<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
(Mark One) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
[ x ] THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2000
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from _________ to __________
Commission File Number: 000-26529
AUDIBLE, INC.
(Exact name of Registrant as specified in its Charter)
DELAWARE 22-3407945
(State or other jurisdiction of (I.R.S. employer
incorporation or organization) identification number)
65 WILLOWBROOK BLVD. 07470
WAYNE, NEW JERSEY (Zip Code)
(Address of principal executive offices)
(973) 890-4070
(Registrant's telephone number, including area code)
None
(Former name, former address and former
fiscal year - if changed since last report)
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No ___
-----
As of May 1, 2000 27,376,009 shares of common stock ("Common Stock") of the
Registrant were outstanding.
1
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AUDIBLE, INC.
INDEX
FORM 10-Q
<TABLE>
<CAPTION>
PART I - FINANCIAL INFORMATION Page
----
<S> <C> <C>
Item 1. Financial Statements:
Condensed Balance Sheets as of March 31, 2000 (unaudited)
and December 31, 1999........................................ 3
Condensed Statements of Operations for the three months ended
March 31, 2000 and 1999 (unaudited) ......................... 4
Condensed Statements of Cash Flows for the three months ended
March 31, 2000 and 1999 (unaudited).......................... 5
Notes to Condensed Financial Statements...................... 6
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations................ 10
Item 3 Qualitative and Quantitative Disclosure
about Market Risk............................................ 15
PART II - OTHER INFORMATION
Item 1. Legal Proceedings............................................ 16
Item 2. Changes in Securities........................................ 16
Item 3. Defaults Upon Senior Securities.............................. 16
Item 4. Submission of Matters to a Vote of Securities Holders........ 16
Item 5. Other Information............................................ 17
Item 6. Exhibits and Reports on Form 8-K............................. 17
Signatures.............................................................. 19
</TABLE>
2
<PAGE>
PART I - FINANCIAL INFORMATION
ITEM 1. Financial Statements
AUDIBLE, INC.
CONDENSED BALANCE SHEETS
-------------------------
<TABLE>
<CAPTION>
March 31, 2000 December 31, 1999
--------------- -----------------
Assets (unaudited)
<S> <C> <C>
Current assets:
Cash and cash equivalents............................................... $ 12,363,009 $ 12,030,392
Short-term investments, including interest receivable................... 17,879,280 24,849,666
Accounts receivable, net................................................ 82,204 50,890
Royalty advances........................................................ 1.958,037 652,342
Prepaid expenses and other current assets............................... 1,012,663 672,526
Notes receivable due from stockholders.................................. 150,000 150,000
--------------- -----------------
Total current assets................................................... 33,445,193 38,405,816
Property and equipment, net................................................ 2,368,776 1,423,003
Other assets............................................................... 67,796 96,980
--------------- -----------------
Total assets........................................................... $ 35,881,765 $ 39,925,799
=============== =================
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable......................................................... $ 2,071,842 $ 1,513,492
Accrued expenses and compensation........................................ 2,575,209 1,594,676
Royalty obligations, current............................................. 968,000 503,500
Current maturities of obligations under capital leases................... 212,628 263,320
Advances, current........................................................ 892,509 934,765
--------------- -----------------
Total current liabilities.............................................. 6,720,188 4,809,753
Deferred cash compensation................................................. 189,389 177,762
Advances, non current...................................................... 63,044 252,174
Royalty obligations, non current........................................... 631,000 60,500
Obligations under capital leases, net of current maturities................ 20,922 47,187
Stockholders' equity:
Common stock, par value $.01. 50,000,000 shares authorized, 27,321,745 and
25,709,586 shares issued at March 31, 2000 and December 31, 1999,
respectively.............................................................. 273,217 257,096
Additional paid-in capital............................................... 89,764,835 68,969,417
Deferred compensation and services....................................... (19,462,997) (725,764)
Notes due from stockholders for common stock............................. (477,535) (579,025)
Treasury stock at cost: 532,350 shares of common stock at
March 31, 2000 and December 31,1999................................... (142,015) (142,015)
Accumulated deficit...................................................... (41,698,283) (33,201,286)
--------------- -----------------
Total stockholders' equity............................................. 28,257,222 34,578,423
--------------- -----------------
Total liabilities and stockholders' equity............................... $ 35,881,765 $ 39,925,799
=============== =================
</TABLE>
See accompanying notes to condensed financial statements.
3
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AUDIBLE, INC.
CONDENSED STATEMENTS OF OPERATIONS
-------------------------
<TABLE>
<CAPTION>
Three Months Ended
March 31,
----------------------------
2000 1999
(unaudited) (unaudited)
<S> <C> <C>
Revenue, net:
Content and services........................... $ 315,066 $ 57,882
Hardware....................................... -- 57,173
Other.......................................... 189,130 200,000
----------- -----------
Total revenue, net........................... 504,196 315,055
----------- -----------
Operating expenses:
Cost of content and services revenue........... 394,243 152,182
Cost of hardware revenue....................... -- 63,039
Production expenses............................ 1,718,353 494,612
Development.................................... 1,168,453 320,434
Sales and marketing............................ 4,795,640 396,098
General and administrative..................... 1,486,632 430,567
----------- -----------
Total operating expenses..................... 9,563,321 1,856,932
----------- -----------
Loss from operations......................... (9,059,125) (1,541,877)
Other (income) expense, net.................. (562,128) (67,445)
=========== ===========
Net loss..................................... $(8,496,997) $(1,474,432)
=========== ===========
Basic and diluted net loss per common share..... $(0.33) $(0.20)
=========== ===========
Weighted average shares outstanding............. 25,597,835 7,452,065
=========== ===========
</TABLE>
See accompanying notes to condensed financial statements
4
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AUDIBLE, INC.
