<PAGE>
**DRAFT 8/8/00 **
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 June 30, 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) 837-2700
(Registrant's telephone number, including area code)
None
(Former name, former address and former
fiscal year - if changed since last report)
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No __
---
As of August 8, 2000, 27,546,989 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>
Item 1. Financial Statements:
Condensed Balance Sheets as of June 30, 2000 (unaudited)
and December 31, 1999............................................... 3
Condensed Statements of Operations for the three
and six months ended June 30, 2000 and 1999 (unaudited)............. 4
Condensed Statements of Cash Flows for the six months ended
June 30, 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....................... 11
Item 3. Qualitative and Quantitative Disclosure
about Market Risk................................................... 17
PART II - OTHER INFORMATION
Item 1. Legal Proceedings................................................... 18
Item 2. Changes in Securities............................................... 18
Item 3. Defaults Upon Senior Securities..................................... 18
Item 4. Submission of Matters to a Vote of Securities Holders............... 19
Item 5. Other Information................................................... 19
Item 6. Exhibits and Reports on Form 8-K.................................... 19
Signatures....................................................................... 21
</TABLE>
2
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PART I - FINANCIAL INFORMATION
ITEM 1. Financial Statements
AUDIBLE, INC.
CONDENSED BALANCE SHEETS
---------------
<TABLE>
<CAPTION>
June 30, 2000 December 31, 1999
------------------- -------------------
Assets (unaudited)
<S> <C> <C>
Current assets:
Cash and cash equivalents..................................... $ 10,305,725 $ 12,030,392
Short-term investments, including interest receivable ........ 14,877,371 24,849,666
Accounts receivable, net ..................................... 78,689 50,890
Royalty advances.............................................. 1,574,056 652,342
Prepaid expenses and other current assets..................... 521,882 672,526
Notes receivable due from stockholders........................ 150,000 150,000
--------------- ---------------
Total current assets........................................ 27,507,723 38,405,816
Property and equipment, net......................................... 3,031,373 1,423,003
Other assets........................................................ 49,327 96,980
--------------- ---------------
Total assets................................................ $ 30,588,423 $ 39,925,799
=============== ===============
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable............................................... $ 1,770,484 $ 1,513,492
Accrued expenses and compensation.............................. 2,807,706 1,594,676
Royalty obligations, current................................... 830,500 503,500
Current maturities of obligations under capital leases......... 160,083 263,320
Advances, current.............................................. 731,573 934,765
--------------- ---------------
Total current liabilities................................... 6,300,346 4,809,753
Deferred cash compensation.......................................... 203,005 177,762
Advances, non current .............................................. -- 252,174
Royalty obligations, non current ................................... 513,000 60,500
Obligations under capital leases, net of current maturities......... 2,872 47,187
Stockholders' equity:
Common stock, par value $.01. 50,000,000 shares
authorized, 27,546,989 and 25,709,586 shares issued at
June 30, 2000 and December 31, 1999, respectively............ 275,470 257,096
Additional paid-in capital...................................... 91,493,235 68,969,417
Deferred compensation and services.............................. (17,186,463) (725,764)
Notes due from stockholders for common stock.................... (417,631) (579,025)
Treasury stock at cost: 532,350 shares of common stock at
June 30, 2000 and December 31, 1999........................... (142,015) (142,015)
Accumulated deficit.............................................. (50,453,396) (33,201,286)
---------------- ---------------
Total stockholders' equity ...................................... 23,569,200 34,578,423
---------------- ---------------
Total liabilities and stockholders' equity..................... $ 30,588,423 $ 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 Six Months Ended
June 30, June 30,
-------------------------------- --------------------------------
2000 1999 2000 1999
-------------- -------------- ------------- --------------
(unaudited) (unaudited) (unaudited) (unaudited)
<S> <C> <C> <C> <C>
Revenue, net:
Content and services..................... $ 486,880 $ 91,818 $ 801,947 $ 149,700
Hardware................................. -- 123,591 -- 180,764
Other.................................... 189,129 313,043 378,258 513,043
----------- -------------- ------------- --------------
Total revenue, net.................... 676,009 528,452 1,180,205 843,507
----------- -------------- ------------- --------------
Operating expenses:
Cost of content and services revenue .... 909,544 161,656 1,303,787 313,838
Cost of hardware revenue................. -- 129,987 -- 193,026
Production expenses...................... 1,709,293 722,807 3,427,646 1,217,419
Development.............................. 1,177,077 427,322 2,345,530 747,756
Sales and marketing...................... 4,610,722 903,195 9,406,362 1,299,293
General and administrative............... 1,434,492 543,564 2,921,124 974,131
----------- -------------- ------------- --------------
Total operating expenses.............. 9,841,128 2,888,531 19,404,449 4,745,463
----------- -------------- ------------- --------------
Loss from operations.................. (9,165,119) (2,360,079) (18,224,244) (3,901,956)
Interest income, net ................. 410,006 71,062 972,134 138,507
----------- -------------- ------------- --------------
Net loss.............................. $(8,755,113) $ (2,289,017) $ (17,252,110) $ (3,763,449)
=========== ============== ============= ==============
Basic and diluted net loss per common
share..................................... $ (0.32) $ (0.30) $ (0.66) $ (0.50)
=========== ============== ============= ==============
Weighted average shares outstanding....... 26,940,204 7,602,269 26,269,020 7,527,167
=========== ============== ============= =============
</TABLE>
See accompanying notes to condensed financial statements
4
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AUDIBLE, INC.
