significantly from the
results discussed in these forward-looking statements.
Overview
Audible,
Inc. is the internet’s largest, most diverse provider of premium spoken
audio services for content download and playback on personal computers, CD or
AudibleReady mobile listening devices. Our customers purchase and download their
choice of content, and generally listen during their daily commute or while
exercising, when “their eyes are busy but their minds are free.” We believe that
the Audible service allows our customers to make better use of their time,
allowing them to listen to books, newspapers and magazines that, due to their
busy lives, they would not have the time to read, as well as to listen to time
shifted radio programs on their own schedules. Our online store is located at
audible.com and our single location of operations is in Wayne, New Jersey.
Audible.com is also the Apple iTunes Music Store’s exclusive provider of spoken
word content for digital distribution.
Audible
has more than 70,000 hours of audio programs and over 200 content providers that
include leading audiobook publishers, broadcasters, entertainers, magazine and
newspaper publishers and business information providers. Most of our customers
join the AudibleListener program, where for a monthly fee of either $14.95 or
$21.95, they may download and listen to a prescribed number of audio titles of
their choice. AudibleListeners provide us with their credit card information and
are billed monthly in advance for the AudibleListener service. Customers may
also purchase individual audio titles from us on an á la carte basis.
Since
launching the service in 1997, over 467,000 customers in 120 countries have
purchased content at audible.com. We believe our growth has been driven
primarily by our strong collection of content, value to our
customers by the growing trends of downloading and listening to audio
on-the-go, and by the growing market for digital audio devices that securely
play content from audible.com. We promote the Audible service through
co-marketing partnerships with device manufacturers, online promotions,
promotions with retailers and our customer-get-customer referral program. In
addition, customers at Amazon.com and the Apple iTunes Music Store can purchase
and download Audible content of their choice.
The key
drivers of our business include new customer growth, the cost of acquiring a
customer, our customer cancellation rate, controlling our costs and sales of
Audible content through the Apple iTunes music store. Our new customer growth is
a function of developing compelling advertising and promotion programs to
encourage people to try the Audible service for the first time, as well as the
creation of marketing partnerships that similarly encourage consumers to try our
service. One of our growing sources of new AudibleListeners is via our device
rebate program. Under this program, AudibleListeners that subscribe to our
AudibleListener service for twelve months qualify for a $100 rebate or discount
on certain AudibleReady device purchases. Other sources of new AudibleListeners
include our “tell a friend” customer-get-customer program and our marketing
efforts directed at converting á la carte purchasers to AudibleListener members.
We manage customer acquisition costs by entering primarily into co-marketing
deals where we pay for results, rather than advertising impressions. We believe
that providing our customers with a wide range of high value content, a
compelling value proposition and solid customer service minimizes our customer
cancellation rate.
We plan
to continue to focus on new customer growth, expanding our content selection,
improving the Audible service, broadening the range of AudibleReady listening
devices, broadening our range of marketing and sales partnerships, providing
solid customer service, controlling our costs and pursuing our strategic
initiatives of international expansion, entering the consumer and institutional
learning markets as well as wireless delivery of content to our customers.
Revenue
from the sale of consumer content has increased in each of the last four
quarters. We expect this trend to continue as we expand our customer count.
Although
we have experienced revenue growth in our content sales in recent periods, we
cannot assure you that such growth rates are sustainable, and therefore such
growth rates should not be considered indicative of future operating results. We
cannot assure you that we will be able to continue to increase our revenue, or
that increases in revenue and profitability can be sustained. We believe that
period-to-period comparisons of our historical operating results are not
meaningful and should not be relied upon as an indication of future performance.
Our
revenue is derived from four main categories: (1) content and services revenue,
which includes consumer content and corporate services, (2) hardware revenue,
(3) related party revenue, and (4) other revenue.
Consumer
content revenue consists of content sales made from our website and content sold
through our agreement with the Apple iTunes Music Store. We recognize revenue
from the sale of individual content titles in the period when the content is
purchased. We recognize revenue from the sale of content subscriptions pro rata
over the term of the subscription period. We recognize revenue from the sale of
monthly AudibleListener memberships ratably over the AudibleListener’s monthly
membership period. This results in approximately 50% of the AudibleListener
membership fees received during each calendar month being deferred at month end
and recognized as content revenue in the following month. We recognize revenue
from the sale of UltimateListener, our prepaid discounted content package, and
gift programs when the content is downloaded.
Part of
our marketing strategy to acquire new AudibleListeners includes retail
promotions in which we pay retailers to offer discounts to consumers on their
purchase of AudibleReady devices if they become AudibleListeners for twelve
months. We also have retail promotions in which we purchase electronic
discount certificates or gift cards from retailers and give them away to
our customers for free when they sign up to be AudibleListeners for twelve
months. Point of sale rebates, which are discounts given by a third party
retailer to a customer on the purchase of a digital audio player at the point of
sale of the Audible membership, are recorded as a reduction of revenue in the
period the discount is given in accordance with Emerging Issues Task Force, or
EITF, Issue No. 01-9, “Accounting for Consideration Given by a Vendor to a
Customer (Including a Reseller of the Vendor’s Products)”, or EITF 01-9. The
cost of discount certificate rebates and gift cards that are given to a
customer by Audible at the time the customer purchases the Audible membership,
are recorded as a cost of content and services revenue in accordance with EITF
01-9. As a result, these costs, which we consider marketing, are not included in
marketing expense but instead are recorded either as a reduction of revenue or
as part of cost of content and services revenue as described above.
Customer returns and chargebacks are also recorded as a reduction in
revenue. Estimates for future returns and chargebacks are made and
recorded as an allowance for returns and chargebacks at each period
end.
Corporate
service revenue consists of library sales and audio production services. Where
applicable, we recognize corporate service revenue as services are performed
after the agreement has been finalized, the price is fixed, and collectibility
is reasonably assured. Collectibility is based on past transaction history and
credit-worthiness of the customer.
Hardware
revenue consists of sales of AudibleReady digital audio players sold primarily
at a discount or given away when a customer signs up for a one-year commitment
to our AudibleListener membership. For multiple-element arrangements in which a
customer signs up for a one year membership and receives an audio player for
free, we recognize revenue using the relative fair value method under EITF Issue
No. 00-21, “Revenue Arrangements with Multiple Deliverables,” or EITF 00-21,
whereby each separate unit of accounting is recognized as revenue at its
relative fair value, the delivered item (hardware) is limited to the
non-contingent consideration. Since all the consideration paid by the customer
is contingent upon delivery of our content, no amount is recorded as hardware
revenue under these multiple-element arrangements. The free hardware device is a
cost that we incur to acquire a customer with a one-year commitment to
AudibleListener. For players sold separately, we recognize hardware revenue upon
shipment of the device, pursuant to a customer order and credit card
authorization and include in hardware revenue 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.
Related
party revenue consists of revenue recognized in connection with our agreements
with Audible Germany, France Loisirs S.A.S. and Audio Direct S.A.S., which were
entered into during 2004.
Other
revenue consists of revenue from a license for certain technology rights granted
to a device manufacturer recognized on a straight-line basis over the term of
the agreement, and commissions earned from a retail partner related to our
referral of customers to purchase their digital mobile players. Such commissions
are based on a percentage of the purchase price of the players.
We have
marketing agreements with device manufacturers such as Apple Corp., Creative
Labs, Hewlett-Packard, Kenwood, Motorola, palmOne, Rio Audio, and Toshiba. Under
these agreements, the device manufacturer will receive a portion of the content
revenue generated over a specified period of time from each new Audible customer
referred by them or using their hand-held electronic device. For example, when a
purchaser of an Apple iPod accesses audible.com to download content, Apple Corp.
receives a percentage of the revenue related to content downloaded by this
purchaser. These revenue sharing arrangements typically last one or more years
from the date the device user becomes an Audible customer. We have also entered
into marketing agreements with Cox Communications, Cablevision System’s Optimum
Online broadband service, Time Warner Cable’s Roadrunner broadband service,
Amazon.com, Microsoft, The New York Times Company, Dow Jones (The Wall
Street Journal) and others to promote our content to their customers,
either directly or indirectly under which these marketing partners will receive
payments from us. The payments to these marketing partners are generally based
upon driving potential customers to the Audible website who then become
customers.
We have
also established relationships with electronics retailers such as Crutchfield,
J&R ComputerWorld, Micro Center, MobilePlanet.com, and Tweeter to promote
our AudibleListener membership plan at the point of purchase, offering consumers
a discount against the cost of an AudibleReady device.
On August
30, 2004, Audible Inc., Verlagsgruppe Random House GmbH, and Holtzbrinck
networXs AG entered into a joint venture agreement to form Audible GmbH
(“Audible Germany”). Audible Germany has the exclusive rights to operate a
German language Audible website. Under the joint venture, Random House and
Holtzbrinck each contributed approximately $16,000 in exchange for each
receiving a 24.5% interest in Audible Germany. We contributed approximately
$34,000 in exchange for a 51% interest in Audible Germany. Following initial
formation, Random House and Holtzbrinck are obligated to provide additional
financing of approximately $1,490,000 each in certain installments subject to
Audible Germany meeting certain milestones. In the event of liquidation of
Audible Germany, this additional financing by Random House and Holtzbrinck,
which accrues interest at 8% per annum, is senior in right of payment to our
investment. We may, but we are not obligated to, contribute additional capital
to the entity. Pursuant to a license agreement, beginning in September 2004,
Audible Germany is required to pay us $30,000 per month for thirty months
subject to certain conditions. The agreement also requires Audible Germany to
pay us a royalty ranging from 0.5% to 3% of Audible Germany’s revenue up to an
annual royalty cap of the U.S. dollar equivalent of €1.5 million, subject to
Audible Germany achieving certain operating margins. Audible Germany is a
related party to Audible.
On September
15, 2004, Audible Inc., France Loisirs S.A.S. and Audio Direct S.A.S., a
wholly-owned subsidiary of France Loisirs entered into a 24-month service and
license agreement, whereby France Loisirs intends to launch a French language
spoken word audio service through Audio Direct. Under the agreement, we provide
intellectual property and substantially all of the technological infrastructure
for the operation of the service. In return, France Loisirs is required to pay
us a total of $1,000,000 over the term of the agreement. Commencing the first
fiscal year after the business achieves positive net income, we will receive a
royalty of 5% of the business’s net paid revenue. Net paid revenue means net
revenues for digital spoken word content after the deduction of taxes but
excluding certain hardware revenue. The 5% royalty will apply until the
business’s net paid revenue exceeds €20 million. Once net paid revenue exceeds
€20 million, we will receive a flat fee of €1 million. If net paid revenue
exceeds €33.3 million, we will receive a royalty payment of €1 million, plus 3%
of net paid revenue in excess of €33.3 million. An additional royalty is payable
equal to one-half of the distributable pre-tax profits of the business.
In
September 2003, we entered into a four year agreement with Apple Computer, Inc.
under which Audible is the Apple iTunes Music Store's exclusive provider of
spoken word content for digital distribution. Under the agreement, Apple is
required to incorporate into the Apple iTunes jukebox software AudibleReady
features to enable owners of personal computers and the Apple iPod to download
and listen to spoken audio from audible.com. The iTunes Music Store is the only
digital download music service through which we are permitted to distribute our
content. We began selling content at the Apple iTunes Music Store in October
2003. Apple may convert the agreement to a non-exclusive arrangement for both us
and Apple upon 120 days prior written notice, although Apple will have a
continuing obligation to incorporate AudibleReady features into the Apple iPod
and Apple iTunes jukebox software. Under the agreement, when the Apple iTunes
Music Store sells Audible content, we receive from Apple a fixed price per
content title. During the year ended December 31, 2004, we recognized
approximately $3,677,000 in revenue, or approximately 11% of our total revenue,
from sales at the Apple iTunes Music Store, as compared to approximately
$395,000 recognized during 2003.
As of
February 6, 2004, following the conversion of all of our preferred stock, we no
longer have any special preferences or privileges in our capital structure.
Progress
on Sarbane-Oxley Compliance
Following
our fourth quarter and year end earnings release on February 15, 2005, as a
result of internal control and audit testing conducted in connection with our
required review under Section 404 of the Sarbanes-Oxley Act of 2002, we
identified certain errors in our financial statements, resulting in a net charge
of approximately $190,000. Accordingly, our fourth quarter and full year 2004
earnings, as reflected in our February 15, 2005 earnings release, have been
reduced by approximately $190,000. Our net income for 2004 was $2,024,698, as
compared to our previously announced net income of $2,214,429. The revised
results are reflected in our audited financial statements included in this Form
10-K. The principal error related to the way we accounted for our retail
promotion program, as further described in Item 9A of this Form 10-K.
We are
working to comply with the requirements of Section 404 of the Sarbanes-Oxley Act
of 2002 which requires us to report on management’s assessment of the
effectiveness of the our internal control over financial reporting as of the end
of the fiscal year. Additionally, our independent registered public accounting
firm will issue reports on management’s assessment of our internal control
over financial reporting and on the operating effectiveness of management's
internal control over financial reporting. Pursuant to Rule 13a-15 under the
Securities Exchange Act of 1934, our management, including our Chief Executive
Officer and Chief Financial Officer, supervised and participated in the
performance of 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
this report. Based on that evaluation, our management, including the Chief
Executive Officer and Chief Financial Officer, concluded that our disclosure
controls and procedures were not effective in alerting them in a timely fashion
to material information required to be included in our periodic filings with the
Securities and Exchange Commission, due to the material weaknesses in internal
control over financial reporting, as described in further detail in Item 9A.
In
reliance on SEC Release No. 34-50754 (Order Under Section 36 of the Securities
Exchange Act of 1934 Granting an Exemption from Specified Provisions of the
Exchange Act Rule 13a-1 and 15d-1)(the “Order), which allows us a 45 day
extension to present our report on internal control over financial reporting, we
have not included in this report on Form 10-K management’s annual report on
internal control over financial reporting and the related attestation report of
our independent registered public accounting firm. We intend to file an
amendment to this report on Form 10-K containing the omitted management annual
report and auditor attestation not later than May 2, 2005.
In
conjunction with our continued progress toward compliance with Section 404 of
the Sarbanes-Oxley Act of 2002, through the date of this report, we have
identified three material weaknesses in internal control over financial
reporting as described in Item 9A of this Form 10-K. We are using the framework
issued by the Committee of Sponsoring Organizations of the Treadway Commission
(“COSO”), Internal Control-Integrated Framework, in conducting our assessment,
but we have not yet completed our assessment of the effectiveness of our
internal control over financial reporting. We have identified material
weaknesses involving internal controls over accounting for our retail promotion
program, internal controls over accounting for content costs, and internal
controls over our financial statement closing process. See Item 9A for
additional details regarding these material weaknesses. As a result, we expect
that our independent registered public accounting firm will issue an adverse
opinion on the effectiveness of internal control over financial reporting.
Although
we are in the process of implementing new controls to remediate these material
weaknesses, we cannot assure you that any of the measures we implement will
effectively mitigate or remediate such material weaknesses. In addition to the
material weaknesses described above, during the third quarter of 2004 we
identified significant deficiencies in segregation of duties in the financial
area and an inadequate vacation accrual recordkeeping system. We have remediated
these deficiencies prior to year-end. We or our independent registered public
accounting firm may identify additional deficiencies, significant deficiencies
or material weaknesses in our internal controls.
Achieving
compliance with Section 404 within the prescribed period, and remedying the
material weaknesses we have identified and any additional deficiencies,
significant deficiencies or other material weaknesses that we or our independent
registered public accounting firm may identify, will require us to incur
significant costs and expend significant time and management resources. We
cannot assure you that any of the measures we implement to remedy these
deficiencies will effectively mitigate or remediate such deficiencies. We
also can give no assurance that our independent registered public accounting
firm will agree with our management’s assessment.
Management
has discussed these matters with our independent registered public accounting
firm, our Audit Committee and our Board of Directors.
Results
of Operations
The following table sets
forth certain financial data, as a percentage of total revenue during 2002,
2003, and 2004.
|
|
|
Year
Ended December 31, |
|
|
|
|
2002 |
|
2003 |
|
2004 |
|
Revenue,
net: |
|
|
|
|
|
|
|
|
Content
and services revenue: |
|
|
|
|
|
|
|
|
Consumer
content |
|
|
88 |
% |
|
97 |
% |
|
99 |
% |
|
Point
of sale rebates |
|
|
— |
|
|
(1) |
% |
|
(2) |
% |
|
Services |
|
|
3 |
% |
|
1 |
% |
|
— |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
content and services revenue |
|
|
91 |
% |
|
97 |
% |
|
97 |
% |
| |
|
|
|
|
|
|
|
|
|
|
|
Hardware |
|
|
8 |
% |
|
3 |
% |
|
2 |
% |
|
Related
party revenue |
|
|
— |
|
|
— |
|
|
1 |
% |
|
Other |
|
|
1 |
% |
|
— |
|
|
— |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
revenue, net |
|
|
100 |
% |
|
100 |
% |
|
100 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
expenses: |
|
|
|
|
|
|
|
|
|
|
|
Cost
of content and services revenue: |
|
|
|
|
|
|
|
|
|
|
|
Royalties
and other content charges |
|
|
40 |
% |
|
27 |
% |
|
31 |
% |
|
Discount
certificate rebates |
|
|
— |
|
|
— |
|
|
4 |
% |
|
Total
cost of content and services revenue |
|
|
40 |
% |
|
27 |
% |
|
35 |
% |
|
Cost
of hardware revenue |
|
|
22 |
% |
|
11 |
% |
|
7 |
% |
|
Operations |
|
|
30 |
% |
|
20 |
% |
|
15 |
% |
|
Technology
and development |
|
|
40 |
% |
|
25 |
% |
|
15 |
% |
|
Marketing |
|
|
90 |
% |
|
23 |
% |
|
15 |
% |
|
General
and administrative |
|
|
20 |
% |
|
14 |
% |
|
10 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
operating expenses |
|
|
242 |
% |
|
120 |
% |
|
97 |
% |
| |
|
|
|
|
|
|
|
|
|
|
|
(Loss)
income from operations |
|
|
(142) |
% |
|
(20) |
% |
|
3 |
% |
|
Other
income, net |
|
|
1 |
% |
|
1 |
% |
|
1 |
% |
|
(Loss)
income before income tax and state income tax benefit |
|
|
(141 |
)% |
|
(19 |
)% |
|
4 |
% |
|
Income
tax expense |
|
|
--- |
|
|
--- |
|
|
--- |
|
|
State
income tax benefit |
|
|
2 |
% |
|
1 |
% |
|
2 |
% |
|
Net
(loss) income |
|
|
(139) |
% |
|
(18) |
% |
|
6 |
% |
|
Dividends
on preferred stock |
|
|
(11) |
% |
|
(29) |
% |
|
(2) |
% |
|
Preferred
stock discount |
|
|
— |
|
|
(8) |
% |
|
— |
|
|
Charges
related to conversion of convertible preferred stock |
|
|
— |
|
|
— |
|
|
(29) |
% |
|
Total
preferred stock expense |
|
|
(11) |
% |
|
(37) |
% |
|
(31) |
% |
|
Net
loss applicable to common shareholders |
|
|
(150) |
% |
|
(55) |
% |
|
(25) |
% |
Total
Content and Services Revenue
The
following is our content and services revenue for the last three years:
|
Year
Ended December 31, |
|
Percentage Change |
|
|
2002 |
|
2003 |
|
2004 |
|
2003 vs. 2002 |
|
2004 vs. 2003 |
|
|
$ |
11,287,687 |
|
$ |
18,594,390 |
|
$ |
33,210,355 |
|
|
64.7 |
% |
|
78.6 |
% |
Total
content and services revenue consists
of AudibleListener membership revenue, revenue from single title sales, revenue
from subscriptions, revenue from sales at the Apple iTunes Music Store, point of
sale rebates, library revenue, and corporate services revenue.
Total content
and services revenue has increased primarily due to the growth in our customer
count and to a lesser extent due to price increases. In addition, we recognized
approximately $3,677,000 in revenue in the 2004 period from sales at the Apple
iTunes Music Store, as compared to approximately $395,000 recognized in the 2003
period. We began selling at the Apple iTunes Music Store in October 2003. Our
total customer count has grown from approximately 206,000, 311,000, and 467,000,
at the end of 2002, 2003, and 2004 respectively. Our customer count includes all
customers who have purchased Audible content at audible.com. Our customer count
does not include customers who purchased our content at the Apple iTunes Music
Store. We believe the increase in our customer count was driven by continuing
consumer adoption of digital downloading, increased consumer awareness of the
Audible service, customer satisfaction and improved marketing.
Hardware
Revenue
The
following is our hardware revenue for the last three years:
|
Year
Ended December 31, |
|
Percentage Change |
|
|
2002 |
|
2003 |
|
2004 |
|
2003 vs. 2002 |
|
2004 vs. 2003 |
|
|
$ |
931,875 |
|
$ |
665,584 |
|
$ |
694,900 |
|
|
(28.6 |
)% |
|
4.4 |
% |
Hardware
revenue is
earned primarily from the shipping and handling charge that customers pay us to
receive a free digital audio player when they commit to a twelve-month
AudibleListener membership. Revenue from separate sales of digital audio players
to consumers and libraries is also included in hardware revenue.
Hardware
revenue increased from 2003 to 2004 primarily as a result of a higher number of
free digital audio player device shipments, partially offset by lower sales of
digital audio players to consumers and libraries. Under EITF No. 00-21, with
these multiple-element arrangements, we do not recognize revenue for the
delivery of hardware because all consideration paid by the customer is
contingent upon delivery of the content. Hardware revenue declined from 2002 to
2003 as we shifted from a strategy of selling discounted devices to giving them
away for free to customers who commit to a twelve-month AudibleListener
membership.
Related
Party Revenue
The
following is our related party revenue for the last three years:
|
Year
Ended December 31, |
|
|
2002 |
|
2003 |
|
2004 |
|
|
$ |
0 |
|
$ |
0 |
|
$ |
362,170 |
|
Related
party revenue consists
of revenue recognized in connection with our agreements with France Loisirs and
Audible Germany, which were entered into in September 2004.
Related
party revenue for the 2004 period includes $145,832 in fees earned from our
agreement with France Loisirs, representing the straight-line recognition of
$1,000,000 in fees we will receive pursuant to the arrangement, which is being
recognized over the initial 24-month term of the agreement, as well as $53,784
in billings for reimbursement of certain incremental costs. Related party
revenue for the 2004 period also included $90,000 in fees earned from our
agreement with Audible Germany, as well as $72,554 in billings to Audible
Germany for reimbursement of certain incremental costs incurred by us in
connection with our license and services agreement.
Other
Revenue
The
following is our other revenue for the last three years:
|
Year
Ended December 31, |
|
Percentage Change |
|
|
2002 |
|
2003 |
|
2004 |
|
2003 vs. 2002 |
|
2004 vs. 2003 |
|
|
$ |
150,067 |
|
$ |
64,504 |
|
$ |
52,144 |
|
|
(57.0 |
)% |
|
(19.2 |
)% |
Other
revenue in 2004
includes $32,257 in straight-line amortization of revenue earned from technology
licensing fee arrangements, which ended on June 30, 2004. Also included are
$19,887 in sales commissions earned by allowing one of our marketing partners to
sell AudibleReady digital audio players at audible.com.
Other
revenue in 2003 consisted of $64,504 in straight-line amortization of revenue
derived from technology licensing fees.
Other
revenue in 2002, included our profit participation in Random House Audible
titles sold in physical formats.
We do not
expect other revenue to be a significant source of revenue in the future.
