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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
FORM 10-Q
------------------------
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 1999
[ ] 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 000-26521
ASK JEEVES, INC.
(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C>
DELAWARE 94-3334199
(STATE OR OTHER JURISDICTION OF (IRS EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
</TABLE>
5858 HORTON ST., SUITE 350, EMERYVILLE, CA 94608
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES, INCLUDING ZIP CODE)
(510) 985-7400
(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)
918 PARKER STREET, BERKELEY, CA 94710
(FORMER ADDRESS)
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
The number of shares outstanding of the registrant's Common Stock as of
July 31, 1999 was 26,795,716.
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ASK JEEVES, INC.
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
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<S> <C> <C>
PART I. FINANCIAL INFORMATION
Item 1. Unaudited Condensed Financial Statements:
Condensed Balance Sheets
June 30, 1999 and December 31, 1998....................... 3
Condensed Statements of Operations
Three and six months ended June 30, 1999 and 1998......... 4
Condensed Statements of Cash Flows
Six months ended June 30, 1999 and 1998................... 5
Notes to Condensed Financial Statements..................... 6
Management's Discussion and Analysis of Financial Condition
Item 2. and Results of Operations................................. 8
Item 3. Quantitative and Qualitative Disclosure About Market Risk... 15
PART II. OTHER INFORMATION
Item 1. Legal Proceedings........................................... 16
Item 2. Change in Securities........................................ 16
Item 3. Defaults Upon Senior Securities............................. 16
Item 4. Submission of Matters to a Vote of Securities Holders....... 16
Item 5. Other Information........................................... 16
Item 6. Exhibits and Reports on Form 8-K............................ 16
Signature............................................................ 17
</TABLE>
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PART I. FINANCIAL INFORMATION
ITEM 1. UNAUDITED CONDENSED FINANCIAL STATEMENTS
ASK JEEVES, INC.
CONDENSED BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1999 1998
(UNAUDITED) (SEE NOTE)
------------ ------------
<S> <C> <C>
Current assets:
Cash and cash equivalents................................. $ 12,719,291 $ 5,587,883
Short-term investments.................................... 4,506,424 --
Accounts receivable, net.................................. 2,151,258 236,258
Prepaid expenses and other assets........................... 3,895,952 148,545
------------ -----------
Total current assets.............................. 23,272,925 5,972,686
------------ -----------
Property and equipment, net................................. 2,933,276 835,486
Intangible assets, net...................................... 1,327,673 --
Investments................................................. 4,550,000 --
------------ -----------
Total assets...................................... $ 32,083,874 $ 6,808,172
============ ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable.......................................... $ 3,597,200 $ 605,283
Accrued compensation and related expenses................. 1,250,282 253,062
Accrued marketing expenses................................ 1,766,775 --
Other accrued liabilities................................. 3,074,025 188,220
Deferred revenue.......................................... 942,635 149,842
------------ -----------
Total current liabilities......................... 10,630,917 1,196,407
Capital lease obligations................................... 25,297 45,945
Commitments
Stockholders' equity:
Convertible preferred stock, $.001 par value; (5,000,000
shares authorized)..................................... -- 6,088,222
Common Stock, $.001 par value; 150,000,000 shares
authorized; 23,284,995 and 11,358,077 shares issued and
outstanding at June 30, 1999 and December 31, 1998,
respectively........................................... 43,433,633 4,771,781
Deferred stock compensation............................... (2,298,692) (476,984)
Accumulated deficit....................................... (19,707,281) (4,817,199)
------------ -----------
Total stockholders' equity........................ 21,427,660 5,565,820
------------ -----------
Total liabilities and stockholders' equity........ $ 32,083,874 $ 6,808,172
============ ===========
</TABLE>
Note: The December 31, 1998 balance sheet data is derived from the December 31,
1998 audited financial statements.
See accompanying notes to financial statements.
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ASK JEEVES, INC.
CONDENSED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
-------------------------- -------------------------
1999 1998 1999 1998
------------ ---------- ------------ ---------
<S> <C> <C> <C> <C>
Revenue
Consumer............................ $ 1,898,817 $ 35,355 $ 2,957,885 $ 50,121
Corporate........................... 818,731 -- 891,231 --
------------ ---------- ------------ ---------
Total revenues.............. 2,717,548 35,355 3,849,116 50,121
Cost of revenues:
Consumer............................ 1,162,199 69,734 1,861,330 116,105
Corporate........................... 1,129,955 29,408 1,952,536 50,707
------------ ---------- ------------ ---------
Total cost of revenues...... 2,292,154 99,142 3,813,866 166,812
Gross profit (loss)................... 425,394 (63,787) 35,250 (116,691)
Operating expenses:
Product development................. 1,145,707 170,463 1,887,873 298,235
Sales and marketing................. 7,492,367 183,343 10,161,532 264,215
General and administrative.......... 1,150,493 157,354 2,032,323 234,959
Amortization of deferred stock
compensation..................... 592,193 -- 909,242 --
Write-off of in-process technology
acquired......................... 360,697 -- 360,697 --
------------ ---------- ------------ ---------
Total operating expenses.... 10,741,457 511,160 15,351,667 797,409
------------ ---------- ------------ ---------
Operating loss........................ (10,316,063) (574,947) (15,316,417) (914,100)
Interest income, net.................. 295,141 1,292 426,335 5,090
------------ ---------- ------------ ---------
Net loss.............................. $(10,020,922) $ (573,655) $(14,890,082) $(909,010)
============ ========== ============ =========
Basic and diluted net loss per
share............................... $ (0.47) $ (0.09) $ (0.78) $ (0.15)
============ ========== ============ =========
Weighted average shares outstanding
used in computing basic and diluted
net loss per share.................. 21,410,421 6,516,415 19,083,190 6,216,135
============ ========== ============ =========
</TABLE>
See accompanying notes to financial statements.