CONDENSED STATEMENTS OF CASH FLOWS
-------------------------
<TABLE>
<CAPTION>
Six Months Ended
June 30,
---------------------------------------
2000 1999
------------------ -----------------
(unaudited) (unaudited)
<S> <C> <C>
Cash flows from operating activities:
Net loss.................................................................... $ (17,252,110) $ (3,763,449)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization............................................. 602,817 180,154
Services rendered for common stock and warrants........................... 4,829,259 93,695
Non-cash compensation charge.............................................. 242,634 72,577
Cancellation of common stock issued for services rendered................. - (1,250)
Deferred cash compensation................................................ 25,243 62,055
Changes in assets and liabilities:
Decrease in interest receivable on short-term investments.............. 122,323 -
Increase in accounts receivable, net................................... (27,799) (452,780)
(Increase) decrease in royalty advances................................ (921,714) 85,066
Decrease (increase) in prepaid expenses and other current assets....... 150,644 (478,710)
Decrease in inventory.................................................. - 48,002
Decrease in other assets............................................... 47,653 10,880
Increase in accounts payable........................................... 256,992 279,580
Increase in accrued expenses and compensation.......................... 1,213,030 54,119
Increase (decrease) in royalty obligations............................. 779,500 (29,500)
(Decrease) increase in advances........................................ (455,366) 6,957
--------------- -----------------
Net cash used in operating activities................................ (10,386,894) (3,832,604)
--------------- -----------------
Cash flows from investing activities:
Purchases of property and equipment......................................... (2,211,187) (265,735)
Maturities of short-term investments, net................................... 9,849,972 -
--------------- -----------------
Net cash provided by (used in) investing activities.................. 7,638,785 (265,735)
--------------- -----------------
Cash flows from financing activities:
Proceeds from exercise of common stock options............................. 9,600 -
Proceeds from sale of common stock......................................... 1,000,000 -
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.......... 161,394 41,966
Payment of principal on obligations under capital leases................... (147,552) (248,333)
--------------- -----------------
Net cash provided by financing activities............................ 1,023,442 788,105
--------------- -----------------
Decrease in cash and cash equivalents................................ (1,724,667) (3,310,234)
Cash and cash equivalents at beginning of period............................... 12,030,392 10,526,299
--------------- -----------------
Cash and cash equivalents at end of period..................................... $ 10,305,725 $ 7,216,065
=============== =================
</TABLE>
See accompanying notes to condensed financial statements.
5
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AUDIBLE, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
June 30, 2000 and 1999
(1) Summary of Significant Accounting Policies
Basis of Presentation
The accompanying condensed financial statements as of June 30, 2000,
and for the three and six months ended June 30, 2000 and June 30, 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 and six months ended June 30, 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.
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 and six months ended
June 30, 2000 does not include the effects of outstanding options to
purchase 4,463,820 and 4,880,150, respectively, shares of common stock, and
warrants outstanding to purchase 1,036,954 and 1,962,654, respectively,
shares of common stock; as the effect of their inclusion is antidilutive
during the periods. Diluted net loss per common share for the three and six
months ended June 30, 1999 does not include the effects of options to
purchase 903,450 shares of common stock; warrants to purchase 1,675,001
shares of common stock; warrants outstanding to purchase 94,904 shares of
preferred stock; and 13,400,996 shares of convertible preferred stock on an
"as-if" converted basis; as the effect of their inclusion is antidilutive
during the periods.