Cost
of Content and Services Revenue
The
following is our cost of content and services revenue for the last three years:
| |
|
|
|
|
|
|
|
|
Cost
of Content and Services |
|
Year
Ended December 31, |
|
As
a Percentage of Total Content and
Services
Revenue |
|
|
|
|
2002 |
|
2003 |
|
2004\\ |
|
2002 |
|
2003 |
|
2004 |
|
|
Royalties
and other content charges |
|
$ |
4,904,245 |
|
$ |
5,318,919 |
|
$ |
10,650,382 |
|
|
43.4 |
% |
|
28.6 |
% |
|
32.1 |
% |
|
Discount
certificate rebates |
|
|
— |
|
|
— |
|
|
1,461,719 |
|
|
— |
|
|
— |
|
|
4.4 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
cost of content and services revenue |
|
$ |
4,904,245 |
|
$ |
5,318,919 |
|
$ |
12,112,101 |
|
|
43.4 |
% |
|
28.6 |
% |
|
36.5 |
% |
Cost
of content and services revenue consists
primarily of royalties paid to publishers, the amortization of publisher royalty
advances and equity securities issued in connection with Random House Audible,
as well as discount certificate rebates.
Royalties
and other content charges both in total dollars and as a percentage of
content and services revenue increased from 2003 to 2004 primarily due to the
product mix and quantity of titles sold in the period, including sales at
the Apple iTunes Music Store beginning in October 2003. Discount certificate
rebates, introduced in 2004, are electronic discount certificates or gift
cards given to certain AudibleListeners who commit to joining the
AudibleListener program for twelve months. AudibleListener customers use
these when purchasing an AudibleReady digital audio player.
Cost of
content and services as a percentage of content and services revenue decreased
from 2002 to 2003 due to lower charges during the 2003 period relating to our
agreement with Random House entered into in May 2002, partially offset by higher
royalties as a function of the growth in content and services revenue.
Cost
of Hardware Revenue
The
following is our cost of hardware revenue for the last three years:
|
Year
Ended December 31, |
|
As
a Percentage of
Hardware
Revenue |
|
|
2002 |
|
2003 |
|
2004 |
|
2002 |
|
2003 |
|
2004 |
|
|
$ |
2,717,542 |
|
$ |
2,085,254 |
|
$ |
2,197,013 |
|
|
291.6 |
% |
|
313.3 |
% |
|
316.2 |
% |
Cost
of hardware revenue consists
of the cost of digital audio players that are given away or sold to customers.
The
increase in cost of hardware revenue from 2003 to 2004 was due primarily to the
increase in the quantity of digital devices given away for free to customers who
commit to a twelve-month AudibleListener membership. The reduction in cost of
hardware revenue from 2002 to 2003 was due primarily to a decline in the per
unit cost of digital audio players.
Operations
The
following is our operations expense for the last three years:
|
Year
Ended December 31, |
|
As a Percentage of
Total Content
and Services Revenue |
|
|
2002 |
|
2003 |
|
2004 |
|
2002 |
|
2003 |
|
2004 |
|
|
$ |
3,742,713 |
|
$ |
3,843,311 |
|
$ |
5,145,855 |
|
|
33.2 |
% |
|
20.7 |
% |
|
15.5 |
% |
Operations expense
consists of payroll and related expenses for content acquisition, editorial,
audio conversion, customer service and credit card fees.
The
increase in costs from 2003 to 2004 was primarily due to higher credit card
fees, customer service related expenses, allocated overhead expenses and
non-customer service personnel costs. The increase in costs from 2002 to 2003 is
primarily due to higher customer service related expenses and credit card fees.
These increases were related to customer growth and revenue growth. Our
operating expenses have declined as a percentage of net content and services
revenue, from 2003 to 2004, and from 2002 to 2003, as our content and services
revenue during these periods grew faster than the increases in our operating
expenses as our revenues grow without a commensurate increase in operating
expenses.
Technology
and Development
The
following is our technology and development expense for the last three years:
|
Year
Ended December 31, |
|
As a Percentage of
Total Content
and
Services Revenue |
|
|
2002 |
|
2003 |
|
2004 |
|
2002 |
|
2003 |
|
2004 |
|
|
$ |
4,997,860 |
|
$ |
4,784,648 |
|
$ |
5,058,314 |
|
|
44.3 |
% |
|
25.7 |
% |
|
15.2 |
% |
Technology
and development expense
consists of payroll and related expenses for information technology, systems and
telecommunications infrastructure, as well as technology licensing
fees.
The
increase in technology and development expense from 2003 to 2004 was due
primarily to higher consulting fees related to software development work
performed in connection with our agreements with France Loisers and Audible
Germany, and higher website expenses due to higher bandwidth charges, partially
offset by reduced personnel and related expenses.
The
decrease in technology and development expense from 2002 to 2003 is due
primarily to reduced depreciation expense as a result of certain equipment
becoming fully depreciated, offset in part by higher website, personnel and
related expenses. As our customer base continues to grow and the number of
titles downloaded increases, we will need to continually purchase additional
bandwidth and to further invest in our information technology infrastructure.
Marketing
The
following is our marketing expense for the last three years:
|
Year
Ended December 31, |
|
As a Percentage of
Total Content
and Services
Revenue |
|
|
2002 |
|
2003 |
|
2004 |
|
2002 |
|
2003 |
|
2004 |
|
|
$ |
11,107,981 |
|
$ |
4,494,702 |
|
$ |
5,184,618 |
|
|
98.4 |
% |
|
24.2 |
% |
|
15.6 |
% |
Marketing
expense
consists of payroll and related expenses for personnel in marketing and business
development, as well as advertising expenditures and other promotional
activities. Also included are revenue sharing and bounty payments, which we pay
to our marketing partners.
The
increase in marketing expenses from 2003 to 2004 was primarily due to higher
advertising costs, higher warrant charges incurred in connection with entering
into certain service agreements, and higher personnel costs. These increases
were offset in part by lower expenses recognized during the 2004 period in
connection with our co-branding, marketing and distribution agreement with
Amazon.com, which ended in January 2003.
The
decrease in marketing expense from 2002 to 2003 was due primarily to an
approximate $5.9 million reduction in amortization related to the expiration of
our amended agreement with Amazon.com, lower advertising costs, and lower
warrant charges in connection with the expiration of a service agreement, offset
in part by higher personnel costs.
General
and Administrative
The
following is our general and administrative expense for the last three years:
|
Year
Ended December 31, |
|
As a Percentage of
Total Content
and Services
Revenue |
|
|
2002 |
|
2003 |
|
2004 |
|
2002 |
|
2003 |
|
2004 |
|
|
$ |
2,485,434 |
|
$ |
|
|
$ |
|
|
|
22.0 |
% |
|
|
% |
|
10.7 |
% |
General
and administrative expense consists primarily of payroll and related expenses
for executive, finance and administrative personnel. Also included are legal
fees, audit fees, public company expenses and other general corporate
expenses.
The
increase in general and administrative expense from 2003 to 2004 was primarily
due to higher audit and related fees and higher professional fees related to our
Sarbanes-Oxley compliance activities, higher legal fees, related in part to our
international expansion plans, and NASDAQ fees. These increases were offset in
part by the absence during 2004 of $400,000 in payments made during 2003 to
our officers pursuant to an incentive plan, as well as the absence in 2004 of a
$213,000 expense incurred during 2003 in connection with our forgiveness of
employee promissory notes issued to us in exchange for shares of our common
stock.
The
increase in general and administrative expense from 2002 to 2003 was due
primarily to higher compensation expense and the forgiveness of debt in 2003 in
connection with employee promissory notes issued for shares of our common stock.
These increases were offset in part by the absence during the 2003 period of
stock exchange listing fees and lower depreciation charges in leasehold
improvements due to certain leasehold improvements being fully
depreciated. Our 2005 expense will continue to include ongoing
Sarbanes-Oxley compliance costs as well as cost to improve our internal
controls.
Critical
Accounting Policies
Our
critical accounting policies are as follows:
| |
• |
warrants
issued to non-employees in exchange for goods and services; and
|
| |
• |
employee
stock-based compensation arrangements. |
Revenue
Recognition
We derive
our revenue from four main categories:
| |
• |
content
and services revenue, which includes consumer content, corporate services
and bulk content sales; |
| |
• |
related
party revenue; and |
Content and
Services. Consumer
content revenue consists of content sales made from our website and content sold
through our agreement with the Apple iTunes Music Store. Revenue from the sale
of individual content titles is recognized in the period when the content is
purchased. Revenue from the sale of content subscriptions is recognized pro rata
over the term of the subscription period. Revenue from the sale of monthly
AudibleListener memberships is recognized ratably over the AudibleListener’s
monthly membership period. This results in approximately 50% of the
AudibleListener membership fees received during each calendar month being
deferred at month-end and recognized as content revenue in the following month.
Revenue from the sale of UltimateListener, our prepaid discounted content
package and gift programs is recognized when the content is downloaded.
Part of
our marketing strategy to acquire new AudibleListeners includes retail
promotions in which we pay retailers to offer point of sale discounts to
consumers on their purchase of digital audio players made by others when they
commit to a 12-month AudibleListener membership. These discounts are recorded as
a reduction of content and services revenue in the period the discount is given
in accordance with EITF 01-9. As a result of this GAAP accounting treatment,
these discounts, which we consider marketing, are not included in marketing
expense, but instead, are recorded as a reduction of revenue. Customer returns
and chargebacks are also recorded as a reduction of revenue. Estimates for
future returns and chargebacks are based on historical experience and are
recorded as an allowance for returns and chargebacks at each period end.
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 reasonably assured. Collectibility is based on past transaction history and
credit-worthiness of the customer.
Hardware.
Hardware
revenue consists of sales of AudibleReady digital audio players sold primarily
at a discount or given away when a customer signs up for a one-year commitment
to our AudibleListener membership. For multiple-element arrangements in which a
customer signs up for a one year membership and receives an audio player for
free, revenue is recognized using the relative fair value method under EITF
00-21, whereby each separate unit of accounting is recognized as revenue at its
relative fair value, where the delivered item (hardware) is limited to the
non-contingent amount. Since all the consideration paid by the customer is
contingent upon delivery of the content, no amount is recorded as hardware
revenue under these multiple-element arrangements. The free hardware device
reflects the subsidy that we incur to acquire a customer with a one-year
commitment to AudibleListener. For players sold separately, hardware revenue is
recognized upon shipment of the device, pursuant to a customer order and credit
card authorization and includes amounts received for shipping and handling. Cost
of hardware revenue, regardless of whether the player is bundled with a
membership or sold separately, is recognized upon shipment. We plan to continue
the program of offering a free device when a customer signs up for a one-year
commitment to our AudibleListener Membership, so hardware revenue is not
expected to increase in the future.
Related
Party Revenue. Related
party revenue consists of revenue earned under our agreements with France
Loisirs and Audible Germany. Revenue under the France Loisirs agreement includes
a $1 million technology licensing fee recognized on a straight-line basis over
the initial 24-month term of the agreement. Revenue earned under the Audible
Germany agreement includes $30,000 earned per month over the initial 30-month
term of the agreement. We recognize $30,000 per month only after Audible Germany
has agreed that the services delivered for the prior 60-day period were
satisfactory and collection of the amount is reasonably assured. Revenue earned
under each of these agreements also includes reimbursement of certain
out-of-pocket costs incurred by us that are billed to France Loisirs and Audible
Germany.
Other.
Other
revenue in 2004 consists of sales commissions we earned from a marketing partner
that sells digital audio players at audible.com and from a technology
license that expired in 2004. In 2003, other revenue consisted of straight-line
amortization derived from a technology license. In 2002 other
revenue included our profit participation in Random House Audible titles
sold in physical formats. We do not expect other revenue to be a significant
source of revenue in the future.
Royalty
Expense
Royalty
expense is a component of cost of content and services revenue, and includes
amortization of guaranteed royalty obligations to various content providers,
earned royalties on sales of content, and net realizable value adjustments to
royalty advances. Many of our early content provider agreements contained a
requirement to pay guaranteed amounts to the provider. Anticipating that sales
from these agreements would not be sufficient to recoup the amount of the
guarantees, we adopted a policy of amortizing royalty guarantees straight-line
over the term of the royalty agreement, or expensing the royalty guarantees as
earned, whichever was sooner. In addition, each quarter we review and compare
any remaining unamortized guarantee balance with current and projected sales by
provider to determine if any additional net realizable value adjustments are
required. Royalty expense for sales of content is either paid based upon a
percentage of revenue or as a fixed price per title as per the royalty
agreement. In certain cases, the cost per title may differ depending upon
whether the title is sold as part of the AudibleListener membership or sold as
an a la carte sale.
Warrants
Issued To Non Employees In Exchange For Goods and Services
We
occasionally issue warrants to purchase shares of common stock to non-employees
as part of their compensation for providing goods and services. We account for
these warrants in accordance with EITF Issue No. 96-18, “Accounting for Equity
Instruments that are Issued to Other than Employees for Acquiring, or in
Conjunction with Selling, Goods or Services”, or EITF 96-18. The exercise price
of the warrants is determined by the closing price of Audible’s common stock on
the day of the agreement. Fair value of the warrant issued is estimated using
the Black-Scholes model with the best available assumptions concerning risk free
interest rate, life of the warrant, dividend yield and expected volatility. The
fair value of the warrant is expensed on a straight-line basis over the term of
the agreement and is recorded within the operating expense line item that best
represents the nature of the goods and services provided. Depending on the terms
of the warrant, we apply variable plan or fixed plan accounting in accordance
with EITF 96-18.
Employee
Stock-Based Compensation Arrangements
Our 1999
Stock Incentive 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 stock on the day immediately preceding the employee’s
start date. For additional option grants made to existing employees, the
exercise price is determined by the closing price on 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. We apply
Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued to
Employees,” and Financial Accounting Standards Board Interpretation No. 44,
“Accounting for Certain Transactions involving Stock Compensation - an
Interpretation of APB Opinion No. 25,” in accounting for our stock-based
compensation, as permitted by Statement of Financial Accounting Standards, or
SFAS, No. 123, “Accounting for Stock-Based Compensation,” or SFAS No. 123, as
amended by SFAS No. 148. For options granted at an exercise price lower than the
fair market value of the stock on the grant date, the intrinsic value is
recorded as deferred compensation with a credit to additional paid-in capital
and is expensed on a straight-line basis over the vesting term. If we had
adopted the fair value-based method of accounting for stock-based employee
compensation pursuant to SFAS No. 123, as amended by SFAS No. 148, compensation
expense would increase.
Liquidity
and Capital Resources
From
inception through the date prior to our initial public offering, we financed our
operations through private sales of our redeemable convertible preferred stock
and warrants. Net proceeds from the sales of redeemable convertible stock and
warrants prior to our initial public offering were approximately $28,719,000. In
July 1999, we completed our initial public offering and received net proceeds of
approximately $36,856,000. From the time of our IPO we have raised an
additional approximately $15,860,000 in net proceeds through the private sale of
shares of our convertible stock (all of which were subsequently converted to
common stock), approximately $4,186,000 in net proceeds through the private
sales of our common stock, and approximately $1,294,000 in net proceeds through
the exercise of common stock warrants. In November 2004, we completed a public
offering of our common stock resulting in net proceeds to us of approximately
$46,457,000.
As of
December 31, 2004, our cash and cash equivalents balance was approximately
$13,296,000. In addition, as of December 31, 2004 we had approximately
$48,386,000 in short-term investments which we intend to hold
until maturity. Based on our currently proposed business plans and related
assumptions, we believe that our cash and cash equivalents balance and
short-term investment balance as of December 31, 2004 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 our
business and finance our continued growth. No assurance can be given that such
additional financing, if needed, will be available on terms favorable to the
Company or the stockholders, if at all.
Cash
Requirements
At
December 31, 2004, our principal source of liquidity was approximately
$13,296,000 in cash and cash equivalents and $48,386,000 in short-term
investments which we intend to hold until maturity.
The
following table shows future cash payments due under our commitments and
obligations as of December 31, 2004:
|
Year |
|
Operating
Leases |
|
Capital
Leases |
|
Royalty
Obligations |
|
Inventory
Purchase Commitment |
|
Total
|
|
|
2005 |
|
$ |
352,889 |
|
$ |
122,292 |
|
$ |
150,800 |
|
$ |
187,760 |
|
$ |
813,741 |
|
|
2006 |
|
|
375,656 |
|
|
— |
|
|
38,000 |
|
|
— |
|
|
413,656 |
|
|
2007 |
|
|
398,423 |
|
|
— |
|
|
— |
|
|
— |
|
|
398,423 |
|
|
2008 |
|
|
398,423 |
|
|
— |
|
|
— |
|
|
— |
|
|
398,423 |
|
|
Total |
|
$ |
1,525,391 |
|
$ |
122,292 |
|
$ |
188,800 |
|
$ |
187,760 |
|
$ |
2,024,243 |
|
Sources
and Uses of Cash
Operating
Activities. Net cash
used in operating activities was approximately $7,853,000 and $1,144,000, in
2002 and 2003, respectively. Net cash
provided by operating activities was approximately $5,188,000 in 2004. Net cash
used in operating activities in 2002 was primarily attributable to our net loss,
offset in part by services rendered for common stock and warrants, depreciation
and amortization, and a increase in accrued expenses. Net cash used in operating
activities in 2003 was primarily attributable to our net loss, offset in part by
services rendered for common stock and warrants, depreciation and amortization,
and an increase in accrued expenses. Net cash provided by operating activities
in 2004 was primarily attributable to our net income, an increase in deferred
revenue and advances, an increase in accrued expenses and compensation, an
increase in accounts payable, services rendered for common stock and warrants,
and depreciation and amortization, offset in part by an increase in accounts
receivable, an increase in inventory, and a decrease in royalty obligations.
Investing
Activities. Net cash
used in investing activities was approximately $150,000, $138,000, and
$48,702,000, in 2002, 2003, and 2004, respectively. Net cash used in
investing activities in 2002 and 2003 related to purchases of property and
equipment. Net cash used in 2004 was attributable to the purchase of
short-term investments from the proceeds of our November 2004 public offering,
as well as purchases of property and equipment.
Financing
Activities. Net cash
provided by financing activities was approximately $3,197,000, $7,534,000 and
$47,735,000 in 2002, 2003 and 2004, respectively. Net cash provided by financing
activities in 2002 resulted primarily from the sale of common stock, from the
exercise of employee stock options and from payments received from notes due
from stockholders. Net cash provided by financing activities in 2003 resulted
primarily from the issuance of our shares of convertible preferred stock,
exercise of warrants, and the exercise of employee stock options. Net cash
provided by financing activities in 2004 resulted primarily from the November
2004 public offering and from the exercise of employee stock options, offset in
part by principal payments on capital lease obligations.
As of
December 31, 2004, we had available net operating loss carryforwards totaling
approximately $120,782,000, which
expire beginning in 2010. The Tax Reform Act of 1986 imposes limitations on our
use of net operating loss carryforwards because certain stock ownership changes
have occurred.
As a
result of selling certain of our New Jersey state income tax loss benefits for
cash, we realized $313,580, $250,408, and $723,724, in state income tax benefits
during the years ended December 31, 2002, 2003, and 2004, respectively. We
cannot assure you that this program will be available to us in the future.
New
Accounting Standards
In
November 2004, the Financial Accounting Standards Board (“FASB”) issued
Statement of Financial Accounting Standards No. 151 (“SFAS No. 151”), “Inventory
Costs, an amendment of ARB No. 43, Chapter 4.” SFAS No. 151, amends ARB No. 43,
Chapter 4, to clarify that abnormal amounts of idle facility expense, freight,
handling costs, and wasted material (spoilage) should be recognized as current
period charges. In addition, SFAS No. 151 requires that allocation of fixed
production overhead to the cost of conversion be based on the normal capacity of
the production facilities. The provision of SFAS No. 151 shall be effective for
the Company beginning on September 1, 2005 and is not expected to have a
significant impact on our financial statements.
In
December 2004, the FASB issued Statement of Financial Accounting Standards No.
153 (“SFAS No. 153”), “Exchanges of Nonmonetary Assets - An Amendment of APB
Opinion No. 29”, which addresses the measurement of exchanges of nonmonetary
assets. It eliminates the exception from fair value accounting for nonmonetary
exchanges of similar productive assets and replaces it with an exception for
exchanges that do not have commercial substance. SFAS No. 153 specifies that a
nonmonetary exchange has commercial substance if the future cash flows of an
entity are expected to change significantly as a result of the exchange. This
statement is effective beginning after June 15, 2005 and is not expected to have
a significant impact on our financial statements.
In
December 2004, the FASB issued Statement of Financial Accounting Standards No.
123R (“SFAS No. 123 (R)”), “Share-Based Payment”, which is a revision of SFAS
No. 123, “Accounting for Stock-Based Compensation”. SFAS No. 123(R)
supersedes APB Opinion No. 25, “Accounting For Stock Issued To Employees”, and
amends SFAS No. 95, “Statements Of Cash Flows. Generally, the approach in SFAS
No. 123(R) is similar to the approach described in SFAS No. 123. However, SFAS
No. 123(R) requires all share-based payments to employees, including grants of
employee stock options, to be recognized in the income statement based on their
fair values. Pro forma disclosure is no longer an alternative. The new standard
will be effective, for us, beginning July 1, 2005. We have not yet completed our
evaluation but we expect the adoption to have a material effect on our financial
statements.
In
December 2003, the FASB issued Interpretation No. 46R, “Consolidation of
Variable Interest Entities,” or FIN 46R, that addresses the consolidation of
variable interest entities. FIN 46R provides guidance for determining when a
primary beneficiary should consolidate a variable interest entity, or equivalent
structure, that functions to support the activities of the primary beneficiary.
We adopted FIN 46R on March 31, 2004. Our agreement with France Loisirs, entered
into September 15, 2004, concerning Audio Direct, as described in “Overview”
above, is considered a variable interest in Audio Direct, a variable interest
entity. Because we are not required to provide any funding under this agreement,
we do not have any exposure to loss as a result of the agreement and,
accordingly, do not consolidate the results of France Loisirs.
RISK
FACTORS
We
have a limited operating history with which you can evaluate our business and
our future prospects.
Our
limited operating history and limited number of customers makes predicting our
future operating results difficult. From the time we were incorporated in
November 1995 until September 1997, we generated no revenue while we developed
our secure delivery system and a prototype audio playback device, created our
audible.com website and established relationships with providers of audio
content. Although we began earning limited revenue in October 1997, we have
continued to focus our resources on refining and enhancing our website, playback
and management software, expanding our content selections, and developing
relationships with manufacturers of digital audio players. We have a limited
history of selling content and content subscription services to users of
portable electronic devices manufactured by other parties. We expect to spend
resources on growing our customer base, expanding internationally, starting
Audible Education and Audible Wireless, improving customer service and investing
in other areas where we believe our business can be strengthened.
We
have limited revenue, we have a history of losses, we may not be profitable in
the future, and we may need additional financing, which may not be available to
us.
We had
total revenue of approximately $12,370,000, $19,324,000, and $34,320,000, in
2002, 2003 and 2004, respectively. This limited revenue makes it difficult to
predict our future quarterly results and our revenue and operating results can
vary significantly quarter to quarter. Our revenue is dependent on the
availability and sales of AudibleReady players by third-party manufacturers. We
had content and services revenue of approximately $11,288,000, $18,594,000, and
$33,210,000, in 2002, 2003 and 2004, respectively. We had operating expenses of
approximately $29,956,000, $23,160,000, and $33,238,000, in 2002, 2003, and
2004, respectively. Because many of our expenses, such as employee compensation
and rent, are relatively fixed in the short term, we may be unable to
significantly adjust our spending to compensate for unexpected revenue
shortfalls. Based on our currently proposed business plans and related
assumptions, we believe that our cash and cash equivalents balance and our
short-term investment balance as of December 31, 2004, will enable us to meet
our anticipated cash requirements for operations and capital expenditures for
the foreseeable future. However, there can be no assurance that additional
financing will be available to us when needed, if at all. This would likely
affect the market price of our common stock in a manner, which may be unrelated
to our long-term operating performance. As of December 31, 2004, we have an
accumulated deficit of approximately $130,061,000.