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ASK JEEVES, INC.
CONDENSED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30,
--------------------------
1999 1998
------------ ----------
<S> <C> <C>
OPERATING ACTIVITIES
Net loss.................................................... $(14,890,082) $ (909,010)
Adjustment to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization............................. 398,673 23,168
Contribution of assets and services by stockholders....... -- 150,000
Compensation charge related to stock options.............. 211,750 51,501
Amortization of deferred stock compensation............... 909,242 --
Write-off of in-process technology........................ 360,697 --
Changes in operating assets and liabilities:
Accounts receivable.................................. (1,915,000) (4,313)
Prepaid expenses and other current assets............ (3,747,407) (95,069)
Accounts payable..................................... 2,991,917 --
Accrued compensation and related expenses............ 997,220 (16,934)
Accrued marketing expenses........................... 1,766,775 --
Other accrued liabilities............................ 2,885,805 130,360
Deferred revenue..................................... 792,793 5,978
------------ ----------
Net cash used in operating activities....................... (9,237,617) (664,319)
INVESTING ACTIVITIES
Purchases of property and equipment......................... (2,405,940) (92,153)
Net purchases of investments................................ (9,056,424) --
Purchase of intangible assets............................... (991,393) --
------------ ----------
Net cash used in investing activities....................... (12,453,757) (92,153)
FINANCING ACTIVITIES
Issuance of common stock for cash........................... -- 1,397,500
Issuance of common stock upon exercise of stock options..... 4,202,209 --
Issuance of preferred stock for cash, net of issuance
costs..................................................... 26,455,166 --
Issuance costs related to initial public offering........... (1,813,945) --
Repayment of capital lease obligations...................... (20,648) (3,492)
------------ ----------
Net cash provided by financing activities................... 28,822,782 1,394,008
------------ ----------
Increase in cash and cash equivalents....................... 7,131,408 637,536
Cash and cash equivalents at beginning of period............ 5,587,883 521,247
------------ ----------
Cash and cash equivalents at end of period.................. $ 12,719,291 $1,158,783
============ ==========
SUPPLEMENTAL DISCLOSURE OF NONCASH INVESTING AND FINANCING
ACTIVITIES
Capital lease obligations incurred........................ $ -- $ 89,176
Common stock issued in payment of intangibles............. $ 787,500 $ --
Preferred stock converted to common stock on effectiveness
of initial public offering............................. $ 32,543,388 $ --
</TABLE>
See accompanying notes to financial statements.
5
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ASK JEEVES, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
(UNAUDITED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The Company
Ask Jeeves is a provider of natural-language question answering service on
the Internet for consumers and companies. The Ask Jeeves question answering
services provide users a fast, easy and intuitive way to find information,
products and services on the Internet. The Company combines proprietary tools
and technologies with editorial judgment to let users ask questions in plain
English and to direct them to a small selection of relevant destinations on the
Internet. The Company was incorporated in the State of California in June 1996,
then subsequently reincorporated in the State of Delaware in June 1999.
Public Offering of Common Stock
On June 30, 1999, the registration statement for our initial public
offering (IPO) of 3,450,000 shares (including the underwriter's over-allotment
of 450,000 shares) of common stock was declared effective by the Securities and
Exchange Commission. The purchase price per share was $14.00 per share. Net
proceeds to the Company aggregated approximately $45,000,000 (net of
underwriters' commission and offering expenses of $3,300,000). As of the
effective date of the offering, all of the convertible preferred stock
outstanding was converted into 9,485,690 shares of common stock. Proceeds from
the IPO were received in July 1999.
Unaudited Interim Financial Information
The accompanying financial statements at June 30, 1999 and for the three
and six months ended June 30, 1998 and 1999 are unaudited but include all
adjustments (consisting of normal recurring accruals) which, in the opinion of
management, are necessary for a fair statement of the financial position and the
operating results and cash flows for the interim date and periods presented.
Results for the interim period ended June 30, 1999 and June 30, 1998 are not
necessarily indicative of results for the entire fiscal year or future periods.
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 at the
date of the financial statements and the reported amounts of revenue and
expenses during the reporting period. Actual results could differ materially
from those estimates.
