Back to GetFilings.com
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
Form 10-K
(Mark One)
X Annual Report Pursuant to Section 13 or 15(d) of the
------- Securities Exchange Act of 1934
For the Fiscal Year Ended December 31, 1999
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 (IRS Employer
Incorporation or Organization) Identification No.)
65 Willowbrook Boulevard 07470 - 7056
Wayne, New Jersey (Zip Code)
(Address of Principal Executive Office)
Registrant's telephone number, including area code: (973) 890-4070
Securities to be Registered Pursuant to Section 12(b) of the Act:
Name of Each Exchange
Title of Each Class: on which Registered:
-------------------- --------------------
Common Stock, par value Nasdaq National Market
$0.01 per share
Securities to be Registered Pursuant to Section 12 (g) of the Act:
None
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [_]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K. [_]
Documents incorporated by reference: Specified portions of the Definitive
Proxy Statement to be filed with the Commission pursuant to Regulation 14A in
connection with the 2000 Annual Meeting are incorporated herein by reference
into Part III of this Report. Such proxy statement will be filed with the
Securities and Exchange Commission not later than 120 days after the
Registrant's fiscal year ended December 31, 1999.
The aggregate market value of the voting stock held by non-affiliates of
the Registrant as of March 24, 2000 was approximately $248,289,833.
The number of shares outstanding of the Registrant's Common Stock, as of
March 24, 2000 was 27,421,745 shares of Common Stock.
ii
TABLE OF CONTENTS
Page
---------
iii
FORWARD-LOOKING STATEMENTS
IN ADDITION TO HISTORICAL INFORMATION, THIS ANNUAL REPORT ON FORM 10-K
CONTAINS FORWARD-LOOKING STATEMENTS THAT INVOLVE RISKS AND UNCERTAINTIES THAT
COULD CAUSE ACTUAL RESULTS TO DIFFER MATERIALLY. FACTORS THAT MIGHT CAUSE OR
CONTRIBUTE TO SUCH DIFFERENCES INCLUDE, BUT ARE NOT LIMITED TO, THOSE DISCUSSED
IN THE SECTION ENTITLED "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS." READERS SHOULD CAREFULLY REVIEW THE RISKS
DESCRIBED IN OTHER DOCUMENTS THE COMPANY FILES FROM TIME TO TIME WITH THE
SECURITIES AND EXCHANGE COMMISSION, INCLUDING THE QUARTERLY REPORTS ON FORM 10-Q
TO BE FILED BY THE COMPANY IN 2000. READERS ARE CAUTIONED NOT TO PLACE UNDUE
RELIANCE ON THE FORWARD-LOOKING STATEMENTS, WHICH SPEAK ONLY AS OF THE DATE OF
THIS ANNUAL REPORT ON FORM 10-K. THE COMPANY UNDERTAKES NO OBLIGATION TO
PUBLICLY RELEASE ANY REVISIONS TO THE FORWARD-LOOKING STATEMENTS OR REFLECT
EVENTS OR CIRCUMSTANCES AFTER THE DATE OF THIS DOCUMENT.
4
PART I
Item 1. Business.
Overview
We are the leading provider of premium spoken audio content, such as audio
versions of books and newspapers and radio programs, that is delivered over the
Internet and can be streamed and played back on personal computers and hand-held
digital audio players. The Audible service allows consumers to purchase and
download our content from our Web site (www.audible.com(TM)), store it in
digital files and play it back on personal computers and portable digital audio
players. More than 20,000 hours of audio content is currently available on our
Web site. Several manufacturers have agreed to support and promote the
playback of our content on their hand-held portable digital audio players. As
defined under a Co-branding, Marketing and Distribution agreement, we will be
the exclusive provider of digital spoken audio to Amazon.com.
The market for the Audible service results from the increasing usage of the
Internet and the introduction of hand-held electronic devices that have digital
audio capabilities. In contrast to traditional radio broadcasts, the Audible
service offers customers access to content of their choice and the ability to
listen to what they want, when and where they want--whether commuting,
exercising, relaxing or sitting at their personal computers. Unlike traditional
and online bookstores, which are subject to physical inventory constraints and
shipping delays, we provide a selection that is readily available in digital
format that can be quickly delivered over the Internet directly to our
customers.
We help publishers, producers, authors, device manufacturers and our Web
site affiliates create incremental sources of revenue. We provide new sources of
revenue for publishers of newspapers, magazines, journals, newsletters,
professional publications and business information and producers of radio
broadcasts. In addition, our service provides companies that distribute or
promote our service and manufacturers of hand-held audio-enabled digital players
with a wide selection of content to offer to their customers.
Industry Background
Public demand for new sources of entertainment, information and
educational media continues to grow as amounts of content and its sources
proliferate. Veronis, Suhler & Associates estimates that the communications
industry exceeded $300 billion in revenues in 1997. This is an increase from
less than $60 billion in 1977. During 1997, Americans on average spent more
than 3,300 hours reading, watching or listening to media content. We believe
that many consumers seek a better way to manage this content.
Listening is a way for individuals to consume this content at times when
they are unable to read, such as when they are driving. A 1996 market study by
the Yankee Group indicates that 87% of automobile commuters listened to the
radio an average of 50 minutes a day while commuting. According to the
Department of Transportation, in 1990, 84 million people drove to and from work
alone, an increase of 35% from 1980. As individuals look to use their commuting
time more efficiently and manage an increasing amount of available content,
audiobooks have emerged as a personalized "pay-to-listen" alternative to
radio, which does not allow listeners to control when they listen to a
particular program. Americans spent $2.2 billion on spoken word audio tapes in
1998, an increase from $1.6 billion in 1996. This increasing usage of
audiobooks exists despite limited types of content, high prices
5
and the limitations of cassette tape players. For instance, the audiobook market
does not address timely print content such as newspapers, newsletters, magazines
and journals.
The Internet has emerged as a significant global communications medium
giving millions of people the ability to access and share large amounts of
information. Through the Internet people can quickly receive various forms of
information, from traditional types of publishing such as text to the newer
technologies like streaming audio. Jupiter Communications estimates that over
33% of all Internet users listen to Internet-delivered audio on their personal
computers. In the past, the audio environment available to Internet users
restricted consumers to listening directly from their PC or to players that
allowed short lengths of audio content. Consumer electronics and computer
manufacturers have been addressing this constraint by developing mobile devices
that are capable of storing more audio content for consumers to play.
An International Data Corporation (IDC) analysis calculated that shipments
of hand-held companion devices exceeded 4.5 million units worldwide in 1998 and
will increase to over 14 million worldwide by 2002. We believe seven million of
these mobile devices will be audio-enabled by the year 2002. This estimate does
not include the recent appearance of Internet-connected music players.
According to Forrester Research, the installed base of Internet-connected music
players is estimated to reach one million units in 1999 and 17 million units by
2002.
Audible is developing relationships with cell phone companies and other
high technology providers. Cell phone technology is the ideal match for hand-
held digital audio players. This combination of wireless freedom and digital
transmission will in the future allow a consumer to download from a library of
audio recordings and bypass the anchored desktop PC. This freedom to download
wirelessly will allow unprecedented convenience for consumers.
The confluence of the Internet as an increasingly accepted media
distribution channel, the widespread adoption of audio-enabled mobile devices
and the continuing growth in consumer demand for content in a variety of formats
has resulted in new challenges for the media industry. These challenges include
creating a system that takes advantage of revenue opportunities by making
content readily accessible through the Internet by compensating publishers and
other content creators for quality entertainment and information while
preventing unauthorized duplication and distribution. This creates an
opportunity for a provider who can establish a secure system for Internet
delivery of premium audio content.
Our Solution
We have created the Audible service to give consumers the ability to
download spoken audio content of their choice from the Internet and to listen to
this audio when, where and how they want. The Audible service addresses the
market opportunity created by consumer demand for audio content and the
emergence of the Internet and hand-held audio-enabled digital players. We have
created the first service for secure delivery of premium digital spoken audio
content over the Internet for playback on personal computers and these devices.
Our service allows customers to program their listening time with personalized
selections from a wide collection of spoken audio content available at our Web
site audible.com, including entertainment, news, education and business
information. We have assembled the largest and most diverse collection of
premium spoken audio content available for download on the Internet for playback
on personal computers and hand-held digital audio players. We have more than
20,000 hours of audio content currently available on our Web site, including
daily selected audio content from publications such as The Wall Street
Journal and The New York Times, audio versions of books
6
and periodicals such as The Economist and Harvard Business Review, and radio
programs such as Car Talk, Fresh Air, Marketplace and News From Lake Wobegon. We
provide over 3,000 audiobooks from publishers, including Bantam Doubleday Dell
Audio Publishing and Random House Audio Publishing, each a division of Random
House, Inc., Dove Audio, Harper Audio, Simon & Schuster Audio and Time Warner
AudioBooks, and written by authors such as Dave Barry, John Grisham, Stephen
King, Sidney Sheldon and Amy Tan. We believe that our extensive audio content
collection and our secure delivery system provide benefits to our customers,
content providers, manufacturers of AudibleReady hand-held electronic devices
and other companies which distribute or promote our service.
Benefits to Customers.
Unlike the traditional ways consumers select, organize and consume audio
content, Audible customers can access content of their choice and listen when,
where and how they want--whether commuting, exercising, relaxing or sitting at
their personal computers.
Selection. At our Web site, audible.com, customers can browse and purchase
---------
from a large and diverse collection of readily available premium spoken audio
content, most of which is currently available only through us in digital format
for Internet distribution either pursuant to exclusive arrangements or because,
to our knowledge, no one else currently has these rights. Our collection
currently includes over 3,000 digital audiobooks in a wide variety of categories
from more than 1,500 authors. We are the only source of timely digital audio
editions of leading newspapers and selected periodicals. We also offer popular
and special interest radio programming, including interviews, commentaries and
talk radio. Our collection also contains selections that are difficult to find
or may not otherwise be readily or conveniently available to customers, such as
lectures and speeches. We have over 8,000 of these other audio selections in
addition to our audiobooks.
Convenience. Audible.com provides customers with one-stop shopping for
-----------
their premium digital spoken audio needs. Our customers can browse and sample
spoken audio selections through our easy to navigate Web site. Our customers can
purchase bundled packages of selected audio content and choose automated
delivery of timely audio content on a subscription basis. Unlike traditional and
online bookstores, which are subject to physical inventory constraints and
shipping delays, we provide a selection that is readily available in digital
format that can be quickly delivered over the Internet directly to our
customers.
Listening Experience. Unlike radio, which offers limited programming and no
--------------------
ability for the listener to control broadcast times, our service enables
customers to take greater control of their time and their listening experience.
Customers decide to listen to what they want, when and where they want. Our
service allows customers to skip between selections or individual articles or
chapters within selections. Customers can pause and resume listening where they
left off and can "bookmark" multiple sections of content, rather than be
constrained by the rewind and fast forward functions of cassette tape players.
Lower Prices. We provide customers with lower priced spoken audio content
------------
because we do not incur the costs of traditional audio content manufacture and
physical distribution. For example, on February 29, 2000, the unabridged
digital audio version of Frank McCourt's new novel, `Tis, sold for $24.95 on
audible.com. By comparison, the manufacturer's suggested retail price for the
same title was $49.95 for the cassette tape.
7
Benefits to Business Affiliates.
We help content creators, device manufacturers and other companies which
distribute or promote our service to their customers to create incremental
sources of revenue by aggregating premium audio content and providing a widely-
accepted system for digital spoken audio distribution.
Content creators. We provide a new source of revenue for publishers of
----------------
newspapers, magazines, journals, newsletters, professional publications and
business information and producers of radio broadcasts by creating a new market
for content that is too timely for distribution on cassette tape or compact disc
and too specialized for widely-broadcast radio programs. Additionally, our
electronic delivery service offers publishers of audiobooks a new distribution
channel for their existing audiobook content. Older publications, including
archived or out-of-print content, when converted to digital audio form, can also
provide additional revenue while incurring relatively low costs for storing and
delivering electronic inventory. Our solution has the benefit of reducing the
risk of audio files being copied without authorization by employing a system
designed to limit playback of audio files to specifically identified personal
computers and hand-held digital audio players.
Device manufacturers. Major manufacturers of hand-held audio-enabled
--------------------
digital players, such as Casio, Compaq, and Philips have agreed to support and
promote the playback of our content on their devices. Diamond Multimedia has
agreed to promote our service with its Rio 500 digital audio player. Our service
provides these manufacturers with an attractive application that takes advantage
of the audio capability of their players, which may, in turn, increase their
sales. In most cases, these manufacturers also receive a percentage of the
revenue generated over a specified period of time by each new Audible customer
referred by them through the purchase of a new player.
Companies which distribute or promote our service. We have entered into
-------------------------------------------------
marketing agreements with Amazon.com, Microsoft, RioPort, RealNetworks, The New
York Times, The Wall Street Journal and Los Angeles Times to promote our content
to their customers, either directly or indirectly. In return, we have access to
additional distribution outlets. We have agreed with some of these companies to
share a portion of revenue from sales of our content to their customers.
Our Strategy
Our objective is to enhance our position as the leading provider of
Internet-delivered premium spoken audio content. Key elements of our strategy to
achieve this goal include:
Increase brand awareness.
We seek to make "Audible" a recognizable brand. We continue to use the
AudibleReady brand to signify that a player is enabled to play back Audible
content. We are continuing to enhance brand awareness of the Audible service
and increase visitors to our Web site by expanding our marketing efforts through
online initiatives, such as affiliate programs, sponsorships, direct e-mail
solicitations and banner advertisements. Our co-marketing agreements with
Amazon.com and AudibleReady player manufacturers are key elements of our plans
to make potential customers aware of, and to encourage them to try our service.
We continue to seek to enter into agreements with content providers as well as
owners of Internet portals, destinations and commerce sites to promote co-
branded services to Internet users.
8
Expand content collection.
We plan to acquire more Internet distribution rights to digital audio
versions of books, newspapers, radio broadcasts, magazines, journals,
newsletters, conferences, seminars, performances, lectures, speeches and
television audio tracks. With selected content providers, we plan to create
additional timely digital audio editions of newspapers, periodicals and other
content not otherwise available to consumers in audio format. We intend to
continue to differentiate our service by expanding our collection of exclusive,
original and topic-specific content, building a collection unconstrained by
traditional physical inventory concerns.
Enable additional electronic devices, wireless phones and systems to be
AudibleReady.
We intend to continue to work with the manufacturers of hand-held
electronic devices to support and promote the playback of Audible content on
their players. We also seek to make AudibleReady future generations of audio
players that use the MP3 audio format, a digital compression format that is
currently used primarily for music playback. We are a member of the Secure
Digital Music Initiative consortium, or SDMI, and intend to support it in the
future. The stated goal of the SDMI consortium is to bring together the
worldwide recording industry and technology companies to develop an open
technology for digital music security. We are also seeking to expand the
AudibleReady program to include other mobile players, such as wireless phones,
other hand-held computing devices as they become audio-enabled, and automobile-
based personal computers.
