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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, 2000
or
____ Transition Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the transition period from __________ to __________
Commission File Number: 000-26529
AUDIBLE, INC.
(Exact Name of Registrant as Specified in Its Charter)
Delaware 22-3407945
(State or Other Jurisdiction of (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) 837-2700
Securities to be Registered Pursuant to Section 12(b) of the Act:
None
Securities to be Registered Pursuant to Section 12 (g) of the Act:
Title of Each Class:
--------------------
Common Stock, par value
$0.01 per share
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 2001 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, 2000.
The aggregate market value of the voting stock held by non-affiliates of
the Registrant as of February 28, 2001 was approximately $26,947,909.
The number of shares outstanding of the Registrant's Common Stock, as of
February 28, 2001 was 27,546,989 shares of Common Stock.
AUDIBLE, INC.
FORM 10-K
TABLE OF CONTENTS
PAGE
----
PART I
Item 1. Business.......................................................... 4
Overview.......................................................... 4
Industry Background............................................... 4
Our Solution...................................................... 5
Our Strategy...................................................... 7
The Audible Service............................................... 8
Competition.......................................................10
Intellectual Property and Proprietary Rights......................12
Employees.........................................................13
Item 2. Properties........................................................13
Item 3. Legal Proceedings.................................................13
Item 4. Submission of Matters to a Vote of Security Holders...............13
PART II
Item 5. Market for the Company's Common Equity and Related Stockholder
Matters...........................................................14
Item 6. Selected Financial Data...........................................15
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations.............................................16
Item 7A. Quantitative and Qualitative Disclosure about Market Risk.........30
Item 8. Financial Statements and Supplementary Data.......................30
Item 9. Changes in the Disagreements with Accountants on Accounting and
Financial Disclosure..............................................30
PART III
Item 10. Directors and Executive Officers of the Registrant................31
Item 11. Executive Compensation............................................31
Item 12. Security Ownership of Certain Beneficial Owners and Management....31
Item 13. Certain Relationships and Related Transactions....................31
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K..32
Exhibit Index................................................................32
Signatures...................................................................35
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
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.
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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
electronic devices that have digital audio capabilities. 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 hand-held electronic devices. We offer customers the opportunity
to subscribe to AudibleListener, a monthly audio service. For a fixed monthly
fee, AudibleListener customers may download their choice of programs from
www.audible.com. More than 28,000 hours of audio content, much of which is only
available in digital audio format at www.audible.com, is currently available on
our Web site. Customers can also access products sold by Audible through
www.amazon.com. Several manufacturers, including Hewlett-Packard, Compaq
Computer Corporation, Casio Inc., Franklin Electronic Publishers, Digisette,
LLC., and SONICblue Incorporated's Rio Audio Group have agreed to support and
promote the playback of our content on their hand-held electronic devices. As of
December 31, 2000, Audible had over 51,000 customers in over 100 countries.
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 electronic devices that have
digital audio capabilities 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 $365 billion in revenues in 2000. This is an increase from
less than $60 billion in 1977. During 2000, 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 $2.6 billion on spoken word audio tapes in 1999, an
increase from $1.6 billion in 1996. This increasing usage of audiobooks exists
despite limited types of content, high prices
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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.
According to International Data Corporation (IDC), worldwide sales of
personal handheld mobile devices are expected to increase from approximately 8.3
million units per year in 1999 to approximately 35.5 million units per year in
2003. This estimate does not include portable digital music players. According
to Cahners In-Stat Group, shipments of portable digital music players will
increase from an estimated 2.9 million in 2000 to 10.1 million in 2004.
Audible's strategy is to work with digital device manufactures to enable their
devices to be AudibleReady.
Audible is also 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.
IDC estimates that in 1998 there were 303 million worldwide cellular and
personal communications systems subscribers, and IDC expects that number to
increase to approximately 1.1 billion in 2003. According to The Yankee Group, a
market research firm, the number of mobile cellular phone users is expected to
exceed 1 billion by 2003 with approximately 60% capable of wireless Internet
access.
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 such as Audible that has established 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
28,000 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
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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 5,000 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. Additionally, Audible is strategically aligned
with Random House, Inc., to pioneer the first-ever imprint to produce spoken
word content specifically suited for digital distribution, Random House Audible.
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 5,000 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 12,000 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
enroll in AudibleListener, a monthly subscription program entitling the customer
to download content of their choice, purchase bundled packages of selected audio
content as well as choose automated delivery of timely audio content on a
subscription basis. Unlike traditional and online bookstores, which are subject
to physical inventory constraints and shipping delays, we provide a service that
is readily available in digital format and can be quickly delivered over the
Internet directly to our customers.
Listening Experience. Unlike 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.
Additionally, customers can choose from four different fidelity options for
their listening. Our Service also allows customers to skip between selections or
individual articles or chapters within selections. Customers can pause and
resume listening where they left off and can "bookmark" multiple sections of
content, rather than be constrained by the rewind and fast forward functions of
cassette tape players.
Value. We provide customers with what we believe is a terrific value
proposition in our AudibleListener program, where for a fixed monthly fee, the
customer can download programs of their choice.
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Benefits to Business Affiliates.
We help content creators, device manufacturers and other companies which
distribute our products or promote our service to their customers to create
incremental sources of revenue by aggregating premium audio content and
providing a widely-accepted system for digital spoken audio distribution.
Content creators. We provide a new source of revenue for publishers of
newspapers, magazines, journals, newsletters, professional publications and
business information and producers of radio broadcasts by creating a new market
for content that is too timely for distribution on cassette tape or compact disc
and too specialized for widely-broadcast radio programs. Additionally, our
electronic delivery service offers publishers of audiobooks a new distribution
channel for their existing audiobook content. In a strategic alliance with
Random House, Inc., Random House Audible has been established as a publishing
imprint of Random House, Inc.'s Random House Audio Publishing Group Division.
All titles published by the imprint will be distributed exclusively on the
Internet by Audible. 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 Hewlett-Packard, Casio, and Compaq, have agreed to
support and promote the playback of our content on their devices. SONICblue
Incorporated's Rio Audio Group 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 our products or promote our service. We have
entered into marketing agreements with Amazon.com, Microsoft, The New York Times
and The Wall Street Journal 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 to the extent our cash flow
permits. 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.
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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 in our Format 1,
requires 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. Customers are offered up to
four different fidelity options, allowing them to trade off between fidelity and
device storage capacity.
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Digital audio content.
We currently offer more than 5,000 digital audiobooks and more than 12,000
other audio selections comprising over 28,000 hours of digital spoken audio
content, segmented in four categories:
o 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.
o 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 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.
o 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 develop original programming that premiered at audible.com.
o 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 to
create original comedy and other content programming for Internet
distribution exclusively through audible.com.
We currently have licensed Internet distribution rights to audio content
from more than 160 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. 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.
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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 are available for
download from audible.com. Several player manufacturers have bundled the
AudibleManager and AudiblePlayer software in for their devices. The audio output
jack 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:
o selection;
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o price;
o speed of delivery;
o protection of intellectual property;
o timeliness;
o convenience; and
o 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. Media Bay offers digital downloads of spoken audio. 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 may compete directly with us
by selling premium audio content for digital download.
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.
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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 six patents and have filed five patent applications for some
aspects of the Audible system. We do not know if the other pending patents will
ever be issued and, if issued, if they will survive legal challenges. Legal
challenges to our patents, whether successful or not, may be very expensive to
defend.
We have applied for registration in the United States of several of our
trademarks and service marks, including "AudibleListener", "Audible Hear, There,
and Everywhere", "AudibleReady", and "Who You Gonna Listen To". "Audible",
"audible.com", "AudibleManager" and "AudiblePlayer" have been Registered. We do
not know if all of these marks will be registered or that we will effectively
protect the use of these names. In addition, we have began to take 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 elements of our compression-
decompression technology, that we incorporate into the Audible system. If these
technologies become unavailable to us, we would need to license other technology
which would require us to redesign our system and recode our content. Although
we are generally indemnified against claims that technology licensed by us
infringes the intellectual property rights of others, such indemnification is
not always available for all types of intellectual property and proprietary
rights and in some cases the scope of such indemnification is limited. Even if
we receive broad indemnification, third party indemnitors may not have the
financial resources to fully indemnify us in the event of infringement,
resulting in substantial exposure to us. We cannot assure you that infringement
or invalidity claims arising from the incorporation of this technology,
resulting from these claims, will not be asserted or prosecuted against us.
These claims, even if not meritorious, could result in the expenditure of
significant financial and managerial resources in addition to potential
redevelopment costs and delays, all of which could materially adversely effect
our business, operating results and financial condition.
12
Employees
As of December 31, 2000, we had a total of 84 full-time employees - 23 in
development, 26 in sales and marketing, 27 in production and eight in general
and administrative.
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. We are not currently involved in any legal proceedings.
Item 4. Submission of matters to a vote of Security Holders.
None.
13
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 prices 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 $16.50 $ 10.00
Second Quarter 9.00 3.50
Third Quarter 4.37 1.19
Fourth Quarter 1.31 .37
2001
- ----
First Quarter (through March 23, 2001) $ 1.78 $ .41
On March 23, 2001, the last reported sale price of our common stock was
$1.03 per share. As of March 23, 2001, we had approximately 168 stockholders.
We have never paid or declared any cash dividends on our common stock. Our
present policy is to retain any earnings to finance the growth and development
of the business and, therefore, we do not anticipate declaring or paying cash
dividends on our common stock in the foreseeable future.
In January 2000, in connection with a Services Purchase Agreement, the
Company issued 1,340,033 shares of common stock at the price of $14.925 per
share.
In February 2000, in connection with the cashless exercise of warrants,
the Company issued 169,185 shares of common stock.