Our
common stock has been relatively thinly traded and we cannot predict the extent
to which a trading market will develop, which may adversely affect our share
price.
Our
common stock currently trades on the NASDAQ National Market. Our common stock is
thinly traded compared to larger more widely known companies in our industry.
Thinly traded common stock can be more volatile than common stock trading in an
active public market. We cannot predict the extent to which an active public
market for the common stock will develop or be sustained in the future.
We
are working to comply with the requirements of Section 404 of the Sarbanes-Oxley
Act.
We are
working to comply with the requirements of Section 404 of the Sarbanes-Oxley Act
of 2002 which requires us to report on management’s assessment of the
effectiveness of our internal control over financial reporting as of the end of
the fiscal year with this annual report on Form 10-K. Additionally, our
independent registered public accounting firm also is to issue a report on
management’s assessment of our internal control over financial reporting.
Pursuant to Rule 13a-15 under the Securities Exchange Act of 1934, our
management, including our Chief Executive Officer and Chief Financial Officer,
supervised and participated in the performance of 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 this report. Based on that
evaluation, our management, including the Chief Executive Officer and Chief
Financial Officer, concluded that our disclosure controls and procedures were
not effective in alerting them in a timely fashion to material information
required to be included in our periodic filings with the Securities and Exchange
Commission, due to the material weaknesses in internal control over financial
reporting, as described in further detail in Item 9A.
In
reliance on SEC Release No. 34-50754 (Order Under Section 36 of the Securities
Exchange Act of 1934 Granting an Exemption from Specified Provisions of the
Exchange Act Rule 13a-1 and 15d-1)(the “Order), which allows us a 45 day
extension to present our report on internal control over financial reporting, we
have not included in this report on Form 10-K management’s annual report on
internal control over financial reporting and the related attestation report of
our independent registered public accounting firm. We intend to file
an amendment to this report on Form 10-K containing the omitted management
annual report and auditor attestation not later than May 2, 2005.
In
conjunction with our continued progress toward compliance with Section 404 of
the Sarbanes-Oxley Act of 2002, through the date of this report, we have
identified three material weaknesses in internal control over financial
reporting as described below. We are using the framework issued by the Committee
of Sponsoring Organizations of the Treadway Commission (“COSO”), Internal
Control-Integrated Framework, in conducting our assessment, but we have not yet
completed our assessment of the effectiveness of our internal control over
financial reporting. We have identified material weaknesses involving accounting
for our retail promotion program, accounting for content costs, and our
financial statement closing process. See Item 9A for additional details
regarding these material weaknesses. As a result, we expect that our independent
registered public accounting firm will issue an adverse opinion on the
effectiveness of internal control over financial reporting.
Although
we are in the process of implementing new controls to remediate these material
weaknesses, we cannot assure you that any of the measures we implement will
effectively mitigate or remediate such material weaknesses. In addition to the
material weaknesses described above, during the third quarter of 2004 we
identified significant deficiencies in segregation of duties in the financial
area and an inadequate vacation accrual recordkeeping system. We have remediated
these deficiencies prior to year-end. We or our independent registered public
accounting firm may identify additional deficiencies, significant deficiencies
or material weaknesses in our internal controls.
Achieving
compliance with Section 404 within the prescribed period, and remedying the
material weaknesses we have identified and any additional deficiencies,
significant deficiencies or other material weaknesses that we or our independent
registered public accounting firm may identify, will require us to incur
significant costs and expend significant time and management resources. We
cannot assure you that any of the measures we implement to remedy these
deficiencies will effectively mitigate or remediate such deficiencies. In
addition, we cannot assure you that we will be able to complete the work
necessary for our management to issue its management report due by May 2, 2005.
We also can give no assurance that our independent registered public accounting
firm will agree with our management’s assessment.
We
must retain a significant portion of our AudibleListener customers, or our
revenue will be affected adversely.
Our
AudibleListener service is a major source of our revenue. If too many
AudibleListener customers cancel their membership, our revenue will suffer. The
funds we spend on marketing and promotional activities to acquire new customers
reflect assumptions about how many customers we can acquire and how long they
will remain customers. If our actual experience falls short of our assumptions,
our revenue will be materially affected.
The
market for our service is uncertain and consumers may not be willing to use the
internet to purchase spoken audio content, which could harm our business.
There can
be no assurance that our current business strategy will enable us to sustain
profitable operations. Downloading of audio content from the Internet is a
relatively new method of distribution and its growth and market acceptance is
highly uncertain. Our success will depend in large part on more widespread
consumer willingness to purchase and download spoken audio content over the
Internet. Purchasing this content over the Internet involves changing purchasing
habits, and if consumers are not willing to purchase and download this content
over the Internet, our revenue will be limited, and our business will be
materially adversely affected. We believe that acceptance of this method of
distribution may be subject to network capacity constraints, hardware
limitations, company computer security policies, the ability to change user
habits, and the quality of the audio content delivered. While we believe we have
had some measure of success in gaining market acceptance of this method of
distribution, particularly through our sales of content at the Apple iTunes
Music Store, there can be no assurance that this will continue. Under our Apple
arrangement, Apple may convert the spoken word provision elements of the
agreement related to the Apple iTunes Music Store from an exclusive arrangement
to a non-exclusive arrangement for both us and Apple upon 120 days notice.
We
may not be able to license or produce sufficiently compelling audio content to
attract and retain customers and grow our revenue.
If we are
unable to obtain licenses from the creators and publishers of content to have
that content available on our website on terms acceptable to us, or if a
significant number of content providers terminate their agreements with us, we
would have less content available for our customers, which would limit our
revenue growth and materially adversely affect our financial performance. Our
future success depends upon our ability to accumulate and deliver premium spoken
audio content over the internet. Although we currently collaborate with the
publishers of periodicals and other branded print materials to convert their
written material into original spoken audio content, the majority of our content
originates from producers of audiobooks, radio broadcasts, and other forms of
spoken audio content. Although many of our agreements with content providers are
for terms of one to five years, our content providers may choose not to renew
their agreements with us or may terminate their agreements early if we do not
fulfill our contractual obligations. We cannot be certain that our content
providers will enter into new agreements with us on the same or similar terms as
those currently in effect, or that additional content providers will enter into
agreements on terms acceptable to us.
Manufacturers
of electronic devices may not manufacture, make available, or sell a sufficient
number of products suitable for our service, which would limit our revenue
growth.
If
manufacturers of electronic devices do not manufacture, make available, or sell
a sufficient number of players promoted as AudibleReady, or if these players do
not achieve sufficient market acceptance, we will not be able to grow revenue,
and our business will be materially adversely affected. Manufacturers of
electronic devices have experienced delays in their delivery schedule of their
digital players due to parts shortages and other factors. Although the content
we sell can be played on personal computers, we believe that a key to our future
success is the ability to playback this content on hand-held electronic devices
that have digital audio capabilities. We depend in large measure on
manufacturers, such as Apple Computer, Creative Labs, palmOne, Hewlett-Packard,
Rio Audio, and Samsung to develop and sell their own products and promote them
as AudibleReady.
We
must establish, maintain, and strengthen our brand names, trademarks, and
service marks in to acquire customers and generate revenue, or our business will
be harmed.
If we
fail to promote and maintain our brand names, our business, operating results
and financial condition could be materially adversely affected. We believe that
building awareness of the “Audible,” “Audible.com,” “AudibleComedy,” “Audible
Hear There and Everywhere,” “AudibleListener,” “AudibleManager,”
“AudibleOriginals,” “AudibleReady,” and “Click.Hear” brand names is critical to
achieving widespread acceptance of our service by customers, content providers,
device manufacturers, and marketing and distribution companies with which we
have business relationships. To promote our brands, we will need to increase our
marketing expenditures. We have applied for registration in the United States of
several of our trademark and service marks, including but not limited to
“Audible Entertainment Network,” “AudibleMusic,” “AudibleErotica,” and “Who You
Gonna Listen To.” We cannot assure you that these trademarks and service marks
will be granted.
Increasing
availability of digital audio technologies may increase competition and reduce
our revenue, market share, and profitability.
If we do
not continue to enhance our service and adapt to new technology, we will not be
able to compete with new and existing distributors of spoken audio content. As a
result, we may lose market share and our business would be materially adversely
affected. The market for the Audible service is rapidly evolving and intensely
competitive. We expect competition to intensify as advances in and
standardization of digital audio distribution, download, security, management,
and playback technologies reduce the cost of starting a digital audio delivery
system or a service that gathers audio content. To remain competitive, we must
continue to license or develop technology internally that will enhance the
features of the Audible service, our software that manages the downloading and
playback of audio content, our ability to compress audio files for downloading
and storage, and our security and playback technologies. Increased competition
is likely to result in price reductions, reduced revenues, and loss of market
share - any of which could materially adversely affect our financial
performance.
Our
industry is highly competitive and we cannot assure you that we will be able to
compete effectively, which would harm our business.
We face
competition in all aspects of our business and we cannot assure you that we will
be able to compete effectively. We compete for consumers of audio content with
other internet-based audio distributors and distributors of audio on cassette
tape or compact disc. We compete with others for relationships with
manufacturers of electronic devices with audio playback capabilities. The
business of providing content over the internet is experiencing rapid growth and
is characterized by rapid technological changes, changes in consumer habits and
preferences, and the emergence of new and established companies. We compete with
(1) traditional and online retail stores, catalogs, clubs, and libraries that
sell, rent, or loan audiobooks on cassette tape or compact disc, such as Audio
Book Club, Borders and Barnes & Noble, (2) websites that offer streaming
access to spoken audio content using tools such as the RealPlayer or Windows
Media Player, (3) other companies offering services similar to ours, such as
Media Bay or AudioFeast and (4) online and internet portal companies such as
America Online, Inc., Yahoo! Inc., and Microsoft Network, with the potential to
offer audio content. Many of these companies have financial, technological,
promotional, and other resources that are much greater than those available to
us and could use or adapt their current technology, or could purchase
technology, to provide a service directly competitive with the Audible service.
Capacity constraints and failures, delays, or overloads could
interrupt our service and reduce the attractiveness of our service to existing
or potential customers.
Any capacity
constraints or sustained failure or delay in using our website could reduce the
attractiveness of the Audible service to consumers, which would materially
adversely affect our financial performance. Our success depends on our ability
to electronically, efficiently and with few interruptions or delays distribute
spoken audio content through our website to a large number of customers.
Accordingly, the performance, reliability and availability of our website, our
transaction processing systems and our network infrastructure are critical to
our operating results. We have experienced periodic systems interruptions
including planned system maintenance, hardware and software failures triggered
by high traffic levels and network failure in the internet and our internet
service providers. We believe the complexities of our software and hardware and
the potential instability of the internet due to rapid user growth mean that
periodic interruptions to our service are likely to continue. A significant
increase in visitors to our website or simultaneous download requests could
strain the capacity of our website, software, hardware and telecommunications
systems, which could lead to slower response times or system failures. These
interruptions may make it difficult to download audio content from our website
in a timely manner.
We
could be liable for substantial damages if there is unauthorized duplication of
the content we sell, which would adversely affect our business.
We
believe that we are able to license premium audio content in part because our
service has been designed to reduce the risk of unauthorized duplication and
playback of audio files. If these security measures fail, our content may be
vulnerable to unauthorized duplication playback. If others duplicate the content
we provide without authorization, content providers may terminate their
agreements with us and hold us liable for substantial damages. Although we
maintain general liability insurance, including insurance for errors or
omissions, we cannot assure you that the amount of coverage will be adequate to
compensate us for these losses. Security breaches might also discourage other
content providers from entering into agreements with us. We may be required to
expend substantial money and other resources to protect against the threat of
security breaches or to alleviate problems caused by these breaches.
We
do not have a comprehensive disaster recovery plan and we have limited back-up
systems, and a disaster could severely damage our operations and could result in
loss of customers.
If our
computer systems are damaged or interrupted by a disaster for an extended period
of time, our business, results of operations, and financial condition would be
materially adversely affected. We do not have a comprehensive disaster recovery
plan in effect and do not have fully redundant systems for the Audible service
at an alternate site. Our operations depend upon our ability to maintain and
protect our computer systems - all of which are located in our headquarters and
at a third party offsite hosting facility. Although we maintain insurance
against general business interruptions, we cannot assure you that the amount of
coverage will be adequate to compensate us for our losses.
Problems
associated with the internet could discourage use of internet-based services
like ours and adversely affect our business.
If the
internet fails to develop or develops more slowly than we expect as a commercial
medium, our business may also grow more slowly than we anticipate, if at all.
Our success will depend in large part on increasing use of the internet. There
are critical issues concerning the commercial use of the internet which we
expect to affect the development of the market for the Audible service,
including:
| |
• |
Secure
transmission of customer credit card numbers and other confidential
information; |
| |
• |
Reliability
and availability of internet service providers;
|
| |
• |
Cost
of access to the internet; |
| |
• |
Availability
of sufficient network capacity; and |
| |
• |
Ability
to download audio content through computer security measures employed by
businesses. |
The
loss of key employees could jeopardize our growth prospects.
The loss
of the services of any of our executive officers or other key employees could
materially adversely affect our business. Our future success depends on the
continued service and performance of our senior management and other key
personnel, particularly Donald R. Katz, our Chairman and CEO. We do maintain a
$2.5 million key-man life insurance policy on Mr. Katz. We do not have
employment agreements with any of our executive officers or other key employees.
Our
inability to hire new employees may hurt our growth prospects.
The
failure to hire new personnel could damage our ability to grow and expand our
business. Our future success depends on our ability to attract, hire, and retain
highly skilled technical, managerial, editorial, marketing, and customer service
personnel, and competition for these individuals is intense.
We
may not be able to protect our intellectual property, which could jeopardize our
competitive position.
If we
fail to protect our intellectual property, we may be exposed to expensive
litigation or risk jeopardizing our competitive position. The steps we have
taken may be inadequate to protect our technology and other intellectual
property. Our competitors may learn or discover our trade secrets or may
independently develop technologies that are substantially equivalent or superior
to ours. We rely on a combination of patents, licenses, confidentiality
agreements, and other contracts to establish and protect our technology and
other intellectual property rights. We also rely on unpatented trade secrets and
know-how to maintain our competitive position. We may have to litigate to
enforce our intellectual property rights, to protect our trade secrets, or to
determine the validity and scope of the proprietary rights of others. This
litigation could result in substantial costs and the diversion of our management
and technical resources, which would harm our business.
Other
companies may claim that we infringe their copyrights or patents, which could
subject us to substantial damages.
If the
Audible service violates the proprietary rights of others, we may be required to
redesign our software, and re-encode the Audible content, or seek to obtain
licenses from others to continue offering the Audible service without
substantial redesign and such efforts may not be successful. We do not conduct
comprehensive patent searches to determine whether our technology infringes
patents held by others. In addition, software development is inherently
uncertain in a rapidly evolving technological environment in which there may be
numerous patent applications pending, many of which are confidential when filed
with regard to similar technologies. Any claim of infringement could cause us to
incur substantial costs defending against the claim, even if the claim is
invalid, and could distract our management from our business. A party making a
claim could secure a judgment that requires us to pay substantial damages. A
judgment could also include an injunction or other court order that could
prevent us from offering the Audible service. Any of these events could have a
material adverse effect on our business, operating results, and financial
condition.
We
could be sued for content that we distribute over the internet, which could
subject us to substantial damages.
A lawsuit
based on the content we distribute could be expensive and damaging to our
business. Our service involves delivering spoken audio content to our customers.
As a distributor and publisher of content over the internet, we may be liable
for copyright, trademark infringement, unlawful duplication, negligence,
defamation, indecency, and other claims based on the nature and content of the
materials that we publish or distribute to customers. Although we generally
require that our content providers indemnify us for liability based on their
content (and we carry general liability insurance), the indemnity and the
insurance may not cover claims of these types or may not be adequate to protect
us from the full amount of the liability. If we are found liable in excess of
the amount of indemnity or of our insurance coverage, we could be liable for
substantial damages and our reputation and business may suffer.
Future
government regulations may increase our cost of doing business on the internet,
which could adversely affect our cost structure.
Laws and
regulations applicable to the internet, covering issues such as user privacy,
pricing, and copyrights are becoming more prevalent. The adoption or
modification of laws or regulations relating to the internet could force us to
modify the Audible service in ways that could adversely affect our business.
We
may become subject to sales and other taxes for direct sales over the internet,
which could affect our revenue growth.
Increased
tax burden could make our service too expensive to be competitive. We do not
currently collect sales or other similar taxes for download of content into
states other than in New Jersey. Nevertheless, one or more local, state, or
foreign jurisdictions may require that companies located in other states collect
sales taxes when engaging in online commerce in those states. If we open
facilities in other states, our sales into such states may be taxable. If one or
more states or any foreign country successfully asserts that we should collect
sales or other taxes on the sale of our content, the increased cost to our
customers could discourage them from purchasing our services, which would
materially adversely affect our business.
A
variety of risks could adversely affect our international
activities.
The
operation of our international activities will require significant management
attention as well as financial resources. If international content publishers
fail to provide us with sufficient content, we may not be able to attract
customers with the broad selection of local content required to be successful.
In addition, the concept of digital spoken audio is not as well developed in
Germany, France and the UK as it is in the United States. This may make it more
difficult to acquire new customers in Germany, France and the UK. These factors
may have a material adverse affect on our financial performance.
Our
charter and bylaws could discourage an acquisition of our company that would
benefit our stockholders.
The following
provisions could have the effect of delaying, deterring, or preventing a change
in the control of our company, could deprive our stockholders of an opportunity
to receive a premium for their common stock as part of a sale of our company, or
may otherwise discourage a potential acquirer from attempting to obtain control
of us, which in turn could materially adversely affect the market price of our
common stock:
| |
• |
Our
Board of Directors, without stockholder approval, may issue preferred
stock on terms that they determine. This preferred stock could be issued
quickly with terms that delay or prevent the change in control of our
company or make removal of management more difficult. Also, the issuance
of preferred stock may cause the market price of our common stock to
decrease. |
| |
• |
Our
Board of Directors is “staggered” so that only a portion of its members
are elected each year. |
| |
• |
Only
our Board of Directors, our Chairman of the Board, our President or
stockholders holding a majority of our stock can call special stockholder
meetings. |
| |
• |
Special
procedures must be followed in order for stockholders to present proposals
at stockholder meetings. |
Item 7A. Quantitative and Qualitative Disclosures about Market
Risk.
Not
applicable.
Item 8. Financial Statements and Supplementary
Data.
The
information required by Item 8 of Part II is incorporated herein by reference to
the financial statements filed with this report; see Item 15 of Part
IV.
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure.
None.
Disclosure
Controls and Procedures
Pursuant
to Rule 13a-15 under the Securities Exchange Act of 1934, our management,
including our Chief Executive Officer and Chief Financial Officer, supervised
and participated in the performance of 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 this report. Based on that evaluation, our management,
including the Chief Executive Officer and Chief Financial Officer, concluded
that our disclosure controls and procedures were not effective in alerting them
in a timely fashion to material information required to be included in our
periodic filings with the Securities and Exchange Commission, due to the
material weaknesses in internal control over financial reporting, as described
below.
Internal
Control over Financial Reporting
In
reliance on SEC Release No. 34-50754 (Order Under Section 36 of the Securities
Exchange Act of 1934 Granting an Exemption from Specified Provisions of the
Exchange Act Rule 13a-1 and 15d-1)(the “Order), which allows us a 45 day
extension to present our report on internal control over financial reporting, we
have not included in this Report on Form 10-K management’s annual report on
internal control over financial reporting and the related attestation report of
our independent registered public accounting firm. We intend to file
an amendment to this Report on Form 10-K containing the omitted management
annual report and auditor attestation not later than May 2, 2005.
Our
management is responsible for establishing and maintaining adequate internal
control over financial reporting. All internal control systems, no matter how
well designed, have inherent limitations. Therefore, even those systems
determined to be effective can provide only reasonable assurance with respect to
financial statement preparation and presentation.
A
significant deficiency in internal control is a control deficiency, or
combination of control deficiencies, that adversely affects a company’s ability
to initiate, authorize, record, process or report external information reliably
in accordance with U.S. generally accepted accounting principles, such that
there is more than a remote likelihood that a misstatement of the company’s
annual or interim financial statements that is more than inconsequential will
not be prevented or detected. A material weakness in internal control is a
significant deficiency, or a combination of significant deficiencies, that
results in more than a remote likelihood that a material misstatement of the
annual or interim financial statements will not be prevented or
detected.
In
conjunction with our continued progress toward compliance with Section 404 of
the Sarbanes-Oxley Act of 2002, through the date of this report, we have
identified three material weaknesses in internal control over financial
reporting as described below. We are using the framework issued by the Committee
of Sponsoring Organizations of the Treadway Commission (“COSO”), Internal
Control-Integrated Framework, in conducting our assessment, but we have not yet
completed our assessment of the effectiveness of our internal control over
financial reporting. We have identified material weaknesses involving internal
controls over accounting for our retail promotion program, internal controls
over accounting for content costs, and internal controls over our financial
statement closing process. As a result, we expect that when we issue our amended
Form 10-K, we will conclude that our internal control over financial reporting
was not effective and our independent registered public accounting firm will
issue an adverse opinion on the effectiveness of internal control over financial
reporting. There can be no assurance that additional deficiences, significant
deficiencies or material weaknesses will not be identified.
Accounting for Retail Promotion
Program
Our
retail promotion program provides certain customers with a $100 incentive
towards the cost of an AudibleReady digital audio player. To qualify for this
incentive, the customer must join the AudibleListener program and agree to
remain a member for 12 months. As of December 31, 2004, we did not have
controls that were adequately designed to capture the expense for those
customers who received promotional incentives through our customer service
department. During 2004, we correctly provided our customers with these
incentives and correctly paid the retailers, but we did not properly record the
expense of these programs in our February 15, 2005 earnings release announcing
our 2004 annual and fourth quarter results. This has resulted in a net charge to
earnings of approximately $184,000 in the fourth quarter of 2004. The impact to
prior quarters in 2004 was determined to be immaterial. We were unaware of this
material weakness until after releasing our full year and fourth quarter
earnings. To improve our internal controls over this program and to ensure that
our retail promotion expense is complete and accurate, in 2005 we
began using information generated by our system that tracks how many
customers signed up for the incentive program and were issued electronic
discount certificates or gift cards or qualified for a point of purchase
discount at the retailer, instead of our previous e-mail confirmation tracking
method that failed to capture customers who received the incentives through our
customer service department. We are also tracking our inventory of discount
certificates and gift cards to ensure that the movement in these items equals
the system-generated information.
Accounting
for Content Costs
This
material weakness arose as a result of aggregating several significant
deficiencies, all of which impacted the cost of content revenue, as described
below. As of December 31, 2004, we did not have effective controls
over the reconciliation of royalty expense to revenue earned. In analyzing
our accrued royalty balances, we identified that we had recognized excess
royalty expense on AudibleListener membership revenue that was deferred. As of
December 31, 2004, our review control over the accuracy of royalty
rates being utilized in our royalty calculations was not operating effectively.