Continue to improve the customer experience.
We intend to make the Audible service increasingly easy for customers to
use and personalize. We intend to take advantage of the flexibility of our
online distribution system to offer a variety of selections, pricing and
subscription models designed to maximize customer satisfaction and to generate
recurring revenue. We continue to enhance audible.com to make it easier for
customers to find specific selections and to actively suggest selections that
might be of interest to them based on their prior purchasing patterns. We also
are enhancing our AudibleManager software to make it simpler for customers to
manage their personal audio content selections and automate downloads and
transfers of content to mobile players. We provide customer service seven days
per week and 24 hours per day via telephone, email and real time text chat.
The Audible Service
Audible's integrated spoken audio delivery service includes four
components: (1) our Web site, audible.com; (2) our collection of digital audio
content; (3) our software for downloading, managing, scheduling and playing
audio selections; and (4) a variety of AudibleReady players.
Audible.com.
Our Web site, audible.com, delivers a large and diverse selection of
premium digital spoken audio content in a secure format through the Internet. At
audible.com, visitors can browse, sample, purchase, subscribe, schedule, stream
and download digital audio content. One hour of spoken audio, requiring about
two megabytes of storage, takes approximately 15 minutes to download to a
personal computer using a 28 kbps modem, approximately eight minutes using a
56 kbps modem or approximately ten seconds using a high speed Internet
connection, and approximately six minutes to transfer the content from the
personal computer to an AudibleReady player.
9
Digital audio content.
We currently offer more than 3,000 digital audiobooks and more than 8,000
other audio selections comprising over 20,000 hours of digital spoken audio
content, segmented in four categories:
. Audiobooks. We offer a wide selection of audiobooks from more than 1,500
----------
authors. We offer both abridged (typically three to ten hours long) and
unabridged (typically five to 20 hours long) versions of original works,
read either by the authors or by professional narrators.
. Timely audio editions of print publications. Our service enables the
-------------------------------------------
timely distribution of audio editions of newspapers and periodicals
previously available only in print. We offer a 40-minute daily audio
edition of The New York Times and a twice-daily daily selected audio
content from The Wall Street Journal. We also offer audio editions of
the Los Angeles Times, San Jose Mercury News, Harvard Business Review,
Slate, The Economist and numerous technology and investment newsletters.
. Radio broadcasts. We offer popular and special-interest radio programs
----------------
shortly after they are originally broadcast so our customers have the
flexibility to listen to these programs when and where they want. We
offer audio versions of broadcasts such as Fresh Air, Marketplace, Car
Talk, and Science Friday. With National Public Radio we will develop
original programming which will premiere at audible.com.
. Lectures, speeches, performances and other audio. We offer a broad
------------------------------------------------
selection of lectures, speeches, dramatic and comedy performances,
educational and self-improvement materials, religious and spiritual
content, television audio tracks and other forms of spoken audio, many
of which are difficult to find from any other source. We also offer
specialty content created exclusively for audible.com. For example, our
agreement with comedian and actor Robin Williams will create original
comedy and other content programming for Internet distribution
exclusively through audible.com on a weekly basis.
We currently have licensed Internet distribution rights to audio content
from more than 140 publishers, producers of radio content and other content
creators. Our license agreements are typically for terms of one to three years,
and many provide us with exclusive Internet distribution rights. Under most
licensing arrangements, we pay the content creator a portion of the revenue we
receive, typically a 12% royalty. In the majority of arrangements, we also pay a
guaranteed advance against the content creator's revenue share.
In most cases, we license audio recordings from publishers and content
creators. In other cases, such as with The New York Times, The Los Angeles
Times, San Jose Mercury News, The Economist and Harvard Business Review, we
record and produce audio versions from the print publications. In all cases, we
convert the audio into our compressed, digital format.
Audible software.
Our software consists of AudibleManager and AudiblePlayer(TM) for
downloading, managing, scheduling and playing audio selections.
10
AudibleManager enables our customers to download and listen to digital
spoken audio content and transfer it to an AudibleReady player for mobile
playback. AudibleManager can also be used to organize individual selections, to
specify listening preferences and to manage delivery options for subscriptions.
Selections that exceed playback time limitations on a customer's hand-held
electronic device can be listened to over successive sessions by reconnecting
the player to the customer's personal computer and initiating a synchronization
command that automatically replaces the sections that have been played with new
content.
Our AudiblePlayer software enables users of hand-held digital players to
control and customize their listening experience. Unlike cassette tape or
compact disk players, AudibleReady players allow fast navigation of the content
through section markers and bookmarks that can be set by the user. Users can
skip between selections, individual articles or chapters, effectively allowing
them to control the listening experience.
AudibleReady devices.
AudibleReady players are personal computers and other hand-held electronic
devices that have a speaker or an audio output jack and can be enabled to play
back our audio content. The AudibleManager and AudiblePlayer software enable
these devices to receive and play back Audible content and are available for
download from audible.com. Several player manufacturers have bundled the
AudibleManager and AudiblePlayer software in the packaging for their devices.
In addition, some device manufacturers plan to adapt their players to support
the Audible service. The audio output jack of all of these players can work
with headphones or a cassette adaptor to enable the content to be played through
a car stereo system.
We have formed co-marketing relationships with a number of consumer
electronics and computer companies to promote AudibleReady hand-held electronic
devices and our content to consumers. The device manufacturers are generally
required to promote the Audible service through a variety of means, which may
include (1) displaying the AudibleReady logo on their players, (2) displaying
the AudibleReady logo on the outside of the player package, (3) including our
brochures inside the player package and (4) referring to Audible and
AudibleReady in their brochures and manuals. In most cases, the device
manufacturers receive a percentage of the revenue related to the content
downloaded by the purchasers of their AudibleReady players. These revenue
sharing arrangements typically last one to two years from the date the device
user becomes an Audible customer.
Other services.
We also provide audio production and hosting services to corporations that
enable them to deliver in digital audio format training, analysis, marketing and
other information to their employees, suppliers and customers.
Competition
The market for the sale and delivery of spoken audio is highly competitive
and rapidly changing. Principal competitive factors in the spoken audio market
include:
. selection;
11
. price;
. speed of delivery;
. protection of intellectual property;
. timeliness;
. convenience; and
. sound quality.
Although we believe that we currently compete favorably with respect to these
factors, we cannot be sure that we can maintain our competitive position against
current or new competitors, especially those with longer operating histories,
greater name recognition and substantially greater financial, technical,
marketing, management, service, support and other resources.
We compete with (1) traditional and online retail stores, catalogs, clubs
and libraries that sell, rent or loan audiobooks on cassette tape or compact
disc, (2) Web sites that offer streaming access to spoken audio content using
tools such as the RealPlayer or Windows Media Player and (3) other companies
offering services similar to ours.
Audiobooks on cassette tape or compact disc have been available from a
variety of sources for a number of years. Traditional book stores, such as
Borders and Barnes & Noble, and online book stores, such as barnesandnoble.com
offer a variety of audiobooks. The Audio Book Club offers discounted audiobooks
by mail order. Rental services, such as Books on Tape, offer low pricing for
time-limited usage of audiobooks, and libraries loan a limited selection of
audiobooks. One or more of these competitors might develop a competing
electronic service for delivering audio content.
Competition from Web sites that provide streaming audio content is intense
and is expected to increase significantly in the future. Yahoo!Broadcast.com and
RealNetworks offer a wide selection of streaming audio content. These companies
and other portal companies including America Online, Excite, Lycos and Infoseek
may compete directly with us by selling premium audio content for digital
download.
Audiohighway.com also offers downloaded digital audio content for playback
on personal computers. Command Audio has announced plans to deliver audio
content through FM radio frequency for mobile playback.
Our content providers and other media companies may choose to provide
digital audio content directly to consumers. In addition, a small number of
companies control primary or secondary access to a significant percentage of
Internet users and therefore have a competitive advantage in marketing to those
users. These providers could use or adapt their current technology, or could
purchase technology, to provide a service that directly competes with the
Audible service.
Many of these companies have significantly greater brand recognition and
financial, technical, marketing and other resources than we do. We also expect
competition to intensify and the number of competitors to increase significantly
in the future as technology advances providing alternative methods to deliver
digital audio content through the Internet, satellite, wireless data, FM radio
frequency or other means.
12
Intellectual Property and Proprietary Rights
We regard our patents, copyrights, service marks, trademarks, trade dress,
trade secrets and similar intellectual property as critical to our success. To
protect our proprietary rights, we rely on a combination of patent, trademark
and copyright law, trade secret protection and confidentiality and license
agreements with our employees, customers, business affiliates and others.
Notwithstanding these precautions, others may be able to use our intellectual
property or trade secrets without our authorization. If we are unable to
adequately protect our intellectual property, it could materially affect our
financial performance. In addition, potential competitors may be able to
develop technologies or services similar to ours without infringing our patents.
We hold one patent and have filed ten patent applications for some aspects
of the Audible system, four of which have been issued. We do not know if the
other pending patents will ever be issued and, if issued, if they will survive
legal challenges. Legal challenges to our patents, whether successful or not,
may be very expensive to defend.
We have applied for registration in the United States of several of our
trademarks and service marks, including "Audible", "audible.com" "Audible
Hear, There, and Everywhere", "Audiblemanger", "AudibleReady", and "Who You
Gonna Listen To". "audible.com" and "Audiblemanager" have been registered,
and "Audible" and "AudibleReady" have received adverse actions by the Patent
and Trademark Office. We do not know if these marks will be registered or that
we will effectively protect the use of these names. In addition, we have not
taken affirmative steps to protect our trademarks outside of the United States
and effective trademark, service mark, and copyright protection is not
necessarily available in every country in which our services are available
online.
We also license some of our intellectual property to others, including our
AudibleReady technology and various trademarks and copyrighted material. While
we attempt to ensure that the quality of our brand is maintained, others might
take actions that materially harm the value of either these proprietary rights
or our reputation.
We license technology from others, including our compression-decompression
technology, that we incorporate into the Audible system. If these technologies
become unavailable to us, we would need to license other technology which would
require us to redesign our system and recode our content. Although we are
generally indemnified against claims that technology licensed by us infringes
the intellectual property rights of others, such indemnification is not always
available for all types of intellectual property and proprietary rights and in
some cases the scope of such indemnification is limited. Even if we receive
broad indemnification, third party indemnitors may not have the financial
resources to fully indemnify us in the event of infringement, resulting in
substantial exposure to us. We cannot assure you that infringement or
invalidity claims arising from the incorporation of this technology, resulting
from these claims, will not be asserted or prosecuted against us. These claims,
even if not meritorious, could result in the expenditure of significant
financial and managerial resources in addition to potential redevelopment costs
and delays, all of which could materially adversely effect our business,
operating results and financial condition.
13
Employees
As of December 31, 1999, we had a total of 60 full-time employees -- 15 in
research and development, 14 in sales and marketing, 23 in production and eight
in general and administrative.
14
Item 2. Properties.
Our principal administrative, sales and marketing, research and development
and production facility is located at 65 Willowbrook Boulevard, Wayne, New
Jersey, 07470, where we lease approximately 22,000 square feet. Our lease
expires on February 27, 2003.
Item 3. Legal Proceedings.
We may from time to time become a party to various legal proceedings
arising in the ordinary course of our business. Any such proceeding, even if not
meritorious, could result in the expenditure of significant financial and
managerial resources. The Company is not currently involved in any legal
proceedings.
Item 4. Submission of matters to a vote of Security Holders.
None.
15
PART II
Item 5. Market for the Company's Common Stock Equity and Related Stockholder
Matters.
Our common stock is traded on the Nasdaq National Market under the symbol
"ADBL." Prior to July 16, 1999, there was no established public trading market
for any of our securities.
The following table sets forth, for the periods indicated, the range of
high and low closing sales price for our common stock as reported on the Nasdaq
National Market.
1999 High Low
- ---- ------ -------
Third Quarter (from July 16, 1999) $21.00 $ 6.88
Fourth Quarter 15.94 8.44
2000
- ----
First Quarter (through March 24, 2000) 16.94 10.44
On March 24, 2000, the last reported sale price of our common stock was
$12.06 per share. As of March 24, 2000, we had approximately 195 stockholders.
We have never paid or declared any cash dividends on our common stock. Our
present policy is to retain earnings to finance the growth and development of
the business and, therefore, we do not anticipate declaring or paying cash
dividends on our common stock in the foreseeable future.
In November, 1999, in connection with a two year content licensing and co-
marketing agreement entered into with a content provider, we issued a warrant to
purchase 10,000 shares of common stock at $7.65 per share. The warrant expires
May 20, 2003. This warrant and the underlying securities have not been
registered under the Securities Act of 1933, as amended.
16
Item 6. Selected Financial Data.
The selected financial data set forth below should be read in conjunction
with the financial statements and related notes thereto and "Management's
Discussion and analysis of Financial Condition and Results of Operations" and
other financial information appearing elsewhere in this Form 10-K. The selected
financial data set forth below as of December 31, 1998 and 1999 and for the
years ended December 31 1997, 1998 and 1999, are derived from, and are qualified
by reference to, our audited financial statements included elsewhere in this
Form 10-K. The balance sheet data as of December 31, 1995, 1996 and 1997 the
statement of operations data for the period from November 3, 1995, the date of
inception, through December 31, 1995, and the year ended December 31, 1996 are
derived from our audited financial statements not included elsewhere in this
Form 10-K.
Selected Financial Data
(in thousands, except per share data)
Period Nov. 3,
1995 (date of
inception) to
December 31, Year Ended December 31,
--------------- -----------------------------------------------------------------
1995 1996 1997 1998 1999
--------------- -------------- ---------------- -------------- -------------
(in thousands, except share and per share data)
Statement of operations data:
Revenue, net:
Content and services........................... $ -- $ -- $ 3 $ 132 $ 478
Hardware....................................... -- -- 57 244 314
Other.......................................... -- -- -- -- 951
------- ------- ------- ------- --------
Total revenue, net............................. -- -- 60 376 1,743
------- ------- ------- ------- --------
Operating expenses:
Cost of content and services revenue........... -- -- 78 372 812
Cost of hardware revenue....................... -- -- 252 556 308
Production expenses............................ -- 684 1,982 1,639 3,397
Research and development....................... 49 1,810 2,672 1,642 2,680
Write-down related to hardware business........ -- -- -- 952 --
Sales and marketing............................ -- 256 1,228 1,453 6,109
General and administrative..................... -- 786 1,921 1,838 3,015
------- ------- ------- ------- --------
Total operating expenses...................... 49 3,536 8,133 8,452 16,321
------- ------- ------- ------- --------
Loss from operations........................ (49) (3,536) (8,073) (8,076) (14,578)
------- ------- ------- ------- --------
Other (income) expense, net................. -- (27) (44) 62 (1,102)
------- ------- ------- ------- --------
Net loss........................................ $ (49) $(3,509) $(8,029) $(8,138) $(13,476)
======= ======= ======= ======= ========
Basic and diluted net loss per common share..... $(0.02) $(1.10) $(1.49) $(1.15) $(0.85)
Weighted average shares outstanding............. 2,250 3,177 5,379 7,097 15,890
Balance sheet data:
Cash and cash equivalents....................... $ 388 $ 758 $ 646 $ 10,526 $12,030
Short-term invesments........................... ---- ---- ---- ---- 24,404
Total assets.................................... 435 1,232 3,482 12,147 39,926
Noncurrent liabilities.......................... -- 314 1,169 1,688 538
Redeemable preferred stock...................... 389 3,430 12,378 27,725 ----
Total stockholders' equity (deficit)............ (19) (3,488) (11,427) (19,529) 34,578
17
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations.