Computation of Net Loss Per Share
Basic net loss per share is computed using the weighted average number of
common shares outstanding during the period and the incremental common shares
issuable upon the conversion of the convertible preferred stock (using the
if-converted method). Dilutive earnings per share is computed using the weighted
average number of common and dilutive common equivalent shares outstanding
during the period. Common equivalent shares consist of the incremental common
shares issuable upon the exercise of stock options and warrants (using the
treasury stock method). Common equivalent shares are excluded from the
calculation if their effect is anti-dilutive. Pursuant to SEC Staff Accounting
Bulletin No. 98, common stock and convertible preferred stock issued for nominal
consideration, prior to the effective date of the IPO, are required to be
included in the calculation of basic and diluted net loss per share as if they
were outstanding for all periods presented. To date, the Company has not had any
issuances or grants for nominal consideration.
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ASK JEEVES, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
The following table sets forth the computation of net loss per share:
<TABLE>
<CAPTION>
THREE MONTH ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
-------------------------- --------------------------
1999 1998 1999 1998
------------ ---------- ------------ ----------
<S> <C> <C> <C> <C>
Basic and Diluted net loss per share
Numerator: Net loss................. $(10,020,922) $ (573,655) $(14,890,082) $ (909,010)
Denominator: Weighted-average shares
outstanding basic and diluted....... 21,410,421 6,516,415 19,083,190 6,216,135
Basic and diluted net loss per
share............................... $ (0.47) $ (0.09) $ (0.78) $ (0.15)
</TABLE>
Commitments and Contingencies
On April 30, 1999, the Company entered into a five-year lease for its
headquarters. The total obligation under the lease is $5.7 million and is
payable in monthly payments of $87,841 commencing in August 1999.
Capital lease obligations for equipment represent the present value of
future lease payments under the agreements. The Company has options to purchase
the leased assets at the end of the lease terms.
The Company is a party to a legal proceeding and claim. In the opinion of
management, the amount of the ultimate liability with respect to this action
will not materially affect the financial position, results of operations or cash
flows of the Company.
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MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Except for the historical information contained herein, this overview and
the following discussion contain forward-looking statements that involve risks
and uncertainties. Our actual results could differ materially from those
discussed here. Factors that could cause or contribute to such differences
include, but are not limited to, those discussed in Registration Statement on
Form S-1 filed April 30, 1999, as amended.
OVERVIEW
We have two principal businesses based on the same underlying technology.
The Consumer Question Answering Service allows users to obtain answers to
frequently asked questions online. The Corporate Question Answering Service
helps companies provide a human-like online interface for their customers.
Revenues from the Consumer Question Answering Service consist primarily of
two components:
- advertising revenues; and
- knowledge base licensing fees.
We earn advertising revenues from short-term advertising contracts by
delivering impressions to users over a specified period of time. Advertising
rates, measured on a cost per thousand impressions ("CPM") basis, are dependent
on whether the impressions are displayed in general rotation throughout our Web
site or are directed to targeted audiences or channels within Ask Jeeves, such
as the computer, entertainment, family, health, money, shopping and travel
channels. Revenues are based upon actual impressions delivered as measured by
our third party advertising delivery provider, Doubleclick, Inc. We currently
license the Ask Jeeves knowledge base to three companies that provide
Internet-wide navigation services. These companies are AltaVista Company,
Netscape Communications, Inc., and Infonautics Corporation. Knowledge base
licensing fees consist of a fixed fee that is recognized ratably over the
contract term, generally a twelve month period. In the future, we expect that
licensing of the knowledge base will not be a significant part of our business
model. We also expect to generate a portion of our revenues from a third
component, the facilitation of electronic commerce. We expect to generate
revenues from electronic commerce transactions through arrangements with our
electronic commerce merchants. Typically, we receive payment only if the user
clicks on the answer that links to such electronic commerce merchant's Web site,
a cost per click ("CPC") basis. We have not generated any revenues from the
facilitation of electronic commerce from inception through June 30, 1999.
Revenues from the Corporate Question Answering Service consist of three
components:
- knowledge base customization;
- maintenance and information service fees; and
- per-answer fees.
We recognize knowledge base customization and maintenance and information
service fees ratably over the contract term, generally twelve months. We
recognize per-answer fees based on answers delivered at contractual per-answer
rates, subject to negotiated annual minimums and maximums, if applicable.
Payments received prior to delivering the knowledge base or providing
maintenance and information services are recorded as deferred revenues and are
recognized ratably over the contract term.
Cost of revenues for our Consumer Question Answering Service consists
primarily of salaries and personnel costs associated with the content
development and maintenance of Ask Jeeves and providing data analysis, testing
and training. Cost of revenues for our Corporate Question Answering Service
consists primarily of salaries and related personnel costs and other direct
costs to provide knowledge base information and maintenance services to
corporate customers. We believe that ongoing content development is required to
remain competitive, and we expect that our production and content expenses will
continue to increase in absolute dollars in the future.
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Product development expenses consist primarily of salaries and related
personnel costs, consultant fees and expenses related to the design,
development, testing and enhancement of our technology and services. To date all
software development costs have been expensed as incurred. We believe that
continued investment in product development is critical to attaining our
strategic product objectives and, as a result, we expect these expenses to
increase in absolute dollars in the future.