In March 2000, in connection with the cashless exercise of warrants, the
Company issued 102,941 shares of common stock.
In April 2000, in connection with the cashless exercise of warrants, the
Company issued 54,264 shares of common stock.
In May 2000, in connection with a Co-Publishing, Marketing, and
Distribution agreement, the Company issued 169,780 shares of common stock at the
price of $5.89 per share.
In June 2000, in connection with the exercise of an employee stock option,
the Company issued 1,200 shares of common stock at the price of $8.00 per share.
During the year ended December 31, 2000, we invested $20,328,000 of our
funds in accordance with the use of proceeds in our Registration Statement Form
S-1 (No. 333-76985). As of December 31, 2000 we have $16,107,000 in remaining
funds which are currently in cash, cash equivalents, or invested in Government
backed obligations with maturities of up to one year. We plan to use our
remaining funds available to continue our sales and marketing efforts, acquire
and produce audio content and other uses at the discretion of our management.
None of the net proceeds of the offering were paid directly or indirectly to any
of our directors or officers, or their associates, or persons owning 10 percent
or more of any class of our equity securities.
14
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, 1999 and 2000 and for the
years ended December 31, 1998, 1999 and 2000, are derived from, and are
qualified by reference to, our audited financial statements included elsewhere
in this Form 10-K. The selected financial data set forth below as of December
31, 1996, 1997 and 1998, and for the years ended December 31, 1996 and 1997 are
derived from our audited financial statements not included in this Form 10-K.
Selected Financial Data
Year Ended December 31,
--------------------------------------------------------------------------------
1996 1997 1998 1999 2000
--------------- -------------- ---------------- -------------- -------------
(in thousands, except per share data)
Statement of operations data:
Revenue, net:
Content and services........................... $ -- $ 3 $ 132 $ 478 $ 2,519
Hardware....................................... -- 57 244 314 1,273
Other.......................................... -- -- -- 951 757
------- ------- ------- ------- --------
Total revenue, net............................. -- 60 376 1,743 4,549
------- ------- ------- ------- --------
Operating expenses:
Cost of content and services revenue........... -- 78 372 812 3,668
Cost of hardware revenue....................... -- 252 556 308 2,572
Production expenses............................ 684 1,982 1,639 3,397 6,458
Development.......................... 1,810 2,672 1,642 2,680 4,444
Write-down related to hardware business........ -- -- 952 -- --
Sales and marketing............................ 256 1,228 1,453 6,109 16,052
General and administrative..................... 786 1,921 1,838 3,015 5,548
------- ------- ------- ------- --------
Total operating expenses...................... 3,536 8,133 8,452 16,321 38,742
------- ------- ------- ------- --------
Loss from operations........................ (3,536) (8,073) (8,076) (14,578) (34,193)
Other (income) expense, net................. (27) (44) 62 (1,102) (1,602)
------- ------- ------- ------- --------
Loss before state income tax benefit............ (3,509) (8,029) (8,138) (13,476) (32,591)
State income tax benefit........................ -- -- -- -- 316
------- ------- ------- ------- --------
Net loss........................................ $(3,509) $(8,029) $(8,138) $(13,476) $(32,275)
======= ======= ======= ======= ========
Basic and diluted net loss per common share..... $(1.10) $(1.49) $(1.15) $(0.85) $(1.21)
Weighted average shares outstanding............. 3,177 5,379 7,097 15,890 26,644
======= ======= ======= ======= ========
As of December 31,
--------------------------------------------------------------------------------
1996 1997 1998 1999 2000
--------------- -------------- ---------------- -------------- -------------
Balance sheet data:
Cash and cash equivalents....................... $ 758 $ 646 $ 10,526 $ 12,030 $14,149
Short-term investments........................... ---- ---- ---- 24,404 1,957
Total assets.................................... 1,232 3,482 12,147 39,926 20,732
Noncurrent liabilities.......................... 314 1,169 1,688 538 713
Redeemable preferred stock...................... 3,430 12,378 27,725 ---- ----
Total stockholders' equity (deficit)............ (3,488) (11,427) (19,529) 34,578 14,593
15
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 on 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.
Hardware revenue in 2000 represents revenue from the sale of AudibleReady
digital audio players, primarily the Rio 500, manufactured by SONICblue
Incorporated's Rio Audio Group. Hardware revenue accounted for 28% of our
revenue in 2000. Digital audio players are sold from www.audible.com at a deep
discount from normal retail price, when a customer enrolls in AudibleListener
for a 12 month period.
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, 2000, more than 51,000 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. We recognize revenue
from content subscriptions pro rata over the subscription term. Typically, we
pay our content providers a 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 royalty advances to reflect their estimated net realizable value.
16
We recognize revenue from sales of digital audio players 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 Corporation
("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 which
began in the quarter ended June 30, 1999 through the initial term of the
agreement which ends in the second quarter of 2001. During the years ended
December 31, 1999 and 2000, $441,000 and $757,000 respectively, of this advance
was recognized as other revenue.
We are party to several joint marketing agreements with device
manufacturers such as Casio, Compaq, SONICblue Incorporated's Rio Audio Group
and Hewlett-Packard. Under these agreements, 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 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.
In January 2000, the Company entered into two agreements with Amazon.com.
As defined in the Co-Branding, Marketing and Distribution agreement, the Company
is the exclusive provider of digital spoken audio to Amazon.com. In January,
2001, the Company signed Amendment No.1 to it's Co-Branding, Marketing, and
Distribution Agreement with Amazon.com. During the three-year term of this
agreement, in consideration for certain services, Amazon will receive
$22,500,000 plus a specified percentage of revenue earned over a threshold
amount in addition to common stock warrants. Under the Securities Purchase
Agreement dated January 30, 2000, Amazon.com purchased 1,340,033 shares of
common stock from the Company for $20,000,000.
In February 2001, Microsoft purchased 2,666,666 shares of Audible Series A
Redeemable Convertible Preferred stock for $10,000,000 at a per share price of
$3.75. Each share of preferred stock may be converted into four shares of Common
Stock, (equivalent to a price of $.9375 per share), subject to adjustment under
certain conditions. The Series A Redeemable Convertible Preferred stock is
convertible at the option of the holder at any time prior to the fifth
anniversary of the original issue date. Dividends are payable semi-annually at a
annual rate of 12% in either additional preferred shares or in cash at the
option of the Company. On the fifth anniversary of the original issue date,
Audible is required to redeem all remaining outstanding shares at a per share
price of $3.75 plus all accrued and unpaid dividends.
17
Results of Operations
The following table sets forth certain financial data as a percentage of
total revenue during 1998, 1999 and 2000.
Year Ended December 31,
--------------------------------------------------------
1998 1999 2000
------------------ ------------------ ----------------
Revenue, net:
Content and services........................ 35% 27% 55%
Hardware.................................... 65 18 28
Other....................................... -- 55 17
-------- ------- -----
Total revenue, net....................... 100% 100% 100%
-------- ------- -----
Operating expenses:
Cost of content and services revenue........ 99 47 81
Cost of hardware revenue.................... 148 18 56
Production expenses......................... 436 195 142
Development................................. 436 154 98
Write-down related to hardware business..... 253 -- --
Sales and marketing......................... 386 351 353
General and administrative.................. 489 173 122
-------- ------- -----
Total operating expenses................. 2,247 937 852
-------- ------- -----
Loss from operations.......................... (2,147) (837) (752)
-------- ------- -----
Other (income) expense:
Interest income............................. (14) (66) (36)
Interest expense............................ 31 3 1
-------- ------- -----
Total other (income) expense............. 17 (63) (35)
-------- ------- -----
Loss before state income tax benefit......... (2,164) (775) (717)
State income tax benefit..................... -- -- 7
-------- ------- -----
Net loss...................................... (2,164)% (775)% (710)%
======== ======= =====
2000 Compared to 1999
Total revenue, net. Total revenue for 2000 was $4,549,000, as compared to
$1,743,000 for 1999, an increase of $2,806,000, or 161%.
Content and services. Content and services revenue for 2000 was
$2,519,000, as compared to $478,000 for 1999, an increase of $2,041,000, or
427%. Content and services revenue increased primarily as a result of the
customer base increasing from 13,000 customers to just more than 51,000
customers, growth in corporate clients and bulk content sales.
Hardware. Hardware revenue for 2000 was $1,273,000, as compared to
$314,000 for 1999, an increase of $959,000, or 305%. Hardware revenue increased
as a result of selling more AudibleReady digital audio players, primarily the
Rio 500, manufactured by SONICblue Incorporated's Rio Audio Group.
Other. Other revenue for 2000 was $757,000, as compared to $951,000 for
1999, a decrease of $194,000, or 20%. Other revenue in 2000 consisted of revenue
recognized in connection with our agreement with Microsoft, granting Microsoft
the right to distribute software platforms enabling users to access and use
Audible content.
18
The majority of the other revenue for 1999 was generated in connection with our
agreement with Microsoft, and 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 content. The remaining $60,000 in other revenue for 1999 related to
services provided under our agreement with Compaq Computer Corporation.
Operating expenses.
Cost of content and services revenue. Cost of content and services revenue
was $3,668,000, or 146% of content and services revenue, for 2000, as compared
to $812,000, or 170% of content and services revenue, for 1999. This increase
was primarily due to the acquisition of additional content licenses which
resulted in additional amortization of new content agreement minimum guarantees,
our obligations under our agreement with Random House, Inc. to create the Random
House Audible imprint, and the amortization of warrants issued to Random House
in connection with the agreement. In addition, we recorded an adjustment of
$871,000 in 2000, to reflect the net realizable value of content agreement
guarantees, as compared to a similar adjustment of $146,000 in 1999.