CONDENSED STATEMENTS OF CASH FLOWS
-------------------------
<TABLE>
<CAPTION>
Three months Ended
March 31,
-------------------------
2000 1999
----------- -----------
(unaudited) (unaudited)
<S> <C> <C>
Cash flows from operating activities:
Net loss........................................................................... $(8,496,997) $(1,474,432)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization..................................................... 276,369 89,911
Services rendered for common stock and warrants................................... 1,978,205 -
Non-cash compensation charge...................................................... 96,101 18,144
Cancellation of common stock issued for services rendered......................... - (1,250)
Deferred cash compensation........................................................ 11,627 21,714
Changes in assets and liabilities:
Decrease in interest receivable on short-term investments....................... 59,332 -
Increase in accounts receivable, net............................................ (31,314) (226,347)
Increase in royalty advances.................................................... (1,305,695) (39,562)
(Increase) decrease in prepaid expenses and other current assets................ (340,137) 8,637
Increase in inventory........................................................... - (60,132)
Decrease in other assets........................................................ 29,184 4,685
Increase (decrease) in accounts payable......................................... 558,350 (53,644)
Increase (decrease) in accrued expenses and compensation........................ 980,533 (47,459)
Increase in royalty obligations................................................. 1,035,000 54,500
(Decrease) increase in advances................................................. (231,386) 20,000
----------- -----------
Net cash used in operating activities.......................................... (5,380,828) (1,685,235)
----------- -----------
Cash flows from investing activities:
Purchases of property and equipment................................................ (1,222,142) (96,610)
Maturity of short-term investments, net............................................ 6,911,054 -
----------- -----------
Net cash provided by (used in) investing activities............................ 5,688,912 (96,610)
----------- -----------
Cash flows from financing activities:
Proceeds from issuance of Series D redeemable convertible preferred stock,
net of issuance costs.................................................... - 994,472
Payments received on notes due from stockholders for common stock.................. 101,490 36,366
Payment of principal on obligations under capital leases........................... (76,957) (122,799)
----------- -----------
Net cash provided by financing activities...................................... 24,533 908,039
----------- -----------
Increase (decrease) in cash and cash equivalents............................... 332,617 (873,806)
Cash and cash equivalents at beginning of period.................................... 12,030,392 10,526,299
----------- -----------
Cash and cash equivalents at end of period.......................................... $12,363,009 $ 9,652,493
=========== ===========
</TABLE>
See accompanying notes to condensed financial statements.
5
<PAGE>
AUDIBLE, INC.
NOTES TO UNAUDITED CONDENSED FINANCIAL STATEMENTS
March 31, 2000 and 1999
(1) Summary of Significant Accounting Policies
Basis of Presentation
The accompanying condensed financial statements as of March 31, 2000 and
for the three months ended March 31, 2000 and March 31, 1999 are unaudited
and, in the opinion of management, include all adjustments (consisting of
normal recurring adjustments and accruals) necessary to present fairly the
results for the periods presented in accordance with generally accepted
accounting principles. Operating results for the three months ended March 31,
2000 are not necessarily indicative of the results that may be expected for
the year ending December 31, 2000. These financial statements should be read
in conjunction with the audited financial statements and notes thereto for the
year ended December 31, 1999 from the Company's Annual Report on Form 10-K/A.
Audible was incorporated in 1995, and commenced commercial operations in
October 1997, and through March 31, 1999, was in the development stage for
financial reporting purposes. Subsequent to March 31, 1999, Audible
substantially completed its development efforts in establishing its business
and accordingly is no longer considered a development stage company.
Reclassifications
Certain items in the March 31, 1999 condensed financial statements have
been reclassified to conform with the March 31, 2000 presentation.
Basic and Diluted Net Loss Per Common Share
Basic and diluted net loss per common share is presented in accordance with
the provisions of SFAS No. 128, "Earnings Per Share." Basic net loss per
common share excludes dilution for common stock equivalents and is computed by
dividing net loss available to common stockholders by the weighted average
number of common shares outstanding for the period. Diluted net loss per
common share reflects the potential dilution that could occur if securities or
other contracts to issue common stock were exercised or converted into common
stock and resulted in the issuance of common stock. Diluted net loss per
common share is equal to basic net loss per common share, since all common
stock equivalents are antidilutive for each of the periods presented.
Diluted net loss per common share for the three months ended March 31, 2000
does not include the effects of outstanding options to purchase 4,263,850
shares of common stock, and warrants outstanding to purchase 1,035,954 shares
of common stock; as the effect of their inclusion is antidilutive during the
period. Diluted net loss per common share for the three months ended March 31,
1999 does not include the effects of warrants outstanding to purchase 675,001
shares of common stock; warrants outstanding to purchase 94,904 shares of
preferred stock; and 13,400,985 shares of convertible preferred stock on an
"as-if" converted basis; as the effect of their inclusion is antidilutive
during the period.