We had been recognizing royalties for one content provider at a rate that was
higher than the rate stipulated in the agreement. We also learned that our
process for calculating royalties on AudibleListener membership revenue did not
include an adequate review of the royalty allocation factor to prevent or detect
a misstatement that was more than inconsequential. As a result, we
adjusted our cost of content revenue. To address this material weakness, we are
in the process of adding and changing internal controls related to accounting
for content costs.
Financial
Statement Closing Process
This
material weakness arose as a result of aggregating several significant
deficiencies: inadequate review and approval of journal entries in the financial
statement preparation process, ineffective review of spreadsheet
calculations used in the financial statement preparation process, and the
need for additional technical accounting and public company reporting
personnel in the finance department. Additionally, we identified a
significant deficiency related to an ineffective review process over
supporting documentation and assumptions used in account analyses. These
significant deficiencies were not remediated as of December 31, 2004 and
resulted in adjustments to our financial statements. Because these significant
deficiencies all have an impact on the financial statement closing process,
their aggregate impact is deemed to be a material weakness in the financial
statement closing process. To correct this material weakness we will require a
more formal review of certain elements of the financial statement closing
process and supporting schedules. Also, we have recently added an
additional accounting staff member whose responsibility it will be to review
account analyses, spreadsheets and journal entries to ensure they are complete
and accurate.
Management has discussed these matters with our
independent registered public accounting firm, our Audit Committee and our Board
of Directors.
Changes
in Internal Controls
During
the third quarter of 2004 we had also disclosed that we had identified
significant deficiencies in the segregation of duties in the financial area and
in accruing for vacation time. We remediated these deficiencies prior to
year-end.
Item
10. Directors and Executive Officers of the Registrant.
The
information required by Item 10 is hereby incorporated by reference from the
Proxy Statement for our 2005 Annual Meeting of Stockholders.
Item
11. Executive Compensation.
The
information required by Item 11 is hereby incorporated by reference from the
Proxy Statement for our 2005 Annual Meeting of Stockholders.
Item
12. Security Ownership of Certain Beneficial Owners and Management and Related
Stockholder Matters.
The
information required by Item 12 is hereby incorporated by reference from the
Proxy Statement for our 2005 Annual Meeting of Stockholders.
Item
13. Certain Relationships and Related Transactions.
The
information required by Item 13 is hereby incorporated by reference from the
Proxy Statement for our 2005 Annual Meeting of Stockholders.
Item
14. Principal Accounting Fees and Services
The
information required by Item 14 is hereby incorporated by reference from the
Proxy Statement for our 2005 Annual Meeting of Stockholders.
Item
15. Exhibits, Financial Statement Schedules.
|
(a)
Documents filed as part of the report: |
|
Page
Number |
|
|
|
|
|
|
|
|
(1) |
Financial
Statements |
|
|
|
|
|
|
|
|
|
|
|
Report
of Independent Registered Public Accounting Firm |
|
F-1 |
| |
|
|
|
|
|
|
|
Balance
Sheets at December 31, 2003 and 2004 |
|
F-2 |
|
|
|
|
|
|
|
|
|
Statements
of Operations for the years ended |
|
|
|
|
|
December
31, 2002, 2003 and 2004 |
|
F-3 |
|
|
|
|
|
|
|
|
|
Statements
of Stockholders' (Deficit) Equity for the years ended December 31, 2002,
2003 and 2004 |
|
F-4 |
|
|
|
|
|
|
|
|
|
Statements
of Cash Flows for the years ended December 31, 2002, 2003 and
2004 |
|
F-7 |
|
|
|
|
|
|
|
|
|
Notes
to Financial Statements |
|
F-8 |
|
|
|
|
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|
|
|
(2) |
Financial
Statement Schedules |
|
|
|
|
|
|
|
|
| |
|
All
financial statement schedules have been omitted because the
applicable information has been included in the accompanying footnotes to
the financial statements |
|
|
|
|
|
|
|
|
|
|
(3) |
Exhibits |
|
|
|
|
|
The
following exhibits are filed or incorporated by reference, as stated
below: |
|
|
|
Exhibit
Number |
|
|
| |
|
|
|
3.1* |
|
Amended
and Restated Certificate of Incorporation of Audible |
|
3.1.2*** |
|
Certificate
of Amendment to the Amended and Restated Certificate of Incorporation of
Audible |
|
3.2* |
|
Amended
and Restated Bylaws of Audible, Inc. |
|
3.3! |
|
Certificate
of Retirement dated March 12, 2004 |
|
10.1+* |
|
License
Agreement dated November 4, 1998, by and between Microsoft Corporation and
Audible, Inc. |
|
10.2+* |
|
Digital
Rights Management Agreement dated November 4, 1998, between Microsoft
Corporation and Audible, Inc. |
|
10.3+* |
|
Development
Agreement dated November 12, 1998, by and between RealNetworks, Inc. and
Audible, Inc. |
|
10.4* |
|
RealMedia
Architecture Partner Program Internet Agreement dated November 12, 1998,
between RealNetworks, Inc. and Audible, Inc. |
|
10.15* |
|
1999
Stock Incentive Plan |
|
10.19* |
|
Office
lease dated June 20, 1997, by and between Audible, Inc., 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, Inc., as
sublessee, and Painewebber Incorporated, as sublessor |
|
10.26* |
|
Employment
Offer Letter from Audible, Inc. to Andrew Kaplan dated May 25,
1999 |
|
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, Inc. 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, 2001, to
Robin Williams (relating to Exhibit 10.30) |
|
10.32++# |
|
Co-Branding,
Marketing and Distribution Agreement dated January 30, 2000 by and between
Audible, Inc. and Amazon.com Commerce Services,
Inc. |
|
10.34++ |
|
Amendment
No. 1 to Co-Branding, Marketing and Distribution Agreement dated as of
January 24, 2001 by and between Amazon.com Commerce Services, Inc. and
Audible, Inc. (relating to Exhibit 10.32) |
|
10.36*** |
|
Registration
Rights Agreement dated January 25, 2002 by and between Audible Inc.,
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. |
|
10.38> |
|
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. |
|
10.40! |
|
Series
A Settlement Agreement by and between Audible Inc. and investor parties
thereto dated February 6, 2004. |
|
10.41! |
|
Form
of common stock warrant issued by Audible Inc. to investor parties in
connection with the Series A Settlement Agreement dated February 6,
2004. |
|
10.43++ |
|
License
and Services Agreement by and between Audible Inc., and Audible GmBH dated
August 30, 2004. |
|
10.44++ |
|
Master
Alliance Agreement by and between Audible Inc., France Loisirs S.A.S. and
Audio Direct S.A.S. dated September 15, 2004. |
|
10.45@ |
|
Articles
of Association of Audible GmBH. |
|
23.1 |
|
Consent
of KPMG LLP, Independent Registered Public Accounting
Firm |
|
31.1 |
|
Annual
Certifications of the Chief Executive Officer pursuant to Section 302 of
the Sarbanes-Oxley Act of 2002. |
|
31.2 |
|
Annual
Certifications of the Chief Financial Officer pursuant to Section 302 of
the Sarbanes-Oxley Act of 2002. |
|
32.1 |
|
Annual
Certifications of the Chief Executive Officer pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002. |
|
32.2 |
|
Annual
Certifications of the Chief Financial Officer pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002. |
|
|
|
|
|
* |
|
Incorporated
herein by reference to the Company's Registration Statement on Form S-1,
No. 333-76985 |
|
|
|
|
|
** |
|
Incorporated
by reference from the Company's 10-K/A for the period ended December 31,
1999 |
|
|
|
|
|
*** |
|
Incorporated
by reference from the Company's 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, 2001. |
|
|
|
|
|
> |
|
Incorporated
by reference from the Company's Form 8-K filed on August 5,
2003. |
| |
|
|
| ! |
|
Incorporated
by reference from the Company's 10-K for the fiscal year ended December
31, 2003. |
| |
|
|
| @ |
|
Incorporated
by reference from the Company's Form 10-Q for the quarterly period ended
September 30, 2004. |
| |
|
|
|
^ |
|
Executive
Compensation Plans and Arrangements. |
+
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.
Pursuant
to the requirements of Section 13 or 15(d) 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:
|
/s/ Donald
R. Katz |
|
|
|
|
|
Donald
R. Katz |
|
|
Chairman
and Chief Executive Officer |
|
|
|
|
|
Date:
March 29, 2005 |
Pursuant
to the requirements of the Securities Exchange Act of 1934 this report has been
signed below by the following persons on behalf of the registrant, in the
capacities and on the dates indicated. Each person whose signature appears below
in so signing also makes, constitutes, and appoints Donald R. Katz and Andrew P.
Kaplan, and each of them, his or her true and lawful attorney-in-fact, with full
power of substitution, for him in any and all capacities, to execute and cause
to be filed with the SEC any and all amendments to this report, with exhibits
thereto and other documents in connections therewith, and hereby ratifies and
confirms all that said attorney-in-fact or his substitute or substitutes may do
or cause to be done by virtue hereof.
|
Name |
|
Title |
|
Date |
| |
|
|
|
|
|
|
|
|
|
|
|
/s/
Donald R. Katz |
|
|
|
March
29, 2005 |
| |
|
|
|
|
|
Donald
R. Katz |
|
Chairman
and Chief Executive Officer |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
/s/
Andrew P. Kaplan |
|
|
|
March
29, 2005 |
| |
|
|
|
|
|
Andrew
P. Kaplan |
|
Chief
Financial Officer, Executive Vice President, Finance |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
/s/
Winthrop Knowlton |
|
|
|
March
29, 2005 |
| |
|
|
|
|
|
Winthrop
Knowlton |
|
Director |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
/s/
Richard Sarnoff |
|
|
|
March
29, 2005 |
| |
|
|
|
|
|
Richard
Sarnoff |
|
Director |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
/s/ Gary
L. Ginsberg |
|
|
|
March
29, 2005 |
| |
|
|
|
|
|
Gary
L. Ginsberg |
|
Director |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
/s/
Johannes Mohn |
|
|
|
March
29, 2005 |
| |
|
|
|
|
|
Johannes
Mohn |
|
Director |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
/s/
Alan Patricof |
|
|
|
March
29, 2005 |
|
|
|
|
|
|
|
Alan
Patricof |
|
Director |
|
|
|
|
|
|
|
|
|
/s/
Oren Zeev |
|
|
|
March
29, 2005 |
| |
|
|
|
|
|
Oren
Zeev |
|
Director |
|
|
| |
|
|
|
|
|
/s/
William Washecka |
|
|
|
March
29, 2005 |
| |
|
|
|
|
|
William
Washecka |
|
Director |
|
|
Report
of Independent Registered Public Accounting Firm
Board of
Directors and Stockholders
Audible,
Inc.
We have
audited the accompanying balance sheets of Audible, Inc. as of December 31, 2003
and 2004, and the related statements of operations, stockholders’ (deficit)
equity, and cash flows for each of the years in the three-year period ended
December 31, 2004. The financial statements are the responsibility of the
Company’s management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We
conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our
opinion, the financial statements referred to above present fairly, in all
material respects, the financial position of Audible, Inc. as of December 31,
2003 and 2004, and the results of its operations and its cash flows for each of
the years in the three-year period ended December 31, 2004, in conformity with
U.S. generally accepted accounting principles.
/s/ KPMG
LLP
Short
Hills, New Jersey
March 29,
2005
AUDIBLE,
INC.
BALANCE
SHEETS
|
|
December
31, |
|
|
|
|
2003 |
|
2004 |
|
|
ASSETS |
|
|
|
|
|
Current
assets: |
|
|
|
|
|
|
Cash
and cash equivalents |
|
$ |
9,074,987 |
|
$ |
13,296,006 |
|
|
Short-term
investments |
|
|
— |
|
|
48,386,399 |
|
|
Interest
receivable on short-term investments |
|
|
— |
|
|
76,151 |
|
|
Accounts
receivable, net of allowance for returns and chargebacks of $14,200 and
$14,600 at December 31, 2003 and 2004, respectively |
|
|
245,641 |
|
|
786,987 |
|
|
Accounts
receivable - related party |
|
|
— |
|
|
87,625 |
|
|
Royalty
advances |
|
|
72,338 |
|
|
140,634 |
|
|
Prepaid
expenses |
|
|
596,720 |
|
|
665,984 |
|
|
Inventory |
|
|
99,936 |
|
|
394,109 |
|
|
|
|
|
|
|
|
|
|
|
Total
current assets |
|
|
10,089,622 |
|
|
63,833,895 |
|
| |
|
|
|
|
|
|
|
|
Property
and equipment, net |
|
|
272,851 |
|
|
919,090 |
|
|
Other
assets |
|
|
418,524 |
|
|
20,805 |
|
|
|
|
|
|
|
|
|
|
|
Total
assets |
|
$ |
10,780,997 |
|
$ |
64,773,790 |
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES
AND STOCKHOLDERS’ EQUITY |
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
Current
liabilities: |
|
|
|
|
|
|
|
|
Accounts
payable |
|
$ |
526,359 |
|
$ |
850,906 |
|
|
Accrued
expenses |
|
|
2,448,630 |
|
|
3,628,556 |
|
|
Royalty
obligations |
|
|
408,000 |
|
|
150,800 |
|
|
Accrued
compensation |
|
|
361,230 |
|
|
448,156 |
|
|
Capital
lease obligations |
|
|
— |
|
|
120,795 |
|
|
Deferred
revenue |
|
|
873,520 |
|
|
2,445,868 |
|
|
|
|
|
|
|
|
|
|
|
Total
current liabilities |
|
|
4,617,739 |
|
|
7,645,081 |
|
| |
|
|
|
|
|
|
|
|
Deferred
cash compensation |
|
|
58,750 |
|
|
— |
|
|
Royalty
obligations-noncurrent |
|
|
— |
|
|
38,000 |
|
| |
|
|
|
|
|
|
|
|
Commitments
and contingencies |
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
Stockholders’
equity: |
|
|
|
|
|
|
|
|
Convertible
Series A preferred stock, par value $0.01, Authorized 4,500,000 shares at
December 31, 2003 and 2004; 3,473,967 and no shares issued and outstanding
as of December 31, 2003 and 2004, respectively |
|
|
13,027,375 |
|
|
— |
|
|
Convertible
Series B preferred stock, par value $0.01, Authorized 1,250,000 shares at
December 31, 2003 and 2004; 1,250,000 and no shares issued and outstanding
as of December 31, 2003 and 2004, respectively |
|
|
1,137,500 |
|
|
— |
|
|
Common
stock, par value $.01. Authorized 40,000,000 shares at December 31, 2003
and 2004; 15,015,518 and 24,169,775 shares issued at December 31, 2003 and
2004, respectively |
|
|
150,155 |
|
|
241,697 |
|
|
Additional
paid-in capital |
|
|
110,507,841 |
|
|
187,248,675 |
|
|
Deferred
compensation |
|
|
(239,425 |
) |
|
(154,173 |
) |
|
Notes
due from stockholders for common stock |
|
|
(58,750 |
) |
|
— |
|
|
Treasury
stock at cost; 229,741 shares of common stock at December 31, 2003 and
2004 |
|
|
(184,740 |
) |
|
(184,740 |
) |
|
Accumulated
deficit |
|
|
(118,235,448 |
) |
|
(130,060,750 |
) |
|
|
|
|
|
|
|
|
|
|
Total
stockholders’ equity |
|
|
6,104,508 |
|
|
57,090,709 |
|
|
|
|
|
|
|
|
|
|
|
Total
liabilities and stockholders’ equity |
|
$ |
10,780,997 |
|
$ |
64,773,790 |
|
See
accompanying notes to financial statements.
AUDIBLE,
INC.
STATEMENTS
OF OPERATIONS
|
|
|
Year
Ended December 31, |
|
|
|
|
2002 |
|
2003 |
|
2004 |
|
Revenue,
net: |
|
|
|
|
|
|
|
Content
and services revenue: |
|
|
|
|
|
|
|
|
Consumer
content |
|
$ |
10,939,871 |
|
$ |
18,594,531 |
|
$ |
33,838,272 |
|
|
Point
of sale rebates |
|
|
— |
|
|
(104,710 |
) |
|
(696,044 |
) |
|
Services |
|
|
347,816 |
|
|
104,569 |
|
|
68,127 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
content and services revenue |
|
|
11,287,687 |
|
|
18,594,390 |
|
|
33,210,355 |
|
|
Hardware |
|
|
931,785 |
|
|
665,584 |
|
|
694,900 |
|
|
Related
party revenue |
|
|
— |
|
|
— |
|
|
362,170 |
|
|
Other |
|
|
150,067 |
|
|
64,504 |
|
|
52,144 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
revenue, net |
|
|
12,369,539 |
|
|
19,324,478 |
|
|
34,319,569 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
expenses: |
|
|
|
|
|
|
|
|
|
|
|
Cost
of content and services revenue: |
|
|
|
|
|
|
|
|
|
|
|
Royalties
and other content charges |
|
|
4,904,245 |
|
|
5,318,919 |
|
|
10,650,382 |
|
|
Discount
certificate rebates |
|
|
— |
|
|
— |
|
|
1,461,719 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
cost of content and services revenue |
|
|
4,904,245 |
|
|
5,318,919 |
|
|
12,112,101 |
|
|
Cost
of hardware revenue |
|
|
2,717,542 |
|
|
2,085,254 |
|
|
2,197,013 |
|
|
Operations |
|
|
3,742,713 |
|
|
3,843,311 |
|
|
5,145,855 |
|
|
Technology
and development |
|
|
4,997,860 |
|
|
4,784,648 |
|
|
5,058,314 |
|
|
Marketing |
|
|
11,107,981 |
|
|
4,494,702 |
|
|
5,184,618 |
|
|
General
and administrative |
|
|
2,485,434 |
|
|
2,633,031 |
|
|
3,540,016 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
operating expenses |
|
|
29,955,775 |
|
|
23,159,865 |
|
|
33,237,917 |
|
|
|
|
|
|
|
|
|
|
|
|
|
(Loss)
income from operations |
|
|
(17,586,236 |
) |
|
(3,835,387 |
) |
|
1,081,652 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
income (expense): |
|
|
|
|
|
|
|
|
|
|
|
Interest
income |
|
|
85,158 |
|
|
25,451 |
|
|
252,873 |
|
|
Interest
expense |
|
|
— |
|
|
— |
|
|
(32,221 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
other income |
|
|
85,158 |
|
|
25,451 |
|
|
220,652 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Loss)
income before income tax expense and state income tax
benefit |
|
|
(17,501,078 |
) |
|
(3,809,936 |
) |
|
1,302,304 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
Income
tax expense |
|
|
— |
|
|
— |
|
|
(1,330 |
) |
| |
|
|
|
|
|
|
|
|
|
|
|
State
income tax benefit |
|
|
313,580 |
|
|
250,408 |
|
|
723,724 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
(loss) income |
|
|
(17,187,498 |
) |
|
(3,559,528 |
) |
|
2,024,698 |
|
|
Dividends
on preferred stock |
|
|
(1,365,720 |
) |
|
(5,656,894 |
) |
|
(614,116 |
) |
|
Preferred
stock discount |
|
|
— |
|
|
(1,444,444 |
) |
|
— |
|
|
Charges
related to conversion of convertible preferred stock |
|
|
— |
|
|
— |
|
|
(9,873,394 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
preferred stock expense |
|
|
(1,365,720 |
) |
|
(7,101,338 |
) |
|
(10,487,510 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
loss applicable to common shareholders |
|
$ |
(18,553,218 |
) |
$ |
(10,660,866 |
) |
$ |
(8,462,812 |
) |
|
Basic
and diluted net loss applicable to common shareholders per common
share |
|
$ |
(1.82 |
) |
$ |
(1.01 |
) |
$ |
(0.40 |
) |
|
Basic
and diluted weighted average common shares outstanding |
|
|
10,169,406 |
|
|
10,506,704 |
|
|
20,912,997 |
|
See
accompanying notes to financial statements.
AUDIBLE,
INC.
STATEMENTS
OF STOCKHOLDERS’ (DEFICIT) EQUITY
| |
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
Common
Stock |
|
|
|
|
Convertible
Series
A
Preferred
Stock
|
|
Convertible
Series
B
Preferred
Stock
|
|
Series
C
Preferred
Stock
|
|
Shares
|
|
ParValue |
|
|
Balance
at December 31, 2001 |
|
$ |
— |
|
$ |
— |
|
$ |
— |
|
|
9,182,229 |
|
$ |
91,822 |
|
|
Common
stock repurchases |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
Sale
of common stock |
|
|
— |
|
|
— |
|
|
— |
|
|
1,356,589 |
|
|
13,566 |
|
|
Common
stock issued in connection with a technology license |
|
|
— |
|
|
— |
|
|
— |
|
|
16,666 |
|
|
167 |
|
|
Amortization
of deferred compensation |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
Amortization
of deferred services |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
Amortization
of warrants for services |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
Exercise
of common stock options |
|
|
— |
|
|
— |
|
|
— |
|
|
3,704 |
|
|
37 |
|
|
Series
B Preferred stock issued in connection with Co-Publishing and Distribution
agreement |
|
|
— |
|
|
1,137,500 |
|
|
— |
|
|
— |
|
|
— |
|
|
Payments
received on notes due from stockholders |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
Reclassification
of common shares outstanding |
|
|
— |
|
|
— |
|
|
— |
|
|
3,100 |
|
|
31 |
|
|
Net
loss |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
Accrued
dividends on redeemable preferred stock |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
Balance
at December 31, 2002 |
|
|
— |
|
|
1,137,500 |
|
|
— |
|
|
10,562,288 |
|
|
105,623 |
|
|
Deferred
compensation related to stock options issued below fair market
value |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
Amortization
of deferred compensation |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
Amortization
of deferred services |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
Amortization
of warrants for services |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
Cashless
exercise of common stock warrants |
|
|
— |
|
|
— |
|
|
— |
|
|
14,083 |
|
|
141 |
|
|
Exercise
of common stock options |
|
|
— |
|
|
— |
|
|
— |
|
|
238,523 |
|
|
2,385 |
|
|
Exercise
of common stock warrants |
|
|
— |
|
|
— |
|
|
— |
|
|
408,643 |
|
|
4,086 |
|
|
Series
A Preferred stock reclassification due to removal of mandatory redemption
feature |
|
|
13,027,375 |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
Sale
of Series C Preferred stock |
|
|
— |
|
|
— |
|
|
5,859,772 |
|
|
— |
|
|
— |
|
|
Conversion
of Series C Preferred Stock and accrued dividends into common
stock |
|
|
— |
|
|
— |
|
|
(5,859,772 |
) |
|
3,791,981 |
|
|
37,920 |
|
|
Forgiveness
of notes due from stockholders |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
Elimination
of payments due to Amazon |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
Preferred
stock issuance discount |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
loss |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
Accrued
dividends on preferred stock |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
Balance
at December 31, 2003 |
|
|
13,027,375 |
|
|
1,137,500 |
|
|
— |
|
|
15,015,518 |
|
|
150,155 |
|
|
Conversion
of Series A Preferred Stock |
|
|
(13,027,375 |
) |
|
— |
|
|
— |
|
|
4,669,347 |
|
|
46,693 |
|
|
Conversion
of Series B Preferred Stock |
|
|
— |
|
|
(1,137,500 |
) |
|
— |
|
|
416,666 |
|
|
4,167 |
|
|
Preferred
dividends and conversion inducement |
|
|
— |
|
|
— |
|
|
— |
|
|
1,166,666 |
|
|
11,667 |
|
|
Sale
of common stock |
|
|
— |
|
|
— |
|
|
— |
|
|
2,022,500 |
|
|
20,225 |
|
Cashless
exercise of common stock warrants |
|
|
— |
|
|
|
|
|
— |
|
|
39,888 |
|
|
398 |
|
|
Exercise
of common stock options |
|
|
— |
|
|
— |
|
|
— |
|
|
801,525 |
|
|
8,015 |
|
|
Exercise
of common stock warrants |
|
|
— |
|
|
— |
|
|
— |
|
|
37,665 |
|
|
377 |
|
|
Deferred
compensation related to stock options issued below fair market
value |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
Amortization
of warrants for services |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
Payments
received on notes due from stockholders |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
Reversal
of unused accrued expense related to Series C financing |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
Preferred
stock expense |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
Income
tax benefit due to exercise of stock options |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
Net
income |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
Balance
at December 31, 2004 |
|
$ |
— |
|
$ |
— |
|
$ |
— |
|
|
24,169,775 |
|
$ |
241,697 |
|
See
accompanying notes to financial statements.