Cost of hardware revenue. Cost of hardware revenue was $2,572,000, or 202%
of hardware revenue, for 2000, as compared to $307,000, or 98% of hardware
revenue, for 1999. This increase was primarily due to our selling digital audio
players at a deep discount from normal retail price when a customer enrolls in
the AudibleListener program for a 12 month period.
Production expenses. Production expenses were $6,458,000 for 2000, as
compared to $3,397,000 for 1999, an increase of $3,061,000, or 90%. 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 continued to upgrade and expand our
capacity. Audio production and Web site-content increased as we continued
producing selections available on our Web site and performed more daily original
programming. Content acquisition expenses increased as we expanded our original
content acquisition team.
Development. Development costs were $4,445,000 for 2000, as compared to
$2,680,000 for 1999, an increase of $1,765,000, or 66%. 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
device Original Equipment Manufacturers (OEM) to plan for compatibility of
Audible software on their platforms. In addition, during 2000, we completed the
upgrade of our Web site from "Broadvision" version 2.5 to "Broadvision" version
4.0 providing our customers new features and enhanced functionality.
Sales and marketing. Sales and marketing expenses were $16,052,000 for
2000, as compared to $6,109,000 for 1999, an increase of $9,943,000, or 163%.
This increase was primarily due to the non cash expenses recognized in
connection with our Co-Marketing Agreement with Amazon.com and an increase in
personnel and higher advertising costs associated with increased marketing
efforts, offset by lower costs associated with the amortization of warrants
issued in connection with a services agreement in 1999.
General and administrative. General and administrative expenses were
$5,548,000 for 2000, as compared to $3,015,000 for 1999, an increase of
$2,533,000, or 84%. 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 $1,624,000 for 2000, as
compared to $1,150,000 for 1999, an increase of $474,000. 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 public offering which occurred in July 1999. Interest
expense was $22,000 for 2000, as compared to $48,000 for 1999, a decrease of
$26,000. This decrease was primarily due to the lower principal balance on our
capital equipment lease line.
State income tax benefit. As a result of selling certain of our New Jersey
state income tax loss benefits for cash the Company realized $316,000 in state
income tax benefit during the year ended December 31, 2000.
19
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 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 in future years will be
the result of selling third party AudibleReady digital audio players.
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 and 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 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 performed 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.
Development. 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 began to upgrade 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.
20
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 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.
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:
o acquire and retain customers;
o build awareness and acceptance of audible.com, the AudibleReady
format and AudibleReady devices;
o extend existing and acquire new content provider relationships; and.
o 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, 2000, 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, 2000, we had an accumulated deficit of $65,476,000. 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 continue to invest in sales and marketing, content
acquisition and production over the next several quarters.
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 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.
21
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 into 13,400,985 shares of common
stock. At December 31, 2000, our principal source of liquidity was $14,149,000
in cash and cash equivalents, and $1,958,000 in short-term treasury bill and
government agency note investments.
At December 31, 2000, our principal commitments consisted of our
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, revenue sharing commitments pursuant to agreements with
device manufacturers, and commitments under our agreements with Amazon.com and
Random House. At December 31, 2000, we had leased $1,241,000 in equipment on the
lease line, of which $302,000 was disposed of and written off during 1999, and
had an outstanding lease obligation of $47,000.
In January 2000, we entered into a three year Co-Branding, Marketing and
Distribution Agreement with Amazon.com. In January 2001, we signed Amendment No.
1 to the agreement. Under the amended agreement, our remaining obligation
consists of cash payments of $1,000,000 in 2002 and $1,500,000 in 2003.
In May 2000, we entered into a four-year Co-Publishing, Marketing, and
Distribution Agreement with Random House to form a strategic alliance to
establish Random House Audible, a publishing imprint. Audible is obligated to
contribute $1,000,000 annually for four years towards the funding of Random
House Audible. As of December 31, 2000, $500,000 of the first year obligation
had been paid.
Net cash used in operating activities was $5,047,000 for 1998, $10,395,000
for 1999 and $18,605,000 for 2000. Net cash used in 1998 was primarily
attributable to our net operating loss and increases in inventory, offset in
part by increases in advances. 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 2000 was primarily
attributable to our net operating loss, increases in royalty advances and
accounts receivable and a decrease in advances, offset in part by increases in
accounts payable, accrued compensation and royalty obligations.
22
Net cash used in investing activities was $4,000 for 1998, and $25,959,000
for 1999. Net cash provided by investing activities was $19,791,000 for 2000.
Net cash used in investing activities in 1998 was related to purchases of
property and equipment. For 1999, in addition to purchases of property and
equipment of $1,505,000, we invested $50,000 in a interest bearing note issued
to a stockholder as well as purchased $24,404,000 in short-term investments. Net
cash provided by investing activities for 2000 was primarily related to the
$22,446,000 in net redemptions of short-term investments and the $100,000
repayment of a note issued to a shareholder, offset in part by $2,763,000 of
purchases of property and equipment. Capital expenditures for 2001 are expected
to be minimal.
Net cash provided by financing activities was $14,931,000 for 1998,
$37,858,000 for 1999 and $933,000 for 2000. 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. Net cash provided by financing
activities resulted primarily from the issuance of our redeemable convertible
preferred stock during 1998 and 1999, from the proceeds of our initial public
offering during 1999, and during 2000 from the sale of common stock and
repayment of notes due from shareholders offset in part by capital lease
payments.
As of December 31, 2000, we had available net operating loss carryforwards
totaling approximately $58,577,000, 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.
On February 8, 2001, Microsoft purchased 2,666,666 shares of Audible
Series A Redeemable Convertible Preferred stock for $10,000,000 at a per share
price of $3.75. Each share of preferred stock may be converted into four shares
of Common Stock, (equivalent to a price of $.9375 per share), subject to
adjustment under certain conditions. The Series A Redeemable Convertible
Preferred stock is convertible at the option of the holder at any time prior to
the fifth anniversary of the original issue date. Dividends are payable
semi-annually at a annual rate of 12% either in additional preferred shares or
in cash at the option of the Company. On the fifth anniversary of the original
issue date, Audible is required to redeem all remaining outstanding shares at a
per share price of $3.75 plus all accrued and unpaid dividends.
Based on the Company's currently proposed plans and assumptions related to
the implementation of its business plan, we believe that our cash, cash
equivalent, and short-term investment balances together with the recent
Microsoft investment described above will enable us to meet our anticipated cash
requirements for operations and capital expenditures into the first quarter of
2002. However, any projection of future revenues is subject to a level of
uncertainty; therefore we have developed a plan that will allow the Company to
reduce its expense base and reduce its cash requirements if planned revenues are
not achieved. If current cash, cash equivalents, short-term investments and the
$10,000,000 received from Microsoft in February 2001 are insufficient to satisfy
our liquidity requirements in 2001, we will need to raise additional funds
through public or private financing or other arrangements. Beyond the first
quarter of 2002, we will require additional cash to fund our ongoing working
capital and capital expenditures. No assurance can be given that such additional
financing, when needed, will be available on terms favorable to us or to our
stockholders, if at all, and that such financing would not be antidilutive to
our stockholders.
New Accounting Standards
In the second quarter of 1998, the Financial Accounting Standards Board
(FASB) issued Statement of Financial Accounting Standards (SFAS) No. 133,
"Accounting for Derivative Instruments and Hedging Activities." In June 1999,
the FASB issued SFAS No. 137 which defers the effective date of SFAS No. 133.
SFAS No. 133 requires an entity to recognize all derivatives as either assets or
liabilities in the statement of financial position and measure those instruments
at fair value. Gains or losses resulting from changes in the values of those
derivatives would be accounted for depending on the use of the derivative and
whether it qualifies for hedge accounting. The Company currently does not use
derivative instruments and as such believes the adoption of SFAS No. 123,
beginning January 1, 2001, will have no effect on the Company's financial
position, results of operations or cash flows.
23
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 and content
subscription services to users of hand-held portable electronic devices
manufactured by other parties. We expect to spend significant resources on
growing our customer base and expanding our service and promoting our brand
name. These activities will result in significant losses until such time as the
Company is able to generate sufficient revenue to support its operations.
We have limited revenue, we have a history of losses, we may not be profitable
in the future, and we will need additional financing.
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 $1,743,000 and $4,549,000 for
1999 and 2000, 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 $478,000 and
$2,519,000 for 1999 and 2000, respectively. We had operating expenses of
$16,321,000 and $38,742,000 for 1999 and 2000, respectively. Because most of our
expenses, such as employee compensation and rent, are relatively fixed in the
short term, we may be unable to significantly adjust our spending to compensate
for unexpected revenue shortfalls. If current cash, cash equivalents, short-term
investments and the $10,000,000 received from Microsoft in February 2001 are
insufficient to satisfy our liquidity requirements in 2001, we will need to
raise additional funds through public or private financing or other
arrangements. Beyond the first quarter of 2002, we will require additional cash
to fund our ongoing working capital and capital expenditures. There can be no
assurance that additional financing will be available to the Company when
needed, if at all. This would likely affect the market price of our common stock
in a manner which may be unrelated to our long-term operating performance. As of
December 31, 2000, we have incurred net operating losses of approximately
$65,476,000 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.
There can be no assurance that the Company's current business strategy
will enable it to achieve profitable operations. Downloading of audio content
from the Internet is a relatively new method of distribution and its growth and
market acceptance is highly uncertain. Our success will depend in large part on
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.
24
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 electronic devices
that have digital audio capabilities. Because we no longer manufacture our own
AudibleReady players, we depend on manufacturers, such as SONICblue
Incorporated, Philips, Casio, and Compaq, 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 registration in the United States of several of our
trademark and service marks, including "AudibleListener", "Audible Hear, There,
and Everywhere", AudibleReady" and "Who You Gonna Listen To". We cannot assure
you that these trademarks and service marks will be granted.