6
<PAGE>
AUDIBLE, INC.
NOTES TO UNAUDITED CONDENSED FINANCIAL STATEMENTS
March 31, 2000 and 1999
(2) Stockholders' Equity
Stock Split
On May 26, 1999, the Company affected a three-for-two stock split to all
stockholders of record at the close of business on May 26, 1999. Accordingly,
all share and per share data in the accompanying financial statements have
been adjusted retroactively to reflect the split.
Common Stock
In March 1999, the Company issued 229,500 shares of common stock to
employees at a price less than the fair value of the stock at the time of
issuance. These shares, which are subject to vesting over four years, were
paid for by full recourse promissory notes executed by the employees. The
difference between the fair value and the issue price of these common shares
of $907,214 was recorded as deferred compensation, a component of stockholders
equity, and is being recorded as an expense straight line over the vesting
term. In February 2000, the Company offered 100,000 common shares to its new
CEO in connection with his offer of employment at five dollars per share less
than the fair value of the stock. Accordingly, the Company recorded $500,000
as deferred compensation in February 2000 and is recording the compensation
expense straight line over the vesting term. During the three months ended
March 31, 2000 and 1999, $96,101 and $18,144, respectively, of compensation
expense was recognized related to these transactions with an offset to
additional paid-in-capital.
In April 1999, the Company established the 1999 Stock Incentive Plan (the
"Plan"), which permits up to 9,000,000 common stock shares to be issued
under the Plan. 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. As of March 31, 2000, options
to purchase 4,276,350 common stock shares have been granted under this Plan.
In April 1999, the Company increased the number of shares of common stock
authorized from 16,000,000 to 50,000,000. As of March 31, 2000 and December
31, 1999, the Company had 27,321,745 and 25,709,586, respectively, common
stock shares issued. As of March 31, 2000 and December 31, 1999, the Company
had 1,035,954 and 1,410,954 shares of common stock, respectively, reserved for
issuance upon exercise of outstanding common stock warrants, and 4,263,850 and
1,448,600 shares of common stock, respectively, reserved for issuance upon
exercise of outstanding options.
In January 2000, the Company issued 1,340,033 shares of common stock in
connection with two agreements with Amazon.com (see note 6). During the three
months ended March 31, 2000, the Company also issued 272,126 shares of common
stock in connection with the cashless exercise of 375,000 common stock
warrants.
7
<PAGE>
AUDIBLE, INC.
NOTES TO UNAUDITED CONDENSED FINANCIAL STATEMENTS
March 31, 2000 and 1999
(3) Redeemable Convertible Preferred Stock
In February 1999, the Company issued 250,000 shares of Series D convertible
preferred stock at $4.00 per share, for net proceeds of $994,472. Each holder
of outstanding shares of Series D convertible preferred stock had voting
rights equal to the number of shares of common stock into which the Series D
convertible preferred stock are convertible, which was a 3 for 2 share basis,
subject to certain adjustments for antidilution, at the option of the
stockholder, as defined in the Company's Certificate of Incorporation, as
amended.
At the closing of the Company's initial public offering (IPO) on July 15,
1999, all shares of the Company's convertible preferred stock were
automatically converted into 13,400,985 shares of common stock.
(4) Microsoft Agreement
In November 1998, the Company entered into a five-year agreement with
Microsoft. The agreement provides for services related to integration of
products, the granting of various rights and licenses, and the provision for
Microsoft to be paid future royalties for content distributed as a result of
the software developed in the agreement. Under the terms of the agreement,
Microsoft committed a minimum of $2.0 million in payments to the Company to
integrate certain products and acquire various rights and licenses.
Microsoft advanced Audible $1,500,000 in November 1998 in consideration of
Audible granting Microsoft the right to distribute software enabling users of
Microsoft platforms to access and use Audible content. The Company has
allocated $50,000 of this advance to certain development work that will be
recognized as a reduction of development expense upon its completion. The
remaining $1,450,000 of this advance is being recognized as revenue on a
straight line basis beginning in the quarter ended June 30, 1999 through the
initial term of the agreement which ends the second quarter of 2001. During
the three months ended March 31, 2000, $189,130 of this advance was recognized
as other revenue.
Audible will pay Microsoft a royalty on content licensed and distributed by
Audible to each end user that accesses its content using the developed
software. Royalties will be recognized during the period that the related
content revenue is earned. Through March 31, 2000, Audible had not recognized
any royalties under this agreement.
Also under the agreement, during the three months ended March 31, 1999,
Audible performed technology integration services for which the Company
recognized other revenue of $200,000. Microsoft has options under the
agreement to acquire additional rights and licenses and extend the term of the
agreement for additional financial consideration.
In April 1999, in connection with an amendment to the agreement with
Microsoft, the Company issued to Microsoft a warrant which expires November
18, 2003 to purchase 100,000 shares of common stock at $9.00 per share. The
fair value of this warrant is being amortized as an expense on a straight-line
basis over the same period as the $1,450,000 advance described above. During
the three months ended March 31, 2000, $67,215 was recorded as a production
expense with the non-cash charge for services to additional paid-in-capital.
8
<PAGE>
AUDIBLE, INC.