AUDIBLE,
INC.
STATEMENTS
OF STOCKHOLDERS’ EQUITY (DEFICIT)
| |
|
|
|
|
|
|
|
|
|
|
Additional
paid-in capital |
|
Deferred
compensation |
|
Deferred
services |
|
|
Balance
at December 31, 2001 |
|
$ |
93,912,212 |
|
$ |
(467,600 |
) |
$ |
(5,416,667 |
) |
|
Common
stock repurchases. |
|
|
— |
|
|
— |
|
|
— |
|
|
Sale
of common stock |
|
|
3,145,684 |
|
|
— |
|
|
— |
|
|
Common
stock issued in connection with a technology license |
|
|
26,833 |
|
|
— |
|
|
— |
|
|
Amortization
of deferred compensation. |
|
|
— |
|
|
293,112 |
|
|
— |
|
|
Amortization
of deferred services |
|
|
— |
|
|
— |
|
|
5,547,500 |
|
|
Amortization
of warrants for services |
|
|
1,153,998 |
|
|
— |
|
|
— |
|
|
Exercise
of common stock options |
|
|
5,519 |
|
|
— |
|
|
— |
|
|
Series
B Preferred stock issued in connection with Co-Publishing and Distribution
agreement |
|
|
— |
|
|
— |
|
|
(547,500 |
) |
|
Payments
received on notes due from stockholders |
|
|
— |
|
|
— |
|
|
— |
|
|
Reclassification
of common shares outstanding |
|
|
(31 |
) |
|
— |
|
|
— |
|
|
Net
loss |
|
|
— |
|
|
— |
|
|
— |
|
|
Accrued
dividends on redeemable preferred stock |
|
|
— |
|
|
— |
|
|
— |
|
|
Balance
at December 31, 2002 |
|
|
98,244,215 |
|
|
(174,488 |
) |
|
(416,667 |
) |
|
Deferred
compensation related to stock options issued below fair market
value |
|
|
238,680 |
|
|
(238,680 |
) |
|
— |
|
|
Amortization
of deferred compensation |
|
|
— |
|
|
173,743 |
|
|
— |
|
|
Amortization
of deferred services |
|
|
— |
|
|
— |
|
|
416,667 |
|
|
Amortization
of warrants for services |
|
|
719,357 |
|
|
— |
|
|
— |
|
|
Cashless
exercise of common stock warrants |
|
|
(141 |
) |
|
— |
|
|
— |
|
|
Exercise
of common stock options |
|
|
434,673 |
|
|
— |
|
|
— |
|
|
Exercise
of common stock warrants |
|
|
1,233,453 |
|
|
— |
|
|
— |
|
|
Series
A Preferred stock reclassification due to removal of mandatory redemption
feature |
|
|
— |
|
|
— |
|
|
— |
|
|
Sale
of Series C Preferred stock |
|
|
— |
|
|
— |
|
|
— |
|
|
Conversion
of Series C Preferred Stock and accrued dividends intocommon
stock |
|
|
6,693,160 |
|
|
— |
|
|
— |
|
|
Forgiveness
of notes due from stockholders |
|
|
— |
|
|
— |
|
|
— |
|
|
Elimination
of payments due to Amazon |
|
|
1,500,000 |
|
|
— |
|
|
|
|
|
Preferred
stock issuance discount |
|
|
1,444,444 |
|
|
— |
|
|
— |
|
|
Net
loss |
|
|
— |
|
|
— |
|
|
— |
|
|
Accrued
dividends on preferred stock |
|
|
— |
|
|
— |
|
|
— |
|
|
Balance
at December 31, 2003 |
|
|
110,507,841 |
|
|
(239,425 |
) |
|
— |
|
|
Conversion
of Series A Preferred Stock |
|
|
12,980,682 |
|
|
— |
|
|
— |
|
|
Conversion
of Series B Preferred Stock |
|
|
1,133,333 |
|
|
— |
|
|
— |
|
|
Preferred
dividends and conversion inducement |
|
|
13,838,333 |
|
|
— |
|
|
— |
|
|
Sale
of common stock |
|
|
46,436,368 |
|
|
— |
|
|
— |
|
|
Cashless
exercise of common stock warrants |
|
|
(398 |
) |
|
— |
|
|
— |
|
|
Exercise
of common stock options |
|
|
1,777,369 |
|
|
— |
|
|
— |
|
|
Exercise
of common stock warrants |
|
|
56,123 |
|
|
— |
|
|
— |
|
|
Deferred
compensation related to stock options issued below fair market
value |
|
|
— |
|
|
85,252 |
|
|
— |
|
|
Amortization
of warrants for services |
|
|
510,744 |
|
|
— |
|
|
— |
|
|
Payments
received on notes due from stockholders |
|
|
— |
|
|
— |
|
|
— |
|
|
Reversal
of unused accrued expense related to Series C financing |
|
|
7,500 |
|
|
— |
|
|
— |
|
|
Preferred
stock expense |
|
|
— |
|
|
— |
|
|
— |
|
|
Net
income |
|
|
— |
|
|
— |
|
|
— |
|
|
Balance
at December 31, 2004 |
|
$ |
187,248,675 |
|
$ |
(154,173 |
) |
$ |
— |
|
See
accompanying notes to financial statements.
AUDIBLE,
INC.
STATEMENTS
OF STOCKHOLDERS’ (DEFICIT) EQUITY
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Treasury
stock
|
|
|
|
|
|
|
|
|
Notes
due
from
stockholders
for
common
stock
|
|
Shares
|
|
Cost
|
|
Accumulated
deficit
|
|
Total
stockholders’
equity
(deficit)
|
|
|
Balance
at December 31, 2001 |
|
$ |
(294,456 |
) |
|
(225,575 |
) |
$ |
(179,990 |
) |
$ |
(93,194,809 |
) |
$ |
(5,549,488 |
) |
|
Common
stock repurchases |
|
|
— |
|
|
(4,166 |
) |
|
(4,750 |
) |
|
— |
|
|
(4,750 |
) |
|
Sale
of common stock |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
3,159,250 |
|
|
Common
stock issued in connection with a technology license |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
27,000 |
|
|
Amortization
of deferred compensation |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
293,112 |
|
|
Amortization
of deferred services |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
5,547,500 |
|
|
Amortization
of warrants for services |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
1,153,998 |
|
|
Exercise
of common stock options |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
5,556 |
|
|
Series
B Preferred stock issued in connection with Co-Publishing and Distribution
agreement |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
590,000 |
|
|
Payments
received on notes due from stockholders |
|
|
4,911 |
|
|
— |
|
|
— |
|
|
— |
|
|
4,911 |
|
|
Reclassification
of common shares outstanding |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
Net
loss |
|
|
— |
|
|
— |
|
|
— |
|
|
(17,187,498 |
) |
|
(17,187,498 |
) |
|
Accrued
dividends on redeemable preferred stock |
|
|
— |
|
|
— |
|
|
— |
|
|
(1,365,720 |
) |
|
(1,365,720 |
) |
|
Balance
at December 31, 2002 |
|
|
(289,545 |
) |
|
(229,741 |
) |
|
(184,740 |
) |
|
(111,748,027 |
) |
|
(13,326,129 |
) |
|
Deferred
compensation related to stock options issued below fair market
value |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
Amortization
of deferred compensation |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
173,743 |
|
|
Amortization
of deferred services |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
416,667 |
|
|
Amortization
of warrants for services |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
719,357 |
|
|
Cashless
exercise of common stock warrants |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
Exercise
of common stock options |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
437,058 |
|
|
Exercise
of common stock warrants |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
1,237,539 |
|
|
Series
A Preferred stock reclassification due to removal of mandatory redemption
feature |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
13,027,375 |
|
|
Sales
of Series C Preferred stock |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
5,859,772 |
|
|
Conversion
of Series C Preferred Stock and accrued dividends into common
stock |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
871,308 |
|
|
Forgiveness
of notes due from stockholders |
|
|
230,795 |
|
|
— |
|
|
— |
|
|
— |
|
|
230,795 |
|
|
Elimination
of payments due to Amazon |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
1,500,000 |
|
|
Preferred
stock issuance discount |
|
|
— |
|
|
— |
|
|
— |
|
|
(1,444,444 |
) |
|
— |
|
|
Net
loss |
|
|
— |
|
|
— |
|
|
— |
|
|
(3,559,528 |
) |
|
(3,559,528 |
) |
|
Accrued
dividends on preferred stock |
|
|
— |
|
|
— |
|
|
— |
|
|
(1,483,449 |
) |
|
(1,483,449 |
) |
|
Balance
at December 31, 2003 |
|
|
(58,750 |
) |
|
(229,741 |
) |
|
(184,740 |
) |
|
(118,235,448 |
) |
|
6,104,508 |
|
|
Conversion
of Series A Preferred Stock |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
Conversion
of Series B Preferred Stock |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
Preferred
dividends and conversion inducement |
|
|
— |
|
|
— |
|
|
— |
|
|
(3,362,490 |
) |
|
10,487,510 |
|
|
Sale
of common stock |
|
|
— |
|
|
— |
|
|
— |
|
|
|
|
|
46,456,593 |
|
|
Cashless
exercise of common stock warrants |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
Exercise
of common stock options |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
1,785,384
|
|
|
Exercise
of common stock warrants |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
56,500 |
|
|
Deferred
compensation related to stock options issued below fair market
value |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
85,252 |
|
|
Amortization
of warrants for services |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
510,744 |
|
|
Payments
received on notes due from stockholders |
|
|
58,750 |
|
|
— |
|
|
— |
|
|
— |
|
|
58,750 |
|
|
Reversal
of unused accrued expense related to Series C financing |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
7,500 |
|
|
Preferred
stock expense |
|
|
— |
|
|
— |
|
|
— |
|
|
(10,487,510 |
) |
|
(10,487,510 |
) |
Income
tax benefit due to exercise of stock options |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
780 |
|
|
Net
income |
|
|
— |
|
|
— |
|
|
— |
|
|
2,024,698 |
|
|
2,024,698 |
|
|
Balance
at December 31, 2004 |
|
$ |
— |
|
|
(229,741 |
) |
$ |
(184,740 |
) |
$ |
(130,060,750 |
) |
$ |
57,090,709 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See
accompanying notes to financial statements.
AUDIBLE,
INC.
STATEMENTS
OF CASH FLOWS
| |
|
|
|
|
|
|
|
|
|
|
Year
Ended December 31,
|
|
|
|
|
2002
|
|
2003 |
|
2004
|
|
Cash
flows from operating activities: |
|
|
|
|
|
|
|
|
|
|
|
Net
(loss) income |
|
$ |
(17,187,498 |
) |
$ |
(3,559,528 |
) |
$ |
2,024,698 |
|
|
Adjustments
to reconcile net (loss) income to net cash (used in) provided by operating
activities: |
|
|
|
|
|
|
|
|
|
|
|
Depreciation
and amortization |
|
|
1,506,815 |
|
|
498,206 |
|
|
498,959 |
|
|
Services
rendered for common stock and warrants |
|
|
6,153,998 |
|
|
1,136,024 |
|
|
510,744 |
|
|
Services
rendered for preferred stock |
|
|
547,500 |
|
|
— |
|
|
— |
|
|
Noncash
compensation charge |
|
|
293,112 |
|
|
173,743 |
|
|
85,252 |
|
|
Noncash
forgiveness of notes due from stockholders forcommon stock |
|
|
— |
|
|
198,995 |
|
|
— |
|
|
Non-cash
bonus in satisfaction of note receivable fromstockholder |
|
|
40,250 |
|
|
— |
|
|
— |
|
|
Deferred
cash compensation |
|
|
(3,000 |
) |
|
— |
|
|
(58,750 |
) |
|
Income
tax benefit from exercise of stock options |
|
|
— |
|
|
— |
|
|
780 |
|
|
Amortization
of discounts on investments |
|
|
— |
|
|
— |
|
|
(86,164 |
) |
|
Changes
in assets and liabilities: |
|
|
|
|
|
|
|
|
|
|
|
Interest
receivable on short-term investments |
|
|
1,260 |
|
|
— |
|
|
(76,151 |
) |
|
Accounts
receivable, net |
|
|
(36,141 |
) |
|
(56,378 |
) |
|
(541,346 |
) |
|
Accounts
receivable from related party |
|
|
— |
|
|
— |
|
|
(87,625 |
) |
|
Royalty
advances |
|
|
(1,743 |
) |
|
(13,913 |
) |
|
(68,296 |
) |
|
Prepaid
expenses and other current assets |
|
|
(76,891 |
) |
|
140,103 |
|
|
(69,264 |
) |
|
Inventory |
|
|
371,958 |
|
|
(22,674 |
) |
|
(294,173 |
) |
|
Other
assets |
|
|
(75,000 |
) |
|
(327,719 |
) |
|
397,719 |
|
|
Accounts
payable |
|
|
(442,077 |
) |
|
(551,150 |
) |
|
324,547 |
|
|
Accrued
expenses |
|
|
1,907,174 |
|
|
996,317 |
|
|
1,187,426 |
|
|
Royalty
obligations |
|
|
(321,950 |
) |
|
(215,500 |
) |
|
(219,200 |
) |
|
Accrued
compensation |
|
|
(430,569 |
) |
|
81,651 |
|
|
86,926 |
|
|
Deferred
revenue |
|
|
(100,092 |
) |
|
378,019 |
|
|
1,572,348 |
|
|
Net
cash (used in) provided by operating activities |
|
|
(7,852,894 |
) |
|
(1,143,804 |
) |
|
5,188,430 |
|
|
Cash
flows from investing activities: |
|
|
|
|
|
|
|
|
|
|
|
Purchases
of property and equipment |
|
|
(149,545 |
) |
|
(137,657 |
) |
|
(401,895 |
) |
|
Purchases
of short-term investments |
|
|
— |
|
|
— |
|
|
(48,300,235 |
) |
|
Net
cash used in investing activities |
|
|
(149,545 |
) |
|
(137,657 |
) |
|
(48,702,130 |
) |
|
Cash
flows from financing activities: |
|
|
|
|
|
|
|
|
|
|
|
Proceeds
from issuance of Series C convertible preferred stock, net |
|
|
— |
|
|
5,859,772 |
|
|
— |
|
|
Proceeds
from the sale of common stock, net |
|
|
3,186,250 |
|
|
— |
|
|
46,456,593 |
|
|
Payments
received on notes due from stockholders for common stock |
|
|
4,911 |
|
|
— |
|
|
58,750
|
|
|
Proceeds
from exercise of common stock options |
|
|
5,556 |
|
|
437,057 |
|
|
1,785,384 |
|
|
Proceeds
from exercise of common stock warrants |
|
|
— |
|
|
1,237,539 |
|
|
56,500 |
|
|
Payment
of principal on obligations under capital leases |
|
|
— |
|
|
— |
|
|
(622,508 |
) |
|
Net
cash provided by financing activities |
|
|
3,196,717 |
|
|
7,534,368 |
|
|
47,734,719 |
|
|
(Decrease)
increase in cash and cash equivalents |
|
|
(4,805,722 |
) |
|
6,252,907 |
|
|
4,221,019 |
|
|
Cash
and cash equivalents at beginning of year |
|
|
7,627,802 |
|
|
2,822,080 |
|
|
9,074,987 |
|
|
Cash
and cash equivalents at end of year |
|
$ |
2,822,080 |
|
$ |
9,074,987 |
|
$ |
13,296,006 |
|
See note
17 for supplemental disclosure of cash flow information.
See
accompanying notes to financial statements.
AUDIBLE,
INC.
NOTES
TO FINANCIAL STATEMENTS
DECEMBER
31, 2002, 2003, AND 2004
(1) Reverse
Stock Split
At the
annual meeting of stockholders held on June 3, 2004, the stockholders approved a
proposal to amend and restate the Company’s certificate of incorporation to
effect a reverse stock split and to decrease the authorized number of shares of
common stock on a proportional basis. The proposal granted the Company’s Board
of Directors (“Board”) authority to effect a reverse stock split of the
Company’s common stock of between and including two and four shares to be
combined into one share of common stock. No fractional shares were to be
converted.
On June
3, 2004, the Board approved a reverse stock split in the ratio of one for three
shares effective June 17, 2004. On the effective date, each holder of record was
deemed to hold one share of common stock for every three shares of common stock
held immediately prior to the effective date. The 64,480,245 common shares then
issued and outstanding were converted into 21,493,415 shares of common stock.
Following the effective date of the reverse stock split, the par value of the
common stock remained at $.01 per share.
All share
numbers and amounts have been retroactively restated for all periods presented
to reflect the one for three reverse stock split.
(2) Description
of Business and Business Conditions
The
Business
Audible
Inc. (the “Company”), incorporated on November 3, 1995, was formed to create the
Audible service, a solution delivering premium digital spoken audio content from
its website, audible.com, over the internet for playback on personal computers
and mobile devices. The Company commenced commercial operations in October 1997.
The
Company has experienced net losses applicable to common shareholders of
$18,553,218, $10,660,866, and $8,462,812, during the years ended December 31,
2002, 2003, and 2004, respectively, and has an accumulated deficit of
$130,060,750 as of December 31, 2005. The Company raised $46,456,593, net of
direct costs from the sale of common stock in an offering in November 2004. As
of December 31, 2004, the Company’s cash and cash equivalents balance was
$13,296,006, and its short-term investments balance was $48,386,399. The Company
believes that its cash and cash equivalents and short-term investment balances
will enable it to meet its anticipated future cash requirements for operations
and capital expenditures for the foreseeable future.
The
Company may need to raise additional funds to finance its continued growth. No
assurance can be given that such additional financing, if needed, will be
available on terms favorable to the Company or to its stockholders, if at
all.
(3) Summary of
Significant Accounting Policies
Cash
and Cash Equivalents
The
Company considers short-term, highly liquid investments with original maturities
of three months or less at the time of purchase to be cash equivalents. Cash
equivalents at December 31, 2003 and 2004 were $8,531,628, and $13,033,728,
respectively, and consisted primarily of money market funds and notes due from
governmental agencies. Cash balances at December 31, 2003 and 2004 were $543,359
and $262,278, respectively, and consisted of funds in the Company’s checking
account.
| |
|
December
31, |
|
| |
|
2003 |
|
2004 |
|
|
Cash |
|
$ |
543,359 |
|
$ |
262,278 |
|
|
Cash
equivalents |
|
|
8,531,628 |
|
|
13,033,728 |
|
|
Total |
|
$ |
9,074,987 |
|
$ |
13,296,006 |
|
In addition, the Company has restricted
cash deposits being held as a reserve by the Company’s credit card processors.
These restricted cash deposits at December 31, 2003 and 2004 were $402,719 and
$5,000 repsectively, and are included in Other Assets on the accompanying
Balance Sheets.
AUDIBLE,
INC.
NOTES
TO FINANCIAL STATEMENTS
DECEMBER
31, 2002, 2003, AND 2004
Short-Term
Investments
Investments
purchased with a maturity of more than three months, and less than twelve
months, are classified as short-term investments. The Company's short-term
investments, as of December 31, 2004, of $48,386,399, consisted of governmental
agency notes and mortgage-backed securities that are to be held to maturity
because the Company has the positive intent and ability to hold these securities
to maturity. Held to maturity securities are stated at amortized cost, adjusted
for amortization of premiums and accretion of discounts to maturity. Dividend
and interest income are recognized when earned. Premiums and discounts are
amortized or accreted over the life of the related held to maturity security as
an adjustment to yield using the effective interest method. A decline in the
market value of held-to-maturity security below that is deemed to be
other-than-temporary results in a reduction in carrying amount to fair value.
The impairment is charged to earnings and a new cost basis for the security is
established. To determine whether an impairment is other-than-temporary, the
Company considers whether it has the ability and intends to hold the investment
until a market price recovery and considers whether evidence indicating the cost
of the investment is recoverable outweighs evidence to the contrary. Evidence
considered in this assessment includes the reasons for the impairment, the
severity and duration of the impairment, changes in the value subsequent to
year-end, and forecasted performance of the investee.
The
amortized cost, gross unrealized holding losses and the fair value of
held-to-maturity debt securities by major security type and class of security at
December 31, 2004 were as follows:
| |
|
Amortized
cost |
|
Gross
unrealized holding losses |
|
Fair
Value |
|
| Held to
maturity: |
|
|
|
|
|
|
|
|
|
|
|
Mortgage
Backed Securities |
|
$ |
4,917,761 |
|
$ |
4,476 |
|
$ |
4,913,285 |
|
|
Governmental
agency securities |
|
|
43,468,638 |
|
|
16,018 |
|
|
43,452,620 |
|
| |
|
$ |
48,386,399 |
|
$ |
20,494 |
|
$ |
48,365,905 |
|
All of
the debt securities classified as held to maturity mature during the 2005 fiscal
year.
Allowance
for Returns and Chargebacks
The
allowance for returns and chargebacks is recorded as a reduction of revenue and
is estimated based on a percentage of revenue, taking into account historical
experience. A portion of the allowance is recorded as a reduction of accounts
receivable based on an estimate of returns that will be made related to sales
that were unpaid at period-end. The remaining portion of the allowance is
reflected as an accrued liability at period-end.
The
activity in the allowance accounts during the years ended December 31, 2002,
2003, and 2004 was as follows:
|
Balance
at December 31, 2001 |
|
$ |
12,400 |
|
|
Provision
for returns |
|
|
374,282 |
|
|
Returns
provided |
|
|
(377,182 |
) |
|
Balance
at December 31, 2002 |
|
|
9,500 |
|
|
Provision
for returns |
|
|
323,772 |
|
|
Returns
provided |
|
|
(319,072 |
) |
|
Balance
at December 31, 2003 |
|
|
14,200 |
|
|
Provision
for returns and chargebacks |
|
|
1,036,963 |
|
|
Returns
and chargebacks provided |
|
|
(867,979 |
) |
|
Balance
at December 31, 2004 |
|
$ |
183,184 |
|
The
amount of the allowance that was recorded as a reduction of accounts receivable
as of December 31, 2003 and 2004 was $14,200 and $14,600,
respectively.
Inventory
is stated at the lower of cost or market using the first-in, first-out method.
As of December 31, 2003 and 2004, inventory consists of digital audio players
manufactured by third party manufacturers.
AUDIBLE,
INC.
NOTES
TO FINANCIAL STATEMENTS
DECEMBER
31, 2002, 2003, AND 2004
Property
and Equipment
Property
and equipment are stated at cost. Property and equipment under capital leases
are stated at the present value of minimum lease payments. Depreciation is
calculated using the straight-line method over the estimated useful lives of the
respective assets, which are three years for computer server and website
equipment, and two years for office furniture and equipment, and studio
equipment.