Increasing availability of digital audio technologies may increase competition
and reduce our 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
25
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 Media Bay and (4) on-line and Internet portal companies
such as America Online, Inc., Yahoo! Inc., and Microsoft Network, with the
potential to offer audio content. Many of these companies have financial,
technological, promotional and other resources that are much greater than those
available to us and could use or adapt their current technology, or could
purchase technology, to provide a service directly competitive with the Audible
service.
Capacity constraints and failures, delays or overloads could interrupt our
service and reduce the attractiveness of our service to existing or potential
customers.
Any capacity constraints or sustained failure or delay in using our 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.
26
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 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:
o the secure transmission of customer credit card numbers and other
confidential information;
o the reliability and availability of Internet service providers;
o the cost of access to the Internet;
o the availability of sufficient network capacity; and
o 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.
27
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 hold six patents and have filed five other
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.
28
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:
o 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;
o 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;
o our board of directors is "staggered" so that only a portion of its
members are elected each year;
o if, during the first year following the investment by Microsoft, our
Board of Directors approves a merger or similar transaction which
indicates a per share value of our common stock of less than $4.00,
each share of preferred stock issued to Microsoft Corporation shall
be convertible into shares of our common stock at a special rate of
1 to 1.5. This provision may have the effect of making it more
difficult for us to complete a merger or similar transaction. The
special conversion provisions will lapse in the event that we
receive proceeds from additional financings of $10 million or more.
29
o 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
o 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 filed with this report; see Item 14 of
Part IV.
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure.
None.
30
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 2001 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 2001 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 2001 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 2001 Annual Meeting of Stockholders.
31
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 F-1
Balance Sheets at December 31, 1999 and 2000 F-2
Statements of Operations for the years ended
December 31, 1998, 1999 and 2000 F-3
Statements of Stockholders' (Deficit) Equity
for the years ended December 31, 1998, 1999
and 2000 F-4
Statements of Cash Flows for the years ended
December 31, 1998, 1999 and 2000 F-5
Notes to Financial Statements F-6
(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
3.1.1*** Certificate of Designation of Designations, Limitations, Restrictions
And Relative Rights of the Series A Convertible Preferred Stock of
Audible, Inc.
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)
32
Exhibit Number Description
- -------------- -----------
10.8* Loan and Security Agreement dated April 6, 1998, by and between
Silicon Valley Bank, as lender, and Audible, as borrower, for a
revolving line of credit of up to $1,000,000
10.10* Security and Loan Agreement dated November 20, 1996, between Audible,
as borrower, and Imperial Bank, as lender, for up to $500,000
10.14* Amended and Restated Registration Rights Agreement dated February 26,
1998, by and among Audible and certain stockholders named therein
10.14.1* Amendment No. 1 to Amended and Restated Registration Rights
Agreement dated December 18, 1998 (relating to Exhibit 10.14)
10.14.2* Amendment No. 2 to Amended and Restated Registration Rights
Agreement dated June 17, 1999 (relating to Exhibit 10.14)
10.15* 1999 Stock Incentive Plan
10.16* Form of Common Stock Warrants issued March 31, 1997 by Audible to
various investors in connection with the Series C preferred stock
financing
10.17* Form of Stock Restriction Agreement by and between Audible and the
Named Executive Officers made in connection with various purchases and
sales of shares of restricted common stock
10.18* Form of Promissory Note made by the Named Executive Officers in favor
of Audible in connection with various purchases and sales of shares of
restricted common stock
10.19* Office Lease dated September 20, 1997, by and between Audible, as
tenant, and Passaic Investment LLC, Sixty-Five Willowbrook Investment
LLC and Wayne Investment LLC, as tenants-in-common, as landlord
10.20* Sublease Agreement dated July 19, 1996, by and between Audible, as
sublessee, and Painewebber Incorporated, as sublessor
10.21+* Agreement dated April 3, 1999 by and between Audible and Diamond
Multimedia Systems, Inc.
10.22* Common Stock Purchase Warrant, issued April 22, 1999, to Microsoft
Corporation
33
Exhibit Number Description
- -------------- -----------
10.23* Employment Offer Letter from Audible to Guy Story dated September
10, 1996
10.24* Employment Offer Letter from Audible to Brian Fielding dated April
25, 1997
10.25* Employment Offer Letter from Audible to Travis Millman dated September
29, 1997
10.26* Employment Offer Letter from Audible to Andrew Kaplan dated May 25,
1999
10.27** Employment Offer Letter from Audible to Thomas G. Baxter dated
February 3, 2000
10.28** Warrant Agreement to purchase 10,000 Shares of Common Stock at a price
of $7.65 per share, dated October 8, 1999, issued by Audible to
National Public Radio, Inc.
10.29* Common Stock Purchase Warrant, W-1, issued June 17, 1999, to Robin
Williams
10.30* Common Stock Purchase Warrant, W-2, issued June 17, 1999, to Robin
Williams
10.31++# Securities Purchase Agreement dated January 30, 2000, by and between
Audible and Amazon.com Commerce Services, Inc.
10.32++# Co-Branding, Marketing and Distribution Agreement dated January 30,
2000, by and between Audible and Amazon.com Commerce Services, Inc.
10.33*** Series A Convertible Preferred Stock Purchase Agreement by and between
Audible Inc. and Microsoft Corporation dated as of February 8, 2001.
23.1*** Consent of KPMG LLP, Independent Accountants
- -------------------------------------------------
* Incorporated herein by reference to the Company's Registration Statement on
Form S-1, No. 333-76985
** Incorporated by reference from the Company's 10K/A for the period ended
December 31, 1999
# Incorporated by reference from the Company's 10Q for the quarterly period
ended September 30, 2000
*** Filed herewith.
+ Portions of these Exhibits were omitted and have been filed separately with
the Secretary of the Commission pursuant to the Company's Application
requesting Confidential Treatment under Rule 406 of the Securities Act of
1933.
++ Portions of these Exhibits were omitted and have been filed separately with
the Secretary of the Commission pursuant to the Company's Application
requesting Confidential Treatment under Rule 24 b-2 of the Securities
Exchange Act of 1934.
(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.
34
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, 2001
----------------------------------
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. Each person whose signature appears below in so signing also
makes, constitutes, and appoints Thomas G Baxter and Andrew P. Kaplan, and each
of them, his or her true and lawful attorney-in-fact, with full power of
substitution, for him in any and all capacities, to execute and cause to be
filed with the SEC any and all amendments to this report, with exhibits thereto
and other documents in connections therewith, and hereby ratifies and confirms
all that said attorney-in-fact or his substitute or substitutes may do or cause
to be done by virtue hereof.
Name Title Date
- ---- ----- ----
/s/ Thomas G.Baxter President, Chief Executive March 28, 2001
- --------------------------------- Officer and Director
Thomas G. Baxter (Principal Executive Officer)
/s/ Andrew P. Kaplan Chief Financial Officer and Vice March 28, 2001
- --------------------------------- President, Finance and
Andrew P. Kaplan Administration
(Principal Financial Officer and
Principal Accounting Officer)
/s/ Donald R. Katz Director and Chairman of the Board March 28, 2001
- ---------------------------------
Donald R. Katz
35
Name Title Date
- ---- ----- ----
/s/ W. Bingham Gordon Director March 28, 2001
- ---------------------------------
W. Bingham Gordon
/s/ Winthrop Knowlton Director March 28, 2001
- ---------------------------------
Winthrop Knowlton
/s/ Richard Sarnoff Director March 30, 2001
- ---------------------------------
Richard Sarnoff
36
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Page
-----
Independent Auditors' Report........................................... F-1
Balance Sheets at December 31, 1999 and 2000........................... F-2
Statements of Operations for the years ended
December 31, 1998, 1999 and 2000...................................... F-3
Statements of Stockholders' (Deficit) Equity
for the years ended December 31, 1998, 1999 and 2000.................. F-4
Statements of Cash Flows for the years ended
December 31, 1998, 1999 and 2000...................................... F-5
Notes to Financial Statements.......................................... F-6
37
Independent Auditors' Report
Board of Directors and Stockholders
Audible, Inc.:
We have audited the accompanying balance sheets of Audible, Inc. as of
December 31, 1999 and 2000, 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, 2000. 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 auditing standards generally
accepted in the United States of America. 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, 1999 and 2000, and the results of its operations and its cash flows for each
of the years in the three-year period ended December 31, 2000, in conformity
with accounting principles generally accepted in the United States of America.
KPMG LLP
New York, New York
March 14, 2001
38
AUDIBLE, INC.