The following discussion and analysis of our financial condition and
results of operations should be read in conjunction with our financial
statements and related notes thereto, and other financial information included
elsewhere in this Annual Report Form 10-K.
This Annual Report Form 10-K contains forward-looking statements and
information relating to our company. We generally identify forward-looking
statements in this prospectus using words like "believe," "intend," "will,"
"expect," "may," "should," "plan," "project," "contemplate," "anticipate,"
"seek" or similar terminology. These statements are based on our beliefs as well
as assumptions we made using information currently available to us. Because
these statements reflect our current views concerning future events, these
statements involve risks, uncertainties and assumptions. Actual results may
differ significantly from the results discussed in these forward-looking
statements.
Overview
We provide Internet-delivered premium spoken audio content for streaming
and playback on personal computers and hand-held digital audio players. 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 through audible.com. We were incorporated in 1995,
commenced commercial operations in October 1997, and through March 31, 1999, we
were in the development stage for financial reporting purposes. Subsequent to
March 31, 1999, we substantially completed our development efforts in
establishing our business and accordingly no longer consider ourselves a
development stage company.
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 65% of our revenue in 1998, and 18% of our revenue in 1999.
However, we discontinued the production of the player in April 1999, sold our
remaining inventory, and do not expect to earn any MobilePlayer revenue after
1999. Our primary focus is the aggregation and delivery of digital spoken audio
content, and, we will depend upon computer and consumer electronics companies to
manufacture and sell players 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 that trend to continue as sales of audio content and
services increase and eventually account for the majority of our revenue. As of
December 31, 1999, more than 13,000 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 content sales in the period when content is
downloaded and the customer's credit card is processed. 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 payments to reflect their estimated net realizable
value.
18
We recognize revenue from subscriptions pro rata over the subscription
term. Royalty expense on subscriptions is currently accrued on the full
subscription price in the month the subscription is purchased. We plan to
implement a financial reporting system that will allow us to pro rate the
accrual on the subscription royalty over the term of the subscription.
We recognize revenue from sales of the Audible MobilePlayer upon shipment.
We recognize revenue from audio production and hosting services which we provide
to corporations as the services are performed.
In November 1998, we entered into an agreement with Microsoft, one of our
stockholders, to integrate some of our products, grant various rights and
licenses and provide for Microsoft to be paid future royalties for content
distributed as a result of the customized software developed under the
agreement. Microsoft committed a minimum of $2,000,000 in payments to us over
the course of the five-year term of the agreement to integrate 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 research and
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
in the second quarter of 2001. During the year ended December 31, 1999,
$441,304 of this advance was recognized as other revenue. Also under the
agreement, during the year ended December 31, 1999 Audible (i) has performed
technology integration services for which the Company has recognized other
revenue of $200,000, (ii) has delivered a license for certain technology
rights for which the Company has recognized other revenue of $250,000, and
(iii) has delivered 300 Audible MobilePlayers for which the Company recognized
hardware revenue of $50,000. Microsoft has options under the agreement to
acquire additional rights and licenses and extend the term of the agreement
for additional financial consideration.
We are party to several joint marketing agreements with device
manufacturers such as Casio, Compaq, Diamond Multimedia, and Philips. Under
these agreements, our device manufacturers may receive a portion of the
revenue generated over a specified period of time by each new Audible customer
referred by them through the purchase of a new player. For example, a purchaser
of Compaq's hand-held electronic device known as Aero will be able to use the
device and our AudibleManager software to access audible.com and download
content. Compaq will receive a percentage of the revenue related to content
downloaded by this purchaser. These revenue sharing arrangements typically last
one or two years from the date the player user becomes an Audible customer.
On January 30, 2000, the Company 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 threshold amount. Under the Securities
Purchase Agreement, Amazon.com has purchased 1,340,033 shares of common stock
from the Company for $20,000,000.
19
Results of Operations
The following table sets forth certain financial data as a percentage of
total revenue during 1997, 1998 and 1999.
Year Ended December 31,
--------------------------------------------------------
1997 1998 1999
------------------ ------------------ ----------------
Revenue, net:
Content and services........................ 5% 35% 27%
Hardware.................................... 95 65 18
Other....................................... -- -- 55
-------- ------- -----
Total revenue, net....................... 100% 100% 100%
-------- ------- -----
Operating expenses:
Cost of content and services revenue........ 130 99 47
Cost of hardware revenue.................... 418 148 18
Production expenses......................... 3,289 436 195
Research and development.................... 4,433 436 154
Write-down related to hardware business..... -- 253 --
Sales and marketing......................... 2,037 386 351
General and administrative.................. 3,187 489 173
-------- ------- -----
Total operating expenses................. 13,494 2,247 937
-------- ------- -----
Loss from operations.......................... (13,394) (2,147) (837)
-------- ------- -----
Other (income) expense:
Interest income............................. (251) (14) (66)
Interest expense............................ 178 31 3
-------- ------- -----
Total other (income) expense............. (73) 17 (63)
-------- ------- -----
Net loss...................................... (13,321)% (2,164)% (775)%
======== ======= =====
1999 Compared to 1998
Total revenue, net. Total revenue for 1999 was $1,743,000, as compared to
$376,000 for 1998, an increase of $1,367,000, or 364%.
Content and services. Content and services revenue for 1999 was $478,000,
as compared to $132,000 for 1998, an increase of $346,000, or 262%. Content and
services revenue increased primarily as a result of the our customer base
increasing from under 3,000 customers to just over 13,000 customers and the
addition of new corporate customers.
Hardware. Hardware revenue for 1999 was $314,000, as compared to $244,000
for 1998, an increase of $70,000, or 29%. Hardware revenue increased as a result
of selling more Audible MobilePlayers. Hardware revenue from the sale of the
Audible MobilePlayer will cease going forward as we do not expect to sell
MobilePlayers after December 31, 1999.
Other. Other revenue for 1999 was $951,000, as compared to no other revenue
for 1998. The majority of the other revenue was generated in connection with our
agreement with Microsoft Corporation. Under the agreement, revenue for the year
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 $441,000 relating to the recognition of
revenue from the advance for granting Microsoft the right to distribute software
platforms enabling users to access and use Audible
20
content. The remaining $60,000 in other revenue for 1999 related to services
provided under our agreement with Compaq Computer Corporation. For 1999,
$510,000 of the other revenue is considered nonrecurring.
Operating expenses.
Cost of content and services revenue. Cost of content and services revenue
was $812,000, or 170% of content and services revenue, for 1999, as compared to
$372,000, or 281% of content and services revenue, for 1998. This increase was
primarily due to the acquisition of additional content licenses which resulted
in additional amortization of new content agreement minimum guarantees. In
addition, we recorded an adjustment of $146,000 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 a result
of the amortized guaranteed amount being compared to an increased content and
services revenue amount.
Cost of hardware revenue. Cost of hardware revenue was $307,000, or 98% of
hardware revenue, for 1999, as compared to $556,000, or 228% of hardware
revenue, for 1998. This decrease was primarily due to the discontinuation of
production of the MobilePlayer and the absence of a write-down of units from
cost to their net realizable value in 1999.
Production expenses. Production expenses were $3,397,000 for 1999, as
compared to $1,639,000 for 1998, an increase of $1,758,000, or 107%. 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 into two hosting facilities. Audio production
and Web site-content increased as we continued producing selections
available on our Web site as well as doing more daily original programming.
Content acquisition expenses increased as we made a number of significant key
hires during the later part of 1999 as well as the expense associated with the
amortization of warrants issued to Microsoft in 1999.
Research and development. Research and development costs were $2,680,000
for 1999, as compared to $1,641,000 for 1998, an increase of $1,039,000, or
63%. This increase was primarily due to increased personnel and outsourced
costs in the development of the original and subsequent versions of Audible
Manager, AudibleReady formats, and the upgrade of our Web site. During the
year, we performed work with many OEM device manufacturers to plan for
compatibility of Audible software on their platforms. In addition, during 1999,
we upgraded our Web site from "Broadvision" version 2.5 to "Broadvision" version
4.0. Not only did this upgrade provide new features and functionality, it also
was necessary to ensure that our Web site would be Y2K compliant.
Sales and marketing. Sales and marketing expenses were $6,109,000 for
1999, as compared to $1,453,000 for 1998, an increase of $4,656,000, or
320%. This increase was primarily due to an increase in personnel and higher
advertising costs associated with increased marketing efforts, and the expense
associated with the amortization of warrants issued in connection with a
services agreement in 1999.
General and administrative. General and administrative expense was
$3,015,000 for 1999, as compared to $1,838,000 for 1998, an increase of
$1,177,000, or 64%. 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 $1,150,000 for 1999, as
compared to $53,000 for 1998, an increase of $1,097,000. This increase was
primarily due to additional interest income resulting from a higher average
cash and cash equivalent balance and short-term investments resulting from the
proceeds from our initial
21
public offering which occurred in July 1999. Interest expense was $48,000 for
1999, as compared to $115,000 for 1998, a decrease of $67,000. This decrease was
primarily due to the lower principal balance on our capital equipment lease
line.
1998 Compared to 1997
Total revenue, net. Total revenue for 1998, was $376,000, as compared to
$60,000 for 1997, an increase of $316,000, or 527%.
Content and services. Content and services revenue for 1998, was $132,000,
as compared to $3,000 for 1997, an increase of $129,000. Content and services
revenue increased as a result of our increased customer base.
Hardware. Hardware revenue for 1998, was $244,000, as compared to $57,000
for 1997, an increase of $187,000, or 328%. Hardware revenue increased as the
number of MobilePlayers sold increased which was partly offset by a reduction in
their selling price.
Operating expenses.
Cost of content and services revenue. Cost of content sales and services
revenue was $372,000, or 281% of content and services revenue, for 1998, as
compared to $78,000, for 1997. This increase was primarily due to the
acquisition of additional content and resulting amortization of minimum
guarantees. Earned royalties were $24,000, or 18% of content and services
revenue, for 1998, and $2,000, or 82% of content and services revenue, for 1997.
Amortization of contract guarantees was $349,000 for 1998, and $76,000 for 1997.
Cost of hardware revenue. Cost of hardware revenue was $556,000, or 228% of
hardware revenue, for 1998, as compared to $252,000 for 1997, an increase of
$304,000, or 121%. This increase was primarily due to the increase in the total
number of MobilePlayers sold.
Production expenses. Production expenses were $1,639,000 for 1998, as
compared to $1,982,000 for 1997, a decrease of $343,000, or 17%. This
decrease was primarily due to the reduction of personnel and outsourced costs
following the completion and launch of our Web site and the production of our
initial audio content in 1997.
Research and development. Research and development expenses were $1,641,000
for 1998, as compared to $2,672,000 for 1997, a decrease of $1,031,000,or 39%.
This decrease was primarily due to completion of the development in 1997 of
the Audible MobilePlayer, the completion of our Web site and of Version 1.0 of
the AudibleManager software.
Write-down related to hardware business. Write-down related to hardware
business was $952,000 for 1998. This charge consisted of a reduction of
$370,000 in the carrying value of the remaining inventory of Audible
MobilePlayers, an impairment loss of $181,000 on MobilePlayer molds and
manufacturing equipment and a charge of $401,000 to satisfy the Company's
remaining purchase commitments under its Audible MobilePlayer manufacturing
agreement.
Sales and marketing. Sales and marketing expenses were $1,453,000 for
1998, as compared to $1,227,000 for 1997, an increase of $226,000, or 18%.
This increase was primarily due to increased personnel and advertising costs.
22
General and administrative. General and administrative expense was
$1,838,000 for 1998, as compared to $1,921,000 for 1997, a decrease of $83,000,
or 4%. This decrease was primarily due to a reduction in administrative
personnel costs.
Interest income. Interest income was $53,000 for 1998, as compared to
$151,000 for 1997, a decrease of $98,000, or 65%. This decrease was primarily
due to a lower average cash and cash equivalent balance during 1998.
Interest expense. Interest expense was $115,000 for 1998, as compared to
$107,000 for 1997, an increase of $8,000, or 7%. This increase was primarily
due to additional interest expense resulting from increased obligations under
our capital equipment lease line during 1998.
Factors Affecting Operating Results
We have only a limited operating history with which to evaluate our
business and prospects. Our limited operating history and emerging nature of the
market for Internet-delivered audio content makes predicting our future
operating results difficult. In addition, our prospects must be considered in
light of the risks and uncertainties encountered by companies in the early
stages of development in new and rapidly evolving markets, specifically the
rapidly evolving market for delivery of audio content over the Internet. These
risks include our ability to:
. acquire and retain customers;
. build awareness and acceptance of audible.com, the AudibleReady
format and AudibleReady devices;
. extend existing and acquire new content provider relationships; and
. manage growth to stay competitive and fulfill customer demand.
If we fail to manage these risks successfully, it would materially adversely
affect our financial performance.
As of December 31, 1999, we had not entered into any derivative financial
instruments, other financial instruments or derivative commodity investments
that expose us to material market risk. We currently do not and do not plan to
engage in derivative instruments or hedging activities.
We have incurred significant losses since inception, and as of December 31,
1999, we had an accumulated deficit of $33,201,000. 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 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
23
our operations; and (9) general economic conditions and economic conditions
specific to electronic commerce and online media. In the past, we experienced
fluctuations in demand for the Audible service based on the level of marketing
expenditures, the occurrence of external publicity and the quality of our
software and Web site. Any one of these factors could cause our revenue and
operating results to vary significantly in the future. In addition, as a
strategic response to changes in the competitive environment, we may from time
to time make pricing, service or marketing decisions or acquisitions that could
cause significant declines in our quarterly operating revenue.