Property
and equipment held under capital leases and leasehold improvements are amortized
on a straight-line basis over the lease term or the estimated useful life of the
asset, whichever is shorter. Their amortization is included with depreciation
expense.
Maintenance
and repairs are expensed as incurred.
Impairment
of Long-Lived Assets
The
Company accounts for long-lived assets in accordance with the provisions of SFAS
No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets” (SFAS
144). The Company reviews its long-lived assets (property, plant and equipment)
for impairment when events or circumstances indicate that the carrying amount of
an asset may not be recoverable. If the sum of the expected cash flows,
undiscounted and without interest, is less than the carrying amount of the
related asset, an impairment loss is recognized as the amount by which the
carrying amount of the asset exceeds its fair value.
Royalties
Royalty
advances and the corresponding royalty obligations represent payments made and
payments to be made to various content providers pursuant to minimum guarantees
under their royalty agreements, net of royalties expensed. These agreements give
the Company the right to sell digital audio content over the internet. The
royalty obligations recorded in the accompanying balance sheets are classified
between current and noncurrent based on the payment terms specified in the
agreements. The Company periodically adjusts the balance of these advances to
reflect their estimated net realizable value. Royalty expense is included in
cost of content and services revenue in the accompanying statements of
operations.
Stock-Based
Compensation
SFAS No.
148, “Accounting for Stock Based Compensation-Transition and Disclosure, an
Amendment of FASB Statement No. 123” (“SFAS 148”), amended FASB Statement No.
123, “Accounting for Stock-based Compensation” (“SFAS 123”), to provide
alternative methods of transition for a voluntary change to the fair value
method of accounting for stock-based compensation. However, it allows an entity
to continue to measure compensation cost for those instruments using the
intrinsic value method of accounting prescribed by Accounting Principles Board
Opinion No. 25 (“APB 25”), “Accounting for Stock Issued to Employees,” provided
it discloses the effect of SFAS 123, as amended by SFAS 148, in footnotes to the
financial statements. The Company has chosen to continue to account for
stock-based compensation using the intrinsic value method.
The
Company’s 1999 Stock Incentive 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 each employee’s 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 3,000,000 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 4,200,000 shares. As of December
31, 2003 and 2004, options to purchase 3,147,363 and 2,600,331, respectively,
shares of common stock were outstanding.
AUDIBLE,
INC.
NOTES
TO FINANCIAL STATEMENTS
DECEMBER
31, 2002, 2003, AND 2004
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 income (loss)
applicable to common stockholders and net income (loss) applicable to commons
shareholders per common share would have changed to the pro forma amounts
indicated in the table below.
| |
|
|
|
|
|
|
|
|
|
|
2002
|
|
2003
|
|
2004 |
|
|
Net
loss applicable to common shareholders as reported |
|
$ |
(18,553,218 |
) |
$ |
(10,660,866 |
) |
$ |
(8,462,812 |
) |
|
Add:
Total stock-based employee compensation cost included in reported net loss
applicable to common shareholders (based on intrinsic value
method) |
|
|
293,112 |
|
|
173,743 |
|
|
85,252 |
|
|
Deduct:
Total stock-based employee compensation expense determined under fair
value method for all awards |
|
|
6,349,116 |
|
|
4,103,294 |
|
|
2,669,870 |
|
|
Pro-forma
net loss applicable to common shareholders |
|
$ |
(24,609,222 |
) |
$ |
(14,590,417 |
) |
$ |
(11,047,430 |
) |
|
Basic
and diluted net loss applicable to common shareholders per common
share: |
|
|
|
|
|
|
|
|
|
|
|
As
Reported |
|
$ |
(1.82 |
) |
$ |
(1.01 |
) |
$ |
(0.40 |
) |
|
Pro
Forma |
|
$ |
(2.42 |
) |
$ |
(1.39 |
) |
$ |
(0.53 |
) |
The
Company has used the Black-Scholes option pricing model in calculating the fair
value of options and restricted stock awards granted. The assumptions used and
the weighted-average information for the years ended December 31, 2002, 2003 and
2004 are as follows:
| |
|
|
|
|
|
|
|
|
|
|
December
31,
|
|
|
|
|
2002
|
|
2003
|
|
2004 |
|
|
Risk-free
interest rate |
|
|
5.00 |
% |
|
5.00 |
% |
|
3.66 |
% |
|
Expected
dividend yield |
|
|
— |
|
|
— |
|
|
— |
|
|
Expected
lives |
|
|
7
years |
|
|
7
years |
|
|
5 years |
|
|
Expected
volatility |
|
|
109 |
% |
|
117 |
% |
|
122 |
% |
|
Weighted-average
grant date fair value of stock options granted during the
year |
|
$ |
2.60 |
|
$ |
2.58 |
|
$ |
10.61 |
|
Stock
and Equity Instruments Issued for Goods and Services
The
Company issues warrants to purchase shares of common stock to non- employees as
part of their compensation for providing goods and services. The Company
accounts for these warrants in accordance with the EITF Issue No. 96-18,
“Accounting for Equity Instruments that are Issued to Other than Employees for
Acquiring, or in Conjunction with Selling, Goods or Services.” The exercise
price of the warrants is determined by the closing price of Audible’s common
stock on the day of the agreement. Fair value of the warrant issued is estimated
using the Black-Scholes model with the best available assumptions concerning
risk-free interest rate, life of the warrant, dividend yield and expected
volatility. The fair value of the warrant is expensed on a straight-line basis
over the term of the agreement and is recorded within the operating expense line
item that best represents the nature of the goods and services provided.
Depending on the terms of the warrant, the Company applies variable plan or
fixed plan accounting in accordance with EITF No. 96-18.
Cost
of Content and Services Revenue
Cost of
content and services revenue includes earned royalties on sales of content as
specified by the terms of the content agreements, periodic net realizable value
adjustments to royalty advances, amortization of warrants issued to content
providers in connection with content agreements, other non-recoupable content
costs, and discount certificate rebates. Royalty expense for sales of content is
either paid based upon a percentage of revenue or as a fixed price per title as
per the royalty agreement. In certain cases, the cost per title may differ
depending upon whether the title is sold as part of the AudibleListener
membership or sold as an a la carte sale. Cost of content and services revenue
for the years ended December 31, 2002, 2003, and 2004 was as follows:
AUDIBLE,
INC.
NOTES
TO FINANCIAL STATEMENTS
DECEMBER
31, 2002, 2003, AND 2004
| |
|
|
|
|
|
|
|
|
|
|
Year
Ended December 31,
|
|
|
|
|
2002
|
|
2003
|
|
2004 |
|
|
Earned
royalties |
|
$ |
3,352,448 |
|
$ |
4,742,388 |
|
$ |
10,393,330 |
|
|
Net
realizable value adjustments |
|
|
79,702 |
|
|
17,979 |
|
|
--- |
|
|
Amortization
of warrants issued to providers |
|
|
496,705 |
|
|
685,936 |
|
|
181,254 |
|
|
Random
House Audible content costs (see note 11) |
|
|
922,497 |
|
|
(134,997 |
) |
|
--- |
|
|
Other
content costs |
|
|
52,893 |
|
|
7,613 |
|
|
75,798 |
|
|
Royalties
and other content charges |
|
$ |
4,904,245 |
|
$ |
5,318,919 |
|
$ |
10,650,382 |
|
|
Discount
certificate rebates |
|
|
— |
|
|
— |
|
|
1,461,719 |
|
|
Total
cost of content and services revenue |
|
$ |
4,904,245 |
|
$ |
5,318,919 |
|
$ |
12,112,101 |
|
Advertising
Expenses
The
Company expenses the costs of advertising and promoting its products and
services as incurred. These costs are included in marketing expense in the
accompanying statements of operations and totaled $1,511,788, $1,040,507, and
$1,609,571, for the years ended December 31, 2002, 2003, and 2004, respectively.
Income
Taxes
The
Company accounts for income taxes using the asset and liability method of SFAS
No. 109, “Accounting for Income Taxes.” Under the asset and liability method,
deferred tax assets and deferred tax liabilities are recognized for the future
tax consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases and operating loss and tax credit carryforwards. Deferred tax assets and
liabilities are measured using enacted tax rates expected to apply to taxable
income in the years in which those temporary differences are expected to be
recovered or settled. The effect on deferred tax assets and liabilities of a
change in tax rates is recognized in results of operations in the period in
which the tax change occurs. Deferred tax assets are reduced, if necessary, by a
valuation allowance for any tax benefits, which are more likely than not, not
going to be realized.
Basic
and Diluted Net Loss Applicable to Common Shareholders Per Common Share
Basic and
diluted net income (loss) applicable to common shareholders per common share is
presented in accordance with the provisions of Statement of Financial Accounting
Standard (“SFAS”) No. 128, “Earnings Per Share.” Basic net income (loss)
applicable to common shareholder per common share is computed by dividing net
income (loss) applicable to common shareholders by the weighted average number
of common shares outstanding for the period. Diluted net income (loss)
applicable to common shareholders 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. Potential common shares consist primarily of incremental shares
issuable upon the assumed exercise of stock options and warrants to purchase
common stock using the treasury stock method.
For 2002,
2003, and 2004, all potential common shares have been excluded from the diluted
calculation because the Company had a net loss applicable to common
shareholders, and their inclusion would have been anti-dilutive. The following
table summarizes the potential common shares excluded from the diluted
calculation:
| |
|
|
|
|
|
|
|
|
|
Year
ended
December
31, |
|
| |
|
|
|
|
|
|
2002
|
|
2003
|
|
2004
|
|
|
Stock
Options |
|
|
2,515,633 |
|
|
3,147,363 |
|
|
2,600,331 |
|
|
Warrants |
|
|
1,174,414 |
|
|
715,438 |
|
|
1,035,329 |
|
|
Convertible
Series A Stock |
|
|
4,405,055 |
|
|
4,669,347 |
|
|
— |
|
|
Convertible
Series B Stock |
|
|
416,666 |
|
|
416,666 |
|
|
— |
|
AUDIBLE,
INC.
NOTES
TO FINANCIAL STATEMENTS
DECEMBER
31, 2002, 2003, AND 2004
Comprehensive
Income (Loss)
The
Company’s comprehensive income (loss) is equal to its net income (loss) for all
periods presented.
Use
of Estimates
The
preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities, disclosure of contingent assets and liabilities at the date of the
financial statements, and reported amounts of revenues and expenses during the
period. Significant items subject to estimates include the recoverability
of the carrying amount of property and equipment, the allowance for chargebacks
and returns, recoverability of royalty advances, valuation
allowance on deferred tax assets and fair value of equity-based compensation.
Actual results could differ from those estimates.
Fair
Value of Financial Instruments
Financial
instruments that potentially subject the Company to significant concentrations
of credit risk consist of cash and cash equivalents, short-term investments,
accounts receivable, accounts receivable from related parties, accounts payable
and accrued expenses. At December 31, 2003 and 2004, the fair values of
these financial instruments approximated their carrying values due to the
short-term nature of these instruments.
Revenue
Recognition
Consumer
Content Revenue
Consumer
content revenue consists of content sales made from the Company’s website and
content sold through the Company’s agreement with the Apple iTunes Music Store.
Revenue from the sale of individual content titles is recognized in the period
when the content is purchased. Revenue from the sale of content subscriptions is
recognized pro rata over the term of the subscription period. Revenue from the
sale of monthly AudibleListener memberships is recognized ratably over the
AudibleListener’s monthly membership period. This results in approximately 50%
of the AudibleListener membership fees received during each calendar month being
deferred at month-end and recognized as content revenue in the following month.
Revenue from the sale of UltimateListener, a prepaid discounted content package,
and gift programs are recognized when the content is downloaded.
Point
of Sale Rebates and Discount Certificate Rebates
Part of
the Company’s marketing strategy to acquire new AudibleListeners includes retail
promotions. These retail promotions consist of offering rebates to consumers on
their purchase of digital audio players from certain retailers if the customer
commits to a twelve month AudibleListener membership. These rebates take one of
two forms. The first type, reflected as point of sale rebates on the statement
of operations, relates to a discount given by a third party retailer to a
customer on the purchase of a digital audio player at the point of sale of the
Audible membership. The cost of these rebates is accounted for as a reduction in
content revenue in the period the discount is given. The second type, reflected
as discount certificate rebates on the statement of operations, relates to
retailer promotional codes or retailer gift cards that are given to a customer
by Audible at the time the customer purchases the Audible membership. These
promotional codes are honored by third party retailers and allow the customer to
purchase a digital audio player at a discounted price from the third party
retailer. The gift cards are honored by third party retailers on a future
purchase. The cost of these promotional codes and gift cards is accounted for as
a cost of content revenue when the customer commits to a twelve-month
AudibleListener membership under one of the retailer promotion programs. The
accounting for both types of customer rebates as described above is pursuant to
Emerging Issues Task Force (“EITF”) Issue No. 01-9, “Accounting for
Consideration Given by a Vendor to a Customer (Including a Reseller of the
Vendor’s Products).”
AUDIBLE,
INC.
NOTES
TO FINANCIAL STATEMENTS
DECEMBER
31, 2002, 2003, AND 2004
Services
Revenue
Services
revenue consists of library sales and audio production services. Service revenue
is recognized as services are performed after the agreement has been finalized,
the price is fixed and collectibility is reasonably assured. Collectibility is
based on past transaction history and credit-worthiness of the customer.
Hardware
Revenue
Hardware
revenue consists of sales of AudibleReady digital audio players. Most of the
Company’s AudibleReady digital audio devices are sold at a discount or given
away for free when a customer signs up for a one-year commitment to an
AudibleListener Membership. For multiple-element arrangements in which a
customer signs up for a one year membership and receives an audio player for
free, revenue is recognized using the relative fair value method under EITF
Issue No. 00-21, “Revenue Arrangements with Multiple Deliverables,” whereby each
separate unit of accounting is recognized as revenue at its relative fair value,
where the delivered item (hardware) is limited to the non-contingent
consideration. Since all the consideration paid by the customer is contingent
upon delivery of the content, no amount is recorded as hardware revenue under
these multiple-element arrangements. The free hardware device reflects the
subsidy incurred to acquire a customer with a one-year commitment to
AudibleListener. For players sold separately, hardware revenue is recognized
upon shipment of the device, pursuant to a customer order and credit card
authorization and includes amounts received for shipping and handling.
Related
Party Revenue
Related
party revenue consists of revenue earned under agreements with France Loisirs
(see note 13) and Audible Germany (see note 12). Revenue under the France
Loisirs agreement includes a $1,000,000 technology licensing fee that is being
recognized on a straight-line basis over the initial 24-month term of the
agreement. Revenue under the Audible Germany agreement includes $30,000 earned
per month over the initial 30-month term of the agreement. The Company
recognizes $30,000 per month only after Audible Germany has agreed that the
services delivered for the prior 60-day period were satisfactory and collection
of the amount is reasonably assured. Revenue earned under each of these
agreements also includes reimbursement of certain incremental out-of-pocket
costs incurred by the Company that are billed to France Loisirs and Audible
Germany in accordance with EITF Issue 01-14, “Income Statement Characterization
of Reimbursement Received for ‘Out-of-Pocket’ Expenses Incurred”.
Other
Revenue
Other
revenue for the years ended December 31, 2002, 2003 and 2004, included revenue
from a license granted for certain technology rights to a device manufacturer
which was recognized on a straight-line basis over the term of the agreement
which expired in June 2004. Other revenue for the year ended December 31, 2004
also included revenue from commissions earned by the Company for referring
customers to a retail partner to purchase a digital audio device, which is
recognized in the period when the purchase is completed. Other revenue for the
year ended December 31, 2002 also included profit participation from hard copy
sales of products in connection with the agreement with Random House, which was
recognized upon receipt of the final sales data from Random House.
Shipping
and Handling Costs
Shipping
and handling costs, which consist of costs and fees associated with warehousing,
fulfillment, and shipment of digital audio devices to customers, are recorded as
a component of marketing expense in the Statements of Operations. These costs
totaled $363,560, $383,851 and $486,790, for the years ended December 31, 2002,
2003, and 2004, respectively.
AUDIBLE,
INC.
NOTES
TO FINANCIAL STATEMENTS
DECEMBER
31, 2002, 2003, AND 2004
(4) Property
and Equipment
Property
and equipment at December 31, 2003 and 2004 consists of the following:
| |
|
Balance
as of December 31, 2003 |
|
Balance
as of December 31, 2004 |
|
|
|
|
|
|
|
|
Studio
equipment |
|
$ |
799,145 |
|
$ |
549,359 |
|
|
Computer
server and Web site equipment |
|
|
3,724,554 |
|
|
4,567,189 |
|
|
Office
furniture and equipment |
|
|
1,248,353 |
|
|
850,750 |
|
|
Leasehold
improvements |
|
|
827,317 |
|
|
827,317 |
|
|
Equipment
in process |
|
|
--- |
|
|
28,384 |
|
Total
property and equipment |
|
|
6,599,369 |
|
|
6,822,999 |
|
|
Less
accumulated depreciation and amortization |
|
|
(6,326,518 |
) |
|
(5,903,909 |
) |
|
Total
property and equipment, net |
|
$ |
272,851 |
|
$ |
919,090 |
|
|
|
|
|
|
|
|
|
|
Depreciation
and amortization expense on property and equipment totaled $1,506,815, $498,206,
and $498,959, in 2002, 2003 and 2004, respectively.
As of
December 31, 2003 and 2004, property and equipment of zero and $743,302,
respectively, were held under capital leases.
(5)
Accrued Expenses
The
components of the accrued expenses balance as of December 31, 2003 and 2004 are
are follows:
| |
|
December
31,
2003 |
|
December
31,
2004 |
|
|
Royalties |
|
$ |
1,629,038 |
|
$ |
1,882,039 |
|
|
Retail
rebates and discounts |
|
|
- |
|
|
461,182 |
|
|
Professional
fees |
|
|
221,000 |
|
|
346,000 |
|
|
Revenue
sharing and bounty payments |
|
|
386,740 |
|
|
304,718 |
|
|
Other
accrued expenses |
|
|
211,852 |
|
|
634,617 |
|
| |
|
|
|
|
|
|
|
|
Total
accrued expenses |
|
$ |
2,448,630 |
|
$ |
3,628,556 |
|
(6) Notes
Due from Stockholders for Common Stock
Notes due
from stockholders 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’ (deficit) 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.
Compensation expense was 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.
On
January 29, 2003, the unpaid principal and unpaid interest balance due on these
notes to the Company from stockholders that were employees, net of deductions
from the bonuses due to the employees, was $263,240. On January 29, 2003 the
employees were notified that the Company would not require them to repay the
unpaid principal nor the unpaid interest on the notes payable. The employees
were 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 first quarter of 2003 as a general and
administrative expense. This expense is the net of the total amount forgiven by
the Company, less the combined amount of all accrued interest. Of this $212,566
forgiveness of debt charge, $198,995 was a non-cash charge, with the remaining
$13,571 representing the Company’s payroll tax obligations in connection with
the bonuses paid.
In
addition, for the remaining notes issued to former directors in the amount of
$58,750 not covered under this debt forgiveness, the Company extended the due
dates to December 31, 2003 and reduced the interest rate in 2003 to 4%. In
January 2004, the Company received payment of $3,750 on one of the notes from a
former director. In May 2004, the Company received payment of the last remaining
$55,000 balance of notes outstanding.
AUDIBLE,
INC.
NOTES
TO FINANCIAL STATEMENTS
DECEMBER
31, 2002, 2003, AND 2004
(7) Stockholders’
(Deficit) Equity
Common
Stock
On
February 6, 2004, in connection with the conversion of the outstanding Series A
Preferred Stock (“Series A”), the Company issued 5,836,013 shares of common
stock to Apax Partners (“Apax”). The Series A conversion was the result of a
negotiated agreement under which, in addition to the 4,669,347 shares of common
stock issuable upon conversion of the outstanding Series A shares in accordance
with the terms of conversion, the Company issued to Apax 1,166,666 common shares
of common stock and warrants to purchase 333,333 shares of common stock. Of the
additional 1,166,666 shares issued, 389,863 shares were issued in payment of
cumulative accrued dividends at the date of conversion, and 776,803 shares
together with the warrants to purchase 333,333 shares were issued as an
inducement to Apax to convert its Series A shares. The warrants are exercisable
at $21.00 per share and expire on February 5, 2011. The fair value of the
776,803 shares of common stock and the warrants to purchase 333,333 of
$9,873,394 has been recorded as a charge to the net loss applicable to common
shareholders in the Statement of Operations for the year ended December 31,
2004.
On
February 6, 2004, the Company issued 416,666 shares of common stock to Random
House upon conversion of their outstanding Series B Preferred Stock (“Series B”)
in accordance with the original terms of conversion.
On
November 17, 2004, the Company issued 2,022,500 shares of common stock in
connection with a secondary public offering at a price of $24.50 per share. Net
proceeds received by the Company were $46,456,593 net of direct costs.
At
December 31, 2003 and 2004, the Company had 15,015,518 and 24,169,775,
respectively, common stock shares issued. At December 31, 2003 and 2004, the
Company had 3,862,801 and 3,635,660, respectively, common shares reserved for
common stock warrants and options. Additionally, at December 31, 2003, the
Company had 4,669,347 shares of common stock reserved for the conversion of
outstanding Series A Convertible Preferred Stock, and 416,666 shares of common
stock reserved for the conversion of outstanding Series B Convertible Preferred
Stock.
Prior to
the Company’s initial public offering, shares of common stock outstanding were
purchased under the Company’s Stock Restriction Agreements, which contain
certain restrictions related to the sale and transfer of the shares and certain
vesting and buyback provisions. Under the Stock Restriction Agreements, shares
were purchased by employees and consultants of the Company through the issuance
of full recourse promissory notes. In general, shares sold to employees vest
over a 50-month period, with the Company maintaining an option to repurchase
unvested shares. Shares of common stock were also, on occasion, issued in
exchange for services.
At
December 31, 2002 the balance of notes due from stockholders under the Company’s
Stock Restriction Agreements related to both current employees and several
former directors was $289,545. As of January 29, 2003, the unpaid principal and
unpaid interest balance due on these notes from current 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 or the unpaid interest on the notes. The remaining
notes issued to former directors in the amount of $58,750 were not covered under
this debt forgiveness and were paid in 2004.
Employee
Stock-based Compensation
The
Company has on occasion issued options to purchase shares of common stock to
employees at a price less than the fair value of the stock at the time of
issuance. The difference between the fair value and the price of options issued
is recorded as deferred compensation, a component of stockholders’ equity, and
is amortized as compensation expense straight-line over the vesting term of the
option. When employees who have these options leave the Company, the remaining
unexpensed deferred compensation is reversed against additional paid-in-capital.
During
the years ended December 31, 2002, 2003 and 2004, $293,112, $173,743, and
$85,252 respectively, of compensation expense was recognized related to these
transactions.
AUDIBLE,
INC.
NOTES
TO FINANCIAL STATEMENTS
DECEMBER
31, 2002, 2003, AND 2004
Employee
Stock Incentive Plan
In April
1999, the Company established the 1999 Stock Incentive Plan (the Plan), which
permits up to 3,000,000 shares of common stock 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 4,200,000 shares. The Plan permits the
granting of stock options, stock appreciation rights, restricted or unrestricted
stock awards, phantom stock, performance awards and other stock-based awards.
The majority of the options granted vest over a fifty-month period and expire
ten years from the date of the grant.