Balance Sheets
December 31,
----------------------------
Assets 1999 2000
------------- -------------
Current assets:
Cash and cash equivalents............................................................ $ 12,030,392 $ 14,149,027
Short-term investments............................................................... 24,404,004 1,957,733
Interest receivable on short-term investments........................................ 445,662 95,336
Accounts receivable, net of allowance for doubtful accounts
of $3,353 and $6,983 at December 31, 1999 and 2000, respectively ............... 50,890 193,752
Royalty advances..................................................................... 652,342 847,396
Prepaid expenses..................................................................... 672,526 464,133
Inventory............................................................................ -- 118,170
Notes receivable due from stockholders............................................... 150,000 50,000
------------ ------------
Total current assets............................................................... 38,405,816 17,875,547
Property and equipment, net............................................................ 1,423,003 2,818,792
Other assets........................................................................... 96,980 37,510
------------ ------------
Total assets....................................................................... $ 39,925,799 $ 20,731,849
============ ============
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable..................................................................... $ 1,513,492 $ 1,754,440
Accrued expenses..................................................................... 1,183,573 1,336,825
Royalty obligations-current.......................................................... 503,500 772,700
Accrued compensation................................................................. 411,103 1,061,054
Current maturities of obligations under capital leases............................... 263,320 47,187
Advances-current..................................................................... 934,765 453,476
------------ ------------
Total current liabilities.......................................................... 4,809,753 5,425,682
Deferred cash compensation............................................................. 177,762 211,065
Royalty obligations-noncurrent......................................................... 60,500 502,000
Advances-noncurrent.................................................................... 252,174 --
Obligations under capital leases, net of current maturities............................ 47,187 --
Stockholders' (deficit) equity:
Common stock, par value $.01. Authorized 50,000,000 shares at December 31,
1998 and 1999; 25,709,586 and 27,546,989 shares issued at December 31,
1999 and 2000, respectively...................................................... 257,096 275,470
Additional paid-in capital........................................................... 68,969,417 92,196,174
Deferred compensation................................................................ (725,764) (1,034,024)
Deferred services.................................................................... -- (10,833,334)
Notes due from stockholders for common stock......................................... (579,025) (391,703)
Treasury stock at cost: 532,350 and 536,505 shares of common stock at
December 31, 1999 and 2000, respectively............................................ (142,015) (143,061)
Accumulated deficit.................................................................. (33,201,286) (65,476,420)
------------ ------------
Total stockholders' equity......................................................... 34,578,423 14,593,102
------------ ------------
Commitments and contingencies
Total liabilities and stockholders' equity........................................ $ 39,925,799 $ 20,731,849
============ ============
See accompanying notes to financial statements.
F-2
AUDIBLE, INC.
Statements of Operations
Year ended December 31,
-------------------------------------------------------------
1998 1999 2000
------------------- ------------------- -------------------
Revenue, net:
Content and services............................... $ 132,357 $ 477,675 $ 2,519,345
Hardware........................................... 243,733 313,627 1,273,117
Other.............................................. -- 951,303 756,518
----------- ----------- ------------
Total revenue, net.............................. 376,090 1,742,605 4,548,980
----------- ----------- ------------
Operating expenses:
Cost of content and services revenue............... 372,114 812,062 3,667,799
Cost of hardware revenue........................... 555,575 307,395 2,571,994
Production expenses................................ 1,639,420 3,397,297 6,457,638
Development........................................ 1,641,458 2,680,108 4,444,531
Write-down related to hardware business............ 952,389 -- --
Sales and marketing................................ 1,453,196 6,108,988 16,052,207
General and administrative......................... 1,838,365 3,015,227 5,548,085
----------- ----------- ------------
Total operating expenses.......................... 8,452,517 16,321,077 38,742,254
----------- ----------- ------------
Loss from operations............................ (8,076,427) (14,578,472) (34,193,274)
----------- ----------- ------------
Other (income) expense:
Interest income................................... (53,081) (1,150,231) (1,623,640)
Interest expense.................................. 114,728 48,070 21,810
----------- ----------- ------------
Total other (income) expense ................... 61,647 (1,102,161) (1,601,830)
----------- ----------- ------------
Loss before state income tax benefit................ (8,138,074) (13,476,311) (32,591,444)
State income tax benefit ........................... -- -- 316,310
----------- ----------- ------------
Net loss........................................ $(8,138,074) $(13,476,311) $(32,275,134)
=========== =========== ============
Basic and diluted net loss per common share......... $(1.15) $(0.85) $(1.21)
=========== =========== ============
Weighted average shares outstanding................. 7,096,945 15,890,528 26,643,589
=========== =========== ============
See accompanying notes to financial statements.
F-3
AUDIBLE, INC.
Statements of Stockholders' (Deficit) Equity
Notes due
from
stockholders
Common stock Additional for
------------ paid-in Deferred Deferred common
Shares Par Value capital compensation services stock
--------- --------- ---------- ------------ -------- ----------
Balance at December 31, 1997............. 6,099,204 $ 60,992 $ 694,832 $ -- $ -- $ (596,375)
Common stock repurchases................. -- -- -- -- -- 190,514
Common stock issued and reissued 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 reissued 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)
Common stock repurchases................. -- -- -- -- -- 1,046
Deferred compensation related to stock
options issued below fair market value.. -- -- 870,000 (870,000) -- --
Common stock issued in connection with
Co-Marketing and Distribution agreement. 1,340,033 13,400 19,986,600 -- (20,000,000) --
Common stock issued in connection with
Co-Publishing and Distribution agreement. 169,780 1,698 998,302 -- -- --
Amortization of deferred compensation.... -- -- -- 561,740 -- --
Amortization of deferred services........ -- -- -- -- 9,166,666 --
Amortization of warrants for services.... -- -- 1,243,445 -- -- --
Exercise of common stock warrants........ 326,390 3,264 (3,264) -- -- --
Exercise of common stock options......... 1,200 12 9,588 -- -- --
Reversal of initial public offering
issuance costs.......................... -- -- 122,086 -- -- --
Payments received on notes due from
stockholders............................ -- -- -- -- -- 186,276
Net loss................................. -- -- -- -- -- --
---------- -------- ----------- ---------- ------------ -----------
Balance at December 31, 2000............. 27,546,989 $275,470 $92,196,174 $(1,034,024) $(10,833,334) $ (391,703)
========== ======== =========== ========== ============ ===========
AUDIBLE, INC.
Statements of Stockholders' (Deficit) Equity
Treasury stock Total
-------------- Accumulated stockholders'
Shares Cost deficit (deficit) equity
---------- ---------- ------------- ----------------
Balance at December 31, 1997............. -- $ -- $ (11,586,901) $ (11,427,452)
Common stock repurchases................. (1,172,724) (190,514) -- --
Common stock issued and reissued 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 reissued 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
Common stock repurchases................. (4,155) (1,046) -- --
Deferred compensation related to stock
options issued below fair market value.. -- -- -- --
Common stock issued in connection with
Co-Marketing and Distribution agreement. -- -- -- --
Common stock issued in connection with
Co-Publishing and Distribution agreement. -- -- -- 1,000,000
Amortization of deferred compensation.... -- -- -- 561,740
Amortization of deferred services........ -- -- -- 9,166,666
Amortization of warrants for services.... -- -- -- 1,243,445
Exercise of common stock warrants........ -- -- -- --
Exercise of common stock options......... -- -- 9,600
Reversal of initial public offering
issuance costs.......................... -- -- -- 122,086
Payments received on notes due from
stockholders............................ -- -- -- 186,276
Net loss................................. -- -- (32,275,134) (32,275,134)
---------- --------- ------------ ------------
Balance at December 31, 2000............. (536,505) $(143,061) $(65,476,420) $ 14,593,102
========== ========= ============ ============
See accompanying notes to financial statements.
F-4
AUDIBLE, INC.
Statements of Cash Flows
-------------------------------------------
Year ended December 31,
-------------------------------------------
1998 1999 2000
------------- ------------- -------------
Cash flows from operating activities:
Net loss............................................................. $(8,138,074) $(13,476,311) $(32,275,134)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization....................................... 681,076 479,907 1,367,348
Gain on disposal of property and equipment.......................... -- -- (7,560)
Services rendered for common stock and warrants..................... 16,250 1,349,726 10,410,111
Noncash compensation charge......................................... -- 181,450 561,740
Cancellation of common stock issued for
services rendered................................................. -- (1,250) --
Deferred cash compensation.......................................... 37,810 10,444 33,303
Write-down of inventory............................................. 656,740 -- --
Impairment loss on equipment........................................ 181,151 -- --
Changes in assets and liabilities:
Interest receivable on short-term investments..................... -- (445,662) 350,326
Accounts receivable, net.......................................... (6,742) (42,374) (142,862)
Royalty advances.................................................. (47,443) 123,060 (195,054)
Advance to manufacturer........................................... 350,000 -- --
Prepaid expenses.................................................. 16,565 (569,610) 208,393
Inventory......................................................... (545,822) 129,535 (118,170)
Other assets...................................................... 7,145 9,173 59,470
Accounts payable.................................................. 110,185 1,030,521 240,948
Accrued expenses.................................................. 4,079 975,055 275,338
Royalty obligations............................................... 78,250 17,000 710,700
Accrued compensation.............................................. 51,628 147,868 649,951
Advances.......................................................... 1,500,000 (313,061) (733,463)
----------- ----------- ------------
Net cash used in operating activities............................ (5,047,202) (10,394,529) (18,604,615)
----------- ----------- ------------
Cash flows from investing activities:
Purchases of property and equipment.................................. (3,907) (1,505,073) (2,763,137)
Proceeds from disposal of property and equipment..................... -- -- 7,560
Purchases of short-term investments ................................. -- (61,268,261) (25,462,949)
Redemptions of short-term investments ............................... -- 36,864,257 47,909,220
Note receivable (issued to) repaid by stockholder.................... -- (50,000) 100,000
----------- ----------- ------------
Net cash (used in) provided by investing activities.............. (3,907) (25,959,077) 19,790,694
----------- ----------- ------------
Cash flows from financing activities:
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 --
Proceeds from the sale of common stock............................... -- -- 1,000,000
Payments received on notes due from stockholders for
common stock........................................................ 20,507 378,451 186,276
Proceeds from exercise of common stock options....................... -- 100,000 9,600
Payment of principal on obligations under capital leases............. (436,294) (471,224) (263,320)
----------- ----------- ------------
Net cash provided by financing activities........................ 14,931,222 37,857,699 932,556
----------- ----------- ------------
Increase in cash and cash equivalents............................ 9,880,113 1,504,093 2,118,635
Cash and cash equivalents at beginning of year........................ 646,186 10,526,299 12,030,392
----------- ----------- ------------
Cash and cash equivalents at end of year.............................. $10,526,299 $12,030,392 $ 14,149,027
=========== =========== ============
See note 18 for supplemental disclosure of cash flow information
See accompanying notes to financial statements.
