-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, T36v2LZuoqQjzRSQX3FusyAYZqPFunklvv/Y4b7atcgWUqMOGKFSbLGwCTPVG/MF Fl4lVpOWOKFS0+aBp90m2Q== 0000928385-00-001528.txt : 20000515 0000928385-00-001528.hdr.sgml : 20000515 ACCESSION NUMBER: 0000928385-00-001528 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 20000331 FILED AS OF DATE: 20000512 FILER: COMPANY DATA: COMPANY CONFORMED NAME: AUDIBLE INC CENTRAL INDEX KEY: 0001077926 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-BUSINESS SERVICES, NEC [7389] IRS NUMBER: 223407945 FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 000-26529 FILM NUMBER: 629459 BUSINESS ADDRESS: STREET 1: 65 EILLOWBROOK BOULEVARD CITY: WAYNE STATE: NJ ZIP: 07470 BUSINESS PHONE: 9738904070 MAIL ADDRESS: STREET 1: 65 WILLOWBROOK BLVD CITY: WAYNE STATE: NJ ZIP: 07470 10-Q 1 FORM 10-Q 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 AUDIBLE, INC. INDEX FORM 10-Q
PART I - FINANCIAL INFORMATION Page ---- 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
2 PART I - FINANCIAL INFORMATION ITEM 1. Financial Statements AUDIBLE, INC. CONDENSED BALANCE SHEETS -------------------------
March 31, 2000 December 31, 1999 --------------- ----------------- Assets (unaudited) 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 =============== =================
See accompanying notes to condensed financial statements. 3 AUDIBLE, INC. CONDENSED STATEMENTS OF OPERATIONS -------------------------
Three Months Ended March 31, ---------------------------- 2000 1999 (unaudited) (unaudited) 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 =========== ===========
See accompanying notes to condensed financial statements 4 AUDIBLE, INC. CONDENSED STATEMENTS OF CASH FLOWS -------------------------
Three months Ended March 31, ------------------------- 2000 1999 ----------- ----------- (unaudited) (unaudited) 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 =========== ===========
See accompanying notes to condensed financial statements. 5 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 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 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 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 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 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. =============================================================================== Three Months Ended March 31, ------------------ 2000 1999 (unaudited) 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)% ============================================================================
11 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 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 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 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 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 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) 10.6* 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
17 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 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 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 EX-27 2 EXHIBIT 27
5 1,000 3-MOS DEC-31-2000 JAN-01-2000 MAR-31-2000 12,363 17,879 92 10 0 33,445 3,896 1,527 35,882 6,720 0 0 0 273 0 35,882 504 504 394 9,563 0 0 6 (8,497) 0 (8,497) 0 0 0 (8,497) (.33) (.33)
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