Sales and marketing expenses consist primarily of salaries, commissions and
related personnel expenses as well as advertising and promotional expenditures.
We intend to pursue aggressive sales and marketing campaigns and expand our
sales and marketing organization, which will result in an increase in absolute
dollars in our sales and marketing expenses in the future.
General and administrative expenses consist primarily of salaries and
related personnel costs and other related costs for general corporate functions,
including executive management, finance, facilities administration, legal,
recruiting and fees for other professional services. We expect general and
administrative expenses to increase in absolute dollars in the future as we add
personnel and incur additional costs related to the growth of our business and
our operation as a public company.
Interest income and expense includes income on the Company's cash and
short-term investments net of expenses related to the Company's financing
obligations. Proceeds from the Company's recent initial public offerings are
expected to increase the interest income generated in the near term, partially
offset by an expected increase in interest expense.
For six months ended June 30, 1999, in connection with the grant of certain
stock options to employees, we recorded deferred stock compensation totaling
$2.2 million representing the difference between the deemed fair value of our
common stock on the date such options were granted and the exercise price. Such
amount is included as a reduction of stockholders' equity and is being amortized
by charges to operations on a graded vesting method. We recorded amortization of
deferred stock compensation expense of $718,000 for the six months ended June
30, 1999. At June 30, 1999, we had a total of $2.0 million remaining to be
amortized over the corresponding vesting periods of the options, generally four
years. Due to the graded vesting method of amortization, most of the deferred
compensation charge will be incurred over the first two years of the vesting of
the options. The amortization expense relates to options awarded to employees in
all operating expense categories.
Additionally, for the six months ended June 30, 1999, in connection with
the grant of stock options to Roger A. Strauch and Daniel H. Miller, who served
as our consultants, we recorded deferred stock compensation of $511,000. This
amount represents the difference between the deemed fair value of our common
stock on the date such options were granted and the exercise price and is being
amortized by charges to operations over the service period which concludes in
December 1999. We recorded amortization of deferred stock compensation expense
of $191,000 in the six months ended June 30, 1999.
We have incurred significant net losses and negative cash flows from
operations since our inception, and at June 30, 1999, we had an accumulated
deficit of approximately $20 million. These losses have been funded primarily
through the issuance of preferred and common equity securities. We believe that
we will continue to incur operating and net losses and negative cash flows from
operations for the foreseeable future and that the rate at which we will incur
such losses may increase from current levels.
RESULTS OF OPERATIONS
Revenues
Revenues were $2.7 million and $3.8 million for the three and six months
ended June 30, 1999, respectively. Revenues from the Consumer Question Answering
Service were approximately $1.9 million for the three months ended June 30,
1999, of which $1.8 million was generated from advertising revenues and $125,000
from knowledge base licensing fees. Revenues from the Corporate Question
Answering Service were $819,000 and $891,000 for the three and six months ended
June 30, 1999, respectively. Total revenues from the Consumer Question Answering
Service for the three and six month periods ended June 30, 1998
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were $35,000 and $50,000, respectively. There were no revenues from the
Corporate Question Answering Service in 1998. The revenue growth over the
respective prior year periods is primarily attributable to increased advertising
revenue due to increased use of the Internet by consumers and acceptances of the
Internet as an advertising and commerce medium, increased viewer traffic on our
web-sites (ASK.Com and AJKids.com), and the launching of our Corporate Question
Answering Service. Total revenue for the three months ended June 30, 1999, as
compared to the three months ended March 31, 1999, increased by 140 percent. The
increase in revenue resulted from an increase in the Company's sales force and
an aggressive marketing campaign, increased viewer traffic, and new business
signed and implemented in the Corporate Question Answering Service. There can be
no assurance that the current advertisers will continue to purchase advertising
space and services from us or that we will be able to successfully attract
additional advertisers. There can also be no assurance that corporate customers
will continue to require services of our Corporate Question Answering Service.
For the three and six months ended June 30, 1999, total questions received, on a
combined basis by the Consumer and Corporate Question Answering Service, were
92.3 million and 155.7 million, respectively.
Cost of Revenues
Cost of revenues for our Consumer Question Answering Service and Corporate
Question Answering Service were $1.2 million and $1.1 million, respectively, for
the three months ended June 30, 1999 compared to $70,000 and $29,000,
respectively, for the three months ended June 30, 1998. The primary reason for
the increase in cost of revenues during these periods is related to increased
hosting costs and the hiring of personnel and related personnel costs associated
with development of our public site, specifically in the areas of content
development, maintenance, data analysis, and testing. In addition, the Company
incurred increased costs associated with personnel and related personnel costs
required to provide knowledge base information and maintenance services to our
corporate customers. Also included in costs of revenues for the three months
ended June 30, 1999 is $91,000 of amortization charges from the acquisition of
assets from Lumina Design Systems, Inc. Management expects its hosting, content
development and web site costs will continue to increase to meet the demands for
web services and provide additional services to users of our public site and our
Corporate Question Answering Service customers.