F-5
AUDIBLE, INC.
Notes to Financial Statements
December 31, 1998, 1999 and 2000
(1) Description of Business and Business Conditions
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.
The Company has experienced recurring net losses of $8,138,074,
$13,476,311 and $32,275,134 during the years ended December 31, 1998, 1999, and
2000. As a result of these losses, the Company's cash, cash equivalent and
short-term investment balances have declined to $16,106,760 in the aggregate as
of December 31, 2000. In response to these conditions, management of the Company
has established a business plan that, together with the recent Microsoft
Corporation (Microsoft) investment of $10,000,000 (see note 5) are designed to
enable the Company to meet its anticipated cash requirements into the first
quarter of 2002. In the future, the Company will need to raise additional funds
through public or private financing, or other arrangements. No assurance can be
given that such additional financing, when needed, will be available on terms
favorable to the Company or to the stockholders, if at all.
(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 paid
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 1998 and 1999 financial statements have been
reclassified to conform to the 2000 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. Under multiple element arrangements, fair value is
allocated to the elements based on prices charged when the elements
F-6
AUDIBLE, INC.
Notes to Financial Statements
December 31, 1998, 1999 and 2000
are sold separately. If there are undelivered elements, fair value of the
undelivered element is deferred and revenue is recognized on the delivered
elements using the residual method.
Other revenue for the year ended December 31, 2000 relates to fees billed
and recognized for licensing under agreements with Microsoft (see note 8). Total
revenues attributable to Microsoft represented 55% and 17%, respectively, of
total revenue for the years ended December 31, 1999 and 2000, respectively. No
single customer accounted for more than 10% of revenue in 1998.
Cash Equivalents
The Company considers short-term, highly liquid investments with original
maturities of three months or less at the time of purchase to be cash
equivalents. Cash equivalents at December 31, 1999 and 2000 were $11,474,215 and
$14,107,270, respectively, and consisted primarily of investments in treasury
bill and government agency notes with maturities of less than three months.
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 accrued pro
rata over the term of the investment. Short-term investments at December 31,
1999 and 2000 were $24,404,004 and $1,957,733, respectively. Interest receivable
on short-term investments was $445,662 and $95,336 at December 31, 1999 and
2000, respectively.
Allowance for Doubtful Accounts
The activity in the allowance for doubtful accounts during the years ended
December 31, 1998, 1999 and 2000 was as follows:
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
Provisions 64,889
Less: Write-offs 61,259
-------
Balance at December 31, 2000 $ 6,983
=======
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, 1998, 1999 and 2000
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.
Cost of Content and Services Revenue
Cost of content and services revenue includes amortization of guaranteed
royalty obligations expensed straight-line over the term of the royalty
agreement, earned royalties on sales of content as specified by the terms of the
content agreements, periodic net realizable value adjustments to royalty
advances, amortization of warrants issued to content providers in connection
with content agreements, and all other non-recoupable content costs. Cost of
content and services revenue for the years ended December 31, 1998, 1999 and
2000 was as follows:
Year ended December 31,
-----------------------------------------------
1998 1999 2000
----------- ------------ ------------
Amortization of minimum guarantees............ $348,561 $590,699 $936,426
Earned royalties.............................. 23,553 75,095 507,868
Net realizable value adjustment............... --- 146,268 870,963
Amortization of warrants issued to providers.. --- --- 395,893
Other content costs (see note 17)............. --- --- 956,649
-------- -------- ----------
$372,114 $812,062 $3,667,799
======== ======== ==========
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 as of
December 31, 1998. The Company discontinued manufacturing its Audible
MobilePlayer in 1999 and, accordingly, had no inventory on hand as of December
31, 1999. As of December 31, 2000, inventory consists of AudibleReady digital
audio players manufactured by third party manufacturers. The Company recorded a
charge of $286,603 in 1998 to write down inventory to market value. This charge
is included in cost of hardware revenue in the accompanying 1998 statements of
operations. The 1998 write-down is in addition to the write- down to net
realizable value discussed in note 6.
Stock-Based Compensation
The Company applies Accounting Principles Board (APB) Opinion No. 25,
"Accounting for Stock Issued to Employees," and Financial Accounting Standards
Board (FASB) Interpretation No. 44, "Accounting for Certain Transactions
involving Stock Compensation - an Interpretation of APB Opinion No. 25," 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 proforma 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.
Compensation expense, if any, is recognized on a straight-line basis over the
vesting term.
F-8
AUDIBLE, INC.
Notes to Financial Statements
December 31, 1998, 1999 and 2000
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.
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 Conjunction 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.
Development
Development expenses are expensed as incurred. Included in 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.
F-9
AUDIBLE, INC.
Notes to Financial Statements
December 31, 1998, 1999 and 2000
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 operations and totaled $407,472, $2,226,476 and
$2,113,850 for the years ended December 31, 1998, 1999 and 2000, 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, 1998, 1999 and 2000 does not include the effects of warrants to purchase
675,001, 1,410,954 and 1,878,654 shares of common stock, respectively; warrants
to purchase 94,904, 0 and 0 shares of preferred stock, respectively (adjusted
for the common stock split); options to purchase 0, 1,448,600 and 5,365,900
shares of common stock, respectively; and 8,684,000, 0 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, 1998, 1999 and 2000
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, 1999 and 2000, 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.
New Accounting Standards
In March 2000, the FASB issued FASB Interpretation No. 44 (FIN 44),
"Accounting for Certain Transactions involving Stock Compensation - an
Interpretation of APB Opinion No. 25". FIN 44 clarifies the application of
Opinion 25 for (a) the definition of employee for purposes of applying Opinion
25, (b) the criteria for determining whether a plan qualifies as a
non-compensatory plan, (c) the accounting consequence for various modifications
to the terms of a previously fixed stock option or award, and (d) the accounting
for an exchange of stock compensation awards in a business combination. The
adoption of FIN 44 in 2000 did not have a material effect on the Company's
financial position, results of operations or cash flows.
In December 1999, the United States Securities and Exchange Commission
issued Staff Accounting Bulletin No. 101 (SAB 101), "Revenue Recognition in
Financial Statements." SAB 101 provides guidance on applying generally accepted
accounting principles to revenue recognition issues in financial statements.
Certain EITF Issues were also adopted by the Company during the fourth quarter
of 2000, consistent with the implementation date of SAB 101, including EITF
00-21, "Accounting for Multiple-Element Revenue Arrangements," ETIF 00-14,
"Accounting for Certain Sales Incentives", and EITF 99-19, "Reporting Revenue
Gross as a Principal versus Net as an Agent." The adoption of SAB 101 and these
EITF Issues did not have a material effect on the Company's financial position,
results of operations or cash flows. As a result of these adoptions, the Company
has reclassified hardware revenue, cost of hardware revenue and marketing
expenses related to its sales of third party hand-held electronic devices for
the nine months ended September 30, 2000. This reclassification had no impact on
the Company's net loss for any quarter as hardware revenue increased by
$618,469, cost of hardware revenue increased by $1,513,469 and marketing
expenses decreased by $895,000 for the nine months ended September 30, 2000 (see
note 19). There were no similar sales of third party handheld electronic devices
in 1999 or 1998.
F-11
AUDIBLE, INC.
Notes to Financial Statements
December 31, 1998, 1999 and 2000
(4) Stockholders' (Deficit) Equity
Common Stock
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, 1999 and 2000, the Company had 25,709,586, and 27,546,989, respectively,
common stock shares issued. Additionally, at December 31, 1999 and 2000, the
Company had 2,859,554 and 7,244,554, respectively, common shares reserved for
common 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.
In January 2000, the Company issued 1,340,033 shares of common stock in
connection with two agreements with Amazon.com (see note 16). In May 2000, the
Company issued 169,780 shares of common stock in connection with an agreement
with Random House, Inc. (see note 17).
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
Shares issue price
------------ -------------------
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..................................................... (1,172,724) $.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
Repurchased..................................................... (4,155) $.25
----------
Balance at December 31, 2000.................................... 7,065,764
==========
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' equity, and is being
recorded as an expense straight-line over the vesting term.
F-12
AUDIBLE, INC.
Notes to Financial Statements
December 31, 1998, 1999 and 2000
In February 2000, the Company offered 100,000 common shares to its new Chief
Executive Officer (CEO) in connection with his offer of employment at five
dollars per share less than the fair value of the stock. The Company recorded
$500,000 as deferred compensation in February 2000 and was recording the
compensation expense straight-line over the vesting term. The offer to purchase
these shares was rescinded in August 2000, and the CEO did not purchase any of
the offered shares. In August 2000, the Company issued to its CEO 500,000
options at an exercise price equal to the fair value of the common stock at the
time of issuance. The Company is recording the original compensation expense
over the vesting term of the new option grant and will account for 100,000 of
the 500,000 newly issued options as replacement options using variable
accounting by adjusting the compensation associated with these 100,000 options
based on the closing price of the Company's stock in accordance FIN 44. In March
2000, the Company issued 370,000 options to purchase shares of common stock to
employees at $1.00 less than the fair value of the common stock at the time of
issuance. These options are subject to vesting over four years. The difference
between the fair value and the issue price of these options of $370,000 was
recorded as deferred compensation, and is being recorded as an expense straight-
line over the vesting term.
During the years ended December 31, 1999 and 2000, $181,450 and $561,740,
respectively, of compensation expense was recognized related to these
transactions.
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 majority of the options granted vest
over a fifty month period and expire ten years from the date of the grant.