(2) Stockholders' Equity
Common Stock
In March 1999, the Company issued 229,500 shares of common stock to
employees at a price less than the fair value of the stock at the time of
issuance. These shares, which are subject to vesting over four years, were
paid for by full recourse promissory notes executed by the employees. The
difference between the fair value and the issue price of these common
shares of $907,214 was recorded as deferred compensation, a component of
6
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AUDIBLE, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
June 30, 2000 and 1999
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 a 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 June
30, 2000, and June 30, 1999, $189,129 and $63,043, respectively, of this
advance was recognized as other revenue. During the six months ended June
30, 2000, and June 30, 1999, $378,258 and $63,043, respectively, 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 June 30, 2000, Audible had not
recognized any royalties under this agreement.
Also under the agreement, during the six months ended June 30, 1999
Audible (i) has performed technology integration services for which the
Company has recognized revenue of $200,000, and (ii) has delivered a
license for certain technology rights for which the Company has recognized
revenue of $250,000. 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 June 30, 2000 and June 30, 1999, $67,215 and
$22,405, respectively, was recorded as a production expense with the non-
cash charge for services to additional paid-in-capital. During the six
months ended June 30, 2000 and June 30, 1999, $134,430 and $22,405,
respectively, was recorded as a production expense with the non-cash charge
for services to additional paid-in-capital.
7
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AUDIBLE, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
June 30, 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 June 30, 2000 and June 30,
1999, $74,254 and $71,290, respectively, was recorded as a marketing
expense with the non-cash charge for services to additional paid-in-
capital. During the six months ended June 30, 2000 and June 30, 1999,
$308,737 and $71,290, respectively, 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 and six months
ended June 30, 2000, $2,500,000 and $4,166,666, respectively, was recorded
as a marketing expense relating to this agreement.
(7) Random House Agreement
On May 5, 2000 Audible and Random House entered into a four-year Co-
Publishing, Marketing, and Distribution Agreement to form a strategic
alliance to establish Random House Audible, a publishing imprint, as
defined in the agreement, to produce spoken word content specifically
suited for digital distribution. All titles published by the imprint will
be distributed exclusively on the Internet by Audible. As part of this
alliance, Random House, through its Random House Ventures, LLC subsidiary,
purchased 169,780 shares of Audible common stock from the Company for
$1,000,000. Audible will be contributing $1,000,000 annually towards
funding the acquisition and creation of digital audio titles through Random
House Audible. During the three and six months ended June 30, 2000,
$160,000 was recorded as a cost of content and services revenue expense
8
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AUDIBLE, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
June 30, 2000 and 1999
related to this contribution. The agreement further provides for Random
House to be granted a warrant to purchase 878,333 shares of Audible common
stock at various exercise prices that vest over the term of the agreement
as well as the granting of additional warrants to Random House to purchase
Audible common shares based on future performance. The fair value of these
warrants is being amortized as an expense on a straight-line basis over the
four year term of the agreement, and the warrants are accounted for using
variable plan accounting and compensation costs will vary each accounting
period until the measurement date. During the three and six months ended
June 30, 2000, $152,175 was recorded as a cost of content and services
revenue expense with the non-cash charge for services to additional
paid-in-capital. 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
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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
10
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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 21% of our revenue for the six months ended June 30, 1999. Revenue
from the sale of the Audible Mobile Player 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 June 30,
2000, more than 25,000 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.
11
<PAGE>
We are party to several joint marketing agreements with device
manufacturers including Casio, Compaq, S3-Diamond Multimedia and Philips. Under
these agreements, 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 May 2000, Audible and Random House entered into a four-year
Co-Publishing, Marketing, and Distribution Agreement to form a strategic
alliance to establish Random House Audible, a publishing imprint, as defined in
the agreement, to produce spoken word content specifically suited for digital
distribution. All titles published by the imprint will be distributed
exclusively on the Internet by Audible. As part of this alliance, Random House,
through its Random House Ventures, LLC subsidiary, purchased 169,780 shares of
Audible common stock from the Company. 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.
Results of Operations
The following table sets forth certain financial data for the periods
indicated as a percentage of total revenue for the three and six months ended
June 30, 2000 and 1999.