Our limited operating history and the emerging nature of our market make
prediction of future revenue difficult. We have no assurance that we will be
able to predict our future revenue accurately. Because we have a number of
fixed expenses, we may be unable to adjust our spending in a timely manner to
compensate for unexpected revenue shortfalls. Accordingly, any significant
shortfall in relation to our expectations could cause significant declines in
our operating results. We believe that our quarterly revenue, expenses and
operating results could vary significantly in the future, and that period-to-
period comparisons should not be relied upon as indications of future
performance. Due to the foregoing factors, it is likely that in some future
quarters our operating results will fall below the expectations of securities
analysts and investors, which could have a material adverse effect on the
trading price of our common stock.
Liquidity and Capital Resources
From inception through the date prior to our initial public offering, we
financed our operations through private sales of our redeemable convertible
preferred stock and warrants. Net proceeds from the sales of redeemable
convertible stock and warrants were $28,719,000 since inception.
In July 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 in 13,400,985 shares of common stock.
At December 31, 1999, our principal source of liquidity was $12,030,000 in cash
and cash equivalents, and $24,404,000 in short-term treasury bill and government
agency note investments.
At December 31, 1999, 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 December 31, 1999, we had leased $1,241,000 in equipment on
this line and had an outstanding balance of $311,000.
Net cash used in operating activities was $8,587,000 for 1997, $5,047,000
for 1998 and $10,395,000 for 1999. Net cash used in 1997 and 1998 was
primarily attributable to our net operating losses and increases in inventory,
offset in part by increases in advances in 1998, and increases in accounts
payable, accrued compensation and royalty obligations in 1997. Net cash used in
1999 was primarily attributable to our net operating loss and increases in
interest receivable on short-term investments and increases, in prepaid
expenses, offset in part by increases in accounts payable and accrued expenses.
Net cash used in investing activities was $276,000 for 1997, $4,000 for
1998 and $25,959,000 for 1999. Net cash used in investing activities in 1997 and
1998 were primarily related to purchases of property and equipment. For 1997
and 1999, we invested $100,000 and $50,000 respectively, in interest bearing
notes issued to stockholders. For 1999 we invested $24,404,000 for the
purchases of short-term investments.
24
Net cash provided by financing activities was $8,751,000 for 1997,
$14,931,000 for 1998 and $37,858,000 for 1999. During 1998, we had a
$1,000,000 bank agreement to provide letters of credit which expired in
April 1999 and under which we did not draw any amounts. During 1997, we had a
$500,000 bank line of credit agreement under which we drew the full amount.
This line expired in December 31, 1997 and prior to such time, the balance had
been paid in full. Net cash provided by financing activities resulted primarily
from the issuance of our redeemable convertible preferred stock offset by
capital lease payments during 1997 and 1998 and from the proceeds of our
initial public offering during 1999.
As of December 31, 1999, we had available net operating loss carryforwards
totaling $24,200,000, which expire beginning in 2010. The Tax Reform Act of
1986 imposes limitations on our use of net operating loss carryforwards because
certain stock ownership changes have occurred.
We believe our cash and cash equivalent balance and the funds invested in
short-term investments will be sufficient to meet our anticipated cash
requirements for through the end of fiscal 2000. 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, if at all.
25
RISK FACTORS.
We have a limited operating history with which you can evaluate our business and
our future prospects.
Our limited operating history and small number of customers makes
predicting our future operating results difficult. From the time we were
incorporated in November 1995 until September 1997, we generated no revenue
while we developed our secure delivery system and a prototype audio playback
device, created our audible.com Web site and established relationships with
providers of audio content. Although we began earning limited revenue in October
1997, we have continued to focus our resources on refining and enhancing our Web
site and our playback and management software and in expanding our content
selections and developing relationships with manufacturers of hand-held portable
digital audio players. We have limited history of selling content to users of
hand-held portable digital playersmanufactured by other parties which only
recently became AudibleReady. We expect to spend significant resources on
expanding our service and promoting our brand name.
We have limited revenue, we have a history of losses and we may not be
profitable in the future.
Our limited revenue and history of losses makes it uncertain when or if we
will become profitable. Our failure to achieve profitability within the time
frame expected by investors may adversely affect our business and the market
price of our common stock. We had total revenue of $376,000 and $1,743,000
for 1998 and 1999, respectively. This limited revenue makes it difficult to
predict our future quarterly results and our revenue and operating results can
vary significantly quarter to quarter. Our limited revenue will make relatively
minor fluctuations in revenue much more significant on a percentage basis. Our
revenue is dependent on the availability and sales of AudibleReady players by
third-party manufacturers. We had content and services revenue of $132,000 and
$478,000 for 1998 and 1999, respectively. We had other revenue of none and
$951,000 for 1998 and 1999, respectively. For 1999, $510,000 of the other
revenue is considered nonrecurring. We had operating expenses of $8,452,000 and
$16,321,000 for 1998 and 1999, respectively. Because most of our expenses, such
as employee compensation and rent, are relatively fixed in the short term, we
may be unable to adjust our spending to compensate for unexpected revenue
shortfalls. Accordingly, any significant shortfall in relation to our
expectations could cause significant declines in our operating results. This
would likely affect the market price of our common stock in a manner which may
be unrelated to our long-term operating performance. As of December 31, 1999, we
have incurred net operating losses of approximately $33,201,000 since inception,
and we expect to continue to incur significant losses for the foreseeable
future.
The market for our service is uncertain and consumers may not be willing to use
the Internet to purchase spoken audio content.
Downloading of audio content from the Internet is a relatively new method
of distribution and its growth and market acceptance is highly uncertain. Our
success will depend in large part on consumer willingness to purchase and
download spoken audio content over the Internet. Purchasing this content over
the Internet involves changing purchasing habits, and if consumers are not
willing to purchase and download this content over the Internet, our revenue
will be limited and our business will be materially adversely affected. We
believe that acceptance of this method of distribution may be subject to network
capacity constraints, hardware limitations, company computer security policies,
the ability to change user habits and the quality of the audio content
delivered.
26
We may not be able to license or produce sufficiently compelling audio content
to attract and retain customers and grow our revenue.
If we are unable to obtain licenses from the creators and publishers of
content to have that content available on our Web site on terms acceptable to us
or if a significant number of content providers terminate their agreements with
us, we would have less content available for our customers, which would limit
our revenue growth and materially adversely affect our financial performance.
Our future success depends upon our ability to accumulate and deliver premium
spoken audio content over the Internet. Although we currently collaborate with
the publishers of periodicals and other branded print materials to convert their
written material into original spoken audio content, the majority of our content
originates from producers of audiobooks, radio broadcasts, conferences, lectures
and other forms of spoken audio content. Although many of our agreements with
content providers are for initial terms of one to three years, our content
providers may choose not to renew their agreements with us or may terminate
their agreements early if we do not fulfill our contractual obligations. We
cannot be certain that our content providers will enter into new agreements with
us on the same or similar terms as those currently in effect or that additional
content providers will enter into agreements on terms acceptable to us.
Manufacturers of electronic devices may not manufacture, make available or sell
a sufficient number of products suitable for our service, which would limit our
revenue growth.
If manufacturers of electronic devices do not manufacture, make available
or sell a sufficient number of players promoted as AudibleReady, or if these
players do not achieve sufficient market acceptance, we will not be able to grow
revenue and our business will be materially adversely affected. Manufacturers of
electronic devices have experienced delays in their delivery schedule of their
digital players due to parts shortages and other factors. Although the content
we sell can be played on personal computers, we believe that a key to our future
success is the ability to playback this content on hand-held digital audio
players. Because we no longer manufacture our own AudibleReady players, we
depend on manufacturers, such as Philips, Casio, Compaq and Diamond Multimedia,
to develop and sell their own products and promote them as AudibleReady.
We must establish, maintain and strengthen our brand names, trademarks and
service marks in order to acquire customers and generate revenue.
If we fail to promote and maintain our brand names, our business, operating
results and financial condition could be materially adversely affected. We
believe that building awareness of the "Audible," "audible.com"' and
"AudibleReady" brand names is critical to achieving widespread acceptance of
our service by customers, content providers, device manufacturers and marketing
and distribution companies with which we have business relationships. To
promote our brands, we will need to substantially increase our marketing
expenditures. We have applied for trademark and service mark registrations of
our brand names in the United States. The application for "audible.com" has
been allowed and the applications for "Audible" and "AudibleReady" have
received adverse actions by the Patent and Trademark Office. We are challenging
the adverse actions by filing a request for reconsideration and a notice of
appeal with the Patent and Trademark Office. There can be no assurance that any
of our brand names will be registered as trademarks or that we will effectively
protect the use of these names.
Increasing availability of digital audio technologies may increase competition
and reduce our gross margins, market share and profitability.
If we do not continue to enhance our service and adapt to new technology,
we will not be able to compete with new and existing distributors of spoken
audio, we will lose market share and our business
27
will be materially adversely effected. The market for the Audible service is
new, rapidly evolving and intensely competitive. We expect competition to
intensify as advances in and standardization of digital audio distribution,
download, security, management and playback technologies reduce the cost of
starting a digital audio delivery system or a service that gathers audio
content. To remain competitive, we must continue to either license or internally
develop technology that will enhance the features of the Audible service, our
software that manages the downloading and playback of audio content, our ability
to compress audio files for downloading and storage and our download, security
and playback technologies. Increased competition is likely to result in price
reductions, reduced gross margins and loss of market share, any of which could
materially adversely affect our financial performance.
Our industry is highly competitive and we cannot assure you that we will be able
to compete effectively.
We face competition in all aspects of our business and we cannot assure you
that we will be able to compete effectively. We compete for consumers of audio
content with other Internet-based audio distributors and distributors of audio
on cassette tape or compact disk. We compete with others for relationships with
manufacturers of electronic devices with audio playback capabilities. The
business of providing content over the Internet is experiencing rapid growth and
is characterized by rapid technological changes, changes in consumer habits and
preferences and the emergence of new and established companies. We compete with
(1) traditional and online retail stores, catalogs, clubs and libraries that
sell, rent or loan audiobooks on cassette tape or compact disk, such as Audio
Book Club, Borders, and Barnes & Noble, (2) Web sites that offer streaming
access to spoken audio content using tools such as the RealPlayer or Windows
Media Player, such as Yahoo!Broadcast.com, (3) other companies offering services
similar to ours, such as Audiohighway.com and Command Audio and (4) on-line and
Internet portal companies such as America Online, Inc., Yahoo! Inc., Excite,
Inc., Lycos Corporation, Infoseek Corporation and Microsoft Network, with the
potential to offer audio content. Many of these companies have financial,
technological, promotional and other resources that are much greater than those
available to us and could use or adapt their current technology, or could
purchase technology, to provide a service directly competitive with the Audible
service.
Capacity constraints and failures, delays or overloads could interrupt our
service and reduce the attractiveness of our service to existing or potential
customers.
Any capacity constraints or sustained failure or delay in using our Web
site could reduce the attractiveness of the Audible service to consumers, which
would materially adversely affect our financial performance. Our success depends
on our ability to electronically distribute spoken audio content through our Web
site to a large number of customers efficiently and with few interruptions or
delays. Accordingly, the performance, reliability and availability of our Web
site, our transaction processing systems and our network infrastructure are
critical to our operating results. We have experienced periodic systems
interruptions including planned system maintenance, hardware and software
failures triggered by high traffic levels, and network failure in the Internet
and our Internet service providers. We believe the complexities of our software
and hardware and the potential instability of the Internet due to rapid user
growth mean that periodic interruptions to our service are likely to continue. A
significant increase in visitors to our Web site or simultaneous download
requests could strain the capacity of our Web site, software, hardware and
telecommunications systems, which could lead to slower response times or system
failures. These interruptions may make it difficult to download audio content
from our Web site in a timely manner.
28
We could be liable for substantial damages if there is unauthorized duplication
of the content we sell.
We believe that we are able to license premium audio content in part
because our service has been designed to reduce the risk of unauthorized
duplication and playback of audio files. If these security measures fail, our
content may be vulnerable to unauthorized duplication or playback. If others
duplicate the content we provide without authorization, content providers may
terminate their agreements with us and hold us liable for substantial damages.
Although we maintain general liability insurance, including insurance for errors
or omissions, we cannot assure you that the amount of coverage will be adequate
to compensate us for these losses. Security breaches might also discourage other
content providers from entering into agreements with us. We may be required to
expend substantial money and other resources to protect against the threat of
security breaches or to alleviate problems caused by these breaches.
We do not have a disaster recovery plan or back-up systems, and a disaster could
severely damage our operations.
If our computer systems are damaged or interrupted by a disaster for an
extended period of time, our business, results of operations and financial
condition would be materially adversely affected. We do not have a disaster
recovery plan in effect and do not have fully redundant systems for the Audible
service at an alternate site. Our operations depend upon our ability to
maintain and protect our computer systems, all of which are located in our
headquarters and at two third party offsite hosting facilities. Although we
maintain insurance against general business interruptions, we cannot assure you
that the amount of coverage will be adequate to compensate us for our losses.
Problems associated with the Internet could discourage use of Internet-based
services like ours.
If the Internet fails to develop or develops more slowly than we expect as
a commercial medium, our business may also grow more slowly than we anticipate,
if at all. Our success will depend in large part on increasing use of the
Internet. There are critical issues concerning the commercial use of the
Internet which we expect to affect the development of the market for the Audible
service, including:
. the secure transmission of customer credit card numbers and other
confidential information;
. the reliability and availability of Internet service providers;
. the cost of access to the Internet;
. the availability of sufficient network capacity; and
. the ability to download audio content through computer security
measures employed by businesses.
The loss of key employees could jeopardize our growth prospects.
The loss of the services of any of our executive officers or other key
employees could materially adversely affect our business. Our future success
depends on the continued service and performance of our senior management and
other key personnel, particularly Thomas G. Baxter, our President and CEO, and
Donald R. Katz, our Founder and Chairman of the Board. We do not have
employment agreements with any of our executive officers or other key employees.
29
Our inability to hire new employees may hurt our growth prospects.
The failure to hire new personnel could damage our ability to grow and
expand our business. Our future success depends on our ability to attract, hire
and retain highly skilled technical, managerial, editorial, marketing and
customer service personnel, and competition for these individuals is intense. In
particular, we have experienced difficulty in hiring software and Web site
developers. Our failure to hire these technical employees could delay
improvements in, and enhancements to, the Audible service.
We have no experience in acquiring companies or technologies and any
acquisitions of this type may disrupt our business or distract our management,
due to difficulties in assimilating acquired personnel and operations.
We have no experience in acquiring businesses, technologies, services or
products. From time to time, we engage in discussions and negotiations with
companies regarding our acquiring or investing in such companies' businesses,
products, services or technologies. If we acquire or invest in another company,
we could have difficulty in assimilating that company's personnel, operations,
technology and software. In addition, the key personnel of the acquired company
may decide not to work for us. If we make other types of acquisitions, we could
have difficulty in integrating the acquired products, services or technologies
into our operations. These difficulties could disrupt our ongoing business,
distract our management and employees, increase our expenses and adversely
affect our results of operations. Furthermore, we may incur indebtedness or
issue equity securities to pay for any future acquisitions. The issuance of
equity securities would be dilutive to our existing stockholders. As of this
date we have no agreement to enter into any material investment or acquisition
transaction.