A summary of the stock option activity under the Plan is as follows:
Exercise Price Per Weighted Average
Number of Shares Share Exercise Price
--------------- ---------------- ---------------
Balance, December 31, 1998 -- -- --
Granted 1,501,100 $2.00 - $15.38 $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 - $15.38 $9.71
Granted 4,575,500 $0.44 - $40.00 $10.61
Canceled (657,000) $1.25 - $40.00 $21.74
Exercised (1,200) $8.00 $8.00
---------
Balance, December 31, 2000 5,365,900 $0.44 - $15.88 $9.01
=========
Exercisable:
December 31, 2000 441,293 $1.25 $ 1.25
396,905 $2.00 - $ 8.00 $ 7.37
627,245 $9.12 - $15.88 $12.91
---------
1,465,443 $1.25 - $15.88 $ 7.90
=========
F-13
AUDIBLE, INC.
Notes to Financial Statements
December 31, 1998, 1999 and 2000
A summary of the total stock options outstanding as of December 31, 2000 is
as follows:
Weighted Average
Exercise Price Weighted Average Remaining
Number of Options Per Share Exercise Price Contractual Life
960,250 $0.44 - $ 1.91 $ 1.22 9.66 years
1,537,400 $2.00 - $ 8.00 $ 6.84 8.90 years
2,868,250 $9.12 - $15.88 $12.78 8.99 years
--------- -------------- ------ ----------
5,365,900 $0.44 - $15.88 $ 9.01 9.08 years
========= ============== ====== ==========
The Company has computed the proforma disclosures required under SFAS No.
123 for all stock options granted in 1999 and 2000 using the Black-Scholes
option pricing model prescribed by SFAS No. 123.
The assumptions used and the weighted-average information for the years
then ended are as follows:
December 31,
------------------------
1999 2000
------- -------
Risk-free interest rate.......................................... 6.00 % 6.00 %
Expected dividend yield.......................................... --- ---
Expected lives................................................... 7 years 7 years
Expected volatility.............................................. 70% 126%
Weighted-average grant date fair value of options granted during
the year ..................................................... $ 7.81 $ 9.87
The effect of applying SFAS No. 123 would be as follows:
1999 2000
------------- -------------
Net loss:
As Reported........................... $(13,476,311) $(32,275,134)
Pro Forma ............................ $(14,412,428) $(43,329,652)
Basic and diluted net loss per common:
As Reported........................... $ (0.85) $ (1.21)
Pro Forma ............................ $ (0.91) $ (1.63)
At December 31, 2000, 3.6 million shares of common stock were available
for future grants under the Plan.
Warrants
In 1998, in connection with obtaining a line of credit from a bank, the
Company issued warrants to its bank to purchase 7,500 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 1998 was insignificant on the date of grant.
In April 1999, in connection with an amendment to the agreement with
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.
F-14
AUDIBLE, INC.
Notes to Financial Statements
December 31, 1998, 1999 and 2000
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 expire May 20, 2003.
In May 2000, in connection with a agreement with Random House, Inc. the
Company issued 878,333 warrants with a price range of $5.89 to $50.00 and a
weighted average exercise price of $10.29, which expire May 5, 2007.
In June 2000, in connection with a content provider agreement, the Company
issued a warrant to purchase 10,000 shares of common stock at a price of $4.68
per share, which expires June 1, 2007.
In June 2000, in connection with a content provider agreement, the Company
issued a warrant to purchase 1,008 shares of common stock at a price of $4.69
per share, which expires June 1, 2005.
In June 2000, in connection with a content provider agreement, the Company
issued a warrant to purchase 1,500 shares of common stock at a price of $4.88
per share, which expires June 5, 2005.
In July 2000, in connection with a content provider agreement, the Company
issued a warrant to purchase 10,000 shares of common stock at a price of $4.31
per share, which expires July 10, 2007.
In July 2000, in connection with a services agreement, the Company issued
a warrant to purchase 1,000 shares of common stock at a price of $4.00 per
share, which expires July 31, 2005.
In November 2000, in connection with a content provider agreement, the
Company issued a warrant to purchase 5,000 shares of common stock at a price of
$1.03 per share, which expires November 13, 2007.
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. For the years
ended December 31, 1998, 1999 and 2000, $0, $1,349,726 and $1,243,445 was
recognized as expense related to warrants, as follows:
1998 1999 2000
---- ---- ----
Cost of content and services revenue $ -- $ 11,731 $ 347,941
Production expenses -- 156,835 268,860
Sales and marketing expenses -- 1,181,160 568,570
General and administrative -- -- 58,074
---------- ----------- ---------
$ -- $1,349,726 $1,243,445
========== =========== ===========
F-15
AUDIBLE, INC.
Notes to Financial Statements
December 31, 1998, 1999 and 2000
A summary of the warrant activity for the years ended December 31, 1998,
1999, and 2000 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, 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
Issued 906,841 $1.03 - $ 50.00 $10.08
Exercised (439,141) $1.79 - $ 4.00 $ 2.96
---------
Balance, December 31, 2000 1,878,654 $0.01 - $ 50.00 $ 7.98
=========
Exercisable:
December 31, 2000 150,000 $0.01 $ 0.01
592,259 $4.00 - $ 5.89 $ 5.22
426,500 $7.65 - $ 9.00 $ 8.24
----------
1,168,759 $0.01 - $ 9.00 $ 5.65
==========
A summary of the total stock warrants outstanding as of December 31, 2000
is as follows:
Weighted Weighted Average
Average Remaining Contractual
Number of Warrants Exercise Price Per Share Exercise Price Life
150,000 $ 0.01 $ 0.01 8.46 years
836,321 $ 1.03 - $ 5.89 $ 5.35 6.51 years
664,000 $ 7.65 - $ 9.00 $ 8.15 7.23 years
228,333 $10.00 - $50.00 $22.34 6.26 years
---------- --------------- ------ ----------
1,878,654 $ 0.01 - $50.00 $ 7.98 6.89 years
========== =============== ======= ==========
The warrants exercised in 1999 and 2000 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 and
326,390, respectively.
F-16
AUDIBLE, INC.
Notes to Financial Statements
December 31, 1998, 1999 and 2000
(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 would 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.
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.
F-17
AUDIBLE, INC.
Notes to Financial Statements
December 31, 1998, 1999 and 2000
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 of 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.
Microsoft Investment
On February 8, 2001, Microsoft purchased 2,666,666 shares of Audible
Series A Redeemable Convertible Preferred stock for $10,000,000 at a per share
price of $3.75. Each share of preferred stock may be converted into four shares
of Common Stock, (equivalent to a price of $.9375 per share), subject to
adjustment under certain conditions. The Series A Redeemable Convertible
Preferred stock is convertible at the option of the holder at any time prior to
the fifth anniversary of the original issue date. Dividends are payable
semi-annually at a annual rate of 12% in either additional preferred shares or
in cash at the option of the Company. On the fifth anniversary of the original
issue date, Audible is required to redeem all remaining outstanding shares at a
per share price of $3.75 plus all accrued and unpaid dividends.
(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.
F-18
AUDIBLE, INC.
Notes to Financial Statements
December 31, 1998, 1999 and 2000
(7) Property and Equipment
Property and equipment at December 31, 1999 and 2000 consists of the
following:
December 31,
--------------------------------------
1999 2000
----------------- -------------------
Studio equipment................................................. $ 385,732 $ 631,134
Computer server and Web site equipment........................... 1,603,946 2,761,900
Office furniture and equipment................................... 590,657 1,132,743
Leasehold improvements........................................... 93,829 789,046
---------- ----------
2,674,164 5,314,823
Less accumulated depreciation and amortization................... 1,251,161 2,496,031
---------- ----------
$1,423,003 $2,818,792
========== ==========
Property and equipment includes equipment under capital leases.
Depreciation and amortization expense on property and equipment, including
equipment under capital leases, totaled $655,711, $479,907 and $1,367,348 in
1998, 1999 and 2000, respectively.
(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 years ended
December 31, 1999 and 2000, $441,304 and $756,518, respectively, of this advance
was recognized and is recorded as other revenue on the accompanying 1999 and
2000, 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, 2000, 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 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.
F-19
AUDIBLE, INC.
Notes to Financial Statements
December 31, 1998, 1999 and 2000
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 years
ended December 31, 1999 and 2000, respectively, $156,835 and $268,860,
respectively, was recorded as a production expense related to this agreement
with the non-cash credit for services to additional paid-in-capital in the
statement of stockholders' 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 and 2000,
$1,181,160 and $568,570, respectively, was recorded as a marketing expense
related to this agreement with the non-cash credit for services to additional
paid-in capital in the 1999 and 2000 statement of stockholders' 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 1998, 1999 or 2000 due to
the Company's net losses in each of the years. As a result of selling certain of
its New Jersey state income tax loss benefits for cash, the Company realized
$316,310 in state income tax benefit during the year ended December 31, 2000.
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,
---------------------------------------------------------------
1998 1999 2000
-------------------- -------------------- -------------------
Computed "expected" tax benefit............. $(2,766,945) $(4,581,946) $(11,081,091)
Decrease (increase) in tax benefit resulting from:
State tax benefit, net of federal benefit -- -- (208,765)
Increase in the federal valuation allowance 2,765,000 4,578,000 10,963,000
Other, net.................................. 1,945 3,946 10,546
----------- ---------- -----------
$ -- $ -- $ (316,310)
=========== ========== ===========
F-20
AUDIBLE, INC.