<TABLE>
<CAPTION>
=================================================================================================================
Three Months Six Months
Ended June 30, Ended June 30,
-------------- --------------
2000 1999 2000 1999
(unaudited) (unaudited)
<S> <C> <C> <C> <C>
Revenue:
Content and services........................ 72% 18% 68% 18%
Hardware.................................... -- 23 -- 21
Other....................................... 28 59 32 61
------------- ----------- ---------- -------------
Total revenue.......................... 100% 100% 100% 100%
Operating expenses:
Cost of content and services revenue........ 135 31 110 37
Cost of hardware revenue.................... -- 25 -- 23
Production expenses......................... 253 137 290 144
Development ................................ 174 81 199 89
Sales and marketing......................... 682 171 797 154
General and administrative.................. 212 103 248 116
------------- ----------- ---------- -------------
Total operating expenses............... 1,456 548 1644 563
------------- ----------- ---------- -------------
Loss from operations............................. (1,356) (448) (1,544) (463)
Interest income, net................... 61 15 82 17
------------- ----------- ---------- -------------
Net loss......................................... (1,295)% (433)% (1,462)% (446)%
=================================================================================================================
</TABLE>
12
<PAGE>
Three months ended June 30, 2000 compared to three months ended June 30, 1999.
Total revenue, net. Total revenue, net for the three months ended June 30,
2000, was $676,000, as compared to $528,000 for the three months ended June 30,
1999, an increase of $148,000, or 28%.
Content and services. Content and services revenue for the three months
ended June 30, 2000, was $487,000, as compared to $92,000 for the three months
ended June 30, 1999, an increase of $395,000, or 429%. Content and services
revenue increased as a result of our increased customer base and the addition of
a new content and services agreements with corporate clients.
Hardware. There was no hardware revenue recognized for the three months
ended June 30, 2000, as compared to $124,000 for the three months ended June 30,
1999, a decrease of $124,000. We do not expect to realize any further hardware
revenue due to the discontinuation of sales of the Audible MobilePlayer at the
end of 1999.
Other. Other revenue for the three months ended June 30, 2000, was
$189,000, as compared to $313,000 for the three months ended June 30, 1999.
Other revenue for both periods related to our agreement with Microsoft
Corporation. Revenue for the three month period ended June 30, 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 June 30, 1999 consisted of $250,000 in nonrecurring revenue for
delivery of a license for certain technology rights; and $63,000 from the
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.
Operating expenses.
Cost of content and services revenue. Cost of content and services revenue
was $910,000, or 187% of content and services revenue, for the three months
ended June 30, 2000, as compared to $162,000, or 176% of content and services
revenue, for the three months ended June 30, 1999. This increase was primarily
due to the acquisition of additional content licenses, including our agreement
with Random House, which resulted in additional amortization of new content
agreement minimum guarantees, non cash amortization of warrants issued, and
other content costs. For the three month period ended June 30, 2000, we also
recorded a charge of $154,000 to reflect the net realizable value of content
agreement guarantees.
Cost of hardware revenue. There was no cost of hardware revenue for the
three months ended June 30, 2000, as compared to $130,000 for the three months
ended June 30, 1999. This decrease was due to the discontinuation of sales of
the Audible MobilePlayer.
Production expenses. Production expenses were $1,709,000 for the three
months ended June 30, 2000, as compared to $723,000 for the three months ended
June 30, 1999, an increase of $986,000, or 136%. 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.
Development. Development costs were $1,177,000 for the three months ended
June 30, 2000, as compared to $427,000 for the three months ended June 30, 1999,
an increase of $750,000, or 176%. 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 $4,611,000 for the
three months ended June 30, 2000, as compared to $903,000 for the three months
ended June 30, 1999, an increase of $3,708,000. This increase was due to
increased personnel and advertising costs associated with our increased
marketing efforts, as well as the expenses recognized in connection with our
Co-marketing Agreement with Amazon.com.
General and administrative. General and administrative expense was
$1,434,000 for the three months ended June 30, 2000, as compared to $544,000 for
the three months ended June 30, 1999, an increase of $890,000, or 164%. This
increase was primarily due to increased personnel and higher legal, accounting
and recruiting fees during the period.
Interest income, net. Interest income was $416,000 for the three months
ended June 30, 2000, as compared to $84,000 for the three months ended June 30,
1999, an increase of $332,000. 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 June 30, 2000, as compared to $13,000 for the three
months ended June 30, 1999, a decrease of $7,000. This decrease was primarily
due to the lower principal balance on our capital equipment lease line.