We may not be able to protect our intellectual property.
If we fail to protect our intellectual property, we may be exposed to
expensive litigation or risk jeopardizing our competitive position. The steps
we have taken may be inadequate to protect our technology and other intellectual
property. Our competitors may learn or discover our trade secrets or may
independently develop technologies that are substantially equivalent or superior
to ours. We rely on a combination of patents, licenses, confidentiality
agreements and other contracts to establish and protect our technology and other
intellectual property rights. We have one patent and have filed eight patent
applications. We also rely on unpatented trade secrets and know-how to maintain
our competitive position. We may have to litigate to enforce our intellectual
property rights, to protect our trade secrets or to determine the validity and
scope of the proprietary rights of others. This litigation could result in
substantial costs and the diversion of our management and technical resources
which would harm our business.
Other companies may claim that we infringe their copyrights or patents.
If the Audible service violates the proprietary rights of others, we may be
required to redesign our software, and re-encode the Audible content, or seek to
obtain licenses from others to continue offering the Audible service without
substantial redesign and such efforts may not be successful. We do not conduct
comprehensive patent searches to determine whether our technology infringes
patents held by others. In addition, software development is inherently
uncertain in a rapidly evolving technological environment in which there may be
numerous patent applications pending, many of which are confidential when filed,
with regard to similar technologies. Any claim of infringement could cause us
to incur substantial costs defending against the claim, even if the claim is
invalid, and could distract our management from our business. A party making a
claim could secure a judgment that requires us to pay substantial damages. A
judgment could also include an injunction or other court order that could
prevent us from offering the Audible service. Any of these events could have a
material adverse effect on our business, operating results and financial
condition.
30
We could be sued for content that we distribute over the Internet.
A lawsuit based on the content we distribute could be expensive and
damaging to our business. Our service involves delivering spoken audio content
to our customers. As a distributor and publisher of content over the Internet,
we may be liable for copyright, trademark infringement, unlawful duplication,
negligence, defamation, indecency and other claims based on the nature and
content of the materials that we publish or distribute to customers. Although we
generally require that our content providers indemnify us for liability based on
their content and we carry general liability insurance, the indemnity and the
insurance may not cover claims of these types or may not be adequate to protect
us from the full amount of the liability. If we are found liable in excess of
the amount of indemnity or of our insurance coverage, we could be liable for
substantial damages and our reputation and business may suffer.
Future government regulations may increase our cost of doing business on the
Internet.
Laws and regulations applicable to the Internet covering issues such as
user privacy, pricing and copyrights are becoming more prevalent. The adoption
or modification of laws or regulations relating to the Internet could force us
to modify the Audible service in ways that could adversely affect our business.
We may become subject to sales and other taxes for direct sales over the
Internet.
Increased tax burden could make our service too expensive to be
competitive. We do not currently collect sales or other similar taxes for
download of content into states other than in New Jersey. Nevertheless, one or
more local, state or foreign jurisdictions may require that companies located in
other states collect sales taxes when engaging in online commerce in those
states. If we open facilities in other states, our sales into such states may be
taxable. If one or more states or any foreign country successfully asserts that
we should collect sales or other taxes on the sale of our content, the increased
cost to our customers could discourage them from purchasing our services, which
would materially adversely affect our business.
Our contractual obligations, charter and by-laws could discourage an acquisition
of our company that would benefit our stockholders.
Provisions of our agreement with Microsoft and of our certificate of
incorporation and bylaws may make it more difficult for a third party to acquire
control of our company, even if a change in control would benefit our
stockholders. These provisions include:
. prior to discussing with anyone the sale of our company, we must notify
Microsoft and Microsoft has a right to negotiate exclusively with us
for 21 days to acquire our company. We are not obligated to accept any
offer from Microsoft. If we do not reach agreement during this period,
we may discuss with others the sale of our company;
. our board of directors, without stockholder approval, may issue
preferred stock on terms that they determine. This preferred stock
could be issued quickly with terms that delay or prevent the change in
control of our company or make removal of management more difficult.
Also, the issuance of preferred stock may cause the market price of our
common stock to decrease;
. our board of directors is "staggered" so that only a portion of its
members are elected each year;
31
. only our board of directors, our chairman of the board, our president
or stockholders holding a majority of our stock can call special
stockholder meetings; and
. special procedures which must be followed in order for stockholders to
present proposals at stockholder meetings.
These provisions could have the effect of delaying, deterring or preventing
a change in the control of our company, could deprive our stockholders of an
opportunity to receive a premium for their common stock as part of a sale of our
company, or may otherwise discourage a potential acquirer from attempting to
obtain control of us, which in turn could materially adversely affect the market
price of our common stock.
Item 7A. Quantitive and Qualitative Disclosure about Market Risk.
See Item 7 for discussion.
Item 8. Financial Statements and Supplementary Data.
The information required by Item 8 of Part II is incorporated herein by
reference to the financial statements and schedules filed with this report; see
Item 14 of Part IV.
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure.
None.
32
PART III
Item 10. Directors and Executive Officers of the Company.
The information required by Item 10 is hereby incorporated by reference
from the Proxy Statement for our 2000 Annual Meeting of Stockholders.
Item 11. Executive Compensation.
The information required by Item 11 is hereby incorporated by reference
from the Proxy Statement for our 2000 Annual Meeting of Stockholders.
Item 12. Security Ownership of Certain Beneficial Owners and Management.
The information required by Item 12 is hereby incorporated by reference
from the Proxy Statement for our 2000 Annual Meeting of Stockholders.
Item 13. Certain Relationships and Related Transactions.
The information required by Item 13 is hereby incorporated by reference
from the Proxy Statement for our 2000 Annual Meeting of Stockholders.
33
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K.
(a) Documents filed as part of the report: ____________ Page Number
-----------
(1) Independent Auditors' Report
Balance Sheets at December 31, 1998 and 1999
Statements of Operations for the years ended
December 31, 1997, 1998 and 1999
Statements of Stockholders' (Deficit) Equity
for the years ended December 31, 1997, 1998
and 1999
Statements of Cash Flows for the years ended
December 31, 1997, 1998 and 1999
Notes to Financial Statements
(2) Financial Statement Schedules
All Financial Statement Schedules have been omitted because they
are either in the accompanying footnotes to the financial
statements or are not applicable.
(3) Exhibits
The following exhibits are filed or incorporated by reference, as
stated below:
Exhibit Number Description
- -------------- -----------
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)
34
Exhibit Number Description
- -------------- -----------
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
10.9* Security and Loan Agreement dated November 20, 1996, between Audible,
as borrower, and Imperial Bank, as lender, for up to $500,000
10.10* Promissory Note dated March 28, 1997, from Donald Katz in favor of
Audible, in the principal amount of $100,000
10.10.1* Allonge to Note dated April 21, 1999 between Donald Katz and Audible
(relating to Exhibit 10.12.1)
10.11* Security Agreement dated March 28, 1997, by and between Donald Katz
and Audible
10.12* Amended and Restated Registration Rights Agreement dated February 26,
1998, by and among Audible and certain stockholders named therein
10.12.1* Amendment No. 1 to Amended and Restated Registration Rights
Agreement dated December 18, 1998 (relating to Exhibit 10.14)
10.12.2* Amendment No. 2 to Amended and Restated Registration Rights
Agreement dated June 17, 1999 (relating to Exhibit 10.14)
10.13* 1999 Stock Incentive Plan
10.14* Form of Common Stock Warrants issued March 31, 1997 by Audible to
various investors in connection with the Series C preferred stock
financing
10.15* 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
10.16* 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
10.17* 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
10.18* Sublease Agreement dated July 19, 1996, by and between Audible, as
sublessee, and Painewebber Incorporated, as sublessor
10.19+* Agreement dated April 3, 1999 by and between Audible and Diamond
Multimedia Systems, Inc.
10.20* Common Stock Purchase Warrant, issued April 22, 1999, to Microsoft
Corporation
35
Exhibit Number Description
- -------------- -----------
10.21* Employment Offer Letter from Audible to Andrew Kaplan dated May 25, 1999
10.22* Common Stock Purchase Warrant, W-1, issued June 17, 1999, to Robin Williams
10.23* Common Stock Purchase Warrant, W-2, issued June 17, 1999, to Robin Williams
10.24 Employment Offer Letter from Audible to Thomas G. Baxter dated February 3, 2000
10.25 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.
23.1 Consent of KPMG LLP, Independent Accountants
24.1 Powers of Attorney (included in signature pages)
27 Financial Data Schedule
_________________________________________________
* Incorporated herein by reference to the Company's Registration Statement on
Form S-1, No. 333-76985
+ Portions of these Exhibits were omitted and have been filed separately with
the Secretary of the Commission pursuant to the Company's Application requesting
Confidential Treatment under Rule 406 of the Securities and Exchange Act of
1933.
(b) Reports on Form 8-K
None
(c) Exhibits
The exhibits required by this Item are listed under Item 14(a)(3).
(d) Financial Statement Schedules
All schedules have been omitted because they are either included
in the accompanying footnotes to the financial statements or are
not applicable.
36
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
AUDIBLE, INC.
By: /s/ Thomas G. Baxter
-----------------------------------
Thomas G. Baxter
President and Chief Executive
Officer
Date: March 30, 2000
----------------------------------
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears
below constitutes and appoints Thomas G. Baxter and Nancy Spangler, and each of
them, as his true and lawful attorneys-in-fact and agents, with full power of
substitution and resubstitution, for him and in his name, place, and stead, in
any and all capacities, to sign any and all amendments to this Report, and to
file the same, with all exhibits thereto, and other documents in connection
therewith, with the Securities and Exchange Commission, granting unto said
attorneys-in-fact and agents, and each of them, full power and authority to do
and perform each and every act and thing requisite and necessary to be done in
connection therewith, as fully to all intents and purposes as he might or could
do in person, hereby ratifying and confirming that all said attorneys-in-fact
and agents, or any of them or their or his substitute or substituted, may
lawfully do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934 this
report has been signed below by the following persons in the capacities and on
the date indicated.
Name Title Date
- ---- ----- ----
/s/ Thomas G.Baxter President, Chief Executive March 30, 2000
- --------------------------------- Officer and Director
Thomas G. Baxter (Principal Executive Officer)
/s/ Andrew P. Kaplan Chief Financial Officer and Vice March 30, 2000
- --------------------------------- President, Finance and
Andrew P. Kaplan Administration
/s/ Donald R. Katz Director and Chairman of the Board March 30, 2000
- ---------------------------------
Donald R. Katz
37
Name Title Date
- ---- ----- ----
/s/ Timothy Mott Director March 30, 2000
- ---------------------------------
Timothy Mott
/s/ R. Bradford Burnham Director March 30, 2000
- ---------------------------------
R. Bradford Burnham
/s/ Thomas Hirschfeld Director March 30, 2000
- ---------------------------------
Thomas Hirschfeld
/s/ W. Bingham Gordon Director March 30, 1999
- ---------------------------------
W. Bingham Gordon
/s/ Winthrop Knowlton Director March 30, 2000
- ---------------------------------
Winthrop Knowlton
/s/ Richard Brass Director March 30, 2000
- ---------------------------------
Richard Brass
38
Independent Auditors' Report
Board of Directors and Stockholders
Audible, Inc.:
We have audited the accompanying balance sheets of Audible, Inc. as of
December 31, 1998 and 1999, and the related statements of operations,
stockholders' (deficit) equity, and cash flows for each of the years in the
three-year period ended December 31, 1999. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Audible, Inc. as of December
31, 1998 and 1999, and the results of its operations and its cash flows for each
of the years in the three-year period ended December 31, 1999 in conformity with
generally accepted accounting principles.
KPMG LLP
Short Hills, New Jersey
January 31, 2000
F-1
AUDIBLE, INC.
Balance Sheets
December 31,
----------------------------
Assets 1998 1999
------------- -------------
Current assets:
Cash and cash equivalents............................................................ $ 10,526,299 $ 12,030,392
Short-term investment................................................................ -- 24,404,004
Interest receivable on short-term investments........................................ -- 445,662
Accounts receivable, net of allowance for doubtful accounts
of $21,043 and $3,353 at December 31, 1998 and 1999, respectively.......... 8,516 50,890
Royalty advances..................................................................... 775,402 652,342
Prepaid expenses..................................................................... 102,916 672,526
Inventory............................................................................ 129,535 --
Notes receivable due from stockholders............................................... -- 150,000
------------ ------------
Total current assets............................................................... 11,542,668 38,405,816
Property and equipment, net............................................................ 397,837 1,423,003
Note receivable due from stockholder-non current....................................... 100,000 --
Other assets........................................................................... 106,153 96,980
------------ ------------
Total assets....................................................................... $ 12,146,658 $ 39,925,799
============ ============
Liabilities and Stockholders' (Deficit) Equity
Current liabilities:
Accounts payable..................................................................... $ 482,971 $ 1,513,492
Accrued expenses..................................................................... 208,518 1,183,573
Royalty obligations-current.......................................................... 396,000 503,500
Accrued compensation................................................................. 263,235 411,103
Current maturities of obligations under capital leases............................... 471,224 263,320
Advances-current..................................................................... 441,304 934,765
------------ ------------
Total current liabilities.......................................................... 2,263,252 4,809,753
Deferred cash compensation............................................................. 167,318 177,762
Royalty obligations-non currrent....................................................... 151,000 60,500
Advances-non currrent.................................................................. 1,058,696 252,174
Obligations under capital leases, net of current maturities............................ 310,507 47,187
Redeemable convertible preferred stock (non-cumulative):
Series A, par value $.01. Authorized 1,068,000 shares; 534,000 shares and
no shares issued and outstanding at December 31, 1998 and
December 31,1999, respectively (liquidation value $504,514 and redemption value
$400,500 at December 31,1998)....................................................... 389,189 --
Series B, par value $.01. Authorized 2,100,000 shares; 2,050,000 shares
and no shares issued and outstanding at December 31, 1998 and
December 31, 1999, respectively (liquidation value and redemption value $3,075,000
at December 31, 1998)............................................................... 3,040,581 --
Series C, par value $.01. Authorized 2,300,000 shares; 2,250,000 shares and no
shares issued and outstanding at December 31, 1998 and
December 31, 1999, respectively (liquidation value and redemption value
$9,000,000 at December 31, 1998).................................................... 8,947,875 --
Series D, par value $.01. Authorized 4,375,000 shares; 3,850,000 shares and no
shares issued and outstanding at December 31, 1998 and
December 31, 1999, respectively (liquidiation value and redemption value
$15,400,000 at December 31, 1998)................................................... 15,347,009 --
Stockholders' (deficit) equity:
Common stock, par value $.01. Authorized 16,000,000 and 50,000,000 shares at
December 31, 1998 and 1999, respectively; 7,394,355 and 25,709,586 shares issued
at December 31, 1998 and December 31, 1999, respectively........................... 73,944 257,096
Additional paid-in capital........................................................... 1,162,420 68,969,417
Deferred compensation................................................................ -- (725,764)
Notes due from stockholders for common stock......................................... (1,040,158) (579,025)
Treasury stock at cost: no shares and 532,350 shares of common stock at
December 31, 1998 and December 31, 1999, respectively............................... -- (142,015)
Accumulated deficit.................................................................. (19,724,975) (33,201,286)
------------ ------------
Total stockholders' (deficit) equity............................................... (19,528,769) 34,578,423
------------ ------------
Commitments and contingencies
Total liabilities and stockholders' (deficit) equity............................... $ 12,146,658 $ 39,925,799
============ ============
See accompanying notes to financial statements.