NOTES TO UNAUDITED CONDENSED FINANCIAL STATEMENTS
March 31, 2000 and 1999
(5) Services Agreement
In June 1999, in connection with a services agreement, the Company issued a
warrant to purchase 150,000 shares of common stock at $0.01 per share, which
is fully vested, and a warrant to purchase 500,000 shares of common stock at
$8.00 per share, which is subject to vesting over a three year period. The
agreement allows for an additional warrant to purchase 250,000 shares of
common stock at $8.00 per share upon extension of the agreement for an
additional year also subject to vesting. The fair value of these warrants is
being amortized as an expense on a straight-line basis over the initial term
of the service agreement of three years, except that 250,000 of the warrants
are accounted for using variable plan accounting and compensation costs will
vary each accounting period until the measurement date. During the three
months ended March 31, 2000, $234,483 was recorded as a marketing expense with
the non-cash charge for services to additional paid-in-capital.
(6) Amazon Agreement
In January 2000, the Company entered into two agreements with Amazon.com.
Under the Co-Branding, Marketing and Distribution agreement the Company will
be the exclusive provider of digital spoken audio (as defined) to Amazon.com.
During the three year term of this agreement, in consideration for certain
services, Amazon will receive annually $10,000,000 plus a specified percentage
of revenue earned over a specified amount. Under the Securities Purchase
Agreement, Amazon.com purchased 1,340,033 shares of common stock from the
Company for $20,000,000. Under the agreement the consideration paid by Amazon
for the purchase of the common stock, and the Company's obligation for the
annual fee for the first two years, 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 is being amortized over the
initial two-year term on a straight-line basis. During the three months ended
March 31, 2000, $1,666,666 was recorded as a marketing expense relating to
this agreement.
(7) Subsequent Event
On May 5, 2000 Audible and Random House entered into a four-year agreement
to form a strategic alliance to establish Random House Audible, a publishing
imprint, as defined in the agreement, to produce spoken word content
specifically suited for digital distribution. All titles published by the
imprint will be distributed exclusively on the Internet by Audible. As part
of this alliance, Random House, through its Random House Ventures, LLC
subsidiary, will purchase 169,780 shares of Audible common stock from the
Company. Audible will be contributing $1,000,000 annually towards funding the
acquisition and creation of digital audio titles through Random House Audible.
The agreement further provides for the granting of 878,333 Audible common
stock warrants to Random House at various exercise prices that vest over the
term of the agreement as well as the granting of additional Audible common
stock warrants to Random House based on future performance. Additionally, the
agreement contains provisions for profit participation and bounties, among
other items. Random House Audible will be an imprint of Random House, Inc.'s
Random House Audio Publishing Group division.
9
<PAGE>
ITEM 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
The following discussion and analysis of our financial condition and results
of operations should be read in conjunction with our audited financial
statements and notes thereto appearing in our 1999 Annual Report on Form 10-K/A.
This discussion and analysis contains forward-looking statements that involve
risks and uncertainties. Our actual results may differ materially from those
anticipated in these forward-looking statements as a result of a number of
factors.
Overview
We provide Internet-delivered premium spoken audio content for playback on
personal computers and hand-held electronic devices. We have the largest and
most diverse collection of premium digital spoken audio content available for
purchase and download from the Internet, most of which is currently available
only at our Web site audible.com.
In order to test consumer behavior, demonstrate to content providers the
viability of digital distribution of audio content and test our business model,
we designed, created and sold limited numbers of our own Internet-enabled mobile
audio playback device, the Audible MobilePlayer. Sales of the MobilePlayer
accounted for 18% of our revenue for the three months ended March 31, 1999.
Revenue from the sale of the Audible MobilePlayer ceased in the fourth quarter
of 1999. Our primary focus is the aggregation and delivery of digital spoken
audio content, and, in the future, we will depend upon computer and consumer
electronics companies to manufacture and sell devices that are promoted as
AudibleReady. Revenue from the sale of audio content and services has increased
in each of the last four quarters. We expect this trend to continue as sales of
audio content and services become the majority of our revenue. As of March 31,
2000, more than 18,300 customers had purchased content from our Web site.
Although we have experienced revenue growth in our content sales in recent
periods, there can be no assurance that such growth rates are sustainable, and
therefore such growth rates should not be considered indicative of future
operating results. There can also be no assurance that we will be able to
continue to increase our revenue or attain profitability or, if increases in
revenue and profitability are achieved, that they can be sustained. We believe
that period-to-period comparisons of our historical operating results are not
meaningful and should not be relied upon as an indication of future performance.
We recognize revenue from the sale of individual content titles in the period
the content is downloaded and the customer's credit card is processed. We
recognize revenue from subscription sales pro rata over the subscription term.
Typically, we pay our content providers a 12% royalty based upon net sales of
the content downloaded by our customers. The majority of our content agreements
require us to make advance royalty payments for minimum guarantees which are
amortized on a straight-line basis over the term of the agreement or are
expensed as royalties are earned, whichever is sooner. In addition, the Company
periodically adjusts the balance of these royalty advance payments to reflect
their estimated net realizable value.
We recognize revenue from audio production and hosting services we provide to
corporations as the services are performed. We recognized sales of the Audible
MobilePlayer upon shipment.