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Six months ended June 30, 2000 compared to six months ended June 30, 1999.
Total revenue, net. Total revenue, net for the six months ended June 30,
2000, was $1,180,000, as compared to $844,000 for the six months ended June 30,
1999, an increase of $336,000, or 40%.
Content and services. Content and services revenue for the six months ended
June 30, 2000, was $802,000, as compared to $150,000 for the six months ended
June 30, 1999, an increase of $652,000, or 435%. Content and services revenue
increased as a result of our increased customer base and the addition of a new
content and services agreements with corporate clients.
Hardware. There was no hardware revenue recognized for the six months ended
June 30, 2000, as compared to $181,000 for the six months ended June 30, 1999, a
decrease of $181,000. We do not expect to realize any further hardware revenue
due to the discontinuation of sales of the Audible MobilePlayer at the end of
1999.
Other. Other revenue for the six months ended June 30, 2000, was $378,000,
as compared to $513,000 for the six months ended June 30, 1999. Other revenue
for both periods related to our agreement with Microsoft Corporation. Revenue
for the six month period ended June 30, 2000 consisted of $378,000 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 six month period ended June 30, 1999
consisted of $200,000 for services provided to create an AudibleReady software
player for Microsoft's Windows CE product; $250,000 for delivery of a license
for certain technology rights; and $63,000 relating to amortization of revenue
from the advance for granting Microsoft the right to distribute software
enabling users of Microsoft platforms to access and use Audible content. During
the six months ended June 30, 1999, $450,000 of the other revenue is considered
nonrecurring.
Operating expenses.
Cost of content and services revenue. Cost of content and services revenue
was $1,304,000, or 163% of content and services revenue, for the six months
ended June 30, 2000, as compared to $314,000, or 209% of content and services
revenue, for the six months ended June 30, 1999. This increase was primarily due
to the acquisition of additional content licenses, including our agreement with
Random House, which resulted in additional amortization of new content agreement
minimum guarantees, non cash amortization of warrants issued, and other content
costs. For the six month period ended June 30, 2000, we also recorded an
adjustment of $229,000 to reflect the net realizable value of content agreement
guarantees.
Cost of hardware revenue. There was no cost of hardware revenue for the six
months ended June 30, 2000, as compared to $193,000 for the six months ended
June 30, 1999.
Production expenses. Production expenses were $3,428,000 for the six months
ended June 30, 2000, as compared to $1,217,000 for the six months ended June 30,
1999, an increase of $2,211,000, or 182%. 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.
Development. Development costs were $2,346,000 for the six months ended
June 30, 2000, as compared to $748,000 for the six months ended June 30, 1999,
an increase of $1,598,000, or 214%. 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 $9,406,000 for the
six months ended June 30, 2000, as compared to $1,299,000 for the six months
ended June 30, 1999, an increase of $8,107,000. 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
$2,921,000 for the six months ended June 30, 2000, as compared to $974,000 for
the six months ended June 30, 1999, an increase of $1,947,000, or 200%. This
increase was primarily due to increased personnel and higher legal, accounting,
and recruiting fees during the period.
Interest income, net. Interest income was $984,000 for the six months ended
June 30, 2000, as compared to $166,000 for the six months ended June 30, 1999,
an increase of $818,000. 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 $12,000 for the six
months ended June 30, 2000, as compared to $28,000 for the six months ended June
30, 1999, a decrease of $16,000. This decrease was primarily due to the lower
principal balance on our capital equipment lease line.
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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 June 30,
2000, we had an accumulated deficit of $50,453,000. 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 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.
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 June 30, 2000, our principal source of liquidity was $10,306,000 in
cash and equivalents, and $14,877,000 in short-term treasury bill and government
agency note investments.
At June 30, 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, as well as our agreements with Amazon.com and Random House, and
revenue sharing commitments pursuant to agreements with device manufacturers. At
June 30, 2000, we had leased approximately $1,241,000 in equipment on our lease
line and had an outstanding balance of $163,000.
Net cash used in operating activities was $10,387,000 for the six months
ended June 30, 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 six months ended June 30, 1999 was
$3,833,000. Net cash used in the period was primarily attributable to our net
loss in the period and increased accounts receivable and prepaid expenses.
Net cash provided by investing activities was $7,639,000 for the six months
ended June 30, 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
$266,000 for the six months ended June 30, 1999. Net cash used in the period was
related to purchases of property and equipment.