A summary
of the stock option activity under the Plan is as follows:
| |
|
|
|
|
|
|
|
|
|
|
Number of Shares |
|
Exercise Price
Per
Share |
|
Weighted Average
Exercise
Price |
|
|
|
|
|
|
Balance,
December 31, 2001 |
|
|
2,003,300 |
|
|
$1.08-$46.68 |
|
|
$9.12 |
|
|
Granted |
|
|
835,666 |
|
|
$0.93-$3.54 |
|
|
$2.85 |
|
|
Canceled |
|
|
(319,629 |
) |
|
$1.17-$46.68 |
|
|
$7.80 |
|
|
Exercised |
|
|
(3,704 |
) |
|
$1.50 |
|
|
$1.50 |
|
|
Balance,
December 31, 2002 |
|
|
2,515,633 |
|
|
$0.93-$46.50 |
|
|
$7.20 |
|
|
Granted |
|
|
1,238,000 |
|
|
$0.66-$12.60 |
|
|
$2.67 |
|
|
Canceled |
|
|
(367,746 |
) |
|
$1.17-$46.50 |
|
|
$11.40 |
|
|
Exercised |
|
|
(238,524 |
) |
|
$0.66-$3.75 |
|
|
$1.83 |
|
|
Balance,
December 31, 2003 |
|
|
3,147,363 |
|
|
$0.66-$38.25 |
|
|
$5.34 |
|
|
Granted |
|
|
277,691 |
|
|
$9.30-$29.70 |
|
|
$12.63 |
|
|
Canceled |
|
|
(23,217 |
) |
|
$0.66-$12.60 |
|
|
$3.92 |
|
|
Exercised |
|
|
(801,506 |
) |
|
$0.66-$16.50 |
|
|
$2.23 |
|
|
Balance,
December 31, 2004 |
|
|
2,600,331 |
|
|
$0.69-$38.25 |
|
|
$6.80 |
|
|
Exercisable: |
|
|
|
|
|
|
|
|
|
|
|
December
31, 2004 |
|
|
315,642 |
|
|
$0.69-$1.98 |
|
|
$1.54 |
|
|
|
|
|
811,412 |
|
|
$2.13-$9.30 |
|
|
$3.24 |
|
|
|
|
|
412,651 |
|
|
$10.05-$38.25 |
|
|
$23.46 |
|
|
|
|
|
1,539,705 |
|
|
$0.69-$38.25 |
|
|
$8.31 |
|
|
|
|
|
A summary
of the total stock options outstanding as of December 31, 2004 is as follows:
|
Number
of Options |
|
Exercise
Price
Per
Share |
|
Weighted
Average
Exercise
Price |
|
Weighted
Average
Remaining
Contractual
Life |
|
|
|
|
|
667,749 |
|
|
$0.69-$1.98 |
|
|
|
|
|
7.95
years |
|
|
1,324,588 |
|
|
$2.13-$9.30 |
|
|
$3.31 |
|
|
7.72
years |
|
|
607,994 |
|
|
$10.05-$38.25 |
|
|
$20.13 |
|
|
6.91
years |
|
|
2,600,331 |
|
|
$0.69-$38.25 |
|
|
$6.80 |
|
|
7.59
years |
|
At
December 31, 2004, approximately 551,000 shares of common stock were available
for future grants under the Plan.
Warrants
The
Company frequently issues common stock warrants to third parties in exchange for
services. The fair values of warrants issued in exchange for services are
determined in accordance with EITF Issue No. 96-18 and are recognized as an
expense under fixed plan or variable accounting using the Black-Scholes pricing
model depending on the terms of the agreements over the periods in which
services are being performed. The assumptions used in the Black-Scholes pricing
model to calculate fair values, including risk-free interest rate and
volatility, were determined using available information on the measurement date.
Expected dividend yield of zero was used for all calculations. For the years
ended December 31, 2002, 2003, and 2004, $1,153,998, $719,357, and $510,744,
respectively, was recognized as expense related to warrants, as follows:
AUDIBLE,
INC.
NOTES
TO FINANCIAL STATEMENTS
DECEMBER
31, 2002, 2003, AND 2004
| |
|
|
|
|
|
|
|
|
2002 |
|
2003 |
|
2004 |
|
|
|
|
|
|
Cost
of content and services revenue |
|
$ |
496,705 |
|
$ |
685,936 |
|
$ |
181,254 |
|
|
Cost
of hardware revenue |
|
|
— |
|
|
— |
|
|
16,417 |
|
|
Marketing
expenses |
|
|
657,293 |
|
|
33,421 |
|
|
313,073 |
|
|
|
|
$ |
1,153,998 |
|
$ |
719,357 |
|
$ |
510,744 |
|
A summary
of the warrant activity for the years ended December 31, 2002, 2003, and 2004 is
as follows:
|
|
|
Number of
Warrants |
|
Exercise Price
Per
Share |
|
Weighted Average
Exercise
Price |
|
|
Balance,
December 31, 2001 |
|
|
$818,542 |
|
|
$0.03-$150.00
|
|
|
|
|
|
Issued |
|
|
425,143 |
|
|
$0.93-$3.45 |
|
|
$3.36 |
|
|
Cancelled |
|
|
(69,271 |
) |
|
$24.00 |
|
|
$24.00 |
|
|
Balance,
December 31, 2002 |
|
|
1,174,414 |
|
|
$0.03-$150.00 |
|
|
$10.89 |
|
|
Exercised |
|
|
(430,643 |
) |
|
$0.96-$3.03 |
|
|
$2.94 |
|
|
Issued |
|
|
6,333 |
|
|
$0.60-$0.99 |
|
|
$0.84 |
|
|
Expired |
|
|
(34,666 |
) |
|
$27.00 |
|
|
$27.00 |
|
|
Balance,
December 31, 2003 |
|
|
715,438 |
|
|
$0.03-$150.00 |
|
|
$14.55 |
|
|
Exercised |
|
|
(81,108 |
) |
|
$0.60-$2.73 |
|
|
$1.77 |
|
|
Issued |
|
|
400,999 |
|
|
$1.50-$21.00 |
|
|
$17.98 |
|
|
Balance,
December 31, 2004 |
|
|
1,035,329 |
|
|
$0.03-$150.00 |
|
|
$16.96 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
Exercisable: |
|
|
|
|
|
|
|
|
|
|
|
December
31, 2004 |
|
|
388,718 |
|
|
$0.03-$4.50 |
|
|
$3.01 |
|
|
|
|
|
217,168 |
|
|
$9.75-$17.67 |
|
|
$17.21 |
|
|
|
|
|
429,443 |
|
|
$21.00-$150.00 |
|
|
$29.29 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,035,329 |
|
|
$0.03-$150.00 |
|
|
$16.89 |
|
Of the
81,108 warrants exercised in 2004, 43,443 were exercised through cashless
transactions in accordance with the original terms of the warrant agreements.
Accordingly, the number of common stock shares issued as result of these
cashless exercises was 39,888. In 2003, 22,000 warrants were exercised through
cashless transactions resulting in the issuance of 14,083 common shares. No
warrants were exercised during 2002.
A summary
of the total common stock warrants outstanding as of December 31, 2004 is as
follows:
| |
|
|
|
|
|
|
|
|
Number
of Warrants |
|
Exercise
Price Per Share |
|
Weighted
Average Exercise Price |
|
Weighted
Average RemainingContractual Life |
|
|
|
|
388,718 |
|
|
$
0.03-$ 4.50 |
|
|
$
3.01 |
|
|
2.74
years |
|
217,168 |
|
|
$
9.75-$ 17.67 |
|
|
$
17.21 |
|
|
2.42
years |
|
|
429,443 |
|
|
$21.00-$150.00 |
|
|
$
29.29 |
|
|
5.25
years |
|
|
1,035,329 |
|
|
$
0.03-$150.00 |
|
|
$
16.89 |
|
|
3.71
Years |
|
Convertible
Preferred Stock
Series
A
In
February 2001, Microsoft purchased 2,666,666 shares of Series A Preferred stock
(“Series A”) for $10,000,000 at a per share price of $3.75. Each share of Series
A was originally convertible into one and one-third shares of common stock,
(equivalent to a price of $2.8125 per share), subject to adjustment under
certain conditions. As a result of the investment in the Company made by Special
Situations Funds in the first quarter of 2002, the conversion rate was adjusted
as per the Series A Certificate of Designation to 1.3441 shares of Common Stock
for each share of Series A stock. The stock was convertible at the option of the
holder at any time. Dividends were payable semi-annually at an annual rate of
12% in either additional preferred shares or in cash at the option of the
Company. On the fifth anniversary of the original issue date, the Company was
required to redeem all remaining outstanding shares at a per share price of
$3.75 plus all accrued and unpaid dividends. As of August 2003, the Company had
issued to Microsoft an aggregate of 807,301 additional shares of Series A in
respect of the dividends payable through June 1, 2003.
AUDIBLE,
INC.
NOTES
TO FINANCIAL STATEMENTS
DECEMBER
31, 2002, 2003, AND 2004
In August
2003, Apax Partners purchased from Microsoft the 3,473,967 then-outstanding
shares of Audible Series A Preferred Stock and agreed to certain amendments to
the security. As amended, the Series A was no longer mandatorily redeemable,
therefore the Series A was reclassified into permanent equity, was convertible
at any time by the holders into shares of common stock, and dividends would
accrue and compound semi-annually for a period of four years at the rate of 12%
per annum. In the event of the conversion of the Series A, all accrued but
unpaid preferred dividends would have converted into shares of common stock. In
liquidation, the Series A ranked pari passu with the Company’s Series B
Preferred Stock.
On
February 6, 2004, Apax Partners converted all of its Series A and accrued
dividends into 4,669,347 shares of common stock. The Series A conversion was the
result of a negotiated agreement with the Company, where the Company issued
1,166,666 shares and 333,333 warrants to purchase common stock to Apax Partners.
Of the common shares issued, 389,863 were issued as dividends due at the date of
conversion, and 776,803 shares and 333,333 warrants were issued as an inducement
to Apax Partners to immediately convert its Series A shares. The 333,333
warrants are exercisable at $21.00 and expire on February 5, 2011. The fair
value of the 776,803 shares of common stock and the 333,333 warrants of
approximately $9,873,374 was determined in accordance with EITF Issue No. 96-18
and this expense is included in the charges related to conversion of convertible
preferred stock in the accompanying 2004 statement of operations.
Series
B
In March
2002, the Company issued 1,250,000 shares of Series B Preferred Stock (“Series
B”) in connection with an amendment to its contract with Random House (see note
11). At any time on or after March 26, 2004, subject to certain conditions, all
outstanding shares of Series B stock were to automatically convert to shares of
common stock at the then effective conversion price. Effective August 2003, the
Series B stock ranked pari passu with the Company’s Series A and Series C
preferred stock. On February 6, 2004 Random House converted the Series B into
416,666 shares of common stock in accordance with the original terms of
conversion.
Series
C
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 Preferred Stock (“Series C”) at a per share price of $5.40.
Proceeds received by the Company, net of direct costs, were approximately
$5,859,772. Each share of Series C stock was convertible into three and
one-third shares of common stock. The Series C stock is entitled to receive
dividends that 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 would have converted
into shares of common stock. In liquidation, the Series C stock ranked 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 $0.39 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 accompanying 2003 Statement of Operations
within net loss applicable to common shareholders, with the credit to additional
paid-in capital.
The
Series C stock automatically converted to common stock on December 23, 2003. The
automatic conversion was triggered in accordance with terms based on the average
price and average trading volume of the company’s common stock over a 60-day
period. Upon conversion all 1,111,111 outstanding shares of Series C were
converted into 3,703,703 shares of common stock. In addition, at conversion
date, all accrued dividends were due to be paid in common stock. Upon
conversion, 88,278 shares of common stock were issued to satisfy accrued
dividends. The common stock issued was valued at $9.87 per share, the closing
price of the common stock on the conversion date. This $871,308 expense is
included in the dividends on preferred stock in the accompanying 2003 Statement
of Operations.
Amendment
to Certificate of Incorporation
On March
12, 2002, stockholders of Audible approved an amendment to the Company’s Amended
and Restated Certificate of Incorporation to increase the number of authorized
shares of common stock from 16,666,666 shares to 25,000,000 shares. On September
25, 2003, stockholders of Audible approved an amendment to the Company’s Amended
and Restated Certificate of Incorporation to increase the number of authorized
shares on common stock from 25,000,000 shares to 40,000,000 shares.
Special
Situation Funds Investment
On
February 15, 2002, Special Situations Funds purchased 1,356,589 shares of common
stock for $3,500,000 at a per share price of $2.58. Net proceeds received by the
Company were $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 406,977 shares of common stock. The
warrants were exercisable at a price of $3.45 per share anytime prior to
the fifth anniversary of the issue date. As a result of the issuance of the
Series C Preferred Stock at a conversion price of $1.62, the exercise price of
the Special Situation Fund’s warrants was adjusted down to $3.03 per share in
accordance with the original terms. The Company had the right to demand the
warrant holder exercise its rights in the event that the closing bid price of a
share of the Company’s common stock exceeds $6.90 for twenty consecutive trading
sessions.
AUDIBLE,
INC.
NOTES
TO FINANCIAL STATEMENTS
DECEMBER
31, 2002, 2003, AND 2004
On
November 26, 2003, as a result of the price of the Company’s common stock
exceeding $6.90 for twenty consecutive trading sessions, the Company called
these warrants. Special Situations Fund exercised all 406,977 outstanding
warrants and on December 2, 2003 paid the Company $1,233,139 in exchange for the
issuance of 406,977 shares of common stock.
(8) Income
Taxes
There is
no federal provision for income tax expense in 2002 or 2003 due to the
Company’s net losses in each of those years. Income tax expense in 2004 was
$1,330. As a result of selling certain of its New Jersey state income tax loss
benefits for cash, the Company realized $313,580, $250,408, and
$723,724, in state income tax benefits during the years ended December 31,
2002, 2003 and 2004, respectively.
The
difference between the actual income tax benefit and that computed by applying
the U.S. federal income tax rate of 34% to pretax loss is summarized below:
|
|
|
Year
Ended December 31, |
|
|
|
|
2002 |
|
2003 |
|
2004 |
|
|
Computed
“expected” tax (benefit) expense |
|
$ |
(5,950,271 |
) |
$ |
(1,295,378 |
) |
$ |
442,783 |
|
|
(Increase)
decrease in tax (benefit) expense resulting from: |
|
|
|
|
|
|
|
|
|
|
|
State
tax benefit, net of federal benefit |
|
|
(206,962 |
) |
|
(165,269 |
) |
|
(476,328 |
) |
|
Increase/(decrease)
in the federal valuation allowance |
|
|
5,839,000 |
|
|
1,205,000 |
|
|
(691,963 |
) |
|
Permanent
differences |
|
|
4,653 |
|
|
5,239 |
|
|
3,114 |
|
|
|
|
|
(313,580 |
) |
$ |
(250,408 |
) |
$ |
(722,394 |
) |
The tax
effects of temporary differences that give rise to significant portions of the
deferred tax assets and liabilities as of December 31, 2003 and 2004 are as
follows:
|
|
|
December
31, |
|
|
|
|
2003 |
|
2004 |
|
Deferred
tax assets: |
|
|
|
|
|
|
Net
operating loss carryforwards |
|
$ |
45,504,000 |
|
$ |
48,977,000 |
|
|
Capitalized
research and developmental costs |
|
|
166,000 |
|
|
44,000 |
|
|
Book
depreciation in excess of tax depreciation |
|
|
1,331,000 |
|
|
864,000 |
|
|
Deferred
compensation and accrued vacation |
|
|
88,000 |
|
|
68,000 |
|
|
Advances |
|
|
148,000 |
|
|
--- |
|
|
Other,
net |
|
|
232,000 |
|
|
136,000 |
|
|
Total
deferred tax assets |
|
|
47,469,000 |
|
|
50,089,000 |
|
|
|
|
|
|
|
|
|
|
|
Deferred
tax liability: |
|
|
|
|
|
|
|
|
Prepaid
expense |
|
|
--- |
|
|
(234,000 |
) |
|
Net
deferred tax assets |
|
|
47,469,000 |
|
|
49,855,000 |
|
|
|
|
|
|
|
|
|
|
|
Less
valuation allowance: |
|
|
|
|
|
|
|
|
Federal |
|
|
38,608,000 |
|
|
41,760,000 |
|
|
State |
|
|
8,861,000 |
|
|
8,095,000 |
|
|
Total
valuation allowance |
|
|
47,469,000 |
|
|
49,855,000 |
|
|
Net
deferred taxes |
|
$ |
— |
|
$ |
— |
|
In
assessing the realizability of deferred tax assets, the Company considers
whether it is more likely than not that some portion or all of the deferred tax
assets will not be realized. The ultimate realization of deferred tax assets is
dependent upon the generation of future taxable income during the periods in
which those temporary differences become deductible. Based on the Company’s
historical net losses, management believes it is more likely than not that the
Company will not realize the benefits of these deferred tax assets and,
accordingly, a full valuation allowance, which increased by $7,325,000,
$1,386,000 and $2,386,000, in 2002, 2003, and 2004 respectively, has been
recorded on the deferred tax assets as of December 31, 2003 and 2004.
AUDIBLE,
INC.
NOTES
TO FINANCIAL STATEMENTS
DECEMBER
31, 2002, 2003, AND 2004
Of the
deferred tax asset and valuation allowance related to Federal and State net
operating loss carry forwards, approximately $4,840,000 relates to a current
year tax deduction attributable to stock options and warrants. The company will
increase paid-in capital when these benefits are realized. The change in federal
valuation allowance for the year ended December 31, 2004 includes $3,827,000
attributable to current tax deductions related to stock option activity. An
income tax benefit of $692,000 was recognized in the actual income tax provision
due to a decrease in the federal valuation allowance that was associated with a
corresponding decrease in the related deferred tax assets.
As of
December 31, 2004, the Company has net operating loss carry-forwards for federal
income tax purposes of approximately $120,782,000, which begin to expire in 2010
if not used to offset future taxable income. As of December 31, 2004, the
Company has net operating loss carry-forwards for New Jersey income tax purposes
of approximately $87,901,000, which begin to expire in 2008 if not used to
offset future taxable income. The Company has experienced certain ownership
changes, which, under the provisions of Section 382 of the Internal Revenue Code
of 1986, as amended, result in an annual and aggregate limitation on the
Company’s ability to utilize its net operating losses in the future. The Company
is currently conducting a study to determine the extent of the
limitations.
(9) Services
Agreement
In June
1999, in connection with a services agreement, the Company issued a warrant to
purchase 50,000 shares of common stock at $0.03 per share, which was fully
vested, and a warrant to purchase 166,666 shares of common stock at $24.00 per
share, which was subject to vesting over a three-year period. The agreement
allows for an additional warrant to purchase 83,333 shares of common stock at
$24.00 per share upon extension of the agreement for an additional year, also
subject to vesting. In addition to the warrants, the agreement also allowed for
the purchase of 50,000 shares of common stock at the IPO price of $27.00 per
share on the IPO date. In January 2001, the services agreement was amended,
whereby the warrant to purchase 166,666 shares of common stock was cancelled and
a new warrant to purchase 133,333 shares of common stock at $2.73 per share was
issued. The second warrant to purchase 133,333 shares of common stock at $2.73
per share vested over a 20-month period ending January 2003.
The fair
value of these warrants and purchase option was determined in accordance with
EITF Issue No. 96-18 and was being amortized as an expense on a straight-line
basis using variable plan accounting over the remaining term of the service
agreement. During the years ended December 31, 2002, and 2003, $479,869, and
$20,296, respectively, was recorded primarily as a marketing expense related to
this agreement with the non-cash credit for services to additional paid-in
capital. There was no expense related to this agreement during the year ended
December 31, 2004.
(10) Amazon
Agreement
In
January 2000, the Company entered into two agreements with Amazon.com. Under the
Co-Branding, Marketing and Distribution Agreement the Company was the exclusive
provider of digital spoken audio (as defined) to Amazon.com. On January 24,
2002, the Company signed Amendment No.1 to its Co-Branding, Marketing, and
Distribution Agreement with Amazon.com. Under the amendment, the annual fee for
Year 3 (which ended January 24, 2003) of the agreement was reduced from
$10,000,000 to $1,500,000 and an additional fee of $1,000,000 was payable in
Year 2 of the agreement. Also in connection with Amendment No.1, the Company
issued 166,667 fully vested common stock warrants to Amazon.com at an exercise
price of $4.50 per share, which became exercisable after January 31, 2003. The
fair value of these warrants was determined in accordance with EITF Issue No.
96-18 and was amortized as an expense on a straight-line basis over the
remaining term of the agreement which ended in January 2003. During the years
ended December 31, 2002, 2003, and 2004, $172,800, $14,400, and none,
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 three-year term of this agreement, as amended, in consideration for certain
services, Amazon.com received $22,500,000 plus a specified percentage of revenue
earned over a specified amount. Under the Securities Purchase Agreement,
Amazon.com purchased 446,677 shares of common stock from the Company for
$20,000,000. Under the agreements, the consideration due from Amazon.com 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 two of $10,000,000 plus the additional
$2,500,000 payment required under the amendment, or $12,500,000, was amortized
on a straight-line basis over the remaining term of the agreement of 24 months,
which ended in January 2003. During the years ended December 31, 2002, 2003, and
2004, $5,000,000, $416,667, and none, respectively, was recorded as a marketing
expense related to the straight-line amortization of the non-cash portion of
deferred services. During the years ended December 31, 2002, 2003, and 2004,
$1,250,000, $104,167, and none, respectively, was recorded as a marketing
expense representing the straight-line amortization of the cash portion of
payments due under this agreement.
AUDIBLE,
INC.
NOTES
TO FINANCIAL STATEMENTS
DECEMBER
31, 2002, 2003, AND 2004
(11) Random
House, Inc. 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, 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 subsidiary Random House Ventures, LLC, purchased
56,593 shares of Audible common stock from the Company for $1,000,000. Over the
term of the agreement Audible was to contribute toward 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 from the Company
under the agreement from $4,000,000 to $2,750,000. In exchange for this waiver,
under the amendment the Company issued 1,250,000 shares of Series B stock to
Random House Ventures. If they had not been converted, as described above, then
on March 26, 2004 all outstanding shares of Series B stock would have
automatically converted to shares of common stock at the then effective
conversion price. Through December 31, 2002, $1,250,000 of the $2,750,000
obligation had been paid, with the remaining amount of $1,500,000 due in 2003
and 2004. On February 10, 2003, the agreement was further amended so that
Audible was no longer required to pay the $1,500,000 in imprint fees that were
due in 2003 and 2004.
The fair
value of the Series B stock issued was determined in accordance with EITF Issue
No. 01-1, “Accounting for a Convertible Instrument Granted or Issued to a
Nonemployee for Goods or Services or a Combination of Goods or Services and
Cash”. Accordingly, using the measurement date of March 26, 2002, the fair value
of the Series B stock issued was determined to be $1,137,500. On April 1, 2002
when the Series B was issued, the Company recorded $547,500 (the difference
between the fair value of the shares and the previously recognized accrued
liability of $590,000) as deferred services, a component of stockholders’
equity. During the years ended December 31, 2002 and 2003, $922,497, and a
credit of $134,997, respectively, representing the reversal of the accrual, was
recorded as a credit to cost of content and services revenue related to this
agreement. There was no expense related to this agreement during the year ended
December 31, 2004.