10
<PAGE>
We are party to several joint marketing agreements with device manufacturers
including Casio, Compaq, Diamond Multimedia and Philips. Under these agreements,
our device manufacturers may receive a portion of the content revenue generated
over a specified period of time by each new Audible customer referred by them
through the purchase of a new device. For example, a purchaser of Casio's hand
held electronic device can use our AudibleManager software to access
audible.com, purchase and download content into the device. Casio will receive a
percentage of the revenue related to the content purchased by this customer.
These revenue sharing arrangements typically last one or two years from the date
the device user becomes an Audible customer.
In January 2000, we entered into two agreements with Amazon.com. As defined in
the Co-Branding, Marketing and Distribution agreement, the Company will be the
exclusive provider of digital spoken audio to Amazon.com. During the three year
term of this agreement, in consideration for certain services, Amazon will
receive annually $10,000,000 plus a specified percentage of revenue earned over
a specified amount. Under the Securities Purchase Agreement, Amazon.com
purchased 1,340,033 shares of common stock from the Company for $20,000,000 (see
note 6 to the condensed financial statements).
In February 2000, Thomas G. Baxter joined Audible as President, Chief
Executive Officer (CEO) and Director. Mr. Baxter was previously President of
Comcast Cable Communications Inc. from 1989 to 1998, and most recently served as
an Operating Partner with Evercore Partners, a private equity and advisory firm.
Results of Operations
The following table sets forth certain financial data for the periods
indicated as a percentage of total revenue for the three months ended March 31,
2000 and 1999.
<TABLE>
===============================================================================
Three Months
Ended
March 31,
------------------
2000 1999
(unaudited)
<S> <C> <C>
Revenue:
Content and services.................................... 62% 18%
Hardware................................................ 0 18
Other................................................... 38 64
-------- -----
Total revenue........................................ 100% 100%
Operating expenses:
Cost of content and services revenue.................... 78 48
Cost of hardware revenue................................ 0 20
Production expenses..................................... 341 157
Development............................................. 232 102
Sales and marketing..................................... 951 126
General and administrative.............................. 295 136
-------- -----
Total operating expenses............................. 1,897 589
-------- -----
Loss from operations...................................... (1,797) (489)
Other (income) expense, net.......................... (112) (21)
-------- -----
Net loss.................................................. (1,685)% (468)%
============================================================================
</TABLE>
11
<PAGE>
Three months ended March 31, 2000 compared to three months ended March 31, 1999.
Total revenue, net. Total revenue, net for the three months ended March 31,
2000, was $504,000, as compared to $315,000 for the three months ended March 31,
1999, an increase of $189,000, or 60%.
Content and services. Content and services revenue for the three months
ended March 31, 2000, was $315,000, as compared to $58,000 for the three months
ended March 31, 1999, an increase of $257,000, or 443%. Content and services
revenue increased as a result of our increased customer base and the addition of
a new content and services agreement with a corporate client.
Hardware. There was no hardware revenue recognized for the three months
ended March 31, 2000, as compared to $57,000 for the three months ended March
31, 1999, a decrease of $57,000. We do not expect to realize any further
hardware revenue after December 31, 1999 due to the discontinuation of sales of
the Audible MobilePlayer.
Other. Other revenue for the three months ended March 31, 2000, was
$189,000, as compared to $200,000 for the three months ended March 31, 1999.
Other revenue for both periods related to our agreement with Microsoft
Corporation. Revenue for the three month period ended March 31, 2000 consisted
of $189,000 in revenue resulting from amortization of the advance from Microsoft
relating to granting Microsoft the right to distribute software platforms to
enable users to access and use Audible content. Revenue for the three month
period ended March 31, 1999 consisted of technology integration services
performed to create an AudibleReady software player for Microsoft's Windows CE
product.
Operating expenses.
Cost of content and services revenue. Cost of content and services revenue
was $394,000, or 125% of content and services revenue, for the three months
ended March 31, 2000, as compared to $152,000, or 262% of content and services
revenue, for the three months ended March 31, 1999. This increase was primarily
due to the acquisition of additional content licenses, which resulted in
additional amortization of new content agreement minimum guarantees. For the
three month period ended March 31, 2000, we recorded an adjustment of $75,000 to
reflect the net realizable value of content agreement guarantees. The decrease
of cost of content and services revenue as a percentage of content and services
revenue is the result of the amortized guaranteed amount being compared to an
increased content and services revenue amount.
Cost of hardware revenue. There was no cost of hardware revenue for the
three months ended March 31, 2000, as compared to $63,000 for the three months
ended March 31, 1999. This decrease was due to the discontinuation of sales of
the Audible MobilePlayer.
Production expenses. Production expenses were $1,718,000 for the three
months ended March 31, 2000, as compared to $495,000 for the three months ended
March 31, 1999, an increase of $1,223,000, or 247%. This increase was primarily
due to increased personnel, increased audio production, and increased expenses
to support and expand our infrastructure and systems. Web site and related
expenses increased as we upgraded and enlarged our production capacity and
expanded our hosting capacity. Content acquisition expenses increased due to
additional personnel as well as the expense associated with the amortization of
warrants issued to Microsoft which began in June 1999.