Product Development Expenses
Product development expenses increased to $1.1 million for the three months
ended June 30, 1999, from $170,000 for the same period a year ago. Product
development expenses increased to $1.9 million for the six months ended June 30,
1999, from $298,000 for the same period a year ago. The primary reasons for the
dollar increase were the hiring of additional personnel and related personnel
costs and consultant fees and expenses related to the design, development,
testing and enhancement of our technology and services. We believe the
development of additional features and tools are vital for us to remain
competitive in our industry. We anticipate that we will continue to devote
substantial resources to product development. These costs are expected to
continue to increase in dollar amount in future periods.
Sales and Marketing Expenses
Sales and marketing expenses increased to $7.5 million and $10.2 million
for the three and six months ended June 30, 1999, respectively, from $183,000
and $264,000 for the same periods a year ago. The dollar increase was primarily
due to increases in advertising expenses related to our branding campaign, the
hiring of additional sales and marketing personnel and commissions needed to
support the increase in revenues. We intend to continue pursuing an aggressive
brand-enhancement strategy, which will include mass market and multimedia
advertising, promotional programs and public relations activities. Consequently,
these costs are expected to continue to increase in dollar amount in future
periods.
General and Administrative Expenses
General and administrative expenses increased to $1.2 million and $2.0
million for the three and six months ended June 30, 1999, respectively, from
$157,000 and $235,000 for the same periods a year ago.
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The dollar increase in general and administrative expenses was primarily due to
increased depreciation on fixed assets and an increase in the number of finance,
legal, business development and MIS personnel to support the growth of our
business, and recruiting costs related to filling key senior executive
positions.
Interest Income and Expense
Interest income, net totaled $295,000 and $426,000 for the three and six
months ended June 30, 1999, respectively, compared to net interest income of
$1,292 and $5,090 in the comparable periods in 1998. Most of this increase was
generated from interest income on proceeds from our private equity financings of
preferred and common stock, partially offset by increased interest charges on
capital lease obligations. Proceeds from our recent initial public offering are
expected to increase the interest income generated in the near term, partially
offset by an expected increase in interest expense.
LIQUIDITY AND CAPITAL RESOURCES
Since our inception, we have financed our operations primarily through the
private placement of equity securities. As of June 30, 1999, we had $21.8
million in cash, cash equivalents and investments. Net cash used in operating
activities was $9.2 million for the six months ended June 30, 1999. The net cash
used in operating activities resulted primarily from net operating losses and
increases in accounts receivable and prepaid expenses, partially offset by the
timing of accounts payable settlements and accrued expenses. Net cash used in
investing activities was $12.5 million for the six months ended June 30, 1999.
Net cash used in investing activities related to purchases of $2.4 million of
property and equipment for the six months ended June 30, 1999 and $92,000 for
purchases of property and equipment for the six months ended June 30, 1998. In
addition, for the six months ended June 30, 1999, we purchased $9.1 million of
short-term and long-term investments. Net cash provided by financing activities
was $28.8 million for the six months ended June 30, 1999 and related primarily
to net proceeds from the sale of preferred equity securities of $26.5 million,
which was offset against issuance costs of $1.8 million, and proceeds from the
exercise of stock options under the Company's stock incentive plans of $4.2
million.
We have no material commitments or obligations other than those under
capital and operating leases. In June 1999, we entered into a leasing agreement
with Comdisco, Inc. to finance equipment and software purchases up to a maximum
of $3.5 million. As of July 31, 1999, we have utilized approximately $2 million
of the total credit line. Our capital requirements depend on numerous factors,
including market acceptance of our question answering services and the amount of
resources we invest in site and content development, marketing and selling our
services and our brand promotions. We have experienced a substantial increase in
our expenditures since our inception consistent with growth in our operations
and staffing, and we anticipate that this will continue for the foreseeable
future. Additionally, we will continue to evaluate possible investments in
businesses and technologies, and we plan to expand our sales and marketing
programs and conduct more aggressive brand promotions.
We currently anticipate that our available cash resources combined with the
net proceeds from this offering will be sufficient to meet our anticipated needs
for working capital and capital expenditures for at least the next eighteen
months. At the end of such period, we will need to generate sufficient cash flow
from operations to meet our anticipated needs for working capital and capital
expenditures, or we will need to raise additional capital. However, if during
that eighteen-month period or thereafter, we are not successful in generating
sufficient cash flow from operations or in raising additional capital when
required in sufficient amounts and on terms acceptable to us, these failures
could have a material adverse effect on our business, results of operations and
financial condition. If we raise additional funds through the issuance of equity
or convertible debt securities, the percentage ownership of our stockholders
will be reduced.
YEAR 2000 COMPLIANCE
Many currently installed computer systems and software products are coded
to accept or recognize only two digit entries in the date code field. These
systems and software products will need to accept four digit entries to
distinguish 21st century dates from 20th century dates. As a result, computer
systems and software
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<PAGE> 12
used by many companies and governmental agencies may need to be upgraded to
comply with such Year 2000 requirements or risk system failure or
miscalculations causing disruptions of normal business activities.