Net cash provided by financing activities was $1,023,000 for the six months
ended June 30, 2000. Net cash provided by financing activities during the period
resulted primarily from sale of common stock as part our agreement with Random
House, and the payments received on notes due from stockholders, partially
offset by capital lease payments. Net cash provided by financing activities for
the six months ended June 30, 1999 was $788,000. 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 in sales and marketing efforts, acquiring
new content, extending 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.
15
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Year 2000
To the best of our knowledge as of June 30, 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
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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.
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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 May 2000, in connection with a Co-Publishing, Marketing, and
Distribution Agreement, we issued 169,780 shares of common stock at the
price of $5.89 per share.
(2) During the three months ended June 30, 2000, we issued 54,264 shares of
common stock in connection with the cashless exercise of 64,141 warrants.
(3) During the three months ended June 30, 2000, we issued stock options to
our employees and directors for an aggregate of 714,000 shares of common
stock at exercise prices between $3.81 and $14.69 per share, pursuant to
our 1999 Stock Incentive Plan.
(4) During the three months ended June 30, 2000, we issued warrants under
various service agreements with outside parties for an aggregate of
990,841 shares of common stock at exercise prices between $4.09 and
$50.00.
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 June 30, 2000, we invested $6,059,000 of our
funds in accordance with the use of proceeds in our Registration Statement Form
S-1. As of June 30, 2000 we have $25,183,000 in remaining funds which are
currently invested in Government backed obligations with maturities of up to one
year. We plan to use the remaining funds available 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 were 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
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ITEM 4. Submission of Matters to Vote of Security Holders
(a) The Company held its annual meeting of Stockholders on May 31, 2000
(the "Annual Meeting").
(b) N/A.
(c) The following matters were voted upon at the Annual Meeting:
(i) All Nominees were elected as directors to serve until the 2002
Annual Meeting of Stockholders, or until their respective successors
are elected and duly qualified, with 99.9% of the shares of Common
Stock present and voting at the meeting voting for Messer's Burnham,
Hirshfeld and Mott as follows:
Nominee For Withheld
Mr. Burnham 13,617,072 20,231
Mr. Hirshfeld 13,617,072 20,231
Mr. Mott 13,617,072 20,231
(ii) The appointment of KPMG LLP as the Company's independent auditors
was ratified by 99.3% of the shares present and voting at the meeting
(votes for: 13,546,608; votes against or withheld: 90,695).
ITEM 5. Other Information
None
ITEM 6. Exhibits and Reports on Form 8-K
(a) Exhibits
3.1#* Amended and Restated Certificate of Incorporation of Audible
3.2##* Amended and Restated Bylaws of Audible
10.1+* License Agreement dated November 4, 1998, by and between
Microsoft Corporation and Audible 10.2+* Digital Rights
Management Agreement dated November 4, 1998, between
Microsoft Corporation and Audible
10.3+* Development Agreement dated November 12, 1998, by and
between RealNetworks, Inc. and Audible
10.4* RealMedia Architecture Partner Program Internet Agreement
dated November 12, 1998, between RealNetworks, Inc. and
Audible
10.5* Master Lease Agreement dated November 19, 1996, by and
between Comdisco, Inc. as lessor, and Audible as lessee
10.5.1* Addendum to Master Lease Agreement dated November 20, 1996,
by and between Comdisco, Inc., as lessor, and Audible, as
lessee (relating to Exhibit 10.5)
10.8* Loan and Security Agreement dated April 6, 1998, by and
between Silicon Valley Bank, as lender, and Audible, as
borrower, for a revolving line of credit of up to $1,000,000
10.10* Security and Loan Agreement dated November 20, 1996, between
Audible, as borrower, and Imperial Bank, as lender, for up
to $500,000
10.12* 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
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
# 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
on Form S-1 (No. 333-76985) as Exhibit No.3.4.
. Incororporated by reference from the Company's 10K/A as Exhibit
10.24.
++ Incororporated by reference from the Company's 10K/A as Exhibit
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.
** Filed herewith.
(b) Reports on Form 8-K
None
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this Report to be signed on its behalf by the
undersigned thereunto duly authorized.
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AUDIBLE, INC.
By: ________________________________
Name: Andrew P. Kaplan
Title: Chief Financial Officer and
Vice President, Finance and
Administration
Dated: August 9, 2000
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