12
<PAGE>
Development. Development costs were $1,168,000 for the three months ended
March 31, 2000, as compared to $320,000 for the three months ended March 31,
1999, an increase of $848,000, or 265%. This increase was primarily due to
increased personnel and outsourced costs in the development of new versions of
Audible Manager, AudibleReady formats, and the continuous upgrade of our Web
site.
Sales and marketing. Sales and marketing expenses were $4,796,000 for the
three months ended March 31, 2000, as compared to $396,000 for the three months
ended March 31, 1999, an increase of $4,400,000. This increase was due to
increased personnel and advertising costs associated with our increased
marketing efforts, as well the expenses recognized in connection with our Co-
Marketing agreement with Amazon.com, and the amortization of warrants issued in
connection with a services agreement.
General and administrative. General and administrative expense was
$1,487,000 for the three months ended March 31, 2000, as compared to $431,000
for the three months ended March 31, 1999, an increase of $1,056,000, or 245%.
This increase was primarily due to increased personnel and higher legal,
accounting, and recruiting fees during the period.
Other (income) expense, net. Interest income was $568,000 for the three
months ended March 31, 2000, as compared to $83,000 for the three months ended
March 31, 1999, an increase of $485,000. This increase was primarily due to
additional interest income earned from higher average cash and cash equivalent
and short-term investment balances resulting from the proceeds from our initial
public offering, which occurred in July 1999. Interest expense was $6,000 for
the three months ended March 31, 2000, as compared to $15,000 for the three
months ended March 31, 1999, a decrease of $9,000. This decrease was primarily
due to the lower principal balance on our capital equipment lease line.
Factors Affecting Operating Results
We have only a limited operating history with which to evaluate our business
and prospects. Our limited operating history and emerging nature of the market
for Internet-delivered audio content makes predicting our future operating
results difficult. In addition, our prospects must be considered in light of
the risks and uncertainties encountered by companies in the early stages of
development in new and rapidly evolving markets, specifically the rapidly
evolving market for delivery of audio content over the Internet.
We have incurred significant losses since inception, and as of March 31, 2000,
we had an accumulated deficit of $41,698,000. We believe that our success will
depend largely on our ability to extend our leadership position as a provider of
premium digital spoken audio content over the Internet. Accordingly, we plan to
invest heavily in sales and marketing and content acquisition and production
over the next several quarters, to add additional personnel and to make capital
expenditures to upgrade our systems capacity.
Our operating results have varied on a quarterly basis during our short
operating history and may fluctuate significantly in the future as a result of a
variety of factors, many of which are outside of our control. Factors that may
affect our quarterly operating results include but are not limited to: (1) the
demand for the Audible service; (2) the availability of premium audio content;
(3) sales and consumer usage of AudibleReady devices; (4) the introduction of
new products or services by a competitor; (5) the cost and availability of
acquiring sufficient web site capacity to meet our customers' needs; (6)
technical difficulties with our computer system or the Internet or system
downtime; (7) the cost of acquiring audio content; (8) the amount and timing of
capital expenditures and other costs relating to the expansion of our
operations; and (9) general economic conditions and economic conditions specific
to electronic commerce and online media. In the past, we have experienced
fluctuations in demand for the Audible service based on the level of marketing
expenditures, the occurrence of external publicity and the quality of our
software and Web site. Any one of these factors could cause revenue and
operating results to vary significantly in the future. In addition, as a
strategic response to changes in the competitive environment, we may from time
to time make pricing, service or marketing decisions or acquisitions that could
cause significant declines in our quarterly operating revenue.
13
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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 were $28,719,000 since inception.
On July 15, 1999, we completed an initial public offering of 4,600,000 shares
of common stock at $9.00 per share. Total proceeds were $36,856,000, net of
underwriting discounts and commissions of $2,898,000 and offering costs of
$1,641,000. Concurrent with the offering, all shares of our redeemable
convertible preferred stock were converted into 13,400,985 shares of common
stock. At March 31, 2000, our principal source of liquidity was $12,363,000 in
cash and cash equivalents, and $17,879,000 in short-term treasury bill and
government agency note investments.
At March 31, 2000, our principal commitments consisted of obligations under
our capital lease line, which allows us to purchase up to $1,750,000 of
equipment, operating lease commitments, contractual commitments with content
providers and revenue sharing commitments pursuant to agreements with device
manufacturers. At March 31, 2000, we had leased approximately $1,241,000 in
equipment on our lease line and had an outstanding balance of $234,000.
Net cash used in operating activities was $5,381,000 for the three months
ended March 31, 2000. Net cash used during the period was primarily attributable
to our net operating loss partially offset by services rendered for common stock
and increased accounts payable and accrued expenses and compensation. Net cash
used in operating activities for the three months ended March 31, 1999 was
$1,685,000. Net cash used in the period was primarily attributable to our net
loss in the period and increased accounts receivable.
Net cash provided by investing activities was $5,689,000 for the three months
ended March 31, 2000. Net cash provided during the period was primarily related
to maturities of short-term investments partially offset by cash used to
purchase property and equipment. Net cash used by investing activities was
$97,000 for the three months ended March 31, 1999. Net cash used in the period
was related to purchases of property and equipment.
Net cash provided by financing activities was $25,000 for the three months
ended March 31, 2000. Net cash provided by investing activities during the
period resulted primarily from the payments received on notes due from
stockholders, partially offset by capital lease payments. Net cash provided by
financing activities for the three months ended March 31, 1999 was $908,000.