STATE OF READINESS
We have made an assessment of the Year 2000 readiness of all our relevant
operating, financial and administrative systems, including the hardware and
software that support our information technology ("IT") and non-IT systems. Our
assessment plan consists of:
- quality assurance testing of our internally developed proprietary
software;
- contacting third-party vendors and licensors of material hardware,
software and services that are both directly and indirectly related to
the delivery of our services to our users;
- contacting vendors of third-party systems;
- assessing repair or replacement requirements;
- implementing repair or replacement;
- implementation of the plan; and
- creating contingency plans in the event of Year 2000 failures.
All of our third party software and hardware vendors have provided written
statements, which were obtained at our request or from their public Web sites,
indicating that they are Year 2000 compliant. We performed a Year 2000
simulation on our material IT and non-IT systems during the first half of 1999
to test system readiness. Simulation tests have been performed on all but the
router system provided by Cisco Systems, Inc. Our business would experience an
interruption of service if simulation tests were conducted on this router system
and therefore we are relying on Cisco's Year 2000 Compliance Statement, which is
on its Web site. We have three hardware and software non-compliant systems which
will be retired in the second half of 1999. Replacement systems have been
identified and simulation tests are expected to be completed in the second half
of 1999. If these replacement systems do not pass our simulation tests, we will
have to revise these systems or find further replacements. All of our material
third party service providers have represented in writing that they are in the
process of remediating Year 2000 problems and are expected to be Year 2000
compliant in the fourth quarter of 1999.
RISKS OF YEAR 2000 ISSUES
We are not currently aware of any Year 2000 compliance problems relating to
our software or our IT or non-IT systems that would have a material adverse
effect on our business, results of operations and financial condition,
notwithstanding our efforts to detect and correct such problems. There can be no
assurance that we will not discover Year 2000 compliance problems in our
software that will require substantial revisions or replacements. In addition,
there can be no assurance that third-party software, hardware or services
incorporated into our material IT and material non-IT systems will not need to
be revised or replaced, which could be time consuming and expensive. Our failure
to fix our software, if necessary, or to fix or replace third-party software,
hardware or services, if necessary, on a timely basis could result in lost
revenues, increased operating costs and other business interruptions, any of
which could have a material adverse effect on our business, results of
operations and financial condition. Moreover, the failure to adequately address
Year 2000 compliance issues in our IT and non-IT systems could result in claims
of mismanagement, misrepresentation or breach of contract and related
litigation, which could be costly and time-consuming to defend. In addition,
there can be no assurance that governmental agencies, utility companies,
Internet access companies, third-party service providers and others outside our
control will be Year 2000 compliant. The failure by such entities to be Year
2000 compliant could result in a systemic failure beyond our control, such as a
prolonged Internet, telecommunications or electrical failure, which could
prevent us from operating our Web site.
Because our needs for additional hardware and software change, we are
engaged in an ongoing Year 2000 assessment. We have not developed any
contingency plans. The completion of our Year 2000 simulation
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<PAGE> 13
testing and the responses received from third-party vendors and service
providers will be taken into account in determining the need for and nature and
extent of any contingency plans.
COSTS TO DATE
Costs associated with Year 2000 compliance matters have been approximately
$100,000 to date and the Company anticipates additional costs of $100,000. Most
of our expenses have related to, and are expected to continue to relate to, the
operating costs associated with time spent by employees in the evaluation and
testing process and Year 2000 compliance matters generally. Such costs, if
higher than anticipated, could have a material adverse effect on our business,
results of operations and financial condition.
BUSINESS RISKS
OUR BUSINESS IS EXTREMELY DIFFICULT TO EVALUATE BECAUSE OUR OPERATING HISTORY IS
LIMITED
Because of our limited operating history, it is extremely difficult to
evaluate our business and prospects. Our revenue and income potential are
unproven and our business model is constantly evolving. Our new operating
structure is entirely untested, and we cannot be sure that our structure will
provide the value to us that we expect. Because the Internet is constantly
changing, we may need to change our business model again to adapt to those
changes. Frequent changes in organizational structure could impose significant
burdens on our management and our employees and could result in loss of
productivity or even increased employee attrition.
WE HAVE A HISTORY OF NET LOSSES AND EXPECT TO CONTINUE TO INCUR NET LOSSES
We expect to have increasing net losses and negative cash flows for the
foreseeable future. The size of these net losses will depend, in part, on the
rate of growth of our revenues from our advertisers, corporate customers and
electronic commerce merchants and on our expenses. It is critical to our success
that we continue to expend financial and management resources to develop our
brand loyalty through marketing and promotion, enhancement of our question
answering services and expansion of our other services. As a result, we expect
that our operating expenses will increase significantly for the foreseeable
future. With increased expenses, we will need to generate significant additional
revenues to achieve profitability. Consequently, it is possible that we may
never achieve profitability, and even if we do achieve profitability, we may not
sustain or increase profitability on a quarterly or annual basis in the future.
If we do not achieve or sustain profitability in the future, then we will be
unable to continue our operations.
OUR QUESTION ANSWERING SERVICES ARE NOVEL AND UNPROVEN
Our question answering services are novel and unproven. We will be
successful only if Internet users adopt our natural-language question answering
services on Ask Jeeves and on the Web sites of our corporate customers. It is
difficult to predict the extent and rate of user adoption of our question
answering services. We cannot assure you that widespread acceptance of our
question answering services will occur. Visitors to our service may use it once
or twice and then revert to traditional search techniques to navigate the
Internet.