The
original agreement further provided for Random House to be granted a warrant to
purchase 292,777 shares of Audible common stock at various exercise prices that
vest over the term of the agreement as well as the granting of additional
warrants to Random House to purchase Audible common shares based on future
performance. The fair value of these warrants was determined in accordance with
EITF Issue No. 96-18 and is being amortized as an expense on a straight-line
basis over the 50-month term of the agreement. The warrants are accounted for
using variable plan accounting whereby compensation costs vary each accounting
period until the final measurement date. During the years ended December 31,
2002 and 2003, $448,336, and $680,728, 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. There was no expense related to this
warrant during the year ended December 31, 2004.
The
Company and Random House continue to operate under the general terms of the
agreement, which expired on June 30, 2004, with the exception that the works
produced under the imprint are no longer exclusive to Audible.
(12)
Audible
Germany Agreement
On August
30, 2004, the Company, Verlagsgruppe Random House GmbH (“Random House”) and
Holtzbrinck Networxs AG (“Holtzbrinck”) entered into a joint venture agreement
(the “Joint Venture”) to form Audible GmbH (“Audible Germany”). Random House is
an affiliate of Bertelsmann AG. Bertelsmann AG and its affiliates own
approximately 5.8% of Audible’s common stock, inclusive of certain common stock
warrants held by the entities.
Audible
Germany will have the exclusive rights to operate a German language Audible
website. Under the Joint Venture, Random House and Holtzbrinck each contributed
approximately $16,542 in exchange for each receiving a 24.5% interest in Audible
Germany. The Company was required to contribute $34,384 in exchange for a 51%
interest in Audible Germany. After the initial formation, Random House and
Holtzbrinck will provide additional financing of approximately $1,490,000 each
in certain installments, subject to Audible Germany meeting certain milestones.
In the event of liquidation of Audible Germany, this additional financing by
Random House and Holtzbrinck accrues interest at 8% per annum and is senior to
Audible’s capital investment. The Company may, but is not obligated to,
contribute additional capital to the entity. Any profits distributed by Audible
Germany are to be distributed in accordance with the ownership interests.
AUDIBLE,
INC.
NOTES
TO FINANCIAL STATEMENTS
DECEMBER
31, 2002, 2003, AND 2004
The
Company has determined that Audible Germany is not a variable interest entity as
defined in FASB Interpretation No. 46R, “Consolidation of Variable Interest
Entities, an interpretation of ARB No. 51” (“FIN 46R”) because, as a development
stage enterprise, Audible Germany will have sufficient equity to permit it to
finance the activities in which it is currently engaged in without additional
subordinated financial support. In addition, the other criteria within FIN 46R
that would characterize Audible Germany as a variable interest entity have not
been met. Rather, Audible Germany is a voting interest entity.
Under
EITF 96-16, “Investor’s Accounting for an Investee When the Investor has a
Majority of the Voting Interest but the Minority Shareholder or Shareholders
Have Certain Approval or Veto Rights”, the Company has determined that the
minority shareholders, together, have significant participatory rights, allowing
them to participate in significant decisions of Audible Germany and to block
significant decisions proposed by Audible. As a result of the significant
participatory rights held by the minority shareholders, the Company does not
have unilateral control over Audible Germany. Therefore, Audible does not
consolidate the results of Audible Germany but rather accounts for its
investment in Audible Germany under the equity method of accounting. Under the
equity method of accounting, the Company records 51% of the profits, if any, and
51% of the equity losses but only until such time that the Company records
losses equal to the initial investment of the Company plus any profits
previously recorded. Audible has no further obligation to fund the operations of
Audible Germany. The Company will continue to monitor its portion of unreported
equity losses in the event that Audible Germany subsequently generates income.
The Company would resume applying the equity method after its share of profits
equals the unreported equity method losses.
In
connection with the Joint Venture, on August 30, 2004, the Company entered into
a license and services agreement with Audible Germany (the “License”). Under the
License, Audible Germany intends to launch a German language spoken word audio
service. The terms provide for the Company to provide intellectual property and
substantially all of the technological infrastructure for the operation of the
service. In return, Audible Germany is required to pay Audible $30,000 each
month for a period of 30 months, beginning in September 2004. Every 60-days
during this agreement, the parties will meet to review and accept the services.
The monthly payments are subject to refund if Audible Germany does not accept
the services, subject to reasonable cure. Under the License, Audible recognizes
$30,000 of revenue per month but only after Audible Germany has agreed that the
services delivered for the prior 60-day period were satisfactory and collection
of the amount is reasonably assured. Also under the License, Audible Germany
will pay the Company royalties ranging from 0.5% to 3% of revenue up to an
annual royalty cap of the U.S. dollar equivalent of €1.5 million, subject to
Audible Germany achieving certain operating margins.
During
the year ended December 31, 2004 the Company recognized $90,000 under the
license agreement as the services were deemed to have been delivered and
accepted. In addition, the Company also recognized $72,554 in billings for
certain incremental reimbursable costs incurred in connection with the License
in accordance with EITF 01-14. These amounts are included in related
party revenue on the 2004 Statements of Operations.
The
Company recorded its 51% share of the equity losses of Audible Germany. As a
result, the Company recorded losses attributable to Audible Germany equal to
$34,384, the amount of the initial investment and the full investment was
reduced to zero on the Balance Sheet as of December 31, 2004. This expense is
included in General and Administrative expense for the year ended December 31,
2004.
(13)
France
Loisirs Agreement
On
September 15, 2004, the Company, France Loisirs S.A.S. (“France Loisirs”) and
Audio Direct S.A.S., a wholly owned subsidiary of France Loisirs (“Audio
Direct”), entered into a 24-month Master Alliance Agreement (the “Agreement”).
France Loisirs is a wholly owned subsidiary of Bertelsmann AG. Bertelsmann AG
and its affiliates own 5.8% of Audible’s common stock, inclusive of certain
common stock warrants held by the entities.
Under the
Agreement, France Loisirs intends to launch a French language spoken word audio
service through Audio Direct. The terms provide for Audible to provide
intellectual property and substantially all of the technological infrastructure
for the operation of the service. In return, France Loisirs is required to pay
Audible $1,000,000, payable as follows: $250,000 in September 2004, $250,000 in
October 2004, $250,000 in January 2005 and $20,833 for each of the following 12
months. Commencing the first fiscal year after the business achieves positive
net income, the Company will receive a royalty of 5% of the business’s net paid
revenue. Net paid revenue means net revenues for digital spoken word content
after the deduction of taxes but excluding certain hardware revenue. The 5%
royalty will apply until the business’s net paid revenue exceeds €20,000,000.
Once net paid revenue exceeds €20,000,000, the Company will receive a flat fee
of €1,000,000. If net paid revenue exceeds €33,300,000, the Company will receive
a royalty payment of €1,000,000, plus 3% of net paid revenue in excess of
€33,300,000. An additional royalty is payable equal to one-half of the
distributable pre-tax profits of the business.
AUDIBLE,
INC.
NOTES
TO FINANCIAL STATEMENTS
DECEMBER
31, 2002, 2003, AND 2004
FIN46R
addresses the consolidation by business enterprises of variable interest
entities (VIEs) and requires that if an enterprise is the primary beneficiary of
a variable interest entity, the assets, liabilities, and results of the
activities of the variable interest entity should be consolidated in the
financial statements of the enterprise.
Audio
Direct is considered a VIE because its equity is not sufficient to permit the
entity to finance its activities without additional subordinated financial
support. Audible and France Loisirs form a related party group, as defined in
FIN 46R, as a result of the Bertelsmann affiliation and the number of seats that
Bertelsmann holds on the Audible Board of Directors. Under FIN 46R, the entity
within the related party group that is most closely associated with the variable
interest entity is the primary beneficiary.
Based
upon analysis, the Company determined that France Loisirs is more closely
associated with Audio Direct, primarily because France Loisirs is required to
fund the operations of Audio Direct, including the $1,000,000 payment due to
Audible. France Loisirs is therefore considered to be the primary beneficiary of
Audio Direct. As a result, the Company does not consolidate the results of Audio
Direct but rather accounts for its variable interest in Audio Direct under the
cost method of accounting.
Because
the Company has not made and is not required to provide any funding to France
Loisirs or Audio Direct, it has no exposure to loss under the Agreement.
The
$1,000,000 in fees are non-refundable and not subject to any acceptance
provisions. Since fair values do not exist for the different services (elements)
that Audible is providing, the services are considered one unit of accounting
under EITF 00-21 and accordingly, the $1,000,000 in fees is recognized as
related party revenue on a straight-line basis over the 24-month term at the
rate of $41,667 per month, provided collectibility is reasonably assured.
During
the year ended December 31, 2004, $145,832 of revenue was recognized in
connection with this agreement, representing the straight-line recognition of
$1,000,000 in revenue being recognized over the 24-month term of the agreement.
In addition, the Company also recognized $53,784 in billings for certain
incremental reimbursable costs incurred in connection with the license in
accordance with EITF 01-14. These amounts are included in related
party revenue on the 2004 Statements of Operations.
(14) Employee
Benefit Plan
The
Company has a 401(K) plan based on contributions from employees and
discretionary Company contributions. As of December 31, 2004, the Company had
not contributed to the 401(K) plan to date. Beginning January 1, 2005, the
Company has adopted a policy to match up to the first two percent of salary
contributions made from employees into the 401(K) plan.
(15) Commitments
and Contingencies
Lease
Obligations
The
Company has an operating lease on its office space that expires in December
2008. The lease contains a renewal options for a period of three years. Future
minimum lease obligations under these lease arrangements are
$1,525,391.
Rent
expense of $449,072, $466,229, and $371,102, was recorded under operating leases
for the years ended December 31, 2002, 2003 and 2004, respectively.
The
Company is obligated under capital leases covering equipment that expire at
various dates during the next year. The Company did not have any assets held
under capital leases as December 31, 2003. At December 31, 2004, the gross
amount of plant and equipment and related accumulated amortization recorded
under capital leases were as follows:
| |
|
2004 |
|
|
Computer
server and website equipment |
|
$ |
743,302 |
|
|
Less:
accumulated amortization |
|
|
189,483 |
|
|
Total
computer server and website equipment, net |
|
$ |
553,819 |
|
Future
minimum lease payments under capital leases as of December 31, 2004 are as
follows:
| |
|
Capital
Leases |
|
|
Year
ending December 31, |
|
|
|
|
2005 |
|
$ |
122,292 |
|
|
2006 |
|
|
— |
|
|
2007 |
|
|
— |
|
|
2008 |
|
|
— |
|
|
Total
minimum capital lease payments |
|
|
122,292 |
|
|
Less:
amount representing interest (at a rate of 6%) |
|
|
1,497 |
|
|
Present
value of net minimum capital lease payments |
|
|
120,795 |
|
|
Less:
current installments of obligations under capital leases |
|
|
120,795 |
|
|
Obligations
under capital leases, excluding current installments |
|
$ |
— |
|
AUDIBLE,
INC.
NOTES
TO FINANCIAL STATEMENTS
DECEMBER
31, 2002, 2003, AND 2004
License
Agreements
The
Company has entered into several agreements with certain consumer electronics
and computer companies to license and promote the AudibleReady software for
handheld electronic players. Under the terms of these agreements, the Company is
required to pay the device manufacturers a percentage of the revenue related to
the content downloaded by the purchasers of these AudibleReady players. These
revenue-sharing arrangements typically last one or more years from the date the
player user becomes an Audible customer.
Inventory
Purchase
The
Company has entered into a commitment to purchase certain inventory units from a
third party digital player manufacturer. These devices will primarily be given
to customers for free when they sign up for a one-year commitment to an
AudibleListener Membership.
Summary
of Cash Commitments and Obligations
The
following table shows future cash payments due under our commitments and
obligations as of December 31, 2004.
|
Year |
|
Operating
Leases
|
|
Capital
Lease (1) |
|
Royalty
Obligations |
|
Inventory
Purchase
|
|
Total
|
|
|
2005 |
|
$ |
352,889 |
|
$ |
122,292
(1 |
) |
$ |
150,800
(2 |
) |
$ |
187,760 |
|
$ |
813,741 |
|
|
2006 |
|
|
375,656 |
|
|
— |
|
|
38,000
(2 |
) |
|
— |
|
|
413,656 |
|
|
2007 |
|
|
398,423 |
|
|
— |
|
|
— |
|
|
— |
|
|
398,423 |
|
|
2008 |
|
|
398,423 |
|
|
— |
|
|
— |
|
|
— |
|
|
398,423 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
1,525,391 |
|
$ |
122,292 |
|
$ |
188,800 |
|
$ |
187,760 |
|
$ |
2,024,243 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1): |
The
principal portion of these payments is reflected in current liabilities on
the accompanying December 31, 2004 Balance
Sheet. |
|
(2): |
Reflected
in current and non-current liabilities respectively, on the accompanying
December 31, 2004 Balance Sheet. |
Contingencies
In June
2001, Audible, Inc. 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 as well as certain officers, 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 Litigations”). 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. An amended complaint was filed April 19, 2002. The
Company and the officers, directors, and former directors were named in the
suits pursuant to Section 11 of the Securities Act of 1933, Section 10(b) of the
Exchange Act of 1934, and other related provisions. 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 IPO Litigations. 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. The individual officers,
directors and former director defendants in the IPO Litigation signed a tolling
agreement and were dismissed from the action without prejudice on October 9,
2002.
AUDIBLE,
INC.
NOTES
TO FINANCIAL STATEMENTS
DECEMBER
31, 2002, 2003, AND 2004
In June
2003, a proposed settlement of this litigation was structured between the
plaintiffs, the issuer defendants in the consolidated actions, the issuer
officers and directors named as defendants, and the issuers’ insurance
companies. The settlement would provide, among other things, a release of the
Company and of the individual defendants for the conduct alleged 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.
In June
2004, an agreement of settlement was submitted to the Court for preliminary
approval. The court requested that any objections to preliminary approval of the
settlement be submitted by July 14, 2004, and the underwriter defendants
formally objected to the settlement. The plaintiffs and issuer defendants
separately filed replies to the underwriter defendants’ objections to the
settlement on August 4, 2004. The court granted the preliminary approval motion
on February 15, 2005, subject to certain modifications. The parties are directed
to report back to the court regarding the modifications. If the parties are able
to agree upon the required modifications, and such modifications are acceptable
to the court, notice will be given to all class members of settlement, a
“fairness” hearing will be held and if the Court determines that the settlement
is fair to the class members, the settlement will be approved. There can be no
assurance that this proposed settlement would be approved and implemented in its
current form, or at all.
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.
On
February 22, 2005, a purported class action complaint was filed in the United
States District Court for the District of New Jersey by Dennis Carter on behalf
of himself and all other similarly situated investors against Audible, Inc., its
Chief Executive Officer and Chief Financial Officer. The complaint alleges
violations of sections 10(b) and 20(a) of the Securities Exchange Act of 1934,
and Securities and Exchange Commission Rule 10b-5, and alleges that the
defendants did not make complete and accurate disclosures concerning the
Company’s future plans and prospects. The plaintiff seeks unspecified damages on
behalf of a purported class of purchasers of the Company's securities
during the period from November 2, 2004 through February 15, 2005. It is
possible that additional complaints may be filed in the future. The Company
expects that all individual lawsuits will be consolidated into a single civil
action. The Company believes that the complaint is without merit and intends to
defend the litigation vigorously. Due to the inherent uncertainties of
litigation and because the litigation is at a preliminary stage, the
Company cannot accurately predict the ultimate outcome of this
matter.
On March
23, 2005, Digeo, Inc., a Delaware corporation, filed, but did not serve, a
complaint for patent infringement in Federal District Court in the State of
Washington. The Company believes the claims made in the complaint are without
merit and will not have a material adverse impact on the financial position or
results of operations.
The
Company is not otherwise a party to any lawsuit or proceeding which it believes
is likely to have a material effect on its business.
(16) Customer
Concentration
During
the year ended December 31, 2004, Apple Computer accounted for 11% of total
revenue. During the years ended December 31, 2002 and 2003, there were no
customers who accounted for more than 10% of total revenue.
As of
December 31, 2003 and 2004, Apple Computer accounted for 55% and 67%,
respectively, of the Company's accounts receivable.
(17) Supplemental
Disclosure of Cash Flow Information
The
following supplemental information relates to the Statements of Cash Flows for
the years ended December 31, 2002, 2003 and 2004:
Non-Cash
Financing and Investing Activities
Capital
lease obligations of $743,302 were incurred during the year ended December 31,
2004, when the Company entered into leases for new property and equipment. No
capital leases were entered into during the 2002 or 2003 period.
Reversal
of unused accrued expense related to the Company’s Series C financing of $7,500
was recorded to additional paid-in capital during the year ended December 31,
2004.
In
February 2004, Apax Partners converted all of its Series A Preferred Stock and
accrued dividends, valued at $13,027,375, into 4,669,347 shares of common stock.
The conversion was the result of a negotiated agreement with Apax Partners and
the Company, where the Company issued 1,166,666 shares and 333,333 warrants to
purchase common stock. Of the common shares issued, 389,863 shares were issued
as dividends due at the date of conversion, and 776,803 shares and 333,333
warrants were issued as an inducement convert the Series A shares. The total
dividends and inducement was valued at $13,850,000.
In
February 2004, Random House converted the 1,250,000 shares of Series B Preferred
Stock, originally issued in March 2002, valued at $1,137,500, converted into
416,666 shares of common stock in accordance with the original terms of the
conversion.
During
2004, 43,443 warrants were exercised through cashless transactions in accordance
with the original terms of the warrant agreements. Accordingly, the number of
common stock issued as a result of these cashless exercises was 39,888 shares,
which have a par value of $398.
AUDIBLE,
INC.
NOTES
TO FINANCIAL STATEMENTS
DECEMBER
31, 2002, 2003, AND 2004
Cash
Paid for Interest
Interest
expense paid was $32,221 during the year ended December 31, 2004. No interest
expense was paid during the 2002 or 2003 period.
(18) Quarterly
Results (UNAUDITED)
The
following tables contain select unaudited quarterly financial data for each
quarter of 2003 and 2004. The operating results for any quarter are not
necessarily indicative of results for any future period.
|
|
YEAR
ENDED DECEMBER 31, 2003 |
|
|
|
|
1st
Quarter |
|
2nd
Quarter |
|
3rd
Quarter |
|
4th
Quarter |
|
|
Revenue,
net |
|
$ |
4,109,022 |
|
$ |
4,426,719 |
|
$ |
4,962,582 |
|
$ |
5,826,155 |
|
|
Cost
of content and services revenue |
|
|
965,629 |
|
|
1,137,954 |
|
|
1,331,162 |
|
|
1,884,174 |
|
|
Cost
of hardware revenue |
|
|
548,304 |
|
|
512,508 |
|
|
444,544 |
|
|
579,898 |
|
|
Gross
Margin |
|
|
2,595,089 |
|
|
2,776,257 |
|
|
3,186,876 |
|
|
3,362,083 |
|
|
Operations |
|
|
973,850 |
|
|
912,476 |
|
|
960,695 |
|
|
996,290 |
|
|
Technology
and development |
|
|
1,251,973 |
|
|
1,188,460 |
|
|
1,198,418 |
|
|
1,145,797 |
|
|
Marketing |
|
|
1,463,064 |
|
|
1,095,215 |
|
|
1,038,313 |
|
|
898,110 |
|
|
General
and administrative |
|
|
709,875 |
|
|
497,213 |
|
|
867,025 |
|
|
558,918 |
|
|
Total
operating expenses |
|
|
5,912,695 |
|
|
5,343,826 |
|
|
5,840,157 |
|
|
6,063,187 |
|
|
Loss
before state income tax benefit |
|
|
(1,797,758 |
) |
|
(913,010 |
) |
|
(872,404 |
) |
|
(226,764 |
) |
|
Net
(loss) income |
|
|
(1,797,758 |
) |
|
(913,010 |
) |
|
(872,404 |
) |
|
23,644 |
|
|
Accrued
dividends on preferred stock |
|
|
(363,649 |
) |
|
(376,982 |
) |
|
(454,197 |
) |
|
(4,462,066 |
) |
|
Preferred
stock discount |
|
|
— |
|
|
— |
|
|
(1,444,444 |
) |
|
— |
|
|
Net
loss applicable to common shareholders |
|
$ |
(2,161,407 |
) |
$ |
(1,289,992 |
) |
$ |
(2,771,045 |
) |
$ |
(4,438,422 |
) |
|
Basic
and diluted net loss applicable to common shareholders per common
share |
|
$ |
(0.21 |
) |
$ |
(0.12 |
) |
$ |
(0.27 |
) |
$ |
(0.40 |
) |
|
Weighted
average common shares outstanding |
|
|
10,332,648 |
|
|
10,332,648 |
|
|
10,341,019 |
|
|
11,014,824 |
|
|
|
|
YEAR
ENDED DECEMBER 31, 2004 |
|
|
|
|
1st
Quarter |
|
2nd
Quarter |
|
3rd
Quarter |
|
4th
Quarter |
|
|
Revenue,
net |
|
$ |
6,774,133 |
|
$ |
8,062,088 |
|
$ |
9,278,896 |
|
$ |
10,204,452 |
|
|
Cost
of content and services revenue |
|
|
2,093,262 |
|
|
2,905,841 |
|
|
3,272,268 |
|
|
3,840,730 |
|
|
Cost
of hardware revenue |
|
|
518,035 |
|
|
613,568 |
|
|
747,734 |
|
|
317,676 |
|
|
Gross
Margin |
|
|
4,162,836 |
|
|
4,542,679 |
|
|
5,258,894 |
|
|
6,046,046 |
|
|
Operations |
|
|
1,143,247 |
|
|
1,196,685 |
|
|
1,318,442 |
|
|
1,487,481 |
|
|
Technology
and development |
|
|
1,255,132 |
|
|
1,280,970 |
|
|
1,271,737 |
|
|
1,250,475 |
|
|
Marketing |
|
|
1,152,286 |
|
|
999,711 |
|
|
1,180,929 |
|
|
1,851,692 |
|
|
General
and administrative |
|
|
567,178 |
|
|
840,537 |
|
|
959,518 |
|
|
1,172,783 |
|
|
Total
operating expenses |
|
|
6,729,140 |
|
|
7,837,312 |
|
|
8,750,628 |
|
|
9,920,837 |
|
Income
before income tax expense and state income tax
benefit |
|
|
57,772
|
|
|
255,374 |
|
|
541,666 |
|
|
447,492 |
|
|
Net
income |
|
|
57,772 |
|
|
236,585 |
|
|
483,884 |
|
|
1,246,457 |
|
|
Dividends
on redeemable preferred stock |
|
|
(614,116 |
) |
|
— |
|
|
— |
|
|
— |
|
|
Preferred
stock inducement charge |
|
|
(9,873,394 |
) |
|
— |
|
|
— |
|
|
— |
|
|
Net
(loss) income applicable to common shareholders |
|
$ |
(10,429,738 |
) |
$ |
236,585 |
|
$ |
483,884 |
|
$ |
1,246,457 |
|
|
Basic
net (loss) income applicable to common shareholders per common
share |
|
$ |
(0.56 |
) |
$ |
0.01 |
|
$ |
0.02 |
|
$ |
0.06 |
|
|
Diluted
net (loss) income applicable to common shareholders per common
share |
|
$ |
(0.56 |
) |
$ |
0.01 |
|
$ |
0.02 |
|
$ |
0.05 |
|
|
Basic
weighted average common shares outstanding |
|
|
18,664,387 |
|
|
21,238,711 |
|
|
21,270,416 |
|
|
22,457,573 |
|
|
Diluted
weighted average common shares outstanding |
|
|
18,664,387 |
|
|
23,620,502 |
|
|
23,678,669 |
|
|
25,085,716 |
|