Net cash provided by investing activities during the period resulted primarily
from the proceeds from the sale of redeemable convertible preferred stock,
partially offset by capital lease payments.
We believe our current cash and cash equivalents and short-term investments
will be sufficient to meet our anticipated cash requirements into the early part
of 2001. We plan to use these funds to increase our sales and marketing efforts,
acquire new content, extend arrangements with current content providers, acquire
companies or technologies, add additional personnel and make capital
expenditures to upgrade systems capacity. In the future, we may need to raise
additional funds through public or private financing, or other arrangements. We
have no assurance that such additional financing, if needed, will be available
on terms favorable to us or to our stockholders.
Year 2000
To the best of our knowledge as of March 31, 2000, we have not experienced any
substantial operational difficulties relating to Year 2000 compliance. We will
continue to monitor all of our internal systems, however, we still can be
subject to systematic failures beyond our control related to Year 2000
compliance such as a prolonged Internet, telecommunications or electrical
failure, which could prevent us from delivering the Audible service to our
14
<PAGE>
customers, and decrease the use of the Internet or prevent users from accessing
audible.com. If such conditions occurred they would have a material adverse
effect on our business, results of operations and financial condition.
ITEM 3. Qualitative and Quantitative Disclosure about Market Risk
We do not have operations subject to risk of foreign currency fluctuations,
nor do we use derivative financial instruments in our operations or investment
portfolio.
15
<PAGE>
PART II - OTHER INFORMATION
ITEM 1. Legal Proceedings.
None
ITEM 2. Changes in Securities and Use of Proceeds
Recent Sales of Unregistered Securities
The following information relates to securities issued or sold by us within
the period covered by this Form 10-Q. During that time, we issued unregistered
securities in the transactions described below. Securities issued in such
transactions were offered and sold in reliance upon the exemption from
registration under Section 4(2) of the Securities Act, relating to sales by an
issuer not involving any public offering, or under Rule 701 under the Securities
Act on the basis that these options were offered and sold either pursuant to a
written compensatory benefit plan or pursuant to written contracts relating to
compensation. The sales of securities were made without the use of an
underwriter and the certificates evidencing the shares bear a restrictive legend
permitting the transfer thereof only upon registration of the shares or an
exemption under the Act.
(1) In January 2000, in connection with a Services Purchase Agreement, we
issued 1,340,033 shares of common stock at the price of $14.925 per share.
Report of Offering of Securities and Use of Proceeds Therefrom
In July 1999, we commenced and completed a firm commitment underwritten
initial public offering of 4,600,000 shares of our common stock at a price of
$9.00 per share. The shares were registered with the Securities and Exchange
Commission pursuant to a registration statement on Form S-1 (No. 333-76985),
which was declared effective on July 15, 1999. The public offering was
underwritten by a syndicate of underwriters led by Credit Suisse First Boston
Corporation, J. P. Morgan Securities Inc., Volpe Brown Whelan & Company, LLC and
Wit Capital Corporation as their representatives. After deducting underwriting
discounts and commissions of $2,898,000 and expenses of $1,641,000 we received
net proceeds of $36,856,000.
During the three months ended March 31, 2000, we invested $6,638,000 of our
funds in accordance with the use of proceeds in our Registration Statement Form
S-1. As of March 31, 2000, we have $30,242,000 in remaining funds available
which we plan to use to increase our sales and marketing efforts, acquire and
produce new audio content, add new personnel, make capital expenditures and
other uses at the discretion of our management. None of the net proceeds of the
offering has been paid directly or indirectly to any of our directors or
officers, or their associates, or persons owning 10 percent or more of any class
of our equity securities.
ITEM 3. Defaults Upon Senior Securities
Inapplicable.
ITEM 4. Submission of Matters to Vote of Security Holders
None.
16
<PAGE>
ITEM 5. Other Information
None
ITEM 6. Exhibits and Reports on Form 8-K
(a) Exhibits
<TABLE>
<S> <C>
3.1#* Amended and Restated Certificate of Incorporation of Audible
3.2##* Amended and Restated Bylaws of Audible
10.1+* License Agreement dated November 4, 1998, by and between
Microsoft Corporation and Audible
10.2+* Digital Rights Management Agreement dated November 4, 1998,
between Microsoft Corporation and Audible
10.3+* Development Agreement dated November 12, 1998, by and between
RealNetworks, Inc. and Audible
10.4* RealMedia Architecture Partner Program Internet Agreement dated
November 12, 1998, between RealNetworks, Inc. and Audible
10.5* Master Lease Agreement dated November 19, 1996, by and between
Comdisco, Inc. as lessor, and Audible as lessee
10.5.1* Addendum to Master Lease Agreement dated November 20, 1996, by
and between Comdisco, Inc., as lessor, and Audible, as lessee
(relating to Exhibit 10.5)
10.6* Warrant Agreement to purchase 30,573 shares of Series B
preferred stock at a price of $2.68 per share, dated November
19, 1996, and re-issued as of August 17, 1998, by Audible to
Comdisco, Inc.
10.7* Warrant Agreement to purchase 12,188 shares of Series C
preferred stock at a price of $4.00 per share, dated July 24,
1997, issued by Audible to Comdisco, Inc.