OUR METHODS OF GENERATING REVENUE ARE RELATIVELY NEW AND LARGELY UNTESTED
Revenues from Internet advertising will make up a significant amount of our
revenues for the foreseeable future. Since the Internet advertising market is
new and rapidly evolving, we cannot yet gauge its effectiveness as compared to
traditional advertising media. Advertisers that have traditionally relied on
other advertising media may be reluctant to advertise on the Internet believing
that Internet advertising is less effective than traditional advertising media
for promoting their products and services. Consequently, they may allocate only
limited portions of their advertising budgets to Internet advertising. Our
business could be materially adversely affected if Internet advertising does not
continue to grow or if we are unsuccessful in increasing our advertising
revenues.
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<PAGE> 14
In addition, a portion of our revenues for the foreseeable future are
expected to be derived from the facilitation of electronic commerce
transactions. The market for Internet products and services has only recently
begun to develop and is rapidly changing. Therefore, the success of our business
depends upon the adoption of the Internet as a medium for commerce by a broad
base of customers. If this market fails to develop or develops more slowly than
expected, or if our electronic commerce services do not achieve market
acceptance, our business may suffer.
Furthermore, we expect sales to corporate customers to constitute a growing
percentage of our revenues. Our question answering service has only been
recently implemented onto corporate Web sites. As such, we cannot yet determine
the effectiveness of our Corporate Question Answering Service compared to
traditional methods of customer relationship management, such as e-mail, call
centers and other traditional Web solutions. If we cannot demonstrate to
corporate customers that our Corporate Question Answering Service increases the
rate at which browsers become purchasers, improves customer satisfaction on
their Web sites and reduces expensive support costs, such as those associated
with call centers, our ability to attract and retain corporate customers may be
impaired.
OUR GROWTH WILL DEPEND ON OUR ABILITY TO DEVELOP OUR BRAND
We believe that broader brand recognition and a favorable consumer
perception of the Ask Jeeves brand are essential to our future success.
Accordingly, we intend to continue pursuing an aggressive brand-enhancement
strategy, which will include mass market and multimedia advertising, promotional
programs and public relations activities. These expenditures may not result in a
sufficient increase in revenues to cover such advertising and promotional
expenses. In addition, even if brand recognition increases, the number of new
users may not increase. Further, even if the number of new users increases, the
amount of traffic on Ask Jeeves and the number of corporate customers may not
increase sufficiently to justify the expenditures.
TO MANAGE OUR GROWTH, WE NEED TO IMPROVE OUR SYSTEMS, CONTROLS AND PROCEDURES
AND COORDINATE OUR QUESTION ANSWERING SERVICES
We have experienced and may continue to experience rapid growth, which has
placed, and could continue to place, a significant strain on our managerial,
financial and operational resources. This growth will place a significant strain
on our personnel, management systems and resources. We expect that the number of
our employees, including management-level employees, will continue to increase
for the foreseeable future. We must continue to improve our operational and
financial systems and managerial controls and procedures, and we will need to
continue to expand, train and manage our workforce. We must also maintain close
coordination between our Consumer Question Answering Service and Corporate
Question Answering Service, as well as our technical, accounting, finance,
marketing, sales and editorial organizations. We cannot assure you that our
systems, procedures or controls will be adequate to support our operations or
that we will be able to manage any growth effectively.
WE MAY NOT BE ABLE TO EFFECTIVELY COMPETE AGAINST OUR CURRENT AND POTENTIAL
COMPETITORS
Many of our existing competitors, as well as potential new competitors,
have longer operating histories, greater name recognition, larger customer bases
and significantly greater financial, technical and marketing resources than we
do. This may allow them to devote greater resources than we can to the
development and promotion of their services. Many of these competitors offer a
wider range of services than we do. These services may attract users to our
competitors' sites and, consequently, result in a decrease of traffic to our
site. These competitors may also engage in more extensive research and
development, adopt more aggressive pricing policies and make more attractive
offers to existing and potential employees, partners, advertisers and electronic
commerce merchants. Our competitors may develop products and services that are
equal or superior to ours or that achieve greater market acceptance. In
addition, current and potential competitors have established or may establish
cooperative relationships among themselves or with third parties to better
address the needs of advertisers and businesses engaged in electronic commerce.
As a result, it is possible that new competitors may emerge and rapidly acquire
significant market share.
14
<PAGE> 15
OUR OPERATING RESULTS ARE VOLATILE AND DIFFICULT TO PREDICT
You should not rely on our results of operations during any particular
quarter as an indication of our future results for a full year or any other
quarter. Our quarterly revenues and operating results have varied significantly
in the past and may vary significantly in the future.