F-2
AUDIBLE, INC.
Statements of Operations
Year ended December 31,
-------------------------------------------------------------
1997 1998 1999
------------------- ------------------- -------------------
Revenue, net:
Content and services............................... $ 2,834 $ 132,357 $ 477,675
Hardware........................................... 57,440 243,733 313,627
Other.............................................. -- -- 951,303
----------- ----------- ------------
Total revenue, net.............................. 60,274 376,090 1,742,605
----------- ----------- ------------
Operating expenses:
Cost of content and services revenue............... 78,352 372,114 812,062
Cost of hardware revenue........................... 252,010 555,575 307,395
Production expenses................................ 1,982,098 1,639,420 3,397,297
Research and development........................... 2,672,179 1,641,458 2,680,108
Write-down related to hardware business............ -- 952,389 --
Sales and marketing................................ 1,227,482 1,453,196 6,108,988
General and adminstrative.......................... 1,921,126 1,838,365 3,015,227
----------- ----------- ------------
Total operating expenses.......................... 8,133,247 8,452,517 16,321,077
----------- ----------- ------------
Loss from operations.............................. (8,072,973) (8,076,427) (14,578,472)
Other (income) expense:
Interest income................................... (150,998) (53,081) (1,150,231)
Interest expense.................................. 107,272 114,728 48,070
----------- ----------- ------------
Total other (income) expense ................... (43,726) 61,647 (1,102,161)
----------- ----------- ------------
Net loss........................................ $(8,029,247) $(8,138,074) $(13,476,311)
=========== =========== ============
Basic and diluted net loss per common share......... $(1.49) $(1.15) $(0.85)
=========== =========== ============
Weighted average shares outstanding................. 5,379,003 7,096,945 15,890,528
=========== =========== ============
See accompanying notes to financial statements.
F-3
AUDIBLE, INC.
Statements of Stockholders' (Deficit) Equity
Notes due
---------
from
----
stockholders
------------
Additional for
---------- ---
Common stock paid-in Deferred common
------------ ------- -------- ------
Shares Par Value capital compensation stock
--------- --------- ---------- ------------ ------------
Balance at December 31, 1996............. 4,753,650 $ 47,537 $ 270,935 $ -- $ (248,500)
Common stock repurchases................. -- -- -- -- 15,406
Common stock issued and re-issued from
treasury................................ 1,272,570 12,725 336,743 -- (364,874)
Issuance of common stock for services
rendered................................ 72,984 730 87,154 -- --
Payments received on notes due from
stockholders............................ -- -- -- -- 1,593
Net loss................................. -- -- -- -- --
---------- -------- ----------- ------------ -----------
Balance at December 31, 1997............. 6,099,204 60,992 694,832 -- (596,375)
Common stock repurchases................. -- -- -- -- 190,514
Common stock issued and re-issued from
treasury................................ 1,283,901 12,839 451,451 -- (654,804)
Issuance of common stock for services
rendered................................ 11,250 113 16,137 -- --
Payments received on notes due from
stockholders............................ -- -- -- -- 20,507
Net loss................................. -- -- -- -- --
---------- -------- ----------- ------------ -----------
Balance at December 31, 1998............. 7,394,355 73,944 1,162,420 -- (1,040,158)
Common stock repurchases................. -- -- -- -- 143,882
Common stock issued and re-issued from
treasury................................ 207,914 2,079 56,004 -- (61,200)
Deferred compensation related to common
stock issued below fair market value.... -- -- 907,214 (907,214) --
Common stock issued in initial public
offering, net of issuance costs......... 4,600,000 46,000 36,810,000 -- --
Conversion of redeemable convertible
preferred stock upon initial public
offering................................ 13,400,985 134,010 28,585,116 -- --
Amortization of deferred compensation.... -- -- -- 181,450 --
Amortization of warrants for services.... -- -- 1,349,726 -- --
Cancellation of common stock issued for
services rendered....................... -- -- -- -- --
Exercise of common stock warrants........ 93,832 938 (938) -- --
Exercise of common stock options......... 12,500 125 99,875 -- --
Payments received on notes due from
stockholders............................ -- -- -- -- 378,451
Net loss................................. -- -- -- -- --
---------- -------- ----------- ------------ -----------
Balance at December 31, 1999............. 25,709,586 $257,096 $68,969,417 $(725,764) $ (579,025)
========== ======== =========== ============ ===========
AUDIBLE, INC.
Statements of Stockholders' (Deficit) Equity
Total
-----
Treasury stock Accumulated stockholders'
-------------- ----------- ------------
Shares Cost deficit (deficit) equity
---------- ---------- ------------- ----------------
Balance at December 31, 1996............. -- $ -- $ (3,557,654) $ (3,487,682)
Common stock repurchases................. (233,055) (15,406) -- --
Common stock issued and re-issued from
treasury................................ 233,055 15,406 -- --
Issuance of common stock for services
rendered................................ -- -- -- 87,884
Payments received on notes due from
stockholders............................ -- -- -- 1,593
Net loss................................. -- -- (8,029,247) (8,029,247)
---------- --------- ------------ ------------
Balance at December 31, 1997............. -- -- (11,586,901) (11,427,452)
Common stock repurchases................. (1,172,724) (190,514) -- --
Common stock issued and re-issued from
treasury................................ 1,172,724 190,514 -- --
Issuance of common stock for services
rendered................................ -- -- -- 16,250
Payments received on notes due from
stockholders............................ -- -- -- 20,507
Net loss................................. -- -- (8,138,074) (8,138,074)
---------- --------- ------------ ------------
Balance at December 31, 1998............. -- -- (19,724,975) (19,528,769)
Common stock repurchases................. (550,186) (143,882) -- --
Common stock issued and re-issued from
treasury................................ 21,586 3,117 -- --
Deferred compensation related to common
stock issued below fair market value.... -- -- -- --
Common stock issued in initial public
offering, net of issuance costs......... -- -- -- 36,856,000
Conversion of redeemable convertible
preferred stock upon initial public
offering................................ -- -- -- 28,719,126
Amortization of deferred compensation.... -- -- -- 181,450
Amortization of warrants for services.... -- -- -- 1,349,726
Cancellation of common stock issued for
services rendered....................... (3,750) (1,250) -- (1,250)
Exercise of common stock warrants........ -- -- -- --
Exercise of common stock options......... -- -- 100,000
Payments received on notes due from
stockholders............................ -- -- -- 378,451
Net loss................................. -- -- (13,476,311) (13,476,311)
---------- --------- ------------ ------------
Balance at December 31, 1999............. (532,350) $(142,015) $(33,201,286) $ 34,578,423
========== ========= ============ ============
See accompanying notes to financial statements.
F-4
AUDIBLE, INC.
Statements of Cash Flows
-------------------------------------------
Year ended December 31,
-------------------------------------------
1997 1998 1999
------------- ------------- -------------
Cash flows from operating activities:
Net loss............................................................. $(8,029,247) $(8,138,074) $(13,476,311)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization....................................... 394,688 681,076 479,907
Services rendered for common stock and warrants..................... 87,884 16,250 1,349,726
Non-cash compensation charge........................................ -- -- 181,450
Cancellation of common stock issued for
services rendered................................................. -- -- (1,250)
Deferred cash compensation.......................................... 105,720 37,810 10,444
Write-down of inventory............................................. 195,317 656,740 --
Impairment loss on equipment........................................ -- 181,151 --
Changes in assets and liabilities:
Increase in interest receivable on short-term investments......... -- -- (445,662)
Increase in accounts receivable, net.............................. (1,774) (6,742) (42,374)
(Increase) decrease in royalty advances........................... (478,459) (47,443) 123,060
(Increase) decrease in advance to manufacturer................... (350,000) 350,000 --
(Increase) decrease in prepaid expenses........................... (94,010) 16,565 (569,610)
(Increase) decrease in inventory.................................. (435,770) (545,822) 129,535
(Increase) decrease in other assets............................... (113,298) 7,145 9,173
Increase in accounts payable...................................... 294,545 110,185 1,030,521
(Decrease) increase in accrued expenses........................... (554,980) 4,079 975,055
Increase in royalty obligations................................... 272,750 78,250 17,000
Increase in accrued compensation.................................. 119,968 51,628 147,868
Increase (decrease) in advances................................... -- 1,500,000 (313,061)
----------- ----------- ------------
Net cash used in operating activities............................ (8,586,666) (5,047,202) (10,394,529)
----------- ----------- ------------
Cash flows from investing activities:
Purchases of property and equipment.................................. (176,171) (3,907) (1,505,073)
Purchases of short-term investments, net............................. -- -- (24,404,004)
Note receivable issued to stockholder................................ (100,000) -- (50,000)
----------- ----------- ------------
Net cash used in investing activities............................ (276,171) (3,907) (25,959,077)
----------- ----------- ------------
Cash flows from financing activities:
Proceeds from issuance of Series C redeemable
convertible preferred stock, net of issuance costs.................. 8,947,875 -- --
Proceeds from issuance of Series D redeemable
convertible preferred stock, net of issuance costs.................. -- 15,347,009 994,472
Proceeds from initial public offering, net of issuance costs......... -- -- 36,856,000
Payments received on notes due from stockholders for
common stock........................................................ 1,593 20,507 378,451
Proceeds from exercise of common stock options....................... -- -- 100,000
Payment of principal on obligations under capital leases............. (198,431) (436,294) (471,224)
----------- ----------- ------------
Net cash provided by financing activities........................ 8,751,037 14,931,222 37,857,699
----------- ----------- ------------
(Decrease) increase in cash and cash equivalents................. (111,800) 9,880,113 1,504,093
Cash and cash equivalents at beginning of year........................ 757,986 646,186 10,526,299
----------- ----------- ------------
Cash and cash equivalents at end of year.............................. $ 646,186 $10,526,299 $ 12,030,392
=========== =========== ============
Supplemental disclosures of cash flow information:
Cash paid during the year for interest............................... $ 107,272 $ 114,728 $ 48,070
=========== =========== ============
Supplemental non-cash investing and financing activities:
Common stock issued for notes receivable, net........................ $ 349,468 $ 464,290 $ 61,200
=========== =========== ============
Acquisition of property and equipment under capital leases........... $ 1,202,436 $ 73,180 $ -
=========== =========== ============
Conversion of redeemable convertible preferred stock................. $ -- $ -- $ 28,719,126
=========== =========== ============
See accompanying notes to financial statements.
F-5
AUDIBLE, INC.
Notes to Financial Statements
December 31, 1997, 1998, and 1999
(1) Description of Business
Audible, Inc. (Audible or the Company), incorporated on November 3, 1995,
was formed to create the Audible service, a solution delivering premium
digital spoken audio content from its Web site, audible.com, over the Internet
for playback on personal computers and mobile devices. The Company commenced
commercial operations in October 1997. From its inception through March 31,
1999, the Company 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.
(2) Initial Public Offering
On July 15, 1999, the Company completed an initial public offering (IPO) of
4,600,000 shares of common stock at $9.00 per share. Total proceeds to the
Company were approximately $36.9 million, net of underwriting discounts and
commissions of approximately $2.9 million and offering costs of approximately
$1.6 million. Concurrent with the IPO, all shares of the Company's redeemable
convertible preferred stock were converted into 13,400,985 shares of common
stock.
(3) Summary of Significant Accounting Policies
Basis of Presentation
The accompanying financial statements retroactively reflect the effect of a
3 for 2 common stock split in the form of a stock dividend declared and
payable by the Company effective May 26, 1999 to common stockholders of record
at the close of business on May 26, 1999. Accordingly, all common share and
per share data has been adjusted to reflect such split.
Reclassifications
Certain items in the 1997 and 1998 financial statements have been
reclasasified to conform to the 1999 presentation.
Revenue Recognition
Content revenue from the sale of individual content titles is recognized
in the period when the content is downloaded and the customer's credit card is
processed. Content revenue from the sale of content subscriptions is
recognized pro rata over the term of the subscription period. The Company
sells coupons for the purchase of content at a discount which are generally
redeemed at the time of purchase. Content returns, allowances, and rebates are
recorded as a reduction of revenue. Service revenue is recognized as services
are performed and consists of audio production and hosting services. Hardware
revenue is recognized upon shipment.
Other revenue for the year ended December 31, 1999 relates to fees billed
and recognized for services and licensing under agreements with Microsoft
Corporation (Microsoft) as discussed in note 8, and Compaq Computer
Corporation. Total revenues attributable to Microsoft represented
F-6
AUDIBLE, INC.
Notes to Financial Statements
December 31, 1997, 1998, and 1999
55% of total revenue for the year ended December 31,1999. No single customer
accounted for more than 10% of revenue in 1997 or 1998.
Cash Equivalents
The Company considers short-term, highly liquid investments with an
original maturity of three months or less to be cash equivalents. Cash
equivalents at December 31, 1998 and 1999 were $10,249,043 and $11,474,215,
respectively.
Short Term Investments
The Company's short term investments consist of Treasury Bills and other
government-backed agency notes with a maturity of one year or less. Since the
Company holds these notes until maturity, interest is recognized and accurued
pro rata over the term of the investment. Short-term investments at December
31, 1998 and 1999 were none and $24,404,004, respectively. Interest
receivable on short-term investments was none and $445,662 at December 31,
1998, and 1999 respectively.
Allowance for Doubtful Accounts
The activity in the allowance for doubtful accounts during the years ended
December 31, 1997, 1998, and 1999 was as follows:
Balance at December 31, 1996 $ ----
Provisions 4,556
-------
Balance at December 31, 1997 4,556
Provisions 17,011
Less: Write-offs 524
-------
Balance at December 31, 1998 21,043
Provisions 1,288
Less: Write-offs 18,978
-------
Balance at December 31, 1999 $ 3,353
=======
Royalties
Royalty advances and the corresponding royalty obligations represent
payments made and payments to be made to various content providers pursuant to
minimum guarantees under their royalty agreements, net of royalties expensed.