Notes to Financial Statements
December 31, 1998, 1999 and 2000
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and liabilities as of December 31, 1999 and
2000 are as follows:
December 31,
------------------------------------------
1999 2000
-------------------- --------------------
Deferred tax assets:
Net operating loss carryforwards........................... $10,413,000 $24,758,000
Capitalized start-up costs................................. 886,000 573,000
Capitalized research and developmental costs............... 1,985,000 1,507,000
Book depreciation in excess of tax depreciation............ 246,000 538,000
Deferred compensation and accrued vacation................. 145,000 247,000
Advances................................................... 455,000 18,000
Other, net................................................. 119,000 107,000
---------- -----------
Total deferred tax assets................................. 14,249,000 27,748,000
---------- -----------
Less valuation allowance:................................
Federal................................................. 11,267,000 22,230,000
State................................................... 2,982,000 5,518,000
---------- -----------
Total valuation allowance:................................ 14,249,000 27,748,000
---------- -----------
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, 1999 and 2000.
As of December 31, 2000, the Company has net operating loss carryforwards
for federal income tax purposes of approximately $58,577,000 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. The Company terminated this agreement in 1999
in connection with the decision to discontinue manufacturing the Audible
MobilePlayer (see note 6).
Notes receivable due from stockholders of $150,000 at December 31, 1999
reduced to $50,000 at December 31, 2000 (due to repayment) bear interest at
5.42% annually. The remaining principal amount plus accrued interest is due on
March 27, 2001. The stockholder has pledged 12,500 shares of common stock as
security under the remaining promissory note.
F-21
AUDIBLE, INC.
Notes to Financial Statements
December 31, 1998, 1999 and 2000
(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:
2001...................................................... $ 48,271 $383,058
2002...................................................... -- 384,638
2003...................................................... -- 64,106
-------- ----------
Total future minimum lease payments.................... 48,271 $831,802
==========
Less amount representing interest (8% to 11.5%)........... 1,084
--------
Present value of obligations under capital leases...... 47,187
Less current maturities................................... 47,187
--------
Obligations under capital leases, net of current
maturities............................................. $ --
========
Rent expense of $209,128, $206,128 and $330,019 was recorded under
operating leases for the years ended December 31, 1998, 1999 and 2000,
respectively.
Equipment under capital leases as of December 31, 1999 and 2000 is
summarized as follows:
December 31,
--------------------------------------
1999 2000
------------------ ------------------
Studio equipment........................................... $ 135,855 $135,855
Computer server and Web site equipment..................... 504,055 504,055
Office furniture and equipment............................. 299,269 299,269
---------- --------
939,179 939,179
Less accumulated amortization.............................. 875,947 939,179
---------- --------
$ 63,232 $ --
========== ========
License Agreements
The Company has entered into several agreements with certain consumer
electronics and computer companies to license and promote the AudibleReady
software for handheld electronic players. Under the terms of these agreements,
the Company is required to pay the device 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.
F-22
AUDIBLE, INC.
Notes to Financial Statements
December 31, 1998, 1999 and 2000
(13) Notes Due from Stockholders for Common Stock
Notes due from stockholders of $579,025 and $391,703 at December 31, 1999
and 2000, 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' equity. The notes are full recourse promissory notes
bearing interest at fixed rates ranging from 7.0% to 8.5%. The notes began
maturing 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 1998, 1999 and 2000, the Company repurchased
1,172,724, 550,186 and 4,155 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 401(k)Plan). The 401(k) Plan is based on
contributions from employees and discretionary Company contributions. The
Company has not contributed to the 401(k)Plan to date.
(16) Amazon Agreement
In January 2000, the Company entered into two agreements with Amazon.com.
Under the Co-Branding, Marketing and Distribution Agreement the Company will be
the exclusive provider of digital spoken audio (as defined) to Amazon.com. On
January 24, 2001, the Company signed Amendment No.1 to its Co-Branding,
Marketing, and Distribution Agreement with Amazon.com. Under the amendment, the
annual fee for Year 3 of the agreement is reduced from $10,000,000 to $1,500,000
and an additional fee of $1,000,000 is payable in Year 2 of the agreement. Also
in connection with Amendment No.1, the Company issued 500,000 common stock
warrants to Amazon.com at an exercise price of $1.50 per share, which are
exercisable after January 31, 2002.
During the three-year term of this agreement, in consideration for certain
services, Amazon will receive $22,500,000 (as amended) plus a specified
percentage of revenue earned over a specified amount. Under the Securities
Purchase Agreement, Amazon.com has purchased 1,340,033 shares of common stock
from the Company for $20,000,000. Under the agreements, the consideration paid
by Amazon for the purchase of the common stock, and the Company's obligation for
the annual fee for the first two years per the original Co-Branding, Marketing,
and Distribution Agreement, which are identical amounts, were offset and no cash
was exchanged. Accordingly, $20,000,000 was recorded as deferred services, a
component of stockholders' equity, and is being amortized over the initial
two-year term on a straight-line basis (see note 18). During the year ended
December 31, 2000, $9,166,666 was recorded as a marketing expense related to
this agreement.
F-23
AUDIBLE, INC.
Notes to Financial Statements
December 31, 1998, 1999 and 2000
(17) Random House, Inc. Agreement
On May 5, 2000, Audible and Random House entered into a four-year
Co-Publishing, Marketing, and Distribution Agreement to form a strategic
alliance to establish Random House Audible, a publishing imprint, as defined in
the agreement, to produce spoken word content specifically suited for digital
distribution. All titles published by the imprint will be distributed
exclusively on the Internet by Audible. As part of this alliance, Random House,
through its Random House Ventures, LLC subsidiary, purchased 169,780 shares of
Audible common stock from the Company for $1,000,000. Audible will be
contributing $1,000,000 annually towards funding the acquisition and creation of
digital audio titles through Random House Audible. During year ended December
31, 2000, $640,000 was recorded as a cost of content and services revenue
related to this contribution. The agreement further provides for Random House to
be granted a warrant to purchase 878,333 shares of Audible common stock at
various exercise prices that vest over the term of the agreement, as well as the
granting of additional warrants to Random House to purchase Audible common
shares based on future performance. The fair value of these warrants is being
amortized as an expense on a straight-line basis over the four year term of the
agreement, and the warrants are accounted for using variable plan accounting and
compensation costs vary each accounting period until the measurement date.
During the year ended December 31, 2000, $352,424 was recorded as a cost of
content and services revenue related to these warrants with the non-cash credit
for services to additional paid-in capital. Additionally, the agreement contains
provisions for profit participation and bounties, among other items. Random
House Audible will be an imprint of Random House, Inc.'s Random House Audio
Publishing Group division.
(18) Supplemental Disclosure of Cash Flow Information
The following supplemental information relates to the Statements of Cash
Flows for the years ended December 31, 1998, 1999 and 2000:
No income tax payments have been made in 1998, 1999 or 2000. Total cash
paid for interest expense for the years ended December 31, 1998, 1999 and 2000,
was $114,728, $48,070 and $21,810, respectively.
Non-cash investing and financing activities which occurred in the years
ended December 31, 1998, 1999 and 2000 included:
-Common stock issued for notes receivable, net; $464,290, $61,200 and $0,
respectively.
-Acquisition of property and equipment under capital leases; $73,180, $0
and $0, respectively.
-Conversion of redeemable convertible preferred stock; $0, $28,719,126 and
$0, respectively.
-Reversal of initial public offering costs; $0, $0 and $122,086,
respectively.
-Purchase of treasury stock at cost through reductions in notes
receivable; $190,514 $143,882 and $1,046, respectively.
-Common stock issued for deferred services in connection with a
Co-Branding, Marketing and Distribution agreement; $0, $0 and $20,000,000,
respectively.
-Issuance of common stock upon the cashless exercise of common stock
warrants; 0 shares, 93,832 shares and 326,390 shares, respectively.
F-24
AUDIBLE, INC.
Notes to Financial Statements
December 31, 1998, 1999 and 2000
(19) Quarterly Results (UNAUDITED)
The following tables contain selected unaudited quarterly financial data
for each quarter of 1999 and 2000. The Company has followed SAB 101 and certain
EITF Issues in accounting for its sales of third party hand-held electronic
devices and accordingly, has reclassified hardware revenue, cost of hardware
revenue and marketing expenses for the nine months ended September 30, 2000.
This reclassification had no impact on the Company's net loss for any quarter as
hardware revenue increased by $618,469, cost of hardware revenue increased by
$1,513,469 and marketing expenses decreased by $895,000 for the nine months
ended September 30, 2000. The Company believes that the following information
reflects all normal recurring adjustments necessary for a fair presentation of
the information for the periods presented. The operating results for any quarter
are not necessarily indicative of results for any future period.
YEAR ENDED DECEMBER 31, 1999
1st Quarter 2nd Quarter 3rd Quarter 4th Quarter
Revenue, net $ 315,055 $ 528,452 $ 478,834 $ 420,264
Operating expenses 1,856,932 2,888,531 5,222,497 6,353,117
Net loss $(1,474,432) $(2,289,017) $(4,343,117) $(5,369,745)
Basic and diluted loss per common share $ (0.20) $ (0.30) $ (0.19) $ (0.21)
Weighted average shares outstanding 7,452,065 7,602,269 22,668,320 25,563,462
YEAR ENDED DECEMBER 31, 2000
1st Quarter 2nd Quarter 3rd Quarter 4th Quarter
Revenue, net $ 723,390 $ 840,977 $ 1,113,478 $ 1,871,135
Operating expenses 9,782,516 10,006,096 9,318,479 9,635,163
Loss before state income tax benefit $(8,496,997) $(8,755,113) $(7,850,023) $(7,489,311)
Net loss $(8,496,997) $(8,755,113) $(7,850,023) $(7,173,001)
Basic and diluted loss per common share $ (0.33) $ (0.32) $ (0.29) $ (0.27)
Weighted average shares outstanding 25,597,835 26,940,204 27,014,489 27,013,239
F-25