10.8* Loan and Security Agreement dated April 6, 1998, by and between
Silicon Valley Bank, as lender, and Audible, as borrower, for a
revolving line of credit of up to $1,000,000
10.10* Security and Loan Agreement dated November 20, 1996, between
Audible, as borrower, and Imperial Bank, as lender, for up to
$500,000
10.12* Promissory Note dated March 28, 1997, from Donald Katz in favor
of Audible, in the principal amount of $100,000
10.12.1* Allonge to Note dated April 21, 1999 between Donald Katz and
Audible (relating to Exhibit 10.12.1)
10.13* Security Agreement dated March 28, 1997, by and between Donald
Katz and Audible
10.14* Amended and Restated Registration Rights Agreement dated
February 26, 1998, by and among Audible and certain stockholders
named therein
10.14.1* Amendment No. 1 to Amended and Restated Registration Rights
Agreement dated December 18, 1998 (relating to Exhibit 10.14)
10.14.2* Amendment No. 2 to Amended and Restated Registration Rights
Agreement dated June 17, 1999 (relating to Exhibit 10.14)
10.15* 1999 Stock Incentive Plan
10.16* Form of Common Stock Warrants issued March 31, 1997 by Audible
to various investors in connection with the Series C preferred
stock financing
10.17* Form of Stock Restriction Agreement by and between Audible and
the Named Executive Officers made in connection with various
purchases and sales of shares of restricted common stock
10.18* Form of Promissory Note made by the Named Executive Officers in
favor of Audible in connection with various purchases and sales
of shares of restricted common stock
10.19* Office Lease dated June 20, 1997, by and between Audible, as
tenant, and Passaic Investment LLC, Sixty-Five Willowbrook
Investment LLC and Wayne Investment LLC, as tenants-in-common,
as landlord
</TABLE>
17
<PAGE>
<TABLE>
<S> <C>
10.20* Sublease Agreement dated July 19, 1996, by and between Audible,
as sublessee, and Painewebber Incorporated, as sublessor
10.21+* Agreement dated April 3, 1999 by and between Audible and Diamond
Multimedia Systems, Inc.
10.22* Common Stock Purchase Warrant, issued April 22, 1999, to
Microsoft Corporation
10.23* Employment Offer Letter from Audible to Guy Story dated June 10,
1996
10.24* Employment Offer Letter from Audible to Brian Fielding dated
April 25, 1997
10.25* Employment Offer Letter from Audible to Travis Millman dated
September 29, 1997
10.26* Employment Offer Letter from Audible to Andrew Kaplan dated May
25, 1999
10.27o Employment Offer Letter from Audible to Thomas G. Baxter dated
February 3, 2000
10.28++ Warrant Agreement to purchase 10,000 Shares of Common Stock at a
price of $7.65 per share, dated October 8, 1999, issued by
Audible to National Public Radio, Inc.
10.29* Common Stock Purchase Warrant, W-1, issued June 17, 1999, to
Robin Williams
10.30* Common Stock Purchase Warrant, W-2, issued June 17, 1999, to
Robin Williams
10.31** Securities Purchase Agreement dated January 30, 2000, by and
between Audible and Amazon.com Commerce Services, Inc.
10.32** Co-Branding, Marketing and Distribution Agreement dated
January 30, 2000, by and between Audible and Amazon.com Commerce
Services, Inc.
27 Financial Data Schedule
</TABLE>
# Incorporated by reference from the Company's Registration Statement
on Form S-1 (No. 333-76985) as Exhibit No. 3.2.
## Incorporated by reference from the Company's Registration Statement
of Form S-1 (No. 333-76985) as Exhibit No. 3.4.
o Incorporated by reference from the Company's 10K/A as Exhibit No.
10.24.
++ Incorporated by reference from the Company's 10K/A as Exhibit No.
10.25.
* Incorporated by reference from the Company's Registration Statement
on Form S-1 (No. 333-76985).
+ Information has been omitted from this exhibit pursuant to a request
for confidential treatment filed with the Securities and Exchange
Commission.
** To be filed by Amendment.
(b) Reports on Form 8-K
None
18
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this Report to be signed on its behalf by the
undersigned thereunto duly authorized.
AUDIBLE, INC.
By: /s/ Andrew P. Kaplan
---------------------
Name: Andrew P. Kaplan
Title: Chief Financial Officer and
Vice President, Finance and Administration
Dated: May 12, 2000
19
<TABLE> <S> <C>
<PAGE>
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<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-2000
<PERIOD-START> JAN-01-2000
<PERIOD-END> MAR-31-2000
<CASH> 12,363
<SECURITIES> 17,879
<RECEIVABLES> 92
<ALLOWANCES> 10
<INVENTORY> 0
<CURRENT-ASSETS> 33,445
<PP&E> 3,896
<DEPRECIATION> 1,527
<TOTAL-ASSETS> 35,882
<CURRENT-LIABILITIES> 6,720
<BONDS> 0
0
0
<COMMON> 273
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 35,882
<SALES> 504
<TOTAL-REVENUES> 504
<CGS> 394
<TOTAL-COSTS> 9,563
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
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<INCOME-PRETAX> (8,497)
<INCOME-TAX> 0
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<CHANGES> 0
<NET-INCOME> (8,497)
<EPS-BASIC> (.33)
<EPS-DILUTED> (.33)
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