These agreements give the Company the right to sell digital audio content over
the Internet. The royalty obligations recorded in the accompanying balance
sheets are classified between current and noncurrent based on the payment
terms specified in the agreements. These payments are being amortized on a
straight-line basis over the term of the royalty agreements or are expensed as
royalties are earned by the content providers under the agreements, whichever
is sooner. In addition, the Company periodically adjusts the balance of these
F-7
AUDIBLE, INC.
Notes to Financial Statements
December 31, 1997, 1998, and 1999
payments to reflect their estimated net realizable value. Royalty expense is
included in cost of content and services revenue in the accompanying
statements of operations and includes the following components:
Year ended
-----------------------------------------------
December 31,
-----------------------------------------------
1997 1998 1999
----------- ------------ ------------
Amortization of minimum guarantees............ $76,041 $348,561 $590,699
Earned royalties.............................. 2,311 23,553 75,095
Net realizable value adjustment............... ---- ---- 146,268
------- -------- --------
$78,352 $372,114 $812,062
======= ======== ========
Inventory
Inventory is stated at the lower of cost, principally using the first-in,
first-out method, or market (net realizable value). Inventory consisted of
Audible MobilePlayers and accessories to the Audible MobilePlayers. The
Company recorded a charge of $195,317 and $286,603 in 1997 and 1998,
respectively, to write down inventory to market value. These charges are
included in cost of hardware revenue in the accompanying 1997 and 1998
statements of operations. The 1998 write-down is in addition to the write-
down discussed in note 6. The Company discountinued manufacturing its Audible
MobilePlayer in 1999 and accordingly had no inventory on hand as of December
31, 1999.
Stock-Based Compensation
The Company applies Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees," in accounting for its stock-
based compensation, as permitted by Statement of Financial Accounting
Standards (SFAS) No. 123, "Accounting for Stock-Based Compensation." SFAS
No. 123 establishes a fair value-based method of accounting for stock-based
compensation and requires pro-forma disclosure of net loss and net loss per
common share as if the fair value-based method of accounting for stock-based
compensation, as defined in SFAS No. 123, had been applied.
Property and Equipment
Property and equipment is stated at cost. Depreciation is calculated using
the straight-line method over the estimated useful lives of the respective
assets, which are three years for computer server and Web site equipment and
two years for office furniture and equipment, and studio equipment.
Leasehold improvements are amortized on a straight-line basis over the
lease term or the estimated useful life of the improvement, whichever is
shorter.
Maintenance and repairs are expensed as incurred.
F-8
AUDIBLE, INC.
Notes to Financial Statements
December 31, 1997, 1998, and 1999
Stock and Equity Instruments Issued for Goods and Services
The Company accounts for stock issued to nonemployees for goods and
services based on the fair value of the goods or services received or the fair
value of the stock issued, whichever is more reliably measurable. The Company
accounts for warrants issued to nonemployees for goods and services in
accordance with the Emerging Issues Task Force ("EITF") Issue No. 96-18,
"Accounting for Equity Instruments that are Issued to Other than Employees for
Acquiring, or in Conjuction with Selling, Goods or Services."
Risks and Uncertainties
Inherent in the Company's business are various risks and uncertainties,
including its limited operating history, unproven business model and the
limited history of electronic commerce on the Internet. The Company's success
will depend in part upon the emergence of the Internet as a communications
medium, the availability of spoken audio content, sales of third party mobile
devices and market acceptance of the Audible service.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities,
disclosure of contingent assets and liabilities at the date of the financial
statements, and reported amounts of revenues and expenses during the period.
Actual results could differ from those estimates.
Research and Development
Research and development expenses are expensed as incurred. Included in
research and development are costs incurred to develop the Audible
MobilePlayer, the Company's Web site, AudibleManager, which is the software
that enables customers to download content from the Company's Web site, and
various AudibleReady third party player formats.
Production Expenses
Production expenses are expensed as incurred and consist primarily of
personnel and outsourced costs to support the Company's infrastructure and
systems including its Web site, internal data communications, audio production
activities and acquisition of content.
Advertising Expenses
The Company expenses the costs of advertising and promoting its products
and services as incurred. These costs are included in sales and marketing in
the accompanying statements of
F-9
AUDIBLE, INC.
Notes to Financial Statements
December 31, 1997, 1998, and 1999
operations and totaled $91,295, $407,472 and $2,226,476 for the years ended
December 31, 1997, 1998 and 1999, respectively.
Income Taxes
The Company accounts for income taxes using the asset and liability method
of SFAS No. 109, "Accounting for Income Taxes." Under the asset and
liability method, deferred tax assets and deferred tax liabilities are
recognized for the future tax consequences attributable to differences between
the financial statement carrying amounts of existing assets and liabilities
and their respective tax bases and operating loss and tax credit
carryforwards. Deferred tax assets and liabilities are measured using enacted
tax rates expected to apply to taxable income in the years in which those
temporary differences are expected to be recovered or settled. The effect on
deferred tax assets and liabilities of a change in tax rates is recognized in
results of operations in the period in which the tax change occurs.
Impairment of Long-Lived Assets
The Company accounts for long-lived assets in accordance with the
provisions of SFAS No. 121, "Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to be Disposed Of." SFAS No. 121 requires
that long-lived assets and certain identifiable intangibles be reviewed for
impairment whenever events or changes in circumstances indicate that the
carrying amount of an asset may not be recoverable. Recoverability of assets
to be held and used is measured by a comparison of the carrying amount of an
asset to future net cash flows expected to be generated by the asset. If such
assets are considered to be impaired, the impairment to be recognized is
measured as the amount by which the carrying amount of the assets exceeds the
fair value of the assets. Assets to be disposed of are reported at the lower
of the carrying amount or fair value less costs to sell.
Basic and Diluted Net Loss Per Common Share
Basic and diluted net loss per common share is presented in accordance with
the provisions of SFAS No. 128, "Earnings Per Share." Basic net loss per
common share is computed by dividing net loss 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 all periods presented.
Basic and diluted net loss per common share for the years ended December
31, 1997, 1998 and 1999 does not include the effects of warrants to purchase
675,001, 675,001 and 1,410,954 shares of common stock, respectively; warrants
to purchase 87,404, 94,904 and 0 shares of preferred stock, respectively
(adjusted for the common stock split); options to purchase 0, 0, and 1,448,600
shares of common stock, respectively; and 4,834,000, 8,684,000 and 0 shares of
convertible preferred stock on an "as-if" converted basis, respectively; as
the effect of their inclusion is antidilutive during each period.
F-10
AUDIBLE, INC.
Notes to Financial Statements
December 31, 1997, 1998, and 1999
Fair Value of Financial Instruments
Financial instruments that potentially subject the Company to significant
concentrations of credit risk consist of cash and cash equivalents, short-term
investments, accounts receivable, accounts payable and accrued expenses. At
December 31, 1998 and 1999, the fair values of these financial instruments
approximated their carrying value due to the short-term nature of these
instruments.
Comprehensive Loss
As of January 1, 1998, the Company adopted the provisions of SFAS No. 130,
"Reporting Comprehensive Income," which establishes standards for reporting
and displaying comprehensive income and its components in a full set of
general purpose financial statements. The adoption of this standard has had
no impact on the Company's financial statements. Accordingly, the Company's
comprehensive loss is equal to its net loss for all periods presented.
(4) Stockholders' (Deficit) Equity
Common Stock
In 1997, the Company increased the number of shares of common stock
authorized from 7,000,000 to 12,000,000. In 1998, the Company increased the
number of shares of common stock authorized from 12,000,000 to 16,000,000. In
April 1999, the Company increased the number of common stock authorized from
16,000,000 to 50,000,000. At December 31, 1998 and 1999, the Company had
7,394,355, and 25,709,586 respectively, common stock shares issued and
13,026,000 and none respectively, common stock shares reserved for conversion
of Series A convertible preferred stock, Series B convertible preferred stock,
Series C convertible preferred stock, and Series D convertible preferred
stock. Additionally at December 31, 1998 and 1999, the Company had 769,905
and 2,859,554 respectively, common shares reserved for common and preferred
stock warrants and options. All shares of preferred stock were converted into
13,400,985 shares of common stock at the closing of the Company's IPO.
Prior to the Company's initial public offering, shares of common stock
outstanding were purchased under the Company's Stock Restriction Agreements,
which contain certain restrictions related to the sale and transfer of the
shares and certain vesting and buyback provisions. Under the Stock
Restriction Agreements, shares were purchased by employees and consultants of
the Company through the issuance of full recourse promissory notes (see note
13). In general, shares sold to employees vest over a 50-month period, with
the Company maintaining an option to repurchase unvested shares. Shares of
common stock were also, on occasion, issued in exchange for services.
A summary of common stock issued under Stock Restriction Agreements
follows:
Number of
-------------- Weighted average issue
shares ----------------------
-------------- price
-----
Balance at December 31, 1996.................................... 4,753,650
F-11
AUDIBLE, INC.
Notes to Financial Statements
December 31, 1997, 1998, and 1999
Issued for notes................................................ 1,505,625 $.24
Issued in exchange for services................................. 72,984 Fair value of
services--$87,884
Repurchased..................................................... (233,055) $.07
----------
Balance at December 31, 1997.................................... 6,099,204
Issued for notes................................................ 2,456,625 $.27
Issued in exchange for services................................. 11,250 Fair value of
services--$16,250
Repurchased..................................................... (1,172,734) $.16
----------
Balance at December 31, 1998.................................... 7,394,355
Cancellation of common stock issued for services............... (3,750) Fair value of
services--($1,250)
Issued for notes................................................ 229,500 $.27
Repurchased..................................................... (550,186) $.26
----------
Balance at December 31, 1999.................................... 7,069,919
==========
In March 1999, the Company issued common shares 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 issuance price of these common shares of $907,214 was recorded
as deferred compensation, a component of stockholders' (deficit) equity, and
is being recorded as an expense straight line over the vesting term. During
the year ended December 31, 1999, $181,450 of this expense was recognized.
Employee Stock Incentive Plan
In April 1999, the Company established the 1999 Stock Incentive Plan (the
"Plan") which permits up to 9,000,000 shares of common stock 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. The option grants vest over a
fifty month period and expire ten years from the date of the grant.
A summary of the stock option activity under the Plan is as follows:
Weighted Average
Number of Shares Exercise Price Per Exercise Price
Share
Balance, December 31, 1998 ----
Granted 1,501,100 $2.00 - $15.375 $9.65
Canceled (40,000) $8.00 $8.00
Exercised (12,500) $8.00 $8.00
---------
Balance, December 31, 1999 1,448,600 $2.00 - $15.375 $9.71
=========
Exercisable, December 31, 1999 91,880 $2.00 - $ 8.00 $7.98
=========
F-12
AUDIBLE, INC.
Notes to Financial Statements
December 31, 1997, 1998, and 1999
The Company has computed the proforma disclosures required under SFAS No.
123 for all stock options granted in 1999 using the Black-Scholes option
pricing model prescribed by SFAS No. 123.
The assumptions used and the weighted average information for the year
ended December 31, 1999 are as follows:
Risk-free interest rate.......................................... 6.00 %
Expected dividend yield.......................................... ------
Expected lives................................................... 7 years
Expected volatility.............................................. 70%
Weighted-average grant date fair value of options granted during
the year ..................................................... $ 7.81
The effect of applying SFAS No. 123 would be as follows:
1999 1999
As Reported Pro Forma
----------- ---------
Net loss.......................... $(13,476,311) $(14,412,428)
Basic and diluted net loss per common
share........................... $ (0.85) $ (0.91)
At December 31, 1999, 7.5 million shares of common stock were available for
future grants under the Plan.
Warrants
In 1996, the Company issued warrants to purchase 12,500 shares of Series B
convertible preferred stock which had an exercise price of $4.00 per share and
expire on November 20, 2001. Also in 1996, the Company issued warrants to
purchase 33,582 shares of Series B convertible preferred stock which have an
exercise price of $2.68 and expire on November 19, 2006.
In 1997, the Company issued warrants to purchase 12,188 shares of Series C
convertible preferred stock with an exercise price of $4.00 per share. The
warrants expire on July 24, 2007.
In conjunction with the issuance of the Series C convertible preferred
stock in 1997, the Company issued warrants to purchase 675,001 shares of
common stock at an exercise price of $4.00 per share. The warrants expire on
March 31, 2002.
In 1998, the Company issued warrants to purchase 5,000 shares of Series D
convertible preferred stock which have an exercise price of $4.00 per share
and expire on April 5, 2003.
Using a Black-Scholes option model, the fair value of the warrants issued
in 1996, 1997, and 1998 was insignificant on the date of grant.
F-13
AUDIBLE, INC.
Notes to Financial Statements
December 31, 1997, 1998, and 1999
In April 1999, in connection with an amendment to the agreement with
Microsoft Coporation ("Microsoft") (see note 8), the Company issued Microsoft
a warrant to purchase 100,000 shares of common stock at the IPO price of $9.00
per share which expires November 18, 2003.
In June 1999, in connection with a services agreement (see note 9), 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 warrants expire on June 16,
2009.
In July 1999, in connection with a content provider agreement, the Company
issued a warrant to purchase 4,000 shares of common stock at the IPO price of
$9.00 per share which expires July 16, 2003.
In November 1999, in connection with a content provider agreement, the
Company issued a warrant to purchase 10,000 shares of common stock at 85% of
the IPO price of $9.00 per share, or $7.65 per share which expires May 20,
2003.
The relative fair values of warrants issued in exchange for services were
determined in accordance with EITF Issue No. 96-18 and are being recognized as
an expense over the periods in which services are being performed.
A summary of the warrant activity for the years ended December 31, 1997,
1998, and 1999 is as follows (all preferred stock warrants were converted into
common stock warrants on the IPO date and accordingly, are reflected below
retroactively showing the effect of the common stock split):
Weighted Average
Number of Warrants Exercise Price Per Share Exercise Price
Balance, December 31, 1996 69,122 $1.79 - $ 2.67 $2.03
Issued 693,283 $2.67 - $ 4.00 $3.96
---------
Balance, December 31, 1997 762,405 $1.79 - $ 4.00 $3.79
Issued 7,500 $2.67 $2.67
---------
Balance, December 31, 1998 769,905 $1.79 - $ 4.00 $3.78
Issued 764,000 $0.01 - $ 9.00 $6.56
Exercised (122,951) $1.79 - $ 4.00 $3.63
---------
Balance, December 31, 1999 1,410,954 $0.01 - $ 9.00 $5.30
=========
Exercisable, December 31, 1999 1,160,954 $0.01 - $ 9.00 $4.72
=========
The warrants exercised in 1999 were exercised through cashless transactions in
accordance with the warrant agreements. Accordingly, the number of common
stock shares issued as result of these exercises was 93,832.
F-14
AUDIBLE, INC.