FAILURE TO RETAIN CUSTOMERS OR ADD NEW CUSTOMERS TO OUR CORPORATE QUESTION
ANSWERING SERVICE MAY HAVE AN ADVERSE EFFECT ON OUR REVENUES
To date, a significant portion of our revenues has been attributable to a
limited number of customers. In addition, in the coming year we expect that
revenues associated with the Corporate Question Answering Service will be
heavily dependent on a limited number of customers, comprised primarily of
corporations with large, difficult-to-navigate Web sites. As a result, if we do
not complete sales to a sufficient number of customers, our future revenues will
be adversely affected.
THE OPERATING PERFORMANCE OF OUR SYSTEMS AND SERVERS IS CRITICAL TO OUR BUSINESS
AND REPUTATION
Any system failure, including network, software or hardware failure, that
causes an interruption in our service or a decrease in responsiveness of Ask
Jeeves could result in reduced user traffic on Ask Jeeves and reduced revenues.
Our network and server equipment is located at Frontier Global Center in Palo
Alto, California. Although we believe that our current back-up methods are
adequate, we cannot assure you that the back-up servers will not fail or cause
an interruption in our service.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company's exposure to market risk for interest rate changes relates
primarily to its investment portfolio. The Company had no derivative financial
instruments as of June 30, 1999 or December 31, 1998. The Company places its
investment portfolio in high credit quality instruments and the amount of credit
exposure to any one issue, issuer and type of instrument is limited. The Company
does not expect any material loss with respect to its investment portfolio.
The Company's investments are principally confined to our cash and cash
equivalents and available-for-sale securities, which have short maturities and,
therefore, minimal and immaterial market risk.
15
<PAGE> 16
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
On July 8, 1999, IP Learn, LLC filed a lawsuit in the United States
District Court for the Northern District of California (Case No. 99-3352)
against Ask Jeeves, Inc., alleging that Ask Jeeves infringes a patent that
generally relates to natural language database query systems. IP Learn is
seeking unspecified damages, including attorney's fees, as well as an
injunction. Ask Jeeves' answer to the complaint is due August 26, 1999. Ask
Jeeves believes that allegations of the complaint are without merit and intends
to contest them vigorously. We believe the amount of the ultimate liability with
respect to this action will not materially affect the financial position,
results of operations or cash flows of Ask Jeeves, Inc.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
On June 15, 1999, we issued a warrant to purchase 11,250 shares of common
stock to Comdisco, Inc. as consideration for improved lease terms under its
leasing agreement with Comdisco. The exercise price of this warrant is $14.00
per share and the term of this warrant is five years.
On June 30, 1999, the registration statement for our initial public
offering (IPO) of 3,450,000 shares (including the underwriter's over-allotment
of 450,000 shares) of common stock was declared effective by the Securities and
Exchange Commission. The purchase price was $14.00 per share. Net proceeds to
the Company aggregated approximately $45,000,000 (net of underwriters'
commission and offering expenses of $3,300,000). As of the effective date of the
offering, all of the convertible preferred stock outstanding was converted into
9,485,690 shares of common stock. Proceeds from the IPO were received in July
1999.
ITEM 3. DEFAULTS UNDER SENIOR SECURITIES
Not applicable.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
ITEM 5. OTHER INFORMATION
Not applicable.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
a) EXHIBIT
27.1 Financial Data Schedule
b) REPORTS ON FORM 8-K.
The Company did not file any reports on Form 8-K during the three months
ended June 30, 1999.
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<PAGE> 17
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, as
amended, the registrant has duly caused this report to be signed on its behalf
by the undersigned thereunto dully authorized.
ASK JEEVES, INC.
August 13, 1999 By: /s/ ROBERT W. WRUBEL
------------------------------------
Robert W. Wrubel
President and Chief Executive
Officer
(Principal Executive Officer)
August 13, 1999 By: /s/ M. BRUCE NAKAO
------------------------------------
M. Bruce Nakao
Chief Financial Officer
(Principal Financial Officer)
August 13, 1999 By: /s/ CHRISTINE M. DAVIS
------------------------------------
Christine M. Davis
Corporate Controller
(Principal Accounting Officer)
17
<PAGE> 18
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DOCUMENT DESCRIPTION
- ------- --------------------
<C> <S>
27.1 Financial Data Schedule
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> JUN-30-1999
<CASH> 12,719,291
<SECURITIES> 9,056,424
<RECEIVABLES> 2,493,185
<ALLOWANCES> 341,927
<INVENTORY> 0
<CURRENT-ASSETS> 23,272,925
<PP&E> 3,347,738
<DEPRECIATION> 414,462
<TOTAL-ASSETS> 32,083,874
<CURRENT-LIABILITIES> 10,630,917
<BONDS> 0
0
0
<COMMON> 43,433,633
<OTHER-SE> (22,005,973)
<TOTAL-LIABILITY-AND-EQUITY> 32,083,874
<SALES> 0
<TOTAL-REVENUES> 3,849,116
<CGS> 0
<TOTAL-COSTS> 3,813,866
<OTHER-EXPENSES> 1,877,873
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 8,267
<INCOME-PRETAX> (14,890,082)
<INCOME-TAX> 0
<INCOME-CONTINUING> (14,890,082)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (14,890,082)
<EPS-BASIC> (0.78)
<EPS-DILUTED> (0.78)
</TABLE>