Notes to Financial Statements
December 31, 1997, 1998, and 1999
(5) Redeemable Convertible Preferred Stock
Series A
In December 1995, the Company authorized 1,350,000 shares of Series A
convertible preferred stock which was subsequently decreased in March 1997 to
1,068,000. In 1995, the Company issued 534,000 shares of Series A convertible
preferred stock at $.75 per share for net proceeds of $389,189. Each holder
of outstanding shares of Series A convertible preferred stock had voting
rights equal to the number of shares of common stock into which the shares of
Series A convertible preferred stock were convertible, which was a 3 for 2
share basis.
Stockholders of the Series A convertible preferred stock were entitled to
receive dividends, when and if declared by the Board of Directors, at an
annual rate of $.075 per share. Such dividends were not cumulative.
If a dividend or other distribution was declared on any shares of Series B,
Series C or Series D convertible preferred stock, the Board of Directors had
to simultaneously declare a dividend or distribution on Series A convertible
preferred stock based on the relative aggregated liquidation value of the
outstanding shares of Series A, Series B, Series C and Series D convertible
preferred stock so that the outstanding shares of Series A, Series B, Series C
and Series D convertible preferred stock will participate equally with each
other.
Series B
In July 1996, the Company authorized 2,000,000 shares of Series B
convertible preferred stock which was subsequently increased to 2,200,000 in
November 1996 and then subsequently decreased to 2,100,000 shares in March
1997. During 1996, the Company issued an aggregate of 2,050,000 shares of
Series B convertible preferred stock at $1.50 per share for aggregate net
proceeds of $3,040,581. Each holder of outstanding shares of Series B
convertible preferred stock had voting rights equal to the number of shares of
common stock into which the shares of Series B convertible preferred stock
were convertible, which was a 3 for 2 share basis.
Stockholders of Series B convertible preferred stock were entitled to
receive dividends, when and if declared by the Board of Directors, at an
annual rate of $.15 per share. Such dividends were not cumulative.
Series C
In March 1997, the Company authorized 2,300,000 shares of Series C
convertible preferred stock. In March 1997, the Company issued 2,250,000
shares of Series C convertible preferred stock at $4.00 per share for net
proceeds of $8,947,875. Each holder of outstanding shares of Series C
convertible preferred stock had voting rights equal to the number of shares of
common stock into which the Series C convertible preferred stock were
convertible, which was a 3 for 2 share basis.
F-15
AUDIBLE, INC.
Notes to Financial Statements
December 31, 1997, 1998, and 1999
Stockholders of Series C convertible preferred stock were entitled to
receive dividends, when and if declared by the Board of Directors, at an
annual rate of 10% of the initial Series C convertible preferred stock value
($4.00 per share). Such dividends were not cumulative.
Series D
In February 1998, the Company authorized 1,375,000 shares of Series D
convertible preferred stock which was subsequently increased to 4,375,000 in
December 1998. During 1998, the Company issued an aggregate of 3,850,000
shares of Series D convertible preferred stock at $4.00 per share for
aggregate net proceeds of $15,347,009. During 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 were
convertible, which was a 3 for 2 share basis.
Stockholders of Series D convertible preferred stock were entitled to
receive dividends, when and if declared by the Board of Directors, at an
annual rate eof 10% of the initial Series D convertible preferred stock value
($4.00 per share). Such dividends were not cumulative.
No dividends were declared on any series of the preferred stock.
Automatic Conversion
At the closing of the Company's IPO on July 15, 1999 all shares of Series A
convertible preferred stock, Series B convertible preferred stock, Series C
convertible preferred stock, and Series D convertible preferred stock were
automatically converted into 13,400,985 shares of common stock.
(6) Write-down Related to Hardware Business
In 1998, the Company decided to discontinue manufacturing the Audible
MobilePlayer and instead to focus its efforts on developing the technology to
enable third-party hand-held players to download Audible's content. As a
result, the Company recorded a charge of approximately $370,000 to reduce the
remaining inventory to its net realizable value. The Company also recorded an
impairment loss of approximately $181,000 on certain molds and manufacturing
equipment that were used in the manufacturing of the Audible MobilePlayer.
The impairment loss was measured as the difference between the fair value,
determined to be zero, and the carrying value of the molds and manufacturing
equipment. In addition, the Company recorded a charge of $51,000 and agreed
to use its $350,000 deposit with the manufacturer to satisfy $401,000 in
remaining purchase commitments. These charges comprise the write-down of
approximately $952,000 recorded in the 1998 statement of operations.
(7) Property and Equipment
Property and equipment at December 31, 1998 and 1999 consists of the
following:
F-16
AUDIBLE, INC.
Notes to Financial Statements
December 31, 1997, 1998, and 1999
December 31,
--------------------------------------
1998 1999
----------------- -------------------
Construction in progress......................................... $ 16,428 $ ---
Studio equipment................................................. 155,935 385,732
Computer server and Web site equipment........................... 510,118 1,603,946
Molds and manufacturing equipment................................ 302,463 ---
Office furniture and equipment................................... 392,781 590,657
Leasehold improvements........................................... 93,829 93,829
---------- ----------
1,471,554 2,674,164
Less accumulated depreciation and amortization................... 1,073,717 1,251,161
---------- ----------
$ 397,837 $1,423,003
========== ==========
Property and equipment includes equipment under capital leases.
Depreciation and amortization expense on property and equipment, including
equipment under capital leases, totaled $379,323, $665,711 and $479,907 in
1997, 1998, and 1999, respectively.
An impairment loss of approximately $181,000 was recorded on molds and
manufacturing equipment in 1998 to reduce the net book value to zero since the
Company determined that the carrying amount of the molds and manufacturing
equipment was not recoverable (see note 6). This equipment was disposed of in
1999.
(8) Microsoft Corporation 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 research and 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 in the second quarter of
2001. During the year ended December 31, 1999, $441,304 of this advance was
recognized and is recorded as other revenue on the accompanying 1999 statement
of operations.
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 December 31, 1999, Audible had not
recognized any royalties under this agreement.
Also under the agreement, during the year ended December 31, 1999 Audible
(i) has performed technology integration services for which the Company has
recognized other revenue of $200,000, (ii) has delivered a license for
certain technology rights for which the Company has recognized other
F-17
AUDIBLE, INC.
Notes to Financial Statements
December 31, 1997, 1998, and 1999
revenue of $250,000, and (iii) has delivered 300 Audible MobilePlayers for
which the Company recognized hardware revenue of $50,000. 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 the IPO price of $9.00
per share. The fair value of this warrant was determined in accordance with
EITF Issue No. 96-18 and 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 year ended December 31, 1999, $156,835 was recorded as a production
expense related to this agreement with the non-cash charge for services to
additional paid-in-capital in the 1999 statement of stockholders' (deficit)
equity.
(9) 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 was
determined in accordance with EITF Issue No. 96-18 and 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 final measurement date. During the year ended
December 31, 1999, $1,181,160, was recorded as a marketing expense related to
this agreement with the non-cash charge for services to additional paid-in-
capital in the 1999 statement of stockholders' (deficit) equity. In addition
to the warrants, the agreement also allowed for the purchase of 150,000 shares
of common stock at the IPO price of $9.00 per share on the IPO date.
(10) Income Taxes
There is no provision for income tax expense in 1997, 1998, or in 1999 due
to the Company's net losses in each of the years. No income tax payments have
been made in 1997, 1998, or 1999.
The difference between the actual income tax provision and that computed by
applying the U.S. federal income tax rate of 34% to pretax loss is summarized
below:
Year ended December 31,
---------------------------------------------------------------
1997 1998 1999
-------------------- -------------------- -------------------
Computed "expected" tax benefit............. $(2,729,944) $(2,766,945) $(4,581,946)
Decrease in tax benefit resulting from:
Increase in the federal valuation allowance 2,728,000 2,765,000 4,578,000
Other, net.................................. 1,944 1,945 3,946
----------- ----------- -----------
$ -- $ -- $ --
=========== =========== ===========
F-18
AUDIBLE, INC.
Notes to Financial Statements
December 31, 1997, 1998, and 1999
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and liabilities as of December 31, 1998
and 1999 are as follows:
December 31,
------------------------------------------
1998 1999
-------------------- --------------------
Deferred tax assets:
Net operating loss carryforwards........................... $4,288,000 $10,413,000
Capitalized start-up costs................................. 1,115,000 886,000
Capitalized research and developmental costs............... 1,876,000 1,985,000
Book depreciation in excess of tax depreciation............ 229,000 246,000
Deferred compensation and accrued vacation................. 105,000 145,000
Inventory write-down....................................... 148,000 --
Molds and equipment impairment............................. 72,000 --
Advances................................................... -- 455,000
Other, net................................................. 36,000 119,000
---------- -----------
Total deferred tax assets................................. 7,869,000 14,249,000
Less valuation allowance:..................................
Federal................................................... 6,689,000 11,267,000
State..................................................... 1,180,000 2,982,000
---------- -----------
Total valuation allowance:................................. 7,869,000 14,249,000
---------- -----------
Net deferred taxes........................................ $ -- $ --
========== ===========
In assessing the realizability of deferred tax assets, the Company
considers whether it is more likely than not that some portion or all of the
deferred tax assets will not be realized. The ultimate realization of
deferred tax assets is dependent upon the generation of future taxable income.
Based on the Company's historical net losses, management believes it is more
likely than not that the Company will not realize the benefits of these
deferred tax assets, and accordingly, a full valuation allowance has been
recorded on the deferred tax assets as of December 31, 1998 and 1999.
As of December 31, 1999, the Company has net operating loss carryforwards
for federal income tax purposes of approximately $24.2 million which begin to
expire in 2010 if not used to offset future taxable income. The Company has
experienced certain ownership changes which, under the provisions of Section
382 of the Internal Revenue Code of 1986, as amended, may result in an annual
limitation on the Company's ability to utilize its net operating losses in the
future.
(11) Related-party Transactions
The Company had an agreement with Flextronics to manufacture the Audible
MobilePlayer. The chief executive officer of Flextronics is also a principal
of one of the Company's stockholders. Included in accounts payable is
approximately $51,000 and $13,000 which is due to Flextronics at December 31,
1998 and 1999, respectively. The Company terminated this agreement in 1999 in
connection with the decision to discontinue manufacturing the Audible
MobilePlayer (see note 6).
A note receivable due from a stockholder in the amount of $100,000 at
December 31, 1998 and at December 31, 1999 bears interest at 6% annually. The
principal amount plus accrued interest is due July 15, 2000, under an
amendment executed in April 1999. The stockholder has pledged
F-19
AUDIBLE, INC.
Notes to Financial Statements
December 31, 1997, 1998, and 1999
37,500 shares of common stock as security under the promissory note. A note
receivable due from a stockholder of $50,000 issued in 1999 bears interest at
5.42% annually. The principal amount plus accrued interest is due on September
27, 2000. The stockholder has pledged 12,500 shares of common stock as
security under the promissory note.
(12) Commitments
Lease Obligations
The Company entered into a capital lease line of credit with Comdisco, Inc.
whereby the Company may lease up to $1,750,000 of equipment. The Company has
leased $1,240,585 of equipment under this capital lease line as of December
31, 1999. The Company has operating leases on its office space. Future
minimum lease obligations under these lease arrangements are as follows:
Capital Operating
------------------- --------------------
leases leases
------------------- --------------------
Year ending December 31:
2000...................................................... 276,898 325,672
2001...................................................... 48,271 371,892
2002...................................................... -- 371,892
2003...................................................... -- 44,752
-------- ----------
Total future minimum lease payments.................... 325,169 $1,114,208
==========
Less amount representing interest (8% to 11.5%)........... 14,662
--------
Present value of obligations under capital leases...... 310,507
Less current maturities................................... 263,320
--------
Obligations under capital leases, net of current
maturities............................................. $ 47,187
========
Rent expense of $144,914, $209,128 and $206,335 was recorded under
operating leases for the years ended December 31, 1997, 1998, and 1999,
respectively.
Equipment under capital leases as of December 31, 1998 and 1999 is
summarized as follows:
December 31,
--------------------------------------
1998 1999
------------------ ------------------
Studio equipment........................................... $ 135,855 $135,855
Computer server and Web site equipment..................... 504,055 504,055
Molds and manufacturing equipment.......................... 301,406 ---
Office furniture and equipment............................. 299,269 299,269
---------- --------
1,240,585 939,179
Less accumulated amortization.............................. 953,303 875,947
---------- --------
$ 287,282 $ 63,232
========== ========
F-20
AUDIBLE, INC.
Notes to Financial Statements
December 31, 1997, 1998, and 1999
License Agreements
The Company has entered into several agreements with certain consumer
electronics and computer companies to license and promote the AudibleReady
software for hand-held digital players. Under the terms of these agreements,
the Company is required to pay the device manufacturer a percentage of the
revenue related to the content downloaded by the purchasers of these
AudibleReady players. These revenue sharing arrangements typically last one
to two years from the date the player user becomes an Audible customer.
(13) Notes Due from Stockholders for Common Stock
Notes due from stockholders of $1,040,158 and $579,025 at December 31, 1998
and 1999, respectively, were received by the Company for payment for shares of
common stock purchased by employees and consultants under the Company's Stock
Restriction Agreements (see note 4). These notes have been reflected as a
reduction to stockholders' (deficit) equity. The notes are full recourse
promissory notes bearing interest at fixed rates ranging from 7.0% to 8.5%.
The notes mature beginning in the year 2000.
The Company has exercised its right to purchase shares of unvested stock
from employees who were terminated (under the terms of the Company's Stock
Restriction Agreements). During 1997, 1998, 1999, the Company repurchased
233,055, 1,172,724 and 550,186 shares, respectively. The Company paid for
these shares by reducing the indebtedness under the promissory notes issued to
the Company.
Certain Stock Restriction Agreements with employees contain a provision
whereby the employee is awarded a one-time bonus if still employed by the
Company on the due date of the promissory note equal to the amount of the
promissory note. Compensation expense is recognized on a straight-line basis
over the term of the promissory note. Deferred cash compensation related to
bonuses in the accompanying balance sheets represents the earned, unpaid
portion of such bonuses.
(14) Credit Facilities
In April 1998, the Company entered into a $1,000,000 bank line of credit
agreement. The Company did not draw on this bank line of credit during its
term. The agreement expired on April 5, 1999 and was not renewed.
(15) Employee Benefit Plan
On July 1, 1998, the Company adopted and made available to all of its
employees a 401(k) savings plan (the Plan). The Plan is based on
contributions from employees and discretionary Company contributions. The
Company has not contributed to the Plan to date.
(16) Subsequent Events
On January 30, 2000, the Company 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
F-21
AUDIBLE, INC.
Notes to Financial Statements
December 31, 1997, 1998, and 1999
consideration for certain services, Amazon will receive annually $10 million
plus a specified percentage of revenue earned over a threshold amount. Under
the Securities Purchase Agreement, Amazon.com has purchased 1,340,033 shares
of common stock from the Company for $20 million